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Li Lu

Mega Study Co
KOSDAQ:072870
2004-2008
Industry: Korean Online Tutoring
Category: Contrarian

Context
Mega Study is an online tutoring service in South Korea
The Seneung exam is crucial for college entrance, since all students must attend the same public schools,
tutoring has taken the country by storm
Mega Study was founded by one of the best exam teachers in the country
And he figured out to take the best tutors, record their lectures, and give them 23% of revenue
The company caught fire, doing triple digits revenue growth, 40% operating margins, and is asset-light

Why the Company is Mispriced
In April 2004, the South Korean government rolled out a free tutoring service
This impaired Mega Study, their revenue falling 7% in Q204 and 28% in Q304

Alternative View
The company was trading for 120m, had 50m in net cash, and 15m in earnings
Effectively a 8x PE and 4x EV/Earnings

Li Lu effectively reasoned that teachers would be incentivized to stay with Mega Study because
the government program payed a fix salary, whereas at Mega Study they earned a percent of what they produced
Teachers were incentivized to try their best, and students would flock to what is best
Thereby creating a network effect and economies of scale

Even if other tutoring services appeared, and offered 33% instead of 23%, having a larger audience would draw teachers to Mega Study instead

Li Lu reasoned that there were 2 keys to success for Mega Study (a) teachers earn the most, (b) students get the highest grades

Result
In Q404, Mega Study revenue went up 15%, but down Q105 12%
This volatility appears to be the fight between the government program and Mega Study
The volatility could make you question the viability of their business model
However, if you've done your homework, and balanced both sides of the argument, you've earned a right to an opinion

Over the next few years, Megastudy dominated the Korean online tutoring market, reaching 80% of subscriber market share
and revenue 6x larger than the next competitor.
Revenue grew 50% for several years afterwards,
and the stock went from 18,500 won at IPO in Dec 2004 to 120,000 won in 2008
for a 60% CAGR
Notably
You can find bargains, even in IPOs
Unclear why the stock did not continue to grow in perpetuity post 2008