E-Learning Sees Surge in Demand in China

By: Sol Ahn, CFA

Senior Investment Analyst – Consumer Discretionary

Q1: Why do you believe the COVID-19 pandemic could be a trigger point for online education growth?

Schools in China had been closed for a few months since COVID-19 and most students had to stay home and took various online courses instead. Leading online After School Tutoring players have been actively providing free online courses, leveraging this opportunity and engaging with students to expand their user base and increase market penetration. Online market share indeed is expected to have nearly doubled this year from 7-8% in 2019 to 14-15% in 2020.¹

Q2: Why do you think demand can be so strong for online education even after offline learning centers have resumed in China?

Online education is the most effective and efficient way to penetrate lower-tier cities in China where 70% of the K-12 population resides. Albeit leading players like TAL Group (TAL) and New Oriental Education & Technology Group (New Oriental) have been aggressively opening offline new learning centers in the past several years, they still just have less than mid-single-digit market shares combined in the total offline AST market. However, online education has no physical constraint that will be a scalable business by enhancing its content quality and services.

Additionally, parents find online education learning easily affordable because it costs only around 40% of offline courses.² Thus, this expands the addressable market through low entry price points, especially considering After School Tutoring penetration is only around 40% in China.³

Moreover, students today are tech-savvy and inclined to use digital formats compared to their parent generation. Most K-12 students are born after the invention of smartphones.

One interesting point to add here is that there is an enthralling trend related to teachers’ quality and content. Online star teachers can make several times more money than that of average offline teachers. Many instructors in China are young, passionate, and willing to take on challenges. Thus, they keen to be online teachers to have better pay and build franchises that could enhance their confidence and pride in their jobs. In other words, more passionate teachers with better content quality will increasingly shift to massive open online lectures, supporting faster online education growth.

Q3: What’s your outlook on the offline AST industry?

Unlike e-commerce which deals mainly with physical goods, education is a service business. Thus, we believe offline will still enjoy a bigger share of the pie in the afterschool tutoring industry even from a mid to long-term perspective. We have indeed seen most students who shifted from offline to online during pandemic going back to offline classes once learning centers resumed. More importantly, After the School Tutoring industry is still a very fragmented market with the top two players taking just mid-single-digit shares, and thus leading players will continue to gain shares within the offline industry. In fact, COVID-19 has not only triggered online education growth but also accelerated offline AST consolidation with small mom and pop players going out of the business.

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