Just from onlineeducationLeading New Oriental Online, good future release of financial performance, VIPKID twists and turns in the financing process, Netease Road IPO timing is not very good. Even if there are some prospectus data disclosed by itself, it is difficult to prove how prominent it has in this fierce competition.
NetEase youdao, who burned money
According to the prospectus, NetEase Youdao's net income in 2017 and 2018 was 455.7 billion yuan and 731.6 billion yuan respectively, an increase of 60.5%, and 548.5 million yuan in the first half of 2019, an increase of 67.7%. However, with the acceleration of income growth, its gross interest rate is decreasing, its operating loss is expanding, and its net loss is expanding.
From 2017 to 2018, the gross profit margin of NetEase's youdao fell from 35.5 percent to 29.6 percent, the operating loss increased from 130 million yuan to 219 million yuan, up 68.5 percent from the same period last year, and the net loss increased from 164 million yuan to 209 million yuan, an increase of 27.4 percent over the same period last year. In the first half of this year, the gross profit margin of NetEase youdao fell from 32.9 percent year on year to 29.0 percent, while the operating loss and net loss expanded by 95.0 percent and 102.9 percent, respectively.
Moreover, Netease's savvy working capital gap is still widening. The risk implication of the prospectus is that "we have a large demand for working capital and have experienced a deficit in working capital... As of December 31, 2017, 2018 and June 30, 2019, their operating fund deficits (i.e., total current assets minus total current liabilities) were 974.9 million yuan, 705.3 million yuan and 805.2 million yuan respectively.
From the balance sheet, as of June 30 this year, NetEase youdao's book cash was 52.317 million yuan, the total assets were 639 million yuan, the total liabilities were 1.416 billion yuan, the asset-liability ratio was as high as 221.6 percent, and its shareholders' equity was also negative 1.26 billion yuan.
A large part of Netease's total liabilities is its outstanding interest-bearing short-term loans payable to Netease Group, amounting to 788 billion yuan. According to the prospectus, these loans are usually repaid within one year, and repayment will have a significant negative impact on their liquidity, financial position and cash flow.
Fierce competition and cooling of capital
Although Netease is back-to-back, and Netease's well-known tool-based App has formed a product matrix of tens of millions per day, its core online education business is facing fierce competition and capital investment that has cooled down.
In August, New Oriental online (HK:1797) released its first earnings report since listing in Hong Kong, showing a year-on-year profit loss of 64.109 million yuan in fiscal 2019. New Oriental online said its revenue costs rose 63.3 percent as a result of higher teaching staff costs, course researchers costs and textbook costs, and marketing spending increased 98.2 percent as a result of investing in the university curriculum and K12 division.
The same is true for the good future. In the first quarter of fiscal year 2020, the net loss attributable to the good future reached $7.3 million, compared with a profit of $66.8 million in the same period last year. Good Future Education Group (NYSE: TAL) explained that the loss was due to "further expanding the product and scale of online business and increasing investment in technology".
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Under this kind of industry background, NetEase youdao can only continue to spend money, snatches the customer source. But the dilemma is that there seems to be signs of a return to rationality on the capital side.
According to the statistics of Finance and Economics Network, there were about 170 financing incidents in online education industry in the first half of 2019, which was nearly half the decrease compared with the first half of 2018. The latest round of VIPKID financing has been in an unresolved state for up to 10 months, and some sources point out that investors once hesitated.
Given NetEase youdao's balance sheet, it is not easy to reduce its reliance on existing shareholders for "blood supply" and diversify its sources of funding.