A rumored move by Elon Musk and a controversial acquisition by a Chinese education giant are exposing growing regulatory minefields in cross-border commerce

Key Takeaways:

• Elon Musk's rumored plan to sell Tesla’s China operations underscores the intense governance and technological pressures facing multinational corporations
• TAL Education’s controversial acquisition of an American digital reading company highlights why foreign firms need to prioritize proactive communication

By Brad Burgess and Doug Young

Geopolitical tensions between China and the West are fast becoming a defining force in the global business landscape, reshaping how multinationals operate across borders. This dynamic is currently playing out in two distinct storylines that, while from entirely different sectors, reveal the subtle but mounting pressures on cross-border commerce. On one hand, reports say Elon Musk may be preparing to sell his Tesla (TSLA.US) China operations to pave the way for a merger with SpaceX (SPCX.US). On the other, Chinese private education powerhouse TAL Education Group (TAL.US) recently made a fire-sale purchase of an American digital kids’ literature company, triggering national security scrutiny from U.S. lawmakers.

According to a report in the Wall Street Journal, Musk is reportedly considering a sale of Tesla's Chinese operation to clear the path for a potential merger between the EV maker and his recently listed space company. Musk has publicly dismissed the report as absurd, but, as we’ve seen in the past, a public refutation doesn’t mean strategic gears aren't turning.

The underlying logic for such a move is relatively straightforward. A divestment would remove any China connections from SpaceX’s highly sensitive business ecosystem, which includes critical work for NASA and the Starlink low-orbit global satellite network. There are also compelling technology and governance incentives. For instance, integrating operations would benefit shared technology initiatives, like the Terafab chip development plan in Texas. Musk’s current control over Tesla is also relatively low compared to SpaceX, so a merger would grant him significantly greater control over the automaker.

Divesting the China business, however, would have a massive impact. Tesla China accounts for more than half of the automaker's global production and is a critical export hub for Europe and Asia. The entity’s structure is also unique. Unlike traditional automotive partnerships in China, it is not a joint venture. It was established as a fully owned business — a concession likely granted both to import best practices to China’s EV ecosystem and as a bargaining chip amid pressure from the first Trump administration.

If a sale happens, it would likely be viewed as a significant loss of face for Beijing. The Chinese government could also plead grievance, pointing out the exceptional benefits it originally extended to the U.S. automaker. We don't view Tesla's modular structure as a new template for Western companies; it remains an exception to the rule. Nonetheless, it’s a striking example of how sensitive technology and political risks are forcing a rethink of traditional global integration. European regulators, already viewing China through a skeptical lens, would undoubtedly keep a close watch on whatever independent entity might emerge.

TAL's U.S. acquisition: A double-edged sword

Looking at the reverse flow of capital, TAL’s recent acquisition in the U.S. provides a textbook example of how sudden regulatory transitions can catch a foreign company off guard. TAL purchased Epic, a leading U.S. digital literature provider targeting children, for just $95 million in a bankruptcy sale last year. It was a remarkable discount, considering Epic’s previous Indian owner paid $500 million for the company just four years prior. The deal generated immediate, massive returns, with TAL booking a $400 million gain in its recent quarterly results, highlighting TAL's aggressive pivot toward overseas growth after facing severe domestic crackdowns.

However, this diversification maneuver is shaping up to be a double-edged sword. Almost immediately, U.S. lawmakers called for a national security review of the transaction. Some might intuitively compare this to ByteDance and the forced divestiture of its U.S. TikTok operations. But we believe the nature of this scrutiny is distinctly different. With TikTok, the core geopolitical fear centers on addictive algorithms and the potential for a foreign government to manipulate content in digital echo chambers.

Epic, conversely, is a children’s digital library. The backlash here stems from an entirely different domestic sensitivity in the U.S.: a heated societal debate regarding parental rights and the appropriateness of reading materials in public schools and libraries. It’s less about fear of Chinese authorities injecting Confucian classics into a kids app, and more about who has the authority to curate children's content.

The primary issue here is one of corporate strategy and communication. The U.S. children’s education space is highly regulated and incredibly sensitive. Yet TAL approached the U.S. market much like it might approach the domestic Chinese market: moving swiftly into a gray space with a cheap deal, while hoping to fly under the radar. It didn't proactively check with political consultants or regulators to explain its content controls or assuage parental concerns. While tech veterans like Alibaba (BABA.US) are slowly learning how to proactively navigate foreign regulatory waters, companies like TAL have little experience outside their home market. Culturally, proactive transparency just isn't in their DNA. But as geopolitical tensions mount, there can be severe consequences for acting first and answering questions later. Moving forward, both U.S. and Chinese companies must realize that cross-border deals can no longer afford to be opaque.

The knowledge technology provider is building traceable, callable knowledge assets through its platforms, as knowledge graphs become its largest revenue contributor

By Doug Young

As AI moves from general-purpose models into professional applications, competition is shifting toward domain knowledge, workflows and delivery. Shanghai Able Digital Science & Technology Co. Ltd. (2687.HK) is positioning itself at that application layer after nearly two decades of serving academic and research institutions.

The company converts academic materials, experimental processes and expert know-how into structured, traceable knowledge assets that AI can read and call on. Its products include Polymas, intelligent agents, discipline-specific models, and its Meta Graph and Harness engines.

Knowledge graphs have become the company's fastest-growing business since 2023. In 2025, revenue from that business rose 68.5% to 573.5 million yuan ($84.6 million), or 59.2% of total revenue. Deliveries rose 122.4% to 10,386, while overall gross margin increased to 65.5% from 61.9%. Shanghai Able Digital has also announced framework partnerships with Alibaba Cloud and Volcano Engine, combining their models and cloud capabilities with its knowledge assets and academic scenarios.

CFO Crystal Cao spoke with Bamboo Works about the company's AI strategy, knowledge assets and changing institutional needs.

Bamboo Works: Tell us more about Shanghai Able Digital's Polymas platform. How does it differ from mainstream large language models, and how does it fit into your broader AI strategy?

Crystal Cao: General-purpose models are strong in language and broad reasoning, but professional fields also require authoritative, traceable and updated domain knowledge, plus an understanding of academic workflows. That’s the layer Polymas provides.

Polymas combines our domain AI with leading foundation models and structured specialist knowledge. Through the Meta Graph, answers can be linked to academic materials and knowledge nodes, making reasoning more transparent and reducing unsupported responses – what we call evidence-based AI.

Our strategy is model-agnostic: foundation model + knowledge assets + agents + application scenarios. This lets us adopt advances without relying on one provider.

Q: Your latest annual report describes knowledge graphs as the core growth engine of your digital knowledge content business. How does the product work, and how has it contributed to profitability?

A: Our knowledge graphs do more than visualize information. Academic knowledge is often dispersed across textbooks, papers, courseware, protocols and expert experience. We convert it into structured, traceable, updated and machine-callable assets.

Students can see how concepts and experiments connect. Teachers can generate materials, design assessments and update content from the same foundation. Institutions can map curricula and track scientific and industrial developments. For AI, the graph provides context, sources and guardrails.

This reflects a shift from knowledge storage to knowledge computation. Textbooks may take years to update, while knowledge graphs can be refreshed as research emerges.

At WAIC 2026, we introduced the Meta Graph and the Harness engines, which organize disciplinary knowledge into modular products for different scenarios. This is intended to support more reusable and standardized delivery alongside project-specific work.

Q: You recently announced partnerships with Alibaba Cloud and Volcano Engine. What does each side bring to these collaborations?

A: The technology companies bring foundation models, cloud computing and AI ecosystems. We bring nearly two decades of knowledge-infrastructure experience, multidisciplinary structures, real teaching and research scenarios, and the ability to turn them into deployable products.

A general-purpose model does not automatically understand disciplinary logic, experimental standards or institutional workflows. We act as a translator and knowledge anchor, converting general AI into professional teaching, research and training solutions. This institutional engagement is our real moat.

With Alibaba Cloud, the cooperation includes knowledge-token enablement, physical AI research and multi-agent platforms using the Qwen ecosystem and AgentScope. With Volcano Engine, it includes Doubao knowledge fine-tuning, integrated virtual-and-physical training and digital talent development.

We are also in exploratory discussions with other leading general-purpose AI providers about potential cooperation involving our knowledge assets, application scenarios and delivery capabilities.

Q: How do your products create value for administrators, teachers and students, especially for your key 'lighthouse customers'? And what new products are you developing?

A: Our lighthouse customers are co-development partners. We begin with a high-value discipline or workflow, work with academic experts to build an authoritative knowledge foundation, connect it with teaching, research, assessment or experimentation systems, and turn the solution into reusable modules for other institutions.

For administrators, our products support evaluation and orchestration: structured evidence for learning outcomes, and tools for planning AI transformation and aligning curricula with technology and industry needs. For teachers, they turn materials and experience into reusable knowledge assets while reducing repetitive work. For students, the same foundation supports personalized learning, interactive simulations and source-traceable answers.

Our next generation of products centers on the Meta Graph and the Harness engines’ '1+N+1+N' architecture: one knowledge foundation: multiple teaching, research, industry and experiment modules; one talent-development platform; and multiple discipline-specific configurations.

Q: What are academic and research institutions asking for most as AI becomes more widely adopted? And what opportunities do you see ahead?

A: The question has shifted from whether to adopt AI to how to integrate it responsibly into teaching and research. Institutions want trustworthy outputs, discipline-specific knowledge systems, integration with existing platforms, clear governance and security, and measurable improvements in outcomes.

Student expectations have also changed. Putting textbooks or lectures online is no longer enough. Students increasingly expect on-demand, interactive and personalized knowledge. They want AI to explain difficult concepts in different ways, connect prerequisite knowledge, simulate experiments, provide immediate feedback and show its sources.

At the same time, technology, industry practices and academic knowledge are evolving faster, requiring continuous curriculum renewal. This is driving a shift from resource digitization to knowledge operationalization: static content must become a dynamic system that can be updated, combined, used by people and called on by AI. We see this as a major structural opportunity.

Meanwhile, research may offer an even larger opportunity: AI can assist with literature review, hypothesis generation, experiment design, simulation and computation, data analysis and validation, and research output.

Q: Can you share a project that illustrates your capabilities in scientific research and knowledge services?

A: One example is our work in mechanics under China's national '101 Plan,' led in this field by Zhejiang University. The AIM mechanics model, a discipline-specific AI model for mechanics, is built on 2,026 knowledge points and 4,189 relationships, and connects them with a hypersonic wind-tunnel virtual simulation and a dedicated solver.

The project links concepts, equations, experiments, simulations and research tools into a discipline-level knowledge system. Students can move from a concept to an equation and then into a simulation, while teachers and researchers can update and reuse the same foundation as new results emerge. This helps research knowledge enter teaching faster.

Q: How are current policy priorities, including China's 15th Five-Year Plan for 2026-2030, creating opportunities for your business?

A: We see three reinforcing forces. Higher education, scientific research and talent development are becoming more closely integrated with national innovation and industrial upgrading. New technologies require new disciplines, updated curricula and more complex practical training. At the same time, faster knowledge creation is increasing the operational burden on academic institutions.

The opportunity is therefore not simply a result of supportive policy. Institutions must absorb new research, update teaching content, redesign practical training and prepare teachers and students for emerging technologies much faster. Traditional, manually maintained content systems cannot keep pace.

Our products address that challenge by making knowledge structured, traceable, updatable and callable. The Meta Graph helps institutions understand and govern their knowledge, while the Harness engine applies it across teaching, research, experiments and talent development.

Demand currently exceeds our delivery capacity at a number of institutions, with some implementation schedules extending into 2027 and, in certain cases, 2028. This multi-year pipeline provides greater visibility into future delivery and supports continued growth, subject to project execution.

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The educator’s $95 million purchase of digital reading platform Epic in a bankruptcy sale last year appears to be the source of a $405 million investment gain in its latest financial report

Key Takeaways:

• TAL Education reported a massive profit increase in its fiscal quarter through May, mostly due to a one-time investment gain
• The gain looks tied to the company’s fire sale purchase last year of digital U.S. children’s reading platform Epic, which has raised concerns from some U.S. politicians

By Doug Young

Nice investment!

Investors gave education services provider TAL Education Group (TAL.US) a major round of applause after the release of its latest financial report on Thursday, bidding up the stock 13.3% to a three-month high after the announcement. The report itself was relatively ho-hum, showing strong but slowing growth for the company’s core education services as its rebound from a brutal crackdown five years ago loses momentum.

Instead, what appears to have excited investors was a huge jump in the company’s profit, which was nearly triple what analysts were expecting. The source behind that upside surprise was a massive $405 million gain related to the value of unspecified investments. TAL isn’t the most transparent company, and it kept that tradition by failing to disclose the source of the big one-time gain.

But a likely candidate appears to be its controversial purchase of Epic, a U.S.-based digital reading platform for kids that TAL acquired about a year ago for a bargain price of $95 million. TAL acquired Epic in a bankruptcy liquidation of assets held by Indian firm Byju, which purchased the U.S. company in 2021 for $500 million. That was just one of several Byju purchases that were sold off at the time, including a coding platform that Byju paid $200 million for in 2021, but fetched just $2.2 million in the bankruptcy sale.

Byju looks like a classic case of a company that went on an acquisition binge in a bid to quickly build itself up as the leader in an emerging niche, in this case edtech, only to overpay for assets and ultimately collapse after taking on too much debt.

Founded in California in 2013, Epic is near the top of its class among companies providing e-books for kids, with a catalog of more than 40,000 titles from more than 250 publishers, according to its website. The company doesn’t release financials, but one website estimates its revenue ranges between $50 million and $100 million annually.

Given what Byju paid for Epic, and the circumstances behind its fire sale to TAL, we suspect that most or even all of TAL’s $405 million gain is related to this purchase. But the purchase wasn’t without controversy, as some U.S. politicians voiced concerns about Chinese ownership for a company whose products reach so many young American children.

We’ll return to that part of the story shortly, along with another major risk that TAL faces from its positioning as a leading private education services provider in China. But first a little history to put all of this in context.

TAL and longtime rival New Oriental (EDU.US; 9901.HK) were two of China’s earliest private education providers, with histories dating back more than 20 years as the country’s economy was starting to take off. As leaders in their field, both found huge business by offering after-school tutoring for K-12 students, whose parents were looking to give them an extra edge over their classmates.

Killer crackdown

But the old adage says that “All good things must end,” and they ended quite abruptly for TAL, New Oriental, and a large field of newer rivals in 2021, when Beijing banned the offering of private tutoring services for K-12 students in core curriculum areas.

TAL was representative of the group, watching its revenue and stock price both tumble in the year after the crackdown, as many smaller players went out of business completely. Even after a gradual comeback over the last four years, TAL’s latest annual revenue of $3.05 billion is just two-thirds of the $4.5 billion it recorded in its fiscal year through February 2021 just before the crackdown. Similarly, its latest stock price of about $12.50 is about one-seventh of where it traded at its height in 2021.

Fast forward the present, where the few surviving companies have taken different routes to survive in the current landscape. New Oriental has moved to services targeted at young adults, such as study abroad consulting and preparation for tests like China’s civil service exam. Others have moved to providing services for schools rather than students, while still others have moved to educational products rather than tutoring services.

Within that group, TAL has stayed closest to its roots by continuing to focus mostly on K-12 students, but with more general courses outside the core school curriculum, such as critical thinking, writing and conducting scientific experiments. Despite launching its own learning device segment, centered on tablet-style computers, the company still considers its Peiyou face-to-face learning services, offered in 600 education centers throughout China, as its core product.

The company’s revenue rose 25% to 5.19 billion yuan ($767 million) in the three months to May 31, its fiscal first quarter. While 25% is nothing to be ashamed of, the growth rate has been coming down steadily from nearly 40% in the first quarter of its previous fiscal year, and TAL cautioned it is likely to keep declining.

The company doesn’t break out specific revenue for its three key areas – classroom learning, online learning and educational devices – though it says each of those continues to grow. In a slightly worrisome sign, it flagged potential challenges facing its device business, which looks related to stiff competition and soaring memory prices that are straining all makers of computing products. But again, the classroom-based services appear to be the company’s most important revenue source, and that part of the business is doing well.

TAL has also been doing a good job of controlling costs, with its total operating costs and expenses up just 10.8% in the latest quarter – less than half its revenue growth rate. That boosted its gross margin by nearly 3 percentage points to 57.8% in the latest quarter from 54.9% a year earlier. And on its bottom line, the company’s profit rose to $408 million from $31.3 million year-on-year, though much of that was due to the one-time $405 million gain. Here, we should quickly note that TAL quotes most of its figures in U.S. dollars. But it does most of its business in Chinese yuan, and gives out select yuan figures on its earnings calls.

The bottom line for TAL is that its Epic purchase could quickly shape up as a double-edged sword. On the positive side, it purchased Epic for a bargain price, and that business appears to be doing well and is outside the sensitive China market. But with U.S.-China tensions running high, it’s quite possible TAL may ultimately have to sell the asset. Meantime, its core China business is slowing down, and its own continued focus on the sensitive K-12 student group could also leave the company more exposed than some of its peers to future crackdowns.

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The company’s new business model after a government crackdown centers on providing education services to schools, with a growing use of AI

Key Takeaways:

• Tianli International’s net profit rose 21% in the first half of its fiscal year through February, while its revenue increased by 14.2%
• The company’s gross margins are roughly twice as high as they were before a government crackdown in 2021, after it dropped its tutoring business to focus on school operation

By Edith Terry

Tianli International Holdings Ltd. (1773.HK) is among a handful of edtech companies that have not only survived but thrived in the market five years after China banned for-profit tutoring services for K-12 students in core curriculum areas. Unfortunately for Tianli, investors who were badly burned in the crackdown don’t seem willing to give the company a second chance.

That’s too bad for Tianli, whose turnaround is a story of renewal in a field that still holds out huge potential due to the strong value Chinese culture places on education. In its latest results, announced last week, Tianli reported its revenue grew by 14% year-on-year to 2.1 billion yuan ($314 million) in the six months to February, the first half of its fiscal year, while its profit rose 21% to 471.3 million yuan.

The reversal of an 81.8 million yuan impairment loss was responsible for most of the profit gain, after Tianli was able to obtain operating licenses for art training that it previously wrote off after the crackdown. That loss was just a tiny part of the more than 1 billion yuan in impairments that Tianli took in 2021 related to the crackdown. Without the reversal, Tianli’s profit would have been flat year-on-year.

The flat profit, despite the double-digit revenue growth, was partly the result of margin pressure, as the company’s gross margin fell 2.4 percentage points to 35.2% in the latest six-month period. But notably, the latest figure was twice as high as the year before the regulatory crackdown, when Tianli’s gross margin was just 17.2%.

Tianli is in the same boat with peers like Gaotu Techedu (GOTU.US), TAL Education (TAL.US) and New Oriental (EDU.US, 9901.HK), which have all survived by pivoting to education-related services still permitted post-crackdown. Gaotu turned to prep courses for college entrance and civil service exams, TAL Education to small-class enrichment programs, and New Oriental to adult education and tutoring in non-academic subjects.

Pivot to education services

Tianli pivoted as well. Its founder Luo Shi, a former property developer, previously operated private schools, establishing the first one in 2002. He went on to expand that, and the company had a network of 24 schools and 11 tutoring centers, concentrated in Southwest China’s Sichuan and adjacent provinces by the time of Tianli’s Hong Kong IPO in 2018.

After the crackdown, Tianli “de-consolidated” 30 of its schools, essentially removing them from the listed company’s business. It currently gets its revenue by providing a mix of services for its former network of owned and franchised schools, including the supply of educational, management and logistics services, as well as product sales.

Comprehensive educational services, the company’s biggest revenue source, rose by a modest 3.4% year-on-year to 1 billion yuan for the latest six-month period. Product sales grew by a stronger 45.5% to 691 million yuan, while logistical services fell 1.7% to 326.7 million yuan. Management and franchise fees increased by 38.7%, though they were only a small part of Tianli’s revenue mix at 78.1 million yuan.

The relatively strong results extended a similar performance in Tianli’s previous fiscal year through last August, when its revenue grew by 8.1% to 3.58 billion yuan, and its profit grew by 16.5% to 648 million yuan.

In a recent note, Huatai Securities raised its profit forecast for Tianli’s current fiscal year by 15% to 773 million yuan and maintained its “buy” rating. Guoxin Securities maintained a similar “outperform” rating, noting the market continues to discount education stocks because of declining birth rates and low liquidity for education stocks in general.

Despite the generally positive signals from Tianli’s latest report, investors weren’t convinced. Since the results announcement last Friday, the stock has fallen by more than 10%, leaving it down about 80% from its pre-crackdown peak.

AI embrace

In what probably seems like a no-brainer for education companies, Tianli and its peers are stepping up their investments in AI – something investors may not be pricing into the stock.

Gaotu uses DeepSeek, the Chinese AI frontrunner, for its AI tools and an “All with AI” business strategy. TAL has developed Math GPT, a math specific large language model and an “Inheritance of All Things” educational model developed with Beijing Normal University. New Oriental has a one-on-one bootcamp for personalized tutoring using AI, as well as its “One Look” app based on its personalized tutoring system.

Tianli has also embraced AI with its Tianli Qiming AI Learning Companion, launched last June, which it says is the first large AI model in China to be officially registered and widely applied in classrooms. Luo Shi told China Daily the application combines large-scale resources with personalized growth. “Large models enable students to redefine their learning path and make high-quality educational resources more accessible, turning personalized education into a reality,” he said.

While only experts can compare these offerings on a granular basis, the director of the China Association for Educational Technology, Zhang Shaogang, noted Tianli’s large language model was developed using the experience of 250,000 students in over 100 schools.

By July 2025, the model had already been implemented in 107 schools across China, according to Tianli executive Lou Yongqiang. In March, Tianli signed a strategic agreement with Tencent to develop a “Subject Brain” with “cognitive-level” intelligence. The Tianli brain will create agents for specific subjects, covering research, teaching, learning, practice, testing and evaluation, according to the company.

The AI business seems to be growing quickly. At the end of February, Tianli’s 26th AI College Entrance Exam Intensive Bootcamp project had enrolled 2,331 students, an increase of more than 130% over the previous year. Still, Tianli’s decision not to disclose any financials for the AI business, which falls under its comprehensive educational services segment, suggests it is probably not a significant revenue contributor yet.

Tianli is also doing a good job in cost control. Its ratio of sales, administrative and financial expenses to revenue improved by 0.5 percentage points to 10.7% in the latest six-month period, “achieving a good balance between growth and efficiency,” according to Huatai Securities.

Whether Tianli’s ongoing turnaround will challenge investors to change their perceptions of the company remains to be seen, as many of those are probably still licking their wounds from crackdown-related losses. But at least the company has revived its prospects as a viable business. Its price-to-earnings (P/E) ratio of 6.5 is far below the 24 for both TAL and New Oriental Education, showing Tianli may deserve a fresh look from investors as its post-crackdown recovery marches ahead. 

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Several years after getting clobbered by a government crackdown, the private educator is regaining momentum on its newer education and training businesses

Key Takeaways:

• New Oriental reported its operating profit more than tripled in the second quarter of its current fiscal year through last November
• The company’s new education initiatives segment recorded 21.6% revenue growth during the period

Lee Shih Ta

To mark its 32nd anniversary last Nov. 16, New Oriental Education & Technology Group Inc. (EDU.US; 9901.HK) founder Yu Minhong, while touring Antarctica, issued an internal letter to employees. In it, he used Antarctic penguins as a metaphor for teamwork, articulated New Oriental's aspiration to become a “sower of hope,” and said that the company’s East Buy (1797.HK) livestreaming e-commerce affiliate should serve as “a representative of corporate conscience.”

But the morale-boosting letter failed to resonate. Instead, it drew criticism on social media, as commentators remarked its content failed to address practical pressures facing New Oriental’s frontline staff. Sarcasm followed, including observations that “the boss is vacationing while employees are working overtime.” The negative sentiment hit New Oriental's Hong Kong-listed shares, which closed down 2.17% on Nov. 18, marking a fourth decline over five trading sessions. Its U.S.-listed shares also sagged in the wave of negativity.

While such words and actions from top managers are often amplified and dissected by investors and observers, fundamentals ultimately dictate how publicly listed companies like New Oriental are valued. Some skepticism still exists towards the company, which is trying to show that education can still be profitable in China after a massive government crackdown banned most after-school tutoring services for K-12 students in 2021 and 2022. The company's latest quarterly results, released last week, show New Oriental may have reason for such confidence.

During the three months through last November, the second quarter of its fiscal year, New Oriental generated revenue of $1.19 billion, up 14.7% from a year earlier. Its operating profit for the period reached $66.3 million, up a hefty 244.4%, while its net profit rose 42.3% to $45.5 million. The big profit increases, significantly outpacing revenue growth, were particularly notable.

Profitability improvements

Despite a small decline in selling and marketing expenses to $194 million, New Oriental’s total operating costs and expenses rose 10.4% year-on-year during the quarter, as administrative spending rose by 15.2% on a big jump in employee share-based compensation costs.

Still, the company’s quarterly non-GAAP operating profit margin rose to 7.5%, up more than 4 percentage points from a year earlier. New Oriental CFO Yang Zhihui emphasized that the profit margin gains and accelerating revenue growth owed to improvements in the company’s operational efficiency and better resource utilization for its core education business.

The company’s new education initiatives recorded a notably strong 21.6% year-on-year revenue increase. Management said New Oriental has now launched its non-academic tutoring courses in about 60 cities, attracting about 1.06 million students during the quarter. Concurrently, its intelligent learning systems and devices have also been deployed in about 60 cities, with a base of about 352,000 active paying users.

The new education initiatives segment is distinguished from traditional K-12 academic tutoring that used to be New Oriental’s bread-and-butter in its different cost structure. Investments needed for such new businesses involving content, teaching and research have greater replicability, resulting in lower costs per student. Simultaneously, the use of an online-offline model makes the use of classrooms, teachers and system resources more efficient, driving margin and profit growth.

Recovering demand for UK, Australian study

New Oriental’s core businesses recorded more modest gains during the latest quarter. Its overseas test preparation revenue grew 4.1%, improving from just a 1% increase in the previous period. Its domestic test preparation business targeting adults and university students grew about 12.8% year-on-year. But its overseas study consulting service segment was a slacker, declining about 3% year-on-year, though the decline rate has shown signs of slowing.

Management highlighted that recovering demand for study in countries like Britain and Australia has, to a certain extent, provided a buffer against volatility in North America. More significantly, better integration of the company’s study abroad consulting and test preparation businesses has helped to reduce internal duplicate costs, contributing to the company’s improving profitability.

Management's outlook further reflected confidence that the recovery will continue. New Oriental raised its full fiscal year revenue guidance to between $5.3 billion and $5.5 billion, and forecast its third fiscal quarter revenue would rise between 11% and 14% year-on-year.

New Oriental's U.S.-listed shares rose 5.32% to $58.95 on the day it announced its results, while its Hong Kong-listed shares also gained 3%. Its U.S. shares have risen 13% since the company marked its 32nd anniversary, while its Hong Kong shares are up by 17.8%, providing a nice birthday lift for the stock. HSBC upgraded New Oriental from “hold” to “buy,” expressing optimism that the new education and training businesses can sustain approximately 20% year-on-year growth in the coming quarters. The bank also raised its target price for the U.S.-listed shares from $58 to $68.

New Oriental's Hong Kong-listed stock currently trades at a forward price-to-earnings (P/E) ratio of about 25.7 times, significantly higher than the 7.7 for vocational educator China Education Group (0839.HK). The premium stems partly from strong visibility of New Oriental’s profit recovery and improving cash flow, while it also is probably linked to Yu Minhong’s personal stature. Continued strong growth for the new education and adult training segments could help to keep improving the company’s overall margins, which could support the stock at its relatively high valuation. But if growth momentum slows in those areas, Yu Minhong may have to rush back from his recent globetrotting to help support his stock.

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“The days of unlimited spending on Western luxury items by the Chinese public at large are gone, I think, forever.”

Key Takeaways:

• The departure of Harrods signals a permanent shift away from broad-based "conspicuous consumption," though top-tier brands and tech giants like Apple retain their allure
• Private university operators like XJ International are struggling as the economic value of a degree fades, prompting a shift toward government-aligned vocational training

By Doug Young & Rene Vanguestaine

Disparate market signals often coalesce into a singular narrative of change. Two recent developments illuminate a distinct shift in China’s economic psyche: a move away from the pursuit of prestige for prestige’s sake, and toward a starker, more pragmatic reality.

We begin with the news that Harrods, the legendary British department store brand, is shuttering its Shanghai operations come January. This includes the Harrods Tea Rooms and its private club, Harrods the Residence. The closure ends a five-year experiment that began in 2020, not as a typical retail play, but as an attempt to sell a "British lifestyle." The offering included curated social experiences and a steep 150,000 yuan ($21,000) membership fee.

In retrospect, we believe this was a case of profound bad timing and perhaps a misunderstanding of the market. The concept relied heavily on the allure of "conspicuous consumption" that defined an earlier, booming era of China’s economy. Charging astronomical fees for the privilege of drinking tea – even with Harrods teddy bears – makes sense only when cheap money is abundant. Furthermore, while French or Italian culture often sells itself as a luxury lifestyle in China, the appeal of a purely British social experience is arguably more niche.

There is also a demographic reality to this exit. The club model likely made sense when Shanghai was teeming with Western business executives mingling with wealthy Chinese entrepreneurs. However, geopolitical mayhem and the pandemic have driven many expatriates away, and they simply have not returned.

Does this signal a total collapse of Western luxury in China? We don’t think so. While "second-tier" luxury brands are scaling down, the top-tier players – like Hermes and Louis Vuitton – retain their ability to command high prices. Even Apple, despite headlines of dismaying sales, has seen a rebound; the iPhone 17 recently captured 25% market share. We observe this resilience on the ground, noting that airline crews and consumers in Beijing are still opting for the latest Apple hardware. The market is shrinking, but appetite for the absolute best remains. The days of unlimited spending by the public at large are gone, but the wealthy will continue to buy.

Diminishing returns of a university degree

While the wealthy rethink their club memberships, the middle class is rethinking its path to prosperity. This brings us to XJ International (1765.HK), a company running private universities, which is currently selling off underperforming campuses to service its heavy debt. Unlike the primary education sector, which was decimated by a regulatory crackdown in 2021, XJ is suffering from a shift in market demand.

There was a time when a college degree was viewed as the golden key to a successful future in China. That sentiment is reversing. We believe the economy, compounded by the looming specter of artificial intelligence, has fundamentally altered the value proposition of higher education. Today, a generic college degree is too often a direct route to unemployment.

Youth unemployment remains stubbornly high. Anecdotally, we hear constant reports from Beijing and Shanghai of graduates struggling to find well-paid work. When we look back on 2007, the going salary for a university graduate was around 3,000 yuan. Nearly two decades later, starting salaries haven’t risen significantly enough to justify the investment.

Consequently, we are seeing a pivot toward vocational education — a sector explicitly encouraged by President Xi. There is a growing realization that skilled trade jobs, such as electricians or plumbers, offer better protection against the AI revolution than lower-level white-collar corporate roles.

For investors looking at the education sector, the lesson is clear: align with government priorities or face existential risk. The 'in-between' private universities – those lacking the state-backed clout of elites like Peking University or Tsinghua University – are in a precarious position. Without the “Iron Rice Bowl” funding that protects those top-tier giants, these private institutions are vulnerable to demographic shifts and regulatory changes. The smart money, we believe, will steer clear of this squeezed middle and instead follow the state’s roadmap: investing in vocational training, high-tech, AI, and green energy education. Ultimately, both Harrods and XJ International are casualties of a maturing, tightening environment. Whether it is a 150,000 yuan social club or a four-year degree, Chinese consumers are no longer buying the brand; they are scrutinizing the value.

A prolonged downturn in China’s private higher-education sector has weighed heavily on the debt-heavy company, which is selling assets in a bid to survive

Key Takeaways:

• XJ International’s latest asset sale is priced at just 10 million yuan, but will bring the company 120 million yuan annually in debt it is owed by the asset being sold
• The private school operator has fully redeemed its $350 million zero-coupon convertible bond, eliminating its foreign-currency debt risk

By Lee Shih Ta

China’s private higher-education sector was once a hot ticket for investors, who bet heavily on bright prospects based on the importance Chinese culture places on education. But all that has changed lately as the country finds itself with an oversupply of private colleges following the rapid opening and expansion of many new campuses over the last two decades.

Fading investment since then has hit the heavily indebted XJ International Holdings Co. Ltd. (1765.HK), which has been disposing of assets lately to stay afloat. In its latest transaction on that front, the company said last week it agreed to sell its Xi’an Beinuosi Education Management Co. Ltd. for 10 million yuan ($1.4 million).

More important than the modest sale price is the purchaser’s commitment to repay 120 million yuan in principal plus 8% annual interest owed by the asset being sold to XJ International each year starting from 2026 — effectively providing a predictable cash inflow for the company in the coming years to help ease its persistent financial pressure.

The sale is just the latest for XJ International in the past two years, with market estimates suggesting the company has already realized 2.3 billion yuan from such disposals. The sales span education assets in Jiangxi, Gansu and Yunnan provinces, as well as in the cities of Shanghai and Suzhou, as XJ International’s footprint rapidly shrinks. The company has consistently cited the need to “focus on core quality assets,” “improve the balance sheet,” and “enhance shareholder returns” in all of its disposal announcements.

In stark contrast to a recent past when private higher-education companies were rapidly expanding to cater to growing demand from college-bound students, XJ International is now relying on rapid balance-sheet contraction simply to survive.

Defusing convertible bond risk

XJ International’s financial stress has multiple layers, but a major one of those was its $350 million zero-coupon convertible bond issued in 2021. The debt was the subject of a winding-up petition filed by creditors with the Hong Kong High Court in March last year. That petition was later withdrawn in August, paving the way for restructuring negotiations to begin.

In June this year, the company reached an agreement in principle with a creditor group holding more than 56% of the bonds’ principal, under which each $1,000 of principal debt would be redeemed early for $610. The proposal was approved in July with the support of 95.94% of the outstanding principal holders, making the arrangement binding. The restructuring became effective on Sept. 11, and the company subsequently completed the redemption of all outstanding bonds on Sept. 25, effectively removing its foreign-currency debt risk.

However, defusing the bond risk doesn’t mean XJ International’s financial pressure has disappeared. According to its financial report for the six months through February this year, the company had net current liabilities of 5.63 billion yuan, including 1.13 billion yuan in interest-bearing bank and other borrowings. Meantime, it had just 1.62 billion yuan in cash.

Luckily for investors, the company’s financial statement for the six-month period showed marked improvement. Revenue for the period reached 2.12 billion yuan, up 3.6% year-on-year; its profit rose 28.5% to 307 million yuan; and its operating cash flow swung from a net outflow in the year-ago period to a positive 271 million yuan, suggesting that the company’s finances were back on a positive track.

That said, debt reduction still remains a pressing priority, and asset disposals have become a central component of the deleveraging process. The latest announcement regarding the Xi’an Beinuosi disposal stated the campus’ scale and facilities could not meet future teaching needs, and retaining it would require additional capital expenditure for renovation. Thus, the decision to sell the asset represents a trade-off between growth and cash flow as the company works to shore up its finances.

Ongoing non-core asset disposals

XJ International has accelerated its asset disposals this year, including properties in Baiyin in Gansu province, Nanchang and Zhangshu in Jiangxi province, as well as other assets in the cities of Xi’an in Shaanxi province and Guilin in Guangxi. Market estimates suggest the disposals have generated a combination of cash recovery and debt transfer of more than 800 million yuan.

Earlier announcements show that the assets being divested share several common characteristics: weak profitability, including consecutive losses or negative net asset value in some cases, and the need for continued capital expenditure to upgrade campus facilities and improve teaching conditions — all resulting in long investment payback periods.

Many of the assets being sold are also located in smaller cities where growth in the number of students is slowing and competition among private universities is intense, leaving little room for enrollment expansion and making it difficult to generate stable cash flow. Divesting such assets has therefore become a key strategy in deleveraging and repairing the company’s balance sheet, allowing XJ International to channel more resources into its better performing assets.

XJ International’s shares fell 7.83% to close at HK$0.20 on the first day after the latest asset announcement sale. Even so, the stock remains up about 37% year-to-date, outperforming the broader market. The market’s pricing logic is also relatively clear: with the zero-coupon convertible bond risk now fully defused, XJ International can continue to pursue its strategy of recovering cash through asset disposals and use the money to strengthen its capital structure.

XJ International currently trades at a trailing price-to-earnings (P/E) ratio of around 3.6 times, below Minsheng Education’s (1569.HK) 6.7 times and well behind China Education Group’s (0839.HK) 27.4 times, reflecting lingering investor concerns over the company’s leverage and cash-flow visibility. But a smooth execution of the recent disposals, allowing the company to continue improving its debt structure, could offer some valuation upside for the stock.

For XJ International, asset disposals are only the start of a long deleveraging process. With China’s population now declining, many students opting to skip college in favor of vocational schools and tighter regulatory oversight becoming the norm, private higher-education operators can no longer rely on simply opening new campuses to create value. Building assets with strong academic moats, geographic advantages and stable cash-flow generation will be essential for the long-term prosperity of such companies – a strategy XJ International is now pursuing by shedding its underperforming assets to focus on its best campuses.

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“Well, Chinese women are supposed to hold half of the sky, aren't they?”

By Doug Young & Rene Vanguestaine

Two recent developments in China, one in the capital markets and the other in the airline industry, appear disconnected at first glance. Yet, together they tell a larger story of a nation grappling with the consequences of past policies and adapting to profound demographic shifts. The tentative return of private education companies to the stock market and a budget airline's novel recruitment strategy both highlight an environment of unpredictable policy and the unavoidable pressures of a changing society.

A new Hong Kong IPO application from a vocational educator called Hiducation is noteworthy simply for its existence. The private education sector has been largely absent from capital markets since a brutal 2021 government crackdown. That campaign, aimed at easing the financial and academic burden on families to encourage higher birth rates, effectively wiped out the lucrative after-school tutoring industry by banning for-profit operations in core school subjects. The policy was intended to solve a demographic problem but created another: the collapse of these companies led to the loss of hundreds of thousands of jobs, many held by recent university graduates, which in turn contributed to soaring youth unemployment.

We believe the government has recognized this unintended consequence. Over the last year or so, without any official reversal, Beijing has quietly allowed these education companies to get going again, likely as a pragmatic move to create jobs for young people. This has led to a tentative investor return, though we think it is defined by selectivity and a short-term horizon. The policy ground can shift without warning, making long-term bets a risky proposition.

Hiducation’s focus on vocational training for the construction industry seems smart on the surface, as Beijing supports practical skills training. However, its connection to China's sluggish property market makes its future uncertain. Even the sector leader, New Oriental, illustrates the ongoing volatility. After a strong rebound built on its study-abroad services — a business line exempt from the original crackdown — the company's growth is now flatlining. This new headwind comes not from Beijing, but from anti-immigrant rhetoric in the U.S., which could dampen demand for American university education. It’s a stark reminder that for Chinese companies, regulatory and political risks are both domestic and international.

An airline breaks the mold

In a separate but equally telling development, budget carrier Spring Airlines is making waves by announcing it will hire "older women" as flight attendants. The company is considering women up to age 40, including those who are married and have children — a stark departure from the industry norm across Asia, where flight attendants are typically young and single. While Western travelers are accustomed to seeing flight attendants of all ages, this is a rarity in China.

Spring Airlines stated it wants more experienced people for the roles. However, we believe deeper forces are at play. First, there are simply fewer young people in China today due to decades of falling birth rates. Second, educated young women now have far more career options and are increasingly pursuing professions in fields like law, finance, and accounting that were once dominated by men. The pool of young women available for flight attendant jobs is shrinking just as domestic air travel is growing, creating a labor crunch.

The move has generated some backlash online, with one commenter bizarrely calling it "disrespectful" for highlighting that the women are older and married. This reaction underscores a contradiction in modern China, where official laws against employment discrimination often clash with widely accepted, albeit illegal, ageist hiring practices.

From our perspective, what Spring Airlines is doing is likely the beginning of a broader trend for airlines in Asia. The demographic and social changes that prompted this move in China are also present in other parts of the region, such as Japan and South Korea. Just as the industry evolved in the U.S. and Europe, we expect Asian carriers will increasingly have to adapt to a new reality where experience and professionalism take precedence over youth.

Taken together, the cautious re-emergence of education companies and the shifting hiring practices in the airline industry reveal a China in transition. Both are market-driven responses to the complex interplay of government policy, economic pressures, and powerful demographic trends that will continue to shape the nation’s future.

The provider of exam preparation services is making a series of share buybacks in a bid to bolster confidence, as its business faces mounting competitive pressure

Key Takeaways:

• The company outlined plans to buy back up to 10% of its equity capital over a six-month period
• Fenbi executives increased their holdings and pledged to hold the shares for two years 

By Lau Chi Hang

When China cracked down on the business of after-school tutoring a few years ago, investors switched their focus from academic institutes to providers of vocational education.

Fenbi Ltd. (2469.HK), which specializes in preparing candidates for the civil service exam and jobs in state industries, found itself basking in the spotlight. Prominent investors including Tencent, Hillhouse Capital, IDG Capital, Matrix Partners and DCP Capital all piled in, and the company – whose name means “chalk” in Chinese - went public in 2023.

The shares initially surged to HK$15 from a debut price of HK$9.9. But after a six-month lock-up expired, waves of selling pushed the price into a downward spiral.

Fenbi chairman Zhang Xiaolong accused private equity powerhouse Hillhouse of wantonly dumping his company’s shares. He talked up the education provider’s fundamentals, but the sell-off continued, pushing the stock to a record low of HK$2 in April. The price has since clawed back above HK$3 but is still languishing 60% below the IPO price.

Halting the slide

Aiming to take back the initiative, Fenbi executives loaded up on shares over the past month and then announced a buyback plan on Nov. 3. Fenbi said it would spend up to HK$200 million ($25.64 million) over a six-month period to purchase a maximum of 223 million shares, representing 10% of its issued equity capital.

In the run-up to the buyback announcement, chairman and CEO Zhang had bought 810,000 shares on Oct. 17 for HK$2.41 million, at an average price of around HK$2.97. He went on to scoop up another 230,000 shares on Oct. 28 and 800,000 on Oct. 30 worth a total of HK$2.88 million, priced between around HK$2.78 and HK2.80. By Nov. 4 another 300,000 shares had been added to his tally for HK$903,000.

Others joined in the support effort. Executive director Wei Liang and linked party Li Yong bought 350,000 Fenbi shares on Oct. 17 for nearly HK$1.04 million, paying around HK$2.96 per share.

As an added boost, Zhang and Wei expressed their confidence in the firm’s prospects and pledged in an Oct. 20 statement to refrain from selling their holdings for two years. 

The concerted effort helped to put a floor under the share price. Fenbi shares broke through resistance at HK$3 on the news of the buyback plan, rising as much as 13% to HK$3.16 before softening to close with a 10% gain at HK$3.09.

Faltering performance

The support effort may have jolted the stock above HK$3 for now, but do the company fundamentals stack up?

Fenbi’s earnings figures reveal the toll of intensifying competition in the lucrative testing sector, as more graduates target stable civil service jobs or roles in state-owned enterprises in a tight economy.

The company’s turnover fell 7.7% to 2.79 billion yuan ($393,000) in 2024 from the prior year, although profits jumped 27% to 240 million yuan. Looking more closely at the numbers, the annual profit was nearly 40 million yuan less than the bottom line of 278 million yuan logged in the first half of 2024, meaning a loss was incurred in the second half.

In the first half of 2025, revenues slid 8.5% to 1.49 billion yuan, while net profit sank 18.4% to 227 million yuan. Fenbi blamed the drop on fierce rivalry in the market for entrance exam preparation, while competition also took a bite out of book sales and other businesses.

Fenbi launched a cost-cutting drive last year that became more pronounced in 2025. Administrative expenses fell 7.7% to 182 million yuan in the first half, while spending on marketing and sales slid 4.4% to 306 million yuan, and R&D shrank 0.3% to around 108 million yuan.

Limited scope of buybacks

In that context, can the buybacks deliver a significant and sustained boost to investor confidence? CEO Zhang and related parties bought a total of 2.56 million shares for around HK$7.22 million, a mere drop in the ocean of Fenbi's issued share capital of nearly 2.24 billion shares. With their limited scope, the actions are unlikely to convince investors that those involved in the buybacks have complete confidence in the company.

In fact, less than 30% of Fenbi stock is in the hands of its controlling shareholders, below what is considered the benchmark for positive commitment. The stakeholders collectively own 552.3 million Fenbi shares, or 24.76% of the firm’s corporate equity. 

Fenbi's prospects may hinge on its adoption of AI as a teaching tool for the training and testing market. Since 2024, the company has launched a series of intelligent products including a virtual teaching assistant, Fenbi AI Teacher, and interview coaching services. It followed up in April this year with the launch of a ground-breaking AI-powered exam testing course for a mass audience. As of June 30, around 50,000 candidates had signed up, generating about 20 million yuan in revenue.

Nonetheless, the revenue from AI-powered products still represents a trickle in the company's annual revenue stream of more than 1 billion yuan. Investors may want to adopt a wait-and-see approach towards Fenbi for now.

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China’s fourth largest online vocational educator is looking for a high-tech boost from AI to jumpstart its business, as it searches for elusive profits

Key Takeaways:

• Hiducation has filed to list in Hong Kong, but declining revenues and deepening losses in the first half of this year could undermine its investor appeal
• As the top-ranked provider of training in construction industry skills, the company’s exposure to China’s ongoing property downturn is another negative

By Edith Terry

Beijing Hiducation Technology Corp. Ltd. hopes to educate investors about the growing importance of vocational training in China with its application for a Hong Kong listing last week. But the company could quite possibly get its own lesson from those same investors, who may decide to take a pass on its story tied closely to China’s ailing property market.

Hiducation may be using its application to test investor appetite for a company that’s China’s largest online vocational educational firm for the construction industry, and second largest in emergency services.

With a gross profit margin of 85.8% in the first six months of 2025, Hiducation certainly looks quite attractive in terms of that metric. The company is hoping to follow in the footsteps of leading vocational educator China East Education (0667.HK), which raised $625 million in 2019, making it the world’s largest education float at that time.

But investors haven’t been kind to China East Education’s shares, which have lost about half their value since then. That said, China East Education’s gross margin was just 59% in the first half of this year, well below Hiducation, though its top and bottom lines are both much healthier, with its revenue and profit up 10% and 48%, respectively, for the period. By contrast, Hiducation lost money in the same period, and its revenue also declined.

Hiducation has grown rapidly since it launched its first brand, Haixue Classroom, in 2010 for vocational learning, and its premium credentials training brand, Jingjin Academy in 2018. But it has also been mired in losses since at least 2022, the earliest year covered in its listing document. And as we’ve already noted, its core products are tilted towards jobs in a Chinese property market that has been in the doldrums for the last few years.

Hiducation’s third brand, ShuPeiTong, which provides training services to corporate customers, has been among its weakest performers, as the sagging property market has made most companies unwilling to spend money to train construction workers that are already in abundant supply due to anemic new building activity.

Adding to its woes, Hiducation has becomes a frequent target of consumer ire, with 8,414 complaints on the Black Cat complaint platform, according to a recent count in Chinese media. On the same day as the IPO filing, one person complained about being tricked into buying a costly training program and later denied a refund. Similar complaints have been a recurrent theme for the company, first surfacing as early as 2020 on the Consumer Rights Protection Day investigative program aired each March by leading broadcaster CCTV.

The company’s marketing budget represents over 60% of revenue, which may not only explain its recurrent losses, but could also reflect the company’s hard-selling tactics that have led to the complaints. The listing document shows that Hiducation’s sales and marketing team accounted for a full 80% of its workforce in June this year.

Performance reversal

Up until recently, Hiducation’s losses were narrowing and its revenue seemed to be on a healthy track. It was playing in a broader Chinese vocational education market that looked set for strong growth, thanks in no small part to strong policy support from Beijing. The market for online professional skills and qualification education in China has grown from 37.5 billion yuan ($5.2 billion) in 2020 to 46.9 billion yuan last year. Hiducation ranked fourth in the industry, with 1.1% share of the fragmented market, and is first in the narrower market for construction certificates, according to research cited in the prospectus.

Between 2022 and 2024, Hiducation’s revenue grew by about 28%, from 400 million yuan to 510.5 million yuan, while its losses declined by half from 185.7 million yuan in 2022 to 90.7 million yuan. It had a total learner base of 4.3 million paying users in June this year.

But those positive trends abruptly reversed this year, with revenue declining by 5.5% year-on-year in the first half of 2025 to 231.6 million yuan, and the company’s loss more than doubling to 158.3 million yuan. Its one consistently rising metric was its gross margin, which grew from 78.6% in 2022 to 81.6% in 2024, and rose further to 85.8% in the first half of 2025.

Since almost two-thirds of Hiducation’s revenue comes from its construction-related professional qualification examination courses under the Haixue and Jingjin brands, it’s easy to conclude that ongoing sluggishness in the property market is to blame for the company’s recent downturn. The share of revenue from its construction industry training and qualification services fell from 68.2% in 2022 to 59.5% in the first six months of 2025.

So, why does Hiducation think investors will buy into its IPO now, given its recent slump that’s hardly likely to excite anyone? One answer is AI deployment in the sector, which the company believes will help to improve its performance. Hiducation began exploring large-model AI applications in 2024 and established an independent AI innovation team in 2025, launching more than 30 AI agents over the next six months.

Hiducation is also testing an AI-powered teaching assistant with a function that has supported the grading of more than 13,000 assignments since its launch in September 2024. An AI-powered marketing assistant, launched in August 2025, has supported the analysis of more than 100,000 business opportunities, according to the prospectus. And a membership product launched in May 2025 as a pilot has already acquired 21,000 paying users.

Another reason for hope is Hiducation’s recent moves beyond the construction sector, including into emergency safety, accounting and finance, legal credentials and healthcare.

The bulk of Hiducation’s business comes from its Haixue and Jingjin brands, whose revenue rose from 378.9 million yuan in 2022 to 482.4 million yuan in 2024. Business services under the ShuPeiTong brand contributed 21 million yuan in 2022, but their contribution has fallen from 5.3% of total revenue that year to just 1.8% of in the first half of this year.

By industry, construction-related consumer services accounted for 60.9% of revenue, or 138.5 million yuan, in the first half of this year, while emergency safety training made up 21.6% and “other” qualification examination courses accounted for the rest. Emergency services qualification exams look like the company’s most important growth engine, rising from 13.3% of revenue in 2022 to 21.6% in the first half of this year.

Hiducation plans to use IPO proceeds to upgrade its construction and emergency safety courses, to expand in medical and healthcare, the silver economy and new energy, and to build services for lifelong learning. The largest share will go to AI infrastructure, data collection and research – areas that looks potentially promising, but may also require closer investor scrutiny to determine the true extent to which they can improve its efficiency.

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The education services provider’s latest quarterly report reflected its largely steady but unspectacular performance

Key Takeaways:

• New Oriental Education reported revenue for its fiscal quarter through August reached $1.52 billion, up 6% year-on-year
• The education services provider’s revenue for its fiscal year through May is expected to reach up to $5.4 billion

By Lau Chi Hang

As report cards go, the latest quarterly update from New Oriental Education & Technology Group Inc. (9901.HK, EDU.US) won’t earn the company any gold stars. The leading education services provider reported last week its revenue for the three months through August, the first quarter of its fiscal year, rose 6.1% year-over-year to $1.52 billion, while its operating profit increased 6% to $310 million.

Among its various segments, revenue for overseas test preparation and overseas study consulting grew just 1% and 2% year-over-year, respectively. Its domestic exam prep business for adults and university students performed better, up 14.4% year-on-year, while its new educational business initiatives grew 15.3%.

While revenue slightly exceeded the upper end of its previous guidance for up to $1.51 billion, investors were left unimpressed by a 1.9% decline in its net profit to $240 million.

Stock tumbles

The falling profit spooked investors, with New Oriental's U.S.-listed shares plummeting over 9% in intra-day trade after the announcement, before paring those losses to close down 3.4% for the day at $58.56. Its Hong Kong-listed shares also fell the day after the report’s release.

Despite the selloff, the stock currently trades more than 20% higher from its six-month lows, showing investors haven’t abandoned the company just yet. Equally significant, the shares now trade above the roughly HK$50 level where they were when New Oriental and its peers took a beating in 2021 after Beijing banned them from their main business of providing after-school tutoring to K-12 students in core curriculum areas.

Investors have rewarded the company for a resilience that saw it post $4.9 billion in revenue for its 2025 fiscal year, exceeding the $4.28 billion level from before the crackdown. Such milestones underscore Chairman Yu Minhong's steady leadership during the crackdown and resulting industry upheaval, which allowed the company to chart a rapid and difficult transformation into areas not banned under the new rules.

But momentum during that recovery period appears to have plateaued, making meaningful expansion going forward elusive.

One of the biggest constraints is uncertainty surrounding overseas study-related services that have become one of New Oriental’s biggest revenue sources. Protectionist pivots by President Donald Trump in the U.S., one of the most popular overseas study destinations, have placed restrictions on immigrants and international students since the start of the year, putting a damper on New Oriental's related business.

Growth for the company’s overseas test preparation segment cooled to just 1% year-over-year in its latest fiscal quarter from 14.6% the previous quarter. Similarly, growth for overseas study consulting services slowed to just 2% from 8.2% over that period.

Cost-cutting at the fore

In the absence of potential for major revenue growth, New Oriental is taking a different approach to jumpstart its profits, at least in the short term.

“Despite the challenges posed by the continued slowdown in our overseas businesses, we delivered a year-over-year improvement in our non-GAAP operating margin, driven by our relentless focus on cost optimization and operational efficiency enhancements,” said New Oriental CFO Yang Zhihui.

“We will continue to exercise this discipline and extend our cost and efficiency initiatives across all business lines for the remainder of the fiscal year, positioning ourselves for more sustainable and profitable growth,” he added. In other words, New Oriental looks set to rely primarily on cost-cutting to boost its profit this fiscal year, rather than relying on revenue growth.

New Oriental forecast its revenue would range between $1.13 billion and $1.16 billion in its current fiscal quarter through November, representing 9% to 12% year-over-year growth. The company also reaffirmed its full fiscal-year revenue guidance of $5.15 billion to $5.39 billion, representing annual growth between 5% and 10%.

Such forecasts looked decidedly underwhelming, showing revenue growth is likely to remain in mid- to high-single-digit territory for the next year and maybe longer. A bigger concern, as reflected by the latest quarterly profit backtracking, is that earnings may not necessarily expand alongside revenue growth.

U.S. overhang

New Oriental's growth prospects rely heavily on its new educational business initiatives, which include things like non-academic tutoring courses. But growth for that segment has slowed notably, dropping to 15.3% in the latest fiscal quarter from 32% in the previous quarter, suggesting slowing momentum. Meanwhile, U.S.-related factors will continue to weigh on the company’s overseas study business. Despite a recent thaw in relations and willingness for a meeting between Trump and Chinese President Xi Jinping, ongoing U.S.-China tensions and Trump's unpredictability will continue to create uncertainty around the overseas study business.

Earlier this year, CFO Yang said on an earnings call that New Oriental expects its overseas test preparation business revenue to grow 5% to 10% in the current fiscal year, while its overseas study consulting business revenue will be flat, representing significant slowdowns from previous double-digit growth. Such tepid outlook is clearly behind this year’s conservative forecasts, meaning investors shouldn’t expect too much from the company.

Its current stock price in the HK$50 range gives New Oriental a forward price-to-earnings (P/E) ratio of 25 times, similar to China Education Group (0839.HK). Such a valuation seems to reflect the company’s steady operations, even as it lacks immediate catalysts, meaning its reward-versus-risk profile looks fairly balanced.

The bottom line is that New Oriental has established an efficient operating system and strong track record as well, which is why it’s earned a reputation as a leader in its space. CEO Yu Minhong’s capabilities as CEO are undoubtedly one of its biggest assets, and his keen market acumen has repeatedly saved the company as it navigates through choppy regulatory waters. Under his leadership, New Oriental should remain a formidable enterprise set to make new breakthroughs when market conditions line up in its favor again.

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The edutech company’s new alliance with a U.S. children’s media brand with more than a half century of history looks more promising than its earlier global expansion efforts

Key Takeaways:

• iHuman has formed a new partnership with U.S. children’s publisher Cricket Media, aiming to boost its three-year-old globalization drive
• The new partnership could help return the edutech company to revenue growth, following two years of declines amid sluggish demand in its home China market

By Doug Young

Going global is all the rage these days among Chinese companies, most stymied by a slowing economy and heavy regulation at home. But doing business overseas is often easier said than done, and it’s far easier to announce new products and strategic alliances than actually deriving money from such efforts.

That might explain the muted reaction to iHuman Inc.’s (IH.US) latest announcement of a new strategic tie-up with Cricket Media, a U.S. publisher of a children’s magazine with history dating back to 1973. Shareholders responded with a 3.6% drop for iHuman’s stock on Thursday after release of the announcement, which will see the two sides work together to bring Cricket’s work to the 21^st century using some high-tech touches.

To be fair, iHuman also released its latest quarterly report on Thursday, and some of the negative reaction might have been in response to that. The report was a mixed bag, including continuing revenue declines but a return to profit growth for one of China’s older players in the edutainment space, whose roots date back to the former online game company Perfect World.

We should also point out that iHuman’s stock has been doing quite well in general lately, up around 80% so far this year amid a broader rally for many U.S.-listed Chinese stocks. Education stocks have fared well in the recent rally, as many that survived a major regulatory crackdown in 2021 and 2022 continue to recover from that.

The latest tie-up looks somewhat intriguing, as it will provide iHuman with a well-established U.S. brand in children’s literature, including not only a library with more than a half century of history, but also associated sales and distribution channels.

The company’s global expansion dates back to 2022 with the launch of its bekids brand of apps. It later launched its Aha World brand designed to make learning more fun by adding entertainment elements. The company provided some of the latest developments on Aha World in its latest quarterly earnings report, which we’ll detail shortly.

But the bottom line is that iHuman’s global foray, three years after its official launch, has yet to become a significant revenue spinner for the company. It made no mention of international revenue in its latest earnings report, and its latest annual report for 2024, filed in April, says its revenues are still “primarily derived in China.”

The new Cricket Media partnership will see the two sides develop products using the U.S. company’s extensive library. iHuman will use its expertise in digitalization to create edutainment and interactive learning products from that library. The first product from the collaboration, called Reading Stars, is described as a platform “where kids don't just read, they build a personalized city with earned stars, play mini-games to test their knowledge, and discover that reading is its own reward,” according to the announcement.

We’ll have to see how this new initiative develops, but it certainly looks like it could have more potential than iHuman’s older bekids and Aha World initiatives, which were purely self-developed and thus lacked the local resources that Cricket Media has.

Sagging revenue

iHuman’s big stock gains over the last year look somewhat unusual, given that the company’s revenue has been declining since the second half of 2023 and continued to fall in the second quarter. Instead, the rise looks like a valuation correction, as investors look for well-run Chinese companies whose shares were overly punished during a selloff dating back to 2021.

Even after the run-up over the last year, iHuman’s stock still trades at a relatively modest price-to-earnings (P/E) ratio of 12. That’s well below peers like Youdao (DAO.US) and Fenbi (2469.HK), which trade at multiples of 33 and 34, respectively. iHuman’s price-to-sales (P/S) ratio looks a little more respectable at 1.32, which is roughly the same as Youdao’s 1.33 but trails Fenbi’s 2.23.

iHuman’s discount could owe partly to its falling revenue. That trend continued in the second quarter, as the figure dropped 7% year-on-year to 200 million yuan ($28 million) from 215 million yuan a year earlier. While declines are never good, the latest rate of decline marked an easing from an 11% drop in the first quarter, and a 10% decline for all of 2024, showing the company could return to growth either late this year or in early 2026.

Most of iHuman’s other major metrics also fell, including a 3.5% decline in monthly average users to 23.72 million. One area that rose was the company’s cost of revenue, whose 1.6% increase undermined its gross margin, which dropped to 67.8% from 70.5% a year earlier. But both of those numbers are relatively high, showing the company can still operate quite profitably.

iHuman also lowered its operating costs year-on-year by 12.5%, showing it’s trying to control its operational spending. It appears to be making efforts to collect unpaid bills from its customers as well, reporting its deferred revenue and customer advances dropped to 240 million yuan from nearly 320 million yuan at the end of 2023.

Those efforts ultimately filtered down to the bottom line, as iHuman reported its net income for the second quarter rose to 31.9 million yuan from 24.7 million yuan a year earlier – its first year-on-year profit growth in more than a year.

The company also talked up several of its other recent new initiatives, including a major upgrade for Aha Makeover, part of its Aha World overseas brand. It also added a feature to its Chinese app that allows children to use photo recognition technology to identify Chinese characters they don’t recognize.

Such incremental product improvements look like relatively standard business practice, and probably won’t dramatically improve iHuman’s performance anytime soon. The Cricket Media tie-up, by comparison, looks more promising if the two sides can effectively market its products using Cricket’s U.S. resources. If they can, perhaps we’ll finally see iHuman start to announce some international revenue figures in some of its upcoming financial reports. And perhaps it will return to revenue growth sooner than expected.

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The leading provider of vocational education services posted 10% revenue growth in the first half of the year, as its profit jumped nearly 50%

Key Takeaways:

• China East Education’s revenue rose 10% in the first half of this year, more than twice as fast as its growth rate over the previous two years
• The company is benefitting from a growing preference among young Chinese for vocational training, which is also getting strong support from Beijing

By Doug Young

Vocational education isn’t just helping Chinese youth in a difficult job market. It’s also providing a huge boost to China East Education Holdings Ltd. (0667.HK), whose latest financial report issued this week showed steady growth for nearly all of its major metrics, including a nearly 50% rise in its profit.

More importantly for investors, the company’s emergence as one of China’s leading vocational educators has lit a fire under its previously languishing stock, which has more than tripled over the last 52 weeks to a nearly four-year high. But before investors start snapping up these stocks, we should caution that the sector appears to be divided into sector leaders, whose stocks are thriving, and smaller players that continue to languish. More on that shortly.

Vocational school operators were a neglected group in China’s vast education sector for years, as investors flocked toward faster-growing private companies catering to K-12 students and students entering the country’s more prestigious college system. But the former category was wiped out during a crackdown in 2021 that banned most private tutoring services for K-12 students. The latter category has come under pressure more recently as China churns out growing numbers of college students who can’t find jobs after graduation.

Those two trends have left vocational schools that can train students in more practical skills like cooking, car maintenance and computer repair as one of the best-performing groups among private educators. And unlike the tutoring schools catering to K-12 students, which fell afoul of regulators, the vocational educators have been the recipients of strong government support.

That element showed up in China East Education’s latest report as the company’s government grants doubled to about 21.5 million yuan ($3 million) in the first half of this year from 11.7 million yuan a year earlier. While such amounts are relatively modest, they still reflect growing government support and are essentially free money that can offset expenses and contribute directly to boosting margins and profits.

In one recent key policy boost, vocational educators were granted the right to issue bachelor degrees – a privilege once limited to traditional colleges and universities. Beyond the symbolism of creating more equality among the different types of higher education organizations, the move also had the practical effect of allowing vocational school graduates to apply for civil services jobs and entry to graduate schools.

Responding to the changing environment, China East Education noted that a growing proportion of its students are signing up for its longest programs that typically last for three years. To provide better environments for such long-term learning that increasingly looks like traditional college programs, it is establishing a series of “vocational education industrial parks,” which sounds suspiciously like the vocational equivalent of university campuses.

Those will complement the company’s national network of smaller learning facilities, which accounted for the bulk of its 234 educational centers at the end of June. China East Education has already opened first phases of new vocational industrial parks in Sichuan, Shandong, Guizhou and Henan provinces, and is planning additional similar projects in Jiangsu and Jiangxi provinces.

“The group believes that the vocational education industrial parks will be a key driver in increasing student demand for the group’s education services and cost synergies can be achieved in future,” it said.

Big business in beauty

Next we’ll take a deeper dive into the financials and other key metrics of China East Education’s latest report, which show overall accelerating growth in terms of student enrollments but also reveal that not all study areas are equally attractive in the current weak job environment. While fashion and beauty was a hot area in the company’s latest report, information technology (IT) was surprisingly weak.

The company’s revenue rose 10.2% during the first half of the year to 2.19 billion yuan from 1.98 billion yuan a year earlier, representing a nice acceleration from annual growth between 3% and 4% over the last two years. Its new student enrollments also rose 7.1% year-on-year to 83,521 during the six-month period, while its average total student enrollments rose 5.5% to 152,817.

Fashion and beauty was the star performer among the company’s five main business segments, with its revenue nearly doubling and its average number of student enrollments up 76%. But the segment is a relatively small part of China East Education’s revenue pie, accounting for just 4% of its total revenue in the latest period.

The company’s biggest breadwinners are its cooking education programs, led by its culinary arts segment that offers instruction in Chinese cuisine and accounts for nearly half of its revenue. That division’s revenue rose 11% year-on-year, while the average number of enrolled students rose 8.3%. Its smaller division offering cooking instruction for Western food performed even better, with revenue up 14% and average student enrollments up 18.5%.

Information and technology services was the laggard for the latest period, reporting its revenue fell 3% for the period to make up 17% of the company’s total. Average student enrollment for the segment was also down 6.8% from a year earlier.

While China Education’s overall student enrollment was generally higher, its cost of revenue was largely unchanged, suggesting it was able to accommodate the rise in new students without expanding its staffing. That helped the company raise its gross margin to 57.3% in the first half of the year from 53.0% a year earlier, which helped to boost its net profit 48.4% in the latest period to 403 million yuan from 272 million yuan a year earlier.

As its profits grow, the company boosted its final dividend for last year to HK$0.22 from HK$0.20 in 2023, which is also a likely factor behind the company’s growing attraction to investors.

As we’ve previously noted, not all vocational education stocks are benefiting from growing demand among young Chinese. China Education Group (0839.HK) is another major player and currently trades at a price-to-earnings (P/E) ratio of 27, similar to the 30 for China East Education, which is about twice as large in terms of market cap. But the far smaller China New Higher Education (2001.HK) trades at a meager multiple of just 2.4, while the even smaller Minsheng Education (1569.HK) is barely profitable.

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The adult education company’s shares have tripled since it disclosed a plan to enter the collectible toy business through a major acquisition that closed on March 31

Key Takeaways:

• QuantaSing closed its purchase of collectible toy developer Letsvan at the end of March, and expects the purchase to make a “significant” revenue contribution in its June quarter
• Revenue from the company’s core adult education services plunged by 40% in its latest quarter, as it focused on customer quality over quantity

By Doug Young

QuantaSing Group Ltd. (QSG.US) is learning there are many ways to get cautious consumers to part with their hard-earned money in a sluggish economy.

First, it did that by selling education products to adults, playing on the deeply engrained value Chinese place on self-improvement for themselves and their children. Now it’s discovered something people like even more in such economically uncertain times. That something is toys for adults, part of what’s locally called the “goods economy” that refers to products that help people play in the present to avoid thinking too much about the future.

Discussion of QuantaSing’s recent movement into collectible toys was the highlight of its latest quarterly results announced last Friday. The company’s announced that it completed its purchase of 61% of Shenzhen Yiqi Culture Co. Ltd. on March 31 for 235 mln yuan ($33 million) in cash. Yiqi’s main asset is Letsvan, which makes collectible toys for adults that have become all the rage in China lately.

QuantaSing’s legacy adult education business was less impressive in the quarter through March, the company’s third fiscal quarter. Revenue for its core businesses of providing financial literacy and skills upgrading courses tumbled by nearly half, as it focused on the most profitable customers over simply chasing big numbers.

Even in its core education business, the company is finding some early success by developing more leisure-oriented products like combining education with hobbies like calligraphy and travel. The popularity of such products seems to reflect a growing desire by Chinese to enjoy the present through hobbies like calligraphy, buying collectible toys and dressing up as their favorite anime characters. A more traditional preference for self-improvement education seems to be taking a back seat in the current economic slowdown, probably the result of a weak job market.

“Pop toys have become powerful vehicles for self-expression, particularly among millennials and Gen Z. The sector has proven resilient with key players sustaining strong growth even in economic downturns,” said Chairman Li Peng on the company’s earnings call. “Today's consumer is (increasingly interested in) emotional value over pure functionality. They are seeking comfort, identity affirmation and connection through their purchases. And the pop toys deliver exactly that.”

Investors have gobbled up QuantaSing’s transformation story. The company’s shares have tripled over the last three months, including a nearly 20% jump on Friday after the latest earnings announcement. The stock currently trades at a forward price-to-earnings (P/E) ratio of 23, which looks strong compared with the 13 for education services leader New Oriental (EDU.US; 9901.HK). But QuantaSing probably hopes to eventually achieve a multiple closer to the 47 for Pop Mart (9992.HK), whose shares have skyrocketed over the last year on the huge success for its collectible toys, including the wildly popular Labubu series.

QuantaSing spent much of its earnings release and conference call discussing the Letsvan acquisition, whose results will be included in its next financial quarter for the three months through June. Despite queries from analysts on Letsvan’s future revenue contribution, CFO Xie Dong would only say that the “pop toy business will account for a very significant level of overall revenue at the consolidated level in the next quarter.”

Aggressive expansion

QuantaSing said it has big plans for Letsvan, both domestically and internationally. Letsvan traditionally licensed its characters, with names like Wakuku, to third parties like retailer Miniso (MNSO.US; 9896.HK), which sells the toys in its separate Top Toy chain of stores that it’s preparing to spin off for a separate IPO.

QuantaSing plans to continue such third-party licensing, but also intends to develop its own chain of stores, similar to Pop Mart and Top Toy. The company revealed that it took its first step in that direction by opening a pop-up store at a popular Beijing shopping mall on May 24.

Letsvan has also taken some initial steps outside China, and will accelerate that campaign under QuantaSing’s ownership. “International expansion initiatives are underway,” the company said in its earnings announcement. “Letsvan has already established its footprints in certain Southeast Asian markets and has been exploring opportunities in other overseas markets, including the United States.”

The company has certainly built up huge expectations for its move into collectible toys, which could make its stock vulnerable if its first results including Letsvan aren’t as impressive as many investors are hoping.

One thing QuantaSing has in its favor is its ability to run an extremely profitable education business, even if that business is shrinking. Its gross margin was 83.1% in the quarter through March, which was down slightly from 84.6%, but well ahead of Pop Mart’s 63.9% gross margin last year. We can probably expect QuantaSing’s margin to come down after it includes the new toy business, and investors will be watching closely to see by how much.

We’ll close with a quick look at the company’s core education services, which are rapidly contracting but still quite profitable. QuantaSing’s revenue fell 40% year-on-year to 571 million yuan in the three months to March from 946 million yuan a year earlier. It blamed the plunge on a 44% decline in revenue from its individual online learning services, which account for more than 80% of its total.

But the company also did a good job controlling costs, with the result that both its net income and adjusted net income rose year-on-year to 41.1 million yuan and 37.8 million yuan, respectively. The company had 1.13 billion yuan in cash and short-term investments at the end of March, up from 1.03 billion yuan at the end of June last year, showing it has plenty of financial resources to facilitate its integration and expansion of Letsvan’s toy business.

CFO Xie hinted at some heavy spending ahead during that process, which could eat into QuantaSing’s profits and profitability over the near-term.

“With our healthy cash position, we have the flexibility to support both our existing operations and our strategic initiatives in the pop toys space,” Xie said on the earnings call. “Though we anticipate some near-term profitability fluctuations as we optimize our business mix, our financial foundation remains robust as we execute this strategic evolution.”

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The Zhengzhou-based private education company’s shares have soared since last month as investors cheer its embrace of vocational training and debt repayment

Key Takeaways:

• YuHua Education has shored up its balance sheet by selling its Thai schools to help pay back debt from a 2019 convertible bond issue
• With its revenue up by 7% in the six months through February and adjusted profit more than doubling, the private educator gets a gold star for its latest financial results

By Edith Terry

Like most Chinese education companies, shares of China YuHua Education Corp. Ltd. (6169.HK) have been in the doldrums since 2021, after the government banned after-school tutoring for primary students and cracked down on private operators of K-12 schools.

The sector hasn’t fully recovered since then, and YuHua is no exception. But the company’s latest interim report for the first half of its fiscal year, released last week, shows the company is regaining its footing after shifting from its original focus on operating K-12 schools.

YuHua was just one of a spate of IPOs by online and offline education companies when it listed in Hong Kong in 2017, posting strong growth on a willingness by Chinese to spend heavily on education for themselves and especially their children. The group of stocks mostly followed similar trajectories, peaking in 2020 before crashing in 2021 with the crackdown. YuHua’s shares soared from their offer price of HK$2.05 per share to HK$7.80 at their height in 2020 before collapsing to their current level of about HK$0.50.

Yet YuHua was lucky. After plowing its IPO proceeds and a follow-up equity issue into investments in Thailand and Shandong, and issuing HK$2 billion in convertible bonds, it seemed likely to succumb to its heavy debt load and weak profits. A year ago, the company’s midyear results looked dismal, with a 52.5% drop in adjusted net profit to 229.5 million yuan ($31.8 million) and a slender 5.4% increase in revenue to 1.25 billion yuan.

This time around, the results look much better. Its revenue was up by 7.2% to 1.28 billion yuan and its adjusted net profit more than doubled year-on-year to 434.5 million yuan for the six months through February, the first half of its 2025 fiscal year.

Its adjusted net profit margin for the six months was 31.7%, nearly double the 16.2% from a year earlier, following significant belt-tightening. YuHua’s shares have soared 63% since it first released a preliminary version of its interim results at the end of April, as investors cheered the company’s ongoing turnaround.

So, what happened? After 2021, YuHua Education morphed many of its original K-12 schools into vocational schools, which weren’t subject to the crackdown. It abandoned K-9 education completely, and focused instead on grades 10-12 and above by offering services that were still allowed. Those included college preparatory services, as well as operating vocational high schools and colleges to meet the rising demand for people wishing to gain technical skills.

The shift to vocational education helped YuHua transform from black sheep to star student by aligning with government policy – a key component for successfully doing business in China. The Chinese government has been encouraging the growth of vocational schools to redirect students away from traditional universities and reduce unemployment.

Private school giant

At the time of its IPO in 2017, YuHua was China’s largest provider of private education for K-12 students, with 48,220 students on 16 campuses across Central China’s Henan province, as well as one university. Today its student body has more than doubled to 140,000, at four undergraduate universities, one junior college and 20 primary and secondary schools, according to YuHua’s website. The company’s latest annual report puts the student figure a bit lower, saying it enrolled 108,964 students for the 2024/2025 academic year.

The company has pulled through some hard times. Its annual revenue for its 2024 fiscal year of 2.5 billion yuan was 24% above its revenue in 2020. But its adjusted net profit of 500.7 million yuan for 2024 was only half the 1 billion yuan for 2020.

In 2019, the company was flush with cash from the IPO and a follow-on equity offer of HK$936.7 million ($120 million) in November 2017. In November and December 2019, it issued HK$940 million in convertible bonds, then repurchased them and issued a new tranche of HK$2 billion in convertible bonds due in December 2024. It used some of its cash to purchase assets in Thailand and Shandong province, for 63.7 million yuan and 1.49 billion yuan respectively.

Both the Thai acquisition, which included the licensing and operational rights to Stamford International University in Thailand, and the convertible bonds quickly came back to haunt the company. Private sector education in Thailand is at least as competitive as in China, if not more so. The Thai operation appears to have remained more of a trophy asset than a productive one, and its reported annual contribution to YuHua’s adjusted gross profit of 4.3 million yuan has remained unchanged since 2020. According to YuHua’s 2024 annual report, the Shandong assets also led to significant costs for updates and renovations between 2022 and 2024, leading to a goodwill impairment of about 168 million yuan between 2023 and 2024.

DBS Group Research flagged the risks associated with the convertible bond and the Thai operation as early as April 2019, although it said the company’s fundamental growth remained strong. In December 2024, YuHua calmed investors by repurchasing the bonds and selling the Thai assets for HK$240 million.

Those moves appear to have put the company back on more stable financial footing, and YuHua’s high margins and relatively stable revenue, together with its focus on vocational education, make it look like a survivor. Its market cap of HK$2 billion is substantially more than Wisdom Education’s (6068.HK) HK$253 million, although both companies have similarly low price to earnings (P/E) ratios of 2.7 are 2.56, respectively.

Those lag behind larger peers that use more asset-light models by offering services online and in smaller urban classrooms, rather than operating their own campuses. New Oriental (EDU.US; 9901.HK), whose shares crashed spectacularly in 2021, is back in business with a trailing P/E ratio of 20, while TAL Education (TAL.US) trades at a forward P/E ratio of 26.

Only one analyst polled by Yahoo Finance follows YuHua, but that person rates the company’s stock a “buy.” Even that modest coverage looks relatively encouraging for a class of stocks that were once investor darlings but have fallen off investor radar screens since the education crackdown of 2021.

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China’s leading private provider of education services blamed changing international relations for a slowdown in its business catering to students planning to study abroad

Key Takeaways:

• New Oriental’s revenue from overseas test preparation services grew just 7% in its latest fiscal quarter, down sharply from 21% growth in the previous quarter
• The education company expects revenue from its overseas study consulting business to be flat in its new fiscal year that starts in June, a huge slowdown from previous strong gains

By Doug Young

China’s private education companies learned a difficult lesson four years ago when Beijing wiped out most of their business by banning after-school tutoring services for K-12 students. Now, the group could be learning yet another difficult new lesson as mounting U.S.-China tensions, combined with increasing consumer caution, cast a chill over studying abroad.

That was the loudest message coming through in the latest quarterly report from sector leader New Oriental Education & Technology Group Inc. (EDU.US; 9901.HK), which had been rebounding strongly from the earlier crackdown of 2021. Until now, that is.

After seeing its revenue contract for two straight years following the crackdown, New Oriental finally regained its footing in its fiscal year through May 2024. It reported 43% growth that year on its new mix of overseas test preparation and overseas consulting services, along with domestic test preparation services targeting adults and college students. All of those were still allowed after the crackdown that focused mostly on reducing the pressure on K-12 students in core curriculum areas covered by China’s national college entrance exam.

While New Oriental looks likely to keep its annual revenue growth streak alive in its current fiscal year, which runs through the end of May, it slipped into revenue contraction in the three months to February, the third quarter of its fiscal year. The company’s revenue fell 2% year-on-year during the three-month period to $1.18 billion from $1.21 billion a year ago, according to its latest report released on Wednesday in the U.S.

The company was quick to point out that excluding results from its Hong Kong-listed East Buy (1797.HK) unit, its revenue still grew by 21.2% year-on-year in its latest fiscal quarter to just over $1 billion. East Buy was formerly New Oriental’s online education arm, but shifted to e-commerce after the crackdown. It initially found big success by selling products via livestreaming, often using former teachers as hosts. But that business had its own meltdown last year after a blowup between the company and its star livestreamer, a former English teacher.

While the East Buy brouhaha is relatively old news by now, the sudden shakiness in New Oriental’s overseas-related business is quite new. Many Chinese were already growing uneasy about sending their children to study in the U.S., the most popular study-abroad destination, amid growing stories about students being hassled by immigration officials upon arrival.

Things only grew worse after Donald Trump took office in January and proceeded to deport or try to deport some foreign students who had spoken out for Palestinians during the Gaza conflict in Israel. Trump’s latest threat to ban Harvard from admitting foreign students unless it agrees to a list of his administration’s demands has only made parents in China and other countries even more apprehensive about sending their children to the U.S. to study.

Fallout from the increasingly unwelcoming signals has yet to show up in broader statistics, with a record 1.1 million international students attending U.S. colleges in 2023-2024, according to the Open Doors 2024 Report on International Educational Exchange. But anecdotal stories suggest the number of Chinese applicants to many U.S. schools is dropping dramatically as parents have second thoughts about such a choice. China’s slowing economy is only exacerbating the drop-off as many parents feel less confident about their ability to pay for such an expensive education.

Shifting international relations

All that said, we’ll return to New Oriental and how its latest results reflect the rapidly falling demand for study abroad. While the company’s revenue grew 21.2% in the latest quarter excluding East Buy, that figure represented a slowdown from the 31.3% growth it recorded on the same basis in the previous quarter.

In fact, New Oriental’s overall report showed its growth rapidly slowed in all of its major categories, not just overseas-related ones, reflecting a consumer pullback on such discretionary spending. But the slowdown in overseas-related businesses was the most pronounced.

The company said revenue from its overseas test preparation services business rose 7.1% in the latest quarter, slowing from 21% growth in the previous quarter. The latest 21.4% growth for its overseas study consulting services revenue was also down from 31% growth in the previous quarter.

The company expects revenue from its overseas test preparation services to grow between 5% and 10% in its next fiscal year that begins in June, CFO Stephen Yang said on New Oriental’s earnings call. But he added that revenue from overseas study consulting is expected to be flat for the year, marking a huge slowdown from the strong double-digit growth it previously reported.

“I think the overseas-related businesses, including the overseas test prep and the consulting business, the slowing down is due to the impact of the macro economy situation and the international relations change situation,” Yang said. He added that based on current conditions, the company expects its overseas-related business, which includes both test preparation and study abroad consulting services, to rise between just 5% and 10% in the three months through May, the final quarter of its fiscal year.

One of the company’s other major business areas, domestic test preparation targeting adults and college students, posted 17% revenue growth in the latest quarter, which was also a sharp slowdown from the 34.9% growth in the previous quarter. One of the few bright spots in the report was the company’s new education initiatives, though even that segment’s 34.5% revenue growth for the quarter was down from the 42.6% increase in the previous quarter.

The slowing growth, combined with other margin pressures, left New Oriental with a net profit of $87 million for the latest quarter, flat from a year earlier.

Investors were surprisingly calm about a report that didn’t seem to offer much positive news. The company’s U.S.-listed shares fell 0.7% on Wednesday after the announcement’s release, while its Hong Kong shares rose 1.7% on Thursday. New Oriental’s shares are still a shadow of their former self, down by more than two-thirds from where they traded before the 2021 crackdown. Perhaps investors have gotten used to such bad news and are no longer so worried. And at least in the latest case, it’s always possible that demand for study abroad services could bounce back if and when U.S.-China relations improve.

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The company’s AI-based homework and testing apps and 15.1 million users have helped it to stand out from rivals, though the stock looks expensive after a strong post-IPO rally

Key Takeaways:

• Shares of edtech company Ruanyun jumped up to 80% in their first week of trading, after the company raised $15 million in its Nasdaq IPO
• The maker of homework and testing apps may have saturated its home market in Jiangxi province, and will need to expand nationally to maintain its rapid growth

By Edith Terry

After a chilling crackdown that wiped out dozens of companies overnight, China edtech is suddenly roaring back. While some companies are thriving on adult education and other areas still allowed post-crackdown, others are feasting on government-fueled growing demand from schools for more AI technology and content.

Last December, the country’s education minister declared AI was the “golden key” for the country’s educational system. Squirrel AI, the largest of the AI edtech companies, has raised $180 million and opened 2,000 learning centers across China and plans to open 2,000 more. Its rapid growth has pushed its value above $1 billion, making it an edtech “unicorn.”

A smaller company finding a comfortable spot in the emerging AI edtech space is Ruanyun Edai Technology Inc. (RYET.US) whose shares shot up over 80% in the first week after the company’s April 8 IPO on the Nasdaq, which raised a modest $15 million. The shares have held most of the gains since then, despite recent market volatility, and were up about 50% from their $4 listing price at Wednesday’s close.

Despite its strong debut, Ruanyun looks like a risky bet in many ways. Its cash flow is negative, it has just two major customers, down from a previous three, and its revenue fell sharply in its latest reporting period. The $15 million should help to cover the company’s ongoing losses and negative cash flow, as it searches for a path to sustainability.

Ruanyun specializes in tech for primary and secondary school students, or K-12, which was the focus of the regulatory shift that wiped out an entire industry when the Ministry of Education banned after-school tutoring for profit in 2021. While private companies are banned from directly offering such services to students, they are still allowed to provide products and services to schools and government-owned institutions that provide services to schools, which is what Ruanyun does.

The company’s customers are almost entirely in Jiangxi, an inland, less affluent province with an economy roughly the size of Norway. Co-founders Fu Yan and Zhao Cong are both alumni of Indiana University and veterans of a since-failed New York-based adtech firm, IgnitionOne.

The pair established Ruanyun in 2012, branching into AI databases and paperless testing centers in 2017 and customized homework exercise books in 2020. The company’s most recent revenue and profits aren’t exactly inspiring. Its revenue was flat in its fiscal year through March 2024. But then it suddenly dropped 35% to 4.1 million yuan ($561,000) in the six months to last September, the first half of its fiscal year, from 6.3 million yuan a year earlier, as it blamed a change in its marketing strategy.

Meantime, its net loss widened in the fiscal year through March 2024, but then fell considerably to 680,000 yuan in the six months through last September from 1.5 million yuan a year earlier.

Ruanyun’s two main products are its SmartHomework system and SmartExam platform. SmartHomework relies on a company database with 10 billion data points generated by 15.1 million students from 16,700 schools, 80% in Jiangxi, to provide exercise books customized for each student. The market for such personalized homework books was worth about 80 billion yuan in 2022, according to internal company estimates.

Bigger buyers

After the government crackdown on after-school tutoring, Ruanyun had to start selling its products to schools and other authorized government institutions rather than directly to students. It now supplies those large buyers with its core products, along with AI learning centers, including tablets and printers.

Its SmartExam product covers all 11 subjects in the gaokao, China’s national college entrance exam. Ruanyun also develops test contents and computerized testing centers, facial recognition cameras and hardware designed to keep students from cheating.

Despite its relatively strong positioning, the company’s performance has been somewhat volatile, as reflected by its falling revenue. In 2020, Ruanyun built nine testing centers in Nanchang, Jiangxi’s capital, and 58 more sites from 2020 to 2022. But only one new site was completed between 2022 and March 2024.

In the six months through March 2024, two major customers accounted for a combined 70% of total revenues, down from three major customers that accounted for a combined 80% in the fiscal year through March 2023. That shows that a diversified revenue stream is not one of the company’s strengths, reflecting its reliance on selling to just a handful of large customers in a single province.

In December 2020, Jiangxi Xinhua Distribution Group Co. Ltd made Ruanyun a strategic business partner, providing students in the province with standard subscriptions for the company’s personalized exercise books. But paying users for these fell from 26,900 in the year to March 2023 to 20,200 in the 12 months to March 2024. Still, registered members increased from 14.3 million to 15.1 million over that time, providing an important resource by contributing data for use in the company’s AI database.

Nearly 60% of the company’s revenue in the year through March 2024 came from digitization services, paid by publishers for converting publications to digital format, with the figure growing from $4.5 million in the year to March 2023 to $5.2 million in the next fiscal year.

Platform development revenue for its SmartHomework solution increased by 137% to $3.1 million in its fiscal year through March 2024 from $1.8 million the previous year, due partly to expansion beyond Jiangxi, according to the prospectus.

While Ruanyun’s credentials as an AI company may be somewhat debatable, that may be less important as long as its pedigree helps it expand outside Jiangxi province. One of its biggest selling points lies in its strong ties to an entire province, where its services are integrated within the K-12 education system.

But rival companies may have similar relationships in other provinces, which could put a crimp on Ruanyun’s expansion plans. Such rivals could include Squirrel AI, as well as K-12 tutoring firm Zuoyebang Education Technology, and Tencent-backed Huohua Siwei, all of which are chasing similar customers in the post-crackdown era. In the listed company realm, stalwart New Oriental Education (EDU.US; 9901.HK) recently brought AI expert Dr. Yue Zhuge onto its board, and TAL Education (TAL.US) recently credited its AI learning devices for helping to fuel 62.4% growth in its latest quarterly results.

Following its post-IPO gains, Ruanyun’s shares look a bit expensive with a price-to-sales (P/S) ratio of 33.8, compared to TAL’s 2.92 and New Oriental’s 1.57. That means Ruanyun’s post-IPO rally could be short-lived, unless it can find a way to quickly turbocharge its revenue to bring its ratio down to a more realistic level in line with its much larger peers.

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The adult education company is adding products for seniors to adapt to changing times, and is now also testing out the youth market with a new toy investment

Key Takeaways:

• QuantaSing bought a controlling stake in fantasy toy maker Letsvan, moving it into the fast-growing sector for experiential toys for all ages
• The adult education company’s rising profits and healthy cash flow should help to support the investment

By Edith Terry

Its focus is adult education, but QuantaSing Group Ltd. (QSG.US) was just a child on China’s corporate scene, at 4 years old, when it debuted with a Nasdaq IPO in 2023. Now the young company is marking another milestone in its brief lifetime with an acquisition that will make it the first U.S.-listed company in the hot sector for Chinese pop toy development.

Investors applauded the company’s new toy story, which saw QuantaSing announce in late March that it would acquire a controlling stake in Shenzhen Yiqi Culture Ltd., also called Letsvan, for undisclosed terms. The stock more than doubled in the days after the announcement, and, despite a recent pullback amid recent market volatility, is still about 50% higher than pre-announcement levels.

The investment marks the latest step in QuantaSing’s continuing drive to diversify beyond its core adult education business into other products and offline services, so far primarily for China’s growing number of seniors.

Having targeted a wide swath of the adult market, the company now seems to be setting its sights on Chinese youth, though outside the sensitive education sector. Letsvan is a rising star in China’s world of experiential toys, also known by the initials ACGN, often derived from products like anime, comics, games and novels.

Like QuantaSing, Letsvan is a relatively young company, with a portfolio built around trending toy IPs including fuzzy animal doll Wakuku and Youli Ziyuli, a cute girl doll. The latter is a key product for Miniso (MNSO.US; 9896.HK), one of China’s largest retailers that is also trying its hand at pop toys to tap into the ACGN boom.

QuantaSing’s entry to the market brings it potentially into direct competition with Miniso, as well as Pop Mart International (9992.HK), whose success with pop toys has lit a fire under its stock, sending it up more than fivefold over the last year.

QuantaSing founder and Chairman Li Peng said the Letsvan purchase “reflects our strategic approach to deploying our abundant cash reserves to capture structural opportunities in the consumer sector.” QuantaSing said it will integrate its leadership team with Letsvan’s to implement a strategy that integrates online and offline retail experiences.

QuantaSing’s core online learning business is part of a large but declining market in China, worth a forecast $40.43 billion this year but contracting by 0.89% annually, according to data aggregator Statista. By comparison, China’s character toy market was worth a much smaller 40.3 billion yuan ($5.5 billion) in 2023. But unlike education, the character toy market is expected to grow at a rapid 17.8% annual clip to reach 91.1 billion yuan by 2028, according to market research firm Frost & Sullivan.

Soochow Securities said in a recent report the surging popularity of these goods reflects a “lipstick effect” as consumers turn to cheaper, mood-boosting products. Senior citizens have bought into the fad as well, with sales of elder-oriented toys jumping 124% on the popular Taobao and Tmall e-commerce platforms.

Tapping the ‘silver economy’

QuantaSing has been edging into the “silver economy” boom with related products and offline services since last year, trying to diversify beyond the online courses in financial literacy and other adult topics that still make up over 80% of its revenues. Last August, it declared a new strategic vision of enhancing quality of life for seniors by offering everything from wellness programs and nutritional guidance to technology-assisted healthcare.

By pursuing that group, the company is looking to tap a fast-growing segment of 310 million people in China aged 60 and above, or 22% of the population, according to China’s Ministry of Civil Affairs. That demographic is expected to rise by another 10 million by 2035, accounting for 9% of China’s GDP by that time.

With Letsvan, QuantaSing has gained a stake in the youth culture not only for China, but also in Southeast Asia, where Letsvan has participated in offline trendy toy exhibitions in Thailand, Vietnam and other locations, according to Chinese media. Letsvan distributes through Miniso and Miniso’s Top Toy sub-brand of stores, and sells online through Tmall and ByteDance’s Douyin, the Chinese version of TikTok.

Letsvan is also active in tie-ups with other non-toy companies, collaborating with brands like Hong Kong handbag maker Fion, tea brand Ningji and Tencent’s QQ Music streaming service. “Joining QuantaSing opens tremendous growth opportunities for Letsvan,” said Letsvan CEO Zhan Huiyu. “By combining our IP advantages with QuantaSing’s operational capabilities and entrepreneurial spirit, we aim to become a leading player in the pop toys industry.”

A look at QuantaSing’s latest financial report, released just weeks before the Letsvan announcement, shows why the company is so excited about the new investment. The company’s revenue in three months to December declined by 25.9% year over year to 726.6 million yuan, with individual online learning services generating a big majority of that at 601.3 million yuan, down by an even larger 32% from 873.6 million yuan a year earlier.

On a more positive note, QuantaSing’s net income and total registered users for the quarter both showed gains of 20% or more year-on-year. The company’s cash and short-term investments rose to 1.2 billion yuan at the end of December from 1 billion yuan six months earlier, providing it with plenty of ammunition to acquire new assets like Letsvan.

“Our … financial performance represents our disciplined approach to business transformation,” said CFO Xie Dong on the company’s latest earnings call. “We have the flexibility to carefully evaluate strategic opportunities as we navigate this transitional phase.” 

Also on the call, CEO Li said QuantaSing was shifting from traffic-driven growth to high-quality growth, with “remarkable” results from its online calligraphy project for senior learners. Still in its early stages, QuantaSing is also testing an offline service strategy with Beijing Nursing Home and is developing a membership system as part of its travel study programs.

“By diversifying our revenue streams across different business lines, we’re positioning ourselves to navigate market uncertainties and cyclical challenges,” Li said. “This diversification strategy helps us reduce risks in any single business area and builds a more resilient business in today’s fast changing environment”.

QuantaSing’s stock currently trades at a price-to-sales ratio of 0.46, less than half the 1.05 of domestic peer Youdao (DAO.US) and 1.40 for global competitor Coursera (COUR.US). It may hope that the Letsvan deal will take it more into the zone of Miniso’s far higher P/S ratio of 2.16, or Pop Mart’s meteoric 12.74. Time will tell, but it certainly seems that QuantaSing is doing everything it can to adapt to changing times.

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Among the hardest hit in China’s regulatory crackdown in 2021, the educator is staging a comeback that will see it return to profitability in the current quarter

Key Takeaways:

• Gaotu’s revenue rose 53.8% last year, including accelerating gains throughout the year that culminated with 82.5% growth in the fourth quarter
• The educator’s operating loss narrowed 20.6% for the year despite a steep increase in operating expenses, as it forecast a return to net profitability in the current quarter

By Edith Terry

If at first you don’t succeed, then at least you can learn from your mistakes. Gaotu Techedu Inc. (GOTU.US) has taken that message to heart, reporting fourth quarter and full-year results that show it’s well on the road to recovery as it and other key players in China’s edtech sector build new AI-based product portfolios that are getting a warm government reception.

Gaotu’s latest report, released last week, showed its revenue rose 53.8% to 4.5 billion yuan ($627 million) last year from 2.9 billion yuan in 2023. Its growth accelerated throughout the year, rising from 33.9% in the first quarter to a turbocharged 82.5% in the fourth.

The company has been losing money since the third quarter of 2023, and it continued that trend with a 135.8 million yuan loss in last year’s fourth quarter that was up 13.5% year-on-year. But its operating loss in the latest quarter trended better, narrowing 20.6% to 149.2 million yuan.

CFO Shen Nan said that trail of red ink was set to end soon, forecasting on the company’s earnings call that Gaotu would return to profitability in the current quarter while maintaining “fast revenue growth momentum.” A big reason for the year and a half of losses appears to be ramped up marketing spending for its new products, as well as hiring of more teachers, which we’ll describe in more detail below.

Gaotu’s American depository shares (ADS) leapt 31% the day of the report’s release and continued to rise after that, up 45% through Wednesday. But even after that rally, it still trades at a price to sales (P/S) ratio of just 1.4, similar to the 1.58 for New Oriental Education (9901.HK; EDU.US) and 1.35 for Youdao (DAO.US). Those numbers show investors have yet to fully re-embrace the sector following a brutal regulatory crackdown dating back to 2021.

Nine analysts canvassed by Yahoo Finance also have mixed views on the company, though the overall outlook is positive. Six give it a “strong buy” or “buy,” while two rate it a “hold” and one rates it an “underperform.” The group sees Gaotu’s revenue continuing to grow this year, though at a slower rate of about 30%.

The company forecast revenue growth of about 50% in this year’s first quarter to between 1.41 billion yuan and 1.43 billion yuan.

The crackdown that nearly crushed Gaotu and its peers did so by banning for-profit tutoring in core primary and secondary school subjects. It also crushed their stocks, with Gaotu’s crashing from more than $100 to $2.50 in just six months, wiping out both billions of dollars in market value and thousands of jobs industrywide.

The tutoring industry has quietly begun to grow again, even without any formal change in government policy, by shifting to other subject areas not included in the ban. In August, China’s State Council included education services in a 20-point plan to boost consumption, as part of efforts to address China’s economic slowdown, leading to a boost in shares of listed education companies.

While many companies folded in the crackdown, the survivors have re-invented themselves by focusing on areas that are still allowed, such as vocational training, study abroad and providing instructional materials to accredited schools.

Comeback kid

Gaotu is one of the edtech comeback kids as it slowly rebuilds its business. Its student enrollment hit a record high in 2024, according to Shen, and its revenue reached 1.39 billion yuan in the fourth quarter, up from 946.9 million yuan in the first quarter. Its gross billings, a metric that is a signpost for future earnings, totaled 2.16 billion yuan for the fourth quarter alone, up 69% year-on-year, and equal to nearly 40% of the year’s total of 5.6 billion yuan.

Gaotu and its peers have all been rushing to incorporate AI into their products and are eagerly adopting homegrown DeepSeek. Founder and Chairman Chen Xiangdong said AI is already embedded into “basically all aspects of our operations,” including to automatically generate educational content such as exercises, course outlines and video lectures.

The main spoiler to an otherwise upbeat report was the company’s 52.2% increase in operating expenses in the fourth quarter to just over 1 billion yuan. On an annual basis, operating expenses were up by an even bigger 84.5% to 4.2 billion yuan. Selling expenses for the year nearly doubled to 2.9 billion, equaling 65% of revenues, as the company aggressively marketed its new businesses post-crackdown.

But the increase in operating expenses also tells a positive story. Like its peers, Gaotu has been back in hiring mode after steep job cuts during the crackdown. The fastest-growing component of its operating expenses was its general and administrative expenses, which rose 87.6% for the year. CFO Shen attributed the jump to “proactive talent acquisition efforts to support the expansion of our product portfolio, including onboarding industry professionals with extensive experience and strong management capabilities.”

Shen noted that Gaotu’s cash position stood at 4.1 billion yuan by the end of last year, up by 184 million yuan compared to the end of 2023. Chairman Chen also pointed out the company was cash flow positive in the fourth quarter, providing “a solid foundation for future strategic plans and long-term sustainable growth.”

Like its peers, Gaotu has become a very different company since 2021, when its focus was on after-school tutoring for primary and secondary school students. While learning services still account for most of its revenue, 85% of that came from non-academic tutoring and “traditional learning” services in the fourth quarter. The company’s current courses range from test preparation for study abroad to training for job hunting.

“This year, we successfully helped students gain admission to Harvard, Columbia, Cornell and other Ivy League schools and other prestigious international universities,” Shen said. “By introducing new products and diverse interactive course formats, we are constantly igniting students’ interest in learning, fostering cognitive growth, improving practical skills, cultivating critical thinking and instilling lifelong learning abilities.”

Another 15% of learning services revenue during the fourth quarter came from educational services for college students and adults, Shen said. She added that gross billings for the segment grew by high double-digits, with the segment achieving profitability on an annual basis and generating operating cash flow that was 3.5 times the previous year. “This marks a major milestone in our path towards more sustainable operations,” Shen said.

The bottom line seems to show that Gaotu has learned its lesson, successfully undergoing a brutal transition. More good news may also lie ahead for its stock if the company meets its target of returning to the black this year.

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The education company’s marketing services revenue flatlined in the final quarter of last year, following strong double-digit gains in the first three quarters

Key Takeaways:

• Youdao’s revenue began contracting in the fourth quarter, falling 9.5% year-on-year, as its fast-growing marketing services suddenly flatlined
• The company aims to revive growth in its market services via an enhanced partnership with parent NetEase and more global sales, as its older education business shrinks

By Doug Young

Education may be valuable, but advertising is even more so.

That’s the big lesson learned over the last two years by Youdao Inc. (DAO.US), the education arm of gaming giant NetEase (NTES.US: 9999.HK), whose latest quarterly results show how marketing services could soon become the company’s main breadwinner.

Among other things, the results showed Youdao posted its first-ever annual profit, ending years of losses since its New York listing six years ago. But that milestone was overshadowed by a few more worrisome signals, led by a sharp slowdown in the company’s marketing services that were previously a fast-rising star. That came as Youdao’s original core learning services also continued to show steep declines, causing its overall revenue to start contracting.

The company tried to ease concerns with discussion of a couple of new initiatives to jumpstart the marketing services business, which we’ll detail shortly. Like many other Chinese tech companies, it also talked copiously about AI, noting it had already incorporated DeepSeek into many of its products.

“We are launching our AI Native strategy integrating AI more comprehensively across our business lines by, for example, automating our advertising platforms and introducing AI-driven tutoring for our course customers,” noted Youdao CEO Zhou Feng on Youdao’s earnings call, which included more than 30 references to AI by various company officials.

Despite its words of reassurance on reviving marketing services and greater use of AI, investors weren’t convinced. Youdao’s shares fell 6.8% in the two trading days since the results were announced last Friday.

Here, we should point out that this sell-off comes after a remarkable run-up that saw Youdao’s shares nearly triple over the last six months, including a 40% jump this year alone. At its latest close of $9.68, the shares now trade at a four-year high, lifted by both the company’s own relatively strong performance and a broader wave of bullishness towards overseas-listed Chinese stocks.

Against that backdrop, the latest two-day sell-off looks a bit like profit taking, and the next few weeks will provide a better picture of whether its rally can continue. Even at the latest levels, the stock still trades 43% below its IPO price of $17 during headier days for Chinese stocks when the company first listed in 2019.

That said, we’ll take a deeper dive into Youdao’s latest results to see what’s happening inside this company that’s part of NetEase, one of China’s earliest internet companies that has also become one of its most successful gaming operators. Online learning was Youdao’s original main breadwinner, but it has been scaling back that part of the business following a government crackdown that outlawed after-school tutoring services in core curriculum areas for K-12 students in 2021 and 2022.

The company’s marketing services division was picking up most of the slack for its falling education business to keep overall revenue rising in the first three quarters of last year, though the growth rate was slowing throughout the year. That growth spurt ended in the fourth quarter, however, when Youdao’s overall revenue fell by 9.5% to 1.3 billion yuan ($179 million) from 1.5 billion yuan in the same quarter a year earlier.

Marketing services flatline

Within the company’s broader revenue pie, learning services fell 21.2% to 618 million yuan, accounting for 48% of total revenue. That part of the business accounted for about two-thirds of the company’s revenue as recently as 2022, but has been shrinking rapidly since then and fell to less than half in last year’s second quarter.

“Since the summer we have proactively focused on courses and services with strong demand and maintained a rational approach to customer acquisition,” said CEO Zhou, explaining the reasons behind the rapid declines. “This strategy has enhanced our overall health.”

Such a shift looked acceptable when the company’s marketing services were posting strong growth, including a 46% year-on-year rise in the third quarter and a doubling in the first half of last year. The shift to advertising services also looked like a shrewd move strategically since such services are far less likely to fall victim to future government crackdowns than the far more sensitive education sector.

But Youdao’s marketing services revenue suddenly flatlined in last year’s fourth quarter, rising just slightly to 482 million yuan from 474 million yuan a year earlier, accounting for 37% of total revenue in the latest quarter. The company didn’t provide a detailed explanation for the slowdown, though we should note that overall advertising spending has been sluggish in China lately due to the uncertain business climate.

Instead, Youdao executives focused on a couple of new initiatives that they hope will jumpstart growth in that part of its business. The one with the most near-term potential will probably come from an enhanced relationship with NetEase offering more services across its parent’s large array of internet assets, including not only games but also music and its popular email service. To do that, Youdao and NetEase formed a formal marketing services partnership last year. That relationship now accounts for less than 10% of its advertising revenue, and CEO Zhou said “we expect this to grow considerably in 2025.”

The other initiative comes from expanding its marketing services outside China. The company has been doing that through a relationship with TikTok and recently signed a new deal with Google to further that effort. Youdao President Jin Lei noted that international advertising revenue more than doubled last year to about 100 million yuan, accounting for more than one-fifth of the marketing services total.

In valuation terms, Youdao trades at a price-to-sales (P/S) ratio of 1.57, which looks relatively low compared to some of its peers. The much larger New Oriental (EDU.US; 9901.HK) trades higher with a P/S ratio of 1.8, and TAL Education (TAL.US) is even stronger with a ratio of 4.28. That suggests Youdao’s stock could still have some upside potential even after the recent big run-up. But first it will need to quickly halt its revenue declines by jump-starting its marketing services.

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The provider of civil service exam preparation services is just one of many Chinese edtech companies rushing to incorporate DeekSeek into their products

Key Takeaways:

• Fenbi fell into the red in the second half of last year, as its revenue fell 15% during the six-month period
• The edtech company was profitable for all 2024 thanks to a strong first half, but its annual revenue fell 8.3% as competitors cut into its market share

By Edith Terry

Chalk it up to growing competition among edtech companies racing to see who can make the greatest use of artificial intelligence (AI) to attract the legions of young Chinese eager to work in China’s “iron rice bowl” civil service in an uncertain job market.

Fenbi Ltd. (2469.HK) – an online vocational education company whose name means “chalk” – on Feb. 14 admitted its revenue slipped by up to 8.3% last year to 2.77 billion yuan ($380 million), citing intensified competition in its space catering to takers of China’s civil service exams. That niche has become especially hot lately, as 80 candidates vie for each opening in the current weak job market.

But Fenbi isn’t the only one chasing that group, with others piling in after the country’s recent crackdown on after-school tutoring services that overnight wiped out many companies’ main business, forcing them to look for quick substitutes. Many of those are now rushing to use AI tools in their offerings – a trend that is already accelerating after the January launch of Chinese startup DeepSeek’s free AI assistant.

The news in Fenbi’s profit warning wasn’t all bad. Its expected net profit of at least 225 million yuan represented a 19.3% increase from 2023, thanks to a decrease in employee expenses. Even so, investors bid down Fenbi’s shares by 10% over the next few days.

They might have been worried that the company slipped into the red in the second half of the year with a loss of 52.7 million yuan, reversing a 107 million yuan profit a year earlier. Fenbi managed to break even on an adjusted earnings basis in the final six months of 2024, which excludes stock-based compensation. But even that was also down from a 157 million yuan adjusted profit in the second half of 2023. And its revenue fell by 14.9% year-on-year to 1.14 billion yuan in the final six months of last year, accelerating from a 3% decline in the first half of the year.

The weak second-half results put a damper on a string of better news last year, starting with the company’s June 11 announcement that it had launched one of the first significant AI tools in the exam prep sector, called AI Intelligent Teacher. That was followed by a positive profit alert on July 25, when the company attributed a 240% jump in its profit during the first half of 2024 to its long-term investment in technology and utilization of AI and other online technologies in its tutoring and course products.

Fenbi introduced two new AI products in the second half of last year. But it was hardly alone in its embrace of AI. Its chief rival in civil service exam preparations, Offcn Education (002607.SZ), actually beat Fenbi by developing an AI educational tool in 2023, in collaboration with Puyang Petrochemical Vocational and Technical College, even though it has lagged behind Fenbi in terms of product development.

DeepSeek gold rush

Offcn turned up the heat in the competition this year when it announced a plan to deploy its own DeepSeek series. Rival edtech firms TAL Education (TAL.US) and Youdao (DAO.US) announced similar DeepSeek-based education tools this month. Fenbi was hardly absent from the DeepSeek scramble, announcing it had already “fully embraced” the DeepSeek large language model and would release its own large language model “reconstructing the civil service training ecosystem,” resulting in “exponential improvement in operational efficiency.”

Behind the hype for attention is China’s highly insecure job market, which has turned the annual central government and provincial civil service exams into a field of dreams for recent graduates. More than 3.2 million people qualified to take the test last Nov. 30 to Dec. 1, competing for just 39,700 jobs. The most popular job, for an entry-level staff member at a vocational education association, attracted a whopping 10,665 applicants, according to Huatu Education, citing official data.

The latest overall ratio of 80 applicants for each available job was up from 77 applicants per job in 2023. China’s jobless rate has soared as the economy slowed post-pandemic, with people from ages 16-24 facing 17.6% unemployment, according to China’s National Bureau of Statistics last September. Some estimate the figure could be even higher.

Training applicants for the civil service exams is Fenbi’s core business. Its small-class tutoring sessions, conducted both online and offline, charge over 7,000 yuan for classes of 30 to 60 students over 30 to 120 days. Such classes generated revenue of just over 1 billion yuan, or 63% of the company’s total, in the first six months of last year.

Fenbi’s cash generated from operations fell sharply to 219.6 million yuan in the first half of last year from 370.3 million yuan a year earlier as its revenue began to fall amid intensifying competition, according to its interim report released last August. As its finances weakened, it reduced its headcount of full-time instructors to 3,145 by the middle of last year from 3,536 a year earlier.

Fenbi was one of the first to focus on tutoring support for the civil service exams in 2015, when it was part of the entrepreneurial team at Yuan Inc., once considered an edtech unicorn and creator of the online tutoring app Yuanfudao. Fenbi’s Hong Kong IPO in January 2023 was the first edtech IPO since the regulatory crackdown on K-12 tutoring in 2021, raising HK$198 million ($25.5 million) and giving it a market cap of HK$20 billion.

But the company has been losing its mojo since then as others flocked to its niche after the crackdown. The stock has lost more than 70% of its value since the IPO, taking its market value down to just HK$6.2 billion. Its price-to-sales (P/S) ratio of 2.02 is half of TAL Education’s 4.29 and less than a quarter of Offcn’s 9.76, though it’s ahead of Youdao’s 1.65.

Fenbi only became profitable in 2023, reporting a profit of 188.5 million yuan on revenue of $3 billion that year. While the company remained profitable for all 2024, the drop back into the red in the second half of the year is hardly a good sign. Things could get worse as newcomers turn up the pressure in the civil service exam preparation niche, where rival products could start to look increasingly similar with their growing use of DeepSeek and other AI tools.

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The livestreaming e-commerce company’s revenue declined and it fell into the red in the first half of its fiscal year after the departure of its key online salesman Dong Yuhui

Key Takeaways:

• East Buy’s revenue fell over 20% in the six months to November and it swung into the red following the departure of its star online salesman
• Shares of the company’s parent, New Oriental, dropped 23% last week, weighed down by East Buy’s results and softness in its core education market

By Edith Terry

Who knew a migrant-worker-turned-English-teacher-turned-Internet-salesman could do so much harm? When Dong Yuhui left East Buy Holding Ltd. (1797.HK) last July, it seemed like a healthy move. The company’s livestreaming super salesman had sowed chaos at his employer by inflaming his followers against East Buy’s then-CEO Sun Dongxu, who was ultimately fired as a result. In the end, the two sides parted ways after East Buy agreed to pay a substantial sum to Dong and let him leave with his popular show “Time with Yuhui.”

The divorce was painful for East Buy in the huge volume of negative headlines, and the company’s latest financial report released last week shows it was equally painful on its finances. East Buy’s revenue fell 21.8% to 2.2 billion yuan ($303.7 million) in the first half of its fiscal year through last November, while it fell into the red with a loss of 96.8 million yuan.

The revenue decline was a bit milder, down 9.3%, after excluding discontinued operations from East Buy’s former education business in the year-ago period. Still, the decline was a painful reminder of Dong’s departure, since East Buy’s revenue jumped 34% and the company was quite profitable just a year earlier in the six months to November 2023.

Gross merchandise value (GMV) sold over the company’s channels declined from 5.7 billion yuan a year ago to 4.8 billion yuan in the latest six-month period, and the number of paid orders on Douyin, China’s equivalent of TikTok and one of East Buy’s most important platforms, declined from 59.6 million to 50.1 million in the latest six-month period.

One bright spot in the otherwise dismal report was paid memberships on East Buy’s app, which nearly doubled from 123,800 in the six months to November 2023 to 228,300 in the latest reporting period.

While Dong’s departure was well known, making big headlines at the time, investors still reacted negatively after the seeing the latest report. In the three trading days after the announcement, East Buy’s shares dropped about 4%, bringing its declines over the last year to 30%. Its parent, education company New Oriental (EDU.US; 9901.HK), was doing even worse after it released its own latest financial report on the same day as East Buy’s.

To make the point that it would have performed better without East Buy, New Oriental presented its latest results both with and without East Buy’s. With the East Buy business included, its revenues increased by 19.4% to $1.04 billion; but without East Buy, revenue rose 31.3% to $894 million.

Though its results were far better than its e-commerce offspring’s, New Oriental’s shares tumbled 23% the day of its announcement and have remained at that level since then.

Macquarie slashed its outlook on New Oriental from “outperform” to “underperform” and reduced its price target by a hefty 44% to HK$34.30, based in part on softer projections for its education business and overseas revenue. JPMorgan downgraded the company’s shares from “overweight” to “neutral” while CLSA lowered its revenue and earnings forecasts for the fiscal year but maintained an “outperform” rating.

Education concerns

The big concerns at New Oriental were largely over softness for the company’s core education business. By comparison, concerns were less pronounced at East Buy, whose loss of Dong was a one-time event and whose e-commerce business looked more stable in the current environment.

CICC actually raised its price target for East Buy by 74% to HK$20 after the latest financial report’s release and said it was optimistic about the company’s prospects. Huatai Securities raised its target price by 48% to HK$17.41 and said it saw a “steady trend of quarterly recovery.” Six out of 12 analysts canvassed by Yahoo Finance now rate East Buy a “buy”, though the rest are still cautious on the stock.

While East Buy’s business appears to have stabilized, lingering market jitters still come from last year’s tussle with Dong Yuhui, which spotlighted the dangers of too much reliance on key influencers in the internet age. A former English teacher, Dong rose to fame in 2022 for quoting poetry and using his English-language skills to sell products in his online shows. His influence grew so much that after Dong got in a spat with East Buy’s CEO, the company fired the CEO in a bid to placate its celebrity salesman.

In July last year, Dong left the company after reaching an agreement to acquire his popular program for 76.6 million yuan.

New Oriental Chairman Yu Minhong was quoted in a statement saying he would “make arrangements” for a payment to Dong of undistributed profits from his show as part of the package that would essentially give him his livestreaming program for free, though without East Buy’s logistics and supply chain support. The result on East Buy’s financial report was an 180.7% year-on-year surge in administrative costs to 391.9 million yuan in the six months to last November from the year-ago period, the company said in its latest earnings report.

East Buy had ample liquidity to cover the payments to Dong. It had 1.7 billion yuan in cash at the end of last November, down from 2.3 billion yuan six months earlier before the settlement. It also had 1.4 billion yuan in term deposits and financial assets of 1.7 billion yuan as of Nov. 30, showing its financial position looks quite solid as it heads into a future without its former cash cow.

Meantime, Dong seems to be doing just fine without his former employer. He was first on the 2024 China Internet Anchor Net Income ranking with a net income of 2.8 billion yuan, beating other big-name influencers like Li Jiaqi and Crazy Little Yang by nearly 1 billion yuan.

In the year to January 2025, “Time with Yuhui” sold over 10.2 billion yuan worth of merchandise on Douyin, equal to 20% of the GMV of Dong’s former employer, according to statistics from Xindou, a Douyin data tool. Dong had 27.32 million followers as of January 2025, compared to 29.03 million for East Buy’s channel on Douyin.

In October 2024, Dong said that his company had a staff of 300, far fewer than East Buy’s 1,733, and he was no longer simply a solo operation. How long Dong can sustain his momentum is an open question, though complaints have already surfaced about product fraud and food safety issues in his operations. But such questions, and other issues involving a superstar internet host with a big ego, are no longer any concern for East Buy.

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The edtech company’s shares have performed well since their Nasdaq debut last month, helped by its new venture outside the fickle China market

Key Takeaways:

• Shares of NetClass have climbed by 11% in the two weeks since the company raised $9 million in its Nasdaq IPO
• The Shanghai-based provider of smart classroom software is getting a revenue boost from its global operation run from a second headquarters in Hong Kong

By Edith Terry

A strong 11.4% rise for shares of NetClass Technology Inc. (NTCL.US) in the two weeks since their Dec. 13 Nasdaq trading debut may have surprised some, given the relatively weak sentiment towards other Chinese edtech stocks these days. NetClass raised a modest $9 million in the listing after selling its IPO shares for $5 each, representing the middle of their range. But the stock has trended up nearly every day since, pushing the company’s market cap past the psychologically significant $100 million milestone at its latest close of $5.85.

So, what’s NetClass’ secret? It may be the company’s decision to build a business abroad, starting in Hong Kong and possibly beyond. The background to this story is the well-worn narrative of China’s destruction of a thriving after-school tutoring industry in 2021, when government regulators decided that such services were stressing kids out and shut most of the industry down.

NetClass also took a hit from the crackdown, but not the way you might think.

The company has two revenue streams, both selling products to business customers. One comes from selling subscriptions for its software as a service (SaaS) products, and the other from developing education-related applications. NetClass claims to be one of China’s leading online education brands, with modules for services including teaching management, campus management, online teaching, online exams, epidemic prevention, education credit blockchain systems and lecturer evaluation services.

It began preparing to list as early as 2022 when China’s strict pandemic controls were still in effect and online education was widespread. But it didn’t complete the IPO that year, and stated a fundraising target of $17 million in an updated application in 2023. It lowered that fundraising target to just $9.9 million in yet another update in March last year, back when sentiment towards China stocks was still weak.

But its business in its core China market was deteriorating even as preparations began for its most recent listing attempt. In the six months through March 2024, the first half of its fiscal year, revenue increased by 15.6% to $3.8 million, slowing from 19.8% growth from its fiscal year through September 2023, according to its prospectus. What’s more, its loss in the six months to March last year nearly tripled to $2 million from $723,000 a year earlier.

The company was profitable in its fiscal year through September 2023, with net income up by 22.3% year-on-year to $162,229. But signs of trouble were already showing in its gross profit, which declined by 22.4% to $2.3 million over that period.

While China’s edtech sector never fully disappeared after the 2021 crackdown and has come back since then, it is very different from its peak in 2020, when $10.5 billion in venture capital poured into the sector. NetClass demonstrates some of the current challenges.

Government grant boost

During the pandemic, the sector was buoyed in part by government grants for remote learning. According to a yearly report on the industry by NetEase, the domestic online educational services market in 2023 grew 14.17% year-on-year to 413.3 billion yuan ($56.62 billion), continuing a rebound from a low of 322 billion yuan in the crackdown year of 2021.

NetClass, like other companies, came to depend on those grants. “In prior years, customers benefited from certain government grants during the Covid outbreak for remote learnings,” NetClass said in its prospectus. “Since the related government incentive policy stopped after Covid in fiscal year 2023, some of these customers switched to training packages with lower fees after the expiration of the original service contracts or stopped services. This was not anticipated in our original plan for developing SaaS subscription services.”

As customers defected to cheaper products with the end of government assistance, revenue from NetClass’s SaaS subscription services nosedived by more than half from $5.9 million in the fiscal year through September 2022 to $2.8 million in the next fiscal year. The decline appears to be a one-time phenomenon. But even so, subscription services were flat in the six months to March last year, up just 1.8% over the same period a year earlier.

Meanwhile, revenues for application solutions, which are one-time and project based, increased by 145.9%, from $3.4 million in the fiscal year to September 2022 to $8.3 million a year later. In the six months to March 2024, application development services continued to rise by another 24.8% year-on-year to $2.4 million, helping to offset the weakness in SaaS subscriptions.

While the shifting business mix may be relatively radical, it appears to be saving NetClass from falling into revenue stagnation or even contraction.

The big jump in application solutions revenue comes from a bold decision in 2023 to set up a second headquarters in Hong Kong. As part of the move, it spent $2 million in October 2023 on a third-party AI developer of large language models (LLM) for English language learning. As it built up that part of the business, NetClass’ R&D expenses ballooned to $2.2 million in the six months through March last year from just $310,730 a year earlier. But the international business has quickly gained traction, providing more than half of the company’s revenue in the first half of its fiscal year through March 2024.

“As Hong Kong is a bridge between Mainland China and overseas, the company focuses on Hong Kong and effectively expands its application development business, including data storage and computing equipment, and technical services,” the prospectus says. “Furthermore, the company hopes to expand its market in Southeast Asia in the future.”

Despite the relatively warm welcome for NetClass on Wall Street, investors have yet to warm up again to China’s broader edtech sector after many were burned in the earlier crackdown.

Corporate learning business YXT.com (YXT.US) raised $25 million from its Nasdaq IPO in August, but its shares have dropped nearly 80% since then. And shares of Gaotu Techedu (GOTU.US) fell by 40% last year, despite its reinvention as a lifelong learning edtech company. Shares of sector pioneer New Oriental Education (EDU.US; 9901.HK) also fell 12.4% last year, while TAL Education (TAL.US) lost over 20% despite strong revenue growth.

NetClass’ strong debut has given it a price to sales (P/S) ratio of nearly 9, which seems to show the market thinks it is doing something right with its global diversification strategy. New Oriental and TAL trade much lower with a P/S ratios of 2.3 and 3.3, respectively.

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The digital education company’s business is subject to seasonal factors, causing its revenue to be stronger in the second half of the year than the first half

Key Takeaways:

• Shanghai Able Digital Science has updated its Hong Kong IPO application, showing it focuses on the higher education services market, with Baidu among its backers
• The edutech company’s knowledge graph business is growing strongly by drawing on AI, but its loss widened in the first half of this year

By Bai Xinrui

The end of year is always busy for IPOs, and this year has been especially strong for new Hong Kong listings. Shanghai Able Digital Science & Tech Co. Ltd., a provider of information services for higher education institutions, is hoping to jump on that listing train, recently filing an updated application for its planned Hong Kong IPO. 

Founded in 2008 by Wang Hui and wife Ge Xin, Shanghai Able launched its Zhihuishu brand in 2013. Since then it has attracted the likes of Sina and Baidu (BIDU.US; 9988.HK) as investors in 2016 and 2020, respectively. Its service and support centers numbered more than 100 in 2017. Its latest listing document shows Wang and Ge were its biggest shareholders with a collective 38.44% of the company. Sina is next with 17.9%, followed by Baidu with about 10%.

Shanghai Able engages in higher education informatization services, which refers to using technology for educational activities through the informatization of education content, methodologies, resources and evaluations. Third-party market data in the listing document shows China’s education informatization market grew 10.4% annually between 2019 and last year, when it reached 114 billion yuan ($15.7 billion). The market is expected grow at a slower 7.9% annually in the five years after that to reach 166.5 billion yuan by 2028.

Rising revenue per customer  

Shanghai Able has developed more than 33,000 digital courses, and its products and services spanned 12 disciplines and 92 subjects recognized by China’s Ministry of Education. It is the top-ranked company in China’s higher education teaching and learning digitalization market in terms of revenue.

The company’s business consists of two parts, digital education content products and services, and digital teaching and learning environment products and services. The company had 1,422 customers in 2023. But more impressive was its average revenue per customer, which rose 34.7% year-on-year to 459,200 yuan. Digital education content products and services were the company’s biggest breadwinner, accounting for 87.1% of its revenue in the first half of 2024.

The company’s digital education products and services business caters to higher-education institutions and converts traditional teaching material into digital forms starting with online course development. With an aim of providing more interactive, engaging and personalized learning experiences for students, the company offers products and services such as digital courses, knowledge graphs and virtual simulation courses.

The company typically requires customers to pay a certain percentage of the total contractual amount up front as prepayment, with the outstanding balance due upon delivery, inspection and acceptance of services and products. Digital courses are typically priced anywhere from 10,000 yuan to 100,000 yuan each.

As the application of AI becomes more widespread, the digitalized education market is also embracing such technology. Shanghai Able is using AI technologies in its knowledge graph business to meet different customer needs by delivering software over the cloud or using offline channels, especially in core subjects of engineering and medical education. AI has been particularly useful in the company’s knowledge graph business, whose revenue grew an impressive 7.7 times in the first half of 2024.

The second pillar of its business is digital teaching and learning environment products and services, accounting for 12.8% of revenue. Product offerings in this area include cloud-based learning management system (LMS) and digital classrooms. Cloud-based LMS allows customers to use personal computers or mobile apps to manage or construct simple and interactive teaching processes based on specific application scenarios. The company typically charges based on the number of function modules subscribed to, with subscription fees ranging from 50,000 yuan to 200,000 yuan per year.

Annual profits in sight

As a participant in the highly cyclical educational industry, Shanghai Able’s financial results are also highly variable based on the time of year. The higher education institutions that are its main customers typically finalize their annual procurement schedules and budgets in the first quarter of each year. They usually only make small pre-payments at that time, with the balance typically paid in the second half as products and services are delivered. Thus, the first half of the year is typically a lighter revenue period for the company.

Seasonal factors aside, falling government subsidies have also weighed on the company’s growth in revenue from other sources. At the same time, its distribution and sales expenses increased 32.9% to 104 million yuan in the first half of the year, while its revenue only grew 18% to 241 million yuan. The bottom line was that Shanghai Able not only landed in the red in the first six months of 2024, but its loss widened 80% year-on-year to 109 million yuan.

The pattern was similar in 2023, with the company losing money in the first half of the year, but turning a profit for the whole year after logging more revenue in the second half. Accordingly, the company could still log a profit for all of this year if the previous pattern holds.

Broadly speaking, Shanghai Able is in a high-growth sector, which should technically be attractive to potential investors. But sentiment in Hong Kong is not particularly strong towards new tech listings right now. A case in point is Dmall (2586.HK), a provider of software services for retailers, whose stock tanked 54.3% on its first trading day earlier this month.

Investors also seem relatively lukewarm on the education sector in general these days, with the average stock trading at a forward price-to-earnings (P/E) ratio below 20 times. In such a tepid climate for edutech, Shanghai Able may be wise not to set its IPO valuation sights too high, lest it repeat Dmall’s disastrous trading debut.

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The provider of vocational training has posted solid half-year earnings and is focusing on training for the automotive and IT industries

Key Takeaways:

• The number of new students enrolled at China East Education fell 7.7% in the first half of 2024, as the company put a bigger emphasis on high-value recruitment
• Demand for places on vocational courses is expected to rise in line with a growing market for blue-collar workers and higher salaries for some skilled jobs

By Molly Wen

Struggling to find a job in a weak economy, many Chinese graduates are having to roll up their sleeves and retrain for work in skilled trades or service industries.

Times may be tough for college leavers, with a shrinking pool of entry-level posts in well-paid professions, but the troubled state of the jobs market presents an opportunity for vocational training providers such as market leader China East Education Holdings Ltd. (0667.HK).

More than 11.7 million Chinese students graduated from college this year, but many of them could only find blue-collar jobs, even working as baristas or pastry cooks. Looking to acquire marketable skills, some job-seekers put their academic credentials to one side and signed onto practical training programs for would-be electricians and fashion designers.

Against that backdrop, China East Education has posted a slight rise in half-year revenues and a bigger jump in profit. The number of new students taking its job-oriented courses dipped, but the company was able to earn more for teaching some of its more popular courses, such as training for services generated by the electric car industry.

In its earnings report released last Wednesday, the company said revenues rose 1.6% to 1.98 billion yuan ($278 million) in the first half of 2024 from the same period a year earlier. Net profit jumped 33.2% to 272 million yuan, helped by lower costs of materials, rent and advertising as well as depreciation of school campuses. Selling expenses fell by 49 million yuan, allowing gross margin to rise by two percentage points to 53%.

The results were a mixed bag, reflecting the flux in the jobs market and a shift in the company’s enrollment strategy. The overall number of new students fell 7.7%, a drop attributed to a new focus on high-value business over volume, after the company adjusted its syllabus to prioritize more lucrative and longer-term programs. The average annual tuition or service fee per student rose at all its schools offering training in culinary skills, information and internet technology, except for specialized programs in beautician skills and baking Western-style pastries.

Programs in automotive services saw the biggest rise in annual tuition fees per student, up 7.4%. The most popular long-term courses in auto skills even shot up to 10,800 yuan in annual tuition costs from 6,800 yuan in 2023. New enrollments in courses lasting between one and two years jumped 41.6% to 1,212, while sign-ups for three-year programs slipped 4.3% to 6,720. The rapid rise of China’s electric car industry is fueling demand for related vocational training, pushing the company’s revenue share from automobile service skills from 13.6% in 2019, before the Covid pandemic, to 22.6% in the first half of 2024.

While many courses in automotive and beauty services are flourishing, the company’s core business of chef training has been flagging, hit by growing use of pre-prepared dishes in the food industry. The semi-finished products rolling off food assembly lines have allowed restaurant chains to slash labor costs, reducing demand for fine culinary skills. The number of new students at Anhui New East Cuisine Institute, which provides comprehensive cookery training, fell 11.2% to 34,700 in the first half of the year, while new entrants for courses in pastry making and Western cuisine sank 12.9% to 7,549. The revenue share from culinary training plunged to 63% in the latest set of earnings from 81% in the first half of 2023.

Competition from the state system

Falling recruitment numbers, especially for programs lasting more than a year, would weigh on the company’s earnings in the future. Hence China East Education has embarked on a cost-containment drive, reducing its number of schools and centers across China by 11 to 234 this year. Company official Hua Jun told the media that China East Education would no longer focus on pursuing rapid expansion and revenue growth but would instead aim to optimize profit.

After going public in Hong Kong in 2019, China East Education used nearly half of the IPO proceeds to buy land and resources to build regional centers for its range of courses, seeking to bolster its brand with state-of-the-art facilities on industrial-scale campuses. Vocational education parks in the Chinese provinces of Sichuan, Shandong and Guizhou have come on stream after completing the first phase of construction, according to the earnings release.

The campuses in Jiangsu and Jiangxi are still at the planning stage. The company said about 3 billion yuan has been spent on constructing the regional centers across China and another 2 billion yuan had been earmarked for the project in the future. Cost savings from renting facilities should offset the initial construction investment in the first three years.

Chinese government policies have been supportive of vocational education, and rising demand is pushing up blue-collar pay, boosting interest in training programs. More than 90% of students on China East Education’s long-term programs are placed in jobs or set up their own businesses after graduation, according to company figures, while employment rates for automotive technology and cosmetics skills are even higher at around 96% and 95%.

However, Chinese authorities have been providing more subsidies and support for public institutions that offer vocational training. With lower tuition fees, those public institutes could present a challenge to private providers, as they compete to attract students in straitened economic times.

Looking forward, China East Education said it plans to keep expanding and diversifying its course offerings in response to industry trends and market demand, highlighting areas such as healthcare services or artificial intelligence.

China East Education has an industry-beating price-to-earnings (P/E) ratio of 13 times, nearly double the 7 times for fellow training provider China Education Group (0839.HK). Investors will no doubt be happy to hear that the company is placing a heavy emphasis on maximizing profits in the future.

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The education spinoff of gaming giant NetEase reported narrowing losses in the second quarter and said it expects to be profitable on an operating basis this year

Key Takeaways:

• Youdao reported its revenue grew 14.5% revenue in the first half of 2024, while its operating loss narrowed by more than 90%
• The education company’s revenue from online marketing services doubled in the first half, while its learning services and smart devices revenue fell by 4% and 20%, respectively

By Edith Terry

The last few years have been a learning period for Youdao Inc. (DAO.US), as the separately listed education arm of gaming giant NetEase (NTES.US) was hit by a wave of regulatory tightening against big tech in China. The company’s K-12 online education business was obliterated during a crackdown on after-school tutoring companies, leading Youdao to sell that business in 2021.

Since then, investors have shown little love for the company. Its shares are down 17% so far this year and have lost about three-quarters of their value since their New York listing in 2019. That downward trajectory continued after it released its second-quarter results last week, even as its latest report showed sharply narrowing losses and the potential for profits in the not-too-distant future for a company that has nearly always lost money.

Despite that relatively upbeat outlook, investors bid down the shares by 11% in the days after the latest report’s release.

Youdao thinks investors should give it a new look. Vice President of Finance Wayne Li told analysts on the company’s earnings call last week that a 92% drop in its operating losses in the first half, to 43 million yuan ($6 million) gives “us confidence in achieving positive operating income for the full year of 2024 despite intense competition and various uncertainties.”

Youdao reported its revenue rose by 14.5% to 2.7 billion yuan in the first half of the year, while its net loss narrowed by 83% to 85.9 million yuan. Its operating loss for the six-month period shrank 92% to 42.6 million yuan from 484.9 million yuan a year earlier.

Youdao actually turned a small profit in this year’s first quarter before going back into the red in the second as it sharply boosted its operating expenses. The latest results noted that NetEase, which is highly profitable, continues to offer financial support for Youdao through 878 million yuan in short-term loans and $126.5 million in long-term loans drawn from a $300 million revolving loan facility. 

Youdao seems to be inching ever closer to profitability, even though that road has been far from smooth. That uneven progress was reflected in the mixed results for the company’s three core business segments in the second quarter.

Its online market services were the star performer for the three-month period, with revenue up 68.4% to 511.2 million yuan. But revenue from smart devices fell by 25% to 166.7 million yuan, and learning services revenue also dropped by 5.5% to 643.8 million yuan. Its net loss for the quarter narrowed by about two-thirds year-on-year to 99.5 million yuan from 299.2 million yuan.

Pivot to advertising

A closer look at the results may lead some to conclude the company is inching away from its roots in edtech to becoming a platform offering marketing services for tech companies looking to promote their artificial intelligence (AI) tools. Those marketing services, which also use AI tools, accounted for about 40% of Youdao’s revenue in this year’s second quarter, compared with just about 15% two years earlier.

Customers for those services include big names like ByteDance and Baidu’s Ernie, as well as NetEase. In the second quarter, net revenue from ads by customers promoting their AI tools grew by more than 100% quarter-over-quarter, CEO Zhou Feng said on the earnings call. The strong growth in marketing services helped Youdao improve its gross margin to 48.2% in the second quarter from 47.0% a year earlier.

One of the main drivers in the marketing services surge was overseas advertising by Chinese companies. “Leveraging our deep understanding of client needs, we have accelerated the development of international advertising infrastructure,” said Youdao President Jin Lei. “By the end of the second quarter, our international carrier database has exceeded 7 million, a year-over-year increase of over 200%.”

The numbers suggest that Youdao is taking cues from Facebook owner Meta, which made nearly all of its revenue from advertising last year, much of it driven by personalized algorithms that identify and deliver ads to consumers who are most likely to respond to them. In Youdao’s case, its ads attach to digital content such as its dictionaries and its large language model called Ziyue, or “Ask Confucius.”

Youdao’s learning services for children and adults are subscriber or fee-driven, and that part of its business is shrinking fast, falling from 64% of total revenue in the first half of 2022 to about half in the first six months of this year. The company’s other main revenue source, smart devices is on a similar trajectory, falling from 23% of revenue to 12.8% over the same period.

So, what does all this mean? For one thing, edtech in China seems to be finding new outlets after being banned from targeting after-school tutoring for K-12 students. Recent government calls promoting “high-quality” consumption should also work in Youdao’s favor, since it increasingly brands itself as an AI company in addition to its core business providing learning services.

In its struggling smart device segment, Youdao has started moving down its price points to a more mass-market level, though it still charges 50 yuan to 100 yuan more for its styluses than its peers by promoting their AI features. Sales of its entry-level dictionary pens grew by 50% year-over-year in the second quarter in unit terms, and net revenue was up by 10%.

In its learning services, Youdao now focuses entirely on non-academic courses on Chinese literature and computing, which are still allowed after the earlier crackdown. “Everyone knows that it’s key for future careers,” CEO Zhou said of Youdao’s computing courses.

Despite continuing to lose money, the analyst community remains relatively upbeat on Youdao as its business model shifts. Of the 10 who follow the company polled by Yahoo Finance, nine rate it as a “strong buy” or “buy.”

Youdao’s price to sales (P/S) ratio of 0.48 makes it look undervalued compared to Gaotu Techedu (GOTU.US), which trades at 2.48. After losing two-thirds of its business in the education crackdown, Gaotu has reinvented itself as an adult education company. Recently listed corporate education services provider YXT.com (YXT.US) has an even higher P/S ratio of 8.33, suggesting that investors may want to take a closer look at Youdao.

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The provider of education and training services in southern China has boosted its earnings with new courses, pivoting to non-academic tuition after a crackdown on tutoring for school subjects

Key Takeaways:

• Before the restrictions, academic education contributed nearly 90% of Beststudy’s revenue but the company’s new extra-curricular courses now account for 40% of turnover
• The company has also launched study tours to gain a foothold in a market valued at more than a hundred billion yuan

By Molly Wen

The latest earnings from China Beststudy Education Group (3978.HK) offer a lesson in using creative or critical thinking to find a way out of a crisis.

The company was badly hit by a clampdown on after-school tutoring three years ago, when the government acted to relieve study pressure on children. Beststudy was able to salvage its test-revision business from the cull, which targeted private tuition on subjects in the school curriculum, and then shifted towards offering enrichment programs and study tours to nurture non-academic talents.

Meanwhile, the policy environment recently became more supportive for education in general. In early August, China’s government highlighted education services as a means of boosting consumption amid an uneven economic recovery, leading some investors to sense a possible loosening of the regulatory screws. Against this backdrop, the CSI SWS Education Index, which tracks training-related stocks, rose for nine days in a row.

Beststudy, a leading training enterprise in the south of China, benefited from the education rally. The company’s share price has risen nearly 70% since the start of the year and investors got more positive news last week when Beststudy’s revised business strategy helped to drive a jump in half-year earnings.

Revenue for the first six months of the year rose 68% to 317 million yuan ($44.30 million) from the same period a year earlier, while adjusted net profit surged nearly 169% to 54.41 million yuan. Turnover was still a far cry from the 1.1 billion yuan logged in the first half of 2021, but the profit leap serves to validate the decision to focus on holistic education, sidestepping the official school syllabus.

Before the clampdown in July 2021, Beststudy specialized in providing academic tutoring for individuals or small classes, segments that contributed nearly 90% of its revenue. The regulations wiped out the tutoring business, but Beststudy was still able to offer intensive pre-test coaching for students who were preparing to retake entrance exams for high school or college. The company also launched a range of vocational training courses as well as enrichment programs for school students, covering skills such as critical thinking, computer programming, literature appreciation and outdoors learning.

Income from full-time test preparation services jumped nearly 20% to 124 million yuan in the first half of the year. The company started out in 2000 by coaching high school students for college entrance exams. Five years later it added similar services for children preparing to take entrance tests for high schools. The pre-test business, which survived the government clampdown, offered the company a lifeline while it restructured its business.

Exploring other talents

Faced with the regulatory crisis, other training enterprises shifted to e-commerce and sales of educational hardware. But Beststudy saw a future in promoting learning outside the confines of the school syllabus, with programs labelled as talent education. The talent-based programs were designed to promote skills in areas such as critical thinking, nature study and scientific enquiry with courses including “Curious Young Reporter”, “Thinking Planet” and “Literature and Aesthetic Education”.

These courses were among the first batch of talent products to gain non-academic accreditation from education authorities in Guangdong Province in 2022. In the first half of 2024, Beststudy’s revenue from the talent segment rocketed 321% to 118 million yuan, and the share of total revenue increased from nearly 15% in the first half of 2023 to just under 37%.

The company has also launched study tours to widen horizons and facilitate learning outside the classroom.  China's market for study trips has flourished in recent years, reaching about 146.9 billion yuan in 2023, a year-on-year rise of nearly 62%, according to data from iiMedia Research. The research firm projects the market for educational travel will reach 242.2 billion yuan in 2026.

Players such as Beijing New Oriental Culture and Tourism, an arm of leading education firm New Oriental (EDU.US; 9901.HK), and various travel agencies have also stepped into the market. Study tours typically include lessons from professional teachers and instructors, giving a familiar brand such as Beststudy an advantage when attracting learners.

Keen to boost economic growth, China issued guidelines on Aug. 3 highlighting areas with the potential for higher consumption, including education and training. The directive said education institutions, scientific research bodies and social organizations should be encouraged to make high-quality educational resources available to a wider public. Market-watchers initially saw the move as a signal of easing restrictions on tutoring services. But the policy actually aims to improve the quality and impact of vocational education, while encouraging qualified institutions to provide tutoring on non-academic subjects as a public service, with no fundamental changes to compulsory education.

In any case, the education sector is repairing the damage from the last few turbulent years, judging from operating profits and revenues in recent earnings reports. U.S.-listed TAL Education (TAL.US) recently returned to profit and reported revenues jumped 50% to $414 million for its first quarter to May 31.

Beststudy’s price-to-earnings (P/E) ratio stands at around 17 times, well below the 36 times for New Oriental on the Hong Kong market. At these levels the stock may be worth the attention of investors, as education-related demand is still going strong, outpacing overall consumption.

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The digital corporate learning company is aiming to raise $36 million in a New York listing, as China’s education sector slowly rebounds from a crackdown two years ago

Key Takeaways:

• YXT.com has filed for a New York IPO, aiming to sell investors on its position as China’s largest digital corporate learning company
• YXT is trying to sell investors on its big growth potential, even as its revenue contracted in this year’s first quarter

By Edith Terry

When corporate learning software as a service (SaaS) company YXT.com Group Holding Ltd. filed to list on the Nasdaq last week, the reaction was hardly one of excitement. One analyst said to “avoid it,” noting the company’s declining revenues and history of losses.

But the muted response hasn’t stopped YXT.com from moving ahead with what could be one of the larger IPOs by a Chinese company in New York this year. YXT.com plans to sell 2.75 million American Depositary Shares (ADS) for between $11 and $13 apiece, raising up to $36 million. A pricing at the middle of that range would give the company a market cap of about $650 million.

Despite its commanding position as China’s largest digital corporate learning SaaS provider, YXT.com’s financials have been relatively weak in the last two years. Its revenue fell slightly from 431 million yuan ($69 million) in 2022 to 424 million yuan last year – never a great sign for any company in a growth industry.

What’s worse, the revenue declines accelerated in this year’s first quarter, skidding 33% to 83.2 million from 122.2 million yuan a year earlier. Gross profit for the latest three-month period fell as well, from 77.6 million yuan in 2023 to 52 million yuan in 2024.

Those contractions aren’t too surprising, since many corporations have begun reining in their spending as China’s economy slows after years of rapid growth. Still, the accelerating rate of contraction this year will hardly reassure potential investors.

One brighter spot was YXT.com’s bottom line profit, which turned positive in the first quarter of 2024, to 35 million yuan from a loss of 65.2 million yuan a year earlier. But even there, that profit was only possible due to a one-time gain, and the company continued to lose money on an operating basis. Its losses in general are narrowing, falling from 1 billion yuan in 2022 to 230 million yuan last year.

YXT.com said some of its red ink owes to an ongoing legal battle involving a publisher affiliated with the highly regarded Shanghai-based China Europe International Business School (CEIBS). CEIBS Publishing was established in 2007, in an agreement between the school and venture capitalist and CEIBS board member Eric X. Li, to publish business case studies and other materials generated by CEIBS.

In 2018 and 2019, CEIBS became unhappy with the arrangement, and in 2019 Li and other shareholders sold their 39% of the company to the holding company previously behind YXT.com, called Unicentury. YXT.com later absorbed the publishing company into its subscription-based corporate business. But when CEIBS found out about that, it issued a complaint and the case went into arbitration in Hong Kong.

While the arbitration is still ongoing, YXT.com removed CEIBS Publishing’s finances from its own income statement as of last January. In the first three months of 2024, that resulted in 20.6 million yuan in lost revenue. If that figure was added back to YXT.com’s first-quarter results this year, its revenue would have declined by a milder – but still not encouraging – 15% to 103.8 million yuan this year from 122.2 million yuan in 2023.

Customer hit

The CEIBS dispute has also affected YXT.com’s customer list. At the end of last year the company had 3,501 customers, including 200 Fortune 500 companies in China, in 20 industries, including consumer, healthcare, manufacturing, technology and electric vehicles. But the number had dropped to 2,545 customers by the end of March, after the elimination of 845 customers from CEIBS Publishing Group.

While the CEIBS dispute doesn’t look encouraging, YXT.com – whose name means “cloud learning palace” – does have a more stable story to tell with its core subscription services for corporate learning. Most of its revenue comes from such subscriptions, and revenues from that segment grew from 81.4% of the total in the first three months of 2023 to 92.5% in the first quarter of 2024. Still, that part of the business is also contracting.

The company is also a leader in its space, with five times the number of subscribers of its nearest competitors. That could position it well for growth in a Chinese corporate learning market where digital services accounted for just 19.6% of the overall market last year.

The digital services share of the corporate learning market is expected to grow to 23.3% of the total by 2028, worth about 300 billion yuan out of 1.2 trillion yuan for broader market. YXT.com is also turning its focus away from smaller customers to focus on more profitable large enterprises.

Meanwhile, the company’s cash is starting to run low, which may explain the timing of its IPO. It had just 219 million yuan in cash at the end of March 2024, down by about a third from 320 million yuan at the end of last year and 432 million at the end of 2022.

The company boasts an A-list of backers, including Tencent and Sequoia Capital, and raised $190 million in a funding round in 2021. That valued YXT.com at $1 billion at the time, meaning it has lost roughly a third of its value since then.

Anyone who follows China’s edtech sector will recall that investors got badly burned after a massive crackdown in 2021, when the government banned most after-school tutoring services from K-12 educators. The resulting bloodbath wiped billions of dollars off the market value of companies like New Oriental Education (EDU.US; 9901.HK) and TAL Education (TAL.US).

Some companies went on to reinvent themselves in completely different sectors, while others moved into areas like study abroad preparation and early education that weren’t affected. Providers of education for adults, including vocational education and the kinds of services offered by YXT.com, were never affected, though private education in general remains a sensitive sector in China.

A potential peer comparison for YXT.com could be San Francisco-based online corporate training company Udemy (UDMY.US), which entered the China market in August 2022 with local partner Sanjieke, an online education platform targeting IT professionals. Udemy is aiming for 2,000 customers by 2025 – still far lower than YXT.com’s portfolio.

Udemy currently trades at a price-to-sales (P/S) ratio of 1.42. That compares with a far higher ratio of nearly 11 that YXT.com would be seeking if its shares price in the middle of their range. That suggests YXT.com it believes investors will buy into its growth story even as China’s economy runs into headwinds.

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The online financial educator is seeking to jumpstart its cooling growth with the launch of a stock-learning device equipped with its own content

Key Takeaways:

• JF SmartInvest has rolled out Enjoy-Stock Pad, a device that gives users easy access to its content and tools
• The financial educator took on its current name just a day before the new product rollout, suggesting it may be trying to create a new business identity

By Warren Yang

The latest lesson from stock-trading educator JF SmartInvest Holdings Ltd. (9636.HK) seems to be that desperate times call for desperate measures.

Last Friday, the company, which operates a platform that provides investors with training on financial literacy and stock trading, announced its launch of a device dubbed Enjoy-Stock Pad. The product sounds like a tablet computer equipped with JF SmartInvest’s software to give users easy access to everything the company offers, from online classes to investment and research tools using AI and big data analysis.

Enjoy-Stock Pad “can accurately match the learning needs of investors, realize personalized learning path planning, facilitate investors to learn stock investment in a more comprehensive, systematic and efficient manner, and enhance their financial knowledge and investment ability,” JF SmartInvest said.

The device, which JF SmartInvest described as its “its first stock learning hardware product” wasn’t the only thing new at the company, whose growth has been less-than-impressive lately as China’s sputtering stock markets fail to excite investors. Just a day before the new product announcement, the company changed its name to the current one from JF Wealth. The back-to-back moves seem to reflect a desire — perhaps desperate — to create a new business identity and expand its offerings as its revenue growth loses steam.

Last year, JF SmarInvest’s revenue rose by an underwhelming 6% to 2.3 billion yuan ($317 million) year-on-year, a sharp slowdown from the 27% growth for 2022. Its profitability deteriorated even more, with its gross profit increasing just 1.8% and its net profit falling by more than half to just about 190 million yuan.

Like many companies serving the stock-trading community, JF SmartInvest’s fortunes are often closely tied to the ups and downs of equity markets. That’s bad news for such companies in China lately, as a prolonged property slump and a slowing economy weigh on stock markets. After rallying in late February on hopes for an economic revival, the Shanghai Composite Index has given back all its gains and is now down 3% on the year – sharply contrasting with the 14% year-to-date gain for the S&P 500.

Against this gloomy backdrop, it’s understandable why JF SmartInvest may be doing anything it can to try to breathe some life back into its business. The creation of Enjoy-Stock Pad may be an interesting addition to its main services, providing an important new revenue source because such hardware carries higher price tags than software.

But just how much of a sales boost the new offering will provide remains to be seen. JF SmartInvest presumably will charge more for Enjoy-Stock Pad than its core software services, since a tablet computer that is likely the basis for the product typically costs $200 to $400. The biggest question mark is whether potential customers would want to pay more for such gadgets when they can simply purchase JF SmartInvest’s content for use on their own devices.

Eroding margins

Even if the new device brings in more revenue, that money will also come at a far higher cost than JF SmartInvest’s core software and data product offerings. That could pressure the company’s margins if sales of the product are strong, since hardware typically carries lower profit margins than software.

This can be a headache for JF SmartInvest as it’s already grappling with swelling costs. Last year, its cost of revenue jumped by more than a third, far outpacing its revenue growth, as new hirings for content development and production led to a large increase in personnel expenses. As is often the case with tech companies in a constant race to deliver new services, the company boosted its spending on R&D and more than doubled its general and administrative expenses.

That said, JF SmartInvest has been operating on sky-high margins, thanks to its focus on content, which is relatively cheap to produce. That means it can afford to take a hit to its margins to some extent. And in fact, the company’s gross profit margin for last year stood at well above 80% even after some deterioration, even though it fell by nearly 4 percentage points to 83.6% from 87.3% in 2022.

Another key metric for the company is its refund ratio, and growing customer requests to cancel their contracts were a cause for concern in 2022. But signs on that front were more encouraging last year. The ratio of refunds to total payments for SmartInvest Pro, one of the company’s two flagship products, fell to 18.5% last year from 22.7% a year earlier. The figure for SmartInvest Info, the other main offering that is more affordable, also slipped to 22% from 24.3% over the same period.

JF SmartInvest asks its customers to pay in advance for its services, but it lets them request refunds for unused services during the contract periods. The company books fees as revenue during subscription periods based on services used, while treating the rest as contract liabilities. So, an increase or a decrease in contract liabilities during a year reflects changes in recognized revenue and prepaid subscription fees during the period.

JF SmartInvest went public in March last year as part of a wave of IPOs by fintech companies that generated a lot of buzz. But since then, the company’s shares have lost more than 40% of their value. They still command a respectable price-to-earnings (P/E) ratio of more than 19, but that’s more due to the company’s relatively low profit, rather than investor optimism about its prospects. The stock’s price-to-sales (P/S) ratio is more modest, at less than 2, lower than 2.6 for online stock broker Futu Holdings (FUTU.US).

JF SmartInvest shares fell Monday, the first trading day after the announcement of its latest product, while the Hang Seng Index advanced. This at least suggests that investors aren’t so stoked about its new foray.

The company’s efforts to diversify its revenue stream with a move into hardware are laudable, and almost inevitable, as it now essentially relies on only two products to generate revenue. But simply putting a new product into the market is one thing, while giving people a compelling reason to buy it is another. The company could also get a boost if China’s stock markets show new signs of life. But after two false starts this year and last on hopes of an economic recovery, the likelihood of a fast fix in that regard seems unlikely anytime soon.

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The e-commerce company is trying to diversify its livestreaming and product strategies after a drawn-out dispute with star host Dong Yuhui

Key Takeaways:

• East Buy’s shares fell to a two-year low after the company parted ways with Dong Yuhui, its star livestreaming host who had frequent open conflicts with management
• Dong’s departure marks the e-commerce company’s strategic shift away from overreliance on individual livestreaming hosts

By Xia Fei

Sometimes a divorce is inevitable when a couple fights constantly. But that doesn’t mean it isn’t painful – and sometimes costly – when it eventually happens, even if it was widely anticipated.

That was the case when Dong Yuhui, an English teacher-turned-celebrity livestreaming host, parted ways last week with East Buy Holding Ltd. (1797.HK), the former online education arm of New Oriental (EDU.US; 9901.HK) that became a high-profile online marketplace.

Both sides attempted to portray the split as amicable with blessings from New Oriental founder Yu Minhong, despite a long history of confrontations since East Buy shifted from education to e-commerce about two years ago. Dong, 31, left due to “career aspirations, commitment to his other pursuits and personal time arrangement,” according to the company’s disclosure. More significantly, Dong was allowed to acquire the firm’s Time with Yuhui (Beijing) Technology Ltd., the producer of his popular livestreaming shows, for 76.6 million yuan ($10.6 million).

East Buy has yet to announce results for its fiscal year that ended in May this year. But it reported a profit of 249 million for the six months through last November. By comparison, Time With Yuhui posted a 141 million yuan profit in the first half of the 2024 calendar year, showing that Dong’s departure could take away a big chunk of East Buy’s profits.

The disposal of the unit amounts to a “free gift” to Dong, Yu explained on social media after penning a lengthy open letter about Dong’s departure. But the news was anything but a gift to holders of East Buy’s shares. 

When the resignation was made public on July 25, East Buy thought it might cushion the blow by announcing a share buyback program of up to 500 million yuan on the same day. But investors still dumped the stock, which tanked 23% the next day to touch a two-year low of HK$9.50 before regaining some ground to close at HK$9.92 on Monday. Its market cap has shriveled by nearly 45% since May to a current level of about HK$10 billion ($1.3 billion).

The selloff reflects not only a big drop in market value, but more symbolically the hefty price East Buy has to pay as it attempts to reduce its overreliance on any single livestreaming host. Over the longer run, the breakup may also end the ongoing reputational damage Yu and East Buy have suffered due to the conflict’s very public nature, and allow East Buy to focus on more important challenges such as rising competition and China’s slowing retail market.

Fans effect

Yu and East Buy have come under regular attack over the last year from Dong’s army of passionate fans. Self-described as “mother-in-laws”, Dong’s defenders were infuriated that others in the company allegedly took credit for his unique style that fuses sales pitches with eloquent speeches on everything from how to order a steak to waxing philosophical about life and referencing Shakespeare. His humble start as a poor kid from the countryside also resonated with his legions of supporters.

The internal clash between Dong and management first burst into public view when East Buy dismissed its veteran CEO Sun Dongxu last December in part for the latter’s criticism of China’s “extreme fan culture”.

But the move hardly settled the feud. Yu and Dong were in talks multiple times dating back to March and decided to spin off Time with Yuhui at the end of May to avoid “business conflicts and public opinion disputes,” according to the latest open letter from Yu.

Dong’s fans also cheered him for going solo. On Douyin, the Chinese version of TikTok, East Buy lost nearly 50,000 followers while Time with Yuhui gained more than 370,000 new subscribers. While East Buy made no mention of Dong or Time With Yuhui in its 2023 annual report published in February, alternative data shows the hit from Dong’s exit could be substantial in the near-term.

According to data service provider ChanMama, more than 100 million yuan of products were sold through Time with Yuhui’s livestreaming channel in May, the second highest transaction volume on Douyin that month, while East Buy ranked ninth.

Bearish analysts believe East Buy remains too pricey even after a 65% drop in its share price so far this year. The company trades at a P/E ratio of around 16 times, which is still ahead of the average of 10 for all companies listed in Hong Kong. Daiwa Securities downgraded East Buy from “hold” to “underperform” and axed its target price from HK$29 to HK$11 after the breakup, as it estimated that Dong’s channel brought in roughly half of the total gross merchandise value (GMV) for East Buy in the latest quarter.

Post-star era

While painful, the split is probably an important step for East Buy over the longer term, and serves as a textbook case on the perils of relying too heavily on any single individual’s public personality for a company’s business.

And even though Dong’s rising stardom helped pump up East Buy’s GMV, that wasn’t enough to reverse the company’s falling profits due to intense competition in China’s e-commerce market. East Buy reported 2.8 billion yuan in revenue in the six months to last November, up 34% from a year earlier. But its profit slumped 57% to 249 million yuan, as it more than doubled its spending on marketing, R&D and administrative expenses to keep up with its rivals.

In his public letter, Yu acknowledged that volatile public opinion was leading to “huge uncertainties” for East Buy, causing its reputation and stock to suffer damage.

In a positive sign of pivoting, revenue from East Buy’s private label products and livestreaming e-commerce segment increased by 37% during the six months to last November, making a significant contribution to its overall revenue and offering an early sign of the firm’s strategic shift. East Buy has been cultivating rising new livestreaming hosts, such as YoYo, also a former instructor at New Oriental known for her world history knowledge.

Following the divorce, Citi last week maintained its “buy” rating on East Buy with a target price of HK$36, and said it is watching the company's execution in repositioning itself for sustainable growth. Whether the company can gain a solid foothold in the highly competitive retail market remains to be seen. But a clear break with a controversial star livestreamer is an important first step in stabilizing its ship and laying a more solid foundation for future development.

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The provider of educational products and services for young children said its revenue fell 11% in the first quarter, accelerating from a 4% decline in the previous period

Key Takeaways:

• iHuman’s revenue and profit both declined in the first quarter as it accelerated a global expansion plan to diversify beyond its softening home market in China
• The company’s gross margin and total users both improved, but the omission of its latest paid user count suggests that key metric continued to decline

By Doug Young

Sometimes what’s left unsaid speaks the loudest.

That could partly explain the 4.3% decline for shares of iHuman Inc. (IH.US), a provider of educational products and services for young children, after it published its latest quarterly results last Friday. The report notably didn’t include the company’s latest number of paying users at the end of March, ending a previous practice of including that key metric.

Anyone reading between the lines would probably guess that omission was due to the fact that the number wasn’t too attractive and continued a recent trend of contraction that saw the figure fall by 17% in the fourth quarter to 1.45 million paid users.

The latest report also lacked any quantifiable information on the company’s recent drive to develop its business outside China, which it characterized as a strategic priority. Such a strategy looks prudent for Chinese companies from the educational sector due to the high risk from unpredictable regulatory oversight.

A sudden clampdown on China’s K-12 after-school tutoring sector two years ago wiped out an entire multibillion-dollar industry in an instant. iHuman wasn’t affected due to its focus on younger children and broader learning skills rather than specific courses like math and science. But there’s no guarantee that its area won’t become the future target of another crackdown aimed at lightening the burden of extra coursework on impressionable young minds.

iHuman made several references to the international expansion in its latest report, showing the importance it places on the initiative to diversify its business beyond China. But its failure to disclose any specifics suggests that part of the business has yet to produce any meaningful revenue, which may have disappointed investors.

While those unspoken elements probably worried investors, an acceleration in the company’s revenue declines was probably the biggest culprit behind the selloff of iHuman’s stock after the release of its latest report. iHuman said its revenue fell 11% to 235 million yuan ($32 million) in the first quarter from 265 million yuan a year earlier. The company’s revenue began to contract in last year’s fourth quarter, falling by a milder 4%, ending three years of steady growth since its IPO in 2020.

iHuman attributed the fourth-quarter revenue contraction to the pandemic, explaining that revenue for the fourth quarter of 2022 was exceptionally high and difficult to beat as many families used its services during lengthy periods of home confinement during China’s last-ditch effort to control the spread of Covid. It gave a similar explanation for the 11% decline in the first quarter, even though China had lifted its pandemic controls by the end of 2022 and people were no longer confined to their homes during the year-ago period in the first quarter of 2023.

While the pandemic provides a convenient excuse for its revenue contraction, an equally likely culprit is China’s slowing economy that is causing consumers to rein in their spending. Sellers of big-ticket items like cars and homes are feeling the effects of that caution most acutely. But providers of more discretionary items like the kinds of educational services sold by iHuman are also undoubtedly feeling the pinch.

Left behind

The selloff of iHuman’s shares after the report’s release wasn’t extremely large, and, in fact, the stock bounced back somewhat over the next two trading days. But more telling is a longer-term trend that’s seen iHuman’s shares get left behind from a broader rally for U.S.-listed Chinese shares earlier this year.

That rally lifted the iShares MSCI China ETF (MCHI.US) more than 30% at one point from a low in February, and the index remains up by a much smaller 4.6% year-to-date. By comparison, iHuman’s shares have trended steadily downward since the start of the year and are now down 38% year-to-date.

The company has been profitable for the last two years and continued that trend in the first quarter. But the latest figure was down by more than half to 22.3 million yuan from 53.6 million yuan a year earlier, undoubtedly adding to investor concerns, as it attributed the decline to heavier spending on product development and its international expansion.

“While these increased investments may temporarily impact our short-term profitability, we believe they are crucial for reinforcing our industry leadership, sustaining our long-term growth, and creating long-term value for our shareholders,” CFO Viven Wang said in the earnings announcement.

Its odd mix of relatively solid profits and a sinking share price have left iHuman with a depressed price-to-earnings (P/E) ratio of just 4, and a similarly depressed price-to-sales (P/S) ratio of 0.72. The latter is actually ahead of the 0.33 P/S ratio for Mynd.ai (MYND.US), though it trails well behind the 2.9 for Fenbi (2469.HK), both providers of educational products and services for young children. No matter how you slice it, investors are still relatively cautious on Chinese education stocks in general after many got burned from the earlier crackdown.

iHuman’s report wasn’t all downbeat and did include a few more positive metrics. While its paying users most likely fell during the quarter, the company’s monthly average users (MAUs) rose by a strong 25% to 26.4 million year-on-year. That marked an acceleration from the 14% gain for the metric in last year’s fourth quarter, and probably shows that parents still want this kind of service for their young children, even if they are less willing to pay for it.

The company’s gross margin also improved to 71.5% from 70.0% a year earlier and 71.2% in the previous quarter. Such margins are all quite high, and the improving trend shows iHuman is becoming more efficient in its core business of providing educational products and services for children. The main factor undermining its profit was a 17% increase in its operating expenses, led by a 36% rise in its sales and marketing activities as it rolled out more promotions and tried to build up its international business.

At the end of the day, iHuman is doing its best to navigate a tricky China market where the threat of crackdowns is always a possibility and consumers are increasingly cautious as the economy slows. There’s not much it can do about the regulatory risk. But it will need to show some more concrete progress in the international expansion, and also return to revenue and paid user growth before investors might consider returning to its stock.

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The company often called the ‘Quora of China’ posted a sharply higher gross margin in the first quarter, but its revenue fell for the first time since its 2021 IPO

Key Takeaways:

• Zhihu’s revenue fell 3.3% in the first quarter, marking its first-ever decline since its New York listing
• The company, often called the “Quora of China,” boosted its gross margin by more than 5 percentage points, and said it expects to achieve non-GAAP profitability by year-end

By Doug Young

Who knows when Zhihu Inc. (ZH.US; 2398.HK) will finally turn profitable?

Top brass at the company often dubbed the “Quora of China” seemed to think they knew that answer, reiterating on Wednesday they were aiming to achieve a non-GAAP profit, which typically excludes stock-based employee compensation, by the end of this year. Investors weren’t too impressed, bidding down Zhihu’s stock down by 2.5% after the company reported its first-ever revenue decline in its latest quarterly results.

The Wednesday selloff means Zhihu shares have lost nearly 40% of their value this year, and are now down more than 95% from their IPO price during headier times when the company made its New York listing in 2021. Notably, Zhihu’s shares have been left behind in a recent rally that has lifted most U.S.- and Hong Kong-listed Chinese stocks this year, reflected by a 16% rise for the iShares MSCI China ETF (MCHI.US) from a February low.

Remarks by founder and Chairman Zhou Yuan calling the first-quarter results a “solid financial and operating performance” to start the year might leave some scratching their heads. After all, a first-ever revenue decline is hardly something to brag about. But a closer examination shows Zhou was probably referring to the company’s gross margin, which improved by more than 5 percentage points to 56.6% in the first quarter from 51.5% a year earlier.

Unfortunately, the improving margin didn’t trickle down to Zhihu’s bottom line. Its net loss for the quarter improved slightly to 165.8 million yuan ($23 million) from 179 million yuan a year earlier. But its adjusted non-GAAP loss – the metric it’s eying for breakeven by the end of this year – actually widened to 135.7 million yuan from 120.2 million yuan a year earlier. Clearly, the company has lots of work to do during the rest of the year to reach its breakeven target.

While investors love a profit, they aren’t exactly too excited about a shrinking company. That’s reflected in Zhihu’s anemic price-to-sales (P/S) ratio of just 0.58, which hardly looks like what you’d expect for an internet company that’s a leader in its space.

By comparison, search giant Baidu (BIDU.US; 9888.HK), which also hosts numerous similar user communities, trades at a P/S of 1.78, and China Literature (0772.HK) trades at 3.48. Then there’s U.S. powerhouse Reddit (RDDT.US), which trades far higher than its Chinese peers at 11. Such a China discount within this group owes at least partly to the Chinese companies’ huge volumes of user-generated content, which is highly sensitive in China and poses a big risk from potential government clampdowns.

Still, Zhihu is the only one of its China peers that has yet to find profits, which explains why it’s valued so low even among that sub-group. Four analysts polled by Yahoo Finance aren’t saying whether they expect Zhihu to become profitable by the fourth quarter, though at least one believes it will become profitable next year. Despite the lack of profits, eight of nine analysts polled by Yahoo Finance in May rated Zhihu either a “buy” or “strong buy,” showing at least the analyst community hasn’t given up on the company just yet.

Shrinking revenue

Next, we’ll take a deeper dive into Zhihu’s financials that do seem to show why the company’s margins are improving at the expense of revenue growth. As we’ve noted already, Zhihu’s revenue fell 3.3% to 961 million yuan in the first quarter from 994 million yuan a year earlier.

While the decline represented a dubious first for the company since its listing, it certainly wasn’t a huge surprise. That’s because Zhihu’s revenue growth was slowing rapidly throughout last year, ending 2023 with just a 2.2% increase in the fourth quarter after starting off the year with a 33.8% year-on-year quarterly gain.

While the revenue slumped, Zhihu’s cost of revenue fell by an even larger 13.4% year-on-year to 417 million yuan as it downsized or discontinued less-profitable services that were dragging down its margins. All of its major user metrics were also down, led by a slightly alarming 13% drop in average monthly active users to 89 million. The more important metric of paying subscribers also fell, though just slightly, to 14.8 million from 14.9 million a year earlier. That shows that Zhihu is focusing less on freeloaders that bring it big user numbers but relatively little value, again highlighting the focus on reaching profitability.

Revenue for two of the company’s three main categories also fell, led by a 16% decline in its marketing services revenues to 331 million yuan as it retired some lower-margin products. Its biggest breadwinner, paid memberships, also fell, though only slightly to 450 million yuan from 455 million yuan a year ago.

The company’s lone bright spot, at least from a growth perspective, was its vocational training services, which recorded a 36% gain to 145 million yuan. That part of the business is still the smallest of its three major categories, but has grown over the last year to its current 15% of total revenue from 11% a year earlier.

Zhihu hyped up its various AI initiatives on its earnings call, though such hype has become standard fare for just about any content-centric internet company these days. While it’s true that such content could ultimately revolutionize the field, it’s far less clear who has the best technology and can find ways to harness and monetize it.

Zhihu’s march to profitability isn’t consuming too much money, which should give the company plenty of time to reach its profitability goal. It had 5.2 billion yuan in cash and short-term investments at the end of March, down just a tad from three months earlier and not too far off the 6.3 billion yuan it had at the end of March last year.

At the end of the day, Zhihu looks like quite the mixed bag for any investor interested in its Q&A story: On the one hand it’s a leader in its space and is likely to become profitable in the not-too-distant future. On the other, its revenue has begun to shrink and may not return to growth for a few years more.

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Boasting more than 27,000 online courses and backed by Sina and Baidu, the owner of China’s “Wisdom Tree” learning platform is seeking a Hong Kong IPO to boost spending on educational R&D 

Key Takeaways:

• Shanghai Able’s revenues rose 63% to just over 650 million yuan last year
• In revenue terms, the company ranked first among China’s producers of digital learning materials for higher education 

By Li Shin Ta

China’s education sector offers a case study in technology-driven change, with the rapid rise of virtual classrooms, digital tuition and learning apps.

The online shift is also proving to be a lesson in finance for makers of educational content such as Shanghai Able Digital Science & Tech Co. Ltd..

China’s leading producer of learning materials for the higher education market recently applied to list on the Hong Kong Stock Exchange, with Agricultural Bank of China International as the exclusive sponsor.

The company wants to invest some of the IPO proceeds in upgrading its learning technologies to set the pace in digital education.

Chinese students are familiar with the company’s products through its two well-known learning platforms, Zhidao and Treenity, which is known as “Zhihuishu” or wisdom tree in Chinese.

Zhihuishu carries special connotations for many university students, as the name of an educational program they watched as children on state TV as well as a school homework platform. Nowadays, more and more colleges and universities list platform-based digital modules as elective courses for students seeking study credits.

Founded in Shanghai in 2008, Shanghai Able serves both teachers and students, providing digital instruction materials and learning management systems for educational institutions as well as courses for learners.

Backing from big names

Institutional investors have been piling into the digital education arena in recent years. Between 2015 and 2020, Shanghai Able completed five rounds of financing, attracting investors such as digital giants Sina Corp(SINA.US) and Baidu Inc. (9888.HK; BIDU.US), according to the prospectus. The company was valued at more than 2.3 billion yuan ($318.3 million) after the latest financing round.

Sina is the largest institutional shareholder in the company with a 17.9% stake, followed by Baidu with 10.1%. Other shareholders include Delta Capital, New Margin Ventures and Chengmai Xinri.

With years in the business, Shanghai Able has risen to become a market leader in digitized education, although the industry is highly fragmented. Last year the company ranked second in revenue terms in China’s digital higher education business with a market share of 3.4%, according to a Frost & Sullivan report quoted in the prospectus. As a learning content producer, it ranked first with a market share of 6.2%.

Shanghai Able produced more than 27,000 digital courses in the last three years, covering 12 subject categories and 92 majors, according to the application document. Of those, 513 courses won gold awards from China’s education ministry for undergraduate and vocational courses, the highest tally among China’s top five revenue-generating producers of digital learning, the document said.

Gross margin above 60%

The company’s revenue has fluctuated in the years leading up to the IPO application, but turnover grew last year. Shanghai Able posted 420 million yuan in revenue in 2021, dipping to around 400 million yuan in 2022 but jumping 63% to just over 650 million yuan last year. Overall, revenues grew at a compound rate of 25.2% over the period. 

Annual gross profit traced a similar trajectory over the three years, going from 210 million yuan to 180 million yuan and 390 million yuan, corresponding to gross margins of 51.1%, 44.1% and 60.7%.

The improved figures resulted from delivery efficiencies and economies of scale, plus the launch of new products with bigger margins, the company said.

The bottom line was flushed free of red ink last year, with a profit attributable to shareholders of 81.42 millionyuan after a loss of 59.1 million yuan in 2022.

Key customers

Shanghai Able’s main customers are universities, colleges, and vocational schools.  At the end of 2023, the company had 236 customer service and support centers in 92 cities, covering most of China's provinces, municipalities and autonomous regions.

The most important clients, dubbed “lighthouse customers”, have been awarded special status by the Chinese education authorities as world-class or first-rate universities or vocational schools. Shanghai Able served 231 customers in this category in 2023, nearly 76% of all the schools granted the classification.

According to Frost & Sullivan, these major institutes spend two to four times more on learning technology than standard schools.

Shanghai Able has sought to retain its core customers and encourage them to raise their average spending by pumping out lots of new content across different subjects. So-called overlapping customers that purchase from different parts of the business numbered 346 last year, each generating average revenue of 1.01 million yuan, up from 760,000 yuan in 2021.

With support from the government, China’s digital education business has been growing fast, with further scope to expand. But competition is also fierce, creating a splintered market in which the top five companies together only command a 12.6% share of the business.

Shanghai Able admitted that it may need to cut prices to hold its own in a crowded market. Customers could demand bigger discounts, denting its turnover and profitability.

With a large volume of content, Shanghai Able has an upper hand for now, but technical capability will be key to future expansion and leading market position. However, the company’s investment figures point to an emphasis on sales over innovation. The digital learning firm only spent 100 million yuan last year on research and development, less than its 170 million yuan of sales expenses. 

IPO funds have been earmarked for investments in R&D and customer services, the company said in its listing application. The research targets include artificial intelligence and 3D modelling. If it wants to be top of the class in digital learning, Shanghai Able will need to leverage cutting-edge technologies to deliver profitable products that also get high marks for user experience.

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The vocational training provider’s half-year earnings were well received by investors, aided by a broader rally on the Hong Kong stock market

Key Takeaways:

• China Education Group has slowed its school purchases over the past two years, but spent a hefty 2 billion yuan on campus construction projects in the last six months
• The company’s financial situation is solid, with a cash reserve of 4.53 billion yuan and an interest-bearing debt ratio of 24.7%

By Molly Wen

China’s leading private provider of higher education has achieved positive marks for its latest financial report card.

Buoyed by resilient demand for vocational training, China Education Group Holdings Ltd. (0839.HK) turned in an 18% jump in revenue and a nearly 10% rise in net profit when it released half-year results last week, sending its Hong Kong stock price on a three-day winning streak.

The private education sector has struggled through a turbulent few years after a regulatory crackdown on after-school coaching in 2021. But businesses that focus on teaching college-level students or offering professional development have been viewed as safer investment bets, as they can charge high tuition fees over an extended period with relatively low sales costs.

The Chinese authorities have also been supportive of adult education. But as the economy slows, competition has heated up and some private education groups are groaning under heavy debts after acquisition sprees.

China Education Group is the acknowledged industry leader, withthe highest market cap among private higher education firms listed in Hong Kong and boasting the biggest number of schools. Its half-year results for the period ending Feb. 29 found favor with investors and analysts, coinciding with a generally bullish mood on the Hong Kong stock market and a Hang Seng rally.

During the six months, the group’s revenue rose 18.3% from the same period a year earlier to 3.28 billion yuan ($455 million), while net profit increased 9.6% to 1.07 billion yuan, returning to a rising trajectory.

China Education Group’s stock rose 11.5% over three days after the earnings, as the company managed to reverse a decline in net profit. The figures were also well received by market watchers, including analysts from CICC, West China Securities and Soochow Securities.

CICC noted in its research report that the company had demonstrated stable growth with robust internal drivers, as enrollment of new full-time students rose 8.5% to 271,000 thanks to increased capacity, improved teaching quality and integrated workplace training.

The business growth was firmly rooted in China. Domestic revenue from from higher and secondary vocational education rose 19.2% to 2.67 billion yuan, driven by rising student numbers and increased average income per learner. By contrast, the overseas business performed poorly, with revenue falling 1.86% from the same period a year earlier to just 105 million yuan.

For private higher education groups, the size of the student base and the average income per learner are the two key factors for revenue. Companies seeking to boost their profile and accelerate their expansion often look to buy established schools as off-the-shelf investments.

China Education Group operated just three institutions when it listed on the Hong Kong Stock Exchange in December 2017. The group has since scaled up, acquiring at least 11 schools between 2017 and 2021 with the help of multiple fundraising rounds. Its network now includes eight higher vocational schools and four secondary vocational schools in China, plus higher education institutes in Australia and the United Kingdom.

The education provider has slowed its acquisition pace over the past two years, instead investing heavily in building new campuses. According to its latest financial results, capex spending rose 66.6% to 2.03 billion yuan in the period due to construction projects at existing schools and new campuses in Shandong and Guangdong provinces.

In Shandong, Yantai Institute of Science and Technology is building a new campus with a planned footprint of nearly 500,000 square meters that is due to open in the 2024/25 academic year. In Guangdong, Guangzhou College of Applied Science and Technology in Zhaoqing has completed two phases of a new campus. The third phase is under construction on a newly purchased plot of around 250,000 square meters.

According to Soochow Securities, the company will be able to add another 52,000 students after the new campuses are completed. Schools in Zhaoqing City and Yantai City are expected to host new intakes of 12,800 and 8,154 learners in the 2024/25 academic year, with the student body likely to grow further as new campus capacity is brought into service.

Stronger financial position than peers

Investors have been on edge about debt problems in the private education arena. The vocational training group XJ International Holdings (1765.HK) recently defaulted on $324 million worth of zero-coupon convertible bonds, prompting creditors to file a wind-up petition on March 27. A thicket of legal procedures must be gone through before the Hong Kong court issues its ruling, but the case has soured market sentiment on the sector.  Shares in China Education Group and Minsheng Education Group (1569.HK) went into a downward spiral in late March.

China Education Group is in a relatively healthy financial position. At the end of February, it was sitting on a cash reserve of 4.53 billion yuan. Loans and bond issuance added up to 8.93 billion yuan, including about 1.5 billion yuan in short-term liabilities and 7.43 billion yuan in long-term liabilities. Moreover, before March 28 the company bought back all its convertible bonds due to mature this year, totaling HK $2.36 billion. Its interest-bearing liabilities make up 24.7% of total liabilities.

However, higher investments in teachers and educational facilities have pushed up depreciation costs and eroded margins. The company’s gross margin fell 1.4 percentage points to 56% in the first half from the same period a year earlier. China Education Group now trades at about 8 times earnings, slightly higher than Minsheng Education's price-to-earnings (P/E) ratio of 7 times and outperforming the sector average.

Although its cash situation is stable, the company faces challenges in the future. China’s population is set to shrink, and more college students could struggle to find work, sowing doubt about the value of higher education. With competition among education providers likely to intensify, private colleges charging high fees could he hit hard. Investors will be keen to see whether China Education Group, by virtue of its scale, can pass that test.

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The vocational educator said holders of its zero-coupon convertible bonds due in 2026 are asking for a permitted early redemption

Key Takeaways:

• Holders of all of XJ International’s $315 million worth of outstanding convertible bonds are asking to redeem the notes
• The company said it is seeking external financing to honor the demand, which is allowed under an option in terms of the notes that were set to mature in two years

By Warren Yang

To ordinary folks, lending money to a company nearly interest-free in exchange for possible future gains in its stock price must sound like a risky gamble. And yet before the Fed started raising interest to tame inflation, such financing schemes proliferated. Now, vocational education giant XJ International Holdings Co Ltd. (1765.HK) is offering investors a fresh lesson on the perils of this idea.

Last Thursday, the company, known as Hope Education before a sudden name change this month, said that holders of all of its outstanding convertible bonds worth about $315 million and due in 2026 were asking to redeem the notes on March 2 under an option in terms of the securities. The company said it was seeking external financial resources while exploring options to honor the bondholders’ requests, suggesting it lacks sufficient funds to pay them back. It said it was also preparing to hold discussions with them to find “feasible solutions.”

XJ International issued the bonds in 2021 through a wholly-owned subsidiary to raise $350 million. It later repurchased $34.9 million of the notes, reducing the total outstanding amount to the $315 million that bondholders are now seeking repayment for.

What makes the notes special is that they are zero-coupon convertible bonds that pay no interest until they are redeemed or mature. Even though they don’t generate any income for their holders during their lifetime, investors may find them attractive if they believe a company’s stock price will rise above the conversion price set the time they purchased the bonds.

Zero-coupon convertible bonds boomed in the U.S. before the Fed started raising interest rates in early 2022, as low interest rates suppressed bond yields. Back then, big-name companies including Ford, Twitter and Spotify jumped on this bandwagon to raise funds, dangling possible appreciation of their stock prices as rewards for investors looking for higher returns than what they could earn from simple interest-bearing bonds.

The landscape has shifted outside China since the Fed started raising rates. But within China rates are still falling as the country grapples with an economic slowdown and deflation. In China’s current low-rate environment, zero-coupon convertible bonds issued by Chinese companies can still look attractive to investors if they believe those companies’ stock prices will rise.

But that’s a big “if” as Chinese stocks have been some of the world’s worst performers over the last two years. XJ International is no exception. As of Tuesday’s close, its stock traded at just HK$0.34, down nearly 90% from an all-time high reached in February 2021 and far below a conversion price of HK$3.85 per share for the convertible bonds.

With little likelihood that the shares will rebound to anywhere near the conversion price over the next two years, the holders of its convertible bonds apparently decided to exercise their right to redeem the notes next month at about 103% of their principal.

Honoring its commitment

Now, XJ International must find a way to honor its commitment. The company held 2.8 billion yuan ($389 million) in cash and cash equivalents at the end of last August, just enough to cover what it owes the bondholders. But the convertible bonds aren’t XJ International’s only debt obligation. The company’s other liabilities, including bank loans and payables, amounted to more than 11.6 billion yuan, which already vastly exceeds the company’s shareholder equity.

XJ International booked a significant valuation loss for the convertible bonds in its last fiscal year ended in August, which contributed to a decline in its net profit despite revenue growth for the period. This indicates that perceived credit risks of the company have increased as its liabilities have grown faster than its stakeholder equity.

After all, the root cause of the deterioration of the company’s finances since it issued the convertible bonds is the cooling of its business during the pandemic and its lingering aftermath. At the end of last month, XJ International signed a deal to dispose of two subsidiaries and a school to raise 500 million yuan, which looks like a cash-raising exercise to strengthen its finances.

Last July, XJ International also terminated a deal for one of its entities to lend money to another for the purchase of land for a school. The company didn’t provide a reason for the cancelation, but it could also signal financial troubles.

XJ International’s shaky financial health may be a major reason for the selloff of its shares. The company is hardly alone in falling out of flavor with stock investors nowadays as the Chinese economy struggles. Some investors may also be avoiding education stocks in the wake of a crackdown on after-school tutoring service providers in 2021, though XJ International wasn’t affected by that campaign due to its status as a vocational educator.

In fact, the company’s position providing vocational education makes it well positioned to benefit from government incentives encouraging private companies to offer such services. That focus helped to lift the company’s revenue 18% to 3.58 billion yuan in its most recent fiscal year through last August, as its gross profit rose by a similar 20% to 1.68 billion yuan.

XJ International shares still trade at a seemingly decent price-to-earnings (P/E) ratio of 12, although the figure is inflated by its falling net profit. By comparison, China Education Group Holdings (0839.HK) fetches a lower P/E ratio of about 7, while Minsheng Education Group (1569.HK) trades at just 2.8. All those stocks have plummeted since 2021, reflecting generally soured investor sentiment toward this group.

XJ International founder Wang Huiwu has been buying the company’s shares lately, and this month’s name change may also indicate that he has some big plans to reinvigorate the business. But first the company must resolve the more immediate problem of how to repay its convertible bondholders. 

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The former education business of gaming company NetDragon hopes to entice investors with its rollout of software services next year for its classroom-based educational hardware panels

Key Takeaways:

• Mynd.ai has completed its listing on the NYSE American, taking over the publicly traded shell of a company that was wiped out by China’s education crackdown of 2021
• The company’s main asset is the former education business of gaming company NetDragon, including an educational panel hardware unit and complementary software services

By Doug Young

It’s lesson time.

That’s the plan coming from the newly minted Mynd.ai Inc. (MYND.US), which has become the latest company to rise from the ashes of China’s education crackdown of more than two years ago. Mynd.ai formally took on its new name and assets on Dec. 13, as the listed company closed its acquisition of the education assets of Chinese gaming company NetDragon (0777.HK).

Before the asset transfer, Mynd.ai was known as Gravitas Education Holdings, which operated a chain of preschools in China that were largely wiped out as a result of the education crackdown. That preschool business was sold as part of the makeover that paved the way for the injection of NetDragon’s education assets into the company.

The resulting new company, whose name changed to Mynd.ai as of Dec 13, looks nothing like the former Gravitas. Most importantly, the company’s assets are all outside of China, consisting mostly of a money-losing hardware business selling customized computers, also known as educational panels, to schools around the world in markets like the U.S., Britain, Italy and Australia, with plans to move into developing markets like Thailand and Egypt.

That distinction is quite important for investors, since the new Mynd.ai won’t be subject to the same unpredictable Chinese regulators who snuffed out a multibillion-dollar industry overnight with their ban on private companies providing tutoring services for primary students in 2021.

Still, Mynd.ai is losing big money at the moment, as it focuses on getting as many of its educational panels into classrooms as possible, most of those carrying the Promethean brand name. As it builds up its classroom footprint, the company hopes to start selling educational software for schools to use over its panels in their daily instruction. Such a business, known as software as a service (SaaS) carries much higher margins than hardware sales due to the easy of scalability – which Mynd.ai hopes will lift the company to its first profits.

NetDragon first announced its plan to spin off its education business back in April. The company derives roughly half of its revenue from the education business, and the other half from its older game business. But the game business is its profit engine, carrying an enviable gross margin of 97% in the first half of this year. By comparison, the education business had a far lower gross margin of just 24%, keeping that part of the business squarely in the red.

With the spinoff now complete, the real challenge begins for Mynd.ai to convince investors it has a winning formula that can earn profits in the not-too-distant future. The company has a current market value of about $200 million, based on a regulatory filing last week that showed it had the equivalent of 45.5 million American depositary shares (ADSs) as of Dec. 13, multiplied by its latest closing price of $4.52 on Dec. 22 just before the Christmas holiday.

Chinese or foreign?

Mynd.ai’s latest value would give it a relatively weak price-to-sales (P/S) ratio of just under 0.5, which is hardly what one might expect for a company with such big growth and profit potential. The figure trails the 3.12 for foreign edutech firms Udemy (UDMY.US) and 1.93 for Chegg (CHGG.US). But it’s not far from the 0.64 for China’s own Youdao (DAO.US), showing there may still be some confusion about whether this is a Chinese or foreign edutech play.

NetDragon itself is one of China’s older gaming companies, and will continue to control the new Mynd.ai with 72.9% of its shares. But the company certainly wants investors to think this is a foreign company beyond the grasp of Chinese regulators. We would tend to agree that this looks like a foreign company since most or all its assets are outside China, even though the company itself is controlled by a Chinese entity.

Ownership aside, the other big issue most likely weighing on investors’ minds is Mynd.ai’s big losses, and also a worrisome sales drop in its latest reporting period.

Revenue from NetDragon’s education business shot up 34% in 2022 to 4.3 billion yuan ($603 million), as schools in many of the markets where it operates snapped up its interactive panels in the race to obtain the latest high-tech learning gadgets. But then the figure suddenly sagged by a similar 29% year-on-year to 1.7 billion yuan in the first half of this year.

Company executives said the big revenue drop was temporary, and represented a sort of breather after the big 2022 gains as the market digested all the new panels purchased the previous year. NetDragon’s education division reported a loss of 249 million yuan in the first half of this year, much larger than the 36 million yuan loss a year earlier.

“We currently expect to release the first software subscription package with integration of Promethean panels by the end of the year,” NetDragon said, referring to its education business in its interim results in August. “We are also in active discussion with our partners to explore collaboration in large language models,” it added, hinting at the potential for artificial intelligence to accelerate the adoption of its panels and demand for its software services.

NetDragon first entered the education business as a diversification move in 2014, more than a decade after launching its original gaming business. It quickly grew the business through a series of acquisitions, starting with its $130 million purchase in 2015 of London-listed Promethean World. Two years later it purchased Los Angeles-based JumpStart, a partner of DreamWorks Animation. And in 2022, Promethean acquired Explain Everything, a digital whiteboard app that is becoming the foundation for Mynd.ai’s SaaS business.

Promethean sold 253,000 panels last year alone, meaning it probably has a large enough base to start earning some significant money from its first subscription services when they become widely available next year. Now it just needs to gain some traction for that part of the business, and also return to revenue growth. Doing both of those things could breathe some needed life into the company’s new listing on the NYSE American exchange.

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China's largest privately-owned vocational educator posted double-digit revenue growth in its latest fiscal year, but also a rare profit decline 

Key Takeaways:

• China Education Group’s profit fell in its latest fiscal year, despite growing revenue, due to a 390 million yuan goodwill impairment by one of its vocational colleges
• The leading vocational educator’s student enrollments are expected to keep growing steadily, boosted by favorable national policies

By Li Shih Ta

Life may be returning to normal for Chinese students with the end of pandemic restrictions, but you wouldn’t see that right away by looking at the bottom line in China Education Group Holdings Ltd.’s (0839.HK) latest annual report released at the end of last month. Profits for China’s largest privately-owned education group tumbled by a rare 25.2% in its fiscal year through August, sending its shares down by 18.5% to a 52-week low. The stock is now down about 75% from its peak in June 2021.

But the news was better on China Education’s top line. For its fiscal year through Aug. 31, the vocational educator recorded revenue of nearly 5.62 billion yuan ($793 million), up 18.1% year-on-year. The company said the decline that saw its annual profit fall to 1.38 billion yuan was mainly due to a 390 million yuan goodwill impairment loss related to one of its secondary colleges. 

Expansion side effects 

In 1999, China Education Group’s two founders, Yu Guo and Xie Ketao, set up Jiangxi University of Technology and Guangdong Baiyun University, respectively. They merged the two under a single management in 2017, and began to expand after China’s Ministry of Education started encouraging independent colleges to set up vocational education institutes the next year.

From 2018 to 2020, the group embarked on an acquisition binge, picking up an average of three higher education and vocational education colleges each year. By 2021, it owned 14 colleges in nine cities, mostly in China but also as far afield as Britain and Australia. The M&A approach offered the company a faster and more efficient way to quickly bulk up, since setting up new institutions often involves a much lengthier process.

But M&A also relies on picking the right targets. In its own buying binge, China Education Group focused on leading regional colleges valued more highly than their peers, which allowed it to accumulate goodwill. At the end of its latest reporting period, the company’s cumulative goodwill had reached 3.63 billion yuan, accounting for 10.1% of its total assets.

But the company recorded a 460 million yuan loss due to goodwill impairment for the first time in this year's annual report, accounting for about 1.3% of its total assets. The loss was mainly due to a downward revision of expected revenue from one of its acquired colleges owing to changes in its customer trends and preferences. The company explained that even though the college's business grew year-on-year in its latest fiscal year, it still hasn’t recovered to its pre-pandemic levels.

While goodwill impairment is a one-time item, it could still be considered a red flag if investors believe that future profits might be similarly dragged down by other acquired assets failing to meet expectations.

Steady new enrollment 

Despite the goodwill impairment, China Education Group is still growing steadily. It pocketed 5.4 billion yuan in revenue from its domestic business in its latest year, up 18.2%, mainly driven by the growth in its vocational education business. It also earned 220 million yuan internationally, up 16.4% year-on-year, on the lifting of entry restrictions for foreign students post-pandemic in Britain and Australia.

The revenue increases were mainly driven by growth in student enrollment and tuition fees. China Education Group's full-time enrollment totaled 248,000 students at the end of August, up 7% year-on-year, of which 199,000 students were in its vocational schools, up 13% year-on-year. The company enrolled 97,000 full-time new students for its 2023/2024 academic year, up 17% year-on-year, of which new full-time enrollments were up 18%.

While declining fertility rates are causing headaches for a country that was once the world’s most populous, annual births still exceeded 15 million from 2005 to 2017, meaning demand for higher education should stay relatively strong through at least 2035. The gross enrollment rate in higher education is expected to reach 60% in 2025, and as high as 65% by 2035, according to government estimates.

At the same time, Beijing’s strong support for vocational education is also boosting teaching quality, social recognition of vocational education degrees, and students’ willingness to pursue such a path. Such education oriented to specific skills has become an important means to address worker shortages in areas like machine building and repair and IT services. As such education becomes a more viable option for many, annual enrollments have exceeded those for more general bachelor's degrees for four consecutive years since 2019.

Valuation rebound?

A government paper titled “Opinions on Deepening the Reform of the Construction of a Modern Vocational Education System” released a year ago highlighted the need to expand enrollment for students taking the Vocational Education Higher Education Exam. It also stated priority should be given to key industries and fields such as next-generation information technology (IT), high-grade CNC machine tools and robots, high-end instruments, aerospace equipment, energy-saving and new energy vehicles, new materials, and biomedicine.

To cater to that need, China Education mentioned that its colleges have established 372 undergraduate majors at the higher vocational education level, up by 13 year-on-year, focusing on intelligent manufacturing, digital creativity, virtual reality and other specialties. It offers 182 specialized majors, up by 13 year-on-year; and 205 continuing education majors, up by 13 year-on-year. All this shows the company is moving in a broader direction focused on the "integration of industry and education."

China's vocational education market grew from 604.5 billion yuan in 2018 to 871.9 billion yuan in 2022, representing annual growth of nearly 10%, and is expected to reach 1.27 trillion yuan in 2027, according to Frost & Sullivan. 

Despite that potential, the sharply negative reaction to China Education’s latest goodwill impairment shows the market may still be wary of this policy-sensitive industry. Even after the selloff, China Education Group's price-to-earnings (P/E) ratio of 8.2 times is still higher than those for its main rivals Hope Education (1765.HK) at 7.2 times, and China New Higher Education Group (2001.HK) at 4.3 times.

At the end of the day, China Education Group has emerged as the leading private provider of high education in China, with its strong focus on government-favored vocational training. Its steady expansion through M&A and strong policy support should ultimately work to its advantage as it tries to win back the hearts and dollars of investors.

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The learning solutions company has swung into the black after investing in AI-powered educational devices and developing a newly approved MathGPT tool

Key Takeaways:

• TAL's revenue rose 40% in the second quarter, propelling the education group from a loss to a net profit of $37.9 million.
• Competition over educational AI is heating up in China, as companies develop large-scale AI models and launch intelligent learning devices

By Molly Wen

Imagine a smart tool that can help a struggling student grapple with numbers as well as words. For China’s TAL Education Group (TAL.US), arithmetic is the next frontier in AI-assisted learning.

Like many companies in the sector, TAL has been eager to harness the power of artificial intelligence as a teaching aid, even before ChatGPT burst onto the business scene a year ago. In February, TAL launched a smart learning device linked to the company’s XRS online teaching platform. Going forward, it is looking to add more intelligent tools into the mix, including a large-scale AI model that could act as a personal math tutor.

Educational hardware with embedded AI looks to be a smart choice for China’s learning industry, which is still recovering from a government crackdown two years ago on after-hours tutoring.

TAL revealed on Nov. 7 that its MathGPT had passed the vetting stage under Chinese regulations governing generative AI, becoming one of the first large-scale educational models to get the official green light. This meant the model could move from internal testing to the open market, the company said.

In the future, the learning solutions provider intends to add a series of AI applications to its learning device, as they are developed, including “AI Precision Learning”, “AI Answering Questions”, and “AI Dialogue Learning”. Through an interaction with a student, the dialogue-based app would be able to identify development areas and devise a staged learning plan.

After the news, TAL’s share price rose for three straight days. The cumulative gain of 4.3% expressed investor confidence about the potential payoff from the company’s big bet on AI. The stock had been fluctuating around $9, down 90% from a post-IPO peak of $90.96 but well above a low of $1.60 in 2022.

At the beginning of the year, TAL launched its first learning device, entering the educational hardware market alongside companies such as iFlytek (002230.SZ), Baidu (BIDU.US; 9888.HK), via its AI brand Xiaodu, and Zuoyebang. Despite coming later to the device business, TAL can leverage its XRS brand and tutoring resources. At TAL’s online flagship store on TikTok, the XRS learning tablets are priced from 4,500 to 5,200 yuan. More than 140,000 of the tablets have been sold on TikTok alone, adding up to a gross merchandise volume (GMV) of more than 630 million yuan ($86 million).

The new income stream has bumped up the numbers in TAL’s latest earnings,  announced on Oct. 26. Revenues in the second quarter to the end of August rose 40% to $412 million from the same period last year. The hardware boost meant the company flipped from a net loss of $787,000 in last year’s second quarter to a net profit of $37.9 million this time. Operating cash flow also turned positive in the latest quarter, with a net inflow of $130 million.

After being forced to axe tutoring for school subjects, TAL has found an alternative growth path blending educational services, intelligent hardware, textbooks and products using large-scale learning models. The services include literacy classes for small groups, online courses for larger groups and tutoring for overseas study in science, coding and humanities. However, TAL did not disclose a revenue breakdown for each business in the quarterly results,.

Fierce competition in AI gadgets

After deciding to invest heavily in AI technology, TAL diverged from an earlier strategy of cost controls. Operating expenses and sales costs rose nearly 31% in the quarter from the year-earlier period to $383 million. Cost of sales came to $169 million, a year-on-year rise of 44.6%, while sales and marketing expenses rose just under 49% to $116 million.

The need for higher spending was driven by Intensifying competition in the education industry. Aside from MathGPT, another AI model to gain Chinese regulatory approval is “ZiYue” from Youdao (DAO.US). The language tool, installed in dictionary pens and other devices, acts as an AI tutor, answering children’s questions and helping to resolve study problems.

Students and scholars can choose from various AI language models in learning devices, such as the Xinghuo model in iFlytek machines, the Xiaodu Lingji in the Xiaodu Qinghe, an AI-driven mobile phone, and the Tongyi in a learning device from TmallGenie, part of the Alibaba (BABA.US; 9988.HK) group. All the devices are capable of AI tutoring, voice interaction and other functions similar to those on offer in TAL’s XRS device.

Compared to Baidu, Alibaba and other AI-focused Internet companies, TAL can count on years of experience in the tutoring business, generating data to shape its applications. TAL described its data trove and its understanding of learners as assets in debugging a large-scale AI model. Taking AI tutoring as an example, XRS can draw on accumulated experience of tutoring methods for children of different age groups.

But the strategy does carry policy risks, bearing in mind that the government has acted in the past when it sees a threat to children’s wellbeing. Regulations on the online protection of minors, due to go into effect early next year, require devices aimed at children to identify harmful or unlawful content. Once the rules come into force, regulation of learning devices may come under closer scrutiny.

In terms of valuation, TAL's current price-to-book (P/B) ratio is 1.6 times. That ratio lags the three times for New Oriental Education (EDU.US; 9901.HK), an online tutoring giant that has branched out into e-commerce, but the figure exceeds the 1.3 times for extra-curricular tutoring business Gaotu Techedu (GOTU.US). Therefore, investors may wait to see whether TAL’s recent moves will add up to a bigger share of the market for AI-powered learning devices, and higher profits in the future.

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The education giant has sealed its return to financial health with quarterly adjusted profits at a three-year high and revenues back to 92% of their level before a crackdown on the training sector

Key Takeaways:

• Since divesting its academic tutoring business, New Oriental has bounced back by developing new education ventures, beating market expectations for both revenue and profit in its latest quarter  
• The results pushed its share price to a two-year high, prompting major banks to raise their target price for the stock

By A. Au

Two years after suffering a near-death experience, a market leader in China’s private education industry has roared back to life.

New Oriental Education & Technology Group Inc. (EDU.US; 9901.HK) was forced to rewrite its business model when the government outlawed its biggest revenue earner, after-school tutoring. But the company has found new ways of making money as an education provider, restoring its finances to a healthy state.

New Oriental’s latest quarterly earnings surpassed market expectations, as revenues reached 92% of their pre-crackdown level and adjusted net profit hit a three-year high.

Net revenues for the quarter to the end of August rose 47.7% to $1.1 billion, according to an earnings report released last Wednesday. New Oriental’s net profit soared 152% to $165 million, while adjusted net income on a non-GAAP basis, which better reflects the operations of its main businesses, jumped 126% to $189 million.

Investors welcomed the latest evidence that New Oriental has recovered from the existential crisis of two years ago. Its U.S. share price jumped 5.5% to $64.59 on the day of the earnings report, and advanced another 1.3% to $65.46 the next day, reaching its highest level since July 2021.

That was the month the Chinese government outlined plans to cut the burden of homework and after-hours tutoring for school students, unleashing carnage across China’s private education industry. In November 2021, New Oriental announced that its learning centers around the country would stop providing curriculum-related training services to students from kindergarten through ninth grade (K-9).

The abrupt amputation of a mainstay business generated tens of billions of yuan in costs for laying off staff and cancelling rental contracts, pushing the company deep into the red.

In its last results before the policy bombshell, New Oriental logged revenue of $1.19 billion for the quarter ending in February 2021. The latest quarterly revenue figure of $1.1 billion takes the education provider’s turnover back to 92% of the pre-upheaval level.

New Oriental’s adjusted profit of $189 million in the latest quarter was its best performance in three years, in line with the three months to the end of August 2020. Back then, New Oriental’s training service, without policy disruptions, posted an adjusted profit of $185 million.

After divesting its K-9 curriculum business, New Oriental has focused on tutoring and exam-related services that were not covered by the ruling, such as training students for college tests and overseas study. The company has also added new revenue streams from extra-curricular education, intelligent learning systems and e-commerce live streaming.

By the end of August this year, the company’s total number of schools and learning centers reached 793, an increase of 45 in three months and 87 more than a year earlier. Meanwhile, the company said its tutoring business for non-academic subjects was operating in nearly 60 cities, with about 438,000 enrollments in the last fiscal quarter. In addition, its intelligent learning systems and devices have been adopted in about 60 cities, with around 181,000 active paying users in the period, nearly double the 99,000 in the previous quarter.

In July, the company had projected net revenue for the three months to end August, the first quarter of its fiscal year, would range between $983 million and $1.01 billion, a year-on-year rise of about 32% to 35%. But the actual first-quarter result beat its own forecast, with revenue of $1.1 billion. Founder and chairman Yu Minhong said the company’s new education business was starting to make a major earnings contribution after more than a year of trial and development. Revenue from the new businesses doubled from the same period a year earlier, he said in the earnings statement.

The new ventures include the teaching of life skills and non-academic subjects such as storytelling, art, elocution, personal literacy, science and programming. New Oriental has recognized that middle-class parents in China want their children to develop a range of skills in addition to excelling in traditional subjects.

Higher price target

Meanwhile, the business of preparing students for overseas study has picked up since Covid-era travel controls were lifted. Revenue from New Oriental’s test preparation business grew 51.7% in the quarter while consulting services for overseas study rose 26.6%, in what Yu described as an encouraging performance.

Looking ahead, the company expects revenue for the current quarter ending in November to range between $785 million and $804 million. That would be lower than in the just-announced quarter but would mark a rise of 23% to 26% from the corresponding period a year earlier. The sequential drop is due to seasonal effects. Many college students spend the summer vacation preparing for exams such as TOEFL and IELTS, which test English language ability for university study abroad. Hence, the quarter to the end of August is typically the peak period for New Oriental.

The strong results prompted investment banks to raise their price targets for the stock. CICC said in a research report that quarterly revenue exceeded expectations, lifted by enhanced operating leverage, and the outlook for the full year looked bright. Although the expansion pace may slow after the summer season, the number of New Oriental schools and teaching centers was expected to rise between 15% and 20% in the full fiscal year, while revenue was projected to grow 30%, given a steady increase in the utilization rate. Therefore, the bank raised its price target for New Oriental by 12% to $75, with an “outperform” rating.

Macquarie noted that New Oriental had lowered its guidance for revenue growth in the second quarter ending November to a range of 23% to 26%, mainly due to a higher year-earlier base for its learning equipment business and e-commerce revenue from subsidiary East Buy Holding Ltd. (1797. HK). But the bank said another upside earnings surprise could not be ruled out, as the company has tended towards more conservative guidance and growth momentum in its new business remains strong. The bank maintained an “outperform” rating on New Oriental and lifted its Hong Kong share target price to HK$63.6 from HK$53, a potential rise of about 20% from current levels.

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The provider of educational products and services for children reported just 4.5% revenue growth in the second quarter, but its profit nearly doubled on reduced R&D spending

Key Takeaways:

• iHuman’s revenue grew by an unimpressive 4.5% in the second quarter, but it maintained its margins and reported strong profit growth on cost controls
• The education company’s deferred revenue declined for a second consecutive quarter from a peak at the end of last year

By Doug Young

China’s bloody education crackdown of two years ago destroyed an entire industry, including billions of dollars in market value, as much of the sector was wiped out of existence in just a few months. But now that the dust is finally settling, a new question is presenting itself, namely, is it possible for remaining survivors to actually thrive once again?

The latest earnings from iHuman Inc. (IH.US) don’t look too encouraging in that regard. The quarterly report shows a company whose business is effectively in a holding pattern, eking out single-digit revenue gains that might look good for a slow-growth sector like grocery stores but hardly looks exciting from a growth perspective.

iHuman managed to nearly double its profit for the quarter, which looks impressive at first glance. But a closer examination shows the profit growth actually slowed from triple-digit gains in previous quarters. What’s more, most of the latest gains came from cost savings as the company pulls back its R&D spending.

Such cuts might be good for profits in the present, but, again, are hardly the hallmarks of a growth-hungry company. 

iHuman should at least be commended for simply surviving the crackdown of two years ago, which was mostly targeted at providers of after-school tutoring services for K-12 students in core curriculum areas at Chinese schools. The company managed to skirt the crackdown due to its focus on products and services focused more broadly on developing young children’s creativity and learning skills, rather than on specific school subjects.

But having survived that crackdown, the company hasn’t been able to excite investors with the kinds of high double- and even triple-digit revenue growth it reported before and just after its 2020 IPO. As a result, its shares have lost about three-quarters of their value from their IPO price. That may be better than many former educators that went bankrupt, but such anemic growth is hardly going to draw new investors to its stock.

One of iHuman’s more positive attributes is its profitability, as most of its peers are still losing money. By comparison, the company turned profitable last year and reported its sixth consecutive quarter of profitability in the latest reporting period. But its price-to-earnings (P/E) ratio currently stands at a lowly 7.

Its price-to-sales (P/S) is a bit more respectable at 1.2, as investors have rewarded the company for at least being profitable. By comparison the loss-making Youdao (DAO.US) trades at a P/S ratio of just 0.63; though Fenbi (2469.HK), which targets adult education, trades at a higher 3.3 after it also reported its first profit this year.

iHuman’s shares rose 5.5% in the two trading days after its results were published last Thursday. But then they gave all that back on Monday, which nicely summarizes the lack of excitement about this company, and perhaps more broadly about China’s education sector these days.

That’s unlikely to change anytime soon, as consumers rein in their spending due to all the economic uncertainty in China now. While Chinese parents are famous for spending lavishly on their children’s education, such spending is also one of the first things that’s relatively easy to curb in economically uncertain times.

Cautious company

iHuman also appears to be acting more cautiously these days, which perhaps is a commendable trait in the current economic climate. The company actually cut its overall operating costs by 7.6% in the second quarter to 130 million yuan ($17.8 million), led by a 19% cut in its R&D spending.

At the same time, its sales and marketing spending rose 21%, showing the company was still courting new customers for its existing products. As a result, iHuman managed to boost its average monthly active users (MAUs) by 11.7% year-on-year to 20.3 million during the second quarter – one of the few double-digit gains for its main performance metrics.

One other positive trend came in the company’s deferred revenue and advances, which has been dropping over the past two quarters after peaking at the end of last year. That figure stood at 303 million yuan at the end of 2021, but then rose sharply to 379 million yuan at the end of last year as consumers struggled to pay their bills during China’s tough Covid restrictions.

But the figure began to drop this year, and was back down to 326 million yuan by the end of June. While China’s scrapping of its “zero Covid” policy is probably the main driver behind the improvement, iHuman should also receive some credit for becoming more cautious in the current slowing economic environment.

But caution, while commendable in economically uncertain times, is hardly anything to get excited about. That lack of excitement was manifest in iHuman’s top-line revenue, which rose just 4.5% in the second quarter to 241 million yuan from 231 million yuan in the year-ago period. That slight rise, together with the cost controls, helped the company maintain its gross margin at a relatively strong 70.9%, roughly flat from the 70.8% a year earlier. And as we’ve previously noted, the company’s profit rose 93% to 42.1 million.

One other slightly positive element in iHuman’s report was its cash, which rose slightly to 1.1 billion yuan at the end of June from 1.05 billion yuan at the end of last year. While that might not look too exciting, any increase in the current environment shows the company won’t be facing a cash crunch anytime soon.

We’ll close by returning to the question we posed at the start, namely, will iHuman and other private education companies ever be able to return to their headier growth of an earlier era? Truth be told, Chinese have always placed a huge emphasis on education, and thousands of years of that tradition is hardly likely to change now.

That means the market could still hold big potential in the future. But first China will have to make it through its current economic slowdown and return to more stable growth. And there’s always the potential for future crackdowns, which will remain a major risk factor in China for the foreseeable future.

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The supplier of vocational training and exam tutoring has strengthened its market presence with an average of 9.2 million monthly active users in the first half of the year

Key Takeaways:

• Fenbi performed well across its three major businesses in the first half, with gross margin on classroom-based tutoring jumping 10 percentage points to 46.3%
• Going forward, the company plans to invest in upgrading its AI technology

By Molly Wen

China’s weakening economy has pushed youth unemployment rates to record levels, but the dark cloud came with a silver lining for one business sector: vocational training.

Customers are flocking to adult education providers such as Fenbi Ltd. (2469.HK), looking for help to pass the rigorous civil service exam that is seen as a ticket to a stable government job.

Already fierce, competition for civil service positions has intensified in the economic slowdown since the Covid pandemic. With around one in five people aged 16 to 24 unemployed, more job seekers are pursuing career ambitions in the public sector, as applications for the civil service exam jumped 22% this year to more than 2.5 million.

The benefits to Fenbi’s bottom line were clear in the company’s half-year earnings report released late last month. The training provider swung into profit in its first set of earnings since listing on the Hong Kong stock market early this year, logging operating income of 1.68 billion yuan ($230 million) for the six months, a rise of nearly 16% from the same period a year earlier.

The company turned in a net profit of 81.48 million yuan compared with a loss in the first half of last year, while its adjusted net profit tripled to 288 million yuan.

Fenbi’s share price seesawed as investors weighed up the profit performance and the outlook. The stock fell more than 3% on the day of the results, but over six trading days it climbed 5.9%. Guosheng Securities, Cinda Securities and other small investment banks gave the adult education provider a “buy” rating. CICC Securities said the results were in line with expectations, but the pace of growth could slow in the second half as the timing of this year’s civil service exams would concentrate the benefits in the first half.

Fenbi specializes in online tutoring for people pursuing careers in the civil service, government-sponsored institutions, educational institutions and several other professions and industries. Its business is divided into three main strands: online tutoring, classroom-based training, and learning products and toolkits.

All three segments grew in the first half of the year, led by a rapid rise in face-to-face learning.

The core business of online tutoring brought in revenue of 730 million yuan, 2% more than in the corresponding period last year, while gross margin on this part of the business reached 61%. At the end of June this year, registered users of Fenbi’s online platform totaled 56.2 million. The company said paid visits to its higher priced premium online courses had continued to increase, becoming the main growth engine for its web-based training business.

Classroom-based tutoring also bounced back from the Covid epidemic, as revenues rose just over 32% to 693 million yuan in the first half. The revenue share for classroom instruction, at just over 41%, was not far behind the 43% for online education. With more efficient use of staffing and teaching networks, the gross margin of offline tutoring rose 10 percentage points to 46.3%. In addition, sales of learning products and toolkits rose 23% to 259 million yuan.

Fenbi, which means “chalk” in Chinese, has trimmed its full-time teaching staff by nearly 15% to 3,563, while the number of its other employees rose sharply to 3,672, exceeding the size of its full-time teaching faculty, which may be related to enhanced marketing efforts. The company’s marketing expenses rose around 20% to 304 million yuan compared with the first half of 2022.

In recent years Fenbi has been actively moving from online instruction to face-to-face tutoring using a model known as OMO (online-merge-offline), while applying different course content to the two channels to avoid internal competition. It also set up centers across China to convert the large user base from its online platform into students of the more expensive classroom-based programs.

The average number of monthly active users rose to a multi-year high of 9.2 million in the first half, a year-on-year increase of 23%, the company said.  CICC believes that Fenbi, capitalizing on its rising profile, should be able to drive revenue growth by accelerating the twin-track approach and delivering differentiated offline offerings in the future.

Ramping up AI

Fenbi is also taking advantage of the recent leap forward in AI-generated content by applying smart technology to tasks such as marking. The company’s self-developed intelligent correction system takes less than half a second to process and grade candidates’ work using model answers, saving time and money as the same task takes teachers up to 10 minutes to carry out. In 2022 alone, the automated system served over 2.2 million people and marked 64.67 million questions.

R&D expenses jumped nearly 68% in the first half to 143 million yuan, mainly from increased payments to content and technology developers. The company said it wanted to capitalize on the potential of big data and artificial intelligence by spending nearly HK$30 million on tech projects in the 2023/24 fiscal year. The money will go towards upgrading data analysis and AI technology, developing virtual reality and augmented reality, and coming up with an online interview system.

Despite the positive figures, as a training business Fenbi remains exposed to structural factors in the market for civil service jobs, such as exam scheduling and the scale of public recruitment.  This year the interval between the national civil service exam and the province-level tests was far shorter than in previous years, narrowing the window of profit opportunity for Fenbi.

Competition is also a growing challenge. After China cracked down on after-school tutoring for children, many institutions shifted into vocational education, and the surge in applicants for civil service exams is attracting more rival businesses into the lucrative arena.

Fenbi went public on the Hong Kong stock market in January this year with an issue price of HK$9.9 and rose 12.1% on its debut day.  But as the Hong Kong stock market has faltered, Fenbi shares have fallen by more than half from their IPO price. Currently, the company’s price-to-sales (P/S) ratio is about 3.3 times, lower than the 7.7 times for the industry leader Offcn Education Technology (002607.SZ). Although the market leader has a superior share of the business, its revenues and net profits are falling, leaving Fenbi with room for a valuation rebound in the future.

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The gaming and education company’s interim results are a lot like the famous Charles Dickens novel, including a feel-good ending to the story

Key Takeaways:

• NetDragon’s revenue declined 13% in the first half of 2023, mostly due to a sharp drop in its education business following strong gains the previous year
• Revenue growth from the company’s gaming business grew 8% year-on-year in the latest reporting period

By Edith Terry

When a company’s revenue falls, so does its stock price – most of the time. But that wasn’t the case this time for NetDragon Websoft Holdings Ltd. (0777.HK), whose interim results released last week show its revenue fell 13% during the six months through June, while its profit dropped 12%.

Despite that, the market shrugged off the negativity, giving the 24-year-old, Fuzhou-based company a pat on the back with a 9.3% jump in its share price the day after the results came out. Rather than focusing on the declines, investors seemed encouraged by the company’s strong post-pandemic gains for its gaming business. They also probably liked a robust plan for its other main business in education, where the company is seeking to expand its share at the lower end of the market for its educational devices.

A spinoff of its non-China educational business is pending, and could rid NetDragon of residual drag associated with negative sentiment towards China’s edtech sector following a high-profile crackdown two years ago.

NetDragon’s revenue fell to 3.7 billion yuan ($506 million) in the first half of 2023 from 4.2 billion yuan a year earlier, while its profit dropped to 500 million yuan from 565 million. Its education business dragged down the overall results with a 29% revenue decline in the first half to 1.7 billion yuan and a loss of 249 million yuan. NetDragon’s gaming business fared better with an 8% year-on-year revenue rise to 1.9 billion yuan, and a profit of 1.09 billion yuan.

Gross margin for gaming was 97%, far higher than the 24% for education, explaining why the company is so keen to spin off the latter business that is dragging on its profitability.

In its earnings call after the announcement, Vice Chairman Simon Leung joked, “The first six months is kind of like the Charles Dickens story, the ‘Tale of Two Cities.’” The novel, set during the French Revolution, has a happy ending, and investors appear to think the same will be true for NetDragon as it gets set to return to its gaming roots with the education spinoff.

The education business has not only weighed on NetDragon’s profits, but is also hurting its valuation. Gaming giant NetEase currently trades at a price-to-earnings (P/E) ratio of 19, while U.S. giant Electronic Arts (EA.US) is even higher at 38. By comparison, NetDragon hardly lives up to its “dragon” name with a P/E ratio of just 10.

The company is quite a veteran in China’s gaming space, founded back in 1999 when the internet and online gaming were just getting started in the country. The company’s move into education looked smart in 2014, when education technology, or edtech, was gaining momentum in China and gaming was showing signs of maturing.

Following that strategic decision, NetDragon quickly massed up in edtech hardware, spending $130 million in 2015 to buy London-listed Promethean World, and following that two years later with its purchase of Los Angeles-based JumpStart, a partner of DreamWorks Animation. In 2022, Promethean acquired Explain Everything, a digital whiteboard app.

But in July 2021, when China began its crackdown targeting many for-profit edtech companies, NetDragon’s education business began to look like an expensive mistake.

Unfairly punished

Here’s where the market may have started to unfairly punish NetDragon. Unlike its gaming unit, which is largely a software-based China business, NetDragon’s education business is largely international and hardware-based. It sells high-end tablets under the Promethean brand, and is planning a move into software as a service (SaaS) to add higher-margin subscription revenues to its hardware sales.

NetDragon argues that the first-half revenue decline and losses in its education business are temporary. The decline came off a high base in the first half of 2022, when the education business grew by 71.2% to 2.4 billion yuan, and far outpaced the 1.8 billion yuan from NetDragon’s gaming business.

Leung said the U.S. market is now “taking a pause” to digest the high level of equipment purchases educators made in 2022, and added the company’s business continues to grow faster than the overall industry by a “wide margin.” The analyst community seems to like the company’s story, with nine out of 11 who follow it rating NetDragon as a “buy” or “strong buy.”

NetDragon’s profit downturn in the first half owes partly to high expenses related to its education spinoff, which the company is conducting by injecting the business into U.S.-listed Gravitas Education Holdings (GEHI.US) in a deal first announced in April. The new company, to be named MYND.AI, will allow the education business to conduct its own fundraising and relieve the company of its Chinese associations.

NetDragon’s administrative expenses rose 22.8% year-on-year in the first half of 2023, partly due to spinoff-related costs. Without those costs, administrative expenses would have been up by a lesser 10%, company officials said. “Our team in the U.S. has been working day and night to complete this,” said Leung said of the spinoff. “We are at the very final stage of the process.”

Powered by a post-pandemic rush of enthusiasm among Chinese gamers, Leung said gaming is once again the “exciting” part of NetDragon’s business, as it uses artificial intelligence (AI) to generate graphic content with a 30% increase in efficiency. The company is also using AI to develop smart “non-player characters” or NPCs, avatars that are independent of users and improve the overall gaming environment.

While AI is breathing new life into gaming, NetDragon’s education strategy could be equally exciting in the future. Instead of focusing on high-end products to maintain profit margin, the company is trying to broaden its appeal by pushing into the lower end of the market with its more affordable ActivePanel LX, which began shipping in June. Boosting its footprint through the sale of more such devices will be crucial to developing the company’s SaaS business providing higher-margin programming services over those devices.

With an installed base of 1.7 million devices, the company plans to roll out software subscription services for its education division under the Explain Everything brand by the end of the year. It is using AI and large language models to help teachers organize classroom material more efficiently and to fast-track market entry to the Middle East, among other markets.

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The education products and services provider returned to revenue growth in the second quarter, and got a three-year extension on debt owed to its parent set to mature next March

Key Takeaways:

• Youdao’s revenue grew 26.2% in the second quarter, bouncing back from a decline in the previous quarter, on strong performance for its marketing services
• The provider of education products and services said its parent agreed to a three-year extension for $200 million in loans coming due next March

By Doug Young

There are a few lessons in the latest financial report from Youdao Inc. (DAO.US), a company trying to find its way in China’s rapidly changing landscape for providers of education products and services.

Perhaps most interesting, Youdao’s results offer a convincing case for the power of artificial intelligence (AI) to really breathe new life into a relatively mature business, in this case the company’s marketing services. The company also appears to be leveraging AI in its core education services, making use of generative AI technology to improve its online learning courses.

Separately, Youdao is also showing the importance of having a strong, supportive parent in China’s brave new world of providing education services. The company was rapidly burning through its cash and had some major debt coming due next year to its parent, gaming giant NetEase (NTES.US; 9999.HK). But like any good parent would do, NetEase has graciously extended the due date for that debt by a generous three years to give its offspring more time to stand on its own.

Despite everything the company has going for it, including a history of strong double-digit revenue growth, Youdao is quite the investor laggard among its peers. Its stock currently trades at a price-to-sales (P/S) ratio of just 0.63, compared with around 1 for QuantaSing (QSG.US), which focuses on adult education; 1.03 for Zhihu (ZH.US; 2390.HK), an online Q&A site with a strong education component; and 1.15 for iHuman (IH.US), which focuses on children’s learning devices.

Investors continued with their tepid view on Youdao after publication of its latest results, bidding down the shares by 2.4% last Thursday after the report came out. The stock is down 36% year-to-date.

Truth be told, we’re not completely sure why the company trades at such a discount, since Youdao is a fairly well-respected brand in China and consistently posts double-digit revenue growth and narrowing losses. That said, a loss is still a loss, and the analyst community doesn’t expect Youdao to become profitable this year or next.

We’ll start off with the big top-line number that showed Youdao brought in 1.2 billion yuan ($166 million) in revenue in the second quarter, up 26.2% year-on-year. The growth rate marked a big improvement from the first quarter, when the company also reported 1.2 billion yuan in revenue, which was down 3.1% year-on-year as demand for its core learning services declined.

The company didn’t give any clear reason for the unusual first-quarter drop in its learning services. But that category, its largest, accounting for about 60% of revenue, returned to strong growth in the second quarter, rising 20.8% to 681 million yuan. It didn’t comment very precisely on the return to growth for the category in the second quarter either. But it’s possible that last year’s base was low due to low demand during China’s widespread lockdowns to control the Covid Omicron variant, including a complete lockdown of the entire city of Shanghai in April and May last year.

Marketing services shine

While education services performed well, the real star of Youdao’s latest quarterly report was its marketing services, a relatively mature segment that hasn’t done well in China lately as companies rein in their marketing budgets. Revenue from Youdao’s online marketing services defied broader market trends, nearly doubling during the quarter to 304 million yuan, accelerating from a similarly strong 80% growth rate in the first quarter. Marketing services now account for about a quarter of the company’s revenue, roughly double their contribution for all 2022.

By comparison, internet search leader Baidu (BIDU.US; 9888.HK), considered a benchmark for China’s advertising market, recorded much slower 15% growth for its core marketing services in the second quarter.

CEO Zhou Feng attributed the strong gains to Youdao’s use of AI-generated content, or AIGC. “By empowering our advertising business with AIGC, we ensured more precise targeting, which helped our customers reach their desired audience faster and more accurately, resulting in historic high net revenues of 303.6 million yuan from online marketing services,” he said.

The company’s smart devices, its third major revenue source, continued to be a laggard in the latest quarter. That segment’s revenue fell 7.4% for the period to 222 million yuan, representing a slight improvement from a 16% decline in the first quarter. The declines could represent a recent trend by Chinese consumers to cut back spending on more expensive items like cars, smartphones and other computing devices in the face of uncertainties now facing China’s economy.

Such caution could become a bigger factor for all of Youdao’s businesses in the future, though the company doesn’t typically give guidance for upcoming quarters.

Youdao managed to keep its operating expenses roughly flat year-on-year, with the result that its gross margin improved to 47% from 42.8% a year earlier. As a result, its net loss from continuing operations improved to 299 million yuan from a 454 million yuan loss a year earlier.

We’ll close with a brief discussion of the company’s cash, which we raised earlier, and is always problematic for this kind of company with a long history of losing money. Youdao pointed out that it continues to rapidly burn through money, noting the value of its cash and short-term investments fell to a relatively low 680 million yuan by the end of June from 1 billion yuan at the end of last year. It also noted that it has 878 million yuan in short-term loans and $80 million in long-term loans from NetEase that will come due next March 31.

Such obligations to anyone else would normally put any company in financial difficulties. But NetEase is quite profitable and doesn’t seem in any hurry to collect the debt, and instead agreed to extend the repayment deadline by three years to March 2027. So Youdao can continue trying to improve its business without worry of a cash crunch.

“We are on a clear path to achieving profitability,” Zhou said on the company’s earnings call, as if to address that concern, though he declined to give any timeline.

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The vocational educator’s revenue grew 4% in the first half of the year, reversing a 14% drop a year earlier when China’s tough Covid-control measures forced many of its schools to close

Key Takeaways:

• China East Education returned to revenue growth in the first half of 2023, but its profit fell as its costs increased more quickly
• The company’s shares have lost more than half of their value this year as investors worry that China’s economic uncertainty could dampen demand for vocational education services

By Doug Young

Vocational educators once stood tall in China’s private education sector, basking in the glow of strong government support even as their peers in the K-12 sector suffered under a major government crackdown. But China’s slowing economy is starting to hit even this government-favored group, as young adults worry about paying for education in an uncertain job market.

The latest financial results from one of the industry leaders, China East Education Holdings Ltd. (0667.HK), seem to reflect the many factors at play in the market right now. On the one hand, the company returned to solid growth in the first half of this year, after posting a dismal first-half of 2022 amid some of China’s toughest Covid control measures that frequently forced schools to close.

At the same time, the company’s growth was enough to return it to 2021 levels in terms of student enrollments – but just barely. And its latest half-year revenue was still below 2021 levels, showing it was feeling pressure to lower tuitions as students become more cost-conscious in the current environment of economic uncertainty.

What’s more, the company’s biggest growth in new student enrollments came in demand for short-term programs, which also seems to reflect growing student caution.

China East Education’s shares fell slightly on Monday, the first trading day after it announced its latest interim results, though they rebounded and were up more than 4% in early Tuesday trade. But far more revealing is their dismal performance so far this year, as the stock has lost more than half of its value since January.

The stock now trades at a price-to-earnings (P/E) ratio of 15, which isn’t terrible but certainly doesn’t look like what you might expect from a high-growth sector. But then again, it’s far from clear that China East Education will be growing fast anytime soon. Even at that modest level, the company is still the head of its class among vocational educators. Peers China Education Group (0839.HK) and Hope Education (1765.HK) currently trade at multiples of 9 and 8, respectively, while the lowly Minsheng Education (1569.HK) trades at a multiple of just 2.

Analysts expect China East Education to earn about 4.46 billion yuan ($616 million) in revenue this year, up 13% from the difficult year in 2022. That would also represent about 8% growth above 2021 levels when business was operating more normally. Still, none of that is anything to get too excited about. And as the company comes under pressure to lower tuitions, its bottom line profit could contract over the medium-term.

All this is quite a change for a group that was previously a relative investor favorite. Beijing has published a number of new policies in the last two years to promote the private vocational education sector, aiming to train young people with practical skills like cooking and auto repair. That support is likely to get stronger as China’s youth unemployment rate reaches record highs above 20%. But whether people will want to spend their limited savings on education in such an uncertain job market remains a big question.

Short-term programs in vogue

We’ll kick off our more detailed review of China East Education’s interim results with one of the most noteworthy trends they revealed, namely soaring popularity of the company’s short-term courses. That kind of spike is probably what you would expect in this kind of economically uncertain job market, since many potential students are looking to limit their spending. At the same time, such short-term students are the least attractive for vocational educators like China East Education, since they aren’t around for very long and thus don’t provide much recurring revenue.

The company offers vocational education services in four main areas. Culinary skills is the largest of those, accounting for more than half of the company’s revenue in the first half of the year. Computer and automotive training both provide about 20% of the company’s revenue, while the remainder comes mostly from beauty industry services training.

New student enrollments, typically for courses of one year or less, shot up by 38% in the first half of 2023 year-on-year at the company’s main culinary academy, and were also up about 5% from levels in 2021. Meantime, new short-term student enrollments for the company’s main computer training academy shot up by an even larger 60%.

All of those figures were much bigger than growth in overall new student enrollments, which rose 20% in the first half of the year to 84,552. The company’s school count remained unchanged at 244 schools nationwide by the end of June, showing China East Education also remains cautious despite its stated goal of expanding its network.

The company’s overall revenue grew 4% in the first six months of the year to 1.95 billion yuan, bouncing back from a 14% revenue decline in the first half of last year. But the latest revenue figure was still below the 2 billion yuan in revenue the company posted in the first half of 2021. At the same time, China East Education’s cost of revenue rose 7% in the first half of the year – or about double the rate of revenue growth – squeezing its profit margins.

As a result, the company’s net profit fell 15.9% in the first half of the year to 204 million yuan from 242 million yuan a year earlier. Its profit on an adjusted basis, which excludes costs related to stock-based employee compensation, dropped by a milder 2.7% to 176 million yuan. We can probably expect to see more such profit declines for the foreseeable future.

Notably, the company didn’t provide any commentary on recent market conditions, unlike last year when it gave lengthy comments on the impact it felt from Covid-control measures. That probably at least partly reflects the lack of clarity in the current environment, as many wait to see if Beijing will take more assertive steps to support the economy.

Such steps could include more scholarships for the swelling number of unemployed Chinese youth, which is clearly a concern. That would certainly provide a boost for China East Education and its peers. But in the absence of such signals, the entire sector is likely to plod along for now with slow or no revenue growth and increasing pressure on its profit margins.

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The livestreaming company found itself in the spotlight when one of its Douyin channels was blocked, and seized the chance to promote its own e-commerce platform

Key Takeaways:

• East Buy swiftly launched a 15% discount on its own app after the Douyin livestreaming account was blocked
• More than 330,000 users downloaded its app in a single day, triggering a share price rally

By Molly Wen

E-commercenewcomer East Buy Holding Ltd. (1797.HK) is making a habit of turning adversity into opportunity.

Formerly an online tutoring firm, the company reinvented itself as a livestreaming enterprise, changing its name from Koolearn to East Buy after a government crackdown two years ago wiped out its after-school coaching business.

After surviving the existential crisis, East Buy was transformed into an e-commerce venture with livestreaming channels on the video platform Douyin as well as its own app. The reinvigorated company was for a time a darling of the Hong Kong stock market.

But misfortune struck again on July 26 when one of its Douyin accounts was suddenly suspended for three days, along with related East Buy online stores. For a livestreaming room with a monthly gross merchandise volume (GMV) of about 40 million yuan ($5.54 million), one day offline means more than a million yuan of lost revenue. The news triggered a share price plunge of 6.5% the following day.

But there was a silver lining, in the form of free publicity for the company’s independent platform, which had been trying to strengthen its presence since launching last August. On the same night that the live broadcasts via Douyin were blocked, East Buy announced a 15% discount on its own app, attracting an influx of loyal fans.

On July 28, East Buy climbed to No.1 among Chinese shopping apps in the Apple store, even surpassing PDD Holdings (PDD.US), with more than 330,000 downloads.

From July 26 to 29, daily sales through the East Buy app kept climbing, from 17.5 million yuan to 30 million yuan, then 32 million yuan and 35 million yuan. The daily sales total on the platform came close to matching a whole month of its business on Douyin. Investors cheered the unexpected windfall, as the share price shot up nearly 29% on July 28.

Neither Douyin nor East Buy provided specific reasons for the channel suspension. East Buy CEO Sun Dongxu was cryptic when quizzed during a livestreaming session on the company’s own app, saying carelessness triggered the action. “We will actively rectify the situation, so please don't worry about it,” he said.

Chinese media filled in some of the potential details.  “The Paper” said it was a breach of rules about diverting traffic to a third-party platform, after a QR code for the East Buy app was revealed when a livestreaming host was explaining some product ingredients.  Other media reports said the three-day suspension was linked to East Buy and Douyin using the same livestreaming source.

East Buy resumed its livestreaming on the Douyin channel on the afternoon of Aug. 1. That evening, viewing numbers reached only around 3,000, and Douyin's data monitor showed sales of about 2 million yuan. In fact, East Buy has six accounts on Douyin. “East Buy”, its most popular branded channel, was the first of its accounts to go viral with bilingual livestreaming of goods, building a fan base of about 30 million. The other five accounts, including the one that was suspended, have about 10 million fans in total.

The appeal of East Buy livestreaming has started to fade this year, with declining sales. From January to March 2023, the average daily GMV of all the East Buy livestreaming rooms fell below 20 million yuan, Haitong Securities research shows. The average monthly viewers fell below 10 million, according to Haitong data. Douyin’s data monitor, Cicada Mom, shows the sales of East Buy livestreaming rooms in the first half of this year fell every month except May compared with the same month a year earlier. By contrast, in the second half of 2022 the average daily GMV of East Buy held above 20 million yuan, and the number of viewers never fell below 10 million.

Weaning off Douyin

As a “super live streamer”, East Buy has a delicate relationship with Douyin. On the one hand, Douyin depends on famous live streamers such as East Buy to attract viewers and boost sales, and any troubles they face could hurt platform traffic. On the other hand, Douyin relies heavily on algorithms and big data to track trends in user interests and drive traffic distribution. It would not be easy for East Buy to remain a top destination on the platform forever.

At the beginning of July this year, East Buy launched independent livestreaming on its own app, which could also be viewed on the WeChat applet and WeChat channels. After the trauma of the tutoring crackdown, East Buy is trying to establish a stable business in its new commercial arena with a fully self-owned platform.

Under the Koolearn brand, the company was spun off as a subsidiary of New Oriental Education & Technology Group Inc. (EDU.US; 9901.HK) and listed separately in 2019. Competition was growing fierce in the education sector before the 2021 crackdown that took away its business.

After experiencing upheaval, East Buy is cautious about going it alone without Douyin. On July 9, founder Yu Minhong told a livestreaming audience that East Buy and Douyin are collaborators for mutual benefit in one ecosystem. He said it was normal for an enterprising company to create its own platform, adding: “We hope that people will not over-interpret our action.”

Some industry insiders believe the account block was a blessing in disguise for the East Buy app, attracting a flood of customers in a short space of time, although expanding users over the longer term may be challenging. Moreover, the company must invest heavily to maintain enough active users.

East Buy’s reach is dwarfed by Douyin’s fan base, with the bigger platform boasting more than 800 million daily active users. Indeed, e-commerce customers tend not to be loyal. After the 15% discount ended, livestreaming figures for the East Buy app fell off dramatically, to less than 10,000 peak online visitors on the night of Aug. 1.

However, the market still has a soft spot for East Buy, judging from the company’s price-to-sales (P/S) ratio of about 9 times, compared with just 3 times for fellow livestreaming platform Kuaishou Technology (1024.HK). With falling traffic on Douyin, it remains to be seen whether East Buy can stay in favor with investors.

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The education and e-commerce group has rebounded into profit from a big annual loss and is aiming to break into tourism, responding to booming post-pandemic demand

Key Takeaways:

• New Oriental Education posted a profit of $177 million in its latest financial year, recovering from a $1.19 billion loss a year earlier  
• The group recently set up a tourism arm to explore opportunities in the so-called livestreaming plus travel sector  

By Ken Lo

China’s New Oriental Education & Technology Group Inc. (EDU.US; 9901.HK) looks to have graduated from the school of hard knocks, after learning a lesson about diversification.

In the last couple of years, the education giant has struggled through a government crackdown on private companies providing tutoring to school students. The ban decimated parts of the education sector and sent New Oriental hurtling to a huge loss of $1.19 billion for the financial year ending in May 2022.

But the company has regrouped under founder Yu Minhong and bounced back into the black in its latest annual results, after branching out into livestreaming and e-commerce. The company is now widening its horizons again with the aim of breaking into travel-related services, drawn by surging demand for stimulating experiences and cultural enrichment since Covid restrictions were lifted.

New Oriental announced last Wednesday that it made a net profit of $177 million in the financial year ending in May, despite a slight drop in revenue. Revenue slipped 3.5 % from the prior year to nearly $3 billion, a multi-year low, but the profit margin of 6.3% marked a big turnaround from the previous year's figure of minus 31.6%. CFO Stephen Yang said he was excited to see such encouraging results.

The recovery has been driven by earnings from new educational ventures as well as the push into livestreaming and e-commerce through East Buy Holding Ltd. (1797.HK), a New Oriental subsidiary formerly known as Koolearn.

In the fourth quarter alone, New Oriental's revenue climbed just over 64% to $861 million, and its net profit approached $29 million, swelled by educational sales and rising income from proprietary East Buy products and e-commerce.

The group cited strong post-pandemic demand for a range of educational services in the final quarter. Revenue from overseas test preparation services jumped around 52%, while income from consultancy about overseas study rose 6% year on year. In the domestic market, test preparation for adults and university students pursuing further studies in China logged a 34% year-on-year leap, and the group’s total number of schools and training centers rebounded to 748.

New educational operations also gathered pace. Its non-academic tutoring business was operating in about 60 cities in the fourth quarter, with 629,000 enrolled students.  About 60 cities had also adopted Its intelligent learning system and devices, with 99,000 paid active users in the quarter, feeding into the better-than-expected profits.

Livestreaming e-commerce, which gave the company a new lease of life in the first half of the year, continued to contribute to revenue growth, the company said, although it did not provide any specific figures. East Buy made significant progress in increasing the variety and scale of its offerings, according to the company statement, organizing livestreaming in many provinces to promote knowledge and appreciation of Chinese culture.

The group forecast revenue of between $983 million and $1,006 million in the first quarter of the current financial year, a year-on-year increase of between 32% and 35%.  On the Hong Kong market, the upbeat forecast boosted New Oriental’s shares, which rallied as high as HK$46.50 in a three-day winning streak, with a cumulative gain of 16.8% from HK$39.80. Jefferies Group, a brokerage, raised its price target for New Oriental to HK$67 from HK$55, citing robust demand for the group’s new products, limited competition from rivals and reduced policy risks.

However, China’s livestreaming e-commerce ecosystem has been struggling to attract new traffic and avoid stagnation. With China's economic growth slowing, consumers are becoming more cautious about their spending. Growth in transaction rates for livestreaming e-commerce has plummeted from nearly 590% in 2018 to just over 48% last year. Therefore, investors may doubt whether the business can continue to be a powerful growth engine for New Oriental.

In the half year to end-November 2022, East Buy reported its gross merchandise value (GMV) for the period had reached 4.8 billion yuan ($670 million). The number of its followers on the short-video platform Douyin, a Chinese version of Tiktok, stood at 35.2 million, and paid orders on Douyin totaled 70.2 million.

However, according to Haitong Securities, there are signs of a possible slowdown. In the first quarter East Buy's average daily GMV fell below 20 million yuan, implying a total GMV of only 1.8 billion yuan for the period, Haitong said.

Travel bonanza

With bottlenecks in some of its businesses, the company has had to find alternative routes to sustainable, long-term growth. One of those avenues is the travel business, as tourism demand has exploded this year since China emerged from repeated rounds of pandemic restrictions.

Even armchair travel can be monetized, as livestreamed travelogues encourage consumers to book actual trips or buy the tourist destination’s products online. The so-called “live streaming plus travel” business is flourishing, offering profit opportunities for New Oriental.

Since the start of the year, East Buy has crisscrossed the country to sell produce and showcase the natural beauty of locations across China. The “Shanxi Trip” in May took in many cities including Taiyuan, Datong, Shuozhou and Xinzhou, featuring more than 100 livestreamed Shanxi products with sales exceeding 75 million yuan. In July, Yu Minhong personally hosted a livestreamed event in Gansu that attracted nearly 50 million viewers. Short videos related to the event were played more than 200 million times.

New Oriental set up a cultural tourism venture on July 19 with registered capital of 1 billion yuan, according to data from the enterprise credit agency Qichacha. The new business is described as spanning travel services, cultural and artistic exchanges, creative activities and online sales.

Existing programs such as international study tours and domestic camps are aimed at teenagers, but New Oriental’s venture is targeting a different demographic: middle-aged and elderly travelers. The group’s diverse operations, from the latest travel project to the core education and livestreaming businesses, cater to a wider customer spectrum and offer an advantage over peers in the pure education sector.

New Oriental's price-to-earnings (P/E) ratio is about 58.8 times, a far higher multiple than the 14.4 times for Scholar Education Group (1769.HK), a fellow explorer in the livestreaming e-commerce space. The higher premium may reflect New Oriental’s broader scope, while indicating that investors have faith in the founder’s mission to transform the company.

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Shares of China’s second largest vocational educator were largely unchanged after it terminated an asset shuffle between two subsidiaries with no explanation

Key Takeaways:

• Hope Education terminated a nearly 2-year-old internal asset shuffle with no explanation
• Despite benefiting from supportive government policies, the vocational educator and its peers suffer from lack of investor interest

By Edith Terry

On July 24, investors barely reacted when vocational education giant Hope Education Group Co. Ltd. (1765.HK) announced the termination of an asset swap between two of its related entities. That may be partly because the deal, first announced in December 2021, involved a web of connected companies, making it hard to figure out who won and who lost with the collapse. Such dealings between related companies are all too common in China, where controlling stakeholders often play such shell games behind the scenes by moving assets between their various holdings.

The original agreement between Sichuan Hope and Tequ Linjia involved the purchase of a school called Shuanglin Education, based in Eastern China’s Jiangxi province, for 50 million yuan ($7 million). As part of the deal, Sichuan Hope was supposed to provide a 181.6 million yuan loan for the purchase of 400 mu (266,680 square meters) of land for the school.

No reason was given for the deal’s collapse, though the extended period before the final termination means someone probably wasn’t happy with some of the terms.

Investors have every right to be confused. The two entities involved in the transaction are associated with two of Hope Education’s major shareholders, who apparently didn’t see eye-to-eye on terms of the deal. Sichuan Hope is tied to Hope Education’s founder, Wang Huiwu. Meantime, Tequ Linjia, is tied to New Hope Liuhe (000876.SZ), one of China’s largest private animal feed companies that later expanded into other businesses.

This story has its roots in the legendary tale of four brothers from Sichuan province who were so poor that one, Liu Yongmei, was given away for adoption and now uses the name Chen Yuxin. The four began as chicken and quail farmers, before moving into the animal feed business. In 1995, the four split their businesses into East Hope, West Hope, Continental Hope and New Hope.

Separately, Wang Huiwu helped to co-found Hope Education in 2005. Two years later he brought in Chen Yuxin and West Hope as investors in 2007, hoping to leverage on the Hope brand name. After that, Wang held 49% of Hope Education through his Sichuan Hope, while Chen and West Hope held the majority 51% through Sichuan Tequ.

The company made a HK$3.2 billion ($410 million) IPO in Hong Kong in August 2018, bringing in conglomerate China Everbright (0165.HK) as an investor by selling it a 12.8% stake. The company was hoping to entice investors with its growth story in China’s vocational education sector, where Beijing has been encouraging private investment to help train up young people with such practical skills as cooking and computer maintenance.

But investors haven’t bought into the story. The stock initially rose as much as 70% in its first three years as a public company, but has lost all that and more since then. At its latest close the shares now trade more than 70% below their IPO price.

The lack of enthusiasm may owe partly to murky moves like the recent mysterious asset shuffle and its termination. Hope Education’s shares were unchanged the day after the deal’s termination was announced, suggesting investors had possibly already lost hope after the deal had still failed to close more than a year and a half after first being announced. Then again, perhaps they simply didn’t understand if the termination was good or bad news for the company.

Growth through acquisitions

The deal is just one of many that have helped Hope Education to grow, and fueled some of the earlier enthusiasm toward the stock. The shares reached their all-time high in early 2021, after the company purchased a technical training school with 7,500 students in the Jiangxi city of Gongqing for 500 million yuan. A year earlier in March 2020, Hope Education announced plans to pay $140 million for 62% of Inti Education Holdings in Malaysia, exciting investors with the potential for global expansion.

The company’s base remains in Sichuan province, where it has 10 schools. But it has also expanded into East China with four schools, including the one Gongqing, and has three schools in North China, as well as one each in South and Central China. In addition to Malaysia, Hope Education also has overseas schools in Thailand and Hungary.

The company’s financials also look solid enough. Its student body totaled 280,453 at the end of February, the end of the first half of its latest fiscal year, which was up 20% from the previous year. Its revenues for the six-month period also rose by a healthy 26.7% year-on-year to 1.9 billion yuan. Its net profit fell slightly from the previous year’s level to 428 million yuan, but the figure actually rose 33% on an adjusted basis, which excludes expenses like employee stock compensation.

With a modest price-to-earnings (P/E) ratio of 9, Hope Education isn’t alone in failing to win over investors. China Education Group Holdings (0839.HK) trades at a similarly modest P/E of about 9, while Minsheng Education Group’s (1569.HK) trades at a far lower 2.

Why so little love for China’s vocational education industry? Like its peers, Hope Education’s business is clearly aligned with government policy to rebalance the educational sector towards vocational training, both to mop up unemployed youth and to develop skills needed for the high-tech industries China hopes to promote.

That policy was amplified last December with new guidelines on “deepening the development and reforms of modern vocational educational systems.” Beijing may be pushing such vocational training to reorient millions of China’s unemployed youth who are having difficulty finding jobs after attending conventional colleges.

Vocational educators like Hope tend to suffer from an image problem in the student community, since many such students see vocational education as a second-choice to traditional universities, limiting their interest in attending such schools. Perhaps some of that negative association has spilled over to the investment community.

Some investors may also incorrectly assume that Hope and other vocational educators are vulnerable to fallout from China’s high-profile education crackdown of two years ago, which overnight nearly wiped out an entire group of companies focused on after-school tutoring in core curriculum areas for K-12 students. But the two areas are quite separate, and the vocational educators have repeatedly emphasized they are actually benefitting from – and not being clobbered by – recent government policy.

Murky dealings like the one that Hope just scrapped could also be partly to blame for the lack of investor enthusiasm. At the end of the day, what’s probably needed is more education all around – for investors on the unique positioning of this group of companies, and for school operators on how to operate more transparently.

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The provider of children’s ‘edutainment’ apps reported its revenue grew 9% in the first quarter, while its gross margin was unchanged year-on-year

Key Takeaways:

• iHuman’s revenue grew 9% in the first quarter, while its profit quadrupled as it controlled costs with a sharp drop in R&D spending
• The maker of children’s “edutainment” apps has launched two new initiatives over the last year to tap the international market, but has yet to record significant revenue from those

By Doug Young

Maybe it was the flatness of its margins, despite triple-digit profit growth and revenue growth that came tantalizingly close to double-digits.

That’s our potential explanation for the notable lack of excitement following the release of iHuman Inc.’s (IH.US) latest quarterly financial report on Wednesday. Two days after the announcement, the stock was unchanged from where it closed the day before the company unveiled its latest quarterly report.

Perhaps the lack of excitement is a good thing these days, given that iHuman operates in China’s sensitive education sector that was subject to a major crackdown two years ago that wiped out an entire industry providing after-school tutoring services for K-12 students. iHuman was largely spared in that crackdown, since it operates in a different space offering “edutainment” apps that help kids improve themselves in areas like reading and logic.

Still, iHuman notes in its latest annual report that one of its major risks is the potential for future crackdowns if Beijing decides to ban or limit its products. Accordingly, the company is working to develop its international business that wouldn’t be affected by such crackdowns. That international push was one of the more interesting elements in the company’s latest quarterly report, which mostly reflected the continuation of recent company trends.

All that said, this company looks relatively well situated in its space providing mostly online apps that can help kids improve themselves.

The company’s founder and Chairman Chi Yufeng and CEO Dai Peng both have deep experience in China’s education and gaming space, much of it related to their previous roles at Perfect World (002624.SZ), one of China’s earlier gaming leaders. Its biggest problem lies in its relatively slow growth, even as the company became profitable last year.

iHuman’s revenue growth picked up a bit to 9.3% in this year’s first quarter year-on-year, reaching 265.2 million yuan ($37 million) in the latest period from 242.7 million yuan a year ago. That was more than double the 4.3% revenue growth rate the company reported for all of last year, though it was well behind the roughly doubling of revenue in each of the previous two years.

At least part of the slowdown owes to iHuman’s own strategic shift to providing online services, compared with its previous mix that also had a large component of offline products and services that typically carry lower margins. As it makes that shift, the company said that less than 10% of its revenue came from offline products and services in 2022.

Like many Chinese companies, iHuman has been focused in the last two years on reducing its spending and operating profitably over a previous strategy of growth at any cost. It continued that pattern in the first quarter, with its operating expenses dropping 18.8% year-on-year to 128.8 million yuan, mostly due to a 36% drop in its R&D spending.

Those cost controls, combined with the modest revenue gains, helped iHuman’s profit quadruple to a record 53.6 million yuan in the first quarter from 13.1 million yuan a year earlier.

Stagnant margins

Despite those positive gains, one thing that has remained stubbornly unchanged over the last few years is iHuman’s gross margin, which is one of the best indicators of its profitability. The figure stood at 70% in the latest quarter, which isn’t bad, but was unchanged from a year ago. And despite the company’s steady move to more profitable online services, the latest margin is only up slightly from 68.7% in 2020.

In fact, such margin stagnation wouldn’t be such a problem if the company could scale up its business more rapidly and return to some of its earlier revenue growth rates. One area that could help in that regard is its international business, which dates back to the launch of its Bekids brand in last year’s second quarter. That brand offers subjects like coding, coloring, science and reading.

More recently, the company launched another kids app, Aha World, in the fourth quarter of last year. That app appears to draw more on the gaming roots of iHuman’s top executives, described as an “open-ended fantasy adventure-themed app.”

iHuman said in its latest results that Aha World entered the top 10 children’s apps in both the Apple and Google Play app stores after its launch. Perhaps that was the case at some point, though the app currently ranks 79^th among education apps on the Apple app store, and wasn’t among the top downloaded kids’ apps on Google Play either. But Rome wasn’t built in a day.

More importantly, iHuman didn’t break out international revenue as a separate category in its latest quarterly report, nor did it in its 2022 annual report released in late April. That indicates the figure is probably still relatively minor, mostly likely well below 10% of its total. But it could certainly become an important contributor in the future, and would help the company to diversify away from its heavy reliance on the fickler China market.

Within China, the company also disclosed that it formed a new partnership during the first quarter with Post & Telecom Press and its Children's Fun Publishing Co. Ltd. affiliate, which is a major Chinese children's book publisher. While that may not sound too exciting, the alliance with such a major state-owned entity could help iHuman to navigate any potential regulatory risks in the future, and seems to signal the company isn’t facing any immediate danger from such risk.

Despite all that, investors clearly want more from the company than they’re currently getting. iHuman’s stock currently trades at a price-to-sales (P/S) ratio of just 1.12, which is just barely above the 1 mark that generally indicates positive investor sentiment. Its figure is roughly equal to the 1.15 ratio for 17 Education (YQ.US), which is retooling after getting caught up in the crackdown two years ago. It’s also behind the 1.22 for the recently listed QuantaSing (QSG.US), which focuses on adult learning but is still losing money.

At the end of they day, iHuman seems to have a decent business model and is boosting its prospects with its new publishing partnership at home and its attempts to build up an international business. Now it just needs to start reaping some rewards from those efforts with a return to faster revenue growth.

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The company officially left the fintech realm in the first quarter by posting no revenue from its original online financing business for the first time

Key Takeaways:

• Qudian’s revenue plunged nearly 90% to just 21.9 million yuan in the first quarter, as it officially exited its original online lending business
• The company is likely to make one or more major acquisitions in the consumer space in the next year using its $1.4 billion in cash and short-term investments

By Doug Young

Qudian Inc. (QD.US) passed a dubious milestone in its latest quarterly results by officially generating no revenue for the first time from the online consumer lending that was its original business when it burst onto the scene about a decade ago. But rather than fade into oblivion, the company’s stock has actually jumped more than 50% over the past month, giving Qudian a market cap of nearly $500 million.

The company’s stock jumped another 5% on Monday after it announced its latest results that showed its revenue tanked by nearly 90% in the first quarter to a negligible amount. But rather than focus on that top line shrinkage, investors were fixated on a huge jump in the company’s profit from investment-related income that left it with a huge pile of cash and short-term investments worth nearly 10 billion yuan ($1.4 billion).

It doesn’t take a rocket scientist to see the company’s current value lies in its big cash position. Now it just needs to find something to do with all that money. Qudian touched on some of the possible ways forward in its latest results, and we’ll explore what the future might hold for the company shortly. But first we’ll briefly recap the bumpy road the company has traveled to the present.

At the time of its founding, Qudian was one of a vibrant field of new Chinese online peer-to-peer (P2P) lenders that sprung up as Beijing briefly welcomed private investment into its financial sector that was then dominated by state-run companies.

But it didn’t take long for Beijing to change its mind and clamp down on the sector, forcing most of the newcomers to either close or look for other business models. While many of the survivors became loan facilitators rather than actual lenders, Qudian took the more radical route of trying its hand first as an educator and later as peddler of packaged meals.

Unfortunately for Qudian, the move into education with its Wanlimu Kids Clubs providing after-school tutoring services was poorly timed. Not long after it launched the service, China banned such after-school tutoring services for K-12 students, similar to how it largely outlawed the P2P business just a few years earlier.

Such clampdowns became common over the last few years in China, as Beijing looked to rein in what it considered unruly practices for a number of newly emerging sectors. Those clampdowns appear to be slowing down recently as China focuses more on the economy, though there’s always the potential for more at any time.

Qudian’s move into packaged meals with its QD Foods was less controversial from a regulatory standpoint. But the foray took it well outside of its core competency into an intensely competitive space populated by more qualified names like leading online grocer Dingdong (DDL.US) and Yum China (YUMC.US; 9987.HK), operator of KFC and Pizza Hut restaurants in China.

Food exit

As a result of the stiff competition, Qudian decided to exit the food space. It said in its latest quarterly report that it has “wound down the QD Food business,” though that unit was still producing some of the scant 21.9 million yuan in revenue the company reported in the first quarter. By comparison, revenue from its original financing business officially reached nil for the first time, after contributing about 35 million yuan in the previous quarter.

While Qudian’s revenue tanked in the latest quarter, it continued to incur operating costs of 84 million yuan. That was also down by more than two-thirds from 286 million yuan a year earlier, but was still much higher than its scant revenue. But the company also brought in 241 million yuan from investment income, partly by using its big cash horde to capitalize on high interest rates. It also recorded a 287 million gain on its derivative instruments.

As a result of those two big gains, the company posted a 414 million yuan profit for the quarter, reversing a 143 million yuan loss a year earlier. That helped to boost its cash to the 5 billion yuan, up from 3.5 billion yuan at the end of last year. The company had an even larger total of nearly 10 billion yuan in cash and short-term investments at the end of March, up from about 9 billion yuan three months earlier.

So, this is clearly a company with lots of cash. Now it just needs to find something to do with it.

In many ways Qudian in its current form looks like a special purpose acquisition company (SPAC), which is just a publicly traded empty shell filled with cash. Such companies typically look for real businesses with good potential, then take those businesses public by acquiring them.

Qudian founder and Chairman Luo Min hasn’t said whether such a merger might be his goal, though he gave some hints in the latest results announcement. “Moving forward, we remain focused on navigating market dynamics and capitalizing on new business and investment opportunities, including those overseas, in order to build long-term value for our shareholders," he said, without providing more specifics.

In the announcement, Qudian described itself as a “consumer-oriented technology company in China” and added it “is exploring innovative consumer products and services to satisfy Chinese consumers' fundamental and daily needs by leveraging its technology capabilities.”

All that seems to indicate Luo is likely looking for a good acquisition in the consumer space, most likely based in China but also possibly overseas. That makes sense, given Qudian’s origins as a consumer lender. The company’s large cash holdings mean it could probably afford one or more large acquisitions, perhaps worth a total of $1 billion or more, which could come in the next year. If and when that happens, this company could certainly be worth a second look, depending on what it ends up acquiring.

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The provider of real-time engagement services will split into two units, one focused on China and the other on its international business

Key Takeaways:

• Agora said it will split into two pieces, one for China and the other for its global customers, to take into account the “unique” needs of each market
• The company posted its fifth straight quarter of revenue contraction in the first three months of the year, the result of lingering fallout from China’s education crackdown of 2021

By Doug Young

The year 2023 is rapidly becoming the “Year of the Breakup” for Chinese tech companies, with Agora Inc. (API.US) becoming the latest to join the trend. The provider of real-time engagement services announced it has split itself into two parts, one focused on China and the other on its non-China operations.

The breakup looks similar to one that attracted far bigger headlines in March, when e-commerce giant Alibaba (BABA.US; 9988.HK) announced a plan to split itself into six pieces. Several other companies are moving in similar directions, including autonomous driving technology company TuSimple (TSP.US) and wearable device maker Zepp (ZEPP.US).

A number of factors are driving the trend, including a desire to operate more efficiently, which is one of the main catalysts for Alibaba. For smaller companies like Agora, the decision also has a geopolitical element, recognizing that China is relatively unique for tech companies due to its higher degree of regulatory oversight compared with other global markets. Growing concerns about data security are also driving the trend, leading companies like Agora to clearly define their individual markets and build ring fences around the data it handles in each of those areas.

Agora briefly made global headlines two years ago when media reported it was one of the main technology partners behind social media sensation Clubhouse’s audio chatroom service. But the company quickly came under fire after people discovered that some of the Clubhouse-related data was being routed through Agora’s China-based servers.

The kind of breakup Agora has just revealed would probably address this kind of issue by making sure data from its international division remained outside of China, ideally housed on servers in the same country where each Agora customer was based.

The company’s new international business will retain the Agora name, while the China-based business will take its Chinese name, Shengwang, Agora said in announcing the move earlier this week together with its latest quarterly earnings. The current U.S.-listed Agora would then become a holding company for the two units, which would each operate independently with their own separate management teams. The international division would be based in the Silicon Valley in California, while the Chinese division would be based in Shanghai.

“We believe that this strategic reorganization will allow us to optimally focus our resources on the priorities of each business – driving growth for the Agora business and competing more effectively for the Shengwang business – while taking into consideration the unique economic and product needs of customers in each market,” said Agora founder and Chairman Tony Zhao, who has a rich history working with real-time engagement technology both in Silicon Valley and in China.

Zhao was a founding engineer at Webex, which was later acquired by Cisco (CSCO.US). He was also previously CTO of Nasdaq-listed Chinese social networking and online karaoke site Joyy Inc. (YY.US), formerly known as YY, which like Webex, developed technology enabling real-time video and voice engagement.

Divorce ahead?

Agora didn’t provide any details on whether the newly announced split could ultimately turn into a full-fledged divorce down the road, which would sever all ties between the pair by giving each its own separate listing. But we wouldn’t be surprised if this ultimately happened, since such a move would greatly reduce the data security risks we previously mentioned.

For now, at least, the company has started reporting separate operating metrics for the two main divisions, giving investors a better idea of how each is doing and what different issues they face.

The nine-year-old company was growing rapidly around the time of its June 2020 IPO, though it has yet to earn a profit for any of its previously reported years. But its growth hit a major speedbump last year when one of its key customer groups – providers of K-12 tutoring services in China – was banned by Beijing from providing such services in 2021. As a result, Agora’s revenue began contracting in the first quarter of last year, and has been declining ever since.

That trend continued in this year’s first quarter, with Agora’s overall revenue down 5.6% to $36.4 million for the period, according to its latest report. The declines look set to continue into the second quarter as well. The company forecast its revenue would total between $34 million and $37 million in the three months through June, whose midpoint would represent a 13% decline from the $41 million it reported a year earlier.

The breakdown between the two new independent units shows that China still accounts for the bigger part of Agora’s overall business. But the international portion is rapidly gaining share as it continues to grow, while the China business is still reeling from the loss of the K-12 education business.

Revenue for the Shengwan China business fell 14.5% year-on-year in the first quarter to $21.3 million, accounting for nearly 60% of the total. The international Agora unit’s revenue rose 10.2% to $15.1 million, though we should also point out the latest figure was down about 4.4% from the previous quarter. The company did a good job controlling costs, with its operating expenses down 25.5% from a year ago. As a result, its non-GAAP loss, which excludes items like stock-based compensation, narrowed to $9.1 million from a $16.9 million loss a year earlier.

The company still has plenty of cash, with $416 million in its coffers at the end of March, meaning it’s unlikely to face a cash crunch anytime soon. More importantly, Agora really needs to return to growth in China and also post some stronger growth internationally if it wants to regain investor favor. Zhao dangled artificial intelligence (AI) as a possible catalyst for that kind of new growth in the not-too-distant figure, pointing out such technology allows humans to experience a wider range of interactions online by offering virtual characters in addition to other humans.

That might sound good in principle, but investors are still not too impressed by the company. Its stock initially fell after the latest earnings report release, though it bounced back the next day. But its latest close of $3.025 is still a fraction of its $20 IPO price. In terms of valuation, the company trades at a quite modest price-to-sales (P/S) ratio of 1.8, which is lower than the 2.1 for the similar Twilio (TWLO.US) but higher than the 0.52 for 8x8 (EGHT.US).

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