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Navigating challenges in the education sector
Prepared for SuperReturn China
Varun Jain, Vice President, EY-Parthenon9 May 2018
EY-Parthenon | Page 2
Agenda
► Introduction to the EY-Parthenon education teams
► Recent positive developments in Chinese for-profit education
► What this means for investors
EY-Parthenon | Page 3
EY-Parthenon professionals bring a winning combination of skills and experiences in the education sector
Largest advisor
to the education sector globally
Extensive education
sector experience across China
Trusted advisor
for investors across education sectors
EY-Parthenon | Page 4
EY-Parthenon professionals have completed more than 1,500 education projects in more than 95 countries and in every education sector
EY-Parthenon offices
Education projects
completed by EY-Parthenon
EY-Parthenon | Page 5
We have a global team of education professionals with more than 100 people worldwide
Robert LytleManaging Director, Head of Education,
EY-Parthenon
Ernst & Young LLP
Boston, MA USA
Haven LaddManaging Director, EY-Parthenon
Ernst & Young LLP
Boston, MA USA
Chris LibrizziManaging Director, EY-Parthenon
Ernst & Young LLP
New York, NY USA
Seth ReynoldsManaging Director
EY-Parthenon, Ernst & Young LLP
Boston, MA USA
David HovermanManaging Director, EY-Parthenon
Ernst & Young LLP
San Francisco, CA USA
Kasia LundyManaging Director, EY-Parthenon
Ernst & Young LLP
Boston, MA USA
Chris RossManaging Director, EY-Parthenon
Ernst & Young LLP
Boston, MA USA
North America
Amitabh JhinganPartner, EY-Parthenon
Ernst & Young LLP, India
New Delhi, India
Varun JainDirector, APAC, EY-Parthenon
Ernst & Young LLP
San Francisco, CA USA
Claudia WangDirector, EY-Parthenon
Ernst & Young (China) Advisory Limited
Shanghai, China
EMEA
Matt RobbPartner, EY-Parthenon
Ernst & Young LLP (UK)
London, UK
Derrick BettsDirector, EY-Parthenon
Ernst & Young LLP (UK)
London/Dubai
Jeremy PanacherilPartner, EY-Parthenon
Ernst & Young Middle East
and North Africa (MENA)
Dubai, UAE
Ashwin GopalakrishnanDirector, MENA, EY-Parthenon
Ernst & Young LLP, India
Mumbai, India
Anna GrotbergDirector, EY-Parthenon
Ernst & Young LLP (UK)
London, UK
Corey DixonDirector, EY-Parthenon
Ernst & Young LLP (UK)
London, UK
Oceania
Latin America
Felipe MiglioliManaging Director, EY-Parthenon
Ernst & Young Assessoria Empresarial Ltda.
Sao Paulo, Brazil
Ivo GodoiPartner, EY-Parthenon
Ernst & Young
Sao Paulo, Brazil
Jeremy BarkerPartner
EY-Parthenon
Ernst & Young
Sydney, Australia
Catherine G FridayManaging Director
Ernst & Young
Melbourne, Australia
Ajay KathuriaSenior Consultant, MENA, EY-Parthenon
Ernst & Young LLP, India
Mumbai, India
Supriya JainSenior Consultant, APAC, EY-Parthenon
Ernst & Young LLP
San Francisco, CA USA
Raunaq SabhrawalSenior Consultant, LatAm, EY-Parthenon
Ernst & Young LLP, India
Mumbai, India
Saini KrishnamurthyConsultant, APAC, EY-Parthenon
Ernst & Young LLP, India
Mumbai, India
Archana SarathySenior Consultant, MENA, EY-Parthenon
Ernst & Young LLP, India
Mumbai, India
China
Center of Excellence
Kate KrugerVice President, EY-Parthenon
Ernst & Young LLP
Boston, MA USA
Samantha FisherVice President, EY-Parthenon
Ernst & Young LLP
Boston, MA USA
Julia AmsellemPartner, EY-Parthenon
Ernst & Young Advisory
Paris, France
Alfredo VieyraExecutive Director, EY-Parthenon
Mancera, S.C.
Mexico City, Mexico
EY-Parthenon | Page 6
We have worked on the largest global education deals in each of the last nine years
Carlyle and
Apollo Group
BPP
Acquisition
Est. value: $607m
McGraw-Hill
Education
Unit spin-off
Est. value: $3.1b
KKR
Cognita
Investment
Est. value: $500m
Nord Anglia Education
Meritas Schools
Acquisition
Est. value: $575m
Nord Anglia
Education
BPEA and CPPIB
Taking private
Est. value: $4.3b
Providence
Study Group
Acquisition
Est. value: $570m
Montagu Private Equity
College of Law
Acquisition
Est. value: $450m
Hellman & Friedman
Renaissance Learning
Acquisition
Est. value: $1b
Eurazeo
Glion & Les Roches
Acquisition from Laureate
Est. value: $380m
2009 2010 2011 2012 2013 2014 2015 2016 2017
EY-Parthenon | Page 7
Agenda
► Introduction to EY-Parthenon
► Recent positive developments in Chinese for-profit education
► What this means for investors
EY-Parthenon | Page 8Note: *Average deal values are based only on those deals whose size is publicly disclosed; only deals above $5m are counted
Source: Mergermarket, Preqin, PitchBook, Thomson Reuters, Parthenon projects
Deal activity has increased since 2013 with a spike since 2015
Number of education deals across IPO, corporate, PE and VC transactions
2013 through January 2018
EY-Parthenon | Page 9Note: *Reported deals above US$80m have been shown
Source: Mergermarket, Preqin, PitchBook, Thomson Reuters, Capital IQ
Representative private equity deals*, 2017–18
The largest private equity (PE) deals in 2017–18 were in tutoring, English language training (ELT) and kindergarten
Tutoring
ELT
Kindergarten
Vocational
K–12
Year 2017 2017 2017 2017 2017 2017 2018 2017 2017 2017 2017 2017 2017
PE owner Cathay
Capital,
Goldman
Sachs
CITIC
Capital,
BPEA
Sequoia,
Zhenge
Capital, YF
Capital
Legend
Holdings
Corporations
Sequoia,
GGV,
Tiger
Baiyang Warburg
Pincus,
Genesis
Capital
Warburg
Pincus,
Tencent and
others
China First
Capital
Group
Qiming,
CMH, etc.
IDG,
GGV
CBanner Warburg
Pincus
EY-Parthenon | Page 10Note: 24 out of the 42 Chinese companies that had an IPO overseas have been included in this study
Source: EY-Parthenon research and analysis, Education Investor
Overseas listings by Chinese companies in education sector, by exchange
OneSmart raised $200m
while Sunlands raised
$150m in the last quarter
Overseas listings by Chinese companies in the education sector are at the highest levels seen in the last 15 years
EY-Parthenon | Page 11Source: News Articles
Chinese companies are investing in education businesses overseas
China First Capital Group Limited
G8 Education
MindChampsPreSchool
Example 1
Sailing Capital
Coursera
AstrumEducation
Example 2
NetDragon
Edmodo
Example 3
EY-Parthenon | Page 12
International operators are entering the China market, real estate developers are more focused on education
Sylvan Learning
International operators
Country Garden
Real estate developers
Udacity Vanke
Coursera Evergrande Group
EY-Parthenon | Page 13Source: Bloomberg News
Chinese property enquiries in Vancouver: purchase motivations
This is no surprise given Chinese consumer motivations for real estate purchases are strongly linked with education
EY-Parthenon | Page 14Source: EY-Parthenon white paper on Chinese education regulation reform
Free market pricing allowed for-profit institutions
Favorable tax/subsidy regime
Increases in rentals for land use
There was also significant regulatory reform in the law to promote private education
EY-Parthenon | Page 15
Agenda
► Introduction to EY-Parthenon
► Recent positive developments in Chinese for-profit education
► What this means for investors
EY-Parthenon | Page 16
Source: Singapore and Hong Kong have expat-centered markets in the premium segment (schools not attended by local population) hence a spend on the education metric has not
been shown for those markets.
Source: Parent surveys, industry participant interviews, government statistics, EY-Parthenon research and analysis
EY-Parthenon assessment of spend on education as a percentage of disposable household income, by country
This implies a higher per capita willingness to spend on both compulsory and non-compulsory educational services, vis-à-vis other countries in the region
Parents in China spend more on education, relative to comparable Asian markets, given the 3-family-1-child phenomenon
EY-Parthenon | Page 17
3
years
6
years
18
years22
years
12
years
Source: EY-Parthenon research and analysis
Theoretical lifetime spend on private education for Chinese nationals
Age
group
This trend drives up to ~$400k in private education spend per child over a student’s lifetime by the wealthiest Chinese parents looking to educate their children entirely privately
EY-Parthenon | Page 18
We have identified six key emerging themes in China education space
Expected growth in addressable
demographics, enabling growth
in early-years businesses1
Online education is emerging
across sub-sectors such as
English language learning and
tutoring2
Bilingual K–12 schools expected
to see high growth due to a
large, unaddressed population3
Limited opportunities for
investors in higher education,
due to tight regulations4
China is the largest source
country for the key study abroad
destinations5
Center-based tutoring is
unorganized, continues to be
hyper local, with presence of
both national and regional
brands
6
EY-Parthenon | Page 19
With relaxation of the “one child rule,” relevant population for early-years education is forecast to grow at 1% compound annual growth rate (CAGR) in the next five years
Source: China Bureau of Statistics, EY-Parthenon analysis
Relevant age population, age 2–6, China, 2010–20F
Effect of 2013 decree
allowing even one single
child parent to have two
children
The government relaxed
the ”one child rule”
completely from 2015 end
Effect of 2012 decree
allowing both single child
parents to have two
children
Expected growth in addressable
demographics, enabling growth in
early-years businesses1
EY-Parthenon | Page 20
Who will capture the psychographic of consumers that value social aspects and convenience?
Source: EY-Parthenon interviews and analysis
Case study: adult English language training
Online education is emerging
across sub-sectors such as English
language learning and tutoring2
Convenience and
flexibility, overcome
limited teacher supply
(non-Tier 1 cities)
Social and
networking
opportunity
Offline
providers
Online
providers
?
EY-Parthenon | Page 21
Preliminary data shows new intakes at online ELT providers serve students who left or were not in the market to begin with
Source: EY-Parthenon interviews and analysis
Case study: adult English language training
New intake composition of a leading online adult ELT provider
Online education is emerging
across sub-sectors such as English
language learning and tutoring2
EY-Parthenon | Page 22
Student acquisition costs are still a big challenge for online operators
Source: EY-Parthenon research and analysis.
Case study: leading online operators marketing cost, 2014–17 1H
Online education is emerging
across sub-sectors such as English
language learning and tutoring2
EY-Parthenon | Page 23
~1.5m children can afford an education costing >$10k in China; only 100k–150k students today are enrolled across bilingual schools in China
Note*- Tier 1 cities include Beijing, Shanghai, Guangzhou and Shenzhen, Tier 1.5 cities include Suzhou, Hangzhou, Wuhan, Chengdu, Nanjing, Xi’an, Tianjin
Source: Euromonitor, Oxford Economics, Government Statistics Bureaus, EY-Parthenon forecast model
Affordable population, $10k+ annual fee, by city tier, China, 2016–17
Enrollment of relevant schools, by city tier, 2016–17
There is a large, addressable market for such schools across China
Bilingual K–12 schools expected to
see high growth due to a large,
unaddressed population3
EY-Parthenon | Page 24
The Ministry of Education only permits foreign universities to set up joint campuses with a Chinese partner; foreign branch campuses have been established post-2003 education reforms
Source: EY-Parthenon research and analysis
Development of foreign universities in China, 2003–15Foreign Branch Campus Regulations, China
Foreign ownership
Key regulatory
authority:
Ministry of
Education
Approvals Profit repatriation
► Need local partner to set up a branch campus
► Mode of entry is through joint venture
► Foreign ownership must be <50%
► Must be approved by
the national
government
► Approval process
can take ~3–4 years
► Profits can be
repatriated, but are
subject to ~35% tax
► Royalties and other
fees are also subject
to tax
2003
2004–10
2010–15
► New legislation passed in March, permitting establishment of
foreign university campuses in China in partnership with Chinese
institutions
► 15+ new foreign universities like University of Nottingham
Ningbo and Xi’an Jiaotong Liverpool University were
established in partnership with Chinese institutes
► The government entered into collaborative partnerships to
allow universities to have independent legal registration
► Two foreign universities – NYU Shanghai and Duke Kunshan
were given independent legal status
2010
► The National Outline for Medium and Long-term Education
Reform and Development (2010–20) was released, to improve
investment and quality of education
Xi’an Jiaotong-Liverpool University University of Nottingham Ningbo China
Duke Kunshan UniversityNew York University Shanghai
Limited opportunities for investors
in higher education, due to tight
regulations4
EY-Parthenon | Page 25
The number of Chinese students commencing studying abroad grew from 400k in 2012 to 545k in 2016 at ~8% CAGR
Source: China National Bureau of Statistics, Ministry of Education, Institute of International Education, UNESCO, Oxford Economics, EY-Parthenon interviews and analysis.
Number of Chinese students commencing overseas education, 2003–17
China is the largest source country
for the key study abroad
destinations5
EY-Parthenon | Page 26
Chinese outbound students only represent ~2% of overall tertiary education enrollment in China, indicating headroom for growth
Source: EY-Parthenon interviews and analysis, UNESCO, Oxford Economics
Number of Chinese students commencing
overseas education, by degree, 2010 vs. 2016
Outbound student vs. in-country tertiary
education enrollment, 2016
China is the largest source country
for the key study abroad
destinations5
EY-Parthenon | Page 27
Organized tutoring providers have grown revenues and taken share from unorganized providers
Source: EY-Parthenon interviews and analysis.
Estimated tutoring market size, China, 2013–16
Center-based tutoring is
unorganized, continues to be hyper
local, with presence of both
national and regional brands 6
EY-Parthenon | Page 28
About EY-ParthenonEY-Parthenon professionals are global leaders in strategy consulting. EY-Parthenon teams are
committed to bringing unconventional yet pragmatic thinking together with clients’ smarts to deliver
actionable strategies for real impact in today’s complex business landscape. Innovation has become a
necessary ingredient for sustained success. Critical to unlocking opportunities is the EY-Parthenon
balance of strengths — focused experience with broad executional capabilities — to help you optimize
your portfolio of business, uncover industry insights to make investment decisions, find effective paths for
strategic growth opportunities and make acquisitions more rewarding. EY-Parthenon methodologies,
along with a progressive spirit, can deliver intelligent services for clients, amplify the impact of strategies
and make EY-Parthenon consultants the global advisors of choice for business leaders.
About the EY-Parthenon Education teamsEY-Parthenon Education professionals have an explicit mission and vision to be the leading strategy
advisors to the global education industry. To achieve this, significant investment is made in dedicated
management and team resources so that the global EY-Parthenon education experience extends across
public sector and nonprofit education providers, foundations, for-profit companies and service providers
and investors. EY-Parthenon professionals have deep experience and a track record of consistent
success in working closely with universities, colleges, states, districts, and leading educational reform
and service organizations across the globe.
Contact us
Twitter | @EY_Parthenon
Facebook | facebook.com/EYParthenon/
LinkedIn | linkedin.com/company/ey-parthenon
Follow us for regular updates
parthenon.ey.com
Varun Jain
Director, APAC, EY-Parthenon
Ernst & Young LLP
San Francisco, CA USA
Amitabh Jhingan
Partner, EY-Parthenon
Ernst & Young LLP, India
New Delhi, India
Claudia Wang
Director, EY-Parthenon
Ernst & Young (China) Advisory Limited
Shanghai, China
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