Starting in 2021, policies encouraging vocational education have been frequent. When the “Opinions on Promoting the High-Quality Development of Modern Vocational Education” policy was issued on October 12, we also gave a detailed interpretation of recent policies, focusing on the analysis of the impact of policies on industry valuation and sentiment. Details can be seen“Private Higher Education Collectives Are on the Rise, How Does the Latest Vocational Education Policy Affect Profits and Valuations?”

The analysis of the article at the time was mainly an analysis of the valuation of the non-K12 private education industry. This article extracted the representative primary and secondary vocational education and vocational education service sectors in vocational education for analysis.

I. Detailed explanation of the secondary vocational education system

First, it is necessary to explain the basic concepts of vocational education.

According to the diversion after graduating from junior high school, some of the “ordinary high schools” entered continued their education and entered undergraduate colleges by taking the college entrance examination in the future; the other group of students entered the “secondary vocational education” system. After graduation, this group of students either directly participated in work or continued vocational college or vocational undergraduate education at “higher vocational colleges”.

Among them, secondary vocational education (academic qualifications) includes three forms: secondary colleges, technical schools, and vocational high schools.

1) Secondary schools:Involved in the national recruitment plan to train frontline workers. The normal course of study is 3 years, and they can also continue to study to obtain a college degree

2) Technical schools:More emphasis is placed on technical learning and training to cultivate practical skills. The duration of study is 1-5 years, and students can obtain academic qualifications and vocational qualifications after graduation

3) Career level:Ordinary high school+vocational education. After graduation, a vocational high school diploma is issued, and students still have a chance to take the university entrance exam.

In addition to the academic education system, there is also a type of non-academic vocational skills education that is widely popular among junior high school graduates.That is vocational skills training.For example, the famous “New Oriental Cooking School” in mainland China is characterized by vocational skills education in food service.

Now it's time to focus. Is there a big difference between non-academic vocational skills education and schools with secondary school degrees? The real difference isn't that big. First, for a large number of junior high school graduates, acquiring skills is given priority over obtaining academic qualifications, and schools that provide vocational skills education are usually more practical in the job market due to market competition and flexible systems that can provide better training.

On the other hand, even for students with the required degree, there is still a way to obtain a secondary school degree. For example, vocational schools cooperate with third party schools such as the “National Open University” to provide students with learning opportunities to obtain academic qualifications.

In summary, we have sorted out the secondary vocational education system after graduating from junior high school. Next, we can analyze several trends in the future development of secondary vocational education based on policy guidelines.

II. Analysis of the orientation of middle vocational education: How does the “employment ratio” affect the industry?

The frequent favorable policies for vocational education have become a market consensus, but where are the specific benefits reflected? The first is that the employment ratio of 1:1 directly provides huge incremental enrolment space for secondary vocational education; the second is that policies have given vocational education free and flexible development space; the third is the improvement of the higher vocational education system to enhance social recognition and acceptance of secondary vocational education.

1. The employment ratio of 1:1 will directly expand the student base in secondary vocational education.The so-called employment ratio of 1:1 indicates that at the junior high school graduation stage, the ratio of students enrolled in vocational education and general high schools is around 1:1. Students receiving vocational education and general education are diverted starting with the middle school entrance examination, and the approximate diversion ratio is around 1:1.

Since the current actual employment ratio falls far short of the 1:1 target, secondary vocational education enrollment potential is still huge. According to data from the National Bureau of Statistics, the employment ratio in China in 2020 was around 0.74. Looking at absolute numbers, the number of middle school students enrolled has been declining year by year since 2010, and the number of students enrolled in 2020 was 6.45 million. As a result, there is still a 26% growth gap in the employment ratio in terms of vocational education.

2. Analysis of middle employment policies - the driving force of policies related to the employment ratio

The employment ratio has been low for many years in a row; this is essentially the result of market choices. Middle career graduates are at a disadvantage in terms of income and further education. First, the income of middle school vocational students is significantly lower than the average income of college students and all academic qualifications across the country. According to Zhilian recruitment statistics, the average salary of middle school vocational graduates is 5,888 yuan, which is significantly lower. On the other hand, middle school vocational students have few opportunities to further higher education. According to statistics from the Ministry of Education, the proportion of middle school vocational graduates directly employed reached 80%, and only 20% of students in the district continued to receive higher education.

The current middle career support policy focuses on the two issues of improving teaching ability and further education opportunities. After all, the income level of middle school vocational students is essentially a matter of matching labor skills with the market.

In terms of teaching capacity, the current policy orientation is to make full use of the power of the market.In the “Opinions on Promoting the High-Quality Development of Modern Vocational Education” published on October 12 this year, the document clearly proposed encouraging listed companies and leading enterprises in the industry to organize vocational education, and encouraging enterprises to organize vocational education. The essential purpose is to encourage more market forces to make up for some of the shortcomings in public schools.

According to our research, public schools are generally different from private schools in terms of flexibility and marketization. These include the renewal and iteration of skill majors, the degree of skill and market matching, teacher and incentive systems, and a clear difference in management education for students (14 to 18 years old). This is also the reason why the policy strongly encourages the power of the private sector and enterprises to join vocational education, using more dynamic participants to provide vocational education that is closer to the market, thereby raising the income level of students.

Looking at further education, the policy direction is to give more middle school vocational students the opportunity to participate in higher education.This is divided into two dimensions. It is necessary not only to provide training subjects for further education in the teaching of middle and vocational students, but also to provide various examinations and degree supplies. This includes further education routes for middle and higher education students, such as comprehensive middle and higher education, spring entrance examinations, and counterpart enrollment. Judging from actual results, middle school vocational students in China have also contributed to the main increase in the number of college entrance examinations in recent years.

In summary, the two directions of the recent vocational education policy are to raise the level of vocational education running and the possibility for students to further their studies, thereby achieving the 1:1 goal of “employment ratio” in the future.With the implementation of this target, the number of students enrolled in secondary vocational education is expected to continue to rise in the next few years.

III. Investment Opportunities in Secondary Vocational Education: Oriental Education in China

Through the above analysis, it can be seen that in the future, there will be an increasing base of students graduating from junior high school and entering vocational education, including non-academic vocational education systems.

However, the expansion of the base of middle school vocational students will directly benefit the long-term fundamentals of Oriental Education in China (0667.HK). Although there have been many recent stock price adjustments, it can be seen from management's resolute buybacks that the company itself has full confidence in the company's fundamentals.

Oriental education mainly focuses on vocational training services, including cooking, information technology, and automobile services

1) Cooking technology:“New Oriental Culinary Institute” is almost a well-known vocational education training brand. As of the first half of the year, 65,200 people were trained, contributing mainly to the revenue of Oriental education in China. In addition, there are “Omichi”, which focuses on western food (5,977 people trained in the first half of the year), and “Delicious Academy”, which focuses on personalized cooking experience courses (1,606 people trained in the first half of the year)

2) Information Technology and the Internet:Among them are “Xinhua Computer Education” (4,3269 people trained in the first half of the year) and “Huaxin Zhiyuan (771 people)”. The professionals involved include Internet technology and data engineers.

3) Auto repair major:The main brand is Wantong Auto Repair Education (1,606 people were trained in the first half of the year), with a special focus on vocational skills training in renewable energy vehicles.

So, how will recent secondary vocational education policies affect the fundamentals of Oriental education in China?

For education companies, the two indicators that most directly influence performance are “enrollment ability” and “enrollment cost.”

Pessimists believe that with policy encouragement, public secondary vocational schools will seize Oriental education's ability to enroll students.On the one hand, some investors also have questions about Oriental Education's non-academic “vocational training”, and wonder if “job ratio” will affect non-academic training needs. On the other hand, there are also those who doubt that policies that encourage public schools to improve quality will cause competition among Oriental Education Group and affect enrollment capacity.

Let's start with the conclusion. We believe that the impact of recent policies has had more benefits for Oriental education than challenges.

The first reason is that middle level students place more emphasis on skills. For middle level students, skill learning is directly linked to employment, and the weight of having an education or not is relatively low. One characteristic of Oriental education compared to public schools is that it places great importance on practical training models. More than 70% of them are practical courses, and the average recommended employment rate for cooking, Xinhua computers, and auto repair has reached over 95%. However, according to data from the “2020 Annual Report on the Quality of Vocational Education in China”, the average employment rate of higher vocational students in recent years is around 90%, and Oriental education is even more advantageous in terms of employment. This is the reason why the tuition fees of Oriental education are many times higher than those of public schools, and have been accepted by the market for many years.

The second reason is that Oriental education can still cooperate with academic-based vocational education in terms of training models. According to our research, Oriental education students (long term education system) can directly cooperate with schools such as the National Open University to help students obtain academic qualifications, but the cost is not as high as we thought. On the other hand, many public school students will also participate in training programs under Oriental Education, and public schools will pay part of the tuition fees.

Therefore, when it comes to academic qualifications and non-academic qualifications, Oriental education will not be influenced much by this part.They can also enjoy the incremental increase in students' skills brought about by the “employment ratio.” However, the quality of vocational education and the educational orientation for secondary vocational education will also encourage students to study in high-quality vocational schools.

On the challenge side, it is likely that the biggest impact will be the increase in enrollment costs. Currently, more than 80% of the enrollment costs of Oriental education are carried out through online channels, but with the “employment ratio” requirements, public secondary vocational schools may have stronger enrollment efforts, and it is also easier to cooperate with local schools. As a result, Oriental Education needs to set up offline promotion channels to enroll students, which is likely to increase the cost of enrollment per student.

IV. Summary

Frankly speaking, the Hong Kong stocks of private education companies are still in a slump, and the market still “has lingering feelings” about policy uncertainty. However, judging from the policy orientation and development trend of vocational education, the basic outlook for secondary vocational education is still promising. In particular, for companies such as Oriental Education whose stock prices have been deeply adjusted and management is actively buying them back, this may be a point worth paying attention to.