Fenbi Chalks Up Loss As Edtech Scrambles Into AI

The provider of civil service exam preparation services is just one of many Chinese edtech companies rushing to incorporate DeekSeek into their products

Key Takeaways:

Chalk it up to growing competition among edtech companies racing to see who can make the greatest use of artificial intelligence (AI) to attract the legions of young Chinese eager to work in China's "iron rice bowl" civil service in an uncertain job market.

Fenbi Ltd. (2469.HK) – an online vocational education company whose name means "chalk" – on Feb. 14 admitted its revenue slipped by up to 8.3% last year to 2.77 billion yuan ($380 million), citing intensified competition in its space catering to takers of China's civil service exams. That niche has become especially hot lately, as 80 candidates vie for each opening in the current weak job market.

But Fenbi isn't the only one chasing that group, with others piling in after the country's recent crackdown on after-school tutoring services that overnight wiped out many companies' main business, forcing them to look for quick substitutes. Many of those are now rushing to use AI tools in their offerings – a trend that is already accelerating after the January launch of Chinese startup DeepSeek's free AI assistant.

The news in Fenbi's profit warning wasn't all bad. Its expected net profit of at least 225 million yuan represented a 19.3% increase from 2023, thanks to a decrease in employee expenses. Even so, investors bid down Fenbi's shares by 10% over the next few days.

They might have been worried that the company slipped into the red in the second half of the year with a loss of 52.7 million yuan, reversing a 107 million yuan profit a year earlier. Fenbi managed to break even on an adjusted earnings basis in the final six months of 2024, which excludes stock-based compensation. But even that was also down from a 157 million yuan adjusted profit in the second half of 2023. And its revenue fell by 14.9% year-on-year to 1.14 billion yuan in the final six months of last year, accelerating from a 3% decline in the first half of the year.

The weak second-half results put a damper on a string of better news last year, starting with the company's June 11 announcement that it had launched one of the first significant AI tools in the exam prep sector, called AI Intelligent Teacher. That was followed by a positive profit alert on July 25, when the company attributed a 240% jump in its profit during the first half of 2024 to its long-term investment in technology and utilization of AI and other online technologies in its tutoring and course products.

Fenbi introduced two new AI products in the second half of last year. But it was hardly alone in its embrace of AI. Its chief rival in civil service exam preparations, Offcn Education (002607.SZ), actually beat Fenbi by developing an AI educational tool in 2023, in collaboration with Puyang Petrochemical Vocational and Technical College, even though it has lagged behind Fenbi in terms of product development.

DeepSeek gold rush

Offcn turned up the heat in the competition this year when it announced a plan to deploy its own DeepSeek series. Rival edtech firms TAL Education (TAL.US) and Youdao (DAO.US) announced similar DeepSeek-based education tools this month. Fenbi was hardly absent from the DeepSeek scramble, announcing it had already "fully embraced" the DeepSeek large language model and would release its own large language model "reconstructing the civil service training ecosystem," resulting in "exponential improvement in operational efficiency."

Behind the hype for attention is China's highly insecure job market, which has turned the annual central government and provincial civil service exams into a field of dreams for recent graduates. More than 3.2 million people qualified to take the test last Nov. 30 to Dec. 1, competing for just 39,700 jobs. The most popular job, for an entry-level staff member at a vocational education association, attracted a whopping 10,665 applicants, according to Huatu Education, citing official data.

The latest overall ratio of 80 applicants for each available job was up from 77 applicants per job in 2023. China's jobless rate has soared as the economy slowed post-pandemic, with people from ages 16-24 facing 17.6% unemployment, according to China's National Bureau of Statistics last September. Some estimate the figure could be even higher.

Training applicants for the civil service exams is Fenbi's core business. Its small-class tutoring sessions, conducted both online and offline, charge over 7,000 yuan for classes of 30 to 60 students over 30 to 120 days. Such classes generated revenue of just over 1 billion yuan, or 63% of the company's total, in the first six months of last year.

Fenbi's cash generated from operations fell sharply to 219.6 million yuan in the first half of last year from 370.3 million yuan a year earlier as its revenue began to fall amid intensifying competition, according to its interim report released last August. As its finances weakened, it reduced its headcount of full-time instructors to 3,145 by the middle of last year from 3,536 a year earlier.

Fenbi was one of the first to focus on tutoring support for the civil service exams in 2015, when it was part of the entrepreneurial team at Yuan Inc., once considered an edtech unicorn and creator of the online tutoring app Yuanfudao. Fenbi's Hong Kong IPO in January 2023 was the first edtech IPO since the regulatory crackdown on K-12 tutoring in 2021, raising HK$198 million ($25.5 million) and giving it a market cap of HK$20 billion.

But the company has been losing its mojo since then as others flocked to its niche after the crackdown. The stock has lost more than 70% of its value since the IPO, taking its market value down to just HK$6.2 billion. Its price-to-sales (P/S) ratio of 2.02 is half of TAL Education's 4.29 and less than a quarter of Offcn's 9.76, though it's ahead of Youdao's 1.65.

Fenbi only became profitable in 2023, reporting a profit of 188.5 million yuan on revenue of $3 billion that year. While the company remained profitable for all 2024, the drop back into the red in the second half of the year is hardly a good sign. Things could get worse as newcomers turn up the pressure in the civil service exam preparation niche, where rival products could start to look increasingly similar with their growing use of DeepSeek and other AI tools.