china online education (coe)€¦ · • for filipino teachers (51talk mass market offering, which...

2 // JAGUARMEDIA: CHINESE TECH DEMYSTIFIED – CHINA ONLINE EDUCATION (COE)

Culturally speaking, with regards to English language education, there are two prevailing views among parents in China:

• Armed with a good education in a lucrative field with a strong grasp of the English language, and a child will be set for life.

• Foreign teachers are inherently seen as superior educators of English vs local teachers.

China Online Education satisfies both criteria. The company provides remote English language education services for K-12 andadult students, as well as proficiency test preparation for college/university applicants.

Operates primarily through its 51Talk and HAWO American Academy businesses. 51Talk is one of the largest facilitators ofonline tutoring and live-streaming classrooms globally. Teachers are hired remotely (mostly from the Philippines, but alsofrom America) to teach English to local Chinese students online via its proprietary videoconferencing platform.

51Talk HAWO American Academy


• Provides ~32M lessons annually to over 338K active students.

• Over 23K teachers globally. Teachers deliver paid online lessons as independent contractors based on their availability and

at appropriate remote locations of their choice.

• For North American teachers (HAWO premium offering), the pay can range from anywhere between $17 to $22 an hour.

The company charges $9 per 45-minute session for HAWO American Academy classes.

• For Filipino teachers (51Talk mass market offering, which represents ~90% of gross billings), the pay is typically under $3

per hour. The company charges students ~$7 per 25-minute 1-on-1 session for 51Talk.

• What separates the company from the rest of the competition is that its Air Class platform tracks progress of students and

instructors individually, and allows teachers to adjust the pace of each lesson according to student performance and

reaction, thus accommodating students across all learning curves.


Two major reasons why teaching online in China has been steadily

taking market share away from physical classrooms:

• Lower rental costs for education companies, while easy internet

access and heavy societal reliance on smartphone usage has helped

ensure the smooth transition (China's active online population

reached 883M in 2019, with 98% being mobile users).

• Education market growth in the higher tier cities is decelerating

due to saturation, and online education is the fastest and most

cost-effective way to expand into lower-tier cities. Such places lack

quality teachers, but they make up 50.3% of China’s total

population. By offering remote interactive classes, education

companies can bypass the “scarcity of teachers” problem. See Page

8 of Youdao write-up (Chinese Tech Demystified - Episode 3)


• The pandemic has forced many students to delay their undergrad applications to universities, leaving many institutions struggling

financially. As such, I’m expecting applications and acceptances to go through the roof this year, as people can’t keep putting off

their studies, and colleges are desperate for cash flow. That includes international students.

• Immediate Chinese domestic demand for English learning may accelerate this year, as high-school students and university

applicants begin preparing for their proficiency and speaking tests.

• On a longer-term view, there is the hidden catalyst of a Biden presidency. Under President Trump, new international students in

America declined for three straight years: 3% drop in the 2016/17 (the first in about a decade), 7% drop in 2017/18, and 1% drop

in 2018/19. Nearly 60% of US colleges reported the social and political environment contributed to the decline of new

international students. Non-immigrant visas issued fell to 8.7M in fiscal 2019, the fourth consecutive decline from 10.9M in fiscal

2015. The denial rate for H-1B visas more than tripled to 33% in fiscal 2019 from 10% in fiscal 2016.

• President-elect Biden has already promised to reverse many of Trump’s immigration orders, and has proposed more skilled-worker

visas while giving foreign graduates of American PhD programs a road to citizenship. Could we see a recovery of Chinese

international students in the US?


Amongst competitors in the Chinese Education industry, only Hailiang Education Group (HLG) has managed the same. Everyone else iseither burning lots of cash or reporting slow/negative growth, or both:


• Nearly 90% of COE’s gross billings is generated by remote Filipino teachers whoare paid up to $3 per hour, while the company charges ~$7 per 25-minute 1-on-1session. This translates to industry-leading gross margins.

• Unlike its competitors, COE is sticking with normal prices as it expands into lowertier cities. Instead of slashing prices, management is smartly cutting the size oftheir course package to entice new students to “try out” 51Talk and HAWO.Combined with high retention and renewal rates (plus 68% of new users comingfrom referrals), this helps to ensure strong operating cash flow.

• COE is a pure play specialist in online education, while some of its largercompetitors offer both physical and online lessons. As online class adoptioncontinues to take share away from physical, companies like TAL, GSX, and EDUmay begin to suffer from cannibalization while COE continues to grow organically.In fact, COE is already beginning to steal new market share in Tier 1 cities (TAL’sand EDU’s stronghold!). See of write-up.


Following the 400%+ rally early last year,the stock has been in a 10-monthconsolidation, trading in a range betweenlow $20s and $30.

A revisit of ~$23 would present a niceopportunity to accumulate some shares.

This is currently a ~$550M market capcompany, but reaching at least $1B overtime is a realistic scenario.

china online education (coe)€¦ · • for filipino teachers (51talk mass market offering, which...

Documents