A brief discussion on the characteristics and investment value of the education sector

Scientific statistics have shown us time and time again that a country's affluence has a strong correlation with its higher education enrolment rate. In the 21st century knowledge-based economy, no one would deny that education is a rigid consumer product. According to a Parthenon study, the education industry is the eighth most important economic pillar of the world, accounting for 5% of the global GDP in 2014.

As the disposable income of residents increases, so has education spending year after year. In addition, the education sector is not affected by the economic cycle and also boasts a high and stable rate of returns, making players in the industry preferred M&A or financial investment targets for many institutional investors.

Why are investors attracted to the education industry? To answer that, one must first understand the five major characteristics of the industry:

First of all, the education industry is not affected by the economic cycle. Even in an economic recession, education spending is the least likely among all expenditures to be trimmed. Many in the working population often choose to return to school to improve their skills during an economic crisis.  Education institutions generally have higher enrolment rates in times of economic recession. During the global economic downturn between 2007 and 2009, household  spending on education in many countries and regions, including the United States and the United Kingdom, remained steady, which shows that the education industry is not vulnerable to economic downturn.

Secondly, the prices of education products generally rise faster than inflation. Increases in tuition and fees for academic courses are generally larger than those of the wage levels of white-collar workers, hence are always ahead of inflation. As such, the actual income of education institutions still climb even when there is no increase in student enrolment.

Thirdly, the industry affords stable and predictable returns. By school type, kindergarteners spend on average two years in school, whereasK-12 pupils spend 6-12 years, and local students are usually in school longer, as for students of higher education institutions, they spend 2 to 5 years receiving schooling, and these numbers suggested the income of education institutions is stable and predictable.

Fourthly, working capital requirement is relatively low, while cash turnover is fast. A school usually collects the tuitions for an academic year or semester before the school year starts, and teachers’ salaries and supplier fees are paid periodically during the school year, thus the school can minimize receivables and enjoy ample cash flow. Also, in general, excluding maintenance expenses, a school enjoying stable operation is able to convert 90-95% of its earnings before tax, depreciation and amortization into cash.

Lastly, barriers for new entrants are high. In opening a school, some segments involved command relatively high capital expenditure, and the reputation of an education institution is mainly based on the quality of the education it provides and its performances in terms of the further education enrolment rate and employment rate of graduates. As such results take a long time to manifest and prove, brand building is a time-consuming endeavour.

According to researches and analyses conducted by the Oxford Economic Research Institute and Parthenon, the global education market has continued to heat up in recent years, with private education providers assuming a growing share of the market. In 2016, the spending on private education worldwide totalled at $1.1 trillion, and China was the second largest spender following the United States. In the next issue, we will talk about the development trend of private education in China.