Investing in the Cure for Chinglish

Includes: CAF, CAST, DL, FXI, GXC, PGJ
by: Rob Abbanat

For educational services in China, and English education in particular, the confluence of an underserved market and emerging technologies is a powerful draw for investors.

As an investor, I am forever scouring the landscape for underserved and undeveloped markets, for it is there that I may find the most promising companies in need of capital to grow their businesses and better serve the people. And as a former technology entrepreneur, it is the nexus of underserved markets and new technologies that I find most intriguing. This is precisely why the market for education in China, and more precisely, the market for English education, is so alluring.

China’s education market is enormous, and enormously underserved. With 20% of the world’s students, China has less than 2% of the world’s educational resources to serve them. With a culture that places the highest value on education, the government is working hard to modernize an educational system that was gutted during the Cultural Revolution of the late 60’s. Many private companies have stepped in to fill the gaps and reap the benefits, setting up chains of private schools across the country, serving everything from preschool to university students. And as more and more of China’s second-tier cities spawn middle-class denizens, the demand for these services is only going to increase. Consequently, Chinese education companies like Chinacast Education Corporation (OTCPK:CAST, NASDAQ) and China Distance Holding Ltd. (DL, NYSE), traded on foreign markets are fetching a heft premium for their stock.

But education is a broad category, so where, in particular, should a discerning investor, or for that matter, an aspiring entrepreneur, look for opportunity? Well, if the pervasive use of Chinglish in everything from billboards to magazine ads to corporate literature is an indication, English education promises to be a fertile hunting ground.

What is Chinglish you ask? This often befuddling and always amusing form of communication has its origins in the Chinese desire to become a global business powerhouse. Unlike the French, China’s pragmatic leaders have no illusions about Chinese becoming the international language of business—it is simply too difficult for foreigners to learn. If China is to produce multinational corporations to compete with those in the West, then its citizens must master English. As testimony to their commitment to this goal, China has a near nation-wide policy of putting public signage in both Chinese and English.

But China’s collective grasp of the English language is at least 40 years behind that of northern Europe. This lag has resulted in Chinglish, which is best illustrated with a few cases in point. The “Ambassy Hotel” in Beijing ultimately changed its name after failing to draw in foreigners. In a recent visit to a Chinese hospital, I was directed to the “Health Prevention and Care Dept.” My personal favorite is local restaurant’s morning fare offered on the “Breast Menu,” which I assume is the Chinglish abbreviation for “Breakfast Menu” (but just in case, I had my coffee black, without milk). And if you stay for lunch, they offer “Ass Meat.”

But don’t laugh (too hard), these entertaining anecdotes belie a real need. China currently has more than 300 million people studying English. That’s not a typo: the number of people studying English in China is nearly four times the population of the UK. And 20 million new English students enter the market every year. Furthermore, because English is perceived as an essential skill for success, and because the one-child policy results in two parents plus four grandparents all pining their hopes and resources on one youngster, Chinese families are often willing to expend an inordinate amount of resources on their children’s English education. Companies

But “underserved” is a gross understatement when applied to the market for English education in China. The main problem is a total dearth of native English-speaking teachers. In all but the top-tier cities (Beijing, Shanghai, Shenzhen), students studying English are nearly certain to learn from native Chinese teachers whose grasp of English may be limited at best. Even though the Chinese government mandates English education starting at age 13, two-thirds of English teachers in China don’t meet the Ministry of Education’s minimum qualification standards (by their own account).

In the top tier cities, a few private companies like Education First (EF) and Wall Street English have addressed this need by “importing” native English teachers, and have consequently enjoyed blistering growth during the last five years. Yet these two companies combined probably serve less than 100,000 students—a mere fraction of the total market—and the business of importing people to teach English seems expensive at best, and un-scalable at worst.

This is where technology makes for an interesting play. Many companies, including EF and Wall Street, are now beginning to use web-based technologies to address the market, delivering more and more services such as pre-recorded lessons and interactive applets that allow students to practice their pronunciation.

Since China now has the world’s largest population of internet users, such a strategy enables companies to increase capacity without increasing the capital costs associated with a brick-and-mortar infrastructure. On the cutting edge, some companies are exploring creative ways to leverage the latest generation of video conferencing technology—which benefits from China’s robust broadband infrastructure—to deliver live classes from native English teacher without importing them.

In any case, the market for such technologies and the companies that employ them seems almost endless, which is somehow comforting. I must admit, I would be disappointed to some day awake in a China where all signage is prim, proper, and boringly correct, and Chinglish has gone the way of the dodo. But that won’t stop me from investing in companies who aim to make Chinglish a thing of the past.

Disclosure: No positions