The Zhitong Finance App learned that Zhishang Securities released a research report saying that the market is worried that the valuation of education and training companies is basically reasonable in the short term. The bank believes that the development space for related companies is still long and snowy, and the market share is expected to surpass that of 21 years ago. Approval for non-disciplinary training based on in-depth integration with local policies and high-frequency data is gradually being normalized. Leading institutions have a comparative advantage in running schools in compliance. Combining the dimensions of each company's past ability, store expansion logic, physical space, etc., the bank believes that major companies still have room to expand about 3 times in a neutral situation, and 4 times in an optimistic situation.

The views of Zheshang Securities are as follows:

Unlike the market's vague understanding of regulation in some non-subject areas, the bank believes that the curriculum format, which focuses on literacy education, is in line with the direction and policy requirements of education reform

The revisions to the Public Promotion Law and Education Reform Policy are continuous: the logic that out-of-school training can be a “useful complement” to in-school education should be understood from the perspective of finance, population spatio-temporal patterns, and educational goals

In addition to performance, attention should be paid to product forms: literacy education reforms focusing on comprehensive learning ability, practice, inquiry, thinking, moral sentiments, etc. have been implemented for a long time. Although the literacy courses at out-of-school training institutions include certain knowledge content, their teaching goals, methods, evaluations, etc. are guided by literacy ability rather than “point/further education”, which is in line with the direction of education reform

Unlike the market's vague perception of the size of the non-disciplinary market, the bank believes that combined with product forms and customer base behavior, the non-disciplinary market size is still expected to exceed 400 billion yuan in the future

The customer base pays more attention to improving methods, efficiency, and learning interests. Whether the literacy course can respond to core concerns: the bank believes that in a neutral situation, STEAM products that used to focus on early childhood connections and lower elementary school levels will gradually expand to all K9 age groups in the market environment after a “double reduction”. As parents' attitudes change and products gradually mature, and penetration rate expands, the total market breakthrough is expected to reach at least 400 billion yuan within 3 years.

Unlike the market's belief that non-subject supply competition tends to be intense, the bank believes that the current effective supply of literacy training is still limited, and the industry is showing a mismatch between supply and demand. Judging from the current effective supply, the bank has compiled non-subject registration courses and found that most of them are specialty courses, and literacy courses such as thinking, humanities, and science account for a low proportion.

The market is concerned that the valuation of education and training companies is basically reasonable in the short term. The bank believes that the relevant companies still have a long way to grow, and their market share is expected to surpass that of 21 years ago

Leading companies still have 2-4 times room to expand their stores: the market is concerned that current off-campus training institutions are limited in their ability to expand due to regulatory factors. The bank thoroughly integrates local policies and high-frequency data to determine that approval of non-disciplinary training is gradually being normalized. Leading institutions have a comparative advantage in running schools in compliance. Combining the dimensions of each company's past ability, store expansion logic, physical space, etc., the bank believes that major companies still have room to expand about 3 times in a neutral situation, and 4 times in an optimistic situation.

The steady pace of development in a stable environment will be reflected in the valuation level: the market currently lacks a reasonable judgment on the valuation center of education and training enterprises after the “double reduction”. The bank believes that along with the clarity of the policy environment, maturity of product forms, and changes in user perception, non-disciplinary business development with literacy classes as the main revenue will gradually enter a stable period. Referring to 21 years before the “double reduction”, a steady double-digit growth rate is usually accompanied by a PE level of 30-60 times. The valuation level of related companies is expected to rise to a higher level by 20-30 times the current PE.

Unlike the market, which mainly focuses on current marginal changes, the bank believes that the mid-term development capabilities of the companies concerned should be understood in conjunction with the business philosophy (service quality and standardization ability)

The market mainly tracks marginal changes in the business and financial data of related companies in the short term. The bank believes that it is necessary to thoroughly integrate the business philosophy of each company, combine education as the essence of service, and understand the subsequent brand power and product standardization capabilities of relevant companies, as well as the speed of expansion, health of business indicators, profitability, and valuation levels supported by this

Investment advice

1) The policy environment is becoming more and more clear to regulate the development of the industry

Non-disciplinary off-campus training is defined as a “useful complement”, and the policy environment is gradually becoming clear. Literacy education reforms focusing on comprehensive learning ability, practice, inquiry, thinking, moral sentiments, etc. have been implemented for a long time. Although the literacy courses of out-of-school training institutions include certain subject content, their teaching goals, methods, and evaluations are guided by literacy skills rather than “point/further education”, which is in line with the direction of education reform.

2) Looking at improvements in supply and demand in the short term: diversified demand for non-subject training and the shift of demand after double reduction to non-subject training

Literacy training focuses more on improving learning methods and learning interests. It is at the stage of industry penetration. Along with changes in parent education concepts and the maturity of the curriculum system, the bank expects the 2025 literacy market (humanities+science+English+programming) to be 463.66 billion yuan (CAGR = 23% in 22-25 years), and the optimistic forecast can reach 825.62 billion yuan (22-25 CAGR = 31%).

After the supply is cleared, leading institutions are expected to obtain a market share that surpasses the level before the “double reduction.” Before the “double reduction” in '21, New Oriental and Good's market share in 2020 is expected to be 2.7% and 1% respectively, and the industry pattern is quite scattered; leading companies have a first-mover advantage in literacy business development using brand advantages and retention outlets, and are expected to surpass the market share before the “double reduction” after supply is cleared.

3) Looking at service and expansion capabilities in the medium term (ability to standardize service capabilities+ability to expand in a new regulatory environment)

Education should be a “slow” business of doing a good job in service: learn and think, pay attention to the assessment of process indicators, and keep an eye on renewal rates, course completion rates, and refund rates linked to service quality. Take New Oriental as an example. Currently, the renewal rate for non-subjects is over 70% (previously, New Oriental Health Future subject training could reach 90%; other leaders such as Thinking Fun and Excellent Education were 60%-80%), and there is still room for improvement.

Leading companies still have 2-4 times more room to expand their stores: the literacy training market has long and heavy snow. Combining various methods, the bank believes that major companies still have room to expand about 3 times in a neutral situation, and 4 times in an optimistic situation. As revenue and profit growth rates resume relatively rapid growth, there is also room for valuation improvement. From a medium-term perspective, the number of outlets will be an important gripper for verifying whether performance can support expectations.

4) Looking at finance, population, and consumption trends over the long term

1) Finance: Improvements on the financial side may reduce the long-term participation rate in subject education and training, and at the same time provide a better demand environment for quality education. 2) Population and consumption trends: Affected by the decline in the number of births, the overall K12 population is expected to decline, but with reference to the development of the education industry in Japan and South Korea, along with the increase in individual payment levels and penetration rates, the overall size of the education and training market is relatively stable.

Key companies

Currently, the bank recommends New Oriental-S (09901) (rapid business transformation, obvious supply advantage), and suggests focusing on the future (TAL.US) (focusing on the quality of education and training services, literacy and learning machine business with great potential), university education (000526.SZ) (stable high school infrastructure, pioneering full-time and vocational education), GOTU.US) (literacy business has potential, revenue growth > profit growth in high growth stages), and Thinking Music (01769) (leading regional education and training leader, transforming quality education), Excellent Education Group ( 03978) (Quality education+vocational education+collaborative development of full-time schools), Code Education (300192.SZ) (based on repeated college entrance examinations to expand the vocational education circuit), Shengtong Co., Ltd. (002599.SZ) (develop quality training business, focus on new business developments), Kevin Education (002659.SZ) (K12 business+expand vocational education dual-wheel drive), Doushen Education (300010.SZ) (actively reorganize, develop live e-commerce, explore new businesses)

Risk warning: New business development falls short of expectations; industry competition intensifies; macroeconomic fluctuations affect consumption; industry self-regulation factors