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

China Online Education Group 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.

“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.”