A new era of education development report 2018 August 2018 Deloitte China Contents

Preface 1 I. More opportunities triggered by new development trends 3 1.1 Emerging trends in China's education industry 3 1.2 Favourable policies and investment for the education industry 12 1.3 Development opportunities in the new era 15 II. Empower and schools with new education philosophies 16 2.1 International schools are still developing 16 2.2 International schools develop rapidly driven by education and consumption upgrade 20 2.3 Empowering students and schools 28 III. New applied have penetrated into the education industry 33 3.1 The diversified “indirect auxiliaries” education technologies 36 3.2 The accelerating “direct ” education technologies 42 3.3 The deepening “basic operation” education technologies 43 IV. New motivation models tackle the talent challenges 47 4.1 Talent management challenges faced by Chinese private education industry 47 4.2 Executive profile and trends in executive compensation 49 4.3 The trends towards long-term incentives 52 4.4 Partnership to be a new trend in education market 54 V. New management system improves operation effectiveness 57 5.1 Build core competence 58 5.2 Control marketing cost 59 5.3 Enhance teaching staff management 59 5.4 Prepare for reputation risks and public relations crisis 59 5.5 Respond to regulatory changes and compliance risks 60 5.6 Bring in corporate management thinking 60 Contacts 62 A New Era of Education | I. More opportunities triggeredA New by Era new of Educationdevelopment | Preface trends

Preface

With the adjustment of Chinese population structure and consumption upgrade in domestic market, education consumption has been playing an increasingly important part in China's household consumption, which allows China's education market to maintain the positive development situation. In this report, it is predicted that the scale of China's education market will hit RMB2.68 trillion in 2018. By 2020, the market of private education will grow to RMB3.36 trillion, driven by a favourable policy environment and, in particular, an eager capital market. We have seen 8 education companies going public in Hong Kong and the U.S during the period from the beginning of the year 2018 to early August. By June 2018, 137 deals have been made in the education market, with total investments (USD2.57 billion) surpassing that of the entire 2017. The surge has demonstrated great vitality and unbounded potential of China's education market.

Charlotte Lu There is a pressing need for international schools to be upgraded, as they are at the Leader forefront of changes. With China's rapid economic growth and accelerated pace of Education Industry globalization, Chinese parents are spending more on children's education as their expectations rise, and they are becoming more appreciative of the integration of Chinese and foreign educational philosophies and teaching methods. The focus of education is shifting from examination performance to self-driven learning. Today, parents send their children to school for the purpose of adapting to a constantly evolving world, instead of learning for learning's sake. International schools should put themselves in a broader ecosystem in order to nurture talents for the future.

The development of education industry is driven by technological . In the work report delivered to National People's Congress in 2018, Chinese Premier Li Keqiang stressed the importance of creating bigger and stronger emerging industrial clusters, implementing big data development action plan, stepping up next-generation artificial intelligence R&D and application, and advancing the Internet Plus model in various fields like health care, eldercare, education, culture and . Advancements in big data, AI and stereoscopic technologies may help us alleviate uneven distribution of resources and other issues in the education industry. Now, we need to respond to a significant challenge: how can we leverage new technologies to empower education in a more effective way?

The future education industry will witness a rise of opportunities as well as challenges. Compared with traditional schools, education organizations will be subject to a more complex environment. These organizations will need to create, transmit and apply knowledge in a manner that aligns with the natural process of learning, while meeting market demand and ensuring profitability. In this scenario, challenges will mount in talent development, operational efficiency improvement and risk management. As the education market becomes increasingly affected by inflow of capital and commercial factors, education organizations will need to ensure market growth, further expansion and improved delicacy management without compromising their core competitiveness and quality of education, if they want to thrive in the face of tomorrow's opportunities and challenges.

My sincere gratitude goes to experts and professionals in the education industry for their long-term support for Deloitte education industry reports. Your suggestions and advice will be much appreciated.

1 A New Era of Education | I. More opportunities triggered by new development trends

2 A New Era of Education | I. More opportunities triggered by new development trends

I. More opportunities triggered by new development trends

1.1 Emerging trends in China's of industry scale and market activity. three biggest segments. The total scale education industry According to Deloitte's estimation, of private education is expected to China's education industry has been China's education market will reach reach RMB3.36 trillion by 2020 and be highly valued for its significance by RMB2.68 trillion by 2018 with close to RMB5 trillion by 2025 with a policies, consumers and capital and organizations, K12 & STEAM education CAGR of 10.8%. under its expansion phase in terms and private being the

Figure 1: Forecast on China's education market

Education market 2018: RMB2.6836 trillion Education market 2020: RMB3.3624 trillion

rivte rivte indergrtens indergrtens . . onpubli onpubli onpubli onpubli iger bsi iger bsi edution edution edution edution . . . . ubli iger M ersonl trining M edution edution ersonl trining ubli bsi . . degree grnting . . edution . . ubli ubli rly ildood orporte bsi ubli rly ildood orporte iger ubli edution trining edution indergrtens edution trining edution indergrtens . . . . . . . .

rainin rainin eree rantin education nonuic eree rantin education nonuic eree rantin education uic eree rantin education uic

Share of online education: 9.32% Share of online education: 10.41%

7.0% 37.1% 13.0% 25.8% 17.2% 14.0% 44.7% 10.0% 18.0% 13.3%

nline erly nline orporte nline lnguge nline erly nline orporte nline lnguge ildood trining lerning ildood trining lerning edution edution nline M nline votionl nline M nline votionl edution trining edution trining

Source: Deloitte

3 A New Era of Education | I. More opportunities triggered by new development trends

1.1.1 Diversification of profit for education will exceed before. With the growth in China's models in preschool education 120 million, which is a favourable newborns, enrollment market condition for the development of rate and tuition fee, the overall Preschool education segment preschool market from the perspective demand for preschool education grows steadily while the prospect of demographics. Based on the for those aged 0-6 is rising sharply, of early childhood education statistics of urban household spending and there is an increase trend for remains bright on preschool education, the scale preschool education at a younger age. With the implementation of Universal of preschool education market is These trends will result in an imminent two-child policy in 2015 and the estimated to be RMB800 billion by upgrading of China's preschool raise of people's living standard, the 2020. Besides this, people born in the education consumption, which means number of newborns has climbed to 80s and 90s are becoming parents, the parents hope to let their children 17.8 million in 2016, which has been which implies a younger tendency grow happily and healthily and acquire the highest since 2000. This number of becoming parents. These parents various skills under a well-rounded and will rise steadily in the coming few have higher demand for preschool professional pre-education system. years. By 2020, it is estimated that education and will consequently invest the population of children applied more money and efforts than ever

Figure 2: Newborns in China from 2012 to 2017 (unit: 10,000 persons)

1800

150

100

1650

1600

1550

Source: Wind

The government has increased by RMB10.501 billion with an increase allocation of budget on kindergartens rate of 6.5% as compared with that as it continues to prioritize in 2017. Among all stages of general the development of inclusive education, preschool and high school kindergartens among all agendas education show the largest growth in in preschool education. In 2018, funding, respectively receiving RMB803 the central budget disclosed by the million (35.6% increase over actual Ministry of has shown that expenditure in 2017) and RMB2.064 the expenditure on education is billion (21.5% increase over actual budgeted at RMB171.122 billion, up expenditure in 2017).

4 A New Era of Education | I. More opportunities triggered by new development trends

Figure 3: Preschool and high school education receive the largest increase in central government expenditure on education

35 0% 30 35% 30% 25 25% 20 20% 15 15% 10 10% 5 5% 0 0% recoo Eeentar coo unior i i coo

eeuted budget M million budget M million rowt rte

Source: Ministry of Finance

Both online and offline early In the meantime, multiple online and have formed a closed loop of diverse childhood education witness offline early childhood education models around the Kaishu robust growth, with increased brands have obtained funding IP, rather than a mere "label" that capital investment in quality with unique operation models and generates popularity. This strategy has content targeting paternity product structures. Parenting content helped Kaishustory's revenue to grow From the supply-side perspective, providers have attracted much from RMB60 million in the second half According to Qianzhan Industry attention in particular. Kaishustory, a of 2016 to RMB200 million in 2017. Research , there are 11,000 offline brand featuring storytelling services Another eye-catching performer 7mtt teaching centers under Chinese for children, raised RMB156 million is a company based on UGC (User early childhood education brands. in series B+ fundraising in March, Generated Content). With 200,000 The market concentration ratio of 2018. Kaishustory has posted more mothers as broadcasters, 7mtt is the industry is about 22% with the than 4,000 stories, which are also a building physical parenting centers that top eight having 2,400 teaching launching pad for the company to provide one-stop services from early centers in total. Because the market extend into various product lines childhood education to family-friendly concentration ratio is relatively low, including out-of-classroom learning, activities. As early childhood education there is still a wide space for business "Parent training camp", parenting industry matures, the market will to grow. products online shopping platform gravitate towards providers that are "Kaishu Selected" and the smart device able to offer quality contents and meet "Portable Kaishustory". These products consumers' demands.

Table 1: Major investments in early childhood education market

Company Time City Proceeds raised Phase of funding

7mtt 2017/07 RMB tens of millions Series pre-A

Fancy Education 2017/09 RMB20 million Equity investment

Huiyu 2017/09 RMB33.5 million Series pre-A

Alilo 2017/11 Shenzhen RMB100 million+ Series A

Yuxueyuan 2018/02 USD tens of millions Series C+

Joycus 2018/01 Beijing RMB millions Angel round

Naturling 2018/01 Suzhou RMB5 million Angel round

Kaishustory 2018/03 Beijing RMB156 million Series B+

Source: information in the public domain 5 A New Era of Education | I. More opportunities triggered by new development trends

With informatization of Various types of coexist collaboration applications have been kindergartens still in early stages, in the current preschool education widely recognized such as Zhang Tong Jia profitability of platform model has ecosystem, which brings about fierce Yuan, ibeiliao and Zhihuishu. However, yet to be tested by market competitions. There are two types of the functions of those products are The 3rd Three-year Action Plan for education informatization technology highly homogenous including video Preschool Education issued in April products/services: multimedia products upload, updates on daily recipe, class 2017 delineates that by 2020, all and kindergarten-parents collaboration proceedings and activities. The few provinces (including autonomous platform. Multimedia products include differences among these products are regions and municipalities) need devices (white boards, projectors, limited to visual design and way of using, to improve Preschool Education computers and multimedia machines) and most of the providers have not management information systems and software (digital teaching materials). identified a viable profit model (usually so as to promote the informatization Kindergarten-parents collaboration offering free trials to kindergartens). of registration management, platforms enable instant communication real-time monitoring and project between the kindergarten and parents management by taking full advantage and provide instructions such as of the IT platform. customized parenting plans. Several

Figure 4: Preschool education ecosystem

Preschools/early childhood learning centers Training organizations (online and offline)

0-6 year olds and parents

Publishing & media Education informatization enterprises

Toys/learning tools

Source: Deloitte Research

6 A New Era of Education | I. More opportunities triggered by new development trends

Figure 5: Three profit models of kindergarten-parents collaboration apps

C-end parents pay for the app

•• Ibeiliao initiated the "customized family C-end parents pay for the functions education plan provider" strategy and •• Zhang Tong Jia Yuan and Zhang Xin Bao Bei started charging C-end parents for represent collaborative apps that make profit products, but have not yet turned a profit. mainly through charging parents for CCTV videos and live video broadcasts. Both have turned a profit. Zhang Tong Jia Yuan registered a revenue of nearly RMB200 million in 2017 and over RMB100 million profit in 2018.

Profit models of kindergarten- Paid by B-end advertisers parents collaboration application •• Zhihuishu launched a profit model in June 2016. Under this model, it is evolved from the collaborative platform to a comprehensive management cloud platform, which improves VIP services, implements a loyalty system, and advances cooperation with advertisers and moves into the arena of community e-commerce. From 2016, the advertisement- based profit model started to bear fruits and generate revenue. In 1H 2017, the company's revenue began to grow rapidly, but it has not yet turned a profit.

Source: information from Shanghai Securities compiled by Deloitte

In the long run, informatization products 1.1.2 Increasingly stratified K12 In 2017, each student in China's urban for early childhood education will after-school tutoring market area spent averagely 10.6 hours per augment the attractiveness to users by Emphasis on examination week on after-school tutoring courses. consolidating various resources and performance underpins large Due to the higher pressure from study value-added contents. These products room for the growth of after- and the expectation for better exam need to generate profit by turning school tutoring service market performance, an increasing number registered members into active, paying As one of the most demanded of parents are turning to after-school users, and with the help of advertisers, segmentations in the education tutoring for their children. Demand e-commerce and paid digital content. In market, K12 after-school tutoring has for tutoring services grow higher as the short term, however, encouraging a large room for growth. According to students come closer to the user activity and cultivating regular use a report from Frost & Sullivan, as of entrance exam: over half of secondary remain the main goal. 31 December 2017, there were over school (junior high and high school) 100,000 K12 after-school tutoring students take afterschool tutoring. In providers in China, which implies a 2017, around 12.7% kindergarteners, relatively fragmented market. Based 21.9% elementary school pupils, 36.8% on the total number of students and of students in junior high school and consumption per capita, it is estimated 57.8% of those in high school took K12 that the market size will grow to after-school tutoring. The abundant RMB433.1 billion in 2018, and over and stable consumer base will drive RMB500 billion in 2020, with a CAGR the steady growth of the market. around 9.2% for the next three years.

7 A New Era of Education | I. More opportunities triggered by new development trends

Figure 6: China's after-school tutoring revenue (RMB100 million)

6000 1.00% 5000 12.00% 10.00% 000 8.00% 3000 6.00% 2000 .00%

1000 2.00%

0 0.00% 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E

Total revenue of China's afterschool tutoring maret Growth rate

Source: Frost & Sullivan

Figure 7: After-school tutoring penetration rate for each stage of , 2017

0%

60%

50%

0%

30% 20% 10%

0% indergrten lementry sool unior ig ig sool

Source: Frost & Sullivan

Meanwhile, K12 tutoring market still Tier 2 companies comprises regional remains fragmented and the market leaders that have developed well in their could be divided into tier 1, tier 2 and respective regions with revenue between tier 3 by company turnover and market RMB500 million to 3 billion, such as distribution. Tier 1 companies consist of Xueda Education, Jingrui International national market leaders whose presence Education, Longwen Education, Zhuoyue expand across the country, such as Education, Gaosi Education, Only TAL and New Oriental, each boasting Education, etc. Tier 3 companies are an annual revenue of over RMB10 made up of regional players with revenue billion. Tier 1 companies are valued at below RMB500 million, including Jiayi over RMB100 billion, outperforming Education, Longmen Education, Dazhi the runners up by a large margin. Education, Education and Four Seasons Education.

8 A New Era of Education | I. More opportunities triggered by new development trends

Figure 8: Competition in China's K12 after-school tutoring market

ier revenueM billion ier M billionrevenueM billion ier revenueM million

Source: information in the public domain

1.1.3 Live video streaming propels education industry, which includes billion in 2018, and RMB272.7 billion in the rapid growth of online learning prenatal and childhood education 2019 with an increase of 16%. Based Online learning market is still to basic, higher, and even continued on the current status of China's online unsaturated, with huge potential education. The contents includes learning market, a large user base for growth language learning and academic and underdeveloped technologies With continuous progress in the tutoring to special classes create a huge potential for market internet technology and its increasing and skills development. According to development in the future. popularity rate, online learning has iResearch, the size of online learning penetrated into each segment of the market is expected to reach RMB235.1

Figure 9: Size and growth rate of China's online learning market (RMB100 million)

3000 35%

2500 30%

25% 2000 20% 1500 15% 1000 10%

500 5%

0 0% 2011 2012 2013 2014 2015 2016 2017 2018 2019

nline lerning mret sie M million rowt rte

Source: iResearch

9 A New Era of Education | I. More opportunities triggered by new development trends

Live streaming class/ double Oriental and TAL, Gaosi, First Future, class becoming the mainstream of Aotu, iqeq and ulearning have adopted online learning double teacher class. This model has In 2017, the most popular teaching been applied to IT training, K12 after- model was definitely the "double teacher" school tutoring and childhood education. method (one teacher gives instructions Since 2017, TAL Education Group has through online video broadcast and a adopted the model in all of the cities tutors students in it is operating in, which implies the person). Following the steps of New importance of this teaching model.

Figure 10: TAL Education Group's fast growing revenue from online education

0.0 200.0% . . 180.0% 35.0 160.0% 30.0 . 10.0% 25.0 120.0% . . 20.0 100.0% 33.8 80.0% 15.0 . . 28. . 60.0% 10.0 16. 15.8 0.0% 12.3 5.0 10.8 .0 8. 20.0% 0.0 0.0% FY4Q16 FY1Q17 FY2Q17 FY3Q17 FY4Q17 FY1Q18 FY2Q18 FY3Q18

nline edution revenue million o

Source: TAL's annual report

The double teacher model is recognized From the perspective of learning From the perspective of learning as the best way of merging the resources content: outcomes: and emotional experience previously ••The double teacher model has ••The teacher usually needs to teach isolated by the online-offline gap. This covered K12 tutoring, childhood multiple classes of students at the model has been adopted by major education and many other segments, same time via streaming platform, education organizations as the primary but not all subjects are best taught which cannot guarantee a good strategy for the expansion into Tier-2, 3 in this way. Even for the subjects quality of interaction between teacher and 4 cities. It reconciles the imbalance that it has been proved effective, and student. When there is a huge of educational resources and enables not all learning stages can benefit number of students, it is particularly rapid occupancy of new to the same level. The content and difficult for the teacher to get a clear through the online channel. Despite all method of learning vary from one feedback for students' understanding its popularity in the market, the double subject to the other. For instance, and comprehension, thus the learning teacher model nevertheless has its and often requires quality and outcome would be challenges. hands-on experiments, which undermined. cannot be performed through online streaming but needs to be done by teaching assistants, hampering class procession and learning experience.

10 A New Era of Education | I. More opportunities triggered by new development trends

From the perspective of teaching: While New Oriental and TAL are both At present, paid knowledge products leveraging the double teacher model can be classified into three types in ••The model puts high requirements to capture Tier-3 and Tier-4 cities, terms of how the product is generated: on the cooperation between the Gaosi Education has collaborated with produced by the content provider, teacher and the teaching assistant. Education in a new paradigm co-created by the platform provider The teacher has to draw the for premium courses. Gaosi provides and the content provider, or produced attention of students while ensuring teaching content and Juren offers offline by the platform provider on its own. prompt interaction with the teaching teaching assistance. This cooperation Paid knowledge platforms and some of assistant, which is quite demanding. generates shared benefits and addresses the leading content providers usually Therefore, a good cooperation the pain points of the double teacher develop in three steps: work between the teacher and the model. teaching assistant is the key point for 1. win followers with achieving good teaching quality. offerings; Paid knowledge market estimated 2. screen potential paying users with From the perspective of to reach over RMB20 billion in 2020 Another segment in the online services (Q&A or audio books) that organization: education market that has been require payments of small amount; ••The model does not fit all education relatively more active than others 3. create a layered product portfolio organizations. Based on the is paid knowledge. As Chinese by expanding content coverage characteristics of double teacher consumers develop deeper needs while developing differentiated model, the scale effect is playing for knowledge and become more contents that meet the diversified an important role. In other words, conscious of their own consumption, needs of consumers - from seeking it takes a tutoring chain that education consumption models built superficial knowledge to acquiring owns multiple teaching centers to around "light knowledge" products deep understanding of a subject implement the model, which would are emerging. As statistics from matter. The users' preferred service be difficult for small players to iResearch shows, the market size of models may vary as scenarios operate. China's paid knowledge was RMB4.91 shift, and their favourite types ••The key points for an educational billion in 2017, expanding nearly three of content change with service organization establishing double times YoY. With consumers getting model. Designing scenario-specific teacher model are internet more educated and willing to pay for contents and service models will be technology facilities, which requires quality knowledge services, the paid important for platform providers an continuous investment in internet knowledge market is projected to to improve operational capabilities bandwidth and video streaming continue its growth and expansion in and empower content providers. capabilities. the coming three years, generating RMB23.5 billion in 2020 with a three- year CAGR of 68.5%.

11 A New Era of Education | I. More opportunities triggered by new development trends

1.2 Favourable policies and investment into the informatization of of legal personality and property of investment for the education the education, incubating innovations schools, so as to encourage for-profit industry in learning space, leaning method, and non-profit private schools to play From 2017 and onwards, China's design and organizational to their respective strengths and follow education industry has demonstrated structure, which in turn accelerates a justified path of growth. the following characteristics. the technological upgrading of education companies. China will drive On 10 August 2018, China's Ministry 1.2.1 The government has the modernization of the education of Justice published the Draft promulgated policies regulating industry with application of IT (for revision) Amendment to the various prospects of education technologies, promote the integrated Regulations for the Implementation to guide the informatization of IT technologies and of the on the Promotion of of the education industry; the education, and promote equality and Non-public Schools of the People's Amendment to the Law on quality of education. Republic of China (the "draft for the Promotion of Non-public revision") to solicit public opinions, Schools of the People’s Republic In 2017, Several Opinions on the which is a necessary procedure before of China ("Non-public Education Amendment to Non-public Education the enactment of the amended Non- Promotion Law") under gradual Promotion Law ("the Opinions") was public Education Promotion Law. The implementation published. The Opinions addressed latest draft reflects changes made In 2017, Premier Li Keqiang issues including confusion around to the draft issued on 20 April 2018, announced the formulation and legal personality of schools, unclear which was made known to the public implementation of Modernization of property ownership, and difficulties in to solicit the people's opinions. The China's Education by 2030 in a bid implementing supportive measures. draft for revision contains several to support China's modernization The Opinions further clarifies the modifications to the regulations through modernizing the nation's definitions of non-profit and for-profit published in April in an effort to education sector. With the increasing schools, delineates the definitions reconcile the Non-public Education

Table 2: Changes to private education after enactment of the Amendment to the Non-public Education Promotion Law

Fiscal Land Tuition Admission allowance

Non-public education Relatively less Favorable tax Favorable Degree-granting programs Some extent of before reform compared with policies hardly land policies must be approved by autonomy public education implemented unspecified relevant authorities. Non-degree programs should be reported to and documented by relevant authorities

Non-public Non- Fiscal allowance Tax reductions/ Multiple Market-oriented reforms Certain level education commercial has been raised, exemptions favorable to achieve market- based of state after private more similar to increased, cost land policies pricing overtime governance , reform schools public schools of operation autonomy in reduced admission reduced

For-profit Fiscal allowance Few tax Favorable Market-based pricing Full autonomy in private difficult to obtain, reductions/ land policies admission schools need to rely on exemptions, hardly other channels of heavy tax burden applicable financing

Source: Deloitte Research

12 A New Era of Education | I. More opportunities triggered by new development trends

Promotion Law with municipal and 1.2.2 Online and technology- in total, surpassing the investments provincial regulations. The Regulations powered education remain made throughout 2017(USD1.58 for the Implementation of the Law on the most sought after area for billion). In terms of the number of deals, the Promotion of Non-public Schools investors, with various education STEAM education, of PRC ("Regulations") provides companies listed in HK and US and early childhood education were the significant guidance on the medium stock markets top three investment targets in the first level, and its being promulgated by China's education industry has been half of 2018. the Ministry of Finance rather than by a hot target for capital investment. the Ministry of Education foreshadows Education companies' stable cash We cannot overlook the role of govern- faster implementation. The Regulation flow based on the prepayment model, ment policies in the education compa- is expected to be enforced by the end strong pricing power and gross margin nies' rush for IPO. In addition to going of 2018. However, the draft for revision generated by high value added, and public in the A-share market through remains a regulatory framework new products and drivers brought reorganization and reverse merging, which does not specify the separate by the integration of education and education companies are seeking pub- registration rules for non-profit and technological innovations make the lic trading in HK and the US. Statistics for-profit schools, which remains a industry particularly attractive for the from CVSource shows that from 2017 critical issue. Most non-public schools capital market. Statistics from CVSource to 3 August 2018, 11 education com- find themselves operating in a grey shows that since 2014, VC/PE funds panies went public in HK, and 7 in the area between "for-profit" and "non- have been frequently investing in US. With the enforcement of Non-pub- profit ". The Non-public Education education in terms of the rising total lic Education Promotion Law, more Promotion Law will not be effective investment amount and increasing details and procedural issues will be until the Regulations specifies the number of deals. By June 2018, the addressed. It is estimated that there registration government bodies for education market had seen 137 will be more companies go public. non-profit and for-profit schools. investment deals worth USD2.57 billion

Figure 11: Review of VC/PE investments in China's education sector from 2011 to June 2018

3000 160 10 2500 120 2000 100 1500 80 60 1000 0 500 20 0 0 2011 2012 2013 2014 2015 2016 2017 2018.1-6

otl investments million els

Source: CVSource

13 A New Era of Education | I. More opportunities triggered by new development trends

Figure 12: Investment (number of deals) in China's education market in first half of 2018

M edution enologil development

otionl edution olutions providers rly ildood edution verses edution

nglis trining ompreensive edution servies tersool tutoring

Source: CVSource

Table 3: IPOs of education companies since 2017

Company Date of IPO Stock exchange Base Proceeds raised

Hope Education Group 03/08/2018 SEHK MB Sichuan HKD3.059 billion

Bojun Education Co., Ltd. 31/07/2018 SEHK MB Sichuan HKD438 million

Pu Xin Education Group 15/06/2018 NYSE Beijing USD122.4 million

21st Century Education Group Co, Ltd. 29/05/2018 SEHK MB Hebei HKD406.8 million

Top Education Group Ltd. 11/05/2018 SEHK MB Sydney HKD173 million

Shanghai 1Smart Education Co., Ltd 28/03/2018 NYSE Shanghai USD179.3 million

China Xinhua Education Group Ltd. 26/03/2018 SEHK MB Anhui HKD1.304 billion

Beijing Sunlands Online Education Co., Ltd. 23/03/2018 NYSE Beijing USD149.5 million

China Education Group Holdings Co., Ltd. 15/12/2017 SEHK MB Hong Kong SAR HKD3.225 billion

Shanghai Four Seasons Education Co., Ltd. 08/11/2017 NYSE Shanghai USD101 million

Beijing Ling Yu Tang Education Technology NASDAQ Global 20/10/2017 Beijing USD159.5 million Development Co., Ltd. Market

RYB Education, Inc. 27/09/2017 NYSE Beijing USD144.3 million

Tary Tech Co., Ltd. 22/06/2017 ASX Shanghai AUD22.5 million

Brightscholar Education Holdings Co., Ltd. 18/05/2017 NYSE USD157.5 million

China New Group 19/04/2017 SEHK MB Beijing HKD795.6916 million

Minsheng Education Group Co., Ltd. 22/03/2017 SEHK MB Beijing HKD1.38 billion

China Yuhua Education Group Co., Ltd. 28/02/2017 SEHK MB Henan HKD1.5375 billion

Dadi Education Holdings Limited 16/02/2017 SEHK GEM Hong Kong SAR HKD67.1840 million

Wisdom Education International Holdings 26/01/2017 SEHK MB Guangdong HKD850 million Co., Ltd.

Source: CVSource, Deloitte Research

14 A New Era of Education | I. More opportunities triggered by new development trends

1.3 Development opportunities in of four driving forces—robust are raising the requirements and the new era demand for overseas education, challenges of talent management in With policy changes and increase in upgrading of consumption on education companies. demand, new trends are emerging education, harsh competition for 4. An in-depth appreciation of in China's education market: school entry and quality-oriented operational management international education, technological education—will sustain the challenges is critical in the new applications, talent management and international education boom. era. The inflow of capitals and operational management will bring 2. Emerging technologies are the boom of education market opportunities to grow. empowering education. The may cause companies to lose 1. The appeal of international development of big data, artificial focus, compromise the essence education continues to grow. intelligence and stereoscopic of education for profitability and Demand for international education technology are expected to alleviate be myopic in their development rises with China's fast-burgeoning some of the perennial issues in strategies. Companies unable to wealthy. The amendment to the education, such as unbalanced adapt to the digital transformation Non-public Education Promotion allocation of resources. At present, may stand still when overwhelmed Law will encourage the rise of the challenge looming before us is with the rise of new technologies. private international schools, dual to leverage these new technologies Therefore we predict that a number system schools, bilingual schools for stronger empowerment. of issues in market operation, and international education, and efficiency improvement and risk 3. Talent management challenges boost the demand for language control will challenge education arise for non-public/private training, short-term study abroad companies, compelling them to education industry. Capitals, programs and overseas education find out the root causes of the foreseeing the substantial services. The upcoming flourishing issues, address them with finer growth of private education, have of international education will see management, ensure orderly been flowing into the market. the number of private international development of business, grow fast Transformation of the industry schools surge from 367 in 2017 to and generate more value. and continually rising cost of labor over 600 in 2020. The combination

15 A New Era of Education | II. Enpower students and schools with new education philosophies

II. Empower students and schools with new education philosophies

China has the world's largest market with the world's largest school-aged population. Over more than four decades of development, China's international schools have embarked on a differentiated journey with unique features. With increasingly robust demand for international education across the entire market, there is great potential for future growth. The listing of some private bilingual schools has become the primary driver for a competitive market, with increasingly fierce competition in tier-one cities, and a growing number of international schools in tier-two and tier-three cities. Influencing factors such as polices, technological innovation and social development bring about new challenges for future formats and expansion mode of international schools. Talent requirements in the 21st century and how to gain durable competitive advantages will become the key focus of international schools in the future.

2.1 International schools are still permit, mainly accessible to children High School International Class as developing of expatriates from Hong Kong, representatives. The third category With China's rapid economic growth Macau, Taiwan and foreign countries. is private international schools, and accelerated pace of globalization, Enrollment of students from Chinese independently or jointly established 200 million Chinese new rich have families residing within the territory by non-governmental organizations become increasingly focused on of China is not allowed. Examples of or individuals. Private international organic integration of Chinese and foreign international schools include schools are accessible to Chinese foreign educational philosophy and International School of Beijing, students just as public schools of methodology. Increasing market Shekou International School, and the same kind, and it is necessary demand encourages participation Yew Chung International School of for these schools to get relevant of new players and promotes Shanghai. The second category is qualification before they are open to expansion and growth of existing international divisions or classes foreign students. Examples of private schools. Generally speaking, there is established by Chinese-owned public international schools include Shanghai still a promising prospect for existing schools, accessible to both Chinese United International School, Maple international schools. and foreign students. Students from Leaf International School, and Vanke Hong Kong, Macau, Taiwan and foreign Meisha , which provide In broad sense, international schools countries can study in international international courses on independent fall into three categories. The first division, while Chinese students can campus, aligned with international category is foreign international apply for international class. This standards regarding curriculum, schools established within the is an option mainly for high school educational philosophy, hardware territory of China by legitimate foreign students, with Shanghai High School facilities and students. institutions, foreign companies, International Division, High School international organizations in China Affiliated to Renmin University of and foreigners with residency China Joint Program, and Beijing No.4

16 A New Era of Education | II. Enpower students and schools with new education philosophies

Table 4: Differences of three categories of schools

Foreign international International divisions/classes of Private international schools public schools schools

Established by •• Legitimate foreign •• Domestic public high schools •• Non-governmental institutions or foreigners organizations or with residency permit individuals

Open to •• Foreign students only •• International divisions are open to •• •Both Chinese and foreign (compulsory and high school students from Hong Kong, Macau, students (all education education) Taiwan and foreign countries stage) •• Both foreign and Chinese •• International classes (including students (kindergarten sino-foreign joint program education) approved by provincial department of education, and international curriculum approved by municipal and ) are only open to Chinese students

Education stage •• K12 education •• K12 education (provided by •• K12 education •• Kindergarten education international divisions); high •• Kindergarten education (provided by most schools) school education (provided by (provided by most schools) international classes)

Curriculum Kindergarten •• Well-established foreign •• N/A •• Flexible bilingual courses curricular system with the aligned with the school's adoption of foreign courses features and educational and teaching materials, philosophy, incorporating aligned with the school's international educational features and educational philosophy philosophy. All courses are taught in English

Compulsory •• Well-established foreign •• in line •• Courses and examinations education curricular system with the with syllabus, and high school based on syllabus by adoption of foreign courses education with featured courses educational departments and teaching materials, under the State Council, aligned with the school's aligned with curricular features and educational standards by educational philosophy. All courses are administration taught in English departments •• Additional international courses as appropriate

High school •• A-level, IB, AP and other •• A-level, IB, AP and other •• A-level, IB, AP and other international high school international high school international high school courses recognized by curriculum recognized by foreign courses recognized by foreign universities foreign universities •• TOEFL、SAT、AP and other •• Domestic high school courses for Chinese students (provided by international classes) •• Domestic high school courses

Representatives •• International School of •• Shanghai High School International •• Shanghai United Beijing Division International School •• Shekou International School •• High School Affiliated to Renmin •• Maple Leaf International •• Yew Chung International University of China Joint Program School School of Shanghai •• Beijing No.4 High School •• Vanke Meisha Academy International Class

Source: Deloitte Research 17 A New Era of Education | II. Enpower students and schools with new education philosophies

In terms of supply and demand, witness further growth in the entire Media, the number of international international schools are still in short basic education market. Meanwhile, schools was 734 in 2017. Among these supply. government spending on education schools, 367 were private bilingual has slowed since 2012 (about 4% to schools, accounting for over 50% of From the demand side, the number of 4.5% of GDP). Under the economic the total, followed by international international school students was 250 new normal, it is unlikely to increase divisions of public schools and foreign thousand in 2017, with an estimated educational appropriations per international schools (33% and 17% future growth rate of 10%. While student within a short period of time, respectively). Private bilingual schools the proportion of private education making it difficult for public schools, have shown the fastest growth in 2017 in developed countries such as U.S. which are non-profit-oriented with a at 23.4%, while the growth of foreign and U.K. was 8% to 9%, Chinese focus on fairness, to satisfy parents' international schools slowed down to international school students only demand for differentiated education. 7.7%. International divisions of public accounted for 0.11% of the entire schools showed a limited growth at basic education market. Therefore, it From the supply side, according to merely 4.8% due to policy restraints. is expected that private education will statistics from NewSchool Insight

Figure 13: Number of international school students (2010 - 2020F) Unit: 10,000

0 . . . . . . . 20 . . . .

0 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019F 2020F

Source: NewSchool Insight Media online library, Deloitte Research

Figure 14: Government spending on education (% of GDP) (2010 - 2020F) Unit: RMB10,000 (left); % (right)

6.0%

120 . . . . . . . . . . . . .0% 0 . . . . . . 60 . . . . 2.0% 30

0 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019F 2020F

oernent spendin on education o

Source: National Bureau of Statistics

18 A New Era of Education | II. Enpower students and schools with new education philosophies

Figure 15: Number of China's international schools by category (2010 - 2017)

800 600 00 200 0 2010 2011 2012 2013 2014 2015 2016 2017

International diisions riate ilinual orein international otal o pulic schools schools schools

CAGR . . . .

Source: NewSchool Insight Media online library

In terms of geographic distribution, , , Shandong, Sichuan, there is a high positive correlation Chongqing, etc. With a gradually between international schools saturated market in developed cities, and economic development, international schools will doubtlessly with most international schools expand into tier 3 and tier 4 cities as located in developed provinces and they further develop. Meanwhile, given municipalities. Guangdong has the great potential for further expansion, largest number of international foreign schools will continue their schools (129), followed by Shanghai development in China, with tier 2 and (124) and Beijing (119), and then tier 3 cities as their target markets.

19 A New Era of Education | II. Enpower students and schools with new education philosophies

2.2 International schools develop existing competition. While current 2.2.1 Driving forces for the market rapidly driven by education and leading education groups have growth of international schools consumption upgrade continued their expansion leveraging The market growth of international Generally speaking, private K12 M&A and asset-light mode. Real schools is mainly driven by population schools are transitioning from the estate groups, investment funds and growth especially the explosion of high stage of rapid growth to integration foreign investors are also tiptoeing net worth individuals, the increase of despite considerable market into the area, thereby intensifying Chinese urban residents' expenditure demand, affected by policies and market competition. and willingness on education, and a growing number of students studying abroad.

Figure 16 : Driving forces for the market growth of international schools

Increase A growing Explosion of of Chinese urban residents' number of high net worth expenditure and students studying individuals willingness on abroad education

Source: Deloitte Research

First of all, China's rapid economic abroad to study at high school age education expenditure increased development brings an increasing or younger, while 23% of them from 1.9% between 2006 and 2010 number of high net worth would send their children abroad to 13.5% between 2010 and 2016. individuals. According to China for university education. Therefore, Meanwhile, Chinese urban residents' Private Wealth Report 2017 developed international schools become education expenditure accounted by Bain & Company in collaboration preferred choice for them. As the for 5% of total per capita annual with China Merchants Bank, the number of high net worth individuals expenditures, which is twice of the number of Chinese individuals with continues to grow, the demand percentage of America's average investable assets greater than RMB10 for international schools will rise household expenditure on education million was 1.58 million in 2016, accordingly. (about 2.1%). According to China with a CAGR of 23% between 2014 Household Education Consumption and 2016. These high net worth In addition, increased disposable White Paper 2017, K12 education individuals are less sensitive to tuition income of urban residents leads expenditure accounted for 21% of fees but highly value differentiated to greater interest in education annual household income, indicating education resources that meet expenditure. Chinese urban willingness on education expenditure their expectations. As Hurun Report residents have shown increased and great potential growth in the indicated, 53% of high net worth willingness on education consumption, future as per capita disposable income individuals would send their children with growth rate of per capita increases.

20 A New Era of Education | II. Enpower students and schools with new education philosophies

Figure 17: Urban residents' per capita expenditure on education (2006 - 2016) Unit: RMB per person

1500 1000 500

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Ministry of Education, Deloitte Research

Additionally, there is a rapid tion. For example, in 2015 and 2016 may well satisfy the demand for inter- growth in the number of Chinese school year, there were 123 thou- national education at a younger age, students studying abroad. sand Chinese postgraduates and 136 while providing the best channel for In 2017, the number of overseas thousand Chinese undergraduates those who plan to study in overseas Chinese students hit a record high studying in the U.S. As of May 2017, universities. of 600 thousand, increased by 11.7 there were a total of 37 thousand K12 compared with last year, with a CAGR students in the U.S. with a YoY growth With the increasing demand for of over 15% in recent ten years. Inter- rate of 40%, while the YoY growth rate education and consumption upgrade, national schools effectively satisfies of Chinese postgraduates and under- the market size of international the demand for overseas education graduates in the U.S. were 2% and 9% schools will reach RMB43.6 billion by among a growing number of younger respectively. According to statistics 2020. It is expected that market size students seeking for overseas edu- from New Oriental, about 27% of K12 of private bilingual schools will grow cation. According to survey results students studying abroad were from by 14% to RMB23.1 billion by 2020. of China Household Education Con- international schools, about 3% higher Meanwhile, international classes sumption White Paper 2017, number than in 2015. In the future, undergrad- of public schools will register a flat of -age or younger student uates are expected to become the key growth due to policy factors, while the accounts for 36% of total Chinese driver for overseas education. With an growth of foreign international schools students studying abroad, constituting increasing trend of studying abroad at will slow down to 6% with a relatively the major force of overseas educa- a younger age, international schools saturated market.

Figure 18: Number of Chinese students studying abroad by year (2007 - 2017) Unit: 10,000 persons

80 . . 60 . . . . 0 . . . . . 20

0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Ministry of Education

21 A New Era of Education | II. Enpower students and schools with new education philosophies

Figure 19: Market size of international schools (2010 - 2020) Unit: RMB100 million

500 00 300 200 100

0 2011 2012 2013 2014 2015 2016 2017 2018E 2019F 2020F

Source: NewSchool Insight Media online library

2.2.2 Competitive landscape of International schools generally ••The stage of rapid growth international schools undergo four stages of development: (2000-2019):Driven by increase of There is not yet an industry leader national income, rise of high net ••Nascent stage though relatively large international worth individuals, boom in studying (1969-1989):Pakistan Embassy schools were established 15 to 25 abroad and adoption of two-child College Beijing, the first international years ago. This is partly because policy, international schools have school in Beijing, and International education is a slow process, just as the experienced rapid growth at this School of Beijing, which mainly saying goes that it takes ten years to stage. With the adoption of Interim provides education for children of grow trees but a hundred years to rear Administrative Measures for High foreign embassies, were established. people. When it comes to education, it School International Programs in International schools at this stage are turns out that quantity creating quality 2013, the number of international mainly established for children from can be applied to any progression in divisions of public schools began to expatriate families. study. At the same time, it takes a long decrease. Private bilingual schools time for school to make improvement ••Exploration stage (1990-1999): have started to play a major role in on enrollment rate, scale and famous With China's economic recovery the market as the key growth driver. which are key factors for driven by the reform and opening ••Integration stage parents to select to good schools. up, a multitude of foreign companies (2020-future):Leading international Additionally, in the early stage of have entered the Chinese market, schools are taking shape as the development, education groups tend giving rise to great demand among market becomes further segmented. to adopt asset-heavy mode with great expatriates for international Branded and collectivized investment in capital and land, which, education. Therefore, foreign international school education to some extent, restrained the growth. international schools become the groups will scale up with greater mainstay. industry barrier, lower expansion rate and slower market growth.

22 A New Era of Education | II. Enpower students and schools with new education philosophies

Figure 20: Evolution of international schools

Nascent stage Exploration stage The stage of rapid growth Integration stage

1969–1989 1990–1999 2000–2019 2020–future

During this decade, China has The adoption of deepened its reform and opening Interim Administrative up. As a result, China's economy Measures for High 2020 has experienced greater growth School International by further opening to the outside Programs in 2013 2017 In 2020, the market will world. With a multitude of foreign put forward stricter become increasingly companies entering the Chinese requirements for 2016 integrated as large market, foreign international the establishment of domestic education schools become the mainstay. international divisions groups constantly As of 1999, there were 86 newly by public schools. established international schools, expand market share including 10 international divisions at faster expansion rate via M&As. of public schools, 39 private 2013 bilingual schools, and 28 foreign The adoption of Several schools. Opinions of the State Council on Encouraging In 1997, Regulations on Social Resources to Invest In 1973, the Running of Educational in Education and Promote International Institutions with Social Resources Sound Development of School of was adopted, which provided 2002 Non-public Education Beijing, the first legal basis for private education in 2016 highlighted the international for the first time. With vocational central party's leadership school in China education, and over private schools by which fully preschool education as the 1999 developing classification adopts foreign focus, it encourages educational management system and teaching and In 1989, institutions offering compulsory improving supporting management there education while strictly controlling system, in order to promote system, was were six those offering higher education. modern school system. established, international accessible only schools The adoption of to children Non-public Education in China, The amended Non- of foreign 1997 Promotion Law of the including public Education embassies. five foreign People’s Republic of In 1993, Outline for Promotion Law in international China in 2002 Education Reform 2017 clearly prohibited schools marked a new era and Development for-profit schools for In 1969, and one for the development in China was compulsory education. Pakistan international of China's private adopted, which Embassy division of higher education. clearly explained College Beijing, a public 1993 For the first time, national policies the first school. China has clearly regarding the international encouraged private development of school in capital's entry into the 1990 private education China, was education sector and for the first time. established. promoted the sound 1989 development of private education. 1973 1969 Time

Source: Deloitte Research

23 A New Era of Education | II. Enpower students and schools with new education philosophies

It is a decentralized industry consists in how to invest in compulsory Existing private international schools without established leaders education. While coherent K12 fall into the following three categories. The market of international schools education would be beneficial for the The first category is large listed is highly decentralized due to high development of a mature education education groups, which originated requirements on land, capital, system, it is difficult to attract from certain regions and expanded teachers and brand . capital investment. Meanwhile, the nationwide after getting listed such as According to Huachuang Securities, government has put forward stricter Bright Education Group, Maple the concentration ratio of top eight compliance requirements for schools, Leaf Educational System, Hailiang market players is less than 20%, both in terms of regulatory provisions Education, and Virscend Education, indicating a competitive market with and execution. However, if K12 etc. The second category is regional low concentration. However, for new schools provide for-profit kindergarten education groups, which rely on entrants, the barriers to enter the and high school education, they will government resources at the early market will become higher because faces new challenges such as rising stage to build up reputation and brand of the policy and brand factors. operation costs due to tax increases. eminence locally, and then gradually First of all, the amended Non-public After years of development, existing expand to surrounding regions. The Education Promotion Law clearly education groups have built up brand third category is foreign education prohibits for-profit schools at the stage eminence especially in tier 1 cities groups, which leverage overseas of compulsory education, which will where strong consumption is coupled education resources and brands to lead to dumbbell-shaped development with fierce competition. Therefore, it is expand in the high growth market of of K12 schools. This means that necessary for new entrants to adopt international schools in China. They existing education groups of scale differentiate strategies and get fully would first enter tier 1 cities, and would focus on kindergarten and prepared in geographic selection and then expand to tier 2 cities with great high school education, while adopting strategic positioning, etc. economic strength and population merit-based enrolment for elementary growth. Examples of this category and junior high school students. For include Wellington College, Nord Anglia new entrants, however, the problem Education, and Dulwich College, etc.

Figure 21: Three categories of private international schools

Virscend Education Maple Leaf Education

Hailiang Education Bright Scholar Education

Large domestic listed education groups

Shanghai United International School Wellington College PKU College Nord Anglia Education Shanghai World Academy Dulwich College

Regional education groups Foreign education groups

Source: Deloitte Research

24 A New Era of Education | II. Enpower students and schools with new education philosophies

Large listed education groups have Initially, large listed education groups dual-diploma high school program occupied certain market share tend to adopt asset-heavy mode across China. Targeting at middle with distinctive growth strategies requiring significant investment in class families, Maple Leaf Educational after early stage of development capital and land, and then gradually System has a big customer base Collectivized operation of international scale up. At the early stage of with lower tuition fees than other schools requires brand awareness, development, they would establish international schools. Currently, Maple high enrollment rate, cooperation with and operate schools independently Leaf Educational System achieves overseas teachers, unique curricular to ensure good teaching quality. With rapid expansion mainly by running system and quality students, coupled five to ten years of brand development international schools with partners with local resources. Therefore, and industry experience, they tend holding land in tier 2 and tier 3 cities. domestic educational organizations to change their operation mode from Leveraging Country Garden's vast are relatively advantaged in this area. "asset-heavy" to "asset-light". real estate resources, coupled with increased brand influence after These kind of Schools charge far less For example, Maple Leaf Educational getting listed, Bright Scholar Education than foreign-funded international System established differentiated Group has begun to provide teaching schools, targeting mainly at domestic competitive advantages by focusing management service, while integrating middle classes. Their market share on high school education. It well both internal and external resources increases obviously by expanding to satisfies market demands by offering for continued expansion of school tier 2 and tier 3 cities. British Columbia, Canada accredited network.

Figure 22: Evolution of large domestic education groups

Maple Leaf Bright Scholar Hailiang Education Virscend Education Wisdom Education Educational System Education Group

Inception 1994 1994 1995 2000 2002 •• Company founded •• The first 12-year •• Company founded •• Company founded •• Company founded consistent school •• The first K12 opens in Country school opens 1996 2002 2003 Garden community •• The first school •• The first private •• The first private opens middle school •• The first nine-year opens opens consistent school •• The second private opens middle school opens

1998 2003 2004 Certified as BC 2 schools opens The second private Canada's offshore middle school opens school program

25 A New Era of Education | II. Enpower students and schools with new education philosophies

Figure 22: Evolution of large domestic education groups

The 5th year 1999 1999 2000 2005 2007 •• 3 schools (no new •• 1 school (no new •• 1 school (no new •• 5 schools (no new •• 2 schools (no new school) school) school) school) school) •• International 2001 2002 courses offered • Certified to offer • International • • in Dongguan IB's programs Foundation Guangming High including DP and Program jointly School MYP established with Greenwich University

The 10th year 2004 2004 2005 2010 2012 •• 4 schools •• 8 schools •• 2 schools •• 6 schools (1 new •• 2 schools (no new school) school)

2005 2007 2013 •• The first school •• Certified to offer •• 3 schools for expatriates' A-level and IGCSE (including HS children opens programs KAMA International •• The first School acquired) kindergarten opens

The 15th year 2009 2009 2010 2016 2014 •• 21 schools •• 13 schools •• 2 schools (no new •• Listed on HKEX •• 4 schools (1 new school) school)

2011 2015 •• Certified to offer •• 5 schools: in IB's Primary Years cooperation with Program (PYP) the government

The 20th year 2009 2014 2015 2017 2016 •• Listed on HKEX •• Country Garden •• Listed on Nasdaq •• 16 schools (10 new •• 6 schools: in •• 44 schools Education Group •• 3 schools schools) cooperation with founded the government •• 40 schools •• Listed on HKEX

Now 2017 2017 2017 2017 2017 •• Listed on New York Stock Exchange Number of Number of Number of Number of Number of schools (by schools (by schools (by schools (by schools (by education education stage): education stage): education stage): education stage): stage):65 72 12 30 14 High school 10 High school 5 High school 2 High school 11 High school 4 Junior high Junior high Junior high Junior high Junior high 19 16 3 11 5 school school school school school Elementary Elementary Elementary Elementary Elementary 18 17 3 4 5 school school school school school Kindergarten 18 Kindergarten 34 Kindergarten 4 Kindergarten 2 Kindergarten 0 University 1 Training 1 organization

Source: Listed companies' annual reports and prospectus, Deloitte Research

26 A New Era of Education | II. Enpower students and schools with new education philosophies

Regional education groups target At the early stage of development, contributed the least to Bright Scholar tier 1 cities with quality education foreign international schools were mainly Education Group's total revenue (3.5% resources as key competitive recruiting foreign students in tier 1 cities. of the total in 2016), it showed the advantage Later, they would gradually expand to tier fastest growth with a CAGR of 240% Regional education groups mainly 2 and tier 3 cities by establishing bilingual from 2014 to 2016, which is far higher target one certain region, tier 1 cities in schools accessible to Chinese students. than other services. particular, including Beijing, Shanghai, , and Shenzhen, etc., Build Take Wellington College as an example. At the same time, the development brand awareness among local people, Wellington College International Shanghai of international schools is also especially high net worth individuals. provides K12 education for foreign dependent on the ability to expand, Their development strategy prioritizes students. At the same time, Wellington as a leading position in market share deep dive into regional markets College Bilingual Shanghai and Wellington is crucial for future competition. In instead of rapid expansion through College Bilingual Hangzhou were recent years, listed companies have extended school network, with high-end established to meet the demand for accelerated expansion with rapidly positioning and brand premium as key domestic bilingual schools, with higher increased market share. For example, competitiveness. tuition fees than the average local level. Maple Leaf Education has established For example, the tuition fee of Wellington 14 schools in tier 2 and tier 3 cities For example, Xiehe Education Group, College Bilingual Shanghai is RMB 220 in FY2017 and plans to open another with a relatively long history and rich thousand to 300 thousand per year. 10 between 2017 and 2018. Bright education resources, has maintained a Scholar Education will establish 10 good market reputation based on the Profitability and expansion rate of schools in 2018, mainly in tier 2 and philosophy of “East Meets West”. With schools become crucial given high tier 3 cities. Hailiang Education is a lot of land owners in different cities barrier to industry competition expected to establish about 10 schools seeking cooperation, Xiehe Education The development of schools is a slow in cooperation with Pate's Grammar Group has applied asset-light mode to process limited by various factors School from 2018 to 2020. all its schools. Currently, Xiehe Education such as land, policy and experience, Group is committed to robust and thereby creating high barriers to At present, regional leading education high-quality expansion, taking quality of entry. Meanwhile, the profitability of a groups have already taken shape, education as top priority. It is targeting school is directly affected by the time while existing participants are tier 1 cities as key market and adopts a it takes to become fully subscribed proactively embracing market very cautious approach to expansion in since its establishment. The shorter opportunities by improving profitability tier 2 and tier 3 cities. time it takes, the higher profitability will and expanding under the asset-light be. Generally speaking, a school can mode. It is expected that there will be Foreign international schools are achieve the breakeven point when it is an increase in market concentration of mainly for foreign students with using 60 percent of its capacity. A fully international schools in the future. higher tuition fee subscribed school has limited potential Given relatively long history, excellent for tuition to increase. However, high overseas teaching staff and well- customer stickness allows school established educational system, to improve the profitability through most foreign international schools extracurricular activities, winter/ outperformed competitors in brand summer camps, and various kinds awareness, thereby charging higher of examinations. For example, while tuition fee. supplementary education service

27 A New Era of Education | II. Enpower students and schools with new education philosophies

2.3 Empowering students and workers towards innovators with 2.3.1 Empowering students schools logical thinking and acquire learning A product of industrial revolution, The future of private K12 schools abilities to reshape knowledge. standard processes and volume will mainly depend on the derivation production are the labels of modern and development of two dimensions Meanwhile, the expansion of private education system. However, with – student enablement and school K12 schools is often closely associated dramatic changes to the environments enablement. with their acquisition of market shares. of industry, technology, and Schools may achieve fast performance economy, the pattern of education From millennials to Generation Z, growth through extended mergers industry remains unchanged with students' needs and the challenges and acquisitions, but the selection of no iteration. Based on the study of they face have changed. Increasingly, targets and post-merger integration is on global education the lines between different disciplines often easier said than done. Therefore, innovation in the 21st century, are beginning to blur under the impact it would be vital for education groups education for students in the future of digital technologies. Under the to seek organic growth and establish will focus on four dimensions, which background of globalization and global school-specific management systems. includes intrapersonal competencies, network, the steady accumulation of interpersonal competencies, cognitive knowledge is already losing its value. competencies and values. It is now a new subject for educators to help students shift from knowledge

Harvard University's 21st century education map

Competencies in the intrapersonal domain •• openness: Artistic and cultural appreciation, personal and social responsibility, cultural awareness, etc. •• Work ethic & conscientiousness: Initiative, self-direction, responsibility, self-reflection, self-evaluation, etc.

Competencies in the interpersonal domain •• Teamwork & collaboration: Communication, collaboration, teamwork, interpersonal skills, empathy/perspective taking, etc. •• Leadership: Leadership, responsibility, assertive communication, self-presentation, social influence with others, etc.

Competencies in the cognitive domain •• Cognitive processes: , problem solving, analysis, reasoning and argumentation, decision making, adaptive learning, and executive function •• Knowledge: Oral and written communication, active listening •• Creativity: Creativity and innovation

Values and attitudes •• Values: The values and attitudes cultivated in participants by each program will vary by country, region, philosophies, and other social and cultural factors. •• Values and attitudes are central to developing a person’s character and shaping the beliefs, attitudes, decisions and actions of a person. •• It is important to ask each individual to explicitly name the particular values and attitudes they seek to nurture.Creativity: Creativity and innovation

Source: Harvard University website

28 A New Era of Education | II. Enpower students and schools with new education philosophies

For educators, promoting active, The focus is shifting from massive the future is descending, and critical engaging, and enabling education models examination-oriented skills to thinking, social skills, complex problem will become a key challenge for schools to extensive self-regulated learning solving ability and systemic decision face. The shift involves not only teaching ability. For students, the purpose for making will be key to their success. contents but also school operations. going to schools means not only to Thus, it is of vital importance for schools Specifically are: learn knowledge, but also to equip to redesign their teaching processes. themselves with the ability to adapt in Established by Ali partners and opened Shift from teacher-centered "push-in" a changing world. Schools also need to last year in Hangzhou, Yungu School system to student-centered "pull-out" place themselves in a boarder learning transforms its teaching model from platform. In the teacher-centered school ecosystem to facilitate the development four aspects. Firstly, the school sets up scenario, lessons are the same for all of talents capable of adapting to the a mentoring system which mentors students and are given only within the future. Whittle School which is set to are assigned on a group basis with one classroom setting, with examination as open in Shenzhen in 2019 by a group of mentor for every five students. Mentors the only measurement for evaluation. educational specialists from around the take the emotional development and By contrast, under student-centered world plans to build 36 campuses in 15 physical & of each student education system, the mainstream will countries within the next 10 years. Aiming as their primary focus and emphasize on be adopting a mixture of personalized to develop students from individual, developing life skills and interpersonal learning based on students' individual cultural and global perspectives, the communication for junior students characteristics, online and offline multi- school will design certain independent and nurture potentials and talent for scene learning and a comprehensive courses and activities for each student seniors. Secondly, the school breaks up evaluation system of cognitive/ based on their individual , and classes and puts students of different attainment. Take ETU School in Beijing as establish personal mentoring system backgrounds and ages together as in an example. ETU stresses on setting up to help students develop their own to help students transition to its curriculum and teaching environment development planning and learning social environment. Thirdly, the school from perspectives of developing thinking plans; In the area of culture, Whittle gradually adopts an optional class system pattern, skills and methodology. Based School put emphasis on language, for students enter a higher grade from on the compulsory courses defined by and social teaching, junior to senior to facilitate their individual the Ministry of Education, ETU adopts where students needs to acquire a third and differentiated development. Last, an 80 percent or above project-based language skills apart from English and the school utilizes project-based and scenario learning approach, with focus Chinese, and set up distinctive centers immersive learning to strengthen on knowledge learning as well as the of excellence in various regions, such the cultivation of cross-disciplinary cultivation of character, self-awareness, as the center of excellence in Nanjing capabilities. communication, collaboration and featuring , culture and other skills. ETU also pays attention history; Whittle School is establishing an Regardless of the reform of the senior to student-centered needs through a international exchange learning system high school entrance examination group teaching approach with mixed-age to enhance community practices and or the national university entrance classrooms of 15-18 students each and nurture students' concept of world examination, the criteria of measuring a faculty-student ratio of 1:8. In addition, development rooted in their home academic performance are shifting from ETU deploys an in-house IT system that country. quantification and results-focus to quality administers teaching, school operation, and process-oriented evaluation. Driven faculty, school-home connection and Shift from offering students with static by , educators and society, other aspects to help comprehensively accumulation of knowledge to promoting empowering students should be the track performance of kids in terms of dynamic knowledge cycles. The role of key factor for the future of education in behavior, schoolwork, etc. knowledge in students' competency for China.

29 A New Era of Education | II. Enpower students and schools with new education philosophies

2.3.2 Empowering schools and accelerate expansion by acquiring Experimental School, the P/E ratio Under a high-growth market sizable local schools with brand was 15. In the other case, Wisdom environment, how private K12 schools awareness at the stage of rapid Education acquired 70 percent of capture the market and stay ahead development. Education groups tend shareholder's equity and 70 percent of competition would be key factors to be more cautious about overseas of property rights of Huanan Shida for establishing a strong foothold in M&A as it imposes greater challenges Yuedong Preparatory School with a 45 the future. Expansion will be driven by in terms of post-merger integration. P/E ratio. external M&A and internal multi-level There were only two major overseas growth and output system. M&As during 2016-2018. Depending Cash merger is the main approach of on the purpose or the of M&A for domestic private schools, as As to external M&A, the targets for targets for M&A, P/E ratio of private it is simple and easy to operate with large domestic education groups schools varies from 14 to 45. For short transaction time, and involves no are mainly domestic schools, which example, when Maple Leaf Educational equity dilution. Backed by IPO funding, indicates that major market players Systems acquired 52.4 percent major education groups have sufficient wish to increase their market shares of equity of Hainan Guokeyuan cash in hand for expansion.

Table 5: Overview of M&As by listed education groups (2016-2018)

Domestic/ Date of Value Share of Acquirer Target Target's business scope overseas acquisition (RMB) equity

Maple Leaf Domestic Eastern Shenzhen International K12 education Dec. 2017 89.045 m 55% Education Academy Systems Domestic Hainan Guokeyuan Experimental K12 education Feb. 2017 85.412 m 52.4% School

Domestic Haikou Meishe Jiaohui Education A boarding school providing Jan. 2018 90 m 100% Technology Co., Ltd elementary school service

Domestic Meiwen Qianyan Management A boarding school providing Jan. 2018 40 m 100% Co., Ltd elementary school service

Bright Scholar Overseas Learning Care Group(LCG) Early education N/A Cash N/A Education Group Domestic Five chain kindergartens from Private kindergarten 2018 Cash 75% Wuhan New Jordan

Domestic Can-Achieve Education Education marketing and Jul. 2017 Holdings 21% student recruitment for increase international schools

Domestic School placement & education Education counselling APP Jul. 2018 N/A 100% counselling APP management

Domestic Zhejiang art training school Art school Jul. 2018 N/A 70%

Yuhua Domestic Huibo Education Private high school Apr. 2018 107 m 70% Education Domestic LEI LIE YING LIMITED Private university Dec. 2017 1,430 m 65.71% Mechanic school Vocational skills training center

Hailiang Domestic Educational services for Xiantao Private secondary/high Jun. 2016 224 m 80% Education No.1 Junior High School school Group Domestic Zhejiang Nanrui Experimental Private primary/ secondary Jun. 2017 N/A N/A School school

Wisdom Domestic Huanan Shida Yuedong K12 education Jun. 2017 224 m 70% Education Preparatory School International

Source: Annual reports, Deloitte Research

30 A New Era of Education | II. Enpower students and schools with new education philosophies

Driven by increasingly fierce influence among users. Particularly, outputs will help boost expansion of competition, international schools are such advantages will maximize the schools. Therefore, private K12 schools developing towards branded groups. benefits when expanding from tier are transforming from unidimensional Branded development provides 1 to tier 2/3 cities. At the new stage asset-heavy operation towards a multi- visible advantages, with shared and of competition for quality and school dimensional management model with duplicable faculty training, system and characteristics, premium education a mixture of management, module and resources under a common brand for brand will become a key competitive human resources outputs. efficient management, as well as high factor for school corporations. prevalence in the market with strong Branding and educational service

Figure 24: Output model of multi-dimensional management

•• School management Talent output talent •• Bilingual teachers

•• Brand output Module output •• Courses output •• Digital output

•• Educational consulting School management •• Entrusted management output •• Asset-light model output

Source: Deloitte Research

For school management output, Project cycle would normally follow with physical campuses and school there are three popular models, the school's academic cycle, with operation models, which requires which are educational consulting, service period ranging from three huge amount of initial investment and entrusted management and brand to six years. Operation afterwards long period of preparation. Under output. Buyers of these services are would depend on a school principal the asset-light model, education mostly governments and enterprises responsibility system. The ownership companies expand only with their seeking for expansion via investment and subsequent management would school operation models and the in education. Educational consulting rest on the school owner. preparation period for expansion generally uses existing operational in new districts could be shortened teams for new school building and Lastly, under asset-light model output, utilizing partner's local resources offers advice and recommendations school owners provide land, school (e.g. helping education companies in terms of educational philosophy, buildings and other facilities and obtain quicker required licenses and objectives, operational management, education groups enter as branded approvals for new schools). However, etc. through practices of branded operators. Through this model, there is a partnership risk under the education groups. Project period governments could stimulate growth asset-light model. If the partner no usually ranges from three to six of local economy or regional real longer owns the land use right and months, with consulting reports as estate market by bringing in education property rights of school buildings, or the final deliverable. In entrusted brands, while education groups terminates cooperation agreement management, school owners benefit from expansion via asset-light unilaterally, education companies aim to improve management of operation. Compared to asset-heavy would have no places to operate. In existing educational assets through model, the asset-light model is terms of profitability, intrinsic rewards professional education companies more replicable from perspective of are higher at the beginning under the and provide the manager with certain growth potentials. Under asset-heavy asset-light model, and are relatively amount of investment each year. model, education companies expand lower under asset-heavy model as

31 A New Era of Education | II. Enpower students and schools with new education philosophies

education companies purchase land on the reputation of the brand. The brand systems. A good example is use rights and build school houses scope of support provided varies in Dipont, who provides comprehensive on their own. As school operation actual operations. Some put in heavy international education management stabilizes, education companies investment in guidance and alignment services and support for its 27 schools assume the depreciation and in respect of teaching and faculty, and 34 international curricula centers amortization of land use rights and and some offer light investment with in addition to its school investment school houses under the asset-heavy only communications on the overall and management business. As part of model, while under the asset-light operation strategy and directions. its international curricula management model education companies assume Digital system and curricula output services, Dipont offers recruitment, the rent or provide a share of profits are also good output models that cultivation and career development to the partner. create competitive edge and brand of teachers for partnering schools. effects. Typical examples include A subsidiary of Dipont, Explore CRS It should be noted that such projects Alt School in Silicon Valley and San focuses on talent recruitment and usually originate from new urbanized Yu . Though Alt consulting agencies for teachers of districts, with a certain difference School has closed some of its school international schools, and organizes in the population and economic sites, the development and output of teacher recruitment events annually environment from downtown areas. teaching platform products remains in China to connect educators and As such, education groups need to as its main business model, including bilingual schools. As of 2016, Dipont conduct proper feasibility study to a series of teaching tools, school- has more than 550 foreign teachers ensure future profitability. home connection platform and school within its China network, which is one management system. Taiwan's San of the largest team of international Module output is to modularize Yu Education owns more than 300 teachers in China. products of education groups and kindergartens in China, and is also extend their industry chain from well-known for its publishing business, In a word, empowering students the traditional B2C model to B2B especially picture books and textbooks reflects on the essence and its model. Foreign education groups are for 0-6 year olds. extension of education from a first- expanding in China mostly through principle perspective, while school brand output, under which they Talent output has been a difficult point enablement explores and develops the authorize their brands to Chinese for the development of many school expansion models of education groups partners and charge for a fixed management groups. If it could be from multiple dimensions. These two annual authorization fee or a fixed properly addressed to meet market concepts are complementary and percentage of tuition revenues. demands, which would generate interplay to shape new heights and Authorization fees range from millions business revenue and serve as a breadth for the future K12 education. to ten millions of RMB depending competitive moat to protect their own

32 A New Era of Education | III. New applied technologies have penetrated into the education industry

III. New applied technologies have infiltrated into the education industry

New technologies have constantly emerged and penetrated into the education industry. With the advancements in big data, AI and stereoscopic technologies, imbalanced allocation of resources and other issues in the education industry may be addressed. The question of how to build an empowering education industry and make it more efficient by applying technologies has become a paramount issue. Currently, the technology applications in the education industry can be divided into three types: first, “indirect auxiliaries”, namely using technologies to support teaching, improve scores, enhance efficiency and develop students’ self-learning ability, including adaptive education, VR/AR education, online education, somatosensory education etc.; second, “direct learning”, which refers to introducing technological programs into teaching for improving the innovation and practical ability of students, including STEAM education, maker education etc.; third, “basic operation”, that is, utilizing technologies to improve school management and teaching quality, including smart campus and cloud-based education platforms. Generally speaking, “indirect auxiliaries” applications have the highest penetration rate in the after-school market. As such technologies can improve scores in a short period of time, many parents are willing to pay for it. However, its penetration rate in the school market is lower. The penetration rate of “direct learning” applications increases both in schools and the after-school market with the great policy and capital support. “Basic operation” applications have helped schools evolve from the early stage of campus informatization to the establishment of smart campus.

33 A New Era of Education | III. New applied technologies have penetrated into the education industry

Figure 25: Penetration rate of technology in education industry

High Low School After-school penetration penetration rate rate Kinder- Elemen- Junior Senior Univer- Kinder- Elemen- Junior Senior Univer- garten tary high high sity garten tary high high sity school school school school school school

Indirect AI+ Adaptive auxiliaries learning

Online assistant

Smart robot

Online Live streaming education Mobile App

VR/AR education

Direct STEAM Robot learning education education

3D printing teaching

Maker education

Public schools Non-public schools

Basic Smart Smart teaching operation campus resource

Smart teaching environment

Smart campus management

Smart campus service

Information security system

Source: Deloitte Research

34 A New Era of Education | III. New applied technologies have penetrated into the education industry

3.1 The diversified “indirect methods dynamically, organize large- thirdly, improving the proficiency of auxiliaries” education technologies scale adaptive learning, and satisfy students by applying algorithms to Adaptive learning to be more the demands of students at different help students review the learned widely applied stratifications. knowledge points periodically In nature, adaptive learning is according to the retention curve teaching students according to their Adaptive learning covers five and application frequency; fourthly, aptitudes, which means finding the processes: firstly, collecting relevant analysing data in stages and informing best learning method for each student data in the process of learning and students of their weaknesses with based on the differences in learning practice, including effective learning visualization technologies; finally, capabilities and learning habits. time, the time spending on learning forming a closed loop by sending the Due to technology barriers and high each knowledge point, accuracy etc.; analysis results to the initial point of costs, class was divided in line with secondly, identifying and selecting the system and changing the teaching vague standards. Nowadays, the effective data with AI, clearing data methods according to the learning sophisticated technologies such as AI and removing unnecessary memory, habits and characteristics of students. can adjust teaching plans and teaching and storing data by category;

Figure 26: The closed loop of adaptive learning

Path change

Visualizing

Processing and storing

Collection Circulating and updating

Source: Deloitte Research

Most adaptive learning platforms are Overseas examples indicate that students better know their learning designed to “improve scores”. The adaptive learning increases the status. AI not only facilitates the application of adaptive learning can be percentage of students who communication between teachers divided into two categories: completing courses from 76% to and parents, but also tells students 94% and improves their scores; their weaknesses more intuitively. ••First of all, K12 after-school tutoring Secondly, it charges lower than Second, language learning includes is mainly targeting the junior and one-to-one tutoring. Adaptive English study preparing for or not for senior high school students for learning costs less than face-to- study abroad such as the senior high preparing Middle school entrance face teaching since it’s easier for school/university entrance English examination and University entrance adaptive learning platforms to build examination, CET4, CET6, TOEFL, SAT examination. The penetration rate large-scale question banks; Thirdly, etc. Adaptive learning could achieve is the highest due to three factors: the combination of teaching and better performance in language Firstly, it significantly improves the testing could help parents and learning than in K12 after-school completion degree of teaching.

35 A New Era of Education | III. New applied technologies have penetrated into the education industry

tutoring, as many foreign countries most teaching videos, banks and but raises the requirements on have rich experience in adaptive vocabulary banks are free, only some comprehensive application. It means learning, test banks and abundant premium services such as producing that students will need a complete knowledge reserve. Moreover, with the evaluation reports charge membership learning environment. Adaptive national standard education system, it fees. learning platforms could help teachers would be more difficult for adaptive and students better adapt to new learning platforms to release its The adaptive learning is an inevitable policies on the university entrance full potential in K12 after-school trend. By 2020, China is expected to examination. tutoring than in English learning. implement a series of new policies on Language learning is quite popular the university entrance examination In spite of this, adaptive learning in elementary and high schools for across the country, including platforms still face two challenges: In the following reasons: Firstly, English cancelling the division between arts terms of technology, the integration of becomes more important for greater and , separating English adaptive learning platforms with AI is impact under the globalization listening exam with English reading still at the primary stage and functions trend; Secondly, as education exam, and recruiting students based such as human-machine interaction authorities lower the examination on comprehensive performance and self AI upgrading need to be requirements on English, school etc. After cancelling the division improved. Regarding the content, the courses cannot meet the language between arts and sciences, students splitting of knowledge points need learning requirements of students. need to find the best approach to to be refined. Adaptive learning is It’s conducive for the after-school learn different subjects in line with featured with flexible learning plans, English tutoring market to build accurate evaluation standards; The but it may affect learning effectiveness an integrated teaching ecosystem. policy of recruiting students based if the splitting is rough or omits some Thirdly, because the number of on comprehensive performance content. Chinese oversea student increases requires students to connect the and a younger trend, many elementary knowledge of different subjects, and high school students need to reinforce weaknesses, and accurately take examinations for study abroad; adjust the pace of learning; Separating Fourthly, adaptive learning tutoring reading test from listening test lowers costs less than foreign teachers. As the difficulty of English examination,

36 A New Era of Education | III. New applied technologies have penetrated into the education industry

Smart robots need to increase provide AI–based courseware and can answer exercises and questions; penetration rate in various teacher resources including semantic Fourthly, smart robots for greeting education stages understanding, intelligent retrieval, and guidance, which are mainly In recent years, robot products have knowledge map, voice recognition, used in reception and guidance. In been widely applied in industries and intelligent recommendations etc.; general, smart robots have higher are expanding to the civil market. Secondly, smart campus robots, penetration rate in elementary schools Education robot is an emerging which are mainly used in schools to and kindergartens. Smart campus area. It’s imperative to introduce the provide technology experience in the robots are still under R&D, and most knowledge on robot and its application exhibition hall, handle information of them will be mainly used as campus in information . inquiries in the library, organize administrator, interest enlightener as interest fostering activities in the lab, well as campus guide. They are quite Smart robots are mainly applied and facilitate entertainment activities suitable for elementary students with in four education areas: Firstly, in the assembly hall; Thirdly, smart less study burden and strong curiosity. technology class robots, which can online problem-solving robots, which

Figure 27: Education robot ecosystem

Education training Artificial intelligence organization Robot kit Retailer

Hardware System service Content supply Channel User manufacturing

Manufacturer Education robot Kindergarten Parts maker content Elementary and junior high school

Source: Deloitte Research

The application of smart robots in core part—microphone, though and the rising demand for education, the education sector faces three with different plastic exterior. It will online education enters into an age major challenges: Firstly, the products greatly affect the using experience of intelligence. Factors, including deployed in the market are quite of preschool children. Secondly, deepening mobility, constant product different from those in the lab. education robots are difficult to be improvements and upgrades, the The prototype of the smart robots widely used in classes due to the high support of AI/big data, and the boasts of powerful functions, but the price of host modules, sensors and integration of online and offline education robots in the market are other parts. Thirdly, over-marketing education, will lead online education to quite different. Moreover, because of overdraws customers’ trust. Any a higher level. Especially, AI will bring the unclear and unreasonable product products related to the concept of more possibilities to online education: classification, most education robots robot can be sold as smart education 1. Eliminating knowledge are homogeneous and bland. In most robots, even including cheap learning blindness with big data. Big data cases, they will be introduced into machines and chat robots with limited can help find out the logic between schools. Most robots in the market functions. knowledge points and construct are not recognizable enough for a new knowledge map by splitting similar looking and functions (most Live streaming education and combining knowledge points. products are designed to inquiry undergoes constant blowout To help students quickly grasp all location, weather etc.). 99% of robots growth and intense homogeneous knowledge points, exams also can in the market have the function of competition be used to detect their weaknesses voice chatting. They have only one Driven by favourable policies, economy and make accurate breakthroughs. and environment, technology updates,

37 A New Era of Education | III. New applied technologies have penetrated into the education industry

2. Customize teaching by spending on doing exercises and and allow them to focus on emotion providing students with the accuracy rate. The explanation communication, personalized personalized recommendations. on one knowledge point may guidance and creative thinking AI will show its potential and ability inspire another one, students can development. Besides, teachers after acquiring a certain amount learn how to solve the same kind of can provide targeted mentoring of data. For example, 171xue. exercises. according to the data from the AI- com sends students explanation driven platforms. 3. Real time feedback facilitates with different degrees of difficulty help student get closer to and perspectives based on the teachers. Intelligent tools take over data from its AI-driven platform many repetitive work for teachers including the time students

Figure 28: Online education enters into an age of intelligence

Age of intelligence deepened mobility Constant product improvement and The trend of studying with mobile devices upgrade will continue to grow. Except online foreign Growing user demands help to diversify teacher platforms, test banks and test online education products to better serve banks with picture search function, many users. new technologies will emerge.

Age of intelligence

Indispensable AI and big data Integration of online and offline technologies education The learning method and approach will Education enterprises constantly expand experience more changes. To understand and integrate their industry chains. and meet the demands of users, online Offline and online education are likely education will mainly depend on effective to be integrated more closely, and both operation and accurate data . will develop harmoniously with different focuses.

Source: Deloitte Research

38 A New Era of Education | III. New applied technologies have penetrated into the education industry

Online streaming education has It was also widely applied in language years, but not all content is qualified. become quite mature in recent years, teaching for two factors: Firstly, The essence of education not lies in but in most cases, it was applied in examination. For academic English diversified education methods but rich K12 after-school tutoring and language exams, due to the reform of university and accurate content. Many online learning with an aim to improve entrance examination on English, streaming education platforms just scores. As for K12 after-school schools reduce English courses. The adopt the pattern of live streaming, tutoring, students can enhance and pattern of online education + live but not bring the content into full play expand knowledge and complete streaming allows students to take through live streaming. On the other by taking online streaming different English courses of other hand, China has begun to crackdown classes. In terms of language learning, schools and education organizations on disqualified after-school tutoring students can customize courses on through Apps on mobile phones. organizations since 2018, especially the live streaming platforms and get Regarding non-academic English for online streaming education to know foreign culture and foreign exams, the market of study abroad organizations. schools. expands for growing number of students, but the teaching resources VR education to be an important The pattern of online education + live are in shortage. Online streaming education technology streaming is widely applied in the after- introduces foreign teachers and In 2018, the Ministry of Education school market (including elementary provides life-based language (MOE) requires education departments schools, junior high schools, senior teaching at various places and in to enhance the application of VR high schools and universities) and many situations. Secondly, detailed in teaching. MOE clarifies that the enterprises. It was widely accepted classification. English courses can development of VR may bring huge in K12 education sector for several be divided into more detailed parts: changes to future education industry. reasons: Firstly, the pattern of online reading, listening, speaking, writing, The government allocates large education + live streaming can get vocabulary etc. In the market of amount of money to develop VR. All teachers and students closer and study abroad, students even can find these indicate that VR + education will improve teaching efficiency and courses on introducing foreign schools be one of the highlights in integrating performance via “the 2nd classrooms”, and the social background of foreign technology and education. From the as students need to improve learning countries. Offline tutoring courses are perspective of technology products, efficiency for high scores. Moreover, generally provided by certain teachers, VR education is mainly achieved via some students are too shy to ask however, online streaming education Apps on mobile phones and other questions in classes. Online streaming could realize personalized special devices: the camera on mobile classes could significantly increase the combination. phones and tablets capture relevant frequency of raising questions and information of two-dimensional improve the autonomy of students. The pattern of online education + live products and then show three- Secondly, teaching quality is under streaming is facing challenges from dimensional and dynamic images on supervision. Students are allowed content and policy. On one hand, screens; special devices can directly to comment on online streaming the pattern of online education + live show human-machine interface to teaching by sending bullet screen and streaming is very popular in recent improve visual experience. get refund at any time. And if students have any other teaching demands, they can contact teachers immediately.

39 A New Era of Education | III. New applied technologies have penetrated into the education industry

Figure 29: VR education ecosystem

Content produce and Chip and technology Hardware device distribution

OLED screen Display device Applications in education industry Camera •• PC/PS helmet •• VR-assisted early childhood VR processor •• VR glass box education 9-xis sensor •• All-in-one VR device •• K12 minor courses User Gesture recognition •• Higher vocational education technology Input device Education company Others •• With handle •• Fan-Mei Education

•• With motion capture function •• New Oriental

Panoramic camera device •• Hutuoedu.com •• Smartstudy.com

Source: Deloitte Research

Currently, VR/AR is mainly used to Apps on mobile phones also can be however, we are still not good at provide VR-assisted early childhood downloaded easily. Secondly, children applying VR into the education education, K12 tutoring and higher in kindergartens tend to accept industry compared with foreign vocational education. For virtual early dynamic and stereoscopic objects, counterparts. Many Chinese schools childhood education, parents can such as picture books. adopt imported products since some download Apps or purchase early domestic devices are unqualified and childhood learning machines to help The penetration rate of VR education may cause dizziness after long time children develop interests and develop in schools is relative low, which is use. Chinese virtual reality devices are stereoscopic thinking. It’s a cheap and mainly applied in elementary and developed based on fundamental VR convenient way to arise the interests high schools. China’s virtual reality technologies, which could not provide of children. For K12 tutoring, visual technology is still at an initial stage. enough video content. Secondly, reality technology could help students Due to high price of VR helmet, weak profitability. A VR classroom may better understand time and space in few private schools or education cost about RMB400 thousand to 1 history and classes, and organizations would purchase. Only million. Due to inadequate content, conduct dangerous experiments a few public schools could afford expensive price and low cost efficiency, in chemistry and physics classes. for it. Moreover, without ancillary the profitability of VR has been As for higher vocational education, products, VR helmet itself can not weak in the long run. Besides, most VR education can help make three- provide the best experience. To create players in the VR industry are virtual dimensional product design and favorable environment for students reality technology companies with stimulate environment. in elementary and high schools, weak profitability. Fortunately, some VR education companies need to Internet giants have begun to invest VR education (primarily augmented establish VR classrooms and fully VR. And third, insufficient promotion. reality) is very popular in the after- utilize available resources. Finally, it Some teachers point out that more school market, especially for children is necessary to seek the guidance technology guidance is required in kindergartens. Firstly, young parents of professionals before using virtual before using VR devices in teaching constantly increase the spending reality helmets. process. The public is more familiar on preschool education in recent with VR applications in the gaming years. The sales of VR-based on VR/AR education faces three and entertainment sectors and some early childhood learning machines challenges: Firstly, technological parents think VR may bring negative increases significantly and relevant barriers. China has made impact for students. breakthroughs in VR technology,

40 A New Era of Education | III. New applied technologies have penetrated into the education industry

3.2 The accelerating “direct market enters into the period of rapid 100 new majors featured with “AI + learning” education technologies development. Moreover, favorable X”, and establish 50 AI , STEAM education receives strong policies provide more room for research institutes or interdisciplinary support development of STEAM education. research centers. This Plan will further STEAM education market receives In April 2018, the MOE released the promote AI education, accelerate strong support. As the middle class Artificial Intelligence Innovation Action talent cultivation and benefit STEAM expands, more young parents are Plan for Higher Education Institutions. education. willing to spend more money on By 2020, it aims to form a new talent education, thus STEAM education cultivation pattern of “AI + X”, launch

Table 6: STEAM education benefits from policies

Time Publisher Name Main content

April 2018 Ministry of Artificial Intelligence It aims to form a new talent cultivation pattern of “AI + X”, launch 100 Education Innovation Action Plan new majors featured with “AI + X”, and establish 50 AI academies, for Higher Education research institutes or interdisciplinary research centers by 2020. Institutions

March 2018 Ministry of Work Priorities of the It proposes to develop plans on introducing educational equipment Education Educational Equipment featured with interdisciplinary integration including labs, multi-function Research and Development classrooms and maker space, create comprehensive teaching environment, Center of the Ministry of utilize new technologies such as AI to promote the research and application Education for 2018 of educational equipment, and apply big data to improve educational equipment, to effectively serve education and teaching.

January State Council 13th Five-Year Plan It proposes to help students develop the spirit and ability of innovation 2017 for Education Industry and entrepreneurship, establish a batch of demonstrative study travel Development of the destinations, and enhance aesthetic education. People’s Republic of China

January Department New university admission Students can choose three subjects in the university entrance examination 2017 of Education plan of Zhejiang Province from Politics, History, Geography, Physics, Chemistry, and of Zhejiang Technology (including general technology and information technology) Province according to their interests, strengths and the requirements of the intended schools and majors.

Source: Information in the public domain

STEAM education can improve help students achieve all-around all students. These guidelines point students' practical and innovative development and improve global out the importance of all-around thinking abilities. Robot education competitiveness. development and encourage the has become an important carrier of application of STEAM education STEAM education. In the past, students STEAM robot education is most widely system. STEAM robot education obtained limited knowledge from applied in elementary and junior high requires strong hands-on abilities books and couldn’t meet the criteria of schools as well as universities, with and critical thinking, so students in interdisciplinary talents in technology equal shares between schools and higher grades and junior high schools and science. Nowadays, the robot the after-school market. According are the ideal recipients of robot teaching integrates the knowledge of to the Guidelines for Elementary and education, not to mention they are several sectors including computer, Junior High Schools on Organizing free from heavy pressure and have mechanical , electronics, Comprehensive Practice Activities the time to study robotics. In China’s communications, Contrology, etc. the MOE issued in September 2017, after-school market, the number of and encourages students to explore it emphasizes the significance of robot education organizations for sciences, technologies, engineering, practice activities and aims to provide elementary and junior high school and arts. It aims to comprehensive practice activities for

41 A New Era of Education | III. New applied technologies have penetrated into the education industry

students is approximately 10,000. The penetration rate of STEAM robot 3. Inappropriate course designs: Meanwhile, more universities have education in kindergartens is the education organizations put too launched the robotics related majors. lowest. Children in kindergartens much emphasis on results but In 2017, over 60 higher education cannot meet the requirements of ignore the process, which violates institutions were approved to launch practical abilities and critical thinking, the “flow theory” of STEAM the major of “robotic engineering”. they can only take part in certain education. For instance, parents Besides, more robotic research STEAM toy assembling and elementary would like to see their 4-year-old centers have been established. For robotic courses, while core courses children build better models than example, founded are not yet suitable for them. peers if these children are given the Fudan–Nanshang Joint Intelligent courses for 6 year-old. But, actually Robot Research Center in 2016. STEAM robot education is challenged such courses are too difficult for by misleading education philosophies, 4-year-old children to understand. Robot education is less widely applied improper teaching methods, and Under great challenges and strong in senior high schools, with more inappropriate course designs. sense of frustration, children can’t on-campus applications. Robot think and do things by themselves, 1. Misleading educational education has become a stepping but to imitate or ask for the help philosophies: many after-school stone into universities sponsored from teachers. For long, teachers education organizations attract by 211 and 985 projects, as many would fell stressed and children Chinese parents with branded of them tend to choose students may be less interested or bored. teaching tools, not the STEAM winning robotic and technological teaching plans. competitions in independent 3.3 The deepening “basic admission. Robotic competitions are 2. Improper teaching methods: operation” education technologies more frequently held across China, in robot classes, most students Smart campus steadily develops many top universities have taken only imitate the way teachers Smart campus was put forward robotic knowledge and robotic skills build models instead of creating based on the construction of digital into consideration when recruiting by themselves. It violates the campus in the process of education students with technology specialties. teaching principle of STEAM informatization, which aims to In 2017, universities sponsored by education, “hands-on and minds-on deeply and effectively integrate 211 and 985 projects, including exploration”. Especially in classes information technologies with teaching and Tsinghua with more than 10 students, and improve the effectiveness of University, required candidates of the teachers don’t have enough time teaching and learning, by taking independent admission program have to lead each student to explore, new technologies such as IoT, cloud award-wining experience in technology so in many cases, students only and big data as the core competitions. Afterall, independent imitate teachers or just accept the technologies. It refers to the smart admission is not the only way to get interference of teachers. learning environment that could into universities, most students will apply full-perception, intelligence, still focus on the univeristy entrance data, network and coordination into examination. teaching, research, management and

42 A New Era of Education | III. New applied technologies have penetrated into the education industry

life services, and look into and predict decisions, intelligently analyze a “silos structure” composed of “data teaching and teaching management. digitalization progress, and deeply silo”, “application silo”, “hardware silo” Digital campus has primarily integrated integrate campus activities under the and “resource silo”. To ensure high- the information system resource of principle of “people first”. quality and orderly smart campus higher education institutions, but their construction, the Standardization informatization efforts are confronted As the education reform intensifies, Administration of the People's with two major challenges: inability campus informatization has made Republic of China (SAC) under the to serve end users and incomplete significant progress. In many cases, State Administration for Market application integration. Smart campus schools purchase or develop Regulation published the Smart adopts the user-centric approach information-based application Campus Overall Framework on 7 June and aims to be demand-driven. It systems for some particular demands 2018. It specifies five application areas can intelligently satisfy personalized and without any overall plans. and the construction system of smart demands of campus network users Besides, independent digital campus campus and offers a new perspective and provide them with functional construction has disabled resource on campus activities by combining big services, intelligently make relevant sharing among schools, finally forming data, AI etc.

Figure 30: The Development trend of Smart campus

Intelligentization

Digitalization Development trend

Informatization

Time

Past 5 years Now 5 years in the future

Source: Deloitte Research

43 A New Era of Education | III. New applied technologies have penetrated into the education industry

Table 7: Framework of Smart Campus

Smart campus Application area Construction system Approaches to apply big data and AI framework

Smart teaching Resource generation, online 1. Deeply analyze the learning patterns of resources learning learners and provide targeted suggestions on adjustment based on scientific approaches

2. Intelligently schedule courses with the classification algorithm based on deep neural network, considering students’ historic performance, evaluation data and the teaching quality of teachers

Smart teaching Multi-media classroom, smart Analyze the experience of teachers and environment classroom, maker, practical Infrastructure level – supporting students, provide feedbacks, and optimize training environment platform level – application online teaching environment Smart campus Cooperative office system, platform level – application Enable institutions that provide primary management human resource system, terminal – information system education, vocational education and higher teaching management system, security system education achieve fundamental, advanced and research management system, sophisticated intelligence respectively asset management system, financial management system

Smart campus Campus security service, campus Optimize network communication system and service life service, e-library, operation perception system to provide online users and maintenance security with smart services service, virtual campus service

Information Personnel management, security Recognize faces and other identity features security system management, key management, with identification technology to ensure identity management campus security

The penetration rate of smart teaching progress. Domestic online education In terms of smart campus resources in junior and senior high market grows rapidly and is expected management, as new policies on the schools is moderate, among which to exceed the scale of RMB23 million university entrance examination are public schools utilize more. With by 2018. implemented across the country, the support of local governments, traditional classes will be split and the many public smart teaching resource Regarding smart teaching optional class system will become a platforms are built to optimize environment, multi-media teaching normal state. Smart campus products resource allocation to public schools. has been widely applied across such as electronic class card and Besides, considering heavy pressures China. In 2017, the number of multi- attendance system will help to handle on junior and senior high school media classrooms accounts for 70% teaching management issues. In order students, schools may collaborate with of general classrooms, and 60% of to compete with public schools in enterprises to introduce educational general classrooms were equipped student recruitment, some private Apps or develop online courses with multi-media teaching facilities. To schools start from improving smart independently, to help students better compete with public schools, campus management to attract preview new knowledge, consolidate private education organizations parents and students. learned knowledge and achieve are actively creating smart teaching environment.

44 A New Era of Education | III. New applied technologies have penetrated into the education industry

As for smart campus services, concern of the governments as establishment at state level are as junior and senior high school well as the public in recent years, the guarantee of school-enterprise students are under heavy pressure, many kindergartens collaborate cooperation. Second, mismatched the communication between parents with enterprises to implement products. Smart campus construction and schools could help parents keep information management. 237 requires smart products. However, an eye on students’ study and life. kindergartens in Hubei province have many product designers don’t pay Some high schools have rolled out realized information management attention to and understand the smart card services to connect the in all processes. The authorities design concept of smart campus. systems of access control, attendance and parents can check the state of Therefore, many products ignore the management and canteen services. kids at any time via mobile phones. user centric principle. For instance, Besides, in order to provide quality- Private kindergartens, particularly some Apps designed for sharing smart oriented education, other personalized international kindergartens, target education resources can’t provide cultural and life services will also be high-end customers and charge high complete course scheduling, equal included in. tuition fees, so they perform well course content, and adequate trial in informatization by adopting the sessions (which may make it more The above four kinds of applications practices of foreign kindergartens. difficult to find excellent courses). are more frequently seen in public universities. Local governments are So far, smart campus still faces Education technologies for the providing great support to universities two challenges: first, insufficient purposes of “indirect auxiliaries”, in building and improving smart cooperation among schools, “direct learning” and “basic operation” campus with the advancements of governments and enterprises. are expected to infiltrate further technologies such as IoT. Although the According to the General Provisions and cover the whole education campus management of universities, on Digital Campus Construction of industry, especially in the fields of which covers teaching, scientific Elementary and High Schools (Trial) adaptive learning, smart robots, VR/ research, management, lives etc., is released by the MOE on 26 April 2018, AR education, STEAM education, etc. more complicated than high schools a tripartite cooperation mechanism For “indirect auxiliaries” education and kindergartens, universities among schools, governments and technologies, “AI +” sector will gradually sponsored by 211 and 985 projects enterprises will be established to infiltrate from the after-school market take the leading role in smart campus promote digital campus cooperation into schools and from elder to younger construction. The main reason for among schools, local education groups. “Direct learning” education that is, smart campus can optimize authorities and IT companies. Though technologies will be enhanced to resource deployment in an all-round many policies encourage school- cultivate scarce all-round talents manner and provide more accurate enterprise cooperation, enterprises and comprehensively expand the records and feedback. still face insufficient institutional horizon of students. “Basic operation” guarantee. Consequently, schools education technologies will be more However, information security are not active in collaborating with widely applied to smart campus systems are most widely applied enterprises but pay more attention construction as technology upgrades, in kindergartens, especially in to state-level resources instead of such as cloud computing and big private kindergartens. Since enterprise resources. Complete data, and the demand of information frequent child abuse cases in top-level design and institution management increases. kindergartens have aroused wide

45 A New Era of Education | IV. New motivation models tackle the talent challenges

IV. New motivation models tackle the talent challenges

4.1 Talent management challenges Deloitte’s 2017-2018 A-share Listed 2017). Due to the changing business faced by Chinese private education Companies Executive Compensation environment, incoming informatization industry and Incentive Report shows that, trend, and constantly increasing In recent years, the private education for education enterprises listed in labor costs, private education industry has entered into rapid the A-share market, the labor costs enterprises are facing unprecedented expansion under the close attention accounted for 53.5% of the operating requirements and challenges in talent and great support from the revenues in 2017, ranking high for past management. government, consumers and investors. three consecutive years (from 2015 to

Figure 31: according to Deloitte’s research, there are following major types of talents in the current private education industry

Technical talents Technical talents (e.g. software development ) are the core factor to drive the rapid development of education informatization enterprises and offline education enterprises' transformation toward online operation

Teaching and research teams Teaching and research teams (e.g. teacher and research expert) are the core competence of education groups, which directly affect the teaching quality and results, acting as a powerful support in the expansion and branding of education enterprises

Operation and management talents Operation and management talents (e.g. president, supervisor, regional operation manager etc.) are pivotal in realizing large-scale operation and standardized management and in maintaining long-term development

Sales personnel Sales personnel directly motivate the business growth and expansion

46 A New Era of Education | IV. New motivation models tackle the talent challenges

Figure 32: according to Deloitte, private education enterprises are faced with four main talent management challenges

Currently, the private education industry is labor intensive, but the supply falls short of 1 Short talent supply demand.

As new entrants intensify the industry competition, talent competition heats up, and thus the 2 High staff turnover high staff turnover rates gradually become a challenge.

The education industry's requirements on talents keep leveling up. An ideal candidate Higher talent should be not only proficient in education and technology, but also equipped with business requirements 3 innovation and Internet thinking capabilities. It takes great efforts to find a suitable professional or costs plenty to train one.

Homogenized Traditional and homogenized incentive measures such as bonus, would make it difficult for 4 incentive mechanism enterprises to retain talents, especially senior managers and scarce interdisciplinary talents.

Figure 33: To help enterprises better cope with talent management challenges, Deloitte conducts a survey on enterprises engaging in K12 and early childhood education (50 enterprises that are listed in A-share market, Hong Kong, US or the National Equities Exchange and Quotations market (NEEQ)) and makes in-depth analysis on their senior management team profile, compensation mechanism, and the mid-and-long term incentive mechanisms. Main findings are as follows

Appendix: Explanation of survey data 19 The survey covers 50 enterprises, including:

•• 39 K12 enterprises; 8 early childhood education enterprises ; 3 K12 and early childhood education enterprises

•• 4 listed in A-share market; 5 listed in Hong Kong, 12 listed in the US and 29 listed in NEEQ 11 7

4 5 3

1

A-share listed Hong Kong listed US listed NEEQ listed enterprises enterprises enterprises enterprises

K12 enterprises Early childhood education enterprises

Note 1: Data samples come from the industry company list of Wind database, “education—comprehensive customer service III–customer service II”, and revenues from early childhood education/K12 education businesses account for more than 10%. Note 2: Enterprises listed in Hong Kong and the US refer to enterprises having main assets and businesses in China, but are indirectly listed in Hong Kong and the US via offshore companies registered overseas. Note 3: 3 surveyed enterprises are engaged in both K12 education and early childhood education businesses. These businesses shall be considered separately when conducting data statistics and analysis. Note 4: The data expire on 13 July 2018. Source: Wind, Deloitte Research

47 A New Era of Education | IV. New motivation models tackle the talent challenges

4.2 Executive profile and trends in human resources, strategic development, age of executives is 43.95, and that of executive compensation finance, compliance risk management and founders is 43.40. 4.2.1 Executive profile: responsible teaching may each be managed by a vice for different areas, generally president. Besides this, the head of a pivotal Moreover, the executives' average young branch/school may also be considered an tenure is around 5 years, and a Based on positioning of the business executive role. founder usually stays in his/her own and responsibilities of specific jobs, firm for 8 years. executives take charge of different areas, We sampled 554 executives from 50 including operation, teaching and business companies and 89 founders of 46 development. For instance, the functions of companies. The resulting average

Figure 34: Typical executive positions

Executive positions typical to education enterprises listed Executive positions typical to education enterprises listed in the US(Example) in HK(Example)

Positions Positions

Chairman, general manager(GM) Executive director

Member of the Board Executive director and co-chair

Independent director Executive director and CEO

Director of Finance Chief financial officer

Vice president (business development) Vice president of strategic investment

Vice president(compliance, strategic development) Executive director, senior vice president & CFO

Senior vice president(teaching) Executive director, vice president & global education director (excluding China) Vice president(operation, HR, Party Committee Office, marketing, education management) Vice director of business in China and chief legal officer/ general counsel (China)

President and of the university

Source: Wind, annual reports and Deloitte Research

Figure 35: Average age of executives/founders Figure 36: Average tenure of executives/founders

. . . . . . . . . . . .

enera Ear cidood enera Ear cidood ectives ondes ectives ondes

Source: Wind, annual reports, Deloitte Research Explanation of survey data: The sample contains 554 executives from 50 companies and 89 founders of 46 enterprises; executive statistics is based on information published by listed companies Source: Wind, annual reports, Deloitte Consulting Analysis

48 A New Era of Education | IV. New motivation models tackle the talent challenges

4.2.2 Trend in executive incentives: witnessed the largest growth among 94.7% while that of A-share and US fast growth in executive all items: the CAGR of K12 revenue listed companies grew respectively at compensation shows companies was 68.2% and that of early childhood 37.2% and 20.3%. The A-share listed have high willingness to pay education was 22.2%. companies' executive compensation- Over the past three years, the to-revenue ratio was registered revenue, number of employees, In terms of executive compensation, at 0.95%, followed by that of US productivity per capita and total companies listed in Hong Kong listed (0.62%) and HK listed (0.55%) executive compensation of K12 and witnessed the fastest growth. companies. early childhood education enterprises Executive compensation of HK listed have all been on the rise. The revenue K12 companies grew at a CAGR of

Figure 37: 2015-2017 CAGR of annual revenue, number of employees and productivity per capita of K12 and early childhood education enterprises

.

. . . . .

o evene o o emloees o odctivit e caita

al childhood edcation

Note: Early childhood education enterprises and the NEEQ listed enterprises are not analyzed due to lack of published data. Source: Wind, annual reports and Deloitte Research

Figure 38: 2015-2017 CAGR of K12 enterprises' Figure 39: K12 enterprises' executive compensation- executive compensation to-revenue ratio (2015-2017)

. . shae

. listed . listed

.

.

listed listed shae

Note: Early childhood education enterprises and the NEEQ listed enterprises are not analyzed due to lack of published data. Source: Wind, annual reports and Deloitte Research

49 A New Era of Education | IV. New motivation models tackle the talent challenges

4.2.3 Executive compensation is RMB813,000, 50th percentile is Among HK listed companies, China varies among different positions RMB632,000 and 25th percentile is Maple Leaf Educational Systems (1317. with HK listed companies offering RMB416,000. HK) offers the highest compensation the most competitive cash for GM-level positions, followed by compensation Among all listed companies, those Wisdom Education (6068.HK). Presidents are paid the highest. traded in Hong Kong offer the most For this position, 75th percentile is competitive compensation. The 50th RMB1,155,000, 50th percentile is percentiles of the compensation for RMB748,000, and 25th percentile is president-level and head of finance- RMB411,000; the second highest- level positions are the highest, being paid position is head of finance. RMB1,259,000 and RMB1,785,000 The corresponding 75th percentile respectively.

Figure 40: Executive cash compensation (unit: RMB10, 000)

. . . . . . . . . . .

.

esident Vice esident Head of finance oad seceta

Note1: Analysis of the compensation for president-level positions(GM, president, administrative president and CEO) is based on 11 valid samples; analysis of the compensation for vice president level positions(vice GM, vice president, executive vice president, senior executive vice president, senior vice president) is based on 32 valid samples; analysis of the compensation of head of finance-level positions(head of finance, director of finance, chief financial officer, co-CFO and chief accountant) is based on 9 valid samples; analysis of the compensation of board secretary level positions (board secretary, head of information disclosure, head of investor relations) is based on 7 valid samples. Note2: Compensation samples include annual cash compensation (excluding shares, may include perquisites). Source: Wind, annual reports, Deloitte Research

Figure 41: Executive cash compensation - 50th percentile in each stock market Executive director & CEO . Annual cash compensation: China Maple Leaf RMB5,049,000 . 1317.Hk Executive director, SVP/CFO Annual cash compensation: RMB2,721,000 . . . . Executive director/ . . . administrative president Wisdom . Education Annual cash compensation: 6,068.HK RMB2,195,000 esident Vice esident Head of finance oad seceta N shae ong ong

Note1: Analysis of president-level positions (GM, president, administrative president and CEO) is based on 4 valid samples from A-share stock market, 2 from NEEQ and 5 from Hong Kong stock market; Analysis of vice president-level positions (vice GM, vice president, managing vice president, executive vice president, senior executive vice president, and senior vice president) is based on 21 valid samples from A-share stock market, 5 from NEEQ and 6 from Hong Kong stock market; analysis of head of finance-level positions(head of finance, director of finance, CFO, co-CFO and chief accountant) is based on 4 valid samples from A-share stock market, 2 from NEEQ and 3 from Hong Kong Stock Market; Analysis of board secretary-level positions (board secretary, head of information disclosure, and head of investor relations) is based on 5 valid samples from A-share stock market and 2 from NEEQ. Note 2: Compensation samples include annual cash compensation (excluding stock-based compensation, may include benefits). Note 3: US listed companies have not disclosed information about executive compensation. Source: Wind, annual reports, Deloitte Research

50 A New Era of Education | IV. New motivation models tackle the talent challenges

4.3 The trends towards long-term incentives 4.3.1 Share incentive schemes are common among K12 and early childhood education companies, and most widely adopted among enterprises listed in Hong Kong and US 34 out of 50 K12 and early childhood companies disclosed share incentive schemes (58 in total, 51 still in effect), most popular in HK and US listed firms. 100% of HK listed companies and 91.7% of US listed companies implement share incentives. Around 50% of enterprises listed in the A-share and NEEQ markets grant shares.

Figure 42: Share incentive schemes

Number of companies that US stock Hong Kong A-share NEEQ have disclosed market stock market stock market 16 share incentive 11 5 2 schemes

Percentage among 91.7% 100% 50% 55.2% companies listed in the same stock market

Source: Wind, annual reports, Deloitte Research Most of the companies (16) listed 4.3.2 Most HK and US listed 64% of the companies that have on NEEQ made Employee Stock companies implement share disclosed the date of implementing the Ownership Plan before going public, incentive schemes before going scheme started granting shares within while only 2 did so after the listing. public one year prior to the public listing. Both of the two companies publicly Among all the HK/US listed companies The incentives are mostly given to key traded on the A-share market that offer share incentives, 81% opt to management roles and employees. announced the plan after going public. implement such schemes before going public.

Figure 43: Implementation timeline of HK and US Figure 44: Implementation timeline of A-share listed K12/early childhood education enterprises' and NEEQ listed K12/early childhood education share incentive schemes enterprises' share

Share incentive schemes before and after public listing

A-share NEEQ 2 16 31% 50% 19%

Share incentive schemes Share incentive 100% 100% before public listing schemes after public after public listing before public listing listing

Note: 13 out of 16 samples listed in Hong Kong and US stock market launched share incentive schemes before public listing, of which 11 have disclosed implementation timeline. Source: Wind, annual reports, Deloitte Research

51 A New Era of Education | IV. New motivation models tackle the talent challenges

4.3.3 US and HK listed K12/early childhood education enterprises tend to implement complex incentives while those listed in the A-share and NEEQ market prefer relatively simple schemes

Figure 45: Comparison of share incentive schemes 100% 100% 6% 100% 100% 100%

50% 60% 55%

US HK A-share NEEQ

Restricted stock Stock option Employee Stock Ownership Plan

Source: Wind, annual reports, Deloitte Research

4.3.4 US listed K12/early childhood education enterprises averagely offer 8.85% of the total number of outstanding shares to employees, higher than the percentages offered by companies listed in Hong Kong (3.15%) and the US (2.30%).

Figure 46: Average share incentive ratio (actual shares Figure 47: Average share incentive ratio (shares in the granted against total number of shares outstanding) Employee Stock Ownership Plan against total number of enterprises listed in A-share, Hong Kong and US of shares outstanding) of enterprises listed on NEEQ stock markets 0%

60%

50%

0%

30% 20% 10%

0% indergrten lementry sool unior ig ig sool

Note: Among the samples, 2 of A-share listed companies, 3 of HK-listed companies and 8 of US-listed companies disclosed information about actual shares granted and total number of shares outstanding, and the data includes 16 valid samples listed on NEEQ. Source: Wind, annual reports, Deloitte Research

52 A New Era of Education | IV. New motivation models tackle the talent challenges

4.4 Partnership to be a new trend listed companies may use incentive adopt partnership based on incentive in education market stock options and restricted stock, stock scheme or cash reward for key Over the past few years, partnership among other incentive schemes, on personnel and implement flexible exit has been increasingly endorsed and the headquarter/group level; unlisted mechanism. applied by the private education companies may grant incentive industry. Deloitte believes that equity ownership to employees or Partnerships need to be differentiated private education companies need management based on mid-term with clear paths of entry and exit, and to adopt partnership in a stratified and long-term strategic goals as well diversified incentive measures. and incremental manner with as capital operation and planning. multiple incentives. For instance, Branches of a chain-style business may

Figure 48: Possible pathways for partnerships Incentive options 仅在上市前 Stock option 有激励计划推出 1 For listed education groups/ headquarters 1.1Listed Restricted stock Incentives include stock options and restricted stock in the publically traded company Stock ownership plan for 1.2Unlisted management Equity incentives or equity ownership for management based on mid-to- long-term strategy and the company's capital operations and planning Phantom stock plan/ dividend

partnerships 仅在上市前 Phantom stock plan/ 有激励计划推出 Possible pathways for 2 For branches dividend 2.1Primary Performance-based Implement cash-based partnership that engages core personnel (e.g. rewards system school principal, director, regional operational head) while making allowance for differences of branches Stock option 2.2Advanced Partnership based on ownership of equity in branches granted to key Restricted stock personnel, providing equity ownership exit pathway/mechanism Performance-based stock ownership

Source: Deloitte Research

53 A New Era of Education | IV. New motivation models tackle the talent challenges

Figure 49: Key areas of consideration in transformation into partnership

Differentiation Entry & exit Diversification of incentive measures

Differentiated Clarified entry Partners are partnership criteria and exit entitled to model according pathway different levels of to organizational benefits structure of the company

Number of Share/equity ownership Senior partner employees at HQ-level

Stage in Performance Up Down profitability milestone

Medium-level Share/equity ownership at Size of income partner branch-level

Performance Positioning Up Down milestone and entry/exit pathway Differentiation criteria

Delineated levels of positions Share the profits from …… Junior partner branches

Source: Deloitte Research

Summary and outlook

The fast-changing business environment presents both challenges and opportunities for private education enterprises. On one hand, the rapidly developing private education industry has expanded the talent pool and channel to attract talents, improving the overall quality of professionals in the sector and opening up an opportunity for those who wish to cross industry boundaries from other fields; on the other hand, the inherent flexibility resulting from marketization of private education enterprises constitutes a critical advantage to conduct talent incentive mechanisms. We believe that, with the refinement of management, complex incentive plans and partnership may become important tools for corporate talent management.

54 A New Era of Education | IV. New motivation models tackle the talent challenges

Table 8: List of companies surveyed in the report

Code Name Code Name

A-share(4)

000526.SZ Unigroup Xue 002261.SZ TalkWeb

600661.SH Shanghai Jiao Da Nan Yang 002659.SZ Kaiwen Education

NEEQ(29)

831797 Aileqi 838830 Longmen Education

833173 Yingding Education 839264 Mind Education

833789 Gui Zhi Bu 839278 Qing Da Zi Yu Edu

834782 Haiyi Education 870106 Dashan Education

835085 Kaimi Education 870155 Gaosi Education

836040 Boost 870388 Tong Xue Wen Hua

836667 Robotedu 870769 Da Qian Education

836711 Zhicheng Education 870913 Guan Jian Ci

836859 Alfedu 871337 Huan Qiu You Xue

837026 Ive The Kindergarten 871387 World International English

872082 Bai Nian Yu Cai 838726 Dunshan Education

872141 Hao Xiong Di 871748 Thinktown

872231 Hua Shi Dai 871859 TomorrowEdu

837491 East & West International 871938 Shandong Dazhi Education Education

838468 Guanghua Education Group

US stock market(12)

BEDU.N Bright Scholar REDU.O Rise Immersion Subject English

COE.N 51Talk RYB.N RYB Education

DL.N China TAL.N TAL

EDU.N New Oriental AMBO.A Ambow Education

HLG.O Hailiang Education ONE.N Jingrui Education

FEDU.N Four Seasons NEW Pu Xin Education

Hong Kong stock market(5)

06169 Yuhua Education 01317 China Maple Leaf

01565 Virscend Education 06068 Wisdom Education

01598 21st Century Education

55 A New Era of Education | V. New management system improves operation effectiveness

V. New management system improves operational effectiveness

By releasing the Law on Promotion of Private Education and a series of other policies, China encourages and guides non-governmental capitals to run schools, advocates education organizations to implement autonomous management, and makes the education industry more market-oriented. Predictably, traditional school management will be more diversified and complicated with the introduction of commercial elements in the education industry, since the past management concepts and operating models purely for education purpose can’t meet the current developmental needs anymore. With the participation of social capitals and commercial elements, education organizations expand the binary teaching-learning relationship to a more complicated relationship network, namely an inclusive industrial ecosystem. On the other hand, technological advancement will also usher the education industry into a new stage. The popularization of mobile terminals, communication technology upgrade, the wide application of big data and the evolution of AI-based algorithm will influence the development of education industry profoundly and extensively. In general, compared with traditional public schools, education organizations in the new era have more new traits: enterprise-like operation, diversified participation and digital upgrade.

With capital inflows and explosive growth of the education market, education organizations are prone to lose sight of the forest for the trees, ignore the essence and core of education and adopt short-sighted development strategies for short-term commercial interests. They may also hesitate to embrace new technologies, lost in the trend of digital transformation. Therefore, we think education organizations will face a series of problems including market operation, efficiency improvement and risk control under new circumstances. In order to achieve rapid growth, value increase as well as orderly business expansion, education organizations need to find out the root causes and solve these problems with refined management measures.

By analyzing the relationships among participants in the education industry, we summarize 6 efficiency and risk problems faced by education organizations internally and externally. These problems are mainly caused by unclear operational strategy, the ignorance of product quality and operational efficiency, and the absence of risk response mechanism and practical experience, etc.

56 A New Era of Education | V. New management system improves operation effectiveness

Figure 50: Relationships among internal and external participants with education organizations

Supervision and evaluation Parents Regulators 5.4

Admittance and supervision Quality review Text book 5.5 5.1 Marketing and Platform Recruitment and recruitment management

Education

Students 5.2 5.3 Teachers organizations Client Teacher management

Course offering management Training After-school services

After-sale services Feedback Evaluation and assessment

5.6 Corporate management support

Human Strategy Organization resources Finance Risk control Operation Technology

5.1 Build core competence switch to other platforms without any help maintain core competence in the No matter which sub-sector an hesitation. What could make customers digital era; based on technical support education organization engages in, the more loyal to education organizations? and deep mining of customer base, core competence should be content The answer lies in quality of research education organizations can maintain research and development and the and teaching, strong faculty and customer loyalty by establishing one-stop experience and effectiveness brought considerate services, which are the most platforms with diversified services and by its educational products. Because important factors to operate education products; finally, only strong and stable of low customer retention rates, it may organizations. However, many of them teachers team can ensure education be difficult for education organizations don’t pay enough attention to services organizations to provide high-quality without core competence to maintain such as content, , class services and products. Other than their business models. For example, atmosphere, after-class communication, actively building the core competence, though favored by capital, many online quality feedback and improvement, they also need to establish systemic education organizations don’t focus but allocate much more resources to governance framework and implement on developing content and improving marketing. specific management measures during teaching quality making it easy to lose operation to handle risks such as customers and fail in a short time. In To build core competence, education business loss and low customer loyalty. many cases, due to low customer loyalty organizations should focus on three For example, they could enhance and too many homogeneous products, aspects: technology, platform and behavior and performance management once customers find alternative services teachers. Only powerful technical on teachers, adopt severe penalties, even or products with lower costs, they would support and strong technical barrier can elimination mechanisms; timely predict

57 A New Era of Education | V. New management system improves operation effectiveness

problems when providing services with channels and create more relationship education agencies in particular, their new technologies; establish collaborative marketing channels, e.g. integrating teaching staff are no longer bounded relationship between technological education related offline institutions and in a physical space and may locate research and business development and developing more distribution channels. in anywhere in the country or even fully use new technologies and research At the same time, they establish a around the world. As a result, they resources to promote businesses. close management loop of marketing need to consider factors that are more placement, optimize the marketing complex and at the same time promote 5.2 Control marketing cost placement model in a dynamic manner a unified shared platform of teachers' With rising internet marketing costs and choose marketing channels that are credit information, with a blacklist and stagnant user conversion rate, the more effective and efficient in acquiring mechanism to prevent teachers with average cost of customer acquisition for customers. problems of misconducts from entering all agencies has increased from a few the industry. To ensure teaching quality, dozens of yuan to thousands. There is no 5.3 Enhance teaching staff education agencies must step up the doubt that in the first round of student management development of standardized curricula recruitment, education agencies still Education agencies are experiencing and teaching approach, further enhance put in large sums of money for internet even greater challenges and risks the predominance of their own teaching traffic and converse it into transaction than ever in managing teaching staff. study and contents and weaken the orders. As a result, many education For traditional education agencies, role teachers play in the teaching startups have to continue to raise more especially a great majority of public process via increased standardization of funds to fill in the bottomless hole of schools, teachers are actually their own teaching procedures, making teachers marketing expenses, which would cause assets and form part of their products. reproducible and replaceable. a business landslide if they run out of Whether bounded by labor cash. The ultimate reason why education or de facto employment, education 5.4 Prepare for reputation risks agencies fail to control marketing costs agencies and teachers share the same and public relations crisis is their extensive marketing model. interest. However, as more and more As the supervisor of basic education Online education agencies, for example, new education agencies emerge, the agencies, parents oversee a broad range seldom examine the effectiveness and relationship between education agencies of activities. Unlike external regulators' accuracy of their marketing efforts after and teachers becomes less strong and supervision, parents' supervision is more spending large amounts buying traffic more flexible. Teachers tend to serve comprehensive and deeper as they are to obtain name lists, and the decision part-time at education agencies, and highly sensitive to how schools handle maker, executor and effect evaluator turnover rate of teaching staff is high issues related to their kids. Education of marketing strategy are not properly due to scarcity of high quality teacher agencies, however, could not watch over aligned to establish a close loop of resources in the market and continued and constrain teachers' behavior at all marketing strategy management. There poaching from competitors, which times in their daily operation. Therefore, is a lack of mechanism in their marketing would significantly affect the quality whether there has been an actual risk strategies for post placement review of education. In general, it becomes a issue or merely misunderstanding of to further optimize accuracy of the growing challenge for education agencies communication, ultimately education model. Thus, online education agencies to manage their teachers in a new era, agencies would have to mediate the could not formulate proper evaluation and poor management would result in a dispute as an agent of risk incidents, in mechanisms for marketing related number of educational quality issues or order to resolve public relations crisis and procurement. even risks of students' safety. mitigate reputation risks. These risks and crisis result from a single major accident More and more education agencies have Education agencies need to manage or the combination of multiple different realized that they are unable to control teachers through a comprehensive accidents, probably leading to severe the cost as they spend large sums of system covering recruitment and damages to education agencies' strategic money in internet traffic, and begin to admission, training, teaching evaluation, goals, key assets and even the very explore more diverse marketing channels and performance review. When recruiting existence of themselves. Public relations and precision marketing strategy from and admitting teachers, it requires crisis, if not handled properly, could perspective of cost risk control. They massive fine management efforts to lead to operations being suspended for are working to expand traditional offline confirm teachers' qualifications, morals rectification, huge sums of compensation, and social backgrounds. For online or, the worst, collapse of brand image and business failure.

58 A New Era of Education | V. New management system improves operation effectiveness

project involving education, internet, 5.6 Bring in corporate Therefore, it becomes critical for communication, culture and many management thinking education agencies to establish crisis other areas, regulators are exploring As the management of education management systems and improve their way in balancing loosened control agencies covers increasingly broader adaptability to crisis. Starting from top- and enhanced oversight. Currently, aspects and scope as a result of the level governance, crisis management regulation over the education industry is shift towards enterprise-oriented must form part of education agency's relatively loose in general, but tends to be operation, which comprises a wide range sustainable development plan, and tightened gradually. Education agencies of elements from strategic planning, the related work should be organized need to have a clear understanding of organizational structure and human and executed by the management. At regulatory requirements and closely resources to financial management, risk policy level, education agencies need to follow regulatory changes, otherwise the control, operational management and establish a sound crisis management regulatory situation would negatively technical support, the areas beyond and control system so that both impact their decision making and reach of managers' hands are also management team and functional operations. gradually growing, and it becomes departments may follow related policies increasingly challenging for education and management rules and play their To respond to regulatory changes and agencies to achieve proper balance of parts in handling crisis. A thorough set development trends, it is suggested that power, responsibilities, and interests. of measurement metrics and reporting education agencies fully understand Specifically, enterprises may struggle mechanisms are also required to provide regulatory requirements and take with a number of problems, including a unified standard for the evaluation timely actions to ensure compliance. undefined strategic development goals, management's performance in Fundamentally, education agencies ambiguous lines of organizational addressing the crisis. Lastly, a long-term should rationalize internal management structure, unclear power and accountability mechanism must be set structure and business processes, responsibilities, inadequate coverage up for the management and used to put in place granular management of management system, and defective improve internal management. requirements on every step, and governance mechanisms, which would benchmark against regulatory hinder their growth. 5.5 Respond to regulatory changes requirements. In addition, education and compliance risks agencies may also seek advice from The market-oriented development professional organizations to learn about of education industry has long been leading industry practices and better restricted by state and regulations. balance regulatory compliance and actual China is implementing a number of business benefits. policies, with defined responsibilities and restrictions from perspectives of different authorities, including central and local authorities of education, information technologies (internet education), publicity, industry and commerce as well as human resources, in order to strengthen regulation on the entire education industry. Meanwhile, local governments including Shanghai are also tightening management and regulation over the education industry. As education is a complex systematic

59 A New Era of Education | V. New management system improves operation effectiveness

For most private education start-ups, profit distribution, identifying key risk Ministry of Finance on Internal Controls they must establish an effective and areas and developing self-adjusting of Administrative and Public Institutions, flexible self-loop type of management management mechanisms. However, Guidelines of the Ministry of Education mechanisms for the execution of for non-profit education institutions, on Internal Controls of Colleges and management strategy and enhancement public schools in particular, as they are Universities Directly under the Ministry of management during high-speed not financed by their own funds and aim of Education, and other regulations have growth of the enterprise. Based on the to maximize social benefits instead of all put forward framework requirements actual situation, education agencies profits, the primary goal of management for the management of public colleges may improve their management is to enhance internal management, and universities. In actual management by balancing efficiency and control, maximize the social value of each penny and control process, non-profit enhancing management of planning and spent and prevent noncompliance and education institutions should focus on execution, defining the positions and fraud risks. It is also very important for enhancing the management of revenue management responsibilities of internal these institutions to establish fine and and expenses, tightening internal and functions, emphasizing on performance effective internal management systems. external supervision and preventing goals-oriented development, prioritizing So far, the Basic Standards of the related risks.

Conclusion

In order to stay ahead of competition in a new age and achieve final success, education agencies need to consider how they could establish core competitiveness, including differentiated products and services as well as standardized courses and teaching staff to build up competitive edges not easy to replicate. At the same time, they also need to externally develop and maintain streams of students with a corporate customer relationship management mindset to improve student loyalty; internally design and establish efficient operation model and develop sound systems of fine management and risk control to ensure continued growth and value increase.

60 A New Era of Education | Contacts Contacts

Charlotte Lu Leader Education Industry Tel: +86 21 6141 1801 Email: [email protected]

Roger Chung Iris Li Deloitte Research Deloitte Research Senior Manager Senior Manager Tel: +86 21 2316 6657 Tel: +86 10 8520 7038 Email: [email protected] Email: [email protected]

Deloitte Strategy and Market Research

Crystal Wang Liu Fang Partner Associate Director Tel: +86 21 6141 1683 Tel: +86 21 6141 1446 Email: [email protected] Email: [email protected]

Deloitte Consulting

Wang Yunjuan Partner Tel: +86 755 3353 8698 Email: [email protected]

Deloitte Risk Advisory

Agnes Li Chris Yao Partner Manager Tel: +86 21 2316 6483 Tel: +86 21 6141 2710 Email: [email protected] Email: [email protected]

61 A New Era of Education | Office locations Office locations

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Shanghai 30/F Bund Center 222 Yan An Road East Shanghai 200002, PRC Tel: +86 21 6141 8888 Fax: +86 21 6335 0003 62 63 A New Era of Education | III. New applied technologies have penetrated into the education industry

64 A New Era of Education | III. New applied technologies have penetrated into the education industry

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