Chinese E-learning Firm Listed on NYSE
Youdao, the education-focused subsidiary of NetEase (NTES: NASDAQ), submitted its prospectus to the US Securities and Exchange Commission (SEC) on October 1, and was listed yesterday.
With Morgan Stanley, Credit Suisse, Citigroup, CICC and HSBC as its underwriters, the firm listed under the symbol ‘DAO’ plans to raise up to USD 300 million. EqualOcean reported earlier this year that the NetEase-born Youdao (有道) was seeking an IPO in the US.
“For over a decade, Youdao has developed and used technologies to provide learning content, applications and solutions to users of all ages,” the company said in its IPO documents.
Youdao, a search engine and an online education platform, was launched by NetEase back in 2006. It operates China’s most popular dictionary and translation app. It counted more than 700 million users at the start of the year, according to 36Kr, and raised its Series A financing round at a CNY 7.58 billion valuation in April 2018.
Meanwhile, Netease, the parent company of Youdao, is listed on NASDAQ and is one of China’s largest internet companies, with a revenue of CNY 67.16 billion last year. Netease has more than 800 million users, with a DAU of 17 million across its portfolio of apps, with Youdao accounting for a significant share.
Youdao got listed amid NASDAQ’s crackdown on initial public offerings among small Chinese companies, which is being applied by tightening restrictions and slowing down their approval process, according to Reuters.
Chinese companies have raised over USD 70 billion on the U.S. stock market since 2000, according to Refinitiv data.
Youdao gained a hefty sum of revenue, but at the same time, its net loss doubled. According to the filed prospectus, the firm accumulated a revenue of CNY 548.54 million in the first half of 2019, with a year-on-year increase of 67.7%. The net losses, on the other hand, were as high as CNY 167.89 million compared to CNY 82.75 million in the first half of 2018. Youdao managed to accumulate CNY 731.6 million for the full year of 2018 and its net loss reached CNY 209.3 million.
Although private education in China has a huge potential and its rapid growth is backed by the state as well, there might be some risks in this IPO. First would be the company’s profitability as and second, the danger of competition with giants like its fellow NYSE listed TAL and New Oriental.
Youdao’s business spectrum
Online knowledge tools include Youdao Dictionary, which was China’s top language app in terms of monthly active users in the first half of 2019. Youdao uses these free online tools to let people know about the company and attract traffic to the other businesses it has, such as online courses.
Online courses, meanwhile include Youdao Premium Courses, focusing on K12 students, NetEase Cloud Classroom and China University MOOC. This part of the business generates the largest percentage of revenue for Youdao.
Interactive learning apps enable students to study maths, English and other subjects with a virtual teacher on their mobile devices. Through social media such as WeChat, users may access these apps and share their activities with friends.
Smart devices constitute a hardware arm that includes the Youdao Smart Pen, Youdao Dictionary Pen, and Youdao Pocket Translator. These devices connect with the Youdao interactive learning apps and online courses.
Amid these many businesses, according to the prospectus, most of the revenue of the company is generated by its learning services and products (contributing to almost 60% of net revenues) and online marketing services.
In 2018 online courses - including Youdao Premium Course, NetEase Cloud Classroom and China University MOOC - contributed to 76.8% of the total revenue, comparable to 76.7% the year before.
As mentioned above, China’s private education industry is rapidly growing and contains some very well-established players. The pace of market growth will certainly help Youdao as an online educational service provider. Although there may lay some risks for the company post-IPO.
The first risk might be the competition with well-established giants. Although Youdao is a subsidiary of NetEase which is considered an internet giant, the of core NetEase is not education, unlike TAL and New Oriental.
Take TAL as an example. The company has released a number of online education platforms targeting K12 demand.
We believe that this IPO is a positive move not only for the company but for China’s online education market. The growth of the market will definitely help Youdao grow - yet taking a step towards making a profit poses a real question. Now that the company is listed, we will have to wait for it to release its earnings to make a serious assessment of its performance.