China East Education Returns To Growth As Short-Term Enrollments Surge

Key Takeaways:

• China East Education returned to revenue growth in the first half of 2023, but its profit fell as its costs increased more quickly
• The company’s shares have lost more than half of their value this year as investors worry that China’s economic uncertainty could dampen demand for vocational education services

By Doug Young

Vocational educators once stood tall in China’s private education sector, basking in the glow of strong government support even as their peers in the K-12 sector suffered under a major government crackdown. But China’s slowing economy is starting to hit even this government-favored group, as young adults worry about paying for education in an uncertain job market.

The latest financial results from one of the industry leaders, China East Education Holdings Ltd.(0667.HK), seem to reflect the many factors at play in the market right now. On the one hand, the company returned to solid growth in the first half of this year, after posting a dismal first-half of 2022 amid some of China’s toughest Covid control measures that frequently forced schools to close.

At the same time, the company’s growth was enough to return it to 2021 levels in terms of student enrollments – but just barely. And its latest half-year revenue was still below 2021 levels, showing it was feeling pressure to lower tuitions as students become more cost-conscious in the current environment of economic uncertainty.

What’s more, the company’s biggest growth in new student enrollments came in demand for short-term programs, which also seems to reflect growing student caution.

China East Education’s shares fell slightly on Monday, the first trading day after it announced its latest interim results, though they rebounded and were up more than 4% in early Tuesday trade. But far more revealing is their dismal performance so far this year, as the stock has lost more than half of its value since January.

The stock now trades at a price-to-earnings (P/E) ratio of 15, which isn’t terrible but certainly doesn’t look like what you might expect from a high-growth sector. But then again, it’s far from clear that China East Education will be growing fast anytime soon. Even at that modest level, the company is still the head of its class among vocational educators. Peers China Education Group (0839.HK) and Hope Education (1765.HK) currently trade at multiples of 9 and 8, respectively, while the lowly Minsheng Education (1569.HK) trades at a multiple of just 2.

Analysts expect China East Education to earn about 4.46 billion yuan ($616 million) in revenue this year, up 13% from the difficult year in 2022. That would also represent about 8% growth above 2021 levels when business was operating more normally. Still, none of that is anything to get too excited about. And as the company comes under pressure to lower tuitions, its bottom line profit could contract over the medium-term.

All this is quite a change for a group that was previously a relative investor favorite. Beijing has published a number of new policies in the last two years to promote the private vocational education sector, aiming to train young people with practical skills like cooking and auto repair. That support is likely to get stronger as China’s youth unemployment rate reaches record highs above 20%. But whether people will want to spend their limited savings on education in such an uncertain job market remains a big question.

Short-term Programs In Vogue

We’ll kick off our more detailed review of China East Education’s interim results with one of the most noteworthy trends they revealed, namely soaring popularity of the company’s short-term courses. That kind of spike is probably what you would expect in this kind of economically uncertain job market, since many potential students are looking to limit their spending. At the same time, such short-term students are the least attractive for vocational educators like China East Education, since they aren’t around for very long and thus don’t provide much recurring revenue.

The company offers vocational education services in four main areas. Culinary skills is the largest of those, accounting for more than half of the company’s revenue in the first half of the year. Computer and automotive training both provide about 20% of the company’s revenue, while the remainder comes mostly from beauty industry services training.

New student enrollments, typically for courses of one year or less, shot up by 38% in the first half of 2023 year-on-year at the company’s main culinary academy, and were also up about 5% from levels in 2021. Meantime, new short-term student enrollments for the company’s main computer training academy shot up by an even larger 60%.

All of those figures were much bigger than growth in overall new student enrollments, which rose 20% in the first half of the year to 84,552. The company’s school count remained unchanged at 244 schools nationwide by the end of June, showing China East Education also remains cautious despite its stated goal of expanding its network.

The company’s overall revenue grew 4% in the first six months of the year to 1.95 billion yuan, bouncing back from a 14% revenue decline in the first half of last year. But the latest revenue figure was still below the 2 billion yuan in revenue the company posted in the first half of 2021. At the same time, China East Education’s cost of revenue rose 7% in the first half of the year – or about double the rate of revenue growth – squeezing its profit margins.

As a result, the company’s net profit fell 15.9% in the first half of the year to 204 million yuan from 242 million yuan a year earlier. Its profit on an adjusted basis, which excludes costs related to stock-based employee compensation, dropped by a milder 2.7% to 176 million yuan. We can probably expect to see more such profit declines for the foreseeable future.

Notably, the company didn’t provide any commentary on recent market conditions, unlike last year when it gave lengthy comments on the impact it felt from Covid-control measures. That probably at least partly reflects the lack of clarity in the current environment, as many wait to see if Beijing will take more assertive steps to support the economy.

Such steps could include more scholarships for the swelling number of unemployed Chinese youth, which is clearly a concern. That would certainly provide a boost for China East Education and its peers. But in the absence of such signals, the entire sector is likely to plod along for now with slow or no revenue growth and increasing pressure on its profit margins.