2020-06-16

(28 Pages, 52 graphs and tables)
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  • The pandemic accelerates the online big class penetration as after school tutoring demand is still strong despite a difficult time. We expect the total exam-orientated AST could grow 70% and reach RMB 1,000bn in next 5 years.
  • The key diver for the AST market growth is low-tier cities’ penetration. Currently, the exam-orientated AST penetration rate is 41% in 2019 and we expect it to reach 53% in 2025, which mainly is due to low-tier cities’ AST penetration.
  • We believe online big class sector and GSX will be benefit from the low-tier cities’ penetration. Initiate BUY with TP US$50.
Still much potential on the online big class market
Currently, online big class only takes about 3.5% of the total after school tutoring (AST) market share in 1Q20. However, we expect the online big class could reach to 20% of the AST market share in 2025 because: (1) online big class is taking back the market share that was lost to offline big class; (2) low-tier cities have large demand for the high quality teachers; and (3) the pandemic also accelerated the online big class penetration rate.
 
Winner under an intensive competition
According to our tracking data, we see online big class companies launched an intensive marketing campaign. We expect the online big class market will still have intensive competition in current years. However, we expect 3~4 online big class companies will survive and take 90% of the online big class market share. GSX will be one of the winners as (1) its product has differentiation by targeting low-tier cities and high school students, and (2) its two kinds of marketing channel, external and internal, allow it to acquire students more efficiently.
 
Pandemic accelerates the penetration rate
We believe the pandemic accelerates the online big class penetration rate by allowing more parents and students to experience the online education, especially in the low-tier cities. We also see that GSX is exploring more internal marketing channels. Currently, GSX has more than 3.8mn followers on the Kwai account, which bring more upside for its internal marketing channel.

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