As our data indicates, growth in demand in China for Private after-school tutoring services, English-based test preparation class and tests, and profession training and class for the purpose of certificates has been increasing quickly in the past several years due to increasing competition in students’ academic performance, demand for proficiency of English, and increasing disposable income. However, there are signals indicating that years’ high efficient growth in revenue of many companies may have reached temporary maximum since 2017 or need a pause to wait for accumulation of more demand in undeveloped market/area.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• Demand for private after-school (k-12) tutoring services in China has been increasing very quickly in the past several years as indicated by fast growth in k-12 enrollments in after school tutoring companies and languages school. The growth has been a result of increases in new successfully developed markets and as well existing markets. Competition has been increasingly intensive.
• Demand for professional training and preparation for certificates in IT and healthcare (present the fastest increase) and as well in accounting and engineering fields has grown quickly in the past several years as indicated by the increasing enrollments. However, it seems, to large extent, the increase has come from newly developed market, where demand obviously is not growing as fast as existing market and the significant fixed and staffing investment hurt margins. More data such as same center growth can help better assess sustainability of booming revenue.
• Demand for language and English-based test preparation and tests keeps strong and stable but the growth may be slowing down as market gets mature and slower than expected growth in demand from undeveloped market/areas.
• In most fields, the growth has been mostly driven by the increased enrolled students in small classes and online courses.
• Companies accelerate expanding the physical reach of their network under the competition pressure and to capture the increasing demand from undeveloped market, especially in smaller cities and areas. However, except for k-12 education programs, it seems that developing new market/city has not been successful, in terms of earning, for most of other programs including professional training and English (online) in 2017/18 due probably to economy scales of small cities.

 

Causes behind the trend

• Favourable demographic changes and increasing disposable income of household determine the base of the upward trend in private education business.
• Economy development and industrial demand for skilled professionals may be the major drivers behind booming of professional training.
• The increasing competition for better education resources among students may be the major driver  behind more and more parents in China looking to private tutoring to improve the academic performance of their kids.
• Economy development and globalization help push the demand for language training.
• The general increase in disposable incomes across the country also makes it more profitable to expand business network into some smaller market.
• Recent decline in margin of many programs may be a result of competition for undeveloped areas.

Industry Future

There is a reason to believe that the upward trend will continue since the drivers behind the booming enrollment may exist for a long run. However, companies may have to experience a temporary pullback in their earning due to competition currently. K-12 focused private education and tutoring presents brighter future considering the base size of business. However, the uncertainty in the government’s policies and restriction on private education may be the risky factor in predicting those companies’ performance in a long run.

General Financial Performance of Companies In the Sector

Sales of companies in this sector (China market) seem to grow very quickly in the past several years (41%, 34%, 22%, and 18% for 2015, 2016, 2017, and 2018(1f) respectively based on a typical company data). However, after entering 2018 the growth may be hitting the maximum and may slow down as the new learning centers of those companies did not have enrollment as expected.

As demand for profession IT training services increased quickly as indicated by increased number of enrolled students in the recent years, companies have accelerated expansion of their business such as opening new learning centers and thus caused a declining gross margin (a typical gross margin is currently 66% down from 71%). At the same time, because the SG&A as percentage of sales also went up fast due to increasing spending in marketing and expenses of S&A staffing and more spending in R&D, the typical operating margin among those companies has gone down significantly to about -8%  from 14% about four years ago. Therefore, while companies’ income and cash flow still gained a strong growth due to faster increase in sales in 2015 and 2016 while margin down, large loss has been seen since 2017 due to too fast expansion and slowing growth in sales.

According to our analysis, the current companies’ enterprise price/sales ratio is 1.6 with an interest/EBITDA ratio of 0%.

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