China's Online Education Market: Lower-Tier Cities Offer Growth Prospects
Summary
- China’s online education market has been growing over the past decade. The biggest segment of the market is for online K-12 and STEAM education.
- Adoption has been largely driven by students in top tier cities where incomes are considerably higher and where internet infrastructure is extensive compared to lower tier cities.
- 70% of China's school-age population is located in lower tier cities. Students in these areas are relatively under-served in terms of educational resources compared to their urban peers.
- As rural incomes rise and internet connectivity improves, the online education sector could benefit.
70% of China’s school-age population is located in lower tier cities. However, students in these areas are relatively under-served in terms of educational resources, and there is a big disparity in academic performance between urban students and their peers in less developed urban centers and rural areas. As per capita incomes rise and rural internet connectivity infrastructure improves, China’s online education sector is poised to benefit.
China’s online learning market has been growing steadily over the past decade, reaching a market value of RMB 272.7 billion in 2019, from RMB 575 million in 2011, representing a CAGR of more than 15%.
Source: Deloitte
Rising disposable incomes, the perceived importance of a good education, growing competition for good schools and jobs, and a growing number of Chinese students studying abroad (Chinese students studying overseas increased by nearly 9% in 2018) are triggering demand for vocational training, corporate training, language training, and private education.
While online learning may not be suitable for everyone, there are still plenty of individuals who embrace online learning's convenience of being able to study from anywhere. Research firm Frost & Sullivan sees China’s online education market more than tripling to RMB 696 billion in 2023 from RMB 203 billion in 2019.
According to estimates from Deloitte, online education will account for about 10.41% of China’s overall education market, up from 9.32% in 2018. The biggest segment in China’s online learning market is online K-12 and STEAM education which will account for about 44% of China’s online education market, up from 37.1% in 2018.
Source: Deloitte
According to statistics from China’s Ministry of Education, there are nearly 200 million students in China’s K-12 age group. Of this, an estimated 22% will participate in online tutoring this year, up from 17% in 2019, according to research firm Blue Lotus Research Group.
That suggests ample room for growth in a country that has traditionally attached great importance on good education as a means of enhancing a person’s worth and career. Parents in China perceive after-school tutoring as a necessity given the intense competition in schools, universities and the job market.
China’s after-school tutoring revenue has been steadily increasing along with rising incomes. Asian families reportedly spend as much as 15% of their income on such after-school education services compared to just 2% by their American counterparts. 
Source: Deloitte
China’s per capita incomes are expected to continue their upward trajectory in the years ahead which should push up per capita education expenditure as well.
Source: Trading Economics
With the quarantine period being a prime opportunity for students and parents to try out e-learning platforms and virtual classrooms, they could be enticed to try other online learning products, further propelling the online learning market.
China’s brick-and-mortar schools have already begun implementing online learning and China’s Ministry of Education issued a statement encouraging schools to use internet platforms to continue teaching students while offline schools were suspended during the coronavirus pandemic. Having experienced the benefits of online education such as less time spent commuting between home and school, some of those parents and students may opt for online after-school tutoring as well.
A near-term impact is likely to be reduced customer acquisition costs due to the sharp increase in students turning to online education platforms to continue their studies during the quarantine period. Longer term, online tutoring courses could gain greater acceptance and thereby contribute to market growth.
Rural Opportunity
There is great potential for online education in rural China; China’s rural students have so far been relatively under-served in terms of education compared to their urban peers for reasons including a shortfall of teachers, poor internet connectivity, and relatively low incomes which made private tutoring unaffordable. This explains the significant performance gaps between China’s urban and rural youth; whereas students in Shanghai, for instance, have performed top in the world on standardized tests such as Program for International Student Assessment (PISA), students from lower-income rural provinces in China have performed among the lowest.
To help plug the rural-urban education gap, the Chinese government has implemented a series of measures to introduce rural students and schools to the internet using which they are provided quality online resources which were once unique to urban regions.
Close to 100 million rural Chinese students in primary and secondary schools are covered by a national satellite broadband transmission network for online education, and since year 2012, the proportion of primary and high schools that have access to the internet has grown from 25% to 96% as of 2019. A national online public platform for educational resources became operational in 2012, and by May 2017, all primary and high schools were able to retrieve for free some 19 million items of K-12 learning materials.
With rural students and parents having been introduced to online learning, there is tremendous growth opportunity for the online education market in this area of China, as incomes increase and penetration increases among rural students.
Rural Chinese students make up about 70% of China’s school-aged population as of 2018, according to the National Bureau of Statistics. It has been observed that there is a positive correlation between income per capita and education spend among China’s urban residents, i.e., as incomes rise, spending on education (such as for after-school supplemental education activities) rises.
Source: Deloitte
With urban incomes being nearly nine times higher than that of rural incomes, it is not surprising that China’s online education spend largely stems from urban students. New Oriental Education & Technology Group (NYSE:EDU), for instance, derives nearly 31% of their revenues from just four Tier-1 cities: Beijing, Shanghai, Hangzhou, and Xi’an, according to their latest annual report. Beijing and Shanghai are Tier-1 cities, while Hangzhou, and Xi’an are “New Tier-1” cities.
China’s rural-urban income gap widened between 1990 and 2010 when China’s Gini coefficient deteriorated from about 35, to about 50 in 2009. IMF officials wrote a blog post saying:
More than two decades of spectacular economic growth in China have raised incomes dramatically and lifted millions of people out of poverty. But growth hasn’t benefited all segments of the population equally. In fact, China has moved from being moderately unequal in 1990 to being one of the world’s most unequal countries.
The IMF attributed education gaps as part of the reason driving income inequality.
Source: IMF
However, over the past few years, China’s Gini coefficient has been improving thanks to rural incomes growing faster than urban incomes.
Source: Quartz
As illustrated in the chart below, while China’s urban residents’ per capita incomes doubled between 2010 and 2018, rural residents saw their incomes jump by nearly 2.5 times during the same period.
Source: Statista
This suggests there is tremendous opportunity for the online learning market to expand, as penetration among rural Chinese students grow along with rising incomes.
Rising barriers to entry
China’s online education market had been increasingly subject to increasing regulation. Over the past few years, the Chinese government imposed new regulations governing the sector with more to come in future. Platforms engaged in the business of providing online after-school tutoring services are now subject to the same conditions as all other after-school tutoring institutions and key course information, including subjects, course schedules and course syllabi for school academic subjects courses have to be filed with the local education administration authorities and made publicly available. A proposed Draft Amended Implementation Rules will see further regulations such as requiring e-learning platforms that provide online diploma-awarding courses to hold both a private school operating permit and relevant internet operating permits. Poorly-run training providers will be shut down or be blacklisted.
The online education sector has been one of the beneficiaries of the coronavirus outbreak. With current online education bigwigs such as New Oriental Education and TAL Education (NYSE:TAL) seeing increased activity during the COVID quarantine period, the sector is likely to come under even greater regulatory scrutiny.
What this suggests is the barriers to entry into China’s online education market are now higher than before and they are likely to go higher. Big players such as New Oriental Education and TAL Education may see limited impact while smaller players unable to keep up with rising regulatory costs are most likely to struggle.
Notable Players
China’s online tutoring market leaders New Oriental Education and TAL Education (considered Tier-1 companies given their extensive reach across the country) are both poised to benefit as urban incomes grow and online education spend increases.
However, it could be profitable to consider companies that can capitalize on the online education opportunity beyond China’s Tier-1 cities which offer attractive growth prospects.
New Oriental Education in particular is worth watching; in terms of business operations, New Oriental Education generates strong cash flows (FCF has exceeded US$500 million over the past three years), and FCF per share is on an uptrend.
Source: MacroTrends.net
New Oriental Education’s financial position appears to be strong as well, with the company having have very little debt (debt stood at US$117 million, which was more than offset by their US$3 billion cash pile).
Source: Simply Wall St
Furthermore, New Oriental Education has already made moves to capitalize on the online education opportunity in China’s lower tier cities. In 2017, the company launched “DFUB” which are online, interactive, location-based, after-school tutoring courses targeting students in lower-tier cities. It aims to bring top quality teaching resources from Tier-1 to Tier-3, 4, and 5 cities, covering all subjects in K-12 curriculum for all age groups.
Results so far have been promising; as of 30 November 2019, DFUB courses have been released in 128 cities in China and student enrollments jumped 186.2% year on year.
This article was written by
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