Loss-hit Fenbi Tech Seeks IPO Cash After Education Sector Upheaval

Key Takeaways:

• Fenbi Technology has posted losses of more than 2.5 billion yuan in the past two years after shifting from online into offline training
• The company laid off more than 9,400 employees and cut staff salaries to ease financial pressure

By Fai Pui

A year after a tutoring crackdown shattered China’s prosperous education sector, the still viable pieces of the business are seeking new directions and fresh capital, with a focus on adult education.

The government restrictions decimated the market for private tutoring on core school subjects. Even education industry star Yu Minhong, founder of New Oriental Education EDU, has now turned his hand to live-streamed marketing.

As the business of tutoring school children dried up, attention turned to a part of the education sector that still enjoys official support: vocational training for careers such as teaching or the civil service. Here, competition is fierce.

Among the companies jostling for a bigger piece of the adult education pie is Fenbi Technology Ltd., a platform offering vocational and technical training as well as tuition for civil service exams. The company filed a second IPO attempt in early September after its listing application to the Hong Kong Stock Exchange lapsed in February, now with Citigroup, CICC and Bank of America Securities as joint sponsors.

The name Fenbi – which means “chalk” in Chinese – may not ring a bell with investors, but the firm was formerly part of the more familiar Yuanfudao education brand. Yuanfudao was an online learning “unicorn” that was once highly sought after by China’s venture capital, raising $3.5 billion in 2020 alone. The company, which catered to school-age students, was swiftly dealt a fatal blow by last year’s new education policy. Meanwhile Fenbi Technology, the tutoring service for aspiring professionals, became a new focus for capital, having been hived off from Yuanfudao in 2020.

China’s civil service exams have been dominated for more than 20 years by two companies: Offcn Education Technology (002607.SZ) and Beijing Huatu Hongyang Education. However, the two giants mainly provide offline tutoring services. Seeing an online opportunity, Yuanfudao put Zhang Xiaolong, formerly a well-known lecturer at industry leader Huatu Hongyang Education, in charge of its training for civil service exams and expanded its online footprint from 2013. After civil service exam tutoring was spun off to operate independently under the name of Fenbi Technology, the internet upstart set out to challenge the established industry leaders.

But it has not been a storybook tale of a plucky underdog toppling the giants. The costs of expanding to compete with the industry leaders have weighed heavily, pushing Fenbi Technology deep into the red despite revenue surging from 1.16 billion yuan ($166 million) in 2019 to 3.43 billion yuan last year.

The company recorded a net profit of 154 million yuan in 2019 but swung to a net loss of around 484 million yuan the following year. Losses multiplied from there to a deficit of 2.05 billion yuan in 2021. To take on the two giants, the company had invested heavily in building an offline business, swelling its sales and administrative expenses.

Fenbi Technology’s workforce jumped from 1,592 at the end of 2019 to 12,803 by the close of 2020 and peaked at 16,800 at the end of March last year, according to the prospectus. Employee expenses rose to 1.17 billion yuan in 2020 and 2.72 billion yuan in 2021, accounting for 55% and 79% of total revenue in those years.

As revenue growth could not keep pace with mounting expenses, gross margins plummeted from around 46% in 2019 to 23% in 2020. The company managed a slight increase to 24.5% last year after being forced by financial pressure to slim down through layoffs and pay cuts.

Cost-cutting with mass layoffs 

At the end of last year, Fenbi Technology had only 8,964 employees left on its payroll, falling to 7,388 in the first half of this year, a shrinkage of 9,412 staff from its peak. The average salary of lecturers and other teaching staff also fell from 13,300 yuan in 2019 to 8,900 yuan in the first half of this year. Sales and marketing salaries were slashed even further, from 12,300 yuan to 6,800 yuan, a pay cut of nearly 45%.

As a result, the company cut staff expenses to 771 million yuan in the first half of this year, or just over 53% of revenue.

Fenbi Technology enjoys a leading position in the business of online education for aspiring professionals. According to a report by Frost & Sullivan, it is China’s largest provider of online lessons for vocational exams, with 9.8 million paying users of its training courses and online products last year, four times more than the customers for the second-placed supplier. By the end of June this year, its online platform had accumulated about 43 million registered users, with average monthly active users increasing from about 4.7 million in 2020 to about 6.5 million last year and rising further to about 7.5 million by the end of June this year.

On the back of its huge online membership, Fenbi Technology has ambitiously expanded into the offline market in recent years to counter competition. Last year, about 67.5% of students on its offline courses were recruited from its online paid user base, a proportion that rose to 71% in the first half of this year. The offline training business logged negative gross profit in the past two years but, with cost cutting, managed a gross profit of 190 million yuan in the first half of this year, a margin of just over 36%, though still far below the 60% for its online training.

As a popular Chinese proverb says, bad luck often comes in pairs. The business of training for civil service examinations and vocational qualifications has also had its difficulties, with disruption caused by the Covid pandemic.

Offline tutoring services have taken a hit as civil service exams were generally postponed under strict Covid containment measures taken by several major cities this year. Even Offcn Education, the market leader in tutoring for civil service exams, saw its first-half revenue plunge 54% year-on-year, while its loss increased more than 8-fold to 891 million yuan. In that respect, it was not an auspicious time for Fenbi Technology to stretch its business from online to offline.

Although the educational crackdown did not target vocational training, it cast a shadow over related stocks, as investor confidence in the tutoring sector as a whole was shaken. Prime examples are the plummeting share prices of Offcn Education, China New Higher Education (2001.HK) and China Education Group Holdings (839.HK), which had fallen by between 49% and 67% from their 52-week peaks, as of this Thursday.

Using the 7.4 times price-to-sales (P/S) ratio of the company’s closest counterpart, Offcn Education, as a benchmark for valuation purposes, Fenbi Technology could be listed at a valuation of HK$24.5 billion (21.9 billion yuan), after extrapolating an estimated full-year revenue from the first-half figures.

But given the recent downturn in Hong Kong stocks and the market’s general discount to A-shares, the company may need to attract investors with a lower valuation.

As of the end of June, Fenbi Technology still held cash and cash equivalents of 1.25 billion yuan, and its operating cash flow turned from negative to positive in the first half of the year. With continued cost cutting, the company is fortunate to be spared too much capital stress. Therefore, with an uncertain outlook for the tutoring sector, it can be presumed that one reason for the IPO is to provide cash-out opportunities for early institutional investors with limited patience, such as Tencent Holdings (0700.HK), IDG Capital and Hillhouse Capital.