ZWC Insight | Sub-sector opportunities in K12 online education as needs emerge
10/01/2020

The Education and Training as a multifaced industry has always been accommodative to the needs of different demographics. The New Oriental Group (New Oriental) from China as an example, riding on the growing demand for overseas education preparatory English among high school students in 1993, the Group managed to secure investment from Tiger Global Fund in 2004 and subsequently became the first Chinese education company ever listed on Nasdaq in New York Stock Exchange; while on the other end of the spectrum, TAL Education Group (TAL), founded in 2003 by Peking University graduates, Bangxin Zhang and Yundong Cao, focuses on a hybrid model of ‘Math Olympiad + Elite training + small class’. TAL managed to secure investment from Tiger Global Fund in 2009 and subsequently got listed on Nasdaq in 2010. The company soon grew and exceeded New Oriental Group to be the largest education company by market cap in China in the following years.

Where they may be the obvious success examples in the education and training sectors, there could be many more among different sub-sectors if we look at it at a 7-10 years interval. For example, international education, nursery English, kids music training, adult license training, vocational training, etc, are among the many sub-sectors where potential unicorns could emerge.

With that said, to understand the education and training industry accurately, we have to first map out and detail the demographics of the target users, and identify the corresponding supply chain that caters to the specifc needs. Take New Oriental in China as an example, their core business is on language training for students who will study aboard. The demographics of this group of users are characterized by being highly incentivized high schoolers who are willing to pay premium for intensive crash courses, and low repurchase rate. Another example is TAL, their core business is provision of K12 training where their target group are mostly adolescent who are in elementary school or junior to even high school. Over 80% of the parents of this target group place high hope on their children to become an elite or perform well in the exams. Their mentality focuses more on the long term grooming and nurturing, resulting in a higher repurchase rate.

Hence, we can see that both TAL and New Oriental as billion dollar listed companies have different focuses on segments in their core businesses and runs on different business models. Language training for oversea students requires an incentivized learning environment. This is usually achieved by strong celebrity tutors who can influence and motivate students to learn by providing an interactive and fun learning dynamics. Referrals are frequent and hence New Oriental runs a good mechanism to attract strong celebrity tutors; For TAL,  K12 training focuses the set of standardized training mechanism and materials and recruiting the best students, who can in turn get admitted to reputable schools, to validate their training method. TAL then focuses on marketing and promoting the result of their training methodology.

The influence of the different among target segment’s needs extends to various aspects of the company including organization and appraisal structure, organization culture, etc, and ultimately forms the DNA of the company. Say on the management of teaching staff, celebrity tutors are merely just an employee of the company, they are more like partners of the company as they work on a commission basis where it is no surprises that their annual compensation can reach millions of dollars. However, their performance is closely tied to their popularity, or satisfaction level, among students. TAL’s standardized approach on the contrary focuses more a ‘military-like’ hierarchy training and orderly monitoring to increase and maintain repurchase. Another perspective we can consider is the class size, New Oriental’s customers do not care as much about class size as their main purpose is to pass the exam for oversea studies, hence they run on a model is high margin, low price and massive class size, allowing more income for teachers. As for TAL, K12 training focuses more on the interactions between the teachers and the students, hence they run on a model that is more focused, decently priced and small scale.

Over the years the two companies have evolved quite a bit but their DNAs persist to differentiate their fundamental edges and further impact the upcoming models. Genshuixue is the first profit making online K12 company that has a 3 billion USD market cap this year. We can still find traces of New Oriental in the company as their founders and core management team members came from New Oriental. They managed to digitize the New Oriental model and made it online, running on a model that does not differ much good old New Oriental model – celebrity tutors charging 2-3 times tuition fees of competitors; company shares commission to ensure million dollars annual compensation for celebrity tutors; and even better a professional team to ensure sales lead and conversion for the celebrity tutors. Genshuixue adopts a more wholistic approach to ensure the seamless integration of the company and the celebrity tutors.

So if we are to map the education and training industry by needs of different customer groups, it is inevitable to come across the zillion dollar K12 sectors. As a matter of fact, if we look at New Oriental’s 2018 financials, K12 sector has already taken up close to 60% of their revenue. Genshuixue is another vivid example, with their K12 focus.

The reason behind? The imbalance supply of the provision of K12 education in China and the structuring filtering along the K12 admission systems are the key factors that keep us investors interested in the sector in coming 5-10 years. What is up for grasp are the ever-emerging sub-sectors opportunities that waves of entrepreneurs endeavors to seize. Examples of such are countless, Gaosi Education that emerged from the stepping down of Xueersi in the high end education sub-sector;  Beststudy Group and Scholar Education Group are both billon RMB revenue companies that have took the high spot in South China.