Preschool education in China

01

Preschool Education in China

Karen Jiang, Shanghai Analyst Team

Market Overview

Preschool education is regarded as one of the sunrise industries in China. Since

preschool education is not included under China’s compulsory education

system, preschool enrolment is entirely up to the discretion of families or

parents. The majority of new parents in China were born in the 80s and 90s

and received a higher quality of education compared to older generations,

affording them a correspondingly different outlook and tendencies in regards

to decisions involving schooling.

China’s education system is notoriously rigorous and characterised by intense

competition. As a result, many parents choose to have their children enrol in

kindergartens or early childhood education centres to boost their

competitiveness and ensure they are adequately equipped to succeed.

Children aged from 0-3 are enrolled in early childhood education centres,

which are usually established by private entities. Meanwhile, children aged

from 3-6 attend private or public kindergartens, and may also participate in

extracurricular classes such as those for dancing and drawing. At present, the

market size of preschool education in China is estimated to be around CNY 350

billion. The market for children aged from 0-3 is about CNY 150 billion, while

the market for children aged from 3-6 is about CNY 200 billion. Major Lessons Offered by Early Childhood Education Centres

Age Range Content of Lessons

0-3 Perceptual Training, Body Function Training, Thinking Enlightenment

3-6 Language Training, Music and Art Training, Thinking Training

Source: by UZABASE

Preschool Education in China 20161104

02


Market Preference for Early Childhood Education Centres

Although infants are the main consumers of early childhood education services,

their parents are the major decision makers. According to research conducted

by learning.sohu, parents primarily consider faculty resources, distance to

home, and teaching methods when choosing an early childhood education

centre. Currently, the majority of early childhood education centres are located

either in department stores or near residential areas. Around 51.05% of

children take lessons once a week, while 19.74% and 11.45% take lessons twice

a week and more than twice a week, respectively. The remaining 17.76% take

lessons less than once a week. Foreign brands price one-hour lessons at CNY

150-200, while similar lessons from local brands are priced at CNY 120-160.

When presented with the choice of local brands and foreign brands, only

around 30% of parents have a preference for the latter. Around 75% of parents

have a price tolerance of up to CNY 4,000 for one semester.

Source: learning.sohu

19.48%

19.05%

18.44%

11.68%

10.14%

9.77%

8.79%2.65%

Parent's Consideration for Choosing a Center

Faculty Resources Distance

Teaching Methods Hardware & Environment

Brand Awareness Course Schedule

Price Others

43%

32%

14%

6%5%

Parents' Price Tolerance for One Semester Course

under CNY 2,000CNY 2,000 - 4,000CNY 4,000 - 6,000CNY 6,000 - 8,000over CNY 8,000

03


Increasing Infant Population in China Ensures Market Potential

China has a population of over 1.3 billion. Each year, there are around 16

million infants born in China, with a birth rate floating around 1.2%. Based on

each year’s infant population, as of 2015, there were more than 114.3 million

children aged from 0-6 in China, of which there were 66.2 million children aged

from 0-3. In October 2015, the Chinese government announced that they

would replace the one-child policy with a universal two-child policy, allowing

each married couple across the country to have two children. This policy is

expected to increase the birth rate and solve the aging population issue.

According to experts, the incremental infant population is expected to be

around 5 million infants each year after the implementation of the two-child

policy. In 2017, the infant population is estimated to reach a peak of 21.7

million. As the main consumers of preschool education, the increasing infant

population is a strong indicator of potential growth in the preschool education

market.

Source: National Bureau of Statistics

1.16

1.17

1.18

1.19

1.20

1.21

1.22

1.23

1.24

1.25

1,500

1,520

1,540

1,560

1,580

1,600

1,620

1,640

1,660

1,680

1,700

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

%

10

,00

0 in

fan

ts

China: Infant Population

Infant Population (10,000 infants) Birth Rate (%)

04


Growing Demand for Preschool Education from Kindergartens

Despite the fact that kindergarten education is not subsidised by the

government, an increasing number of parents are sending their children to

kindergartens from age 2-3, usually for a period of three years. In fact, many

primary schools in China require children to first receive preschool education

so that the children will have better sociability. As of 2015, there were 77,300

public kindergartens and 146,400 private kindergartens in China. As the

government has focused its efforts into increased funding for preschool

education, the percentage of public kindergartens has risen from 31.99% to

34.56% from 2010 to 2015. In 2015, 19.62 million and 23.02 million children

were enrolled in public kindergartens and private kindergartens, registering

CAGRs of 4.47% and 10.47% from 2010 to 2015 respectively.

Under the National Medium- and Long-term Education Reform and

Development Plan (2010-2020), the net enrolment rate was expected to reach

70% for three-year preschool education, 80% for two-year preschool education

and 95% for one-year preschool education by 2020. As of 2015, the actual net

enrolment rate has increased from 50% in 2009 to 75% in 2015. However,

compared to developed countries with a net enrolment rate of around 90%,

there is still space for development. In line with the yearly increases in the

country’s infant population, the demand for preschool education from

kindergartens is expected to see further growth going forward.


0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

0

50,000

100,000

150,000

200,000

250,000

2010 2011 2012 2013 2014 2015

# of En

rolled

Stud

ent#

of

Kin

deg

arte

ns

Kindergarten Enrollment

# of Private Kindergartens # of Public Kindergartens

# of Enrolled Students in Private Kindergartens # of Enrolled Students in Public Kindergartens

05


Increasing Expenditure on Education Contributes to Market Growth

The living standards of Chinese citizens have witnessed a vast improvement in

recent years. In 2015, the nationwide annual per capita disposable income was

CNY 21,966, up by 8.9% YoY, while the annual per capita disposable income for

urban residents was CNY 31,195, up by 8.2% YoY. Considering the gradually

increasing level of urbanisation, which grew from 49.68% in 2010 to 56.10% in

2015, the nationwide annual per capita disposable income is expected to

further increase in future. This growing household wealth directly supports

parents in providing higher quality education to their children.

With the upturn in living standards in China, people are beginning to spend

more money on education, culture and entertainment. As of 2015, the annual

per capita consumption on education, culture and entertainment increased by

12.18% YoY to CNY 1,723. Although the survey subject range for these statistics

was changed from 2013, an upward trend in the annual per capita

consumption can still be observed. The annual per capita expenditure on

education, culture and entertainment is estimated to reach CNY 5,000 by 2020.

In addition, the CPI of education, culture and entertainment presented an

upward trend over 2009 to 2015, with a particular increase in the rate of

growth since 2012. Consumers’ increasing willingness to spend on education,

coupled with higher prices, will likely continue to drive growth in the

education, culture and entertainment market.

Annual Per Capita Consumption on Education, Cultural and Entertainment

2010 2011 2012 2013 2014 2015

Urban Resident 1627.6 1851.7 2033.5 1397.7 1535.9 1723.0

Rural Resident 366.7 396.4 445.5

Unit: CNY

Note: Statistic calibre was changed to combine urban and rural residents since 2013


06


Source: by UZABASE based on National Bureau of Statistics

Pursuit of High Quality Education and Increasing Brand Awareness May Drive Industry Reform

In recent years, the surge in the number of private and public kindergartens

has relieved China of its undersupply issue. But with more than 220,000

kindergartens across the country, it is difficult to achieve a unified standard in

terms of the quality of education. In addition, the kindergarten market in China

has low market concentration. Most players operate on a small scale, with

usually one kindergarten, and thus lag behind in education quality and

management expertise. According to Guolian Securities, the top 5 kindergarten

operators operate more than 2,600 kindergartens across the country, but only

represented a market share of around 1.26%. Players in the industry should

therefore focus on establishing a brand presence and managing affiliates in a

systematic fashion in order to improve their performance and boost the overall

quality of the market.

In 2015, the Standing Committee of the National People’s Congress passed a

bill to revise the Education Law of the People’s Republic of China. The revised

law states that the country will establish a standard measure for preschool

education, which is expected to elevate the quality of education as a whole.

100.00100.60

101.00101.51

103.33

105.30

106.77

96.00

98.00

100.00

102.00

104.00

106.00

108.00

2009 2010 2011 2012 2013 2014 2015

CPI Growth of Education, Culture and Entertainment

07


Quick Growth for O2O Early Childhood Education Hard to Realise

The O2O concept has been gaining popularity in China in recent years.

Following this trend, several companies have applied the O2O concept to early

childhood education. One such example of this is Zao Jiao Dao Jia, an O2O

company offering door-to-door early childhood education for infants aged from

0-3. The company finished its pre-A series funding of CNY 10 million in

November 2015. Unlike the one-to-many standardised lessons offered by

traditional education centres, door-to-door early childhood education services

are usually one-on-one and customised. Currently, O2O early education

services charge prices which are similar to those offered by traditional one-to-

many education services, in the hope of taking market share from the latter.

Nevertheless, according to learning.sohu, more than 58% of parents send their

children to early education centres so that their children can mix with peers

and build up their social skills. As such, although door-to-door early childhood

education may offer advantages such as better quality of education and

avoidance of travel and lump-sum settlements, it does not administer the same

socialisation benefits inherent in the services of traditional providers. Further,

the majority of parents only have a need for such services around 1-2 times per

week, compared to other O2O services like food delivery, for which customers

may utilise as frequently as once per day. In addition, parents looking into one-

on-one education services usually expect teachers to have related experience

of at least 3-5 years. However, such experienced professionals are less willing

to work for O2O companies since they are usually able to find more secure,

higher-paying positions in traditional education centres or in kindergartens.

Thus, in spite of the large potential market for O2O early childhood education

services, the market is unlikely to experience rapid growth due to the low

frequency of usage and the difficulty in hiring experienced teaching

professionals.

08


Investments in Online Preschool Education Heating Up; Foreign Capital Restricted

Institutional investors are investing actively in the country’s online preschool

education industry, which has been driven by factors such as the rapid

development of the internet, 4G network and smartphones. Online education

is particularly popular amongst parents who are in their 20s and 30s, as they

are more familiar with internet and smartphone services. In 2016 H1, the

number of funding cases in online education increased by 25.29% YoY to 109.

The total amount of funding was CNY 3.4 billion and online preschool

education accounted for 7.81%. Some companies were listed on the National

Equities Exchange and Quotations (NEEQ), a new Chinese stock market catered

for small- and medium-size companies. Such listings open up a way for small-

and medium-size preschool education companies to raise funds.

Foreign investors are faced with restrictions on investment in preschool

education institutions in China. According to the Catalogue of Industries for

Guiding Foreign Investment (2015 revision), jointly published by the National

Reform and Development Commission and the Ministry of Commerce of the

PRC, foreign investors can only invest in preschool education institutions

through joint ventures. In addition, the president or the main administrator

must hold Chinese nationality, while no less than one-half of the members on

the institution’s trustee council, board of directors, or the joint administrative

committee should be Chinese.

Source: JUSFOUN BIGDATA

22%

18%

14%

13%

9%

7%

5%

4%

3%5%

Distribution of Funding by Number of Cases (2016H1)

K12

Professional Training

Early Childhood Education

Language Learning

Pre-study abroad Training

Interest Education

Higher Education

Education Informationisation

Education Service

Others

09


Source: JUSFOUN BIGDATA

Major Players Aiming for Industrial Integration

American brand Gymboree Corporation began with the founding of Gymboree

Play & Music in 1976, but later the company expanded its business to include

apparel and accessories retail for children. Many Chinese players have followed

a similar business strategy. For example, RYB Education Institute, one of the

largest domestic early childhood education service providers in China, has

undergone business expansion and industrial integration over the past few

years. The company first established an RYB Learning Centre in 1998, offering

parent accompanied early education services. In the following years, the

company expanded its business by introducing RYB Kindergarten and Zhudou

Parenting. Zhudou Parenting sells early education products and operates a

mobile App for early childhood education. The company also established its

own teaching research centre and training school for kindergarten teachers. In

2015, the company partnered with maternal and infant e-commerce platform

Mia.com, and established a new brand called Chainbest.tv. Chainbest.tv is

responsible for displaying maternal and infant products on screens in RYB

learning centres. Parents can scan the QR code and purchase the products

online, which will be prepared and shipped from Mia.com.

29.90%

21.83%

7.81%

19.00%

3.69%

9.43%

8.34%

Distribution of Funding by Amount(2016H1)

K12

Professional Training

Early Childhood Education

Language Learning

Interest Education

Education Service

Pre-study abroad Training, Higher Education,Education Informationisation, Others

10


Increasingly Fierce Competition Driven by Franchise Model and Entry of New Players

There are nearly 13,000 early childhood education centres in mainland China,

around 18% of which are foreign capital funded. One reason for the rapid

expansion of early childhood education centres is its franchise business model.

Around 70% of early childhood education centres in China utilise the franchise

model. Big brands usually start with chain stores and transfer to a franchise

model once the brands have gained a strong reputation. The brand/company

will then charge an initial fee and annual royalty fee as a certain percentage of

total revenue. According to Jiamengfei.com, with the exception for Gymboree,

the franchise centres of the other three major brands, namely GYMBABY, MY

GYM and Babycare, require first-year inputs and expenses of around CNY 1

million for a centre of 400-500 square metres. Additionally, the CNY 1 million

investment is likely to be paid back within 1-2 years, which can be fairly

attractive to investors.

In addition to foreign brands, many local brands in China also apply foreign

teaching methods as a selling point for their services. This is because foreign

teaching methods, especially those from the US, are largely held in high regard

by those parents born in the 80s and 90s. Such methods place value on

children’s creativity, teamwork and character building over their ability to excel

in standardised testing. For instance, GYMBABY leveraged western educational

theory and teaching methods as a reference point to develop its own training

lessons, and received extensive attention from the industry for its innovative

approach.

Meanwhile, a number of Chinese players, either in related or non-related

businesses, are also seeking to enter the early education market. In 2014,

Zhejiang Semir Garment, a Chinese local apparel company, acquired a 70%

stake in Yuhan (Shanghai) Information Technology (provider of brands

FasTracKids and FasTrack English) from Everlearn International Group with a

deal value of CNY 102 million. In June 2016, Gymboree Corporation sold its Play

& Music business (i.e. early childhood education services) to ZEAVION Holdings,

a Singaporean education services company established by a Chinese

entrepreneur. With more and more large enterprises entering the industry, the

early childhood education sector is expected to develop rapidly, and

competition will likely intensify.

11


Major Brands in Early Childhood Education

GYMBABY Gymboree RYB MY GYM Babycare

Country of Origin China USA China USA China

Age 0-6 0-5 0-6 0-8 0-6

# of Centres in China 100 200 1,200 200 700

Franchise ○ ○ ○ ○ ○

First-Year Expense Estimate for a

Franchise Centre (CNY)

1,521,000 for 500

㎡ centre

3,126,000 for 600

㎡ centre -

1,010,000 for 400

㎡ centre

1,426,000 for 500

㎡ centre

Annual Net Profit Estimate (CNY)

984,000 1,648,800 - 1,050,000 1,390,000

Content of Lessons

Art, Sports, Life Practice,

Language, Brain Potential

Play & Learn, Music, Art,

Preschool Steps, Family, School

Skills

Parent accompanied

lessons Language, Art, Logic, Bridge

lessons

Music Together, Abrakadoodle

Enlightenment, Music & Art,

Logic, Language

Expanded Business - Children's Apparel

and Accessories

Kindergarten, Early education

products, Mobile app, Maternal

and infant products O2O

- Maternal and

infant products O2O

Source: Disclosed information of each company and jiamengfei.com

Note: First year input includes rental expense, renovation expense, purchase of teaching tools, promotion fee, staff salaries, etc.

Conclusion

The preschool education industry presents a huge potential market in China

due to the country’s large infant population, parents’ increasing focus on

education, rising household disposable incomes, and the subsequent growth in

education expenditure. Although the preschool education industry in China is

slightly lagging compared to other countries, the industry is now expanding

aggressively with more and more large enterprises and capital flowing into the

market, leading to intensified competition. In future, the Chinese government

is expected to announce rules to officially regulate the market. However, at the

current stage of the industry’s development, players must self-regulate to

ensure the quality of education provided and increase their competency in

order to survive.

12


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