Bda china education

China For Profit Education & Training Sector:Investment AnalysisBDA China LimitedBeijing, March 2009© BDA 2009www.bdaconnect.comcontact_us@bdaconnect.com

Table of Contents• Three Drivers Propelling China’s Education & Training Market• Investment Opportunities in the Education & Training Sector• BDA Capabilities: Helping Investors Succeed in the Education Industry 2

China’s for-profit education & training market is driven by 3 key factors: An emerging middle class, training for aspiring white-collar professionals & blue-collar vocational training Private Training & Education Market Size Drivers of Private Education Market USD BN 2008E-2013F CAGR: 23%• Burgeoning middle class and impact of one child policy: Emerging middle class fuelling growing desire and ability to pay for education 2005-2008E CAGR: 34% 115• White collar: Demand for on-going, 89 75 private professional training in a 62 41 50 highly competitive job market 23 31 17• Blue collar: Demand for vocational 2005 2006 2007 2008E 2009F 2010F 2011F 2012F 2013F training before entering the job market as a vast segment of the population is unable to receive tertiary education • The private training and education market as % of overall education market: approx 23%-26% in 2007 Source: National Bureau of Statistics of China, Ministry of Education, BDA analysis 3

Driver #1: A burgeoning middle class and the impact of one child policy are fuelling demand • Emerging middle class: China’s middle class will represent 80% of the population by 2025 with considerable spending power – Under 19 year olds today number 157 million in urban areas in China, vs. 82 million under 19s in the US • China’s one-child policy: Chinese parents typically invest huge amounts in their children’s education – A child is often the focus of spending of six adults (two parents, four grandparents) who may invest in the child in part to secure their own retirement in a country without well developed social security or pension funds – The one-child policy has been in place since 1979, and is unlikely to be scrapped soon although some exceptions are being appliedShare of Chinese Urban Households by Annual Income -- Urban middle class* will account for up to 80% in 2025 5.6 3.3 Very Wealthy: >RMB 200,000 RMB, USD 29.4k annual income 5.7 9.4 7.7 Wealthy: RMB 100,000 – 200,000, USD 14.7k – 29.4k annual income 12.7 21.1 59.5 Upper Middle Class: RMB 40,000 – 100,000, USD 5.9k – 14.7k annual income } 99.3 92.9 49.7 77.3 19.9 82 MM Lower Middle Class: RMB 25,000 – 40,000, USD 3.7k – USD 5.9k annual income 23.2 9.7 Lowest Tier: < RMB 25,000 or USD 3.7k annual income 1985 1995 2005 2015 2025* Middle Class = annual income between RMB 25,000 and 100,000 RMB Source: National Bureau of Statistics of China, Ministry of Education, reports, BDA analysis 4

Middle class aspirations drive spending on children ranging from day care to tutoring to cultural development • Aspirations of Chinese parents: Ensuring that their children have the best possible start – Annual spending on piano lessons: Over RMB 10K (USD 1.4K), more than 10% of the annual income of an Chinese upper- level urban household – The average annual disposable income of a top 10% Chinese urban family is around RMB 84K (USD 12K) • Main related sectors: – Day Care – International school – English for children – Tutoring – Cultural pursuits: music, popular sports and art relatedSource: National Bureau of Statistics of China, Ministry of Education, BDA analysis 5

Driver #2: White collar training fuelled by intense competition amongst graduates • White collar training is booming fuelled by the highly competitive market for jobs. An estimated 40% of college graduates participated in extra training sessions in 2007 to enhance their competitiveness in the employment market − Large pool of college graduates: Increasing supply of college graduates and insufficient employment demand is creating fierce competition for jobs. The proportion of college graduates remaining unemployed for up to a year increased from 18% to 35% from 2001-2009F − Higher standards for employment: Many companies raised their standards of employment, resulting in many college students and white collar workers requiring additional training College Graduates Unemployed Proportion (2001-2009E) Higher Standards for Employment (2000 vs 2007) -- Additional certificate confer advantagesUnemployed proportion of college graduates 35% 29% 30% 27% Unemployed In 2000 In 2007 18% 2.1 college 1.4 1.6 graduates1 Bachelor’s Degree Bachelor/Master’s Degree 1.1 +Unit: MM 3.6 3.7 3.8 = Job Offer 3.0 employed 0.2 college TOEFL CPA Java 0.9 graduates GRE… CFA… C.NET… 2001 2006 2007 2008E 2009F = Job Offer Note1: “Unemployed college graduates” refer to graduates who remain unemployed one year after graduation Source: National Bureau of Statistics of China, Ministry of Education, BDA analysis 6

White collar training for college students include English, IT training, exam preparation and management training • College students and white-collar workers view English as an essential tool for advancing their careers – People are willing to spend 1－2 months income on English training each year • Main related sectors: – English training – IT training – Certificate training TOEFL test prep course in an English training school – Master entrance exam training – Management trainingSource: National Bureau of Statistics of China, Ministry of Education, BDA analysis 7

Driver #3: Blue collar vocational training is thriving by serving the vast majority of the 15-22 year olds not enrolled in public education• Blue collar vocational training is meeting the demands of the rural masses and migrant laborers, comprising young adults who do not enroll in public high schools, vocational schools, or colleges. China’s traditional economic development model is geared towards laborers with basic professional skills, creating market opportunities for private vocational training schools to provide the training needed by employers as well as to assist rural migrant laborers to find jobs. Breakdown of 15-22 Years Old Population by Demographics Education Status, 2006 • The majority are from rural areas and low tier cities Population aged 15-22= 160 million • Low education background • Lack of work experience and basic skills 17 million College Students, 11% 7 million Public Private vocational Trainings Offer Better Jobs Vocational School Students, 4% Pre Training Post Training • Construction worker • Auto mechanic25 million • Waiter or waitress in • Cook in catering Main low-end restaurant service/higher-end restaurantPublic HighSchool Students, jobs • Security guard • Beautician or hairdresser16% • Tour guide Average monthly RMB 600-800 RMB 1,000-1,200 wages111MM (69%): People who do not enroll in publichigh schools, public vocational schools, or colleges Source: National Bureau of Statistics of China, Ministry of Education, BDA analysis 8

Blue collar vocational training can have a major impact on laborers seeking to increase their income • Rural immigrant laborers invest heavily in vocational training, aspiring to secure better jobs in big cities – Annual tuition fees range from RMB 10k to 15k for auto repair training schools – The per capita total annual income in rural households is around RMB 5K (USD 750) • Main related sectors – Auto repairAuto repair class of an auto repair – Cooking schools vocation school – Basic computer training – Beautician training – Tour guide trainingSource: National Bureau of Statistics of China, Ministry of Education, BDA analysis 9

Private education is a major supplier of kindergarten & employment related training. Tutoring supplements public sector school teaching. Private Sector Sectors Key Features % by enrollments • Less regulated: Pricing is mainly decided by the kindergarten management • Less price sensitive: Annual tuition ranges from several thousand RMB to tens of thousandsKindergarten 37% • Shortage of public kindergarten resources: Leaves room for private players • Fragmented market: No nationally recognized brands • Dominated by public schools: Especially in primary and junior high schoolsPrimary • Long term business: Establishing a track record and credibility takes timeSchool & 4%-10%High School • Large opportunity exists in supplementary services: Prosperous tutoring sector • High barrier for investment in Grade 1-9: Compulsory education is closed to foreign investment • Public school dominates, but lacks flexibility to meet dynamic market demandVocational • Opportunity created by privatization of public schools 13%School • Low entry barrier: Vocational schools such as auto repair schools do not need licenses • High entry barrier: The government is unlikely to issue new licensesCollege 8% • Low ROI: Investment is typically paid back in 10 to 15 years • Dominated by private sector • Famous national brands already exist, such as New Oriental in English training sector and AptechEmployment in IT training sector, still account for a small market share – fragmentation dominates >80% • Customers include both individual and companies • Responds fast to dynamic market demand Source: National Bureau of Statistics of China, Ministry of Education, BDA analysis 11

China has four dynamic for-profit education subsectors: K-12, Vocational, IT & English training Chinese Education Market K-12 Education Vocational Training IT TrainingEnglish Training 12

K-12: Two sub-sectors stand out - day care & international schools Investment Highlights Investment Concerns Selected SubsectorsChinese K-12 Training & Private College Market RMB BN • Approx. 37% of urban kindergartens are private, due to shortage of public kindergartens • High annual tuition: USD 1,500 – 6,000 • CAPEX requirement: Multi- Overall 05-08E • High profit margin of 23% to 40% million dollar CAPEX needed for CAGR 19% • Good customer loyalty, low turnover rate of directly-operated kindergarten kindergarten children expansion in first tier city Day Care • Eased government regulation: Price is • Fragmented market decided by kindergarten management • Quick payback period, avg. 2-4 years 80 65 • Steady demand from expatriates in China: • Long payback period: Avg. 5 5547 Shanghai: 30,000 foreign, school-aged children; to 7 years Beijing: 8,000 students in international schools • Relatively lower margin: • High annual Tuition: USD 20,000 to over The average operating margin 25,000 of a top tier international school • Government policy: The government is with 3 years operation is about2005 2006 2007 2008E International unlikely to issue new licenses for international 12%-15%. School schools in the near term, creating barrier for new • CAPEX requirement: USD 2.5 entrants MM for 1,500 students capacity …… Source: National Bureau of Statistics of China, Ministry of Education, CEIC, CIA Factbook, BDA analysis 13

Vocational training: Top tier schools are experiencing rapid expansion, fierce competition is driving market consolidationMarket Size of Vocational Training in China, 2004-2010F Sector Introduction RMB BN 49 2004-2010E • Auto repair, culinary, car service, hairdressing, CAGR 17% Main 42 mechanical skills, tourism, basic computer 35 Industries applications, etc. 30 25 Target • Students with low education backgrounds from low 22 20 tier cities and rural areas Customers • Beifang Car Repair Vocational Training School Key players • New East Culinary Training School • Shandong Lanxiang Vocational Training School 2004 2005 2006 2007 2008E 2009F 2010F Investment Highlights: Investment Concerns: • Strong market growth driver: • Low entry barrier. Vocational training schools do not – Increasing demand from surplus of rural laborers require licenses from government. – Large demand from job vacancies: annual demand of • Fragmented market: 700,000 workers in auto repair sector; over 30,000 – There are more than 20,000 private vocational cooks needed annually for large-scale catering training schools in China and most of them are small- enterprises scale schools with short operating records • High Margin: 30%-40% operating margin for top tier – The market is consolidating, as competition becomes vocational training schools tighter and number of top tier schools increases • Growing tuition: 2008 annual tuition fee ranges from across China RMB 8,000 to 10,000 for Tier One schools, up 20% from 2007 Source: National Bureau of Statistics of China, Ministry of Education, CEIC, CIA Factbook, BDA analysis 14

IT Training: Divided into Advance and IT segmentsChina IT training market Investment Highlights Investment ConcernsRMB MM • Large gap: 580,000 software-related graduates vs. 250,000 vacancies in Software 2007 Development Advanced • High Tuition: USD 2,000 to 3,000 IT Training: (for six months) Overall 05-08E 05-08 CAGR CAGR 23% 984 • Low entry barrier 27.6% • China has one of the largest data • Intense competition In communication networks in the world 757 regional market Network • Multiple hardware suppliers with • Growth limitation due to 583 different generations of technology the siloed course 474 co-exist, hence different certifications structure 5,016 are required 4,043 Basic IT 3,317 Application • Game sector size: RMB 11BN in 2007 2,726 Training: • YoY growth of entry–level 05-08 CAGR Game employees in 2007: 24% 22.5% • Tuition: from USD 2,000 to 3,000 per 2005 2006 2007 2008E year • Fragmented market: • Broad scope of IT courses: IT basic top player Xinhua only Basic IT courses; Computer/Network has 7% market share in Application application courses; etc. 2007 Training • Tuition: USD 1,200 to 2,200 per year • Not easy to prove value proposition Source: National Bureau of Statistics of China, Ministry of Education, CEIC, CIA Factbook, BDA analysis 15

English training: Rapid growth, strong demand. Market is highly fragmented, with many small players engaged in fierce competition Fast Growth Market size Fragmented Market Investment Highlights: Market Size of English Training in China • Strong market growth Market Share of New Oriental, 2007 2004-2008 E (RMB BN) • Immune to the economic slowdown • High tuition fee: the tuition fee of New Oriental, 5% oversea test prep course in leading 2004-2008E CAGR 19% English training schools ranges from 30.0 RMB1,500-5,000 24.8 • High margin: 25%-30% operating 20.8 17.6 margin for top tier English training 15.0 schools Others, 95% Investment Concerns: • Intense market competition • Fragment market. Rewards are high 2004 2005 2006 2007 2008E for a company to become a “new• World largest English training market, with • Highly fragmented market with New Oriental” over 300 million English learners 50,000 English training• Strong market driver: institutions. − Rising demand for study abroad. Over • New Oriental School, the market 0.2MM students went abroad to study in leader with a revenue of RMB 2008 (GRE,TOEFL,IELTS test prep training) 1.06 billion in 2007, had only − Compulsary subject for Chinese students 5% market share in 2007. (CET4, CET6 test prep training) − Necessary skill in career development (Cambridge Business English Certificate) Source: National Bureau of Statistics of China, Ministry of Education, BDA analysis 16

In recent years, China’s education market has become one of the most attractive areas for venture capitalists and private equity firms VC Investment Breakdown for 2008 (Unit: USD MM) As % of total VC investment IT 601 17.4% Internet 553 16.0% Media 459 13.3% Education 407 11.8% Energy 245 7.1% Healthcare 224 6.5% Telecom 219 6.4% Retail 218 6.3% Others 532 15.4%• Education sector has became an important new sector for VC’s in addition to traditionally hot sectors including internet, IT, and mediaSource: Zero2IPO 18

In recent years, China’s education market has become one of the most attractive area for venture capitalists and private equity firms Amount InvestedEducational Institution Sector Focus (USD MM) Investor Time of InvestmentBeijing Haoyue Group Private college 50 The Carlyle Group Nov 2008Tarena Technologies Inc IT training > 10 IDGVC Nov 2008 Actis Capital LLP, Macquarie Capital AllianceAmbow Education Group E-learning technology 103 Oct 2008 Group, Avenue Capital GroupBeijing Riverdeep International Children English training 30 Istithmar Capital Aug 2008Education TechnologyOriental Cambrige Education Group K-12 and University education 16 Ignition Partners May 2008Beijing Huizhong Yizhi Science & Online game programming and 10 KPCB China Mar 2008Technology graphic design trainingsBeijing Universal Education Group Co., Postgraduate entry exam tutoring ~20 Legend Capital Limited, quoia Capital China Feb 2008Ltd serviceXueda Education Technology (Beijing) Tutoring services 12 CDH Investment Oct 2007Co., Ltd Macquarie Capital Alliance Group, CiscoAmbow Education Group E-learning technology 53 Oct 2007 Systems, CID Group, Avenue Capital GroupEduask International Group IT training 10 SAIF Partners Sept 2007 Language and managementNeworld Education Group 20 The Carlyle Group Sept 2007 training Qiming Venture Partners, SIG AsiaBeijing Juren Education Group K-12 tutoring services 20 Sept 2007 Investment Source: BDA analysis 19

BDA has extensive experience in the education market and has identified key success factors in evaluating an education institution BDA Education Projects Experiences BDA Education Study Model Projects India Education market • Market Demand Vietnam Education marketDeal Sourcing China Day Care market • Regulation External • Competition China Vocational training market Auto repairschoolPre-Due Management training institutionDiligence Agency for studying abroad Recruitment Teaching Result -- Stable -- High-quality -- e.g. High 2 private international K-12 schools employment rate -- Multi-channel -- Steady Private tutoring school -- Consistent with -- Easy-to-expand recruiting 3 private IT related training schools commitmentsDue Diligence Domestic private K-12 school Internal Private English training school Private independent college • Management Team: Innovative professionals with industry expertise and enthusiasm Private culinary training school • Value proposition and reputationM&A Advisory Private tutoring schoolGeneral Market entry strategy for 5 foreignStrategy education institutions Source: BDA analysis 20

BDA can help investors avoid risks including market risks, regulation risks, operational risks, and growth limitations Case study 1: Operational Risk• Occupational injuries and accidents may result from: Student Riot – Poor teaching quality e.g. Vocational Training – Lack of useful courses/services Commitment Reality Internal conflict -- One-month free trial -- No free trial -- Physical punishment – No student satisfaction monitor from teachers -- Hours of practice -- Little practice• BDA will help investors avoid these risks -- Good job -- No good job -- No refund by: – Analyzing value proposition – Evaluating internal operation – Discovering potential risks Case study 2: Growth Limitations• Education companies usually face growth ceiling after initial stage of rapid growth due to: Growth Ceiling – Fierce competition from new market entrants e.g. IT Training – Dependence on a few star teachers – Risks in choosing franchise model• BDA will help investors: Embedded Java .NET Network – Evaluate growth potential System Training Training … Training Training – Assess expansion strategy and capability of education companies – Make sound investment decision Source: BDA analysis 21

BDA is ready to help clients find the next big success in China’s education industry In September 2006, New Oriental • Vocational training (NYSE: EDU), China’s largest private In July 2008, China Distance Education • IT training English training group, listed on NYSE. The company’s stock price (NYSE: DL), China’s leading • English training grew over four times its IPO price of E-learning company, listed • K-12 education USD $15 to over $70 today, with a on NYSE, raising USD • Art Education …… market cap close to USD 3 billion. 61MM. 2006 2007 2008 2009 In Dec 2007, ChinaEdu (NASDAQ: CEDU), China’s largest online degree education company listed on Who will be next ? NASDAQ, raising USD 68MM.Source: BDA analysis 22

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Bda china education

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