China Consumer

A craving for learning

Education stocks have become a hotspot for Chinese investors

English-w

This now comes with an online alternative

The allure of an Ivy League education is compelling for some Chinese tycoons, although their tendency is to make donations to the schools in question rather than necessarily study at them.

Five years ago Harvard received an undisclosed amount from China Evergrande to fund three new educational centres, and Evergrande’s boss Xu Jiayin, who is set to get a $1.7 billion jumbo dividend from his company, was back in Boston this summer, reportedly to discuss another round of giving.

Pan Shiyi, chairman of rival property firm SOHO China, is another of Harvard’s benefactors, donating $15 million four years ago.

The case of Zhang Lei is a little different. The Yale business school graduate founded Hillhouse Capital, a private equity firm, with $20 million from the university’s endowment fund. But he more than returned the favour by donating $8,888,888 to his alma mater five years later.

Might the love affair with schools like Yale and Harvard be cooling off, though, after news that Bytedance, which controls fast-growing media platforms Toutiao and Douyin, is topping up its investment in Minerva, a company that promises an Ivy League education for a fraction of the price?

Minerva was founded in 2011 with a philosophy based around its students logging in for seminars from anywhere around the world. It offers a liberal arts education delivered digitally to students, but the emphasis on video conferencing and online technology is why Bytedance has backed it, aligning with its portfolio of mobile-first products powered by machine learning.

Growth in China’s own ‘learning sector’ have seen 11 Chinese education firms list in the United States this year, up from seven last year, Caijing magazine notes, and there are at least 10 more hoping to go public in New York or Hong Kong.

The flurry of overseas IPOs is related to a regulatory review at home which is making it much more difficult for educational providers to go public on the A-share market. But the most recent consultation paper could be bad news for those already listed. Proposed rules might ban educational groups from merging with non-profit schools and block them from growing through franchising or partnership deals.

The announcement triggered a stock market sell-off in the sector in Hong Kong in mid-August, with more than $4 billion of market value erased in a week. Wisdom Education – a major operator of premium primary and secondary schools in southern China – was one of the worst hit, seeing its stock plunge by 40% in a single session.

The government is cautious about allowing the flourishing private educators to profit too much from education. Prior to the news of the consultation and the proposed policy restrictions, investor interest in the sector had been strong, buoyed by a belief that Chinese spending on schooling and tutoring remained immune to economic slowdown.

The demand is evident in the flood of students heading overseas for school and university, with at least 500,000 Chinese enrolling at international education establishments every year, according to government estimates.

LEK, the consulting firm, estimates that households in China spend more than twice as much of their incomes on education as families from other emerging markets – and that’s despite the fact that they have fewer children.

The wealthiest families pay for their kids to attend private schools or send them abroad to university when they are older. But a wide range of local educational services are available to families of lesser means, including English language classes, after-school tutoring and cramming for exam-goers.

The first wave of tutoring companies in China built up their businesses through a bricks-and-mortar strategy of schools and learning centres, including the largest providers TAL Education and New Oriental, which operate thousands of classrooms around the country.

The rise of internet-based education is more recent but the potential is vast. Classes can be taught anywhere in China – in contrast the best of the face-to-face private tutoring services are clustered mostly in the wealthiest cities.

In the past, in-person tutoring was preferred by parents in the belief that teaching in the classroom delivers the best results. But lower prices for the online platforms and availability nationwide are major attractions, especially for mass-market products, like English-language courses.

One of the beneficiaries is VIPKid, a Beijing-based platform for one-on-one English teaching that has brought together at least 500,000 students with more than 60,000 teachers, many of them from overseas (see WiC378). Tencent is a major backer.

Liulishuo – Chinese for ‘speak fluently’ – is another of the platforms that has been raising hundreds of millions of dollars from investors. Its pitch is the way that its technology personalises language training on its app, which boasts 70 million registered users. Algorithms take students through different categories and topics, linked by a series of short dialogues. Completion of each level unlocks entry to the next, mimicking a game-playing experience.

Zuoyebang, which is backed by Sequoia China and Legend Capital, is another contender. It completed its latest fundraising round in July for a platform on which school kids can upload questions about their homework. For queries without immediate answers there are also virtual sessions with teachers. Zuoyebang claims 70 million active users and says that more than five million people are paying for its live streaming services.

Other brands are battling to build their own niches: Koala Reading is a platform that delivers Chinese language texts, with algorithms that match students to the appropriate academic level, while Shenzhen-based Codemao is concentrating on coding training, where children can write programs for games and animation and show off their creations.

Each of these providers offers tailored content in an engaging manner. Some of the platforms have ambitions to be world-beaters. VIPKid has turned its original model on its head by putting international students of Mandarin in touch with instructors in China, for instance, and has announced plans to broaden its courses across 100 countries over the next three years. There is also a partnership with Microsoft to develop so-called ‘smart classrooms’ online.

Shares in some of the education companies were hit a couple of months ago when a report by short seller Muddy Waters alleged that TAL Education was inflating its profit figures. But the more recent slump at the tutoring firms was different, following an announcement from the Ministry of Justice that it would be stopping education groups from expanding into areas if they lacked a requisite licence.

The government first flagged that it was investigating the sector in February, the South China Morning Post says, when it published findings that more than half of the teaching firms in its survey weren’t appropriately certified. Beijing also wants to prevent the education groups from absorbing not-for-profit schools and is clamping down on cases in which they are benefiting improperly from tax benefits or state subsidies.

Analysts say that the rule changes could speed consolidation in the industry by driving out the marginal players. The broader question is how the for-profit firms are going to co-exist with the state sector in the future. There is also the issue of oversight. For the Chinese government, the risks of allowing English-language instruction through the online platforms may seem minor, even in cases when the teaching is being provided from overseas. But it’s harder to see situations in which Beijing would be happy about school-goers getting most of their tutoring from teachers outside the state sector in other areas of the curriculum – and all the more so if parts of that instruction are coming from places like America.


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