Increasing quantity in insane STG

Introduction

Last week, we highlighted adding the 7th pick to our portfolio which was Sunlands Technology Group (STG) which is specialized in online degrees after post education and other professional education in China. It has almost 50,000 student enrolments per month as well as more than 2,000 employees. Following our last week entry on the stock and as the share is raising from its bottom historical price, we decided to add another addition quantity equal to a single pick to our portfolio this week and averaging our price to the last lowered price. We can’t resist a company that is 20 years old and becoming profitable after long period of loses and trading near its lowest historical price at insane attractive PE. Here below we will highlight more information to our last week detailed report.

Additional information

STG had usually not provided a dividend to its shareholders, which for us make sense because it was initially a losing company, then recovering its negative equity when became profitable. However, last year on June 2022, the company announced a surprise of giving a dividend for the first time equivalent to $0.68, a stunning 17% return comparing to $4 share price. Till now the company didn’t announce dividend for this year and we don’t expect one. Our point is if the company gave dividend last year for the first time in its 20 years history, that is giving a signal of proof of change and trust. We had even noticed that the company capital reinvestment is low and profit is mainly used to pay its liabilities and loans which give increased possibility of dividends in future, especially liabilities is going down continuously quarter per quarter.

To cover all bad and good aspects of the company, we noticed that the asset of the company is in continuous reduction and liabilities also going continuously down. However the equity is continuously improving which mean the reduction in liabilities exceed the reduction in assets. However, that still look odd knowing that the company is getting more and more student enrolments. Below table shows the comparison and the difference to previous quarter between ().

Quarter	Q1 2022	Q2 2022	Q3 2022	Q4 2022	Q1 2023
Shareholder Equity	-131	-110 (+21)	-76 (+34)	-54 (+22)	-29 (+25)
Total Assets	394	367 (-27)	339 (-28)	330 (-9)	324 (-6)
Total Liabilities	526	478 (-48)	415 (-63)	385 (-30)	353 (-32)
Net income	28	17	23	26	26

From above we can see that the sum of the positive change in assets and net income is almost equal the positive change in liabilities which mean assets reduction and net income is usually used to pay the liabilities. Another indicator, always the reduction in liabilities exceed the reduction in assets at any quarter which minimize the worry of assets reduction. That also indicate that the company now reduces the liabilities and its cost to the company using both assets and net income. As in last quarter, the liabilities almost equal assets, which is positive indicator and that can add more stabilization in assets value. To dive more, below table details the main assets components.

It is expected that the drop in cash in Q3 2022 was to pay the dividend at July 2022. The company is very small of around 6.9 million shares and paying a $1 dividend is equivalent of $6.9 million. So, the cash is huge with the company, but also liabilities compared to company size. The number between () indicate the difference between Q1 2022 and Q1 2023

Quarter	Q1 2022	Q2 2022	Q3 2022	Q4 2022	Q1 2023
Total Assets	394	367	339	330	324 (-70)
Property & Equipment	134	125	117	118	117 (-17)
Cash	100	108	95	109	104 (+4)
Right of assets	56	52	48	40	40 (-16)
Short-term investment	35	21	24	10	12 (-13)
Other various points					(-28)

Conclusion

As the company main business represented in student enrollments is growing, the company will remain in good position. Even if the revenues remain almost stable because of competition, the company proved its ability to generate profit from its 20-years established assets. The company will remain trading in a PE ratio below 1 as long as the price is below $6 which is making STG really attractive. Q2 2023 release date is expected to be on 17th Aug where we want continuation of profit and increase in equity. In simple statement, the position of the company now is better than any period from 2018 when started trading in NYSE and started at $125 trade price ! So, why to worry. Below is shareholder equity change per quarter from Macrotrends (Q3 2018 till Q1 2023).

STG at its worst negative equity around Q1 2021 was trading at $14 ! Actually STG traded at $15 in Feb 2023. Another correct statement, STG was trading lowest at $33 at end of 2018 when negative equity was similar to now. Remember, at such profits, if STG gave 10% of its annual profit as dividend, that will be more than 13% returns at current price of $4.4. If STG’s bears was not giving up after the first dividend last year, the company being profitable, and its equity improving, then they will give up, if the company continued such good indicators. The proof is the stabilized in STG price in the last 2 years when the company turned profitable and bears unable to push down further. By logic, the next phase need to be up after a down, then stable phase.