The magical year of 2020 brought upheaval across almost all industries in China.
The education market, in particular, has witnessed dramatic changes with respect to its competitive landscape. With gigantic financing, the edtech giants consolidated their positions through digital marketing across all major platforms. However, many small edtech companies and the majority of local learning centres failed to keep up with the growth rate.
Industry Leaders: A Feast of Money
Revealed by the public numbers, the four market leaders in K12 tutoring, namely TAL Education (NYSE: TAL), Yuanfudao, Genshuixue (NYSE: GSX) Zuoyebang, were busy preparing for the online tutoring battle in the past year. In the last four business days of 2020, TAL raised 3.3 billion USD from Silver Lake Capital, and Zuoyebang closed its E+ round with over 1.6 billion USD. Though Yuanfudao "only" announced a 300 million USD financing by the end of the year, the 8-year-old edtech company collectively raised over 3.5 billion USD in the past 12 months.
China's primary education market received over 10 billion USD in 2020, overseeing a 150% increase from the previous year and taking up 63% of the global education venture capital funding. The industry players also showed strong performance in the stock market. While the stock prices of the long-standing leaders, TAL education and New Oriental, increased by 40% and 50%, respectively. Those of the newcomers, Youdao (NYSE: DAO) and the controversial Genshuixue (NYSE: GSX), were up by 90% and 300%.
The reasons for all the attention that the edtech industry has drawn are threefold.
1. The pandemic catalyzes the demand for online education solutions.
While the investors started eyeing on the sector as early as 2013-2014, as a group of future unicorn edtech companies, such as Yuanfudao and VIPKID, emerged in the market, it was not until 2020 that the entire society acknowledged the value of online education.
During the first half of the year, K12 students isolated at home had to rely on virtual learning platforms to continue their schooling. When teachers in public schools fumbled for a 'glitchless' online lecture, parents and students realized that online education companies' courses were more efficient if knowledge delivery became the only thing that matters during school time.
As with the rest of the world, adult learning in China also boomed in the time of extreme uncertainty during Covid-19. Across all subjects, exam preparation (CFA, CPA, Jurisdiction Exams) and financial knowledge (personal financing, stock investment, etc.) are the leaders on the growth list.
2. The online education business model evolves to have a higher profit margin.
The big-class and small-class tutoring models generate the success of New Oriental (NYSE: EDU) and TAL Education (NYSE: TAL). Online education, however, always suffered from scepticism on its profitability, considering the ever-growing marketing cost. Yet, in 2019 and 2020, the online dual-teacher classroom and interactive AI-class had matured to a point where both practitioners and investors started to see the monetization prospect.
An online dual-teacher classroom consists of one main teacher on the stage, TAs off the stage, and as many as 3000+ students at the same time. The teacher, usually super charismatic, is in charge of imparting the knowledge and building trust between the company and the students. The TAs, mostly fresh graduates from colleges, are in charge of answering basic questions, monitoring students' learning process, and most importantly, persuading parents to purchase the long-term course of the next level in WeChat groups.
The AI-class is a gamified cartoon lesson powered by artificial intelligence without requiring teachers' live presence. The interactive setups in the cartoon allow students to communicate with the screen directly. The AI can also answer students' questions verbally and provide prompt feedback, while the TAs monitor students' progress in the WeChat groups. We see an interesting blend of game, cartoon, lessons, and even some companionship in this new creature. It was reported that the trailblazer of AI-class, Zebra AI (Yuanfudao), generated over 3 billion USD revenue in 2020.
Both models have been proved profitable, and the gross profit margin can be as high as 60%. Most online K12 giants and some front runners of other subjects like drawing and coding pivoted to these two product types.
3. The competition for growth requires an enormous amount of funding.
In early February, when families received notification that campuses wouldn't be open in the foreseeable future, worried parents started looking for online education resources. The online K12 leaders such as Xue'ersi(TAL), Yuanfudao, Zuoyebang, Genshuixue(GSX), and Youdao (DAO) unanimously brought out free live-streamed and pre-recorded courses and distributed them across almost all Internet platforms such as Bytedance(Toutiao, Douyin, Watermelon Video), Kuaishou, Bilibili, etc.
The "free traffic" from the early months encouraged these key players to invest heavily on the Internet and offline channels. In the second half of 2020, online education companies' commercials can be found on social media, video and short video platforms, reality shows, online communities, TV channels, bus stops, subway stations, and even in the elevators. Most notably, Yuanfudao became the sponsor of the 2022 Beijing Winter Olympics.
Using free or cheap trial lessons to attract target customers. Convert them to regular paid courses. These two steps have always been the go-to strategy in the online education market. However, the cost of advertising those short-term lessons skyrocketed when it became the only drive for further growth. Companies sought help from advertisement agents regarding commercial clip-making and target customer optimization. Simultaneously, tech giants like Bytedance and Tencent sent those commercials to the users via their intricate algorithms. It was reported that in the last few months of 2020, a company had to spend over 2000 RMB (300 USD) marketing fee to acquire one K12 user for a 9.9 RMB (1.5USD) trial lesson. According to both companies latest quarterly reports, TAL education spent 421 million USD, while Genshuixue spent 2.05 billion RMB. In 2020, both companies reported consecutive net-loss quarters due to the escalated battle for growth.
Stock Market Performance of Chinese Online Education Companies
We tracked the performance of some well-known education companies and highlighted their big moves in 2020.
TAL Education (NYSE: TAL)
TAL has changed from traditional offline classes (Small-Class & One-On-One Tutoring Model) to offline and online classes. It's online tutoring brand, Xue'ersi Online School, accounted for less than 1.5% of its total revenue in FY2016. In Q2 of FY2021, the percentage climbs to 40%. TAL’s revenue is expected to exceed 10 billion USD in FY2021, which consolidates its top position in offline and online K12 business.
After COVID-19, TAL launched free online courses and changed the original user structure. At present, the number of users in the third, fourth and fifth-tier cities is bigger than that in the first and second-tier cities. Due to the high cost of online advertising, TAL also released new products to attract its own traffic. For example, mobile app Tipaipai (题拍拍) enables students in high school to post homework problems and get instant solutions from straight-A students at top universities in China.
In the secondary market, TAL’s market value rose to more than $40 billion, and it announced an agreement of $3.3 billion private placement with Silver Lake Capital and other investment institutions.
New Oriental (NYSE: EDU; HK: 09901)
In 2020, New Oriental switched to Online-Merges-Offline (OMO) courses and dual-teacher classes. It has launched OMO courses in nearly 20 cities and introduced OMO system to its key businesses like overseas examination courses.
New Oriental's revenue in Q1 of FY2021 was 986.4 million USD, decreasing by about 8% year-on-year. The overseas examination business dropped significantly due to COVID-19, though other businesses were relatively stable.
In the secondary market, New Oriental was listed on the main board of SEHK in November 2020, becoming the first Chinese education company returning to Hong Kong for a secondary list, with a market value of HK$236.7 billion.
Genshuixue (NYSE: GSX)
One of the most controversial online education companies, Genshuixue, brought to the market the online K12 dual-teacher classes model. This high-profit business model, combined with GSX's extreme effort to exploit traffic on WeChat, allowed it to become the few online education companies that ran a profit in 2019. The revenue of FY2021 is expected to increase by three times to about 1 billion USD.
In the secondary market, GSX raised 870 million USD and once surpassed the market value of New Oriental. On the other hand, the company continued to attract scepticism in its financial integrity. As a result of a series of short-selling and first net-loss performance in Q2 of FY2021, GSX’s stock price fluctuated significantly and had dropped 70% from its peak in the year-end.
Youdao (NYSE: DAO)
An affiliated company of China's Internet giant Netease, Youdao joined the education market in 2007, focusing on content and technology. Its business covers online courses, online learning tools, intelligent hardware, and interactive learning applications. Youdao Premium Course is the core business, accounting for 36% of its total revenue. In the first half of 2020, the number of paid users was nearly 500,000, which is expected to grow further in the future.
In the secondary market, Youdao's stock price increased steadily and valued at over 3 billion USD in the year-end.
17 Education (NASDAQ: YQ)
17 Education is a Chinese edtech company that makes people easily relate to the edtech companies of Europe and the United States. More specifically, 17 Education's smart in-school classroom solution delivers data-driven teaching, learning, and assessment products to teachers, students, and parents across over 70,000 K-12 schools, covering one-third of public primary and secondary schools China. The company generates 90% of its income through after-school online classes, which are expected to have more synergy with its in-school products in the years to come. The number of paid users has exceeded one million by September 2020.
17 Education was listed on NASDAQ in December 2020, with a market value of more than 2 billion USD, making it the largest Chinese education company on NASDAQ.
Koolearn (HK: 01797)
Koolearn (New Oriental Online), formerly New Oriental's online education business line, provides online courses of higher education test-prep, K12 tutoring and pre-school training. Its fast-growing brand, DFUB(东方优播), adopts an OMO model in which students are recruited offline while small-class tutoring is delivered online. In the past four years, DFUB expanded into 127 lower-tier cities, with an average annual growth rate of more than 80%.
In the secondary market, Koolearn had a strong performance in the first half but slowed down after its Q1 financial report. It still ranked at the forefront of education companies listed in Hong Kong stock.
Zhonggong Education (SZ: 002607)
As a leading multi-category vocational education institution in China, Zhonggong Education includes exam preparation of most vocations in China, especially the civil-service exam, aka the "exam of the nation." Due to widespread demand in the country, Zhonggong's learning centres can be found in more than 300 cities nationwide. With strong growth, the company's net profit in the first three quarters of 2020 is about 200 million USD.
In the secondary market, Zhonggong Education’s market value has exceeded 200 billion RMB (~ 30 billion USD) and once surpassed TAL Education to become the most valuable education company in the world. In November 2020, Zhonggong issued a private placement of 6 billion RMB to promote a learning centre construction in Beijing.
Chuanzhi Education (SZ: 003032)
Chuanzhi Education focuses on offline IT training under the brand "Dark Horse Coding Camp," which accounts for 85% of its revenue in FY2020.
On January 12th, 2021, Chuanzhi Education became the first education company in China that independently issued IPO on the A-stock market. Its market value now exceeds 10 billion RMB (around 160 million USD).
Chinese EdTech Companies You Should Know
After years of trial-and-error and the catalysis of Covid-19, the top runners of online education startups in China kept striding in both the real and the capital market. In 2020, over 10 billion US dollars poured into the primary market of the education industry.
Yuanfudao's K12 ecosystem has three key product lines — K12 online course (猿辅导), supporting learning tools (猿题库 & 小猿搜题), and Zebra AI (斑马AI). The number of students studying on Yuanfudao reached 3.7 million in 2020, and its revenue has a 200% year-over-year increase.
Yuanfudao raised 3.5 billion USD in 2020 and currently has a valuation of over 15.5 billion USD, making it the highest-valued private edtech startup across the world.
Zuoyebang, incubated from Baidu and independent in 2015, successfully used its homework-assistant app to acquire the highest number of K12 users in the market. The MAU is reportedly over 170 million, while the registered users are over 800 million. Some of the homework app traffic is converted to Zuoyebang's online courses, making the CAC far lower than the average. In the fall of 2020, the number of students attending regular classes exceeded 2.2 million, an over 400% rise from the previous year.
Zuoyebang raised 2.35 billion USD in total and joined the advertising competition with other players.
Zhangmen Education (掌门教育)
Zhangmen Education focuses on providing online 1-on-1 tutoring services for K12 students. The company also released online small-class products for students aged 3 to 8 on thinking and literacy. Zhangmen claimed to have 40 million registered users across the nation.
Zhangmen raised over 400 million USD in September 2020. Reportedly, the company has been planning its IPO in 2021 at the US stock market.
All-round Competency Education
Spark Education (火花思维)
Spark Education was founded in 2016. Famous for its online small-class in mathematical thinking, Spark Education extended online Chinese and English courses in 2020. The number of students exceeded 300,000, and the referral rate was reported to have reached 85%.
Spark Education completed three rounds of funding in 2020 and raised 280 million USD in total. The company is planning to go public in the US stock market in 2021.
VIP Think (豌豆思维)
Spark Education's close competitor, VIP Think, also focuses on mathematical thinking courses. Founded in 2018, the company experienced exponential growth in 2020, in which the average monthly revenue growth rate is more than 100%.
In 2020, VIP Think merged with Magic Ear, an online children's English learning brand, to increase its product lines. With over 250,000 students, its renewal and referral rate is over 85%, and the monthly revenue has exceeded 220 million RMB.
VIP Think raised 180 million RMB in the C round in 2020.
Founded in 2015, Codemao focuses on 4 to 16-year-old children's programming ability. In 2020, schools and consumers contributed a monthly revenue of over 200 million RMB to the company. According to the disclosed data, Codemao has provided 17,000 public schools with programming courses, covering more than 200 cities in China. Among them, its users in third and fourth-tier cities account for nearly 50%.
Codemao raised 1.3 billion RMB in the D round in 2020.
As the online education superstar, VIPKID connects North American teachers and Chinese kids through online one-on-one tutoring. It is still the leading brand for online young children's English learning, and the number of students has exceeded 700,000, reportedly.
To catch up with the K12 giants, VIPKID released the online big-class product "Rice Online School," providing English and Math classes to primary school students in the low-tier cities. 80% of the students are transferred from VIPKID.
Rice Online School independently raised an 80 million USD A round from Tencent in January 2020.
Palfish is an application for students to learn English online through video or audio interactions. It has created a product matrix based on picture books, foreign teachers 1-on-1 tutoring, AI class, and small-class.
Palfish attracted investors' attention as it prolonged the LTV of language learners and focused on the low-tier cities to lower the CAC.
Palfish completed a 120 million USD C2 round funding in 2020 and will keep on expanding subjects.
EEO is an online teaching SaaS provider in the education industry. Its online classroom product, Classin, is an interactive classroom that replicates most classroom scenarios online. A beneficiary of Covid-19, Classin experienced a surge of customers — its DAU raised 10 times in February 2020 compared to that in 2019. Classin serves more than 30,000 education institutions of all sizes in China, with 20 million monthly active users. In September 2020, EEO launched Classin X, an integrated online and offline teaching solutions.
In November 2020, EEO completed a 265 million USD C-round funding, following its 8-digit B-round disclosed in July.
Aixuexi (爱学习，literally translated as "Love Learning"), formerly known as Gaosi Education, was founded in 2009 and started the S2B2C model in 2015. Its OMO product covers teaching and learning scenarios before, during, and after class, which helps alleviate the problems of insufficient supply of teachers and contents faced by education institutions in the small-town and rural market. At present, it has more than 20,000 partners and continues to make efforts in the 2B market.
In 2020, Aixuexi raised nearly 200 million USD in the D2 round.
Trends in Online Education of China
Blue Elephant Capital expects to see the following trends in the education market in the years to come:
In late January 2021, when several hundred-thousands offline education institutions were forced to close due to Covid-19, the concept of online-merges-offline (OMO) became one of the handful of solutions for the founders. By replicating offline courses online and persuading paid customers to accept a discount course package, it is estimated that over 60% of institutions managed to keep their business running, even though the transition from online to the offline operation had been largely inefficient.
Covid-19's trauma, along with the expectation that the disease might co-exist with people for an extended amount of time, urged education institutions to redesign their business model and rethink their organizational strategy. We observed that the development of online and offline versions of course products, the integration of more edtech tools and data service in the product, and the promotion of online collaboration within the company had been the new norm for online education companies post-Covid-19 China.
SaaS and solution providers in the industry finished the year with record-high performance. Online classroom SaaS (EEO), PaaS (POLYV), and WeChat-based streaming tool (Xiao'e Know) all received large-size funding. A similar flourish happened for the solution providers like Aixuexi and TAL Education's Magic School. They offer live-streamed courses and technology-facilitated services to institutions in the small town and rural market.
2. Small town and rural market
“下沉市场,” literally translated as the “sinking market,” refers to small-town and rural markets, where over 70% of the Chinese population lives in. Apart from 49 first and second-tier cities, the rest of China can be included in this realm, where people earn less money than in big cities and prefer more cost-effective products.
Regarding the supply of education products and services, this batch of edtech companies has put most efforts in the 1st and 2nd tier cities. The parents and students in these cities obviously have higher purchasing power and pressure to compete. However, with the prevalence of more cost-effective tutoring products, we have seen an increasing number of edtech companies trying to enter those untapped regions of marginal markets. Education content providers (e.g. Lele Academy, backed by Owl Ventures) and regional online tutoring institutions (e.g. YKT100) have attracted the most attention.
3. Vocational education
Vocational education has been a highlight for both the government and the market throughout the year. The government brought out several plans in 2019 and 2020 to promote the development of technical schools and encouraged collaboration between corporations and schools to improve graduates' employment rate.
The vocational training market also heated up in 2020. Traditional players in civil-service examination and other career-related exam-preparation businesses like Zhonggong and Fenbi Education have seen steady growth in this year of extreme unpredictability. Companies focusing on IT and business upskilling, such as Chuanzhi Education, Terena (NASDAQ: TEDU), and Sanjieke (backed by Owl Ventures), also benefit from Covid-19 due to the increased demand for upskilling. We've also observed some corporate learning companies showing up in the market and expect them to grow in the years to come.
The leaders of edtech companies, mostly established in 2012-2014, have started their IPO journey. In 2019 and 2020, we have seen several renowned edtech companies landing on NYSE and NASDAQ, such as Genshuixue (NYSE: GSX), Youdao (NYSE: DAO), iHuman(NYSE: IH), and 17 Education (NASDAQ: YQ). HK stock market and mainland stock market also became destinations for companies like Koolearn (HK: 01797) and Chuanzhi Education (SZ: 003032).
Behind this batch of the online education giants are a series of renowned VCs and PEs across the globe. The investors have a clear demand to exit through IPO, while the companies also need more funding sources from the secondary market. In the coming year, the edtech IPO watchlist includes (but not limited to) Yuanfudao, Zuoyebang, Zhangmen Education, Spark Education, Codemao, and Lele Academy.
He has been observing and working in the Edtech industry in China for over three years. He has a bachelor degree from UCLA and a Master degree from Harvard Graduate School of Education. He is always passionate about bridging the information and opportunity gaps between China and the world in the education industry.