Dong Yuhui "poured" the Spring Festival Gala, can the future of New Oriental still rely on education?

The education and training industry is an industry that never lacks demand, and the scarcity of high-quality social resources makes public education impossible to achieve absolute fairness. South Korea's 60 years of experience in education reform also proves that while the public education burden reduction policy continues to be introduced, it is also the golden period for the development of the education and training (mainly including non-compulsory education stage education and quality education) industry, and the disturbance of policies may bring short-term impact, but it is difficult to change the long-term trend.

From another point of view, before the birth rate has a significant drag on the industry, as a consumer product with the same investment attributes, the education and training industry is still expected to benefit from the dividends of the decline in the proportion of Chinese residents' housing expenditure in the long run.

Following the launch of the "double reduction" policy in 2021, the overall education and training industry has been dormant for a year, and the processing of K9 education and training business by leading institutions is also nearing completion. With the introduction of the normative and encouraging policies for non-subject education at the end of the year, Dolphin Jun believes that actively transforming education and training institutions are expected to be the first to get out of the impact of double reduction.

As an old player in private education, New Oriental has not hit it a small blow with the double reduction policy, but it also has enough family base to set sail again. In addition to the popular Oriental Selection in 2022, Dolphin Jun is also very concerned about its active transformation of STEM and smart learning devices, and its brand influence and years of industry experience are expected to help new businesses become future growth engines. In addition, operating data for the first quarter of fiscal 2023 shows that New Oriental's high school subject training, overseas study and other teaching and auxiliary businesses have successively come out of the inflection point, and are expected to continue to recover after the epidemic is released.

A Competition at the pyramid level never stops

Involution is everywhere and comes from human nature. As long as the long-term educational concept and college entrance examination, the most widely applicable talent relative screening mechanism, exist, the involution gene is basically difficult to eliminate, which means that the demand for education and training (filling gaps, improving excellence) has no theoretical upper limit.

From 1980 to the present, under the general trend of expanding enrollment, the acceptance rate of the college entrance examination has been rising, but the number of students at the first level of the pyramid has not expanded at the same speed. In the past 20 years, the enrollment of 985 colleges and universities in the country has remained in the range of 180,000-200,000, which has led to the fastest growth in the number of college entrance examinations, but the acceptance rate of 985 has been declining. In other words, in the 40-year trend of college entrance examination expansion, the competition of the head group has not relaxed, but has become more crowded.

Although the workplace society is not based on academic qualifications, in a statistical sense, the college entrance examination is almost the biggest fork in the road before everyone becomes an adult. From campus to society, the difference in average salary between different academic qualifications is difficult to ignore, which also leads parents to flock to invest real money in their children's education before the college entrance examination decides their fate. The saying "no matter how hard you can't suffer children, no matter how poor you can't be poor in education", it is a straightforward expression of the "rigid" demand behind education investment.

The total expenditure on education, culture and entertainment in China's household expenditure has maintained a CAGR of about 10% in recent years. According to the 2017 China Education Finance and Household Survey, the total annual education expenditure of Chinese households is 1.9 trillion yuan, accounting for about 5-6% of the total household expenditure. In addition, the government is also increasing its investment in education, which has been trending higher as a percentage of GDP since 2000.

Because of the impetus of more and more parents' rigid demand, the education industry with public attributes has begun to accelerate marketization, and in the golden 10 years before 2021, the market growth rate of extracurricular tutoring (disciplines, non-disciplines) is very considerable. The development of online subject education is even more rapid, and for a while, in the primary market, education projects have become the sweet potato in the eyes of investors.

However, as a social public undertaking with great impact, education also needs government policy indicators and norms. In addition to general issues such as setting thresholds and market operation concentration, "burden reduction" has always been the main guideline for the government to regulate the education industry. From the first "Burden Reduction Order" in 1955 to the sensational "double reduction" in 2021, in addition to the restrictions on the burden of in-school education, K9 (kindergarten to junior high school) off-campus tutoring has become a key target for rectification.

From the establishment, financing to the development of normal business, the "Double Reduction" has made detailed qualification requirements, and the limitation of "non-profit institutions" has almost completely blocked the commercialization of K9 subject tutoring institutions. Capital took the lead in launching, small and medium-sized education and training institutions closed down, closed down. The leader of education and training institutions led by New Oriental also closed the K9 subject training courses before the end of 2021, but the leader has more surplus food in his family, which can support business transformation to avoid a complete disappearance.

While policy crackdowns are almost devastating in the short term, South Korea's 60 years of education reform experience tells us that policy disruption does not eliminate demand, and demand will only persist in other forms.

2. 60 years of education in Korea: from total ban on private education to complete flattening

First of all, by reviewing the 60-year history of blood and tears education reform in South Korea, Dolphin Jun found that there are some experiences worth helping us predict the future trend of China's education market after reform:

(1) The root cause of the emergence of private education lies in the "rigid" needs of residents under the combined effect of "involution nature" and "relative scarcity of high-quality resources in education". Before the acceptance rate reaches 100%, the private tutoring participation rate tends to rise, with the highest participation rate approaching 80% in South Korea.

The almost unchanged acceptance rate of key universities and the government's policy of reducing the burden of pre-university on-campus education have made the "scarcity" of high-quality resources exist for a long time. Therefore, the demand for extracurricular tutoring for individual individuals will not disappear, and it will also contribute to the price of private training.

(2) It is difficult for private education institutions to shake students' tuition needs, and the proportion of South Korean household education expenditure in total consumption expenditure is rising against the backdrop of declining birth rate and increasing public education expenditure.

(3) "Gaokao reform" + "increase in higher education popularization" will affect the participation rate of private training in the short and medium term, but it will continue to rise naturally after a certain period of time. In the long run, only the "decline in the birth rate" can suppress the overall private education market.

(4) However, because the competition of key universities (high-quality resources) is still fierce, it is the fuel for the growth momentum of private tutoring consumption, and the cost of single tutoring continues to grow rapidly, and high private tutoring has gradually become a special session for middle- and high-income groups.

(5) In private education, the STEM training market such as art and science began to accelerate after the college entrance examination reform in 2008, the student participation rate continued to increase, and the growth rate of single expenditure exceeded that of subject training.

(6) After the reform of the college entrance examination, in addition to the benefits of STEM education, the market for learning equipment and learning materials suitable for students' own home use has also begun to prosper.

In general, the demand for make-up classes is difficult to suppress by policies. There may be some cooling effect in the short term, but the long-term trend is still upward, and the market size may only be pressured by the sharp decline in the birth population.

In terms of subdivided industries, after the ban on subject training, STEM quality education, learning equipment, third-party teaching materials, etc. will also have significant opportunities to benefit and usher in accelerated growth.

1. The existence of high-quality resources is scarce, and the policy cannot help but demand tutoring

South Korea's education reform in order to reduce the burden can be traced back to the 80s of the last century, when the national participation rate of extracurricular training was less than 10%, which can be said to be a "advanced layout" of the government. But the effect is still miserable – the advanced burden reduction policy has not led to more inclusive education, and the demand for remedial training has increased as competition for quality universities remains fierce. As in China, the penetration rate of participating in extracurricular tutoring has increased in tandem with the college entrance examination promotion rate.

Looking back on the 40 years of education reform, the South Korean government's education policy has also wavered because it is difficult to balance the two goals of "increasing demand for supplementary classes of the people" and "reducing the burden and benefiting".

However, during this period, the scale of residents' education expenditure was not affected simultaneously, and the overall growth trend was maintained.

1) Especially in the period from 2000 to 2010, when the number of students continued to decline every year, the proportion of individual families' consumption in education was still rising.

2) After 2010, the proportion of total household education expenditure began to decline, driven by the college entrance examination reform in 2008 and the increase in government public education investment (the participation rate of private tutoring declined), but Dolphin Jun believes that the slowdown in the growth rate of total scale and the decline in proportion are more due to the continuous negative growth of the population born in early 2000:

Despite the reform of the gaokao in 2008, the average education expenditure per child (total education expenditure / number of K12 students in that year) increased until the end of 2016. In 2017, the average family education expenditure may have plummeted due to the introduction of the "free semester system" and the accelerated growth of the number of childless families, but it began to grow again in 2018.

3) But the competition for high-quality educational resources is different, and the demand for private tutoring has not weakened, but has become stronger. According to the data, the scale of students' private extracurricular tutoring spending strongly digested the negative impact of the decline in the birth population fault line in 2017, maintained a sustained growth momentum, and accounted for an increasing proportion of the total education expenditure of families.

If the impact of "being averaged" is excluded, only looking at the paying groups who participate in private tutoring, the expenditure on single tutoring even exceeds the total education expenditure of each family in the country, and private extracurricular tutoring has increasingly become an exclusive service for the middle and high-income class.

The root cause of the increasingly exaggerated increase in the cost of single-child tuition stems from the relative scarcity of high-quality resource endowments. Most of South Korea's top universities are located in Seoul, but the number of admissions to all universities in Seoul has remained stable for many years, so the proportion of their admission has not increased, resulting in fierce competition at the pyramid level, and the demand for subjective "tutoring" and "improvement" has been repeatedly prohibited.

In particular, between 2007 and 2016, the share of Seoul's university enrollment, which has the largest number of high-quality universities, declined. Although the South Korean government began to reform the college entrance examination in 2008, abolishing the score system and replacing it with a grading system, and increasing the proportion of students' comprehensive scores and life records, at the same time, the initiative to "expand the independent enrollment rights of colleges and universities and allow colleges and universities to be selected for separate examinations" has stimulated a new round of "cramming fever" in leading universities.

It was not until 2016, when the new education reform was introduced - the implementation of the junior high school "free semester system", the cancellation of all examinations or examinations during the free semester, the expansion of the introduction of vocational experience, the promotion of employment before study, etc., that the enrollment of ordinary universities fell rapidly, and the proportion of admission to Seoul universities increased slightly.

2. Alternative market for subject tutoring

Above we said that the participation rate of students in the 1980s continued to increase despite the strictest ban on private education in South Korea, which is mainly observed from the perspective of the overall private education industry. But if you look at the situation of market segments, South Korea's policy on college entrance examination reform is not completely ineffective.

For example, after the college entrance examination reform in 2008, coupled with its own higher education acceptance rate approaching 100%, the national private education participation rate declined significantly before 2016. However, at the same time, the participation rate of language learning and STEM non-subject training has increased rapidly, and the speed of increase has accelerated in recent years, and even led to a higher participation rate in overall private education.

From the perspective of individual students, although the price of subject training has risen sharply, the amount of money spent by everyone on non-subject training has also increased from 19% in 2007 to 26% in 2019 before the epidemic, and it has also quickly recovered to 23% in 2021 after the epidemic lockdown was reduced. In the five years before the pandemic, the average growth rate of investment in non-discipline training per student exceeded 10%.

Therefore, although South Korea's birth rate has fallen off a cliff many times since 2012, the size of the non-subject education market still maintains a growth trend, maintaining a CAGR of about 7% from 2016 to 2019 before the epidemic. In contrast, the performance of the two sub-fields of vocational skills training and vocational counseling in private education has not increased significantly.

Third, the demand for education and training still has the potential to improve, and New Oriental is self-salvation

1. The proportion of housing expenditure has declined, and education is expected to benefit

Although domestic families have always been criticized as a social problem in terms of increasing investment in education, if compared with the situation in South Korea, in fact, the involution of Chinese families in education is still far less than that of South Korea.

In terms of the breakdown of household expenditure in China and South Korea, South Korea does not account for a particularly high proportion of food and housing consumption that Chinese residents spend the heaviest. On the contrary, in terms of spending on life services, education and entertainment, Chinese residents are low. In education and entertainment, South Korea's expenditure on education alone is almost equal to the level of China's total expenditure on education and entertainment. After 2017, after the proportion of South Korea's education expenditure decreased significantly, the gap between the proportion of education and entertainment expenditure between China and South Korea residents was significantly narrowed.

For food and housing expenses that vary widely between Chinese and Korean households:

In addition to the high proportion of food because the per capita income of Chinese is not as good as South Korea's and the Engel coefficient is high, the proportion of housing expenditure of ordinary Chinese people was similar to that of South Korea, but it suddenly increased to more than 20% since 2013. It was not until the successive introduction of real estate contraction policies such as the three red lines in 2020 that the proportion of residential expenditure decreased slightly.

However, as of now, the proportion of nearly 25% of expenditure is still not low, and if it can continue to decline steadily in the long term, then the extra spending budget may mainly flow to consumer fields such as daily necessities and services, education and entertainment, and transportation and communications, which are currently lower than South Korea. Dolphin Jun believes that in the field of education, as a consumer expenditure that is more investment in addition to finance and real estate, the possibility of being the first to obtain an overbudget is still very high.

In other words, there is still room for improvement in the overall spending budget of residents on education. If combined with the 60-year history of South Korea's education reform, when there is still potential room for residents' demand, the market size of private education and training may cool down in the short term due to the lack of supply of education and training institutions caused by the introduction of policies, but it does not mean that it will be under pressure for a long time.

Due to the pursuit of high-quality resources, the demand for private education will always exist despite increased public investment in education. Before the decline in the birth rate substantially dragged down the market growth, the overall demand for education and training of the Chinese people was still greater than the supply, especially after the introduction of the double reduction policy. This means that as long as supply recovers, the overall market size will continue to grow.

In addition, South Korea's experience also tells us that with the increase in the penetration rate of higher education and the reform of the subject assessment of the college entrance examination, the participation rate of subject training will naturally stagnate and decline, but the demand for education will not decline significantly, but will migrate to other segments.

2. The pursuit of fair and inclusive education reform has given birth to a prosperous education and training market

The cultivation of China's education and training market originated from the early 90s when state-owned enterprises broke the iron rice bowl and launched a market economy. From the first official guidance document issued in 1988 to promote burden reduction, to the current 35 years of education reform history, there is a similar development trajectory as South Korea - the more public education burden reduction policies, the stronger the demand for education and training. New Oriental also took advantage of the spring breeze of the industry and excavated a new pillar in addition to the overseas study business.

(1) In the early 2000s, the high school and college admission rate hovered around 50%, and the college entrance examination acceptance rate even declined year by year from 2005 to 2008. Like South Korea, the high elimination rate represents the scarcity of high-quality resources, but the country has also introduced regulations for reducing the burden of schools early. In the case of low promotion rates, the decline in on-campus education has naturally led to the rise of out-of-school tutoring.

Coupled with the relatively relaxed policy environment, the government's encouragement of social forces to fill the educational infrastructure, and private education and training institutions flourished during this period. Before the introduction of the double reduction policy, several teaching and training leaders (Good Future, Elite, University of Learning, Excellent Education, etc.) who started with K12 subject training were established around 2000.

New Oriental, which started as a study abroad business, also began to focus on K12 education business in 2005. In 2008, New Oriental's K12 teaching and training income reached 44 million US dollars, accounting for 21.8% of the overall income, and then reached a CAGR of 55% in 2013, which mainly represents the income of Youneng Middle School for subject training, with a CAGR of more than 60%, which can be said to be the golden period of subject counseling.

(2) In 2013, with the introduction of the government's support policy for private high schools and private colleges and universities, the high school promotion rate jumped rapidly to more than 90%, the college entrance examination acceptance rate also exceeded 75%, and the off-campus teaching and training market cooled down slightly.

The revenue growth rate of New Oriental K12 subject training (Youneng Middle School) also dropped rapidly from 66.5% in 2012 to 38.3%, and then the growth rate continued to decline from 2014 to 2015.

(3) However, with the launch of the "Opinions" on the cancellation of national encouragement bonus projects (special strength bonus points, competition extra points) in 2015, that is, the first batch of college entrance examination students in 2018 will implement parallel voluntary admission in 31 provinces, and the independent enrollment of colleges and universities will be adjusted to the national unified college entrance examination. Since then, the pressure of college entrance examination has increased again, which has accelerated the growth of K12 subject training.

The revenue growth rate of New Oriental's Youneng Middle School has also increased to more than 30% since 2016, and the growth rate has increased year by year until the introduction of the policy on standardizing the establishment conditions and qualifications of off-campus training institutions in 2018.

(4) After 2018, off-campus teaching and training ushered in a period of gradual tightening. Until the launch of the double reduction policy in 2021, for-profit institutions for K9 subject training were completely withdrawn.

New Oriental also closed K9-oriented subject training courses before 2022, and the overall education service and test preparation revenue in FY2022 (2021.6-2022.6) fell by nearly 30% year-on-year, and the number of schools and learning centers closed by half from 1,669 at its peak to 706 at the latest. Dolphin Jun expects that after the loss of K9, the subject training income of Youneng Middle School will also decrease by nearly 35% year-on-year, returning to the level of fiscal year 2019 in absolute terms.

3. K9 is completely shut down, pay attention to the logic of New Oriental now?

In the year of purgatory, with the popularity of the Oriental selection, New Oriental also resumed financial disclosure at the end of April last year. FY2022 is synchronized with the timeline of the launch of the double reduction education reform, so the full-year operating data is naturally ugly. However, starting in Q1 of fiscal 2023 (May-August 2022), the Education Services and Test Preparation business recovered to 50% of Q1 revenue in fiscal 2021, an improvement from the 45% recovery in the same period in the previous quarter.

Combined with the data of New Oriental School Closure, as the speed of school closure slows down quarter by quarter, it indicates that the marginal impact of the double reduction policy is also continuing to weaken. Coupled with the increase brought about by the natural return after the epidemic is released, we expect that the K12 old business and the overseas study business (exam preparation + consulting) will recover significantly, so the short-term fluctuations brought by the policy are expected to return to stability soon.

However, the stabilization and recovery of the old business is expected, and Dolphin Jun tends to believe that most of it has been priced in the current stock price, and the follow-up needs to see the operation cash. New Oriental's new businesses such as STEM education, smart learning equipment and live streaming e-commerce selected by Oriental are the current situation that the stock price has doubled 5 times from the bottom, and choose to continue to pay attention to the core logic of New Oriental.

Referring to the experience of South Korea, it is expected that non-subject training (art, language, science, etc.) will mainly undertake the reduction of the budget of Chinese parents in K9 subject training, and the learning software and hardware equipment that can partially replace the subject courses of teaching and training institutions will also benefit. At the same time, under the expectation that the proportion of household housing expenditure will decline in the future, the proportion of education expenditure with the same investment attribute is expected to increase.

According to iResearch, the market size of non-discipline training in 2019 was 529 billion yuan, which fell sharply in 2020 due to the impact of the epidemic lockdown, but has recovered significantly to 505 billion yuan in 2021.

Considering that the annual birth population has continued to decline in recent years, and the target groups of non-subject training are mostly preschool children and primary school students, it is expected that there may be some drag, but despite the pressure, Damo still expects that the non-subject training market can reach a compound annual growth rate of 5% in the next five years.

For New Oriental, this is a new business with high certainty, and the key lies in how big it can be and the gradual realization of expectations. Although the growth rate of the non-discipline market in the future may not be as fast as the discipline training track that New Oriental began to focus on in 2008. However, Dolphin Jun is concerned that New Oriental can rely on its brand influence in the entire education and training market, and the greater growth logic comes from the increase of its own market share.

Recent policy trends are also regulating and encouraging the non-discipline education industry. On December 29, 2022, the Ministry of Education and other thirteen departments issued the "Opinions on Regulating Non-subject Off-campus Training for Primary and Secondary School Students", proposing that by the end of June 2023, the policy and system of non-discipline training in various places will be basically established, and by 2024, the burden of household expenditure will be effectively reduced, and non-subject training will become a useful supplement to school education.

The policy does not have strict restrictions on non-discipline education institutions like subject tutoring institutions, and gives appropriate implementation space in terms of institutional profit-making, advertising and financing measures, as long as they do not involve red lines. The normative requirements of the policy for the establishment of conditions for non-discipline educational institutions will also accelerate industry concentration. Dolphin Jun believes that New Oriental, which has undergone multiple rounds of supervision in the education and training industry, has more experience than most miscellaneous non-disciplinary educational institutions, whether it is the safety of teaching places or the grasp of the qualifications of teachers, which significantly reduces the threshold for New Oriental to enter the market and further increases the difficulty of market share.

In general, the inflection point of the recovery of the old business + the expected increase in the market share of the new business are the core reasons why Dolphin Jun chose to continue to pay attention to New Oriental. Due to the derivative impact of the double reduction policy, the suppression of the emotional valuation of the education industry has not been eliminated, and under the expectation of moderate relaxation of the policy, it is also likely to become a catalyst for valuation improvement in the future. (Source: Dolphin Investment Research)