Education has become an essential element of the Chinese economy and offers real opportunities to investors. Stephanie Li, CFA Investment Analyst with Aubrey Capital Management Ltd, shares with us her vision of a market already considered by Bloomberg to be worth 39 billion dollars in 2015(1) and growing.
To help us understand the issues, can you explain how the education system in China is organised?
“It is divided into two categories - the formal education segment and the informal education segment.
Only the formal education segment issues study certificates recognised by the government. That system is itself divided into 5 categories: fundamental education, secondary (vocational) education, higher education, adult education and the others. Fundamental education is better known under its English name of K-12 education. It consists of 3 years of preschool, 9 years of compulsory schooling and 3 years of high school education. The 9 years of compulsory education are highly controlled by the Ministry of Education, even down to the syllabus. The informal system refers to after school tutoring or online learning.”
Do the authorities try to keep the system consistent throughout the country?
“Oh yes! The Chinese Ministry of Education actually works in direct collaboration with the relevant authorities in the provinces, with the secondary schools and with universities, to implement academic programmes that meet both the needs and the priorities specified by the central government.”
Why is admission to a university in China so difficult?
“Firstly, it is simply a numbers game. There were 14m junior high school graduates and 8m senior high school graduates in 2016 from China. Competition for admission to a top school is intense in China, with standard examinations at each level from kindergarten all the way to university. There are only 4 universities in China that made into the world’s top 100 university list.
Secondly, just in comparison to some of the other countries, college admission rate is really on the low end. The rate of admission to university in Canada is 60%, whereas it is still less than 10% in China.”
What role does the family play in this area?
“The cultural pressure on what are called ‘tiger mums’ (who take their name from their strict approach to education) is such that households can spend up to 15% of their annual income on education. The Hurun study of Chinese millionaires shows that more wealthy families invest between 20 and 25% of their annual income on their children’s education.
Family pressure is also exerted when it comes to the Gaokao, the notorious and feared National Higher Education Entrance Examination. This is the entrance examination for a place at a university in China. To pass it, various subjects need to be mastered - Chinese, English, maths, science, and humanities.
This combined with favourable policies from the government, had meant education has been one of the fastest growing sectors in China. Just two decades ago, higher education in China was a rare privilege enjoyed by small, urban elite. But everything changed in 1999, when the government launched a program to massively expand university attendance. In that year alone university admissions increased by nearly 50% and this average annual growth rate persisted for the next 15 years, creating the largest inflow of university educated workers into the labour market in history.”
Is online education another phenomenon that attracts interest?
“Yes, online education is growing at a similar pace supported by younger-student penetration and the development of internet and mobile platforms in China. Consulting firm iResearch estimates that online education in China generated Rmb100bn revenue in 2014, compared to just Rmb35bn in 2008, posting +184% increase.”
Which companies do you invest in?
“We are shareholders of New Oriental Education and TAL in the after school tutoring market, which is expected to grow at 15% CAGR (Compound Annual Growth Rate) through to 2020. New Oriental and TAL being the leader in such a fragmented market should grow faster than the market as they consolidate the market and take shares from the small players. We also expect consolidation to accelerate as the government has announced policies to tighten the after-school tutoring market and only grant operating licenses to the big players.”
Interview recorded by Cédric Godart on 06 March 2018. It is possible that the opinions and comments recorded in this document will no longer be valid at a future date. Market behaviour observed in the past is never indicative of future behaviour.
About Stephanie Li
Stephanie Li is CFA Investment Analyst with Aubrey Capital Management Ltd, a focused global growth equity manager located in Edinburgh which works closely with TreeTop Asset Management.