Navigating challenges in the education sector...Source: EY-Parthenon research and analysis,...

Navigating challenges in the education sector

Prepared for SuperReturn China

Varun Jain, Vice President, EY-Parthenon9 May 2018

EY-Parthenon | Page 2

Agenda

► Introduction to the EY-Parthenon education teams

► Recent positive developments in Chinese for-profit education

► What this means for investors


EY-Parthenon professionals bring a winning combination of skills and experiences in the education sector

Largest advisor

to the education sector globally

Extensive education

sector experience across China

Trusted advisor

for investors across education sectors


EY-Parthenon professionals have completed more than 1,500 education projects in more than 95 countries and in every education sector

EY-Parthenon offices

Education projects

completed by EY-Parthenon


We have a global team of education professionals with more than 100 people worldwide

Robert LytleManaging Director, Head of Education,

EY-Parthenon

Ernst & Young LLP

Boston, MA USA

Haven LaddManaging Director, EY-Parthenon

Ernst & Young LLP

Boston, MA USA

Chris LibrizziManaging Director, EY-Parthenon

Ernst & Young LLP

New York, NY USA

Seth ReynoldsManaging Director

EY-Parthenon, Ernst & Young LLP

Boston, MA USA

David HovermanManaging Director, EY-Parthenon

Ernst & Young LLP

San Francisco, CA USA

Kasia LundyManaging Director, EY-Parthenon

Ernst & Young LLP

Boston, MA USA

Chris RossManaging Director, EY-Parthenon

Ernst & Young LLP

Boston, MA USA

North America

Amitabh JhinganPartner, EY-Parthenon

Ernst & Young LLP, India

New Delhi, India

Varun JainDirector, APAC, EY-Parthenon

Ernst & Young LLP


Claudia WangDirector, EY-Parthenon

Ernst & Young (China) Advisory Limited

Shanghai, China

EMEA

Matt RobbPartner, EY-Parthenon

Ernst & Young LLP (UK)

London, UK

Derrick BettsDirector, EY-Parthenon


London/Dubai

Jeremy PanacherilPartner, EY-Parthenon

Ernst & Young Middle East

and North Africa (MENA)

Dubai, UAE

Ashwin GopalakrishnanDirector, MENA, EY-Parthenon


Mumbai, India

Anna GrotbergDirector, EY-Parthenon


London, UK

Corey DixonDirector, EY-Parthenon


London, UK

Oceania

Latin America

Felipe MiglioliManaging Director, EY-Parthenon

Ernst & Young Assessoria Empresarial Ltda.

Sao Paulo, Brazil

Ivo GodoiPartner, EY-Parthenon

Ernst & Young

Sao Paulo, Brazil

Jeremy BarkerPartner

EY-Parthenon

Ernst & Young

Sydney, Australia

Catherine G FridayManaging Director

Ernst & Young

Melbourne, Australia

Ajay KathuriaSenior Consultant, MENA, EY-Parthenon


Mumbai, India

Supriya JainSenior Consultant, APAC, EY-Parthenon

Ernst & Young LLP


Raunaq SabhrawalSenior Consultant, LatAm, EY-Parthenon


Mumbai, India

Saini KrishnamurthyConsultant, APAC, EY-Parthenon


Mumbai, India

Archana SarathySenior Consultant, MENA, EY-Parthenon


Mumbai, India

China

Center of Excellence

Kate KrugerVice President, EY-Parthenon

Ernst & Young LLP

Boston, MA USA

Samantha FisherVice President, EY-Parthenon

Ernst & Young LLP

Boston, MA USA

Julia AmsellemPartner, EY-Parthenon

Ernst & Young Advisory

Paris, France

Alfredo VieyraExecutive Director, EY-Parthenon

Mancera, S.C.

Mexico City, Mexico


We have worked on the largest global education deals in each of the last nine years

Carlyle and

Apollo Group

BPP

Acquisition

Est. value: $607m

McGraw-Hill

Education

Unit spin-off

Est. value: $3.1b

KKR

Cognita

Investment

Est. value: $500m

Nord Anglia Education

Meritas Schools

Acquisition

Est. value: $575m

Nord Anglia

Education

BPEA and CPPIB

Taking private

Est. value: $4.3b

Providence

Study Group

Acquisition

Est. value: $570m

Montagu Private Equity

College of Law

Acquisition

Est. value: $450m

Hellman & Friedman

Renaissance Learning

Acquisition

Est. value: $1b

Eurazeo

Glion & Les Roches

Acquisition from Laureate

Est. value: $380m

2009 2010 2011 2012 2013 2014 2015 2016 2017


Agenda

► Introduction to EY-Parthenon



EY-Parthenon | Page 8Note: *Average deal values are based only on those deals whose size is publicly disclosed; only deals above $5m are counted

Source: Mergermarket, Preqin, PitchBook, Thomson Reuters, Parthenon projects

Deal activity has increased since 2013 with a spike since 2015

Number of education deals across IPO, corporate, PE and VC transactions

2013 through January 2018

EY-Parthenon | Page 9Note: *Reported deals above US$80m have been shown

Source: Mergermarket, Preqin, PitchBook, Thomson Reuters, Capital IQ

Representative private equity deals*, 2017–18

The largest private equity (PE) deals in 2017–18 were in tutoring, English language training (ELT) and kindergarten

Tutoring

ELT

Kindergarten

Vocational

K–12

Year 2017 2017 2017 2017 2017 2017 2018 2017 2017 2017 2017 2017 2017

PE owner Cathay

Capital,

Goldman

Sachs

CITIC

Capital,

BPEA

Sequoia,

Zhenge

Capital, YF

Capital

Legend

Holdings

Corporations

Sequoia,

GGV,

Tiger

Baiyang Warburg

Pincus,

Genesis

Capital

Warburg

Pincus,

Tencent and

others

China First

Capital

Group

Qiming,

CMH, etc.

IDG,

GGV

CBanner Warburg

Pincus

EY-Parthenon | Page 10Note: 24 out of the 42 Chinese companies that had an IPO overseas have been included in this study

Source: EY-Parthenon research and analysis, Education Investor

Overseas listings by Chinese companies in education sector, by exchange

OneSmart raised $200m

while Sunlands raised

$150m in the last quarter

Overseas listings by Chinese companies in the education sector are at the highest levels seen in the last 15 years

EY-Parthenon | Page 11Source: News Articles

Chinese companies are investing in education businesses overseas

China First Capital Group Limited

G8 Education

MindChampsPreSchool

Example 1

Sailing Capital

Coursera

AstrumEducation

Example 2

NetDragon

Edmodo

Example 3


International operators are entering the China market, real estate developers are more focused on education

Sylvan Learning

International operators

Country Garden

Real estate developers

Udacity Vanke

Coursera Evergrande Group

EY-Parthenon | Page 13Source: Bloomberg News

Chinese property enquiries in Vancouver: purchase motivations

This is no surprise given Chinese consumer motivations for real estate purchases are strongly linked with education

EY-Parthenon | Page 14Source: EY-Parthenon white paper on Chinese education regulation reform

Free market pricing allowed for-profit institutions

Favorable tax/subsidy regime

Increases in rentals for land use

There was also significant regulatory reform in the law to promote private education


Agenda

► Introduction to EY-Parthenon




Source: Singapore and Hong Kong have expat-centered markets in the premium segment (schools not attended by local population) hence a spend on the education metric has not

been shown for those markets.

Source: Parent surveys, industry participant interviews, government statistics, EY-Parthenon research and analysis

EY-Parthenon assessment of spend on education as a percentage of disposable household income, by country

This implies a higher per capita willingness to spend on both compulsory and non-compulsory educational services, vis-à-vis other countries in the region

Parents in China spend more on education, relative to comparable Asian markets, given the 3-family-1-child phenomenon


3

years

6

years

18

years22

years

12

years

Source: EY-Parthenon research and analysis

Theoretical lifetime spend on private education for Chinese nationals

Age

group

This trend drives up to ~$400k in private education spend per child over a student’s lifetime by the wealthiest Chinese parents looking to educate their children entirely privately


We have identified six key emerging themes in China education space

Expected growth in addressable

demographics, enabling growth

in early-years businesses1

Online education is emerging

across sub-sectors such as

English language learning and

tutoring2

Bilingual K–12 schools expected

to see high growth due to a

large, unaddressed population3

Limited opportunities for

investors in higher education,

due to tight regulations4

China is the largest source

country for the key study abroad

destinations5

Center-based tutoring is

unorganized, continues to be

hyper local, with presence of

both national and regional

brands

6


With relaxation of the “one child rule,” relevant population for early-years education is forecast to grow at 1% compound annual growth rate (CAGR) in the next five years

Source: China Bureau of Statistics, EY-Parthenon analysis

Relevant age population, age 2–6, China, 2010–20F

Effect of 2013 decree

allowing even one single

child parent to have two

children

The government relaxed

the ”one child rule”

completely from 2015 end

Effect of 2012 decree

allowing both single child

parents to have two

children

Expected growth in addressable

demographics, enabling growth in

early-years businesses1


Who will capture the psychographic of consumers that value social aspects and convenience?

Source: EY-Parthenon interviews and analysis

Case study: adult English language training


across sub-sectors such as English

language learning and tutoring2

Convenience and

flexibility, overcome

limited teacher supply

(non-Tier 1 cities)

Social and

networking

opportunity

Offline

providers

Online

providers

?


Preliminary data shows new intakes at online ELT providers serve students who left or were not in the market to begin with

Source: EY-Parthenon interviews and analysis

Case study: adult English language training

New intake composition of a leading online adult ELT provider





Student acquisition costs are still a big challenge for online operators

Source: EY-Parthenon research and analysis.

Case study: leading online operators marketing cost, 2014–17 1H





~1.5m children can afford an education costing >$10k in China; only 100k–150k students today are enrolled across bilingual schools in China

Note*- Tier 1 cities include Beijing, Shanghai, Guangzhou and Shenzhen, Tier 1.5 cities include Suzhou, Hangzhou, Wuhan, Chengdu, Nanjing, Xi’an, Tianjin

Source: Euromonitor, Oxford Economics, Government Statistics Bureaus, EY-Parthenon forecast model

Affordable population, $10k+ annual fee, by city tier, China, 2016–17

Enrollment of relevant schools, by city tier, 2016–17

There is a large, addressable market for such schools across China

Bilingual K–12 schools expected to

see high growth due to a large,

unaddressed population3


The Ministry of Education only permits foreign universities to set up joint campuses with a Chinese partner; foreign branch campuses have been established post-2003 education reforms

Source: EY-Parthenon research and analysis

Development of foreign universities in China, 2003–15Foreign Branch Campus Regulations, China

Foreign ownership

Key regulatory

authority:

Ministry of

Education

Approvals Profit repatriation

► Need local partner to set up a branch campus

► Mode of entry is through joint venture

► Foreign ownership must be <50%

► Must be approved by

the national

government

► Approval process

can take ~3–4 years

► Profits can be

repatriated, but are

subject to ~35% tax

► Royalties and other

fees are also subject

to tax

2003

2004–10

2010–15

► New legislation passed in March, permitting establishment of

foreign university campuses in China in partnership with Chinese

institutions

► 15+ new foreign universities like University of Nottingham

Ningbo and Xi’an Jiaotong Liverpool University were

established in partnership with Chinese institutes

► The government entered into collaborative partnerships to

allow universities to have independent legal registration

► Two foreign universities – NYU Shanghai and Duke Kunshan

were given independent legal status

2010

► The National Outline for Medium and Long-term Education

Reform and Development (2010–20) was released, to improve

investment and quality of education

Xi’an Jiaotong-Liverpool University University of Nottingham Ningbo China

Duke Kunshan UniversityNew York University Shanghai

Limited opportunities for investors

in higher education, due to tight

regulations4


The number of Chinese students commencing studying abroad grew from 400k in 2012 to 545k in 2016 at ~8% CAGR

Source: China National Bureau of Statistics, Ministry of Education, Institute of International Education, UNESCO, Oxford Economics, EY-Parthenon interviews and analysis.

Number of Chinese students commencing overseas education, 2003–17

China is the largest source country

for the key study abroad

destinations5


Chinese outbound students only represent ~2% of overall tertiary education enrollment in China, indicating headroom for growth

Source: EY-Parthenon interviews and analysis, UNESCO, Oxford Economics

Number of Chinese students commencing

overseas education, by degree, 2010 vs. 2016

Outbound student vs. in-country tertiary

education enrollment, 2016

China is the largest source country

for the key study abroad

destinations5


Organized tutoring providers have grown revenues and taken share from unorganized providers

Source: EY-Parthenon interviews and analysis.

Estimated tutoring market size, China, 2013–16

Center-based tutoring is

unorganized, continues to be hyper

local, with presence of both

national and regional brands 6


About EY-ParthenonEY-Parthenon professionals are global leaders in strategy consulting. EY-Parthenon teams are

committed to bringing unconventional yet pragmatic thinking together with clients’ smarts to deliver

actionable strategies for real impact in today’s complex business landscape. Innovation has become a

necessary ingredient for sustained success. Critical to unlocking opportunities is the EY-Parthenon

balance of strengths — focused experience with broad executional capabilities — to help you optimize

your portfolio of business, uncover industry insights to make investment decisions, find effective paths for

strategic growth opportunities and make acquisitions more rewarding. EY-Parthenon methodologies,

along with a progressive spirit, can deliver intelligent services for clients, amplify the impact of strategies

and make EY-Parthenon consultants the global advisors of choice for business leaders.

About the EY-Parthenon Education teamsEY-Parthenon Education professionals have an explicit mission and vision to be the leading strategy

advisors to the global education industry. To achieve this, significant investment is made in dedicated

management and team resources so that the global EY-Parthenon education experience extends across

public sector and nonprofit education providers, foundations, for-profit companies and service providers

and investors. EY-Parthenon professionals have deep experience and a track record of consistent

success in working closely with universities, colleges, states, districts, and leading educational reform

and service organizations across the globe.

Contact us

Twitter | @EY_Parthenon

Facebook | facebook.com/EYParthenon/

LinkedIn | linkedin.com/company/ey-parthenon

Follow us for regular updates

parthenon.ey.com

Varun Jain

Director, APAC, EY-Parthenon

Ernst & Young LLP


[email protected]

Amitabh Jhingan

Partner, EY-Parthenon


New Delhi, India

[email protected]

Claudia Wang

Director, EY-Parthenon

Ernst & Young (China) Advisory Limited

Shanghai, China

[email protected]

mailto:[email protected]



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