Under the long shadow cast by the capital winter since mid-2018 triggered by the deleveraging of financial markets and overall economic downturn, more than 300 financing deals closed by China-based EdTech ventures raised around $2.85 billion(19.9 billion yuan) last year, which shrank by 30% compared to 2018. JMDedu will help our overseas readers deep dive into the education market by spotting out the sub-sectors with noticeable change last year. Most of the Chinese data in this piece are compiled by Duojing Capital.
Overview: plummeting venture trend in the primary market
Apart from the deleveraging of financial markets, more than 40 documents have been issued by the national government last year that stricter regulations targeted at certain sub-sectors have deepened public perception of investment risks. According to the open data compiled by Duojing Capital, 310 deals have been closed in the primary market excluding IPOs and M&A in 2019 with a year-on-year plunge of 32%, witnessing a continuous slump during recent three years.
Contrary to the downturn in the primary market, the secondary market is more promising that the securitization of educational assets and IPOs in overseas markets have become inevitable trends. Specifically, there are 70 education companies listed in A-shares, US and HK stocks, among which 16 firms were listed in 2019 with total fundraising of more than $1.96 billion (13.7 billion yuan). Hong Kong Stock Exchange are preferred by mainland EdTech firms with 10 enterprises listed. Plus, 4 were listed on US stocks, and 2 on A-shares.
Moreover, there are three China-based education companies with a market value of over 100 billion yuan in 2019 namely TAL, New Oriental and Offcn, reflecting that high-quality educational assets have gradually been recognized and favored by investors, meanwhile, enhancing the confidence for an increasing number of followers to enter the secondary market. But Duojing Capital believes that the valuation of some listed companies is already irrational.
Deep dive: breaking down the investment by sub-sectors
Within 2019’s Chinese education sector, four sectors saw a concentration of investments: competence-based education (115 deals), K-12 learning (49 deals), vocational education (44 deals) and educational informatization (44 deals), then followed by early childhood education(31 deals), international education(21 deals), educational urban design (4 deals) and publishing(2 deals). Even though over 60% of the companies are still early stage, 63 deals have been closed in the financing round from B to E, especially in K-12 and educational informatization track. In general, the financing amount of single deal in the education industry has gradually increased that 134 deals have been closed reaching the level of tens of millions yuan and 46 deals at the level of more than 100 million yuan.
Looking at specific sub-sectors, financing of early childhood education slumped compared to last year. Since the second half of 2018, China’s authority has tightened the regulation of this industry, converting to universally-benefit or partnering with the government seems to be the way for private kindergartens to break through. Duojing points out that future opportunities may lie in childcare and the improvement of service configuration for kindergartens. Formative education will also become hot spot amid the upgrade of teaching devices developed for kids, for example, teaching robots are playing the role of both toys and learning companions at children’s learning process. But this kind of equipment will face the pain points of iteration including content, interactive form and technology in the long run.
Competence-based education is still encouraged by the government in terms of school subjects related training activities, children English education, the Big Chinese learning and Mathematical thinking training are all supplements of school education helping students to acquire better performance in the examination also prepare them for future-ready skills. Meanwhile, e-learning has become a new trend in this sub-sector that more than half of the deals have gone to online education providers. For instance, although over 50% of parents prefer their kids to learn English through offline small-size class, online English products targeting early childhood still attracts more than 20% of parents to consume. As of December 2019, there have been 17 deals closed in children English learning, of which 12 are online service providers with a total amount of more than 2.9 billion yuan according to the disclosed data.
When we deep dive into the vocational education market, although supported by a batch of policies enhancing school-enterprise cooperation and industry-education, the number of deals was still less than expected with a year-on-year decrease of 35.7%. As for the reason, Duojing believed that the governmental documents are mainly inclined to developing education systems in the vocational schools while off-campus training programs have not got substantial benefits in fact.
Moreover, investors become more rational about investment in terms of international education due to a less optimistic industry prospect and regulatory risks. With more and more Internet and technological giants tapping into the sub-sector of education informatization, more fierce competition will be sparked in the crowded market space. As for K-12 after-school tutoring, stricter regulations since 2018 H2 will inevitably lead to increased costs of operations. The opportunity proposed by Duojing is the increasing market share in second-, third- and fourth-tier cities amid the acceleration of online learning.
New trends in the education markets
Facing the challenge of aging population, elderly care service industry has attracted significant attention from the Chinese society that education service in terms of silver economy will stimulate new trends in consumption. When producing elderly-oriented contents, activities and community operations is the key path for education companies to monetize.
The issue of agriculture, rural areas and farmers is also one of the cornerstones to maintain the sustainable and stable development of the country so that educational content demands related to this field are surging. Currently, a large number of resources like farming skills have been posted on video platforms with massive traffic flow like Kuaishou and Douyin (TikTok China). Group-based farmer education platforms by adapting the business model of short-video, live broadcast and knowledge payment have also been favored by the capitals. For example, Tiantianxuenong (天天学农), an agricultural technology knowledge learning platform, has raised tens of millions yuan in its Series B round in August 2019, completing four rounds within two years since founded in 2017.
At last, according to the “Thirteenth Five-Year Plan for The Sports Industry”, the total market size of this industry will exceed 3 trillion yuan during this period. Therefore, sports training programs for children to get further education or improve their capacities are also considered as potential market by Duojing.
Overall, in spite of some negative signals proliferating and gaining pace in capital market, the overall trajectory of the EdTech space in China remains positive, with the mood of its participants seemingly not dampened by the notion that a deep-freeze has set in.