Part V – II Analysis on Investment Strategies of Chinese Online Education Companies in 2015
I. Analysis on investment strategies of Internet giants
According to incomplete statistics, almost 30 public and non-public companies have established large investment funds, totaling more than 15b Yuan. Now, both these giants and well-performing entrepreneurs want to invest online education with a very clear purpose. That is in line with the judgment made by the author in 2014: it was impossible for online education companies to grow soon, but if they wanted to grow fast, they had to grow through industrial investment and acquisition!
It is very common to see the collaboration in the online education field in cold winter. It can be seen from the below figure that many listed and investment companies have started making a plan for merger and acquisition. Up to date, Tomorrow Advancing Life has invested almost one hundred companies and formed a solid foundation. Three giants including Baidu, Alibaba and Tencent (BAT) have earlier made arrangements for online education and now already formed a certain scale, e.g. Chuanke, Zybang, SmartStudy, Jiaoyu.taobao Alidingding, KE.QQ, Tencent Campus, Entstudy, Yitiku and others. iFLYTEK prefers K12 very much and also attaches importance to technologies and contents. With high-end voice technology and artificial intelligent system, it also invests and buys Arcsolu Tech (exam technology) and Jyeoo (question bank). In addition, NetDragon invests and purchases CHIVOX (voice) and Prometheus (electronic white board) and others, with an aim to expand K12, vocational education and enterprise training. Talkweb acquires Sea Sky Land, Changzheng Education, Longxing Information and Chengzhang Information in order to comprehensively create the ecosphere of online education.
II. Analysis on the general situation of public education companies
The popularity of online education in China has started fermenting since 2013 and increasingly intensified in 2015. At the beginning of 2015, the capital swept share A like raging fire and then spread to the new OTC market.
According to incomplete statistics, the number of merged and acquired shares A is 20 and more than 70 additional education companies are traded in the new OTC market with the volume of more than RMB 5b in 2015. The capital is so popular mainly because of:
- Huge market space
There are now about 9500 companies engaged in online education. They have about 300,000 employees, over hundreds of thousands of courses and hundreds of millions of users. Besides, according to the research report released by Deloitte, the whole education training market size reached RMB 960b in 2012 and on average, 30% of a child’s monthly consumption was for educational trainings. The market is now nearly 1.5t Yuan, if calculated at the CAGR of 20%.
- Legal support
Draft amendments to the education law, higher education law and non-governmental education promotion law were passed at the State Council executive meeting held on 7 Jan. 2015, and decisions were also made to submit them to the Standing Committee of the National People’s Congress for review.
On Dec. 27, 2015, the decision made at the Standing Committee of the National People’s Congress about the Education Law of the People’s Republic of China was released to amend the Education Law. According to the decision:
Former Article 25 “No organization and individual shall be allowed to establish schools and other education institutions with a purpose of making a profit” in the Education Law is modified as “Schools and other education institutions established with financial funds or donated assets or with part of such funds or assets shall not operate as profit-making organization.” This amendment has the profitability of education companies “rectified”.
- Policy support
According to the Statistical Bulletin of the Implementation of China’s Education Expenditures of 2014 released by the Ministry of Education, China’s total education expenditure in 2014 was 3.280646t Yuan, up 8.04% from last year’s 3.036472t Yuan. The financial education expenditure (mainly including the education funds from public financial budget and governmental funds budget, corporate allocations for enterprise-run schools, education expenditure from school-based industry and social service) is 2.642058t Yuan, up 7.89% from last year’s 2.448822 Yuan, accounting for 4.15% of GDP. There will be more money appropriated to education in the future as China transfers from the low-end manufacturing power to high-end manufacturing and service industry.
The competition for education companies in the capital market arises from the tera-level market space and favorable policies. The wave of merger and acquisition as well as listing appears in the A-share stock and new OTC market markets.
China Online Education Research Institute finds after sorting out education markets in the A-share stock and new OTC market markets that:
(i) New OTC market has become an important financing platform for education companies and A-share education companies are accepted by education companies
There are 137 listed education companies in China. 77 of them are traded on the new OTC market, making up 56.20% of total public enterprises. According to data released by China’s SME share transfer system, the volume of the new OTC market was 191.062b Yuan in 2015 and the figure for companies in relation to education exceeded 5b Yuan. Featured by listing requirements lower than those of shares A and easier financing, the new OTC market has become an important platform of financing for education companies listed and traded in the main-board market, SMEs market and the GEM market.
From the advent of the first share relating to the education – Xin Nanyang in the A-share market to the end of 2015, there were 60 education companies listed and traded in the A-share market, including 20 ones in the main-board market, 21 in the SMEs market and 19 in the GEM market. By early March 2015, Qtone has overpassed XDF, the giant in the education industry after Xin Nanyang pioneered in transforming from private non-enterprise unit to incorporated enterprise in the education industry in China; from the listing of Xueda in the United States in 2010 to the return of Xueda in the A-share market in 2015, it can be predicted that in the next three to five years there will be more and more education companies in the A-share market as part of public companies.
(ii) It is normal for public companies to expand and the extension and crossover speed up
China Online Education Research Institute divides public education companies into three types: expansion, extension and crossover.
Expansion means companies whose main business is about education in the past expand their business scale by integrating the upstream and downstream. Such companies represent 37.22% of the total public education companies, represented by Qtone, Xin Nanyang, Huatu Education, etc. Their strength lies in enormous content resources and offline channels, but they are not good at operateing education via the Internet. However, online education is an emerging industry integrating education, the Internet, big data, cloud computing and others. So companies that were engaged in education before are actively exploring the upstream and downstream business with the hope of rebuilding the whole education industry chain.
Extension means companies whose main business was about education before naturally branch out to education through business. These companies make up 48.18% of total public education companies, represented by LANXUM, ChineseAll, etc.
Crossover means companies whose business is not directly connected with education are engaged in education business through cross-acquisition. These companies account for 14.60% of total public education companies, represented by Xiu Qiang, Binhai Energy, Jinshi Share, etc.
There will be more and more extending and crossover companies in the future as public companies, whose focus is placed on such traditional businesses as manufacturing, energy and property are, on the decline. With a lower ROI (return on investment), these companies have to extend to some emerging businesses in order to raise their share price. Online education, as an emerging industry, has a huge prospect to change traditional education. So it becomes the target for which many listed companies want to conduct the extension and crossover.
(iii) Another wave of applying IT to education in the “three communications and two platforms”
According to China Online Education Research Institute’s analysis on the business of 117 expanding and extending listed companies, 64 of such companies are engaged in technical service and account for 54.70% of total expanding and extending companies. So many companies work on technical service mainly due to the Implementing Plan of Building the Effective Mechanism for Expanding the Coverage of Quality Education Resources with the Use of the Information Means jointly issued by five ministries including the Ministry of Education, National Development and Reform Commission and others in March 2015, which contains measures as follows:
- Accelerating the “connection of broadband network in all schools”;
- Comprehensively pushing the “allocation of quality resources to all classes”;
- Greatly driving the “availability of online learning space to everyone”;
- Building the public service platform for education resources;
- Building the public service platform for education resources, together with the Internet supported by policies, especially driving the fast development of the mobile Internet.
These companies in technical service mainly work on family-school interaction system to build a teaching platform for schools and enterprises. That indicates now China’s education information is at the peak and there are many investment opportunities in the education industry.
III. Investment trend of the online education industry
At present, there exist two totally different opinions – high demand for investment and closed track. The track for language learning, question bank and searching answers from photograph recognition has actually been to be closed, but with too many segments and products in relation to online education, the investment window for online education now does not close and there will be new segments and tracks to constantly appear.
- Still heated online education investment
According to existing information, online education investment is still popular and there exists the phenomenon of investment more than projects. Investment fever recently appears as some projects frequently attract funds – the sign of investment fever.
- Massive failure
Compared with the financing fever, some companies have closed down, but there are now no massive failures in online education as expected. According to the author’s knowledge, most of failed companies belong to small and medium-sized ones without a capital chain. Up to date, no large companies become bankrupt (but there exists job cut or transformation in some companies). It is likely that many companies will close down or merge after the middle of 2016.
- Reasons behind online education investment fever
First, Internet giant’s investment (e.g. Tencent’s investment into Entstudy) leads to the continuous attention paid by the TMT investment community to online education;
Secondly, China’s weak real economy leads the investment to the Internet and education;
Thirdly, the appearance of the new OTC market, especially good performance of education industry in the new OTC market, prompts many companies to raise funds in this market, thus causing the strong investment into education companies.
The stock crash actually affects online education companies’ financing (also including the investment of other industries), but it does not change the strong online education financing on the whole. Therefore, the author judges that without much fluctuation in the financial market, the golden period for the financing by entrepreneurs and the investment by investors of the online education exists before the end of the year.
As for which project to be invested, the investor’s vision is to be tested. In order to provide professional analysis service to the industry, China Online Education Research Institute has gathered thousands of online education-related projects. It is a shortcut for investors to consult a professional research and consulting institution if they want to invest a promising project.
This is a series of articles from Blue Book of China’s Online Education Industry, authored by our partner China Online Education Research Institute (COERI). Each post is a chapter from the blue book and this post is the last chapter of the book.
China Online Education Research Institute (COERI) is an organization dedicated to the research, consulting, and service of Chinese online education industry. It mainly undertakes the following functions:
- Program consulting: provide consulting service about online education industry;
- Research report: compile industrial research report and provide authentic industrial research achievements;
- Technical training: train talents for the online education;
- Academic seminar: organize large- and medium-scale online education seminars to promote the industrial development;
- Product study: study and test the latest online education products and technologies;
- Exchange activity: organize all sorts of exchange activities and propel communication in online education industry