As the world of education reels from the effects of a global pandemic, it’s intriguing to note that even the largest educational players are not immune to financial fluctuations. One pertinent example is China Education Group Holdings Ltd. (0839.HK), which, according to its latest annual report released at the end of last month, witnessed a 25.2% decline in profits for the fiscal year through August. This downturn sent the company’s shares spiraling to an 18-month low, a stark decline from their peak in June 2021.
Delving into the details, China Education’s revenue paints a more positive picture. With an 18.1% rise year-on-year, the company generated nearly 5.62 billion yuan ($793 million). However, this did not translate to the bottom line, largely due to a 390 million yuan goodwill impairment loss from one of its vocational colleges. This impairment acts as a reminder of the challenges inherent in rapidly expanding through acquisitions — a strategy that China Education Group has employed notably since 2018.
China Education Group’s beginnings trace back to 1999 with the establishment of two individual colleges by co-founders Yu Guo and Xie Ketao. The duo unified their vision in 2017, a strategic move that positioned them to leverage policies favoring the creation of vocational education institutes by independent colleges. This enabled the group to expand through a series of acquisitions, which while expedient, has also led to significant goodwill on the balance sheet. The 390 million yuan impairment reflects the recalibration of the expected revenue due to shifts in customer trends at one of the acquired colleges.
Despite the current financial hiccup, China Education Group remains on an upward trajectory, evidenced by a 7% year-on-year increase in full-time enrollment, totaling 248,000 students. Vocational education, in particular, has experienced a 13% rise in student numbers, a testament to the growing appeal and necessity of skill-specific training in today’s labor market.
The robustness of China’s vocational education sector is further underscored by projections indicating a continual demand for higher education, predicated on births exceeding 15 million annually from 2005 to 2017. Coupled with government estimates that foresee the gross enrollment rate in higher education reaching 60% by 2025, the potential for growth in this sector appears strong.
Reinforcing this potential is Beijing’s unwavering support for vocational education. Policies are geared not only toward increasing enrollment but also toward enhancing teaching quality and societal recognition of vocational degrees. With vocational enrollments surpassing those of general bachelor’s degrees for four consecutive years since 2019, the strategic alignment with government policy seems to be a wise course for China Education Group.
In terms of market valuation, despite the negative reaction to the latest goodwill impairment, the group stands as the leading private provider of higher education in China. With a price-to-earnings (P/E) ratio of 8.2 times, it still holds a premium over its main rivals. China Education Group’s future success hinges on navigating the policy-sensitive landscape and capitalizing on its strategic focus on vocational training.
As we assess the dynamics shaping China’s educational landscape, it’s clear that China Education Group holds a significant position. The question remains whether the goodwill impairment is a temporary setback or a sign of deeper valuation concerns. What is apparent is the importance of staying informed on these developments and their broader implications for the education sector and market valuations.
I invite our readers to ponder the resilience and adaptability of educational institutions in the face of financial adversities. What are your thoughts on the sustainability of expansion through acquisition in such a volatile market? Feel free to share your perspectives in the comments, and I encourage you to keep a close eye on the evolving narrative of China Education Group and the educational sector at large.
