Vocational guidance helps Minsheng education thrive amid crackdown

Key Jtake away food :

  • Minsheng Education said its revenue more than doubled last year following a series of acquisitions focused on online services
  • Company performed well as China says it will continue to welcome private investment in vocational education market

By Molly Wen

China’s ‘double reduction’ policy, designed to ease pressure on the country’s stressed students, has weighed heavily on private educators, putting many out of business and forcing others to seek new models outside of their offerings. Previous K-12s. But professional educators are a group that not only survives, but even thrives thanks to multiple favorable government policies targeting this class of businesses that help keep the masses employed.

One of these educators is Minsheng Education Group Co. ltd., (1569.HK), who did the unthinkable in the current climate and released a positive profit alert for 2021, even as many of its peers posted massive losses.

The alert issued last Thursday showed that the company’s revenue last year rose by 105% or more, with net profit up by at least 365%. The net profit associated with its core business grew by 75% or more, slower but still healthy. Using 2020 data as a benchmark, that translates to at least 2.38 billion yuan ($347 million) in revenue for 2021 and 756 million yuan in base net profit.

The company has seen success in recent years by transforming itself into an “internet-plus” professional educator, offering vocational training, exam assessment services, international education and employment services on traditional campuses. and on online forums. It had 97,000 students in 10 schools and raised 655 million yuan in the first half of last year from tuition, room and board, accounting for about 53 percent of its total revenue, according to his interim financial report.

Unlike the K-12 sector, which received a major thump from China’s Ministry of Education in recent months, vocational education has become the apple of the regulator’s eye, receiving many favorable nods. .

The “Regulations on the Implementation of Non-State Education Promotion Law” enacted last September encourages enterprises to establish or co-establish private educational institutions providing vocational education through independent financing, joint ventures or collaborations. Additionally, vocational education and higher education are specifically not included in the areas of education prohibited from engaging in M&A activities.

Another document, entitled “Opinions on Promoting the High-Quality Development of Modern Vocational Education” published last October, also explicitly mentions that listed companies are encouraged to provide vocational training services. The succession of policies gave a regulatory green light to investors wishing to operate vocational schools, throwing a lifeline to the private education sector.

China’s “Vocational Education Law” is also being amended to make vocational education – long considered an ugly grandson of more conventional education – more equal to its more respected sibling.

All of this encouragement comes as China’s vocational education market is growing rapidly. According to a report by Frost & Sullivan, the market value increased from 637.4 billion yuan in 2015 to 859.2 billion yuan in 2019, representing a compound annual growth rate of 7.8%. It is expected to reach 1.2 trillion yuan by 2024, with the growth rate slowing slightly to 6.9%.

Growth through acquisitions

Minsheng Education previously relied heavily on tuition fees as its main source of revenue, creating a bottleneck for its growth. It began expanding into online education in 2019, growing from its singular focus on on-campus education to becoming an “internet-plus” professional education provider. Since then, he has purchased at least four online education companies.

The last of these came last October when he bought UMOOC Online Education Technology (Beijing) for 37.50 million yuan. UMOOC provides education “informing” services, online education support as well as hybrid education apps to more than 400 undergraduate colleges and vocational schools in China. It recorded revenue of about 28.66 million yuan and net profit of 7.85 million yuan in 2020.

Through these acquisitions, Minsheng Education has become one of the largest Internet-plus professional education providers in China. It now has six online education platforms covering online education qualification services, professional postgraduate services and IT vocational training services, as well as human resources and employment services. . Two businesses purchased in 2020 have helped boost its performance, with online education providing 460 million yuan in additional revenue, or 37% of total revenue, since then.

The company also has sufficient funds for future purchases, with 2.3 billion yuan in cash and cash equivalents in its coffers at the end of last June. This will go a long way in supporting its continued high-speed move into the online realm.

Bearish investors

Despite their privileged status, private higher education and vocational education companies have not been spared the exodus of investors with the crackdown of their K-12 peers. As a result, these companies have also become collateral damage of the crackdown, with many of their stocks collapsing sharply.

After going public at an IPO price of HK$1.38 in 2017, Mingsheng Education shares first saw a losing streak in 2018 before recovering. But the recent crackdown – while not affecting its financial performance – has sent its shares tumbling to near all-time lows. The stock rebounded 11.8% to HK$0.76 after last Thursday’s surprise earnings announcement. But an anemic 960,000 shares traded that day, indicating a lack of investor interest.

The stock is down 52% from the high of HK$1.57 it hit last May before the crackdown pulled the rug out from under the entire sector. While significant, this loss is still relatively modest compared to some other directly affected education companies that have lost over 90% of their value.

The company had a price-to-earnings (P/E) ratio of around 9.2 times last year, according to its earnings report, compared to P/E ratios of 9 times for Education in China Group (0839.HK), 8.7 times for Hope Education(1765.HK) and 5.5 times for New higher education (2001.HK). This shows that Minsheng Education is valued higher than its peers, which perhaps reflects its comparative advantage in the industry due to its recent shift to the online domain.

Major investment banks haven’t paid much attention to the company, although Citibank has released a report painting an optimistic picture of its prospects, highlighting its twin growth engines in traditional on-campus education and its wide range of online offers. This gave the company a “Buy” rating with a target price of HK$2.10, suggesting significant upside potential.

But at least for now, the company is smearing itself with the same brush that has poisoned investors toward any Chinese education stock. That, combined with recent weakness in the broader Hong Kong market, means the company may need to post another year of strong growth before investors start to believe again.

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