Instructional materials provider sets price range and $34.5 million fundraising target a year after first filing for a New York listing

Key Takeaways

  • A year after first filing for a New York IPO, Jianzhi Education has set a price range of $5 to $7 and a $34.5 million fundraising target for the listing
  • The listing would come after a strong trading debut for another Chinese education firm, indicating investor interest could be returning to the group after a major crackdown last year

By Doug Young

Could a new dawn be coming for Chinese education stocks?

That’s the million-dollar question these days, as investors try to figure out which remaining Chinese education stocks are positioned to thrive as the dust settles after a massive government crackdown on the sector last year. While it’s too early to say if a rebound is near, it’s noteworthy that two of only a handful of recent U.S. IPO applications by Chinese companies have come from the education sector.

We wrote about one of those two weeks ago when shares of language training company Golden Sun Education (GSUN.US) quadrupled on their first trading day on the Nasdaq, in the best debut by a Chinese company in New York for more than a year. The stock has risen even more since then, showing the first-day gain wasn’t just a fluke.

Now, Jianzhi Education Technology Group Co. Ltd. is hoping to copy that success with its own New York IPO, which was detailed in an updated prospectus filed on Wednesday. Jianzhi first filed for the listing almost exactly a year ago.

We wrote about it then, as the timing seemed quite bad. Momentum was building at that time towards a massive government crackdown that saw Beijing ban private educators from offering tutoring services for K-12 students in core curriculum subjects. What’s more, last July represented the height of a regulatory storm targeting Chinese companies listing in the U.S., bringing such listings to a near-standstill. 

Jianzhi wasn’t affected by the education crackdown since its services weren’t targeted by the new regulations. The company sells content, mostly instructional videos, to customers that include universities and libraries that can then offer that content to college students and adults looking to improve their prospects in China’s competitive job market. China actually encourages private sector involvement in such adult-oriented education services, and thus companies in that area are well positioned to thrive if they can offer products and services the market wants.

Following its initial IPO application a year ago, Jianzhi filed 12 updated prospectuses, including the one this week. The latest document shows the company is aiming to raise about $34.5 million, down from its original $50 million goal last year. It has set a price range of $5 to $7 per American depositary share (ADS). A pricing at the middle of that range would give it a market value of $363 million, making it a midsized player in the education sector.

From a valuation perspective, a pricing at the middle of that range would give Jianzhi a price-to-earnings (P/E) ratio of 44 based on its profit last year, though the number drops to 28 based on its higher profit in 2020. The latter number is roughly comparable to the 25 for China East Education (0667.HK) and well above the 4.3 for Minsheng Education, both providers of vocational training services.

The bottom line is that Jianzhi seems to think it should be valued relatively highly due to its big growth potential. An investor reception similar to Golden Sun’s listing two weeks ago would certainly bode well for China’s private education sector in general.

Education is golden

Truth be told, education is really a no-brainer when it comes to its huge potential in China. The challenge for private companies, as we saw with last year’s crackdown, is to avoid sensitive areas like K-12 education in core subjects like history, literature, math and science. Other subject areas like arts and foreign languages are ok, and so is providing instructional materials to other educational institutions. And as we’ve said above, private companies are also being encouraged to provide adult education.

The bottom line is that most Chinese place huge emphasis on education, both for themselves and their children, and are willing to spend big money on courses, materials and products they feel can give them and their children a competitive edge. Accordingly, any company that can create products and services the market wants, while also avoiding sensitive areas, could do quite nicely.

It’s probably too early to say if Jianzhi is one such company, at least based on data from its latest prospectus that looks good but not outstanding. The company’s revenue grew 14% last year to 473 million yuan ($70 million), roughly comparable to the 13% growth it recorded in 2020.

While those numbers won’t win any awards for head of the class, one could also argue the last two years have been somewhat atypical due to repeated school, library and university closures due to Covid-19 disruptions. So, some might say the company deserves a gold star simply for recording double-digit revenue growth during such a difficult time.

Then there’s the issue of profits, which is more problematic. Jianzhi reported its net profit fell 39% last year to 52.9 million yuan from 86.9 million yuan in 2020. The company blamed two of its major projects that included “significant equipment purchasing cost,” as well as higher costs for its educational content procurement.

As a result of those rising costs, the company’s gross profit margin fell to 22% last year from 31.9% in 2020 and 36.5% in 2019. That kind of profit margin erosion is never a good sign, and Jianzhi probably want to try to push its margins back up by using funds from its IPO to boost its economies of scale.

The company had a relatively modest 61 million yuan in cash at the end of last year, or about $9 million, meaning the IPO would instantly more than triple its cash. The company says that 75% of the funds raised would go to new content and product development, with the rest going to sales, marketing and general administrative expenses.

At the end of the day, Jianzhi Education may be most noteworthy in a symbolic way, since a successful listing would make it one of only a handful of Chinese companies to list in New York over the last year. The company is almost certainly hoping to imitate the huge success of Golden Sun’s IPO, betting that investors may be showing renewed interest in education stocks after shunning the group for the last year.

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