YOUDAO(DAO.US)：A DOMESTIC LEADER IN LEARNING HARDWARE;SMART DEVICES TO SATISFY LEARNING DEMAND

　　Revenue to fall 28% YoY in 2Q22
　　Youdao plans to announce 2Q22 results on August 18. We expect revenue to have declined 28% YoY in 2Q22 to Rmb935mn, mainly as the firm separately listed its K9 academic after-school tutoring business as a discontinued operation. Given that the firm needs to increase investment in R&D and distribution channels after business transformation, we estimate its non-GAAP net loss at around Rmb479mn in 2Q22.
　　Trends to watch
　　COVID-19 headwinds weigh on shipment of learning hardware products; sales of online courses to grow steadily.
　　1. Learning hardware: Given that the 2Q22 resurgence of COVID-19 in some regions of China affected the supply chain, logistics, and shipment of hardware, we expect sales of learning hardware products to increase 3% YoY to Rmb212mn. Since 2Q22, Youdao has rolled out a diverse range of new products, including Smart Lamp and Youdao AI learning machine. We expect the continuous expansion of product portfolio to boost revenue growth.
　　2. Education informatization: The Ministry of Education issued new national curriculum standards for compulsory education in April.[1] Youdao launched a variety of new products to help teachers collect internal school data and assist in lesson preparation.
　　3. Online courses: We expect revenue from learning services (incl. adult training and STEAM courses) to reach Rmb548mn in 2Q22. Driven by robust sales of learning products and online courses, we expect the firm’s revenue to increase 10% YoY in 2022 to Rmb4.4bn.
　　A domestic leader in the dictionary pen market. Youdao has continued upgrading its dictionary pens in order to maintain competitiveness. On August 9, it rolled out the fifth-generation Youdao Dictionary Pen. The firm pioneered the dictionary pen OS system, which can interact with applications such as Youdao Cloud Notes. The dictionary pen provides quality translation services in more than 100 languages and has built-in test preparation books. In July, Youdao launched its AI learning machine, which incorporates mainstream textbooks for elementary and middle schools and has a wide variety of functions to satisfy learning demand.
　　Increasing R&D investment after business transformation. We expect the firm’s gross margin to fall 6ppt YoY to 46% in 2Q22, mainly as revenue from its learning hardware products has slowed amid COVID-19 and the channel construction costs are fixed. Given the release of many new hardware products in 2Q22, we expect R&D and selling expenses to increase QoQ. We estimate the 2Q22 non-GAAP net loss at Rmb479mn.
　　Financials and valuation
　　We maintain our 2022 revenue forecast. Given the firm’s increasing investment in new businesses, we increase our 2022 adjusted net loss forecast to Rmb934mn from Rmb848mn. We leave our 2023 earnings forecast unchanged. Given that we believe it will take longer than the market expects for the firm to turn loss into profit due to increasing investment, we maintain NEUTRAL and we cut our SOTP-based TP by 21% to US$5.5 (1.0x 2022e and 0.7x 2023e P/S), offering 19% upside. The stock is trading at 0.9x 2022e and 0.6x 2023e P/S.
　　Risks
　　Failed business transformation; intensifying competition; disappointing hardware sales.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。