Hong Kong IPO candidate finds lucrative business model by linking up Chinese students with Western schools

Key points:

  • Global Education Technology is one of the few in a new generation of Chinese education service providers that is profitable
  • The company has carved out a strong niche by acting as middleman between Western schools and Chinese students looking to study abroad

By Doug Young

We begin the week with a look at a new Hong Kong IPO filing by Global Education Technology Holdings Ltd., a relative rare company in China’s ultra-competitive private education sector. Those who follow the space can probably guess why this company is unusual: it’s one of the few with a high-tech angle that has found a way to consistently earn profits.

From its name, one might also guess that this company has found its niche in the lucrative area of helping Chinese students to study abroad, mostly in the U.S., Australia and Britain. This particular niche is still relatively large, and far less-competitive than the broader education services market where most of the money-losing companies are vying for business.

So, while Global EduTech’s profits are still quite modest and won’t knock anyone’s socks off, the fact that it’s profitable should be enough to pique investor interest.

We’ll get to some of the company’s financials shortly, as well as a look at its future prospects and how it’s likely to get valued. But first, we’ll focus on some broader market statistics for overseas study, which is increasingly popular for parents and students who want to escape China’s cutthroat domestic education system dominated by rote learning and the infamous college entrance exam known as the gaokao.

Chinese students commencing studies overseas totaled about 541,700 last year, which was down sharply from 703,500 in 2019 due to the global pandemic, according to an industry report compiled by Frost & Sullivan included in the company’s prospectus filed last Wednesday in Hong Kong. But the report points out the unprecedented drop is likely to quickly return to a growth track as the pandemic eases, and the number of Chinese students commencing overseas studies should reach about 900,000 in 2025.

Equally important, the report says that about half of all students who go abroad are likely to use consultants to find their school. That leads nicely into a quick review of Global EduTech’s business model, which looks rather solid due to its lack of reliance on notoriously fickle consumers.

The company describes that model as a business-to-business (B2B) one where it acts as a bridge between China-based education consultants and the educational institutions to which students ultimately go for their studies in the West. Its revenue comes from the Western education institutions, which pay a fee for every student that Global EduTech brings their way.

Some of that fee then goes to the many China-based consultants that are the company’s partners, with Global EduTech pocketing the rest. The model looks quite reliable since it depends on repeat business for the Western educational institutions, meaning such customers are likely to pay their bills to keep the students coming.

Such a system also seems to have plenty of room for automation. That means Global EduTech should be able to lower expenses and improve margins by reducing the need for human assistance that is now one of its major costs. It should also allow it to better match students with the best options based on their abilities and improve their chances of admission.

Modest Profits

This kind of company often has relatively modest revenues, since all its income comes from middleman fees rather than actual tuitions. But it also has much fatter profit margins since it doesn’t have all the expenses for providing actual education.

That’s definitely the case in this instance, with Global EduTech reporting 2020 revenue of HK$181 million ($23 million) – a figure that might not even match the annual salary of CEOs at some of the world’s largest companies. That figure was down by 13.4% from the previous year, again with the global pandemic cited as the major factor for the drop.

Before that, the company’s revenue for 2019 was up 36% from the previous year.

Profit trends were similar. Global EduTech posted a 2020 profit of HK$31 million, which was down 21% from 2020. But if we look at the more-normal previous year, the company’s profit of HK$39 million for 2019 was up 64% from the previous year. Presuming the situation starts to return to more-normal levels, which looks likely based on the latest signs, the strong double-digit revenue and profit growth seem like safe assumptions for at least the next few years.

A deeper dive into the prospectus also unveils the interesting tidbit that the company’s five largest customers accounted for a sizable 41.6% of its revenue last year, with the largest customer accounting for almost half of that. That means a single customer, which wasn’t named in the report, was responsible for nearly a fifth of the company’s revenue last year.

If you’re a “glass-half-empty” person, that could be sign of weakness if something were to happen to the relationship with that key customer. But if you’re a “glass-half-full” type, it could also show there’s plenty of room for growth if the company can diversify its customer base. The fact of the matter is that many Western education institutions are hungry for Chinese because such students are quite happy to pay full tuition, unlike many local students who require scholarships.

In terms of valuation, the market seems to currently place a high premium on profitable Chinese educators. Virtually no one from the online education space is profitable at this point. But traditional classroom specialists New Oriental Education and China East Education command current price-to-earnings (PE) ratios of 50 and 130, respectively.

A more modest PE of 25 would value Global EduTech at around $100 million. The final figure could be two to three times that amount, depending on how much investors like the company’s business model and its growth potential. At the end of the day, Global EduTech does appear to have found a relatively nice niche and stable business model that could provide a platform for solid growth.   

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