The document discusses preschool education in China. It provides an overview of the preschool education market in China, including key statistics on enrollment rates, spending on education, and the size and growth of various segments within preschool education. It also discusses factors driving growth in the market, such as China's increasing birth rate and the growing demand from parents to give children a competitive advantage in China's rigorous education system. Major players in the industry are expanding their businesses through mergers and acquisitions as well as franchise models to capitalize on the large market opportunity in preschool education in China.

1. 01
Preschool Education in China
Karen Jiang, Shanghai Analyst Team
Market Overview
Preschool education is regarded as one of the sunrise industries in China. Since
preschool education is not included under China’s compulsory education
system, preschool enrolment is entirely up to the discretion of families or
parents. The majority of new parents in China were born in the 80s and 90s
and received a higher quality of education compared to older generations,
affording them a correspondingly different outlook and tendencies in regards
to decisions involving schooling.
China’s education system is notoriously rigorous and characterised by intense
competition. As a result, many parents choose to have their children enrol in
kindergartens or early childhood education centres to boost their
competitiveness and ensure they are adequately equipped to succeed.
Children aged from 0-3 are enrolled in early childhood education centres,
which are usually established by private entities. Meanwhile, children aged
from 3-6 attend private or public kindergartens, and may also participate in
extracurricular classes such as those for dancing and drawing. At present, the
market size of preschool education in China is estimated to be around CNY 350
billion. The market for children aged from 0-3 is about CNY 150 billion, while
the market for children aged from 3-6 is about CNY 200 billion.
Major Lessons Offered by Early Childhood Education Centres
Age Range Content of Lessons
0-3 Perceptual Training, Body Function Training, Thinking Enlightenment
3-6 Language Training, Music and Art Training, Thinking Training
Source: by UZABASE
Preschool Education in China
20161104

2. 02
Preschool Education in China
Market Preference for Early Childhood Education Centres
Although infants are the main consumers of early childhood education services,
their parents are the major decision makers. According to research conducted
by learning.sohu, parents primarily consider faculty resources, distance to
home, and teaching methods when choosing an early childhood education
centre. Currently, the majority of early childhood education centres are located
either in department stores or near residential areas. Around 51.05% of
children take lessons once a week, while 19.74% and 11.45% take lessons twice
a week and more than twice a week, respectively. The remaining 17.76% take
lessons less than once a week. Foreign brands price one-hour lessons at CNY
150-200, while similar lessons from local brands are priced at CNY 120-160.
When presented with the choice of local brands and foreign brands, only
around 30% of parents have a preference for the latter. Around 75% of parents
have a price tolerance of up to CNY 4,000 for one semester.
Source: learning.sohu
19.48%
19.05%
18.44%
11.68%
10.14%
9.77%
8.79%
2.65%
Parent's Consideration for Choosing a
Center
Faculty Resources Distance
Teaching Methods Hardware & Environment
Brand Awareness Course Schedule
Price Others
43%
32%
14%
6%
5%
Parents' Price Tolerance for One Semester
Course
under CNY 2,000
CNY 2,000 - 4,000
CNY 4,000 - 6,000
CNY 6,000 - 8,000
over CNY 8,000

3. 03
Preschool Education in China
Increasing Infant Population in China Ensures Market
Potential
China has a population of over 1.3 billion. Each year, there are around 16
million infants born in China, with a birth rate floating around 1.2%. Based on
each year’s infant population, as of 2015, there were more than 114.3 million
children aged from 0-6 in China, of which there were 66.2 million children aged
from 0-3. In October 2015, the Chinese government announced that they
would replace the one-child policy with a universal two-child policy, allowing
each married couple across the country to have two children. This policy is
expected to increase the birth rate and solve the aging population issue.
According to experts, the incremental infant population is expected to be
around 5 million infants each year after the implementation of the two-child
policy. In 2017, the infant population is estimated to reach a peak of 21.7
million. As the main consumers of preschool education, the increasing infant
population is a strong indicator of potential growth in the preschool education
market.
Source: National Bureau of Statistics
1.16
1.17
1.18
1.19
1.20
1.21
1.22
1.23
1.24
1.25
1,500
1,520
1,540
1,560
1,580
1,600
1,620
1,640
1,660
1,680
1,700
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
%
10,000infants
China: Infant Population
Infant Population (10,000 infants) Birth Rate (%)

4. 04
Preschool Education in China
Growing Demand for Preschool Education from
Kindergartens
Despite the fact that kindergarten education is not subsidised by the
government, an increasing number of parents are sending their children to
kindergartens from age 2-3, usually for a period of three years. In fact, many
primary schools in China require children to first receive preschool education
so that the children will have better sociability. As of 2015, there were 77,300
public kindergartens and 146,400 private kindergartens in China. As the
government has focused its efforts into increased funding for preschool
education, the percentage of public kindergartens has risen from 31.99% to
34.56% from 2010 to 2015. In 2015, 19.62 million and 23.02 million children
were enrolled in public kindergartens and private kindergartens, registering
CAGRs of 4.47% and 10.47% from 2010 to 2015 respectively.
Under the National Medium- and Long-term Education Reform and
Development Plan (2010-2020), the net enrolment rate was expected to reach
70% for three-year preschool education, 80% for two-year preschool education
and 95% for one-year preschool education by 2020. As of 2015, the actual net
enrolment rate has increased from 50% in 2009 to 75% in 2015. However,
compared to developed countries with a net enrolment rate of around 90%,
there is still space for development. In line with the yearly increases in the
country’s infant population, the demand for preschool education from
kindergartens is expected to see further growth going forward.
Source: National Bureau of Statistics
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
0
50,000
100,000
150,000
200,000
250,000
2010 2011 2012 2013 2014 2015
#ofEnrolledStudent
#ofKindegartens
Kindergarten Enrollment
# of Private Kindergartens # of Public Kindergartens
# of Enrolled Students in Private Kindergartens # of Enrolled Students in Public Kindergartens

5. 05
Preschool Education in China
Increasing Expenditure on Education Contributes to Market
Growth
The living standards of Chinese citizens have witnessed a vast improvement in
recent years. In 2015, the nationwide annual per capita disposable income was
CNY 21,966, up by 8.9% YoY, while the annual per capita disposable income for
urban residents was CNY 31,195, up by 8.2% YoY. Considering the gradually
increasing level of urbanisation, which grew from 49.68% in 2010 to 56.10% in
2015, the nationwide annual per capita disposable income is expected to
further increase in future. This growing household wealth directly supports
parents in providing higher quality education to their children.
With the upturn in living standards in China, people are beginning to spend
more money on education, culture and entertainment. As of 2015, the annual
per capita consumption on education, culture and entertainment increased by
12.18% YoY to CNY 1,723. Although the survey subject range for these statistics
was changed from 2013, an upward trend in the annual per capita
consumption can still be observed. The annual per capita expenditure on
education, culture and entertainment is estimated to reach CNY 5,000 by 2020.
In addition, the CPI of education, culture and entertainment presented an
upward trend over 2009 to 2015, with a particular increase in the rate of
growth since 2012. Consumers’ increasing willingness to spend on education,
coupled with higher prices, will likely continue to drive growth in the
education, culture and entertainment market.
Annual Per Capita Consumption on Education, Cultural and Entertainment
2010 2011 2012 2013 2014 2015
Urban Resident 1627.6 1851.7 2033.5
1397.7 1535.9 1723.0
Rural Resident 366.7 396.4 445.5
Unit: CNY
Note: Statistic calibre was changed to combine urban and rural residents since 2013
Source: National Bureau of Statistics

6. 06
Preschool Education in China
Source: by UZABASE based on National Bureau of Statistics
Pursuit of High Quality Education and Increasing Brand
Awareness May Drive Industry Reform
In recent years, the surge in the number of private and public kindergartens
has relieved China of its undersupply issue. But with more than 220,000
kindergartens across the country, it is difficult to achieve a unified standard in
terms of the quality of education. In addition, the kindergarten market in China
has low market concentration. Most players operate on a small scale, with
usually one kindergarten, and thus lag behind in education quality and
management expertise. According to Guolian Securities, the top 5 kindergarten
operators operate more than 2,600 kindergartens across the country, but only
represented a market share of around 1.26%. Players in the industry should
therefore focus on establishing a brand presence and managing affiliates in a
systematic fashion in order to improve their performance and boost the overall
quality of the market.
In 2015, the Standing Committee of the National People’s Congress passed a
bill to revise the Education Law of the People’s Republic of China. The revised
law states that the country will establish a standard measure for preschool
education, which is expected to elevate the quality of education as a whole.
100.00
100.60
101.00
101.51
103.33
105.30
106.77
96.00
98.00
100.00
102.00
104.00
106.00
108.00
2009 2010 2011 2012 2013 2014 2015
CPI Growth of Education, Culture and Entertainment

7. 07
Preschool Education in China
Quick Growth for O2O Early Childhood Education Hard to
Realise
The O2O concept has been gaining popularity in China in recent years.
Following this trend, several companies have applied the O2O concept to early
childhood education. One such example of this is Zao Jiao Dao Jia, an O2O
company offering door-to-door early childhood education for infants aged from
0-3. The company finished its pre-A series funding of CNY 10 million in
November 2015. Unlike the one-to-many standardised lessons offered by
traditional education centres, door-to-door early childhood education services
are usually one-on-one and customised. Currently, O2O early education
services charge prices which are similar to those offered by traditional one-to-
many education services, in the hope of taking market share from the latter.
Nevertheless, according to learning.sohu, more than 58% of parents send their
children to early education centres so that their children can mix with peers
and build up their social skills. As such, although door-to-door early childhood
education may offer advantages such as better quality of education and
avoidance of travel and lump-sum settlements, it does not administer the same
socialisation benefits inherent in the services of traditional providers. Further,
the majority of parents only have a need for such services around 1-2 times per
week, compared to other O2O services like food delivery, for which customers
may utilise as frequently as once per day. In addition, parents looking into one-
on-one education services usually expect teachers to have related experience
of at least 3-5 years. However, such experienced professionals are less willing
to work for O2O companies since they are usually able to find more secure,
higher-paying positions in traditional education centres or in kindergartens.
Thus, in spite of the large potential market for O2O early childhood education
services, the market is unlikely to experience rapid growth due to the low
frequency of usage and the difficulty in hiring experienced teaching
professionals.

8. 08
Preschool Education in China
Investments in Online Preschool Education Heating Up;
Foreign Capital Restricted
Institutional investors are investing actively in the country’s online preschool
education industry, which has been driven by factors such as the rapid
development of the internet, 4G network and smartphones. Online education
is particularly popular amongst parents who are in their 20s and 30s, as they
are more familiar with internet and smartphone services. In 2016 H1, the
number of funding cases in online education increased by 25.29% YoY to 109.
The total amount of funding was CNY 3.4 billion and online preschool
education accounted for 7.81%. Some companies were listed on the National
Equities Exchange and Quotations (NEEQ), a new Chinese stock market catered
for small- and medium-size companies. Such listings open up a way for small-
and medium-size preschool education companies to raise funds.
Foreign investors are faced with restrictions on investment in preschool
education institutions in China. According to the Catalogue of Industries for
Guiding Foreign Investment (2015 revision), jointly published by the National
Reform and Development Commission and the Ministry of Commerce of the
PRC, foreign investors can only invest in preschool education institutions
through joint ventures. In addition, the president or the main administrator
must hold Chinese nationality, while no less than one-half of the members on
the institution’s trustee council, board of directors, or the joint administrative
committee should be Chinese.
Source: JUSFOUN BIGDATA
22%
18%
14%
13%
9%
7%
5%
4%
3%
5%
Distribution of Funding by Number of Cases
(2016H1)
K12
Professional Training
Early Childhood Education
Language Learning
Pre-study abroad Training
Interest Education
Higher Education
Education Informationisation
Education Service
Others

9. 09
Preschool Education in China
Source: JUSFOUN BIGDATA
Major Players Aiming for Industrial Integration
American brand Gymboree Corporation began with the founding of Gymboree
Play & Music in 1976, but later the company expanded its business to include
apparel and accessories retail for children. Many Chinese players have followed
a similar business strategy. For example, RYB Education Institute, one of the
largest domestic early childhood education service providers in China, has
undergone business expansion and industrial integration over the past few
years. The company first established an RYB Learning Centre in 1998, offering
parent accompanied early education services. In the following years, the
company expanded its business by introducing RYB Kindergarten and Zhudou
Parenting. Zhudou Parenting sells early education products and operates a
mobile App for early childhood education. The company also established its
own teaching research centre and training school for kindergarten teachers. In
2015, the company partnered with maternal and infant e-commerce platform
Mia.com, and established a new brand called Chainbest.tv. Chainbest.tv is
responsible for displaying maternal and infant products on screens in RYB
learning centres. Parents can scan the QR code and purchase the products
online, which will be prepared and shipped from Mia.com.
29.90%
21.83%
7.81%
19.00%
3.69%
9.43%
8.34%
Distribution of Funding by Amount
(2016H1)
K12
Professional Training
Early Childhood Education
Language Learning
Interest Education
Education Service
Pre-study abroad Training, Higher Education,
Education Informationisation, Others

10. 10
Preschool Education in China
Increasingly Fierce Competition Driven by Franchise Model
and Entry of New Players
There are nearly 13,000 early childhood education centres in mainland China,
around 18% of which are foreign capital funded. One reason for the rapid
expansion of early childhood education centres is its franchise business model.
Around 70% of early childhood education centres in China utilise the franchise
model. Big brands usually start with chain stores and transfer to a franchise
model once the brands have gained a strong reputation. The brand/company
will then charge an initial fee and annual royalty fee as a certain percentage of
total revenue. According to Jiamengfei.com, with the exception for Gymboree,
the franchise centres of the other three major brands, namely GYMBABY, MY
GYM and Babycare, require first-year inputs and expenses of around CNY 1
million for a centre of 400-500 square metres. Additionally, the CNY 1 million
investment is likely to be paid back within 1-2 years, which can be fairly
attractive to investors.
In addition to foreign brands, many local brands in China also apply foreign
teaching methods as a selling point for their services. This is because foreign
teaching methods, especially those from the US, are largely held in high regard
by those parents born in the 80s and 90s. Such methods place value on
children’s creativity, teamwork and character building over their ability to excel
in standardised testing. For instance, GYMBABY leveraged western educational
theory and teaching methods as a reference point to develop its own training
lessons, and received extensive attention from the industry for its innovative
approach.
Meanwhile, a number of Chinese players, either in related or non-related
businesses, are also seeking to enter the early education market. In 2014,
Zhejiang Semir Garment, a Chinese local apparel company, acquired a 70%
stake in Yuhan (Shanghai) Information Technology (provider of brands
FasTracKids and FasTrack English) from Everlearn International Group with a
deal value of CNY 102 million. In June 2016, Gymboree Corporation sold its Play
& Music business (i.e. early childhood education services) to ZEAVION Holdings,
a Singaporean education services company established by a Chinese
entrepreneur. With more and more large enterprises entering the industry, the
early childhood education sector is expected to develop rapidly, and
competition will likely intensify.

11. 11
Preschool Education in China
Major Brands in Early Childhood Education
GYMBABY Gymboree RYB MY GYM Babycare
Country of Origin China USA China USA China
Age 0-6 0-5 0-6 0-8 0-6
# of Centres in China 100 200 1,200 200 700
Franchise ○ ○ ○ ○ ○
First-Year Expense
Estimate for a
Franchise Centre
(CNY)
1,521,000 for 500
㎡ centre
3,126,000 for 600
㎡ centre
-
1,010,000 for 400
㎡ centre
1,426,000 for 500
㎡ centre
Annual Net Profit
Estimate (CNY)
984,000 1,648,800 - 1,050,000 1,390,000
Content of Lessons
Art, Sports, Life
Practice,
Language, Brain
Potential
Play & Learn,
Music, Art,
Preschool Steps,
Family, School
Skills
Parent
accompanied
lessons Language,
Art, Logic, Bridge
lessons
Music Together,
Abrakadoodle
Enlightenment,
Music & Art,
Logic, Language
Expanded Business -
Children's Apparel
and Accessories
Kindergarten,
Early education
products, Mobile
app, Maternal
and infant
products O2O
-
Maternal and
infant products
O2O
Source: Disclosed information of each company and jiamengfei.com
Note: First year input includes rental expense, renovation expense, purchase of teaching tools, promotion fee, staff salaries, etc.
Conclusion
The preschool education industry presents a huge potential market in China
due to the country’s large infant population, parents’ increasing focus on
education, rising household disposable incomes, and the subsequent growth in
education expenditure. Although the preschool education industry in China is
slightly lagging compared to other countries, the industry is now expanding
aggressively with more and more large enterprises and capital flowing into the
market, leading to intensified competition. In future, the Chinese government
is expected to announce rules to officially regulate the market. However, at the
current stage of the industry’s development, players must self-regulate to
ensure the quality of education provided and increase their competency in
order to survive.

12. 12
Preschool Education in China
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