2 Companies with Exposure to China Private Education Industry

Recently, China has introduced sweeping measures to the private education sector, which includes barring curriculum-based tutoring institutions from raising money through stock market listings, in a bid to correct disorderly competition in the industry and ease the burden on Chinese students and their families.

Under the new rules, all institutions offering tutoring on the school curriculum will be registered as non-profit organisations, and no new licences will be granted.

This latest development caused some of the prominent listed Chinese education company to lose at least more than 70% in market value in just under 1 month.

On top of that, foreign capital is also not allowed to control or participate in the private education sector through methods such as mergers and acquisitions, entrusted operations, or franchise chains.

This will have an uncertain ramification on overseas companies and private investment funds who have investment exposure in the industry.

In this article, we will be looking at 2 Small and Mid-Cap companies which has exposure to China Private Education Industry:

• Raffles Education Corporation Limited (SGX: NR7)

• Chip Eng Seng Corporation Limited (SGX: C29)

1) Raffles Education Corporation Limited (SGX: NR7)

Since establishing its first college in Singapore in 1990, Raffles Education Corporation Limited (“Raffles Education”) has grown to provide a full spectrum of education services through a vast network of 18 colleges and universities across 10 countries in Asia Pacific and Europe, which includes: Cambodia, India, Indonesia, Italy, Malaysia, Mongolia, Saudi Arabia, Singapore, Thailand and the People’s Republic of China.

Latest 1H FY2021 Result

For 1H FY2021, Raffles Education’s revenue registered a slight decline of 7% year-on-year to S$48.42 million. The lower revenue was mainly due to lower revenue contribution from ASEAN and Australia region, while being partially offset by the higher revenue contribution from People’s Republic of China (“PRC”).

In terms of revenue contribution, PRC contributed S$23.3 million (48.1% of 1H FY2021’s Revenue), followed by ASEAN Region of S$16.7 million (34.5% of 1H FY2021’s Revenue).

Despite the lower revenue, Raffles Education’s profit after tax surged by more than 300% year-on-year to S$37.60 million. This was mainly due to the gain on disposal of property plant and equipment that is worth $28.1 million.

With PRC contributing the most towards Raffles Education’s topline, there could be a possibility of a significant impact on the company, given the latest relevant measures in China.

2) Chip Eng Seng Corporation Limited (SGX: C29)

Chip Eng Seng Corporation Limited (“Chip Eng Seng”) is a property development and construction company. Its business segments include construction, property developments and property investments, hospitality, and education.

Latest 1H FY2021 Result

For FY2020, its revenue declined by 36% year-on-year to S$674.63 million, mainly due to the property related segments. However, its education business has bucked the trend. Revenue was up 87.8% year-on-year to S$25.93 million, due to contributions from the Invictus-brand international schools and Repton Malaysia school acquired back in FY2019.

Overall, its education business only contributed a mere 3.84% of the Group’s total revenue in FY2020.

Meanwhile, the lower gross profit and higher administrative expenses has pushed the Group into the red, with a loss of S$78.49 million for FY2020, as compared to a profit of S$32.55 million a year earlier.

Latest Update

In the latest announcement dated 28 July 2021, Chip Eng Seng has mentioned that, apart from the Group’s investment in Guangzhou Yuanda Information Development Co., Ltd (“Yuanda”), the Group’s other education-related ventures in the PRC are not in the tuition sector.

Yuanda will likely be affected by the measures as its current key product offering relates to online and onsite tutoring in primary school mathematics. Currently, the Group has an interest of approximately 34.97% in Yuanda, through a Variable Interest Entity (“VIE”) arrangement.

As of 30 June 2021:

• The carrying amount of the Group’s investments in its education-related ventures in the PRC is approximately S$17.6 million, of which approximately S$11.7 million relates to its investment in Yuanda.

• Revenue generated from the Group’s education business in the PRC accounted for approximately 0.1% of the Group’s total revenue.

Lastly, when there is clarity on the actual impact, the Group will, if required, make the appropriate impairment for its investments in the later part of the year.

Conclusion

To summarise, this latest development in the Chinese Private Education industry has caused shockwave not only to the industry players and new entrants, but also investment firm like Singapore’s Temasek and GIC, as well as Warburg Pincus and SoftBank's Vision Fund, which have all invested in many of the industry's big players.

Meanwhile, for the 2 Small and Mid-Cap mentioned above, investors will have to keep a close look at their latest relevant announcement for any material developments towards their education business in China.

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