Jefferies says these two Chinese private tutorial providers are set to ride China’s education boom

China’s private education market is set for solid growth even as the economy slows, analysts say

PUBLISHED : Tuesday, 21 February, 2017, 4:18pm
UPDATED : Tuesday, 21 February, 2017, 10:11pm

Large private education companies are set to grow their market share in China, edging out smaller rivals as they benefit from higher student retention rates, more efficient operating structures, and a pro-education push by the central government, according to analysts from US broker Jefferies.

Beijing-headquartered New Oriental Education & Technology Group and Beijing-headquartered TAL Education, two major companies in the sector, were assigned “buy” recommendations by Jefferies’ analysts Johnny Kin Man Wong and Shawn Zhou. The shares of both companies are listed in New York.

“We believe the retention rates for the large tutorial companies should be higher than the industry average, which we calculate to range between 34 per cent and 42 per cent,” Wong and Zhou wrote. “This corroborates our thesis that the larger operators are taking market share.”

The estimate for 2016 compared to a 30 per cent average industry retention rate in 2015, according to the Blue Papers for Chinese Education and Training Industry 2015, in which consultancy firm Mindtime surveyed nearly 19,000 education companies across the nation.

With higher retention rates compared to smaller rivals, big players face less expenditure on advertisement for attracting new students, according to Wong and Zhou’s note, adding that this would also help larger education companies in 2017.

Education ranked No 2 as a category for discretionary spending in China in 2012, trailing property in the No 1 spot, a clear sign that people are increasingly putting money into their children’s private education amid fierce competition for entry into elite schools.

Consultancy firm Technavio forecast in 2016 that the after-school tutoring market in China will grow steadily and post an impressive compound annual growth rate of almost 12 per cent by 2020.

China’s recent 13th five-year plan rolled out by the central government in 2016, which encourages implemention of online educational training and development of private sector companies.

“New Oriental and TAL are both at the forefront of internet plus educational training and expanding digital educational resources to reach rural students,” Wong and Zhou wrote in the note.

They added that the penetration rates of after-school tutorial groups remain low in China, yet potential demand is large, Wong and Zhou wrote in separate note.

“We believe the absolute level of tutorial penetration in China is lower than that of other Asian countries,” the note said, “There is plenty of room for these companies to grow student enrolment by either expanding into under penetrated markets or by taking market share.”

Tutorial penetration in China may be as low as 40 per cent, compared to 68 per cent in South Korea, according to the report.

Several Chinese education groups have listed on US stock exchanges amid the momentum in recent years.