OMO, the New Era of Online Education March 2020 China offline K-12 - PowerPoint PPT Presentation

OMO, the New Era of Online Education March 2020

China offline K-12 AST market is projected to grow at 9% CAGR, while the premium sector is expected to grow at 16% Premium after-school tutoring (AST) sector The premium sector presents the most grows much faster than the entire market attractive segment in the offline space China K-12 AST Market Size (2018 – 2022F) RMB billions CAGR 611 ~RMB 200bn Drivers of premium market growth: +9% premium market 564 518 Premium 196  Rising awareness and preferences for 475 (32%) CAGR +16% 169 (30%) 146 433 individualized learning (28%) 126 (26%) 109 (25%)  Consumption upgrade by increasing number of Mid-Class families 416 Non-premium 395 373 (68%) 349 CAGR +6% (70%) 324 (72%)  Rising willingness to pay for premium (74%) (75%) services 2018 2019 2020 2021 2022 Notes: 1) Premium tutoring services refers to either 1-on-1classes priced at or above RMB 200 per session or small group classes priced at or above RMB 120 per session, according to Frost & Sullivan 2) Numbers were projected back in 2017, when it only included limited size for online AST sector as it was still at nascent stage. For example, it predicted less than RMB 10bn online revenue by 2022. An updated projection for online sector by the same vendor is provided on next slide 2 Source: Frost & Sullivan : China’s K-12 After-School Tutoring Market Study (March 2018)

China online AST market expects much faster growth at 55% CAGR driven by rapid consumer adoption and increased supply China online AST market penetration China online AST market size RMB billions 367 55% CAGR Online AST as % of total AST market* 45.0% Online Small 39.0% 277 Group Class 32.4% & 1v1 CAGR @ 197 52% 23.4% 15.7% 119 Online Large Group 9.5% 64 Class 4.7% CAGR @ 1.0%1.3%1.8%2.9% 30 58% 12 6 3 2 1 2013 2014 2015 2016 2017 2018 2019E 2020F 2021F 2022F 2023F 2013 2014 2015 2016 2017 2018 2019E 2020F 2021F 2022F 2023F * Forecasts were made before the COVID-19 outbreak, numbers may be higher due to potentially higher online adoption 3 Source: Goldman Sachs Research, Frost & Sullivan, CITIC securities

There are three major online segments, each offers differentiated value propositions thus create growth potential Each online formats satisfies 2 of the 3 key consumer preferences: convenience, effectiveness & price Effectiveness Online Online Small Group 1on1 Class Class Convenience Price Online Large Class While all three segments present attractive growth potential, the online large class segment is relatively crowded, while the other two segments still at early stage 4

Both offline and online models are facing their own challenges Online Model Offline Model X License requirements for centers X Fierce competition X Coverage limitation (~3 kilometers X Learning results not ideal due to limitation from centers) on engagement level, thus still challenged to meet K-12 score improvement requirements, the main industry demand X Capex and local management requirements X High customer acquisition cost due to high cost and low conversion rates in online X Ramp-up time requirements (3yrs to channels stabilize) Profitability largely not proven… so far X X Impact by online penetration only few online large class models profitable 5

OMO model combines advantages of both online and offline models = best Online Model Offline Model OMO Model = worst Pure online, Pure offline Online teaching/service + No offline center No online presence Offline experience center Low, student High, student High, student For customer Convenience needs to visit Can learn at home Can learn at home offline center High, offline real Low, person interactions Interactions / High, offline real only online Services Quality person interactions Online services services also available Relatively low, High, acquires For Company customer online Acquisition Cost Low CAC Offline centers help leads to high CAC lower CAC Light offline centers Fast, can expand Slow, requires serve as experience Expansion Pace license approval center for acquisition nationwide quickly and service functions Combines advantages of both online and offline models 6

OMO model helps offline players address incremental demand, helps expand into areas where offline centers cannot yet cover Customer Types Existing Customer New Customer More frequency while Same city but long also save commute distance from 希望加频的同时 time: OneSmart OMO OneSmart center: Convenience 希望节约往返校区的时间 model Weekday online OMO model courses • Online and offline integrated • Leverages ~430 offline learnings Customer Needs centers in 20+ provinces • Convenient for students at long Better teacher distance to our centers or students For high school prefer online education Better / students* Teacher • Choices for higher quality teachers located in the largest cities of China OMO model * Online education suitable for high school students because: Lower tier city students demand for higher quality teachers often gathered in the largest cities of China such 1. as Beijing and Shanghai 2. College entrance exam is more standardized countrywide in China; 7 3. Students more self driven thus more concentrated when doing online classes

OneSmart OMO model: integrated with offline business and offers supplementary and compelling value proposition OneSmart OMO Model Customer Offline Center acquisition Student Show-room Consultancy Assessment Offline and Online integrated OneSmart APP Teaching & Online Platform Services Teaching Feedback & Services Supplementary to offline business to capture larger market demand Customer Demand Products Unit Economics Proven unit economics (Per Student 1on1 format and typically OneSmart Prefer effectiveness of onsite OP Margin >25%) and margin focused on one or two Offline Model 1on1 tutoring expansion driven by new center subjects ramp-up 1. Unit economics comparable to 1. Offerings of more subjects offline model: some discounts to 1. Time and convenience 2. 1on1, group and large class offline pricing, offset by rental OneSmart OMO 2. No limitation on distance formats savings, higher teacher utilization Model 3. Cover more lower tier cities 3. Choices of shorter term rate and similar acquisition cost 4. Choices of high quality teacher 2. Profitable growth … not to burn packages money for scale 8 8

OMO offerings provide a much larger addressable market, creating largely increased growth potential for OneSmart OneSmart Business Line / City Tier Matrix Growth Strategy Positioning OneSmart Offline Business Higher • Upgrade to more premium Elite products to drive incremental growth Tier 1 & 15 Largest Tier • Growth strategy is to scale up the top 20 cites to 2 Cities achieve city level operations efficiency and OneSmart Offline economy of scale & Weekday Online • Incremental growth and margin expansion driven by ramp-up of the 237 new centers opened in Tier 2 Cities FY18 & FY19 OneSmart Offline & Online OMO OneSmart OMO Tier 3 Cities • Expand our offerings to cover students located far OneSmart from our currently limited center network in tier 2 Online OMO cities • Possibility to enter tier 3 or even lower tier cities where we have not entered yet City Tier Lower Higher While OneSmart will continue to grow its offline business to strengthen its leading position in the offline premium sector, it will strategically focus on OMO model to capture much enhanced addressable market 9 Note: Tier-1 includes 4 cities, Tier-2 includes 45 cities

OneSmart OMO products satisfy the demand of majority students OneSmart OMO Products Map OneSmart Online By Student Grades Online Personalized 1on1 Classes Products 1 － 1on1 Online classes for K-12 tutoring Overseas Studies Test China Student Preparation and Population in 2019 － Focused on middle and high school students Consulting High 24million School Online K-12 personalized 2 Online Small Group Classes 1on1 classes － Two versions: premium and regular Middle 47million School － Initially focused on students from 4 th grade to 9 th Online K-12 Small Group Classes grade, expand to 10 th through 12 th graders Primary School 104 million & 48 million Young Children Classes Kindergarten Overseas Studies Test Preparation and 3 Consulting Classes － Online 1on1 and small group test preparation By Market Segmentation / Affordability classes for students who plan to study abroad Online K-12 Personalized － The consultants also help students through the 1on1 classes school application process Premium K-12 small Premium group classes Market Young Children Classes 4 Young Children Classes － Online small group classes for Primary School & Mass to high- Regular K-12 Small Kindergarten end market group classes － Mainly English Language and Math programs Online Large classes Note: OneSmart also plans to roll out a online large class as a complementary product SKU 10 Source: China student population data based on NDS data and Goldman Sachs research