[JD Says] Great Era of Education: There is no End for Learners, but Path for Investors
[JD says] JD Capital focuses on investment and witnesses market development. Bolstered up by capital, we would like to share our reflections and experiences with enterprises in China.
[Who’s sharing] Department of Education Investment of JD Capital: With extensive investment experiences, the department knows well about the transformation of market models at home and abroad and seizes the investment opportunities in a systematical way. The department concentrates on such sub-fields as kindergartens, international schools, and private colleges, making investments in multiple ways, such as minority ownership and buy-out acquisition.
Nowadays, instead of population size, innovation depends more on population quality, since a bigger population does not bring about any dividends, w population quality proves the core competency of China in the next era.
Enhancing the quality and fairness of education, elevating the level of teaching and innovation of colleges, and supporting and standardizing the development of the education industry—these have become the major concerns of all sectors of society, including families, schools, governments and communities.
It is a crucial opportunity in the era of consumption upgrading for us, an investment firm, to pay attention to the quality enterprises in the education industry.
Favorable policies successively introduced and market demand sharply increased
In 2015, favorable policies for the education industry were successively introduced.
In January, the State Council Executive Meeting passed the draft amendments of Education Law, Higher Education Law and Non-state Education Promotion Law, approving the establishment of for-profit private schools, and taking the concept of “Internet Plus” as a state strategy, which has enhanced the market potential of online education.
In October, the Ministry of Education launched the Action Plan for Innovation and Development in Higher Vocational Education (2015-2018). In the same month, the Fifth Plenary Session of the Eighteenth Central Committee decided to fully implement the two-child policy.
In December, the National People's Congress passed the new Education Law of the People's Republic of China and Higher Education Law of the People's Republic of China. The provision that “any organization or individual may not establish schools or other educational institutions for the purpose of making profit” was replaced by that “a school or any other educational institution to be run entirely or partially with fiscal funding or donated assets shall not be formed as a for-profit organization”—the requirement that colleges could not be established “for the purpose of making profit” was removed.
Thereby, the policies have paved the way for the comprehensive development of education institutions from the supply side. By attracting substantial social capital to education and school operations, education will become more and more industrialized. Moreover, the policies have also helped to ensure that the soaring education demands are met and confidence are given to the current education industry.
The education industry is based on rigid demand. Compared with other industries, it is influenced far less by macro-economy. Therefore, the education industry is also referred to as “an evergreen tree” in investment business.
At present, the overall market volume of preschool education (education for kids aged between 0 and 6) in China is worth 300 billion yuan; the total number of students enrolled in primary and middle schools reaches 191 million, more than any other country in the world. Therefore, the market demand for preschool education and K12 education remains huge. Meanwhile, public statistics show that the market of vocational education is expected to reach approximately 690 billion yuan in 2020. Due to the increasing popularity of tertiary education, the capitalization of this market sub-field has exceeded 70 billion yuan in 2015.
Overall, driven by favorable policies and its nature of rigid demand, in 2015, the size of education market in China totaled 6.8 trillion yuan. In addition, the growth rate of the state educational appropriations has been maintained at over 15% in the past two decades, and the expenditure for education as a share of urban household consumption has increased year by year, making education constitute the second largest household expenditure in China. It is expected that, driven by the two-child policy, the growth rate of preschool education market will be over 15%; influenced by the higher acceptance rate and upgrading of vocational demands, the sub-fields like vocational education promise huge development opportunities.
A fresh round of securitization
A series of favorable polices and continuously emerging quality targets are expanding the market of the education industry by several trillion yuan.
According to the statistics of TalkingData, in the first ten months of 2015, the number of investment and financing programs reached 149, financing 8.209 billion yuan, up by 56.2% over the same period of the previous year.
Rise of special industry investment funds: Due to the unique nature of the education industry, mainstream investors are likely to undervalue some small but promising programs at the early stage. The special investment funds for the education industry can not only provide education start-ups with the first funds, but help to advance their development through abundant connections with industry professionals. These quality programs will become an important part in the merges and acquisitions of the education industry in the future.
Online education is highly favored: In terms of the programs that have obtained investments in 2015, B2C online schools, with a stable cash flow, have been increasingly popular among investors. Among them, the hottest ones are programs which can give play to the stable cash flows of traditional offline education while taking advantage of the relatively low marginal cost of online channels.
Acquisition investment flourishes: Currently, among all the market segments, training institutions with clear business models enjoy relatively stable cash flows. Though the scale of these market segments is not big enough for securitization, for listed companies interested in the education industry, these quality programs are favorable acquisition targets.
During the securitization process of Chinese education enterprises, the first peak was from 2006 to 2008, with six enterprises getting listed, most of which provided training for overseas universities entrance examinations or specialized qualification examinations. The second peak appeared in 2010, with four enterprises listed, mostly engaged in after-class education and English training. Now, the number of listed education enterprises has grown from few to almost thirty. They cover various market segments, including early education, preschool education, K12 education, vocational education, service for studying abroad and education for all-around development.
At present, many A-share listed companies are entering into the education industry through different ways: some expand into the sector by relying on their main businesses; some by virtue of their shareholders; some withdraw from and transform the original main businesses; some plan to develop education as their secondary main business; and some are returning from the privatization of China Concepts Stocks.
In the future, the accelerated launch of registration system, establishment of Strategic Emerging Board, growth of New OTC Market, and the constant improvement of merger and acquisition tools will of great help to the excellent enterprises in different segments of the education industry. They can make full use of capital, grow stronger and develop into leaders of the industry. The capital market of the education industry is expected to embrace a fresh round of securitization.
Four investment targets are leading the industry
Driven by both favorable policies and the growing market, four education segments stand out as the main investment targets in the next few years, namely preschool, K12, vocational and private education. However, as customers in different segments have distinct preferences and learning patterns, the investment styles will differ from one another in the implementation process.
Preschool education: With the introduction of the two-child policy, preschool education will maintain the momentum of rapid growth. At present, leading enterprises have stood out in first-tier cities, where the market is reshuffling and early education institutions are gradually standardized. Nevertheless, in other cities, the number of early education institutions remains relatively small, with existing institutions staking out their turf.
After-class education (K12 education): Due to the reform of college entrance examination system, the once-popular programs like courses for Olympic Mathematics Competition are no longer favored by customers. Instead, programs for hobbies and main subjects will become the major growth engines. Meanwhile, training institutions are about to devote great efforts to online education, and the market size of after-class education will be further developed.
Vocational education: Online education is increasingly recognized by customers, among which qualification courses are the mainstream. Moreover, the favorable policies introduced by the government in recent years will reinforce the advantages of vocational education.
Higher education: At present, the market of private higher education has entered the phase of large-scale reshuffle. Such segments as private undergraduate education are still enjoying huge growth potential. Thanks to the overall favorable policies, the national private higher education groups emerging in the future are expected to go public and increase the market concentration rapidly, achieving relatively fast business growth.
The education industry in 2016 will still feature steadily increasing demands, constantly rising concentration and gradual initiation of large-scale securitization.