A Chinese education stock made its IPO debut late last week
and has been making big moves since, so we wanted to provide some color on what
they do. The name of the company is Puxin (NEW 29.49, +0.69, +2.40%). It's a consolidator of the
after-school education industry in China. Basically, that means it goes around
and acquires smaller schools offering various tutoring services on the
principle that building up enough scale results in better economies of scale in
terms of operating costs.
Puxin has grown rapidly to become the third largest after-school education service provider in China. Its total student enrollments increased 180.4% from 454,945 in 2016 to 1.28 mln in 2017. Puxin offers a full spectrum of K-12 and study-abroad tutoring programs designed to help students achieve academic and extra-curricular excellence as well as to prepare for admission tests and applications for top schools, universities, and graduate programs in China and abroad. In addition to classroom-based tutoring, Puxin has also developed online and mobile apps to provide students with more accessible after-class exposure to Puxin's services and to enhance their learning experience.
China's after-school education market is fast-growing. Its market size reached RMB483.4 bln in 2017 and is expected to grow substantially to RMB804.9 bln in 2022. At the same time, this market is highly fragmented and competitive. There are over 100,000 providers of K-12 after-school tutoring services in China. The top five among these hold less than 4% total market share. Many of these service providers operate a limited number of learning centers, often at a loss, and lack the management expertise or scale necessary to invest further in the curriculum development, instructor training, and supportive technology really necessary to improve students' academic results and to attract more students amidst a competitive landscape.
The continued growth of China's after-school education market is driven by rapid economic growth, intensified competition for high-quality educational resources, and increasing student demand for overseas education and experience.
Chinese culture attaches substantial importance to education as a means of enhancing an individual's worth and promoting his or her social status and career prospects. Given the pressure placed on students to excel on crucial entrance exams to high schools and universities, the shortened school hours required by several recent government policies, as well as a limited supply of quality schools, a large number of parents and students choose private after-school tutoring services to complement public school education.
The demand for study-abroad test prep and consulting services has also benefited from the growing number of Chinese students pursuing higher education abroad. This large and fragmented market presents an attractive consolidation opportunity for Puxin to leverage its expertise in acquisitions and operations.
Puxin screens and evaluates potential acquisitions through a set of rigorous criteria, including the targets' geographic location, their reputation in the local market, their potential for growth, synergies with its existing schools, and estimation of the probability of successful integration. Since inception, Puxin has identified and contacted over 1,000 targets, of which it has acquired 48 schools.
Turning to the financials, the company is not yet profitable and reports negative adjusted EBITDA. However, its acquisition strategy has led to strong top-line growth. In 2017, revenue nearly tripled to US$204.5 mln. In 1Q18, revenue rose 150% year/year to US$79.0 mln. Keep in mind that while this revenue growth is eye-popping, it is predicated mostly on M&A rather than organic growth. That tempers our view a bit.
In sum, the stock has made a big move since its IPO debut last week. And the odd thing is that the deal actually priced on the lower end of the expected range. It priced at $17 while the expected range was $17-20. And this was not a case of a huge pop at the open. It actually opened at $17.13 on Friday. Then the excitement started; it wound up closing at $21 on Friday, and then yesterday it jumped another 37% to close at $28.80. We are not seeing any news, but investors have clearly taken a shine to Puxin. At its highest spike so far today, shortly after the open, the stock showed gains of over 21%. Currently, the stock’s price is fluctuating around 2% higher.
- OUR VIEW
- LEARNING CENTER