Product and Service
Companies included in K-12 private school sector in education industry are primarily private or premium international schools for K-12 students.
Demand for Product and Service
As our sales data indicates, growth in demand in China and Asian market for private education services has been increasing quickly in the past several years, which have resulted in increased competition for resources such as campus and quality teachers. The increasing competition in students’ academic performance and increasing disposable income may be the drivers behind those trends.
Sector’s current, trend, causes behind trend, and future
Current and Trend
- Demand for premium education service in China and some of Asian countries has been strong as indicated by data of companies in this sector.
- Benefiting from strong demand, competition has been more intensive for resources such as quality teachers and campus and acquisition activities have been more frequent.
- Increased competition has significantly lowers companies’ profitability. However, increasing market share/revenue bring more profit for those competitive companies.
Causes behind the trend
- Increasing disposable income of family and increasing realization of academic importance in China and other Asian areas present the fundamental factor for the booming in this sector.
In some of countries, the driver also includes demand from foreign companies’ employees for high quality international schools for their kids as a result of deeper globalization.
There is a reason to believe that the upward trend will continue since the drivers behind the booming may still exist. However, the rising labor costs and thus diluted profits may be supposed to be seen in a short term.
General Financial Performance of Companies In the Sector
It seems that demand for premium education in the past several years has been strong and has huge potentials to grow. It is particularly true in China and other developing countries as indicated by data from some of companies, which present an average of 8-20% growth in 2015, 2016, and 2017.
Our data indicate that there was a universal and significant decline in companies’ gross margins and operating margins in the past several years during the same time when their revenue increased as a result of both increase in tuition and enrollment. We think this is probably a result of increasing competition as we see usually from a booming industry. Schools have to spend more on compensation to retain quality teachers and accelerate expansion by acquisition at higher price. All of those drive companies’ gross margin up. The typical gross margins are in range of 24-36% with a SG&A as percentage of sales of average 15%. The typical operating margin among those companies has gone down to the range of 13-18% from 18-26% about three years ago.
According to our analysis, the current companies’ enterprise price/EBI ratio is between 60 and76 with an interest/EBITDA ratio of 0-40%.