California and Texas Flagging? Why Some Are Targeting China

How real are today’s international marketing opportunities for education publishers and school operators? At the recent International Markets Forum (IMF), Karan Khemka, Head, International Education Practice, The Parthenon Group, made the case that for education markets, “The profit pool is moving from making content for developed markets to delivery of content in emerging markets.” Because China has garnered considerable attention of late, I spoke to six industry executives about why China is getting their attention. This article relates insights from three of them: Trace A. Urdan, Equity Research, Wells Fargo Securities; Din Heiman, COO and General Manager, BrainPOP; and Karan Khemka. “It may seem counterintuitive,” Trace Urdan told me, “but China offers a more favorable business and regulatory climate for educational content and service providers.” With so many market drivers signaling “up,” public stocks of two bellwether Chinese education market firms have recently taken a tumble. For a further perspective on why, I connected with Joseph R. V. Romano, President, Romano Wealth Management. Next month I’ll share more in-the-trenches feedback from Abhinav Mital, Senior Principal, The Parthenon Group; Zou Jing, Chairman and CEO, First Decision Education Group; and Charles Callis, VP Business Development/International, Waterford Research Institute. And that’s just the start of it. I’ll be highlighting more of these markets and their relative appetites for international partners in future articles. I think you’ll be surprised by what these folks have to say.

China’s Education Market’s “Overweight”

A June 19 press release from Equity Research, Wells Fargo Securities, announced, “We have initiated coverage of the International Education industry with an Overweight rating [In layman’s terms, “overweight” indicates a class of securities whose potential is so strong they are recommended for a larger portion of an investor’s portfolio than would otherwise be the case] and a focus on Chinese Education. We remain bullish on the long-term prospects for China's education sector across a range of verticals and student profiles. We believe education companies in China represent an appealing consumer play in one of the largest and still fastest-growing economies in the world.” Trace A. Urdan, a well-known education and publishing industry financial analyst, told me, “Although regulation can seem vague, frequently capricious, and almost entirely opaque in China relative to the elaborate and dogmatic process of public decision-making common in the U.S., the Chinese government is actually far more accommodating to private education providers than any state government. China recognizes quite explicitly that it cannot reach its own goals for educating its population without private providers and private capital. As a consequence, government is invested in the success of private enterprise in a way that one does not often experience in the U.S. education market, where public officials can often seem mistrustful or antagonistic toward private companies. Likewise parents (and grandparents) expect to pay for and highly prize supplemental educational services, and the private market is thriving and well–even as economic growth slows in other consumer sectors. This does not mean that doing business in China is simple, easy, or risk-free, but it does mean that the ambivalence toward private enterprise in education does not present a material risk the way that it sometimes can in the U.S. market.” For a copy of Equity Research’s June 19, 2012, 29-page report, Initiating Coverage of International Education at Overweight China Education, the Best Consumer Play in the Most Exciting Economy, write to Trace Urdan.

Mission Driven...and Too Big to Ignore

Din Heiman, COO and General Manager of BrainPOP, a digital content creator that recently localized its offerings for use in the Chinese-speaking world, points to the size of the market “not just in terms of the business opportunity but also in terms of sheer impact on education. That's an appropriate consideration for non-profits and for mission-driven education organizations too. Ultimately, doing business in China may require awareness of the proverbial thousand-mile trek that starts with the first step. But for BrainPOP it represents a population that simply cannot be ignored, even if as Westerners we're more comfortable in the language and business environments of Europe and South America (where BrainPOP's active too).”

Leverage at the “Point of Instruction”

The increasing globalization of the world’s K-12 markets, the subject of my previous column about the recent International Markets Forum, was on display throughout the program. As I reported last month, Karan Khemka of The Parthenon Group, an expert on business models for emerging market educational publishing, the IMF’s second keynoter, argued that businesses “close to the point of instruction,” such as those operating schools, offer the biggest opportunities. “These are the ones getting real traction and generating impressive returns.” In Khemka’s words, “The profit pool is shifting to direct delivery.” Driving home the point, he added, “There are about twenty $1 billion USD education companies, of which seven are publishers, one is in assessment, and the others are engaged in the ‘direct delivery’ of education demonstrating the eventual scale potential for school operating companies.” Khemka illustrated his argument with the Houghton Mifflin Harcourt RISE (Riverdeep Immersion Subject English) Learning Centers joint venture in China. As described on its website, RISE schools offer a “combination of subject-based English language learning and Houghton Mifflin Harcourt’s award-winning interactive curriculum-based software.” Khemka added, “RISE has hit the sweet spot by targeting an unregulated segment of a fast-growing emerging market to leverage HMH IP in a blended learning model. The RISE value proposition provides a perfect synthesis of consumer needs and desired outcomes, educational content and delivery, and the integration of technology.” Financials for traditional educational publishing models have remained fairly constant, if not stressed downward by the worldwide downturn, “but RISE, in contrast, is an example of what we call a '40-40-40’ business model: 40% margins, 40% year-over-year growth, and 40% annual return on capital. In six years, RISE has grown from zero to an $80 million USD sales business.” You can see a video of Khemka’s IMF presentation and more of the China story here.

Rough Riding in the Wild Far East

As mentioned earlier, with so many market drivers signaling “up,” public stocks of two bellwether Chinese education market firms have recently taken a tumble. To get another perspective on China, I asked Joseph R. V. Romano, President, Romano Wealth Management, to look at two of the stocks featured in the Wells Fargo Securities report, New Oriental Education & Technology Group (EDU) and Ambow Education (AMBO). On July 25 he wrote, “Both of these stocks have not had a good month and are severely under the Wells Fargo Securities targets. Ambow is down 50% to $2.22, currently from $4.35 and the $8 to $10 target price Wells Fargo Securities put out on June 19. New Oriental Education is down to $11.56 (down 6% today) from $27.75 and the $33 to $40 target range Wells Fargo Securities put out on June 19. Things started melting the end of June/beginning of July. The CFO of Ambow resigned after just six months at the post. This is not a good sign, as investors always fear accounting irregularities. A July 18 report by Muddy Waters Research also suggested accounting irregularities. So the growth is impressive (though Ambow still had a big loss despite impressive revenue growth) IF IT IS REAL. These would not be the first Chinese companies to be affected by these concerns. Some have shrugged them off while others have never recovered. It is possible that these reports are being disseminated by people who have a short position in the stock and who are spreading rumors. As you can see, it is impossible to get a feel for what is really going on.  But one thing is certain: the SEC has opened an investigation in New Oriental. Also Ambow did not file its SEC 10-k on time due to irregularities. These are not good signs. More information on New Oriental can be found in a July 24 Bloomberg News story.” A reiteration of Wells Fargo Securities support for its rating of New Oriental, published July 19, is available from Trace Urdan.

Why Bother With China – Don’t Texas, Florida, and California Matter More?

Despite the gyrations of China’s publicly traded education market firms, the underlying fundamentals are strong in ways rarely matched elsewhere. Finding the right business partner in this market in which venture investing and public reporting are showing growing pains isn’t easy. What’s more, for now, unlike the big U.S. school market, it’s a consumer and private schools play, so institutional selling strength doesn’t translate directly. It’s not for the faint of heart or for those with a short span of interest. Texas, Florida, and California, along with the rest of the U.S., certainly aren’t dropping off the K-12 map in the foreseeable future. China is thousands of miles away geographically and, beyond a great cultural divide, with a school market–both private and public–subject to government control considerably different from ours. But,

  • U.S. schools and those in the rest of the developed world are a flat or shrinking market with substantial competition, and
  • The Internet, hunger for English language skills, a fast-growing middle class, and parental concern for giving their children an educational edge are among a host of factors generating dramatic growth in China.

If your firm expanded from a regional base to cover more states or the entire country, you have a sense of what it took to make that happen. For lots of reasons, the world is shrinking. Don’t give up that day job or completely rejigger your portfolio just yet, but it’s time to start thinking more globally.

Note: The IMF, chaired by myself, was the pre-conference day for the Content in Context (CIC) Conference, co-organized by AEP and AAP. You can get some idea of the international attendance at the IMF by scanning here (though this list covers all of the CIC-related events, not just the IMF) and of IMF’s programming here.


Dr. Nelson Heller is President of The HellerResults Group, a global strategic consultancy serving business and non-profits seeking growth opportunities in the education market. He’s the founder of The Heller Reports newsletters and EdNET: The Educational Networking Conference, both started in 1989. The EdNET News Alert, successor to The Heller Reports publications and now published by MDR, reaches over 31,000 education executives worldwide every week and features a regular column from The HellerResults Group each month. He co-organized and chaired the International Markets Forum (IMF), the pre-conference day for the Content in Context (CIC) conference co-produced by AEP and AAP. You can learn more about Nelson and his industry leadership at The HellerResults Group. If you need strategic insight, business partners, international connections, stronger boards, keynoters, or entrepreneurial savvy and want the insight of 30 years at the business and technology crossroads of the education market, you can reach Nelson at 858-720-1914, by email at nelson@hellerresults.com, and on Twitter @NelsonHeller.