Q1 Performance improvement+favorable policies released, and the education sector ushered in “dark and bright”?

Zhitong Finance ·  Jun 3 13:38

Performance is the most intuitive reflection of the quality of the company's operations. With the intensive release of quarterly reports, the recovery in profitability seems to indicate that the education sector is breaking out of its three-year low.

Over a long period of time, improvements in residents' economic standards have driven people's attention to education and market demand to continue to rise, while the relatively scarce resources for high-quality public education have given private education institutions a lot of room for development.

From a market perspective, the education sector has the characteristics of steady growth and high dividends. Combined with the AIGC wave, it is expected that the digital and intelligent transformation of the education industry will accelerate the digital and intelligent transformation of the education industry. The education sector, which is currently at a low valuation, has ushered in cost-effective allocation opportunities.

Most Q1 ushered in a fragmentation of the competitive landscape of profit repair leaders

According to the Zhitong Finance App, in the first quarter of 2024, most education sector companies continued their high prosperity since 2023, and many companies achieved significant growth, reversal, and loss reduction.

According to statistics from Hualong Securities, although the overall profit of the education sector increased in the first quarter, neither revenue nor profit returned to the same period in 2019, and the performance of nearly half of the companies still declined markedly, and the overall performance of the sector was divided.

Among them, Onli Education (600661.SH) and Xuedai Education (000526.SZ) ranked among the top in terms of revenue growth, with year-on-year increases of 47.42% and 35.97%, respectively; University Education, China Public Education (002607.SZ), and China Hi-Tech (600730.SH) performed better in terms of profit, reaching 886.44%, 240.67%, and 126.07%, respectively.

Looking at the segment segment, under the implementation of the “double reduction” policy, the number of domestic K12 educational institutions has been drastically reduced compared to before the “double reduction”. However, after 2 years of business adjustments, more and more companies related to the education and training industry have had a relatively clear direction of business transformation and development, and sector performance has picked up along with it.

Benefiting from favorable policies and business recovery, the profitability of leading K12 Education companies continued to recover. The gross margins of Q1 University Education and Onli Education increased 1.9 and 0.9 percentage points year on year, respectively, and net interest rates increased 6.3 and 20.4 percentage points year on year; the number of employees rose markedly. By the end of 2023, the number of employees at Xuedai Education, Onli Education, and Thinking Le Education (01769) increased 36.9%, 32.9% and 71.8%, respectively.

According to information, among the leading K12 companies, Good Future (TAL.US) and GOTU.US (GOTU.US) are still adhering to the old principles of education and have completely transformed from subject education to a quality education circuit. Among them, Good Future recorded a year-on-year revenue growth rate of 59.7% in the fourth quarter ending February 29, 2024, and operating losses also shrunk by more than 70%. Among them, quality education revenue accounted for more than 40% of total revenue, and Good Future learning machine sales were better than expected; in the first quarter of 2024, Gaotu also had 75% of its revenue from quality education and traditional learning services centered on high school subject training, an increase of about 35% over the previous year. In addition, Gaotu also actively explored the live e-commerce field. The number of fans of Gaotu Jiapin surpassed the 2 million mark in December of last year.

In contrast, New Oriental-S (09901), which accounts for a smaller share of the K12 business, was least affected by the “double reduction” policy storm, and also went the furthest in the cross-border transformation. In the first quarter of fiscal year 2024 (as of August 31, 2023), New Oriental achieved revenue growth of 47.7% to US$1.1 billion and net profit growth of 150.6% to US$165 million. Not only was performance recovering rapidly, but its revenue and profit were also close to the level before the “double decline”.

According to the Zhitong Finance App, in addition to Oriental's self-selected products and live e-commerce business, New Oriental's new education business also achieved good results with a year-on-year increase in revenue of 103.3%. This business includes non-subject tutoring courses, such as literacy classes such as storytelling, eloquence, and writing, as well as quality courses in programming, art, robotics, and science.

Meanwhile, Dongfang Selection continued to grow. In the fiscal year from June 1, 2022 to May 31, 2023, it achieved a total delivery GMV of 10 billion yuan. The total number of orders reached 136 million, and the overall gross profit was 2 billion yuan, a sharp increase of 400.1% over the previous year. However, due to increased self-operated product efforts, its overall gross margin fell to 43.3% from 65.1% in the same period last year.

In the vocational education sector, in 2023, with the exception of Huatu Shanding (300492.SZ), which recorded a loss due to the development of non-academic training business, and the decline in profits of Chuanzhi Education (003032.SZ) due to disruptions in the recruitment market and a decline in the number of enrollees, the gross margins of China Public Education and Action Education (605098.SH) increased 15.9 and 3.1 percentage points year-on-year, respectively. In Q1 2024, the profitability of Huatushanding and CCG Education continued to rise. Gross profit margins increased by 40.3 and 6.1 percentage points, respectively, and net interest rates increased 27.4 and 8.1 percentage points year-on-year, respectively.

Among them, China Education Holdings (00839) continued its expansion strategy, and capital expenditure increased 66.6% year-on-year in the first quarter, mainly due to the expansion of new buildings in existing campuses and the expansion of schools in Shandong and Guangdong Province. At the same time, average tuition fees and student numbers both increased, which also led the company to achieve a total revenue of 3.28 billion yuan in the first half of fiscal year 2024, an increase of 18.3% over the previous year.

In contrast, Chinese public education has changed from a management strategy that focuses on scale to focus on efficiency. On the one hand, it shut down some outlets with low performance output and low human efficiency by shutting down mergers and refining; on the other hand, it promoted organizational restructuring to promote management efficiency. The labor efficiency ratio in 2023 was improved compared to 2022.

The supply-side of the industry clears up marginal improvements in education policies

It can be seen that at present, the fundamentals of many education industry companies have gradually picked up, and looking forward to the future, as the education industry's policy focus changes from “blocking” to “sparse,” the education industry is expected to benefit from the release of industry demand, and there is still room for continued upward recovery in performance.

On February 8, 2024, the Ministry of Education issued the “Regulations on the Administration of Out-of-School Training (Draft for Comments)”, which clarifies the basic position of out-of-school training as a useful complement to school education, and points out that after the “double reduction”, the education industry has gone through supply clearance. Leading institutions have completed compliance transformation in the past 3 years, and proposed to face up to parents' reasonable training needs while promoting legal management.

For K12 education companies, under the trend of the subject education and training market shrinking and user training demand shifting to quality literacy education, the penetration rate of the quality education and training market is expected to increase rapidly, and user portraits basically coincide with subject education and training, and student resources are expected to be reused.

At the same time, policies related to vocational education continue to take a positive trend. The 2024 government work report proposed that the quality of vocational education will be vigorously improved. The National Education Work Conference also pointed out the need to enhance the adaptability and appeal of vocational education and steadily push forward the construction and reform of the modern vocational education system.

According to the Zhitong Finance App, the “College Students' Employability Research Report” recently released by Zhilian Recruitment shows that most college students' recognition of vocational education is increasing, which also confirms that the penetration rate of the vocational education market is expected to increase further. According to the report, 52.2% of graduates gave an affirmative answer to the question of whether “returning” learning skills would help employment, believing that there is a high demand for professional skills in the market, and that there are more employment opportunities after “returning”, accounting for the highest share; secondly, 43.2% believe that multiple skills have multiple paths, and 33.2% believe that this can be used to accumulate social experience.

According to SDIC Securities's market performance in reviewing the education industry since 2023, the CITIC Education Index (CI005816.WI) had a cumulative rise and fall of 9.15% in 2023, outperforming the Shanghai and Shenzhen 300 and the Shanghai Composite Index by 11.44 and 19.12 percentage points respectively; since the beginning of 2024 (2024/1/1-2024/5/13), the cumulative rise and fall rate fell 22.82%, outperforming the Shanghai and Shenzhen 300 and the Shanghai Composite Index by 29.63 and 28.64 percentage points respectively, and the gap with the general market continues to widen.

As can be seen, the recent improvement in the fundamentals of the education sector indicates that the adverse effects of previous policies have been fully digested. Currently, sector valuations have bottomed out, and the release of demand for follow-up education is expected to bring about a “double blow” to education industry policies and performance. At the same time, market concentration is expected to increase after the supply side of the industry is cleared, and deep-rooted segment leaders are expected to take the lead in benefiting.

The translation is provided by third-party software.

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