Over the past two years, the private education market in China has seen rapid expansion. In 2010 alone, over $90 million was invested in this industry by global private equity and venture capital firms. Additionally, five Chinese education companies went public in that year. By the end of the year, the market value of all the listed enterprises in the education industry of China had surpassed $9.2 billion. The BDA group, a leading Chinese consulting company, projects the Private education market to mushroom to $115 billion by 2013 as the demand for skilled labor and white collar jobs increases. Many parents will invest in their child's education, partly because Chinese law only allows for one child. Just to give a feel for the intense focus placed on getting ahead in China, according to the National Bureau of Statistics of China, Chinese parents spend over 10% of their disposable income just on piano lessons.
Many of the Chinese education companies listed in the US have small market caps (range: $10mm - $100mm USD) and are prime takeover candidates. This fragmented market is new and can grow with consolidation. Due to recent legislative encouragement by the Chinese government, private education has grown throughout the system. The most underserved area is the primary school and high school segment with only c.7% of the population enrolled in private schools compared to the system-wide average of 15%. We therefore focus our attention on this "sweet spot" sector within the general Chinese education industry.
There are approximately over 10+ publicly traded companies that operate in this space, such as Ambow Education Holding Ltd. (AMBO), TAL Education Group (XRX) and Noah Education Holdings Ltd. (NED). One small company however, China Education International Inc., (CEII: OB), has begun attracting a lot of attention with volume doubling its trailing 30 day average recently. I think that this excitement could be due to the company's unique business profile which makes it a great acquisition target. CEII currently manages the operation of schools and educational organizations which provided educational services to 15,000 students, projected to rise as enrollment into the schools and programs increase. Further, the Company has been in discussions with various parties to bring additional schools and organizations under its management and leadership during the next 12 months.
This well-funded company has been adding a school to its system around every six months and plans on continued growth. With no net debt and $14.9mm in shareholder's equity, there is a lot of room for growth. While the overall brand of education that they provide is still emerging, there is a unique focus on preparing students for international careers by offering US and UK accredited college level programs. Additionally, there is a focus on learning English with a "Super-ESL" program that puts Chinese kids on the fast track towards communicating in English by providing specialized online classes that puts them in touch with native English speakers so they can work on their accents as well. This is a company that provides innovative educational methods and is attracting both schools and students along the way. This ingenuity shows up in the growth numbers as the table below illustrates:
Table 1: One Year Growth Rates for Comparable Companies
1 Year % Sales Growth
Source: Bloomberg and company filings
As always, it's important to keep an eye on the risks to this type of investment, especially given the low price and market capital. China Educational International has still been unable to turn a profit thus far. This is typical of early stage businesses, but adds to the risk associated with not being able to rely on previous performance. Along the same lines, valuations are quite rich compared to their peers with EV/Sales at a whopping 22x vs. the industry average of 2x. Price to book is more in line though coming in at 2.3x vs. the industry average of 2.1. Additionally, it is also a relatively new industry in China which adds to the uncertainty and allows for a greater risk and greater returns.
Perhaps speculation on its high growth has driven the share price up 65% year-to-date. The added volume noticeably over the past few days without any major news lends credence to the notion that a catalyst may be in the works and that the time to move is sooner rather than later.