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Loss-making Fenbi Tech Seeks IPO Cash After Upheaval in Education Sector - New Oriental Education (NYSE: EDU)

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Important points:

  • Fenbi Technology has recorded a loss of more than 2.5 billion yuan in the past two years after moving from online to offline training.
  • The company laid off more than 9,400 employees and cut employee salaries to ease financial pressure

Phi Pui

A year after the tutoring crackdown shattered China’s thriving education sector, a still viable part of the business is looking for new directions and new capital, with a focus on adult education. there is

Government regulations have decimated the market for tutoring in core school subjects. Even the founder of education industry star Yu Minhong new oriental education educationwhich is now trying its hand at live-streaming marketing.

As the business of tutoring school children dried up, attention turned to the public-supported part of the education sector. It is vocational training for careers such as teaching or civil service. Competition is fierce here.

Among the companies competing for most of the adult education pie are: Fenbi Technology Co., a platform that provides tuition fees for vocational training, technical training, and civil service exams.Company submitted After its listing application on the Hong Kong Stock Exchange expired in February, it attempted a second IPO in early September and is now co-sponsored by Citigroup, CICC and Bank of America Securities.

The name Fenbi, which means “chalky” in Chinese, may not make much of an impression on investors, but the company was previously part of the more familiar education brand Genfu. Yuanfudao is an online learning ‘unicorn’ and was once very popular with Chinese venture capitalists, raising $3.5 billion in 2020 alone. The company, which targets school-aged students, was fatally hit by a new education policy last year. Meanwhile, Fenbi Technology, a tutoring service for aspiring professionals spun off from Genpu in 2020, became a new focus for the capital.

China’s civil service exams have been dominated by two companies for over 20 years: Offcn Education Technology (002607.SZ) and beijing hua map red yang educationHowever, the two giants primarily offer offline tutoring services. Seeing online opportunities, Yuanfudao has expanded its online footprint since 2013, with Mr. Zhang Xiaolong, a former well-known lecturer from industry leader Huatu Hongyang Education, in charge of training for civil service exams. Independently under the name of Fenbi Technology, the internet start-up set out to challenge established industry leaders.

But this was no fairy tale about a brave underdog defeating a giant. The costs of expanding to compete with industry leaders are weighing on him, even as he surged from 1.16 billion yuan ($166 million) in 2019 to 3.43 billion yuan last year. Instead, it drives Fenbi Technology into the red.

The company posted a net profit of 154 million yuan in 2019, but a net loss of about 484 million yuan the following year. Losses doubled from there, and in 2021 he reached a deficit of 2.05 billion yuan. To compete with his two giants, the company invested heavily in building an offline business, inflating its selling and administrative costs.

According to the prospectus, Fenbi Technology’s workforce surged from 1,592 at the end of 2019 to 12,803 at the end of 2020, peaking at 16,800 at the end of March last year. Employee spending increased to 1.17 billion yuan in 2020 and 2.72 billion yuan in 2021, accounting for 55% and 79% of total income in these years. increase.

Gross margin plummeted from about 46% in 2019 to 23% in 2020 as revenue growth couldn’t keep up with rising costs. The company saw a slight increase to 24.5% last year due to financial pressure to cut back through layoffs and salaries. cut

Cost reduction through mass redundancies

At the end of last year, Fenbi Technology had only 8,964 employees left, but it fell to 7,388 in the first half of this year, down 9,412 from its peak. The average salary of lecturers and other teaching staff also dropped from 13,300 yuan in 2019 to 8,900 yuan in the first half of this year. Sales and marketing salaries were further reduced from 12,300 yuan to his 6,800 yuan, a reduction of nearly 45%.

As a result, the company reduced labor costs to 771 million yuan in the first half of this year. This represents just over 53% of his earnings.

Fenbi Technology is a leader in the business of online education for aspiring professionals. Frost & Sullivan reports that the company is China’s largest provider of online lessons for vocational exams, with 9.8 million paying users for its training courses and online products last year, four times more than the second-largest supplier’s customers. . By the end of June this year, the number of registered users of the company’s online platform reached about 43 million, and the average number of monthly active users increased from about 4.7 million in 2020 to about 6.5 million last year. further increased to about 7.5 million. Year.

With a huge online membership, Fenbi Technology has recently expanded ambitiously into the offline market to compete against the competition. Last year, about 67.5% of students in offline courses were recruited from online paying user base, but that percentage rose to his 71% in the first half of this year. The offline training business had a negative gross profit in the past two years, but due to cost reduction, he managed a gross profit of 190 million yuan in the first half of this year. This is him just a margin above 36%, but still well below 60%. for that online training.

As the popular Chinese saying goes, bad luck often comes in pairs. Civil service examinations and vocational qualification training businesses have also been disrupted and challenged by the COVID-19 pandemic.

Offline tutoring services have taken a hit as civil service exams were generally postponed under the strict COVID-19 containment measures adopted in several major cities this year. Even Offcn Education, the market leader in civil service exam tutoring, said that in the first half of the year, his revenue fell by 54% year-on-year, and his loss increased more than eight times to 891 million yuan. I was. In that respect, it was not auspicious time for Fenbi Technology to expand its business from online to offline.

The education crackdown wasn’t aimed at vocational training, but it cast a shadow over related stocks as investor confidence in the overall tutoring sector was shaken. A prime example is the stock price crash of Offcn Education. new higher education in china (2001.HK) and China Education Group Holdings (839.HK) is down 49% to 67% from its 52-week peak as of Thursday.

Using a price-to-sales (P/S) ratio of 7.4x that of its closest counterpart Offcn Education as a benchmark for valuation purposes, Fenbi Technology will be listed at a valuation of HK$24.5 billion (RMB 21.9 billion) There is a possibility. Estimate full-year estimated earnings from the first-half figures.

However, given the recent fall in Hong Kong stocks and the market’s general discount to A shares, the company may need to attract investors with lower valuations.

As of the end of June, Fenbi Technology still had cash and cash equivalents of 1.25 billion yuan, and its operating cash flow turned from negative to positive in the first half of this year. Continued cost reductions have fortunately spared the company undue capital stress. So, given the uncertain outlook for the tutoring sector, we can speculate that one of the reasons for the IPO is to offer early institutional investors with limited patience an opportunity to cash out. Tencent Holdings (0700.HK), IDG Capital, Hillhouse Capital.