Gaotu Techedu: It's Getting Interesting Again

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].