China East Education feasts on growing demand for skilled workers

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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