By Michael Kim
NASDAQ:QSG
READ THE FULL QSG RESEARCH REPORT
Pre-market open on 11/27/24, QuantaSing (NASDAQ:QSG) reported F1Q25 (Sep) earnings results. On a GAAP basis, QSG reported net income of $11.5 million for F1Q25, or $0.21 per ADS. That said, excluding share-based compensation expenses, adjusted EPS came in at $0.23, or below our estimate of $0.30. Relative to our model, lower online education revenues for the legacy business were partially offset by more favorable expense trends.
After updating our model for F1Q25 actuals, we are taking down our F2025 and F2026 adjusted EPS estimates from $0.88/$0.83 to $0.78/$0.76. Our revisions reflect the F1Q25 EPS miss and lower revenue assumptions, as senior officials continue to deemphasize growth across legacy online education courses, partially offset by higher margins, with management prioritizing profitability, and lower shares outstanding given an ongoing focus on returning excess capital to shareholders via share repurchases.
As a result of our lower earnings outlook, we are taking down our price target from $6.00 to $5.50, still representing meaningful upside potential from the stock’s current price. Given QuantaSing’s ongoing business model transition, differentiated focus on the silver demographic in China, and long-term growth potential, we are leaning on our DCF model to value QSG shares. At a high level, despite what we believe to be conservative inputs/assumptions, our valuation work suggests a wide disconnect between QuantaSing’s fundamentals and the stock’s current price.
While we recognize peer valuations become less meaningful as QuantaSing’s business model evolves, P/E multiples of selected online education companies in China as well as here in the U.S. remain meaningfully above QSG’s valuation metrics. As such, we continue to believe current levels provide investors with an attractive entry point for QSG, as awareness and appreciation of the company’s shifting business model, growth prospects, competitive positioning, and valuation disconnect builds in the market.
Following our review of F1Q25 results, we highlight the following key takeaways:
1. Silver transition: On the call, management fleshed out the company’s ongoing transition centered on providing “lifestyle solutions” (i.e., high-demand products and services) catering to middle-aged (45-64 years old) and elderly (65+) individuals, also known as the “silver” demographic. From a strategic perspective, 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 increasingly leveraging the online learning services platform’s operating history, infrastructure, data, and growing user base to drive stepped up demand and cross-selling of products and services catering to the silver demographic, with an emphasis on health and wellness and recreation/leisure. Next, management remains focused on bringing to market a broader range of consumer products across e-commerce and offline retail sales channels. Beyond Chinese liquor (Baiju), focus areas likely encompass health and wellness including Traditional Chinese Medicine (TCM), nutrition (“food as medicine”), beauty, and travel, amongst others. Results to date have been strong, with the Gross Merchandise Value (GMV) of QuantaSing’s wellness products exceeding RMB 50 million ($7+ million) in the first quarter of fiscal 2025, up ~50% compared to RMB 33.6 million ($4.8 million) in the previous quarter, reinforcing accelerating demand trends more broadly and the company’s business model shift (though related growth rates may slow, as management remains focused on taking a measured approach to expanding product/distribution footprints). In addition to broadening the product range, senior officials continue to explore new customer acquisition and sales channels. More specifically, plans are in place to open offline stores/service centers to showcase private label products, build QSG’s brand, and attract middle-aged and elderly customers.
2. Ongoing focus on profitability: Despite the step down in revenue in F1Q25, and our forecasts for ongoing declines, we look for QSG to maintain profitability and stable margins going forward. Our thinking is based on: a) management’s continued focus on optimizing expenses including scaling back on investments in non-core businesses; b) more efficient customer acquisition, as senior officials increasingly leverage the userbase to transition from a traffic-driven business model to a more product-oriented approach (driving higher lifetime values); c) more targeted marketing of value-driven products and services for the silver demographic; and d) more integrated online/offline distribution to build customer relationships/brand loyalty.
3. Strong balance sheet to fund strategic transition and return capital: With RMB 1.2 billion ($170 million) of liquid assets (cash and cash equivalents, restricted cash, and short-term investments) as of September 30, 2024, QSG maintains ample liquidity to continue to invest in the company’s strategic transition while maintaining profitability, and returning capital to shareholders. Focusing on capital management, the Board recently approved a $20 million share repurchase authorization for the 12-month period ending June 10, 2025. During the first quarter of fiscal 2025, management repurchased 1.7 million ADSs for $3.5 million at an average price per share of $2.06. Looking ahead, we expect management to remain active (within SEC regulatory limitations on timing, pricing, and volumes) on the buyback front given the stock’s discounted valuation, thereby providing incremental support to the share price as well as EPS. In addition, the Board recently announced a special dividend of $0.201 per American Depositary share (translating into a 6% yield).
4. Evolving revenue model: In F1Q25, QuantaSing’s legacy online education business generated RMB 709 million ($101 million) of fees, translating into 87% of the company’s total revenues. While management continues to shift resources away from legacy businesses, we expect a measured decline in related contributions over time (primarily related to financial literacy courses), with the company remaining well positioned to continue to gain share across skills upgrading and recreation and leisure platforms. Sustainable competitive advantages include QSG’s scale, established infrastructure, strong brands, a diversified and growing suite of high-quality and in-demand courses, and robust network infrastructure and live streaming capabilities. Furthermore, management seems more dedicated to customer engagement to enhance retention rates, particularly as it relates to the company’s dedicated brand (QianChi) focused on the silver demographic. In turn, senior officials are increasingly connecting QSG’s more focused course catalog to an expanding lineup of private label health and wellness products.
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