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Black-swan events can have profound consequences on how we do things. Consider, for example, how the September 11 terrorist attacks on the United States changed the process we go through at airports to board a plane.
Black swans can also change the adoption rate of new technologies. The SARS crisis of 2003, for instance, contributed to the birth of China’s e-commerce industry, as quarantines and travel restrictions drove people to shop online. Alibaba, still a fledgling company at the time, notably launched its Taobao marketplace at the height of the SARS outbreak in July 2003. Within two years, the upstart platform had surpassed eBay to be the number one C2C marketplace in China, and it is now the world’s biggest ecommerce website.
Today’s coronavirus outbreak may do for educational technology (edtech) what SARS did for ecommerce. In 2014, Michael Trucano, a World Bank specialist on education and technology policy, described the importance of “tipping points” to push educational technology into the mainstream. Mr. Trucano even put forth that an epidemic could be the catalyst, writing: “one credible potential tipping point may be a ‘black swan’ event that could push all of this stuff into the mainstream, especially in places where it to date has been largely peripheral: some sort of major health-related scare.”
Six years later, we’re about to find out whether that argument stands.
Now that China has postponed the start of the new school semester — originally scheduled to start on Feb 17 — millions of Chinese students are shuttered at home until the end of March in a best-case scenario, or perhaps longer. Teachers have been using Alibaba’s DingTalk to stream their classes, but most are unaccustomed to live-streaming courses.
This opens up a huge opportunity for established online education companies, as China has over 200 million elementary and high school students who, together with pre-school kids, account for one sixth of the nation’s total population.
Over the past decade, online learning has become big business in China, a country that culturally prioritizes educational attainment and that gives companies operating in the space a demographic advantage. Revenue from the Chinese online education market reached RMB 251.8 billion (US$35.6 billion) in 2018, and was projected to grow to RMB 543.4 billion over the following 3-5 years, translating to a growth rate of 16% to 24%.
VCs have been plowing money into this segment, and several publicly-listed Chinese companies are already valued at over a billion dollars.
One such company, TAL Education (TAL), served 3.9 million K-12 students as of a year ago and has reported revenue growth of 40% or more for the previous four years. The company has seized on the virus outbreak as an opportunity to rapidly grow that client base and started offering an extensive series of free trial live-video-based course offerings for children in late January.
New Oriental Education & Tech (EDU), with a market capitalization of US$17.3 billion, served 36 million students as of a year ago and has grown revenues by more than 20% in each of the past four years. Its online education business is operated by a subsidiary called Koolearn Technology Holding Ltd, also a publicly-listed company trading under the ticker SEHK: 1797.
GSX Techedu (GSX), the third largest after-school tutoring company in China, is another well-positioned company in this sector whose growth has been astounding. Its first-quarter 2019 revenues of $40 million, represented a 437% increase from a year earlier and earnings were forecast to growth by 163% over the next year. Growth could accelerate this year due to COVID-19.
2019 was a phenomenal year for these companies. While they represent just a small sampling of the entire industry, they are the leaders of the pack. Most saw their stock prices double in value last year, and they are on track to perform even better in 2020 based on YTD gains.
The industry is not without its issues. With no barriers to entry, new edtech service providers have been flooding the market for some time, forcing older companies to burn cash to win market share. Because the cost of acquiring customers often outweighs the revenues generated, most Chinse edtech companies have been struggling with profitability.
Still, this hasn’t stopped investors from embracing the sector, and the customer acquisition issue may improve in the current environment since demand for edtech services is surging.
Despite the sharp stock gains, it may still be worthwhile for investors to keep an eye out for a future entry point. The online penetration rate of the Chinese education industry is said to be lower than that of other sectors such as e-commerce, news, and wealth management, so there is room for growth as more students become accustomed to learning online.
Nelly Nyambi
Managing Director, Research
McAlinden Research Partners |
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