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 (43%, 67%, 64%, and 71%for 2015, 2016, 2017, 2018 so far respectively) probably driven by the increasing disposable income of family in China and intensive competition of academic performance among K-12 student.

As demand for private after-school tutoring services increased quickly as indicated by increased number of enrolled students, companies have accelerated expansion of their business such as opening new branches in new areas and thus caused a declining gross margin (a typical gross margin was 48% in 2017 down from 53%). Therefore, while SG&A as percentage of sales also went down due to quick increase in sales, the typical operating margin among those companies has gone down to 12%  in 2017 from 15% . However, while margin went down companies’ income and cash flow still gain a strong growth due to faster increase in sales during this period. As sales continued to grow we see this company’s gross margin (50% in 2018) was improved benefiting from leverage of rental costs expenses. Therefore, while more spending in marketing (promotions included), we see improved operating margin (13% 2018).

According to our analysis, the current companies’ enterprise price/EBI ratio is 94 with an interest/EBITDA ratio of 5%.

Looking for  multiples to help you make decisions in pricing of PE, M&A, or distressed debt transactions?

Please click the button below.