2014Q1 China Online Education Industry

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2014Q1 China Online Education Industry

  1. 1. 2014Q1 China Online Educaion Industry March 2014
  2. 2. Contents 2 A. General Information B. Current Situation C. Cultural Highlights, User Preferences D. Trends, Key Players E. Recommendations to Foreign Enterprises F. Appendices
  3. 3. Focusing on a unique direction and forming an effective marketing strategy are crucial to win 3 > Facing an influx of internet vendors, the E-learning industry is more prosperous than ever. The market is reckoned to be highly lucrative because of the willingness to pay and the huge user scale. - Now the industry has over 580 startups specializing in a surprisingly diverse range of online applications - In fact, online courses are quite acceptable for post-85s/90s who grew up in digital and internet era > Numerous (large amount of financing) examples show the trends: - Training agencies continue to shift their service capacity toward online - Customers require cost effective, immediate improvement - Entrepreneurs are making significant progress by reforming traditional curricula and pedagogy - Internet firms have launched marketplaces to help corporations or individuals to distribute products - Premium suppliers begin to attract outstanding faculty from abroad and real-world experts from top corporations > To compete with domestic firms, foreign enterprises who want to share the cake therefore need to offer a unique resource either to the consumers or to the domestic co-op partners. Remember that online and offline ought to be connected much more closely than you thought before – and define the right countermeasures and partners, especially when you lack essential offline resources that your competitors have. EXECUTIVE SUMMARY
  4. 4. 4 > Educational resources was never meant to be fair enough; therefore parents have to send their children to extracurricular tutorial classes provided by private training agencies - National education funding accounts for the proportion of GDP at 4%, which was not reached utill 2012, however is still much lower than that of developed countries, even lower than that of other BRICs - Governmental education spending per capita is $42 in China, compared to $2684 in US, 1:64 - Children are sent by parents to learn skills as early as 3 years old -“expecting better chance than others” - 70% of 200 million K12 students have at least once attended after-school tutoring programs - 15 million to 20 million Chinese couples are eligible to have a second child as “one-child” policy is loosened. > The hottest courses are English and Mathematics for K12; Occupational training for adults - English accounts for 20% score in K12’s ultimate test - Gaokao (university entrance examination) > 38% of Senior Highs, 51% of Undergraduates and 5% of Postgraduates intend to study abroad - The intention is most likely immigration, or higher starting salary whether they plan to come back or not > Internet access and bandwidth are not troubles anymore - The number of mobile phone subscribers is over 1.2B; 34% of them use 3G network as of Jan, 2014. The number of 3G subscribers is still increasing by over 17M per month. - Mainstream no-contract smartphones manufactured by Huawei and Xiaomi, etc. are priced as low as $129 Facts about Chinese education system and Internet Penetration A. GENERAL INFO Source: Ministry of Education, Ministry of Industry and Information Technology of PRC
  5. 5. Facing an influx of internet vendors, the online education industry is more prosperous than ever 5 1990s 2000s 2010s Private Training Agency New Winners Learning Purpose Secondary School, College, University and Non-government funded education Internet Vendors Degree Qualification Test Extremely Diverse A. GENERAL INFO Development history of Chinese online education industry
  6. 6. The market is reckoned to be highly lucrative because of the willingness to pay and the huge user scale 6Source: Netease, Inc. “2013-2014 The trends of China's online education”; Ministry of Education, PRC. Monthly Education Spending for Students 100 100 80 123 191 119 Pre- Primary Junior High Senior High Post Secondary Average 1) 1 USD = 6.1 RMB Incl. tuition and fees N=3,453 Unit:USD1) Before 6 6-11 12-14 15-17 18-21 AGE: Number of Enrolled Students Unit: Millions 55 18% 208 68% 43 14% Preschool K12 Post Secondary A. GENERAL INFO All parents would be willing to buy a better chance for their children
  7. 7. The overall financial performance of the Chinese key main private educational suppliers remains bullish 7 Key supplier performance indicators 2009 - 2013e (n=4 top suppliers1)) Revenue Growth [2009=100] ARPU Growth2) [2009=100] Net Margin [%] 1)Stock Symbol: EDU, XRS, XUE, DL; 2)Average Revenue Per User Yearly (USD), for only top 2 suppliers Source: Company Financial Report; Analyst forecasts 100 119 140 159 180 09 10 11 12 13e 16.3 15.4 13.0 11.7 16.0 09 10 11 12 13e 100 153 216 272 342 09 10 11 12 13e 1,921M USD 321 USD A. GENERAL INFO
  8. 8. Top 4’s average recent year stock return is 150% 8  Market Value (US$): − EDU: 4.23B − XRS: 1.91B − DL: 682M − XUE: 360M  Specialization: − EDU: Oversea study − XRS: K12 − DL: Accounting − XUE: K12, one-on- one tutoring As of Mar 17, 2014 A. GENERAL INFO Source: Google Finance
  9. 9. However online education just gets started, compared with offline 9Source: Public information Online Business as % of Total Revenue Expected % Consumers are not completely accustomed to learning not from a real instructor B. CURRENT SITUATION 100% 3-5% 10% 40% Currently in 2-3 years in 5-6 years
  10. 10. The capital market has presented an optimistic judgment 10 2.4 12.1 16.4 22.3 29.1 37.2 47.7 35.7% 36.4% 30.4% 27.9% 28.2% 0% 5% 10% 15% 20% 25% 30% 35% 40% 0 10 20 30 40 50 60 2004 ~ 2012 2013E 2014E 2015E 2016E 2017E USD ($B) Y/Y Growth Rate CAGR= 22.5% CAGR= 31.7% Market Size (in USD1)) Forecast of China Online Education, 2013 - 2017 ~ ~ B. CURRENT SITUATION Source: Essence Securities, Oct 2013 1) 1 USD = 6.0 RMB
  11. 11. Now the industry has over 580 startups specializing in a surprisingly diverse range of online applications 11 Number of Financed Startups As of Mar 20, 2014 Amount (USD1)) of Financing Activities As of Mar 20, 2014 Source: Itjuzi Database, StartuptoChina Analytics 2014 B. CURRENT SITUATION 101 out of 580 (~17%) startups we tracked have got financed by at least angels 43 39 9 4 3 3 Angels Series A Series B Series C Acquired Going Public ~135M ~240M Whole Year of 2013 Single Quarter of 2014 1) 1 USD = 6.1 RMB 47 Cases 14 Cases
  12. 12. Now the industry has over 580 startups specializing in a surprisingly diverse range of online applications (cont’) 12 Number% of New Startups by Segments in 2013 As of August, 2013 24% 17% 6%22% 7% 5% 4% 15% Preschool K12 Certificates Language Overseas IT Interests Others Number% of Startups which got funded in 2013 As of August, 2013 39% 9%4% 25% 6% 6% 4% 7% Preschool K12 Certificates Language Overseas IT Interests Others Source: Itjuzi Publication, 2013 B. CURRENT SITUATION Venture capitals are more fond of unconventional fields such as preschool education, which is expected to grow exponentially because the post-80s, who account for a large proportion of middle class, are giving birth now
  13. 13. In general, education is deemed utilitarian; people used to only pay for something that could quickly come into effect 13 Post Secondary K12 Career Interests Parents say “we cannot let our child lose at the starting line” or “we must make our child go to the best university” Students say “we need a degree or a diploma to find a job because otherwise the employers would not hire us” Employees say “we need that certificate to be qualified for higher level job” People say “If we CANNOT find some FREE substitutes elsewhere, then …” PAY FOR EXPLICIT AIMS OFFLINE DOMINATES 7 24 267 269 335 409 1065 1493 0 500 1000 1500 2000 ATAI DL AMBO XRS EDU CEDU XUE NED Average Revenue (US$) Per User As of Sep 30, 2012 Offline, one on one or small size class Offline, medium to large size class Online Trainings for Occupational Qualification C. CULTUAL HIGHLIGHTS Source: Imeigu, Inc. ‘2012 WHITE BOOK FOR CHINESE EDUCATION INDUSTRY’
  14. 14. But what if online courses become more enjoyable than what the students had expected before? 14Source: Webpage screenshots C. CULTUAL HIGHLIGHTS PAST NOW
  15. 15. And what if the students pay significantly less for online than offline? 15Source: Official Website of DL (China Distance Education Holdings Ltd) C. CULTUAL HIGHLIGHTS An Example of Accountant Qualification Test > Award-winning Lecturers > 10 Minutes per Session > Anytime Anywhere Accessible > All Devices Supported > Tangible Certificates > Easy Payment > Downloadable > Available until the test is over > Extremely low price<$1 / hour Features
  16. 16. In fact, online courses are quite acceptable for post-85s/90s who grew up in digital and internet era 16 C. USER PREFERENCE 2013 Taobao Classmates1) GMV Share Average GMV per User Source: Taobao Typical User Characteristics: Age 23-27; Male; Over 50% of them are employed 1) http://xue.taobao.com/ is marketplace for corporate or individual educators to sell all kinds of resources, including online, offline and textbooks 74 43% 40 24% 57 33% Online Offline Textbooks Total GMV: 171 Million USD 46 114 11 Online Offline Textbooks Unit: USD
  17. 17. On an average, working adults would like to spend $39 a month on part-time study 17 What aspects do you primarily put money into? C. USER PREFERENCE Source: Netease, Inc. “2013-2014 The trends of China's online education”; Ministry of Education, PRC. N=3453 65% 84% 78% 81% 83% 63% 57% 25% 31% 44% 46% 43% 44% 32% 15% 12% 18% 38% 51% 62% 66% 0% 5% 7% 15% 27% 39% 65% <100 100~500 501~1,000 1,001~2,000 2,001~4,000 4,001~10,000 > 10,000 Books Online Courses/Services Offline Training Agencies School Tuition
  18. 18. Factors which working adults value most and skills they need most 18 C. USER PREFERENCE Source: Nielson&Sina and Netease Surveys 2013 Which factors do you value most? Which skills do you need most? Quality and ESL (especially daily oral English - 75%) are always their priority N=1,150 N=3453 7.9% 18.9% 26.7% 35.7% 50.5% 59.3% 79.8% Others Server condition Brand Public praise Price Lecturer Quality 16.8% 17.7% 19.7% 20.3% 22.3% 33.9% 68.4% Natural science Computer software Business administration Education & Psychology Financial planning Professional skills English
  19. 19. The most likely profitable segments and main factors of weakening E-learning effect, perceived by industry insiders 19 Which sector are most likely profitable? Which factors weaken the effect most? 12% 30% 32% 32% 37% 41% 76% Others Requirement of bandwidth Cost of contents Unwillingness of learning Autonomy of learning Promotion efforts and efficiency Lack of rich and simple function 5% 6% 21% 22% 22% 33% 37% 40% 41% 62% No idea Others Post secondary Moocs IT skills Preschool K12 Staff training Foreign language Exam skills Which segments are industry insiders in favor of? (according to a survey of insiders) Source: International Online Education Summit 2013. ‘Online Education Prospects and Hot Spot Analysis Report’. C. USER PREFERENCE
  20. 20. Training agencies continue to shift their service capacity toward online - Customers require cost effective, immediate improvement 20 EDU (#1 in ESL Training) XRS (#1 in K12 Training) Recent merge & acquisition of top 2 suppliers1) Source: Itjuzi Database, StartuptoChina Analytics 2014 D. TRENDS, KEY PLAYERS 1)Stock Symbol: EDU, XRS; 2) Mar 18, 2014; 3)As of Nov 30, 2013, Currency in USD Mkt Cap 4.53B2), Cash, Equiv and ST Invest. 1,092M3) Mkt Cap 1.92B2), Cash, Equiv and ST Invest. 333M3) Jan, 2014 shicha.com has been integrated in 66xue.com owned by EDU Overseas Study and Recruitment Community Jan, 2014 24.5M USD Dec, 2013 8.5M USD Leading Parenting Community Postgraduate Entrance Examination Information & Materials
  21. 21. Entrepreneurs are making significant progress by reforming traditional curricula and pedagogy 21 Evolution of teaching and learning approach and behavior Source: Itjuzi Database, StartuptoChina Analytics 2014 D. TRENDS, KEY PLAYERS PAST TODAY > Primary approach is to understand what the teachers said in class by doing a lot exercises after class > Weak learning process management and lack of efficiency: often allocating resources without acknowledging capability differences > Focus on innovative pedagogy: - Invest in practical and scientific tools - Act like a private tutor - Conduct statistical analysis - Provide access to resources of elite schools Is it really necessary? (e.g.) Assignments Management Tool Total $35M Financing, $100M Valuation
  22. 22. Internet firms have launched marketplaces to help corporations or individuals to distribute courses and relevant materials 22 Everybody in the world could be an instructor based on dozens of open platforms Source: Itjuzi Database, StartuptoChina Analytics 2014 D. TRENDS, KEY PLAYERS Platforms FeaturesOwner or Financed Baidu Alibaba Netease Sina NASDAQ:YY > 1M USD > 10M USD > 3M USD Live Class, Freemium ESL “Priceline” Model “Amazon” Model MOOC, Translation MOOC, Translation Live Class MOOC, Chinese Overseas Study and Application Advisory
  23. 23. Premium training service suppliers begin to attract outstanding faculty from abroad and real-world experts from top corporations 23 Thousands of foreign English teachers and industry experts have joined the community Source: Itjuzi Database, StartuptoChina Analytics 2014 D. TRENDS, KEY PLAYERS Platforms FeaturesFinancing1) 1) Unit: USD, 1USD=6.1RMB 100M 20M Tencent > 12M > 4M ~ 1M 1V1; 1,500 foreign teachers Mobile / Cloud Computing experts Internet technology experts 1V1; low price; foreign teachers 1VN; foreign teachers Foreign advisors who help with application
  24. 24. Potential niche sectors and possible traps for foreign startups 24 Slightly FavorableTrap Very FavorableGood Excellent Advanced ESL Preschool Computer Skills Mobile Apps Featured Certificate Oral English Business Skills Working Adults K12 University E. RECOMMENDATIONS TO FOREIGN ENTERPRISES Legend: 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014
  25. 25. What should do and should NOT do 25 > Focus! Be a upstream supplier offering a UNIQUE and valuable product that domestic companies are not good at, e.g. Copyrighted Foreign Enterprise Staff Training Courses. > If your products are not that unique and rare, you had better try FREEMIUM first for the sake of branding and taking credit from prospective consumers. > CRM is extremely important; keep in close touch with your customers using SOCIAL NETWORK. Best to have a user experience and customer service team in China. > Map the social RELATIONS of users from offline to online; Invest in research! > Do NOT rely on only one platform to promote, try to upload your products to as many platforms as you can. Looking for co- op partners is the most important work. > Do NOT try to establish platform on your own, or you will be struggling with traffic. > K12 is NOT recommended for the time being UNLESS your have resources to reach students who intend to go abroad before college, which means, you could offer a whole set of application services. > Avoid similar courses or features that can be provide by MOOCs such as Coursera, KHAN Academy, etc. DO DON’T E. RECOMMENDATIONS TO FOREIGN ENTERPRISES
  26. 26. Insights from insiders 2013 (slightly pessimistic) 26 Zhang, Bangxin Founder & CEO TAL Education Group (K12) “We have put a lot of effort into exploring the internet field since 2010. We calmed down a little bit in 2013 because there was not yet any special pattern of success came out in two years. “The requirement of current online education is still improvement of the social attribute – certificate or diploma. The needs between online and offline are consistent. When there is no fundamental change in demand, the experience and effect of offline are better. That is why online has not yet boomed. Only till when we do not care about diploma anymore, which means, we want to meet the demands of self-improvement, the boom will come and internet will essentially transform the education” “Educational recourses are stubborn, accepting new things pretty slowly. Therefore online education would not overturn the traditional ones as rapidly as e-commerce.” Chen, Guangtao Founder & CEO duobei.com/ F. FOR YOUR REFERENCE Source: http://tech.163.com/13/1112/14/9DG3QJBH000915BF.html
  27. 27. Insights from insiders 2013 (optimistic or neutral) 27 Li, Xin Vice President yuantiku.com “We have exchanged ideas with many senior teachers, who believed what education is meant mostly to do but is never able to do is teaching students in accordance with their aptitude. The reality of class size makes this issue quite difficult to tackle because it would infinitely increase the work load of teachers. However recently we feel it can be completely solved by data processing technology along with solid internet infrastructure. Thus we decide to provide question bank products to implement one-on-one intelligent training through individualizing user needs based on big data matching.” “Online education ought to attract user traffic utilizing long tail effect in the early stage due to low ARPU. Developers should not merely sell lecture or courseware; instead, try best to build a learning atmosphere. Interaction and service experience should be highly targeted and offline social connections should be entirely migrated to the online world. Jin, Wenji Vice President Legend Capital F. FOR YOUR REFERENCE Source: http://learning.sohu.com/s2013/yuantiku/; http://v.youku.com/v_show/id_XNjA5NjMzOTQ4.html
  28. 28. Please contact us for further information 28 F. CONTACT http://ca.linkedin.com/in/zhouhaiquan/ http://www.startuptochina.ca/ Insights. Solutions. Programs. Get real-world advice for startup success. We help international high grade startups successfully engage with Chinese huge and potentially lucrative market from the very beginning.
  29. 29. Disclaimer 29 DISCLAIMER This presentation was prepared by StartuptoChina.ca (“SC”) exclusively for the benefit and internal use of our clients and solely as a basis for discussion of certain topics related to the online educational service provider described herein. Without the prior written authorization by SC, this presentation is strictly confidential, i.e., you cannot reproduce, summarize or disclose it, in whole or in part. This presentation is of a purely informative nature and does not imply any trade recommendations on securities issued by any of the companies mentioned herein. This document may include forward-looking statements, which may be provided by SC and other 3rd party research institutions and thus could differ materially from actual results due to subjective judgement analysis and objective uncertainty. Some of the facts and inferences may refer to subjective opinions of key persons or entities in the online education industry in China. Therefore there is no guarantee that all the information included herein may not change significantly over a short period of time. Please notice that the contents contained in this presentation are merely for you to better understand the current market conditions. We assume no obligation to your decision-making and subsequent movements if you are not our clients.
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