Will GSX Shares Rally With The Re-Emergence Of COVID-19?

The dual-mode large-class which merges classroom teaching and distance learning at the same time is another competitive advantage promoted by GSX. 

However, most online education institutions currently adopt the double-teacher and big-class model, which can be easily applied in real-world situations. 

GSX has basically imitated the double-teacher model since TAL and New Oriental applied it into their teaching methods a long time ago. In an ideal competitive market, a profitable business model will be imitated immediately.

Unless the company has unique technologies, invention patents or a market monopoly, its business model cannot be treated as a competitive advantage.

As a latecomer to the market, GSX doesn’t have any scale and brand advantages either. Therefore, GSX’s teaching model is not a comparative advantage, nor can it explain the company’s success in the market. 

At present, the listed companies adopting the dual-teacher and big-class model are TAL, New Oriental Online and NetEase Youdao. Among these companies, both New Oriental Online and NetEase Youdao have provided data of the main operating cost in their financial reports.

Let's take a look at GSX’s main operating cost. 

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The main operating cost of GSX is much lower than New Oriental Online (87.2%) and NetEase Youdao (72.9%). Its main operating cost is only one-third of New Oriental Online and Netease Youdao in 2019. Based on previous experiences, one of the characteristics of companies conducting financial fraud is that their main operating costs are low (abnormal gross profit margin), and GSX’s data reflected this characteristic. 

Negative profits reported despite increase in revenue

GSX’s net revenues for 3Q 2020 were CNY 4.91 billion, with a 316.5% year-over-year increase. Net revenues of online K-12 increased 356.5% year-over-year to CNY 4.26 billion. Gross billings were CNY 5.86 billion, up 229.4% year-over-year. Gross billings of online K-12 increased 241.4% year-over-year to CNY 5.08 billion. 

However, the amount of losses in this quarter far exceeded all the accumulated profit income that the firm has reported in the past. 

After announcing the results, GSX saw its stock price decreased by more than 24% during the following session.

According to the financial report, GSX had a net loss of CNY 932.5 million in 3Q 2020, compared with a net profit of CNY 1.9 million in the same period last year.

Prior to this, GSX always claimed to be “the only K-12 listed company that has been consistently profitable since its listing.” 

Looking back at GSX’s quarterly revenue data since its listing in the past two fiscal years, it can be seen that its growth rate has slowed down significantly. It dropped from 473.8% to 282.7% since it first went public in 2019.

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Disclaimer: Please consult your own advisor before making any investment decision. 

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