This Stock Is No Child's Play With A Bet On Silver Economy

The adult education company is adding products for seniors to adapt to changing times, and is now also testing out the youth market with a new toy investment

Key Takeaways:

• QuantaSing bought a controlling stake in fantasy toy maker Letsvan, moving it into the fast-growing sector for experiential toys for all ages
• The adult education company's rising profits and healthy cash flow should help to support the investment

Its focus is adult education, but QuantaSing Group Ltd. (QSG.US) was just a child on China's corporate scene, at 4 years old, when it debuted with a Nasdaq IPO in 2023. Now the young company is marking another milestone in its brief lifetime with an acquisition that will make it the first U.S.-listed company in the hot sector for Chinese pop toy development.

Investors applauded the company's new toy story, which saw QuantaSing announce in late March that it would acquire a controlling stake in Shenzhen Yiqi Culture Ltd., also called Letsvan, for undisclosed terms. The stock more than doubled in the days after the announcement, and, despite a recent pullback amid recent market volatility, is still about 50% higher than pre-announcement levels.

The investment marks the latest step in QuantaSing's continuing drive to diversify beyond its core adult education business into other products and offline services, so far primarily for China's growing number of seniors.

Having targeted a wide swath of the adult market, the company now seems to be setting its sights on Chinese youth, though outside the sensitive education sector. Letsvan is a rising star in China's world of experiential toys, also known by the initials ACGN, often derived from products like anime, comics, games and novels.

Like QuantaSing, Letsvan is a relatively young company, with a portfolio built around trending toy IPs including fuzzy animal doll Wakuku and Youli Ziyuli, a cute girl doll. The latter is a key product for Miniso (MNSO.US; 9896.HK), one of China's largest retailers that is also trying its hand at pop toys to tap into the ACGN boom.

QuantaSing's entry to the market brings it potentially into direct competition with Miniso, as well as Pop Mart International (9992.HK), whose success with pop toys has lit a fire under its stock, sending it up more than fivefold over the last year.

QuantaSing founder and Chairman Li Peng said the Letsvan purchase "reflects our strategic approach to deploying our abundant cash reserves to capture structural opportunities in the consumer sector." QuantaSing said it will integrate its leadership team with Letsvan's to implement a strategy that integrates online and offline retail experiences.

QuantaSing's core online learning business is part of a large but declining market in China, worth a forecast $40.43 billion this year but contracting by 0.89% annually, according to data aggregator Statista. By comparison, China's character toy market was worth a much smaller 40.3 billion yuan ($5.5 billion) in 2023. But unlike education, the character toy market is expected to grow at a rapid 17.8% annual clip to reach 91.1 billion yuan by 2028, according to market research firm Frost & Sullivan.

Soochow Securities said in a recent report the surging popularity of these goods reflects a "lipstick effect" as consumers turn to cheaper, mood-boosting products. Senior citizens have bought into the fad as well, with sales of elder-oriented toys jumping 124% on the popular Taobao and Tmall e-commerce platforms.

Tapping the ‘silver economy'

QuantaSing has been edging into the "silver economy" boom with related products and offline services since last year, trying to diversify beyond the online courses in financial literacy and other adult topics that still make up over 80% of its revenues. Last August, it declared a new strategic vision of enhancing quality of life for seniors by offering everything from wellness programs and nutritional guidance to technology-assisted healthcare.

By pursuing that group, the company is looking to tap a fast-growing segment of 310 million people in China aged 60 and above, or 22% of the population, according to China's Ministry of Civil Affairs. That demographic is expected to rise by another 10 million by 2035, accounting for 9% of China's GDP by that time.

With Letsvan, QuantaSing has gained a stake in the youth culture not only for China, but also in Southeast Asia, where Letsvan has participated in offline trendy toy exhibitions in Thailand, Vietnam and other locations, according to Chinese media. Letsvan distributes through Miniso and Miniso's Top Toy sub-brand of stores, and sells online through Tmall and ByteDance's Douyin, the Chinese version of TikTok.

Letsvan is also active in tie-ups with other non-toy companies, collaborating with brands like Hong Kong handbag maker Fion, tea brand Ningji and Tencent's QQ Music streaming service. "Joining QuantaSing opens tremendous growth opportunities for Letsvan," said Letsvan CEO Zhan Huiyu. "By combining our IP advantages with QuantaSing's operational capabilities and entrepreneurial spirit, we aim to become a leading player in the pop toys industry."

A look at QuantaSing's latest financial report, released just weeks before the Letsvan announcement, shows why the company is so excited about the new investment. The company's revenue in three months to December declined by 25.9% year over year to 726.6 million yuan, with individual online learning services generating a big majority of that at 601.3 million yuan, down by an even larger 32% from 873.6 million yuan a year earlier.

On a more positive note, QuantaSing's net income and total registered users for the quarter both showed gains of 20% or more year-on-year. The company's cash and short-term investments rose to 1.2 billion yuan at the end of December from 1 billion yuan six months earlier, providing it with plenty of ammunition to acquire new assets like Letsvan.

"Our … financial performance represents our disciplined approach to business transformation," said CFO Xie Dong on the company's latest earnings call. "We have the flexibility to carefully evaluate strategic opportunities as we navigate this transitional phase." 

Also on the call, CEO Li said QuantaSing was shifting from traffic-driven growth to high-quality growth, with "remarkable" results from its online calligraphy project for senior learners. Still in its early stages, QuantaSing is also testing an offline service strategy with Beijing Nursing Home and is developing a membership system as part of its travel study programs.

"By diversifying our revenue streams across different business lines, we're positioning ourselves to navigate market uncertainties and cyclical challenges," Li said. "This diversification strategy helps us reduce risks in any single business area and builds a more resilient business in today's fast changing environment".

QuantaSing's stock currently trades at a price-to-sales ratio of 0.46, less than half the 1.05 of domestic peer Youdao (DAO.US) and 1.40 for global competitor Coursera (COUR.US). It may hope that the Letsvan deal will take it more into the zone of Miniso's far higher P/S ratio of 2.16, or Pop Mart's meteoric 12.74. Time will tell, but it certainly seems that QuantaSing is doing everything it can to adapt to changing times.