Quietly Executing Its Growth Strategy

A Surprisingly Low Stock Valuation

A Good Start

A Favorable Course For Revenue and Cash Flow Growth

Michael Kupinski

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Education

QuantaSing Group Limited

Investment Appraisal
The company reported strong fiscal Q2 revenue growth of 24.7% to RMB980.5 million. Adj. EBITDA for the period was RMB98.6 million, illustrated in Figure #1 FY Q2 Results. The results compared favorably to our estimates of RMB930.0 million in revenue and RMB83.0 million in adj. EBITDA. The company benefitted from strong user growth in the quarter. Total registered users grew roughly 45% to 112.4 million users, up from 77.8 million users at the end of the prior year period. Total paying learner grew to 0.4 million, up 24% from the prior year period. 
This quarter, the company began presenting revenue from its Other Personal Interest Courses segment in two categories: Skills Upgrading Courses and Recreation and Leisure Courses. The former includes courses that train productive skills, such as the short video production course and the memory training course. The latter includes courses more focused on personal enrichment, such as the electronic keyboard course, for example. In Q2, the Skills Upgrading Courses drove the strong revenue growth, up 137% to RMB456.4 million. Within the category, the short video production offering is a key driver. Notably, the company recently opened a repeat customer program, which is essentially a next level to the course. Notably, we believe there is still an opportunity for revenue growth from the original course in addition to the opportunity represented by the repeat purchase offering. 
In January, the company launched its own private label Chinese Baijiu (a Chinese Liquor) brand, known as YUNTING. The company is exploring additional opportunities to expand its e-commerce business. In Q2, â€œOtherâ€ segment revenue grew to RMB49.3 million, primarily composed of the companyâ€™s ecommerce business. This was a 10% sequential increase over fiscal Q1. We anticipate that the company will look for additional opportunities to launch private labels and expand its livestream ecommerce offerings. We believe the company will likely realize higher margins from private labels, due to the prospects of bringing various production and quality control costs in house. 
Notably, management is focused on growing the business in a profitable manner, emphasizing cost efficiencies. To that end, the company is implementing AI technology to streamline various aspects of the business. For example, the company uses technology to monitor the performance of teachers and their adherence to the companyâ€™s policies and best practices. This monitoring process would otherwise require a more costly investment in human capital. The company is also opening an office in Hefei, which is a less expensive city than Beijing. As the company grows, management expects to hire more employees to work out of the Hefei location, which could lead to lower personnel costs as a percentage of revenue going forward. We view the companyâ€™s focus on prudent, profitable growth favorably. 
We are raising our revenue and adj. EBITDA forecast for the balance of the fiscal year and flowing through the upside variance from the companyâ€™s Q2 performance. As a result, our fiscal 2024 revenue and adj. EBITDA forecasts are raised from RMB3.671 billion to RMB3.716 billion and from RMB322.5 million to RMB338.1 million, respectively. Figure #2 Forecast Revisions illustrates our estimates. We are also raising our fiscal 2025 revenue forecast from RMB4.203 billion to RMB4.256 billion, which maintains our growth estimate of 14.5% for the year. We are tweaking up our fiscal 2025 adj. EBITDA forecast as a result, from RMB592.8 million to RMB596.2 million. 
As of December 31, 2023, the company had RMB764.3 million in cash and no long-term debt. In our view, the company appears to be well positioned to fund its growth initiatives. 
Near current levels, the QSG shares trade at a modest 0.02 times enterprise value to our 2024 revenue forecast, well below the industry peer group average of 4.0 times 2024 revenue. We believe QuantaSing has healthy growth prospects for its online learning service revenue and could benefit from additional upside from its recently launched e-commerce business. In addition, we believe that margins should improve as the company drives cost efficiencies and from scale of its growing revenues. As such, we believe the company could justify a multiple more in line with peers. Our $10 price target reflects a target enterprise value of roughly 1.0 times our 2024 revenue forecast, still below the valuation of its peer group (4.0 times). We view our price target to be conservative, as it reflects a target multiple that leaves room for further multiple expansion. The shares are rated Outperform.
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Figure #1 FY Q2 Results
 
 <img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/qsg-results-3-7-24.jpg" style="width: 478px;height: 507px" /> 
 
Source: company filings and Noble estimates
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Figure #2 Forecast Revisions
 <img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/qsg-revisions-3-7-24.jpg" style="width: 506px;height: 383px" /> 
 
Source: Noble estimates&nbsp;

QuantaSing Group Limited (QSG)

Quietly Executing Its Growth Strategy

Fundamental Analysis:

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Quietly Executing Its Growth Strategy (QSG)

A Surprisingly Low Stock Valuation (QSG)

A Good Start (QSG)

A Favorable Course For Revenue and Cash Flow Growth (QSG)

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