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China Online Education In A 'Sweet Spot,' Says Morgan Stanley

China Online Education In A 'Sweet Spot,' Says Morgan Stanley
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China Online Education Group (NYSE: COE) is likely to generate solid top-line growth, backed by an increase in the number of paying students and “ample room for ASP hikes,” Morgan Stanley’s Claire Cao said in a report. She initiated coverage of the company with an Overweight rating and a price target of $32.

Market research firm Frost & Sullivan projected China's online education market to record a gross billing CAGR of 38 percent in 2015-2020, significantly higher than the 23 percent in 2010-2015. Within this market, the total gross billing share of the live interactive segment is expected to grow to 40 percent by 2020, from 8 percent in 2015.

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“We believe China Online Education (51Talk) is well positioned in this segment, and expect its gross billing share in China's online English education market to grow from 1.9% in 2015 to 4.7% by 2018,” analyst Claire Cao wrote.

Moving From Red To Black

51Talk is currently in the red, and is expected to turn profitable in 2018, driven by favorable industry trends, a higher mix of K-12 students, and improving sales and marketing efficiency, Cao mentioned. She expects China Online Education’s increasing focus on K-12 students to boost overall user metrics, since these students have higher retention and referral rates.

K-12 students purchase longer and, therefore, more expensive course packages. Moreover, they take courses more frequently than non-K-12 students, the analyst stated. She added, “51Talk is also partnering with public schools and providing more training for its telemarketing personnel, which we expect will substantially lower overall sales & marketing expense as a percentage of revenue.”

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