China’s international school market is highly fragmented. Maple Leaf Education (1317), with the largest student enrolment, just accounted for less than 8% of the total market in the 2013/2014 school year, while other education institutions took up less than 5%. The market is characterised by low homogeneity among competitors and high cost of replacement. Tuition fees mostly depend on parents’ affordability as well as the teaching quality and reputation of the schools.
As pointed out in the last issue, China’s demand for international schools will continue to increase rapidly in the next three to five years while there is still a shortage in supply of international education for Chinese kids. In view of the imbalance between supply and demand, enterprises from a number of sectors are tapping the market, which include:
- Real estate developers: Founded by Vanke, Shanghai Vanke Bilingual School grew out of the “International Bilingual C Program” of Fudan Vanke Experimental Private School; while Country Garden set up its first International Baccalaureate international school as early as in 1994 and established BGY Education Investment in 2014;
- Listed companies: In mid-2015, A-share listed company Zhongtai Bridge entered Beijing’s international school market and targeted establishing four schools in China’s capital city. It also intended to build at least 14 schools in other first-tier cities while pursuing long-term development and brand competitiveness in first- and second-tier cities. Following the acquisition of Xueda Education, Xiamen Unigroup Xue (formerly known as Xiamen Insight Investment) planned to invest in two international school projects in Beijing;
- Other education operators: New Oriental established the Beijing New Oriental Foreign Language School at Yangzhou and Beijing Changping New Oriental Foreign Language School. On the other hand, Nord Anglia, which provided international education exclusively to expatriates’ kids in the past, set up its first bilingual school, Nord Anglia Chinese International School Shanghai, and began recruitment in the 2016 school academic year.
There are three main business models adopted by international schools in China: self-development and operation, leasing and export of brand. Most of the new entrants develop and operate on their own with substantial investment, with the aim of gaining brand recognition. On the other hand, public international schools and certain private international schools primarily operate under leasing arrangements. For private international schools with a good reputation and stable sources of enrolment, they tend to achieve rapid expansion through management entrustment and acquisition of existing schools. Regardless of the business model, the key to success lies in brand building. As parents would like their children to receive an international education without taking the joint entrance examination for universities, the admission rate of the schools to top colleges becomes a crucial factor.
International schools have high profitability and net profit margins. Studies show that a new international school can achieve breakeven when the number of enrolled students reaches one-third of the designed capacity. During the depreciation period, a school would have a net profit margin of 30% at full-enrolment; in the case where its assets reach the time limit, the school would have a net profit margin of 50% at full-enrolment.
Since 2015, certain A-share listed companies have achieved changes of control through “transfer by agreement and non-public issue” whereby the new shareholders are in charge of expansion within the international school sector. As a result, these companies have become unique and high-quality school operators in the A-share market. It is expected that more such companies will enter the international school sector, including its peripheral industries, such as the provision of online courses recognised by international schools. In the meantime, an increasing number of international schools would likely seek listing in Hong Kong. The overall trend towards listing should enhance the transparency of the market segment and investors would then have a better understanding about the industry.