With the change in Chinese population and its class in the domestic market, education consumption is playing an important role in China’s household consumption, due to which Chinese education market is on the rise and developing with rapid acceleration. In 2018 Deliotte had predicted that due to many factors such as favorable policies, an eager capital market, etc. the market of private education will grow to CNY 3.36 trillion. Eight education companies went public from January 2018 to August 2018 in the U.S and Hong Kong. By the end of June 2018, 137 deals were made in the industry, with the amount of total financing of USD 2.57 billion, exceeding that of the whole of 2017.
China’s economy is growing at a very high rate and at the same time, China as a country is globalizing. Chinese parents are willing to spend more money than ever on their children as their expectations rise and they are happy with the new foreign educational system and teaching methods being integrated.
The education industry is being affected by the commercial factors and the inflow of capital, these companies will have to ensure market growth, expand and improve management without compromising their core competitiveness and quality of education. Hence lots of opportunities with challenges will rise for the industry players, in the future.
Reasons for the Boom in China’s Private Education Industry
Early childhood education has risen due to the implementation of two-child policy which brings sufficient demand and the government's policies to encourage preschool education; the growth of K12 extra-curricular training is attributed to the demand increase resulted from the pick-up of the school-age population. Meanwhile, the desire for further education and international education also drives the demand for K12 examination-oriented education and language education; personal training grows because of better economic capability and higher willingness to improve competitiveness, Deloitte reports.
There are three key, long-term themes in the Chinese market that influence consumer behavior: demand for international education, an increase in online adoption and affluence driving demand for premium products.
With almost 1 million Chinese students choosing foreign institutions, international education is a priority for the Chinese parents.
In 2018 China exceeded the USA in terms of education innovation and technology investment by approximately three to one. Just 10 companies have absorbed half of this funding. Online models are proliferating, and Chinese consumers, who bring an “online first” mentality, are willing to engage with education products, reports L.E.K.
The quality and feasibility of Chinese private education are improving day by day, driven by an increasingly urban, and cosmopolitan population. Choosy Chinese education consumers are premium preferring and internationally minded.
The Chinese education sector is highly competitive, with 9.4 million students sitting each year for the gaokao (university admission exam) and C9 universities selecting as few as 50,000. Parents will spend to get an edge, generating hyper-competition from pre-primary school.
According to iResearch Consulting Group, the revenue of China’s online education market reached CNY 251.76 billion in 2018 with a YoY growth of 25.7%, which was estimated to keep a growth rate of 16%-24% in the following 3-5 years. The growth rate may decline but will have a steady rising momentum. The rising acceptance level for online education among users enhanced online service payment willingness and improvement in the online learning experience and effects are the main reasons for the steady growth of the online education market.
Higher education and vocational education have long been the main part of China’s online education market and took up almost 80% of the market. Given that adults usually have stronger self-control ability, clearer study targets, limited spare time and fixed vision, they are the main customer group of online education nowadays, and their demand for education is particularly strong in the scenarios of pursuing a higher education background, searching for a job and preparing for a certification exam.
Four hot sectors in the Education Industry
Primary and secondary online education such as homework tutorials, vocational schools, and English education. Prominent companies include 17ZuoYe (一起作业), VIPKID, Yuanfudao (猿辅导), and ZuoYeBang (作业帮).
Test-oriented education focusing on examinations such as CET-4, CET-6, TOEFL, IELTS and Civil Services Examinations. Some large organizations are Koolearn (新东方在线), GEDU (环球雅思), and Offcn Education (中公教育).
Vocational education and skills training including technology, accounting, finance, and other professional skills. Example companies are FenBi (粉笔网), HuaTu Education(华图教育), ChinaACCA (中华会计网校).
• English language training
In this market of USD 18 billion, 70% of total revenue is from junior training. Parents want their children to be fluent in reading and writing when it comes to English, and that aspiration is driving the market; enrollment in offline, skills-based junior ELT in Tier 1 cities has grown by 25% year-on-year since 2014.
A key factor driving the growth of the market is the growth of the online education market in China. Also, there has been an increase in the adoption of smartphones and other mobile devices in China, which is pushing the growth in the market. The increased per-capita spending capacity of the Chinese population and the flexibility in online education offerings have been key to driving the online education market in China. Training programs conducted by native English-speaking teachers can be availed through the online medium.
• K-12
The bilingual K-12 market is large, at USD 2.2 billion across the 15 largest city markets, with Tier 1 cities Beijing, Shanghai, Guangzhou, and Shenzhen comprising 75% of the market and 84,000 enrollments. Beijing and Shanghai are more established markets, where the concept of bilingual education started with senior grades, while Guangzhou and Shenzhen are new markets with a more diverse grade mix.
K12 education demand is high, parents are usually worried about online education due to the high trail-and error cost. At an initial stage market share was only 9% back in 2012, but due to the improvements in the education concept among parents (post-90), their rising incomes, children’s familiarity of internet, and the second-child policy, parents and students are More receptive to online K12 education now. iResearch estimates that the share of online k12 education will grow to around 28% in 2022 and share of higher education and vocational education in the online education market might drop to about 68%.
• Test prep, tutoring and enrichment
China is the largest TTE market in the world. It has a revenue of CNY 500 billion and has grown at 14% since 2014.
While online provision is still a small segment of the junior ELT market (roughly 10%) according to L.E.T, it is now a key trend. Given consumer perspectives on online education, supporting traditional center-based ELT companies in moving online will be a key opportunity for investors. Premium offline providers remain a strong sub-segment for investors, given that they employ native English speakers and are therefore more resilient and competitive against newer online models offering access to native speakers.
• Higher and Vocational education
China has unveiled a national plan to reform its vocational education system to better prepare its workforce for a more market-oriented economy.
The strongest growth since 2013 has been in private vocational education institutions. China’s higher education system is leaned more toward academic-oriented programs. As China pivots toward a service based economy, there is a need for the workforce to be trained to meet these new demands.
Investments in Chinese education
According to eduFair China, by 2018, the number of users grew 63% to 179 million and the market value reached CNY 300 billion. It is estimated that these number will further grow with each year and reach CNY 714 billion by 2025.
Online Education is the main sector where most of the investments have taken place in China. Companies like, VIPKID, Zouyebang, Yuanfudao, etc., have raised millions of dollars.
The online education in China took a turn from 2010 with online learning, online communities and MOOC’s became common. 2013 became the era of mobile+education, with easy access to smartphones, live streaming classes, and education Apps.
China’s education industry has been a favorite for capital investment. Education companies good profitable business models with stable cash flow based on prepayment, strong gross margin generated by high value-added, and new products brought by the technology make the industry attractive for the capital market.
Since 2014, there has been frequent funding in education. As far as the number of deals in concerned; STEAM education, vocational education, and early childhood education were the top three investment targets in the first six months of 2018.
Statistics from CVSource shows that from 2017 to 3 August 2018, 11 education companies went public in HK, and 7 in the US. With the enforcement of Non-public Education Promotion Law. It is estimated that there will be more companies to go public.
However, when it came to large-scale financing in 2018, American education technology companies were dwarfed by Chinese counterparts. Chinese educational technology companies included VIPKID (USD 500 million), Zouyebang (USD 350 million), etc.
2019 Q1 total investments and leading investors
A total of 1740 investment events took place in the first quarter of 2019. According to Xiniudata. The most active investors have been IDG capital and Zijin venture capital with 24 investments each. They were followed by Sequoia China (16), K2VC (15), Tencent Industry win-win fund (13), Casstar (13) and Matrix partners China (12).
Before Round B investments totaled 882, accounting 51% of the total investment events. The areas invested in the most were: Corporate services, healthcare, education, and finance.
2019 Q1 investments and leading investors in Chinese education
The data of 2019 first quarter education industry compiled by Jingmeiti shows that 131 investment and financing events have taken place in the education industry. That sums up an average of 1.46 financing per day. The total amount is calculated to be CNY 12.5 billion, which is less than that of the previous year’s first quarter (Q1 of 2018).
As we can see from the graph above that the number of financing events has decreased by 14.9% sent, although the total amount of funding has increased by 2.4 % from 2018 Q1.
Now let us take a detailed look at the financing events, total amounts and the funding rounds of 2017 Q1, 2018 Q1, and 2019 Q1.
The amount of late-stage investments in 2017 first quarter is still undisclosed according to the source.
In the first quarter of 2019, almost two-thirds of financing events took place using Chinese Yuan, with only a small portion of them being in US dollars.
If we have a look at the investment events that took place in China’s education industry in the first quarter of 2019, most of are in tier 1 cities with Beijing on top, Shanghai and Guangzhou second and third respectively.
The two of the most active investors in China’s education industry in 2019’s first quarter are TAL and New Oriental with 4 investments each. TAL has invested in DaDa, American Education Company: Ready 4, Qintuan, and His Performance Team (HPT). The companies New Oriental invested in are Micro Language, Xueda, ishizh, and Xiaoyang Edu.
With all the data and facts mentioned above, it is clear that compared with the same period last year, the number of financing events decreased, but the amount increased by 2.44%.
New Oriental and TAL are the most active investors in the education industry with 4 investments each.
The quality of K-12 education still seems to be a concern by the capitals and the investment heat of vocational education is on the rise. Online education institutions are growing at a rapid rate, accounting for half of the large amounts of financing.