By Michael Kim
NASDAQ:QSG
READ THE FULL QSG RESEARCH REPORT
We are initiating coverage of QuantaSing Group Limited (NASDAQ:QSG) with a 12-month price target of $6.00, translating into sizeable upside from the stock’s current price. QuantaSing recently announced a shift in the company’s business model. Going forward, senior management remains focused on providing “lifestyle solutions,” or products and services tailored for older consumers in China, by leveraging the legacy online education platform’s user base, technology, data, and infrastructure.
Our investment thesis revolves around:
1. Business in transition – strategic shift in focus on the “silver economy” in China: As previously announced in August, management officially embarked on a thoughtful and deliberate evolution of the company’s business model. Management’s vision encompasses building a broader ecosystem providing targeted products and services that address evolving educational, social, and consumer demand trends of middle-aged and elderly individuals in China. Specific business initiatives include: i) diversifying the online education platform by introducing courses tailored for older demographics, with an emphasis on health/wellness and recreation/leisure; ii) increasingly bringing senior-focused consumer products to market following the company’s initial foray into the Chinese liquor (Baiju) market; and iii) opening offline stores/service centers to build QSG’s brand and engage middle-aged and elderly customers.
2. Powerful growth drivers: Recent studies suggest China’s “silver economy,” or the market value of goods and services catering to senior citizens, will reach RMB 30 trillion, or more than $4 trillion, by 2035. Key growth drivers likely include: i) demographic tailwinds, with China’s population mix continuing to skew older reflecting declining fertility rates and longer life expectancies; ii) middle-aged and elderly individuals are becoming an increasingly important consumer group in China given rising assets and declining debt levels leading to higher disposable incomes; iii) in response to shifting demographics, the Chinese government remains proactive in introducing policies to support the aging population; and iv) QuantaSing remains well positioned to gain share across the senior education market reflecting the company’s first-mover advantage, well-established infrastructure, and expanding course catalog.
3. Legacy business still has “legs”: Since launching operations in 2019, QuantaSing Group has grown into the largest online adult learning services provider in China. In addition to the company’s legacy financial literacy courses, QSG introduced skills upgrading and recreation and leisure programs starting in 2021. Looking ahead, we look for ongoing growth across QuantaSing’s skills upgrading and recreation and leisure platforms reflecting the company’s scale (127.6 million registered users as of 6/30/24, with 400,000 paying customers in the fourth quarter of fiscal 2024), diversified suite of high-quality and in-demand courses, with a focus on recreation and leisure programs catering to middle-aged and elderly individuals, differentiated technology (network infrastructure, live streaming capabilities, artificial intelligence, data analytics), and broader geographic reach.
4. Financials in transition: Our model calls for adjusted EPS estimates of $0.88 and $0.83 for Fiscal 2025 (ending June 30, 2025) and F2026, respectively. Key modeling inputs include: i) steady revenues through the transition, with a mix shift in favor of QSG’s nascent consumer business, as well as toward skills upgrading and recreation/leisure programs within the legacy online education business; ii) an expense remix, as management continues to reallocate resources away from legacy financial literacy courses to preserve capacity for higher-growth businesses; iii) margin expansion reflecting slowing marketing expense growth following a period of heavy investment spending to build the customer base and generate user traffic; and iv) a strong balance sheet to fund the company’s strategic transition and return excess capital to shareholders.
5. Upward revaluation opportunity: QSG is down meaningfully from the stock’s IPO price of $12.50 in January 2023. In our minds, the post-offering selloff provides investors with an attractive entry point for QSG, as awareness and appreciation of the company’s business model shift, long-term growth prospects, competitive positioning, and valuation disconnect increasingly take hold. Despite what we believe to be conservative inputs/assumptions, our valuation work suggests a wide disconnect between the company’s fundamentals and the stock’s current price. As a crosscheck, we note stocks of other online education companies currently trade at meaningfully higher Price-to-Earnings multiples across the board (though we recognize relative valuations become less meaningful as QuantaSing’s business model evolves).
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