Schools book losses at education provider

| Tereza Cai 11 Feb 2019

China East Education, the largest vocational training provider in China in terms of average students enrolled, is aiming to go public in Hong Kong.

Headquartered in Hefei, Anhui province, China East Education has established a nationwide network of 139 schools as of August 31, 2018.

The largest shareholder is Wu Junbao with a 42.67 percent stake. Wu Wei holds 29.22 percent, and Xiao Guoqing has a 28.11 percent interest.

These three holdings accounting for nearly 100 percent of the shares are cousins and Wu Junbao is also the non-executive director of China East Education's peer China Xinhua Education (2779), which was listed in March 2018 on the main board.

China East Education ranked first in three segments in China - culinary arts, information technology, and auto services, in terms of average students enrolled in 2017, according to Frost & Sullivan.

The company operates under five school brands. About 61 percent of revenue in 2017 came from the famous brand New East Culinary Education with 59.2 percent gross profit margin. Also, 2.6 percent revenue came from Omick Education of Western Cuisine and Pastry.

Xinhua Internet Technology Education, accounted for about 19 percent of its 2017 revenue, and Wisezone Data Technology Education schools took up 2.6 percent. About 14.7 percent of revenue was from Wontone Automotive Education.

In addition, the company founded the experience center Cuisine Academy in 2017.

Moreover, it plans to establish a vocational training education institution in California in the United States. On November 16, 2018, it applied for a provisional operating license for the Xinhua Training School US.

However, China East Education's revenue growth slowed significantly from 27.76 percent in 2016 to 22.02 percent in 2017. Correspondingly, the net profit soared by 68.66 percent from 2015 to 565.48 million yuan (HK$660.34 million) in 2016 and grew by a mere 13.47 percent to 641.62 million yuan in 2017.

During the first eight months of 2018, revenue increased by 14.8 percent year-on-year to 2.06 billion yuan, while net profit dropped notably by 27.28 percent year-on-year to 289.59 million yuan.

The company explained that the new schools generally incur significant fixed costs, while their initial revenue is limited.

New schools that began operations in 2016 recorded a net profit for the first eight months in 2017, but booked net losses for the first eight months in 2018 mainly because it opened 16 new schools under Wisezone Data Technology Education brand in 2016, the company said, adding that the gross profit of this brand fell sharply from 70.5 percent in 2015 to 42.1 percent in 2016, and further declined to 20.8 percent in 2018.

China East Education started 13 new schools during the first eight months in 2018.

Also, the company warned that four schools had not been approved to change school sponsors. This is not allowed. The company says it is communicating with government authorities.

China East Education says that 30 schools are operating without private school operating licenses, while 28 schools providing correspondence education services have not completed registration.

The company also faces regulatory risks and uncertainties related to the teachers' lack of licenses, or qualifications.

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