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Master chef

Why the $625 million IPO of China’s biggest cooking school has disappointed

Chefs-w

Learning to wok

WiC readers still harbouring any doubts about China’s world conquering potential could do worse than watch one of the many adverts propagated by New East Culinary Education.

The country’s leading vocational training institute is well known domestically for its mass marketing campaigns. And what its TV adverts so vividly portray are the sheer scale of the nation, ceaselessly churning out millions of eager new students set to join the workforce each year, all patriotically dressed in matching uniforms of red and yellow.

A new army is on the march and their end destination is a career as a chef, a car mechanic or a computer programmer – or so the adverts would have you believe.

New East itself is the main revenue earner of China East Education (CEE), which went public in Hong Kong on Wednesday. The firm’s HK$4.9 billion ($625 million) flotation is the largest-ever educational IPO, surpassing Laureate Education, which listed on the Nasdaq in 2017.

The IPO comes at a time when the Chinese government has targeted an increase in spending on vocational training so as to provide educational alternatives for more practically minded children.

On May 24, for example, the State Council issued another directive aims at encouraging investment in the sector.

The Chinese cabinet wants more vocational centres to offer training to up to 50 million students. The government is prepared to subsidise these schools to the tune of Rmb100 billion ($14.8 billion) from the country’s unemployment insurance fund.

CEE has 123,959 students enrolled at 145 schools across the country doing courses that range from the culinary to computer programming.

However, its share price fell 11.9% during its first day of trading on Wednesday. It not only underperformed the wider market but also an old school stock like China Tobacco (the overseas unit of China’s tobacco monopoly), which debuted on the same day and rose 9.6%.

Clearly the IPO valuation had been overbaked. Even though the retail order book closed undersubscribed and the institutional order book was only a couple of times covered, the lead managers still decided to price the deal above the mid-point of the price range.

At its offering price, CEE was valued at 14.9 times forecast earnings. As Smartkarma analyst, Toh Zhen Zhou, points out, this was above the sector’s 12 times average. That meant there wasn’t the usual IPO discount that lead managers often use to make sure their deals trade up on the first day of trading.

As the biggest operator of its kind in China, CEE should probably trade at a premium to the sector average. But investors seem to have focused on some of its less flattering metrics. Indeed, what is very clear from its financials is the pressure that its ambitious expansion plans are having on its margins. Net profits dropped 20.5% during the 2018 financial year because it opened 36 new schools in 2017 and 19 in 2018 (it takes about two years for a new school to become profitable).

Student enrolment growth at its culinary arts colleges is also declining and investors are understandably sceptical about whether the company can hit ambitious profit growth targets.

Chinese newspaper columnists also need some convincing about the merits of vocational education as well.

“CEE targets its ads at the parents of rural kids,” pointed out a writer with JRJ. “It promotes the idea that their kids will prosper if they learn to cook, fix a car or how to handle a digger.

“But as rural conditions improve, it seems highly unlikely that kids from these areas will see this as a good career path.”

The company’s management doesn’t agree with that verdict and it says it will use the $625 million IPO proceeds to buy land and set up new schools.


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