China East Education Suffers Covid Slowdown as New Enrollments Drop

Key Takeaways:

• China East Education’s revenue fell 6.1% in the first half of the year, as its new student enrollments dropped 14% due to Covid-related disruptions
• Income fell 12% for the company’s cooking academies that account for 60% of its total revenue, reflecting soft demand from the struggling restaurant industry  

By Doug Young

The latest results from vocational schools operator China East Education Holdings Ltd. (0667.HK) contain a few interesting lessons, including a growing preference from young Chinese adults for longer-term courses typically lasting three years or more. But the longer-term lesson remains relatively constant, namely that such vocational educators are well placed to benefit from Beijing’s drive to build up the country’s adult education sector, with the private sector playing an important role.

That’s a sharp contrast to the K-12 education, which is far more sensitive and thus has been deemed nearly verboten for private sector investment following a major government clampdown last year. But investors still don’t seem to be making that distinction, and have punished adult education providers almost as much as the K-12 educators that remain in business.

China East Education’s shares have lost about 60% of their value over the last year, while its peers like Minsheng Education (1569.HK) and China New Higher Education (2001.HK) are down 50% and 43% over the same period, respectively.

By comparison, shares of former K-12 educators like New Oriental EDU and TAL Education TAL fell off a cliff last spring when details of the crackdown began to emerge, often losing around 90% of their value. But most of their shares have stabilized since then, and are now near or even ahead of year-ago levels.

Within the group of vocational educators, China East Education is the largest of the three mentioned above and seems to be getting a premium for that position. Even after the selloff over the last year, the stock still trades at a relatively strong price-to-earnings (P/E) ratio of 20, well ahead of the 3.5 for Minsheng Education and 5.3 for China New Higher Education.

Despite its leading position, China East Education posted a 6.1% revenue decline in the first half of the year, sinking to 1.88 billion yuan ($274 million) from 2 billion yuan a year earlier, according to its latest report issued on Wednesday after markets closed. The company’s Hong Kong-listed shares rose 1.7% when the market opened Thursday in Hong Kong during a shortened trading day due to a typhoon.

The company’s profit actually rose 1.3% year-on-year during the period to 236 million yuan, though that was largely due to changes in the value of its investments and currency gains. Its gross profit for the period fell 10.3% to 993 million yuan, while its adjusted net profit, which excludes things like share-based compensation, plunged 42% to 175 million yuan.

“During the six months … the physical classes of some of our schools located in mainland China had been temporarily suspended in order to cooperate with the prevention and control of the Covid-19 pandemic,” the company said in comments with its results, echoing an issue confronting many other consumer-facing companies in the first half of the year.

It pointed out it has developed “comprehensive online learning programs” for use when classrooms are closed. But for this type of hands-on education in areas like cooking and auto repair, it really does seem there’s no good substitute for classroom-based teaching, and many students would probably opt not to take classes if only online instruction was available.

Better times ahead?

That said, the company said it was more optimistic on the second half of the year as China brings its latest outbreaks under control. It said it expects “the impact by the epidemic in the second half of 2022 would not have any material adverse impact to the operation and financials of the group.”

Truth be told, the most promising thing the company has going for it is the clear signals coming from Beijing about its support for vocational education in China.

Last October the central government released a document on the promotion of high-quality modern vocational education, encouraging listed and leading companies to provide such services. Two months later, the State Council published another document on the subject of vocational educators granting bachelor degrees, again highlighting the sector’s importance. And in January, the government unveiled a program specifically targeting vocational skills training during the country’s current Five-Year Plan that runs from 2021 to 2025.

China East Education’s latest report partly reflects that government support, with income from unconditional government grants nearly doubling to 22.1 million yuan in the first half of this year from 12.3 million yuan a year earlier. While both those amounts are quite small for a company of this size, the growth sends an important signal of continued and growing government support – something critical for companies to survive and thrive in China.

We’ll round out our discussion by delving more deeply into China East Education’s latest report to look at some of the latest trends in vocational education during these pandemic-troubled times.

Based in the city of Hefei in eastern Anhui province, the company counts cooking classes as its largest area, accounting for about 60% of its revenue, followed by other courses in information technology, auto repair and beauty services. It said its new student enrollments and new customers registered dropped 14% year-on-year to 70,445 in the first half of the year, which seems to reflect reluctance by new students to register for courses due to the potential for pandemic disruptions.

Despite that, the company’s average number of students enrolled stayed relatively constant at 143,566, up 0.2% year-on-year.

Within its main subject areas, revenue from its three cooking academies collectively fell 12%, double the rate of the overall revenue decline, perhaps reflecting slower hiring by restaurants due to all the pandemic disruptions. Automotive training was a bright spot for the company, with revenue up 16% in the first half of the year compared with the same period of 2021. But that part of the business accounts for a relatively small 17% of total revenue.

Finally, there’s the interesting trend involving duration of education that students are signing up for these days. The most popular in that category are the longest education programs lasting three years or longer, which saw increased enrollment for nearly every category of training in the first half of the year. That’s not too surprising, as students often turn to such programs to improve their competitiveness during weak job markets like the one in China now. Meantime, short-term classes of a year or less were mixed, with some areas growing and others contracting; while medium-term classes of two to three years nearly all experienced declining enrollment.