Core Insights - The initial investment thesis on Gaotu Techedu (NYSE: GOTU) was published in September 2023, marking over a year of volatility for its investors [1] - The author has extensive experience in investment banking, focusing on U.S. and Asia markets, with a strong educational background in accounting and finance [1] - The investment approach is influenced by notable investors such as Warren Buffett, Peter Lynch, and Charlie Munger, emphasizing a flexible strategy that includes various investment styles [1] Company Overview - Gaotu Techedu operates in the education sector, specifically focusing on online learning platforms [1] - The company has experienced significant fluctuations in its stock performance, reflecting broader market trends and investor sentiment [1] Investment Strategy - The investment strategy includes a diverse range of styles such as growth, GARP (Growth at a Reasonable Price), deep value, turnaround, cyclical, and special situations [1] - The research methodology involves gathering information from various sources, including public filings, industry periodicals, and management meetings, to ensure comprehensive analysis [1]

Investment Rating - The report assigns a "Buy" rating to the company with a target price of $5.00, indicating an upside potential of 81.6% from the last closing price of $3.05 [2][4]. Core Insights - The company reported a revenue growth of 38.7% year-on-year for FY24Q2, reaching 1.009 billion RMB, exceeding previous guidance [2]. - Non-GAAP operating loss was 453 million RMB, compared to a profit of 50 million RMB in the same period last year, indicating pressure on profitability due to increased investments [2]. - Cash reserves stood at 4.1 billion RMB with no interest-bearing debt, and comparable cash collections grew over 87% year-on-year to 1.65 billion RMB [2]. - The K9 business segment showed significant growth, accounting for over 20% of total revenue, with cash collections from new students increasing by over 200% [2]. - The company expects FY24Q3 revenue growth of 50.5%-53%, projecting revenue between 1.188 billion and 1.208 billion RMB [2]. Financial Performance Summary - FY24Q2 revenue was 1.009 billion RMB, up 38.7% year-on-year, surpassing the guidance of 908-928 million RMB [2]. - Non-GAAP operating profit for FY24Q2 was -453 million RMB, compared to a profit of 50 million RMB in the previous year [2]. - The company anticipates a deferred revenue growth of 71% year-on-year to 1.582 billion RMB for FY24Q3, which is expected to convert into revenue in the second half of FY24 [2]. - The gross margin for FY24Q1 was 69.0%, down 4.8 percentage points year-on-year, primarily due to increased costs from business expansion [2]. - The sales expense ratio increased to 82.7%, up 36.6 percentage points year-on-year, reflecting higher customer acquisition costs for the summer enrollment season [2]. Valuation and Future Outlook - The report adjusts the FY24 net profit forecast to -790 million RMB, indicating expected losses in the next 1-2 years due to significant upfront investments for expansion [2]. - The valuation is based on a discount rate of 12% and a perpetual growth rate of 3% [2]. - The company is recognized as a leading player in the domestic online education sector, actively expanding its offline teaching network with nearly 100 teaching locations nationwide [2].

Core Viewpoint - Gaotu Techedu's Q2 2024 earnings results showed strong revenue growth but significant adjusted net losses, leading to a market overreaction and a stock price decline, despite a maintained "buy" rating due to undervaluation and strong cash reserves [2][12]. Financial Performance - Net revenues increased by 43.6% year-over-year [3] - Gross billings increased by 87.4% year-over-year [3] - Non-GAAP net loss was RMB418 million, a 560% increase from the same period in 2023 [3] - Net operating cash inflow was RMB386.2 million, up 33.8% from RMB288.5 million in Q2 2023 [3] Cost Structure - Cost of revenues increased by 70.0% year-over-year, driven by workforce expansion and increased learning material costs [3] - Operating expenses rose by 144.2% to RMB1,161.1 million from RMB475.4 million in Q2 2023, primarily due to employee expansion and higher marketing expenditures [3] Market Outlook - Gaotu is preparing for strong future demand, as indicated by strategic investments in teacher recruitment and customer acquisition [4] - Non-academic tutoring business saw over 200% growth in gross billings, contributing more than 20% of total revenues for the first time [5] - Management guided for Q3 revenue growth of 50.5% to 53.0% [6] Balance Sheet and Share Repurchases - At the end of Q2, Gaotu had cash and cash equivalents totaling approximately RMB4,103 million (around $570-575 million) [8] - The company has an $80 million share repurchase authorization, with approximately $53 million remaining [8] Financial Projections and Valuation - Revenue projections for 2024 and 2025 have been increased based on management's guidance [9] - The company is applying a 1.2 times EV/Sales multiple to its 2025 estimated sales, indicating significant upside potential [11] Conclusion - Gaotu's strong revenue growth continues, but profitability is impacted by upfront spending for future demand [12] - The stock is considered undervalued with strong downside protection from its balance sheet and share repurchase program [12]

Investment Rating - The report assigns a "Buy" rating for the company, Gaotu (GOTU US), with a target price of $6.50, indicating a potential upside of 96.4% from the current closing price of $3.31 [1][10]. Core Insights - The company reported a quarterly revenue increase of 44% year-on-year to 1 billion RMB, exceeding market expectations by 2% and 3% [1]. - Cash collections grew by 87% year-on-year, driven primarily by K12 education services, which accounted for over 85% of total revenue [2]. - The company anticipates a revenue growth rate of 50.5-53% for Q3 2024, with revenue expected to be between 1.188 billion and 1.208 billion RMB [2]. Financial Performance Summary - For Q2 2024, the company reported a revenue of 1 billion RMB, with a gross margin of 69%, down 5 percentage points year-on-year due to changes in revenue structure [1][3]. - Adjusted operating loss for Q2 2024 was 450 million RMB, with a loss margin of 45%, aligning with previous expectations [1]. - The company expects to continue incurring operating losses due to increased customer acquisition costs and expansion efforts, projecting an adjusted operating loss of 400 million RMB for Q3 2024 [2]. Revenue Breakdown - K12 revenue grew by over 55% year-on-year, with non-academic subjects experiencing triple-digit growth, contributing over 20% to total revenue [2]. - Adult education revenue increased by over 10% year-on-year, with significant growth in study abroad-related services [2]. Future Outlook and Valuation - The revenue forecasts for 2024 and 2025 have been raised by 4% and 14%, respectively, while overall profit expectations have been adjusted downward [2]. - The K12 business is projected to achieve an operating profit margin of approximately 7% in 2024 and 13% in 2025, indicating potential for margin improvement [2]. - The target price has been adjusted to $6.50 from a previous $7.50, reflecting the anticipated continued growth in revenue driven by industry demand [2].

Financial Data and Key Metrics Changes - The company reported a net revenue increase of 43.6% year-over-year to RMB1.0 billion, reflecting strong growth momentum [7][19] - Gross billings grew by 87.4% year-over-year to RMB1.7 billion, exceeding market expectations [7] - Net operating cash inflow reached RMB386.2 million, with cash reserves totaling RMB4.1 billion, an increase of RMB361.3 million from the previous year [8][28] - Deferred revenue reached RMB1.6 billion, representing a 71.5% increase year-over-year, indicating strong support for future growth [8] Business Line Data and Key Metrics Changes - Learning services contributed over 95% of net revenues, with non-academic tutoring services accounting for more than 75% of total revenues, growing nearly 55% year-over-year [21][22] - New initiatives in non-academic tutoring saw triple-digit growth in both net revenues and gross billings, with gross billings from new student enrollments increasing by over 200% year-over-year [22] - Educational services for college students and adults contributed just under 20% of total revenues, growing roughly 10% year-over-year [25] Market Data and Key Metrics Changes - The company has formed strategic partnerships with over 60 leading universities across China to enhance educational offerings and support new hires [13] - The number of students admitted to top Chinese universities in 2024 increased compared to the previous year, showcasing the effectiveness of the company's educational services [16] Company Strategy and Development Direction - The company aims to refine educational offerings, improve teaching quality, and optimize the learning experience as part of its strategic priorities [11] - There is a strong focus on operational efficiency and customer acquisition, with investments in talent and resources to build proprietary channels [15] - The company is committed to its offline business strategy, recognizing the challenges and long-term investments required for successful expansion [37] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ongoing operational improvements and the ability to meet market demand, with expectations for continued revenue growth in the third quarter [19][29] - The company anticipates total net revenues for Q3 2024 to be between RMB1.188 billion and RMB1.208 billion, representing a year-over-year increase of 50.5% to 53.0% [29] Other Important Information - The company has repurchased approximately 7.9 million ADS for about US$27 million under its share repurchase program, demonstrating a commitment to enhancing shareholder value [17][29] - The company is leveraging artificial intelligence to improve internal efficiencies and teaching product design, with a focus on cost reduction and operational improvements [41] Q&A Session Summary Question: Insights on offline expansion and related losses - Management highlighted significant progress in offline business expansion, exceeding initial expectations, and emphasized the importance of teacher recruitment and high-quality educational resources [33][34][36] Question: AI empowerment in education - Management discussed the application of AI in improving internal efficiencies and teaching product design, with a conservative approach to investment in this area [40][41] Question: Revenue growth breakdown for Q3 - Management provided guidance indicating that the majority of revenue growth will come from online business, with offline contributions not yet significant enough to disclose separately [46][48] Question: Drivers behind exceptional new enrollment growth - Management attributed the growth to proactive teacher recruitment and training, as well as a diversified customer acquisition strategy that effectively met market demand [52][55]

Revenue Growth - Net revenues increased by 43.6% to RMB1,009.8 million in Q2 2024 compared to RMB703.1 million in Q2 2023[2][7] - Total net revenues for Q3 2024 are expected to be between RMB1,188 million and RMB1,208 million, representing a 50.5% to 53.0% year-over-year increase[16] - Net revenues for the six months ended June 30, 2024, were RMB1,956,682 thousand, compared to RMB1,410,386 thousand for the same period in 2023[30] - Net revenues for Q2 2024 increased to RMB 1,009,797 (USD 138,953), up 43.7% from RMB 703,094 in Q2 2023[31] Gross Billings - Gross billings surged by 87.4% to RMB1,653.7 million in Q2 2024 from RMB882.3 million in Q2 2023[2][3] - Gross billings for Q2 2024 reached RMB 1,653,692 (USD 227,555), an 87.4% increase from RMB 882,325 in Q2 2023[31] - Gross billings for H1 2024 increased to RMB 2,383,052 (USD 327,919), up 67.7% from RMB 1,421,276 in H1 2023[32] Profit and Loss - Net loss was RMB429.6 million in Q2 2024, compared to a net income of RMB56.2 million in Q2 2023[2][13] - Net loss for the six months ended June 30, 2024, was RMB441,847 thousand, compared to a net income of RMB170,014 thousand for the same period in 2023[30] - Net loss for Q2 2024 was RMB 429,550 (USD 59,108), compared to a net income of RMB 56,161 in Q2 2023[34] - Net loss for H1 2024 was RMB 441,847 (USD 60,801), compared to a net income of RMB 170,014 in H1 2023[34] Gross Profit - Gross profit margin decreased to 69.0% in Q2 2024 from 73.8% in Q2 2023[9] - Gross profit for the six months ended June 30, 2024, was RMB1,371,835 thousand, compared to RMB1,066,024 thousand for the same period in 2023[30] - Gross profit for Q2 2024 was RMB 696,364 (USD 95,823), a 34.2% increase from RMB 518,714 in Q2 2023[34] - Gross profit for H1 2024 was RMB 1,371,835 (USD 188,770), a 28.7% increase from RMB 1,066,024 in H1 2023[34] Non-GAAP Metrics - Non-GAAP gross profit, non-GAAP income (loss) from operations, and non-GAAP net income (loss) exclude share-based compensation expenses, which the company believes provides meaningful supplemental information regarding its performance and liquidity[22] - Non-GAAP gross profit for Q2 2024 was RMB 696,321 (USD 95,817), up 33.3% from RMB 522,299 in Q2 2023[34] - Non-GAAP net loss for Q2 2024 was RMB 418,040 (USD 57,524), compared to a non-GAAP net income of RMB 63,159 in Q2 2023[34] - Non-GAAP gross profit for H1 2024 was RMB 1,374,113 (USD 189,083), up 28.0% from RMB 1,073,599 in H1 2023[34] Operating Expenses - Operating expenses increased by 144.2% to RMB1,161.1 million in Q2 2024 from RMB475.4 million in Q2 2023[10] Cash Flow and Liquidity - Net operating cash inflow increased by 33.8% to RMB386.2 million in Q2 2024 from RMB288.5 million in Q2 2023[2][14] - Cash and cash equivalents increased from RMB636,052 thousand as of December 31, 2023, to RMB1,414,853 thousand as of June 30, 2024[25] Deferred Revenue - Deferred revenue reached RMB1.6 billion as of June 30, 2024, a 71.5% increase from the same period last year[5] Share Repurchase - The company repurchased approximately 7.9 million ADSs for approximately US$27.0 million under its share repurchase program as of August 26, 2024[15] Currency and Geographic Focus - The company primarily conducts its business in China, with revenues predominantly denominated in RMB, and uses an exchange rate of RMB7.2672 to USD1.0000 for currency conversions[24] Assets and Liabilities - Total current assets increased from RMB3,586,707 thousand as of December 31, 2023, to RMB3,830,532 thousand as of June 30, 2024[25] - Total liabilities increased from RMB1,973,284 thousand as of December 31, 2023, to RMB2,604,074 thousand as of June 30, 2024[25] Earnings Per Share - Basic net loss per ADS for the six months ended June 30, 2024, was RMB1.71, compared to a net income per ADS of RMB0.65 for the same period in 2023[30]

Core Viewpoint - Gaotu Techedu Inc. reported significant growth in net revenues and gross billings for the second quarter of 2024, despite incurring substantial operational losses, indicating a strong market demand for its educational services [1][2][6]. Financial Performance - Net revenues for Q2 2024 reached RMB1,009.8 million, a 43.6% increase from RMB703.1 million in Q2 2023 [2][3]. - Gross billings for Q2 2024 were RMB1,653.7 million, up 87.4% from RMB882.3 million in the same period last year [2][3]. - The company reported a loss from operations of RMB464.8 million, compared to an income of RMB43.3 million in Q2 2023 [2][3]. - Net loss for Q2 2024 was RMB429.6 million, a significant decline from a net income of RMB56.2 million in Q2 2023 [2][3]. - Non-GAAP net loss was RMB418.0 million, compared to a non-GAAP net income of RMB63.2 million in the same period last year [2][3]. - Net operating cash inflow increased by 33.8% to RMB386.2 million from RMB288.5 million in Q2 2023 [2][3]. Operational Insights - The cost of revenues increased by 70.0% to RMB313.4 million, primarily due to the expansion of the instructor workforce and higher costs of learning materials [9]. - Operating expenses surged by 144.2% to RMB1,161.1 million, driven by increased employee headcount and marketing expenditures [11]. - Gross profit rose by 34.3% to RMB696.4 million, but the gross profit margin decreased to 69.0% from 73.8% in Q2 2023 [10]. Business Outlook - For Q3 2024, total net revenues are expected to be between RMB1,188 million and RMB1,208 million, reflecting a year-over-year increase of 50.5% to 53.0% [17]. - Deferred revenue as of June 30, 2024, reached RMB1.6 billion, a 71.5% increase from the previous year, indicating strong future revenue support [6]. Shareholder Actions - The company has a share repurchase program authorized for up to US$80 million, with approximately 7.9 million ADSs repurchased for about US$27.0 million as of August 26, 2024 [16].

Investment Rating - The report assigns a "Buy" rating for the company, with a target price of $7.50, indicating a potential upside of 64.5% from the current price of $4.56 [1][10]. Core Insights - The company is expected to exceed revenue expectations in Q2 2024, with projected collections of 16.1 billion RMB, a year-on-year increase of 82%, driven primarily by the K12 business, which is expected to double in growth [1]. - The report anticipates a significant increase in marketing expenses due to strong collection growth and customer acquisition efforts during the summer, leading to an adjusted operating loss of 455 million RMB for Q2 2024 [1][2]. - The company is expected to maintain a high growth rate of over 60% in collections during Q3 2024, although revenue growth may be lower than collections due to various factors [1]. Financial Summary - Revenue projections for the company are as follows: 2,961 million RMB in 2023, 4,368 million RMB in 2024, 5,323 million RMB in 2025, and 6,291 million RMB in 2026, with year-on-year growth rates of 18.5%, 47.5%, 21.9%, and 18.2% respectively [3][11]. - The company is expected to incur a net loss of 675 million RMB in 2024, with a projected recovery to a profit of 237 million RMB by 2026 [3][11]. - The report highlights a significant increase in marketing expenses, projected to reach 2,684 million RMB in 2025, which will impact profitability [3][11]. Valuation - The valuation for the company's education business is adjusted to $7.50 per share based on a 20x P/E ratio for 2025, down from a previous estimate of $9.10 [2].

Core Viewpoint - The recent changes in China's after-school tutoring market, particularly the government's shift in regulatory stance, are seen as positive for Gaotu Techedu (GOTU), leading to an upgrade in the stock rating to "buy" [2][11]. Industry Overview - The Chinese government has historically been inconsistent in its regulatory approach, particularly in the after-school tutoring sector, which faced a crackdown in 2021 due to concerns over "disorderly development" [3]. - The economic downturn following the real estate bubble burst has led to a significant rise in youth unemployment, reaching 21.3% in June 2023, prompting the government to reconsider its stance on the after-school tutoring industry as a potential source of employment [3][4]. Regulatory Changes - The Ministry of Education released draft regulations on February 2, 2024, which clarified rules for high school tutoring, marking the first step towards regulatory easing [4]. - On August 3, 2024, the State Council issued guidelines aimed at boosting service consumption, indirectly signaling support for the after-school tutoring sector [5]. Company Performance - GOTU's revenue is increasingly driven by non-academic tutoring services, which accounted for over 75% of total revenues in Q1 2024, reflecting a 3.5% year-over-year increase [6]. - Financial projections estimate a 30% growth rate for GOTU in 2024, with potential upside from regulatory changes not factored into the model [7]. Financial Metrics - GOTU's revenue has fluctuated significantly, with projections showing a recovery from RMB 2,961 million in 2023 to an estimated RMB 4,850 million in 2025, representing a growth rate of 30% [8]. - The company's gross margin is expected to stabilize around 72% in the coming years, with a projected net income of RMB 96 million in 2024 and RMB 243 million in 2025 [8]. Valuation - Applying a 1.2 times EV/Sales multiple to the estimated 2025 revenue suggests a target market cap of approximately USD 1,171 million, indicating a potential upside of 3.7% from the current market cap of USD 1,130 million [9].

Company Overview - Gaotu Techedu Inc. is a technology-driven education company and online large-class tutoring service provider in China, offering learning services, educational content, and digitalized learning products [3] - The company utilizes an online live large-class format to deliver courses, aiming to effectively disseminate high-quality teaching resources to students in China [3] - Big data analytics is integrated into the company's operations to enhance teaching delivery, improve student learning experiences, and increase operational efficiency [3] Financial Reporting - Gaotu will report its financial results for the second quarter ended June 30, 2024, before U.S. markets open on August 27, 2024 [1] - An earnings conference call will be held on August 27, 2024, at 8:00 AM U.S. Eastern Time, with dial-in details provided for participants [2]