Part 2: Which long-term trends will benefit the Asian market
China's students get fit with intellectual bootcamps
Online education stocks have seen a recent boost due to increased demand for e-learning and e-schooling as a result of social distancing measures during the coronavirus pandemic. However, there are a number of additional long-term trends detached from this economic boom that are likely to ensure flourishing business for educational companies in the future.
For example, student enrollment in Brazil, China and India is expected to grow by more than 50 million between 2015 and 2030*. "However, it is not financially feasible for governments to build only universities made of steel and concrete for this flood of students. Therefore, alternative solutions using bits and bytes, such as e-learning, will have to be used, and the private sector will also be called upon," says Paul Buchwitz, portfolio manager of DWS Invest SDG Global Equities.
The exploding demand for tutoring in Asia will also benefit digital and analog providers. For example, in more developed countries such as Japan and South Korea, between 70 and 80 percent of pre-university students receive tutoring. In China, 26 percent of students receive tutoring, but the absolute figure is actually quite large given the size of the population.
One major factor driving growth in the tutoring industry is the rigorous admissions process for universities, where academic performance is the sole yardstick. Unlike the process in the U.S., social commitment is not taken into account. For example, in 2017, there were around 13 million students who graduated from Chinese schools, 9.4 million of whom attended the Gao Kao, the national college entrance exam. Of the 9.4 million, only 3.7 million were actually admitted to universities, while just 1.2 million made it to the really hip Tier 1 institutions. "So there is a pressure to perform that is incomprehensible to Western observers, and the students are supposed to be made fit for it by tutoring," says Buchwitz.
Lucrative consolidation winners
Triggered by the social distancing measures taken during the coronavirus pandemic, the stock prices of education providers in China, as in the rest of the world, have risen sharply. However, despite the current high valuations, the ongoing consolidation in China’s education market could still prove to be lucrative. The development of Chinese industries often follows a very specific pattern: First, thanks to government support, a large number of start-ups are created that primarily develop technologies to market maturity and grow to a certain size. Then, the respective industry is consolidated to a few large players, mainly through government regulation. In the case of Chinese education companies, for example, this is done through mandatory state tests for teachers and specifications for the size of classrooms, which only a few providers can actually meet.
"These profiteers of consolidation will not only grow as fast as the Chinese tutoring market as a whole, which is expected to grow by between nine and ten percent every year until 2023, but they will also be able to gain market share," says Buchwitz. What's more, only these companies should be in a position to raise capital and know-how for the expansion of the digital component, which could help them steal additional customers from analog providers. And according to the portfolio manager, the growth of the online component is likely to be significantly stronger by 2023 than the tutoring market as a whole.
*Source: Citi Research
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