Global stock markets continue to see extremely volatile trading in recent weeks, as the coronavirus outbreak officially reaches pandemic levels. The overall flight to safety has led to a surge in U.S. Treasury bond prices, as yields were crushed to record lows. Major corporations are continuing to warn about the likely hit to their top and bottom earnings as a result of the outbreak and its disruption to supply chains.
However, it has not been all bad news in the equity markets. Surprisingly, there are even some industries that have been benefitting from the outbreak. Outside of toilet paper and hand sanitizer suppliers, Chinese online education companies have largely not only outperformed the broader market, but they are seeing positive returns thus far in 2020.
Before the outbreak, the Chinese online education industry was already drawing a strong outlook consensus from the investment community. However, with the outbreak closing down traditional classroom learning, millions of students have had to turn to online education opportunities. This has led to what Bloomberg described as one of the “biggest sustained, mass experiment in online education since the internet was founded in the 1980s.”
While Chinese digital education stocks have seen strong upward moves over the past month, one company that could be next to make waves is Meten EdtechX (NASDAQ: EDTX) (NASDAQ: EDTXW).
EDTX: Meten Merger Estimated to Close March 30, 2020
EdtechX is a London-based education technology company, which also happened to be the first edtech SPAC (special purpose acquisition company) to be listed on the Nasdaq. The company’s common shares are listed under the symbol “EDTX,” while its warrants trade under the symbol “EDTXW.”
As of March 11, 2020, EDTX has returned 0.42% year-to-date, while EdtechX’s warrants, EDTXW, have soared 24.63% since the start of 2020.
In December 2019, EDTX announced a $535 million merger agreement with Meten Education, an omnichannel Chinese education company based out of Shenzhen. The merger is estimated to close on March 30, 2020.
Meten is a market leader in English language training and education services across China. Being based out of Shenzhen, China’s “Silicon Valley,” Meten is in a prime location to continue capturing growth. The company’s Likeshuo digital education platform has seen strong enrollment growth as a result of the coronavirus outbreak, according to a recent press release from the company.
Between February 1-17, 2020, Meten disclosed that its gross billings for its online courses surged 287% year-over-year, including the number of new paying users which grew by 119% year-over-year. Meten noted that the massive growth was “driven by a combination of continuous enhancements to the company’s digital offering and the impact of the coronavirus epidemic on the Chinese education industry.”
In 2018, Meten reported revenues of $200 million (RMB 1,424m) and $20.1 million (RMB 144m) in EBITDA. This is a strong increase from Meten’s 2016 results of $113.9 million (RMB 802m) in revenue and $2.4 million (RMB 17.1m) in EBITDA. Overall, this represents a two-year revenue CAGR of 33% and EBITDA CAGR of 190%.
Meten EdtechX: Recent Filings Show Strong Operational Progress
EdtechX has delivered several key operational developments recently via SEC filings. One of the most important updates was from a Forward Purchase Agreement with Azimut Enterprises, which produced an aggregate investment of $20 million.
According to the agreement, Azimut agreed to purchase up to 2,000,000 units of EDTX at $10.00 per unit, through a private placement offering. At the end of February 2020, EdtechX informed Azimut that they “would be required to purchase 2,000,000 units of EdtechX, for an aggregated investment of $20 million, upon the closing of the business combination,” according to the SEC filing.
EdtechX CEO, Benjamin Vedrenne-Cloquet, and Chairman, Charles McIntyre, were recently interviewed in a news article published by Alpha Week. In the article published February 24, 2020, Alpha Week focuses on EdtechX’s merger with Meten Education.
On March 9th, EdtechX was also mentioned in an article from Financial News entitled “What Kind of Business Does Well in China During a Quarantine?” This is great for the company, as mainstream media is beginning to pick up on EDTX’s story and potential.
New Investor Presentation Shows Company Trading At Discount to Several Industry Averages
Meten EdtechX management also released an updated version of its investor presentation, which now provides in-depth information on Meten, the overall industry, and valuations. According to the deck’s pro forma valuation and outlook estimates, Meten EdtechX is trading at a discount to the industry average for the Chinese education industry.
According to the company, Meten EdtechX’s enterprise value-to-sales (EV/Sales) ratio is trading at an estimated 3 times in 2019, 2.5 times in 2020, and 2.1 times in 2021. These estimates are trading at discounts ranging from 60-68% compared to the industry averages: average EV/Sales 2019E of 9.3x (68% discount), 2020E of 7.2x (65% discount), and 2021E of 5.2x (60% discount).
When isolating EV/Sales estimates for Meten’s online business, the discounts to the industry average only continue to grow. The average EV/Sales ratio for the industry estimated for 2019 comes in at 16.5x (82% discount), 2020E is at 9.7x (74% discount), and 2021E is 6x (66% discount). Meten’s EV/Sales discounts to industry average between 2019-2021 range from 66% to 82%.
Valuation discounts to industry averages extend beyond just EV/Sales. In 2020, Meten EdtechX sees its EV/Adjusted EBITDA coming in at 19.6, with 2021 estimates set at 14.6. This compares to the industry average EV/Adjusted EBITDA estimates of 54.4 in 2020 (64% discount) and 33 in 2021 (56% discount).
Looking at Price/Adjusted Earnings, Meten EdtechX estimates 2020 multiple of 29 and 2021 estimates of 20.2. The average industry estimates for 2020 and 2021 are less compelling: 2020 estimates of 158.8 (82% discount) and 2021 estimates of 49.4 (59% discount).
Peers and Coronavirus Performance
During the coronavirus outbreak, the average peer in China’s online education industry has seen gains of almost 48%. This includes companies like GSX Techedu, Inc. (NYSE: GSX), Youdao, Inc. (NYSE: DAO), LAIX, Inc. (NYSE: LAIX), IDP (ASX: IEL), and Koolearn (SEHK: 1797).
Omnichannel peers like TAL Education Group (NYSE: TAL) and New Oriental Education & Technology Group (NYSE: EDU), have seen average gains of 11.50% since the beginning of the outbreak.
- GSX +92.68% YTD
- DAO +57.03%
- LAIX -3.50%
- IEL +2.02%
- Koolearn +65.68%
- TAL +12.53%
- EDU + 5.82%
- EDTX +0.42%
- EDTXW +24.63%
Comparing EDTX’s common stock returns compared to online and omnichannel peers highlights the potential opportunity, as the underlying fundamentals of the industry show strength. The company’s warrants have seen nice returns in recent weeks, which makes them a potential compelling option as well for more sophisticated investors that understand warrants.
Outlook & Estimates
Between 2016 and 2018, Meten saw its revenue grow at a compound annual growth rate (CAGR) of 33.3% to 1.42 billion RMB (USD $199.3 million) in 2018. In the investor presentation, management provides estimates and guidance for full-year 2019, 2020, and 2021 results.
Currently, EdtechX is forecasting full-year 2019 revenues to come in at $202 million USD, before growing to $245 million USD in 2020 and $299 million USD in 2021. Between 2018 and 2021, this represents revenue CAGR of 14.50%. However, when breaking down growth by online and offline, digital revenue growth is projected to grow 37.80% between 2018 and 2021.
Bottom-line estimates for 2019-2021 are also flashing strong growth. EdtechX estimates 2019 adjusted EBITA of $19 million USD and adjusted net income of $9 million USD. For 2020, adjusted EBITDA is estimated to come in at $31.14 million USD and adj. net income at $22.4 million USD. In 2021, adj. EBITDA estimates grow to $42.1 million USD and adj. net income of $32.2 million USD. Between 2018 and 2021, this represents adj. EBITDA CAGR of 27.8% and adj. net income CAGR of 44.7%.
During a time when Chinese online education companies are seeing big recognition, EdtechX looks like an appealing option for those that may have missed the initial rally or are looking for value in the space. The upcoming merger completion with Meten Education will only further solidify the growth story, which is projecting strong earnings growth over the next several years. Despite the strong growth estimates and an overall fundamentally-sound industry environment, EdtechX trades at steep discounts compared to its peers’ average in the industry. For value and growth investors alike, this is an interesting story beginning to unfold.
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