Vircend Education divests its compulsory education assets and sets off lightly again.

Since the compulsory education stage in China cannot be operated in the form of for-profit private schools, this private education group is looking for"Light assets"Way of survival

Key points:

*Virscend edu adopts a 'light asset' model, where the government or developers provide the school land, and the company offers operation and management services.

*Last year, the group incurred a net loss of 1.8 billion yuan in the first 8 months due to the termination of compulsory education phase business.

This article is written by Molly.

The "Regulations on the Implementation of the Private Education Promotion Law" implemented on September 1, 2021, subject private schools in the compulsory education phase to the strictest regulations. After a halt in trading for a month and a half,$VIRSCEND EDU (01565.HK)$The performance for the first 8 months of last year was announced, this financial report, which was issued after two delays, reflects the challenges the company is facing.

Virscend Edu is a large private education group in southwest China, providing K-12 and university private education. In the 8 months up to August 31, 2021, the company went from profit to loss, with a net loss of 1.813 billion yuan, of which the loss from terminating the compulsory education stage business amounted to 1.615 billion yuan.

The company did not specify when its stocks could resume trading. But during the trading suspension, starting from 2021, it has lost approximately three-quarters of its value.

With the sword of Damocles hanging over the head of private K-12 education groups, when the compulsory education stage business that contributes main income is forced to be abandoned, where does the road of private education industry lead to?

Most Stringent Regulation

Looking at the changes in laws related to private education, the Chinese government's regulation is becoming increasingly strict. The revised "Private Education Promotion Law" in 2016 first stipulated "Profit-making private schools offering compulsory education shall not be established", but the details were unclear at that time, making the past five years a window for relevant companies to go public and raise funds. Since 2016, at least 12 such private education groups have been listed in the US or Hong Kong.

In the latest "Implementation Regulations", the relevant control has been upgraded to state that "No social organizations or individuals may control private schools offering compulsory education, non-profit preschool education through mergers and acquisitions, agreement control, and other means", directly impacting private school groups listed on the US, Hong Kong with the Variable Interest Entity (VIE) structure.

Based on regulatory requirements, Virscend Edu stated in the annual report that, starting from August 31, 2021, it had lost control over the operating entities providing compulsory education services, representing businesses that once contributed over 40% of Virscend Edu's income, needed to be removed from the listed company.

Before the separation of compulsory education services, Virscend Edu owned 11 primary schools and 11 middle schools. In the first 6 months of 2021, the primary and middle school businesses contributed 0.225 billion yuan and 2.87 billion yuan to Virscend Edu, accounting for 24% and 31% of the total tuition income respectively during the period; after the separation, Virscend Edu only owns 9 schools.

Most listed educational institutions have a problem of a single income structure. In the first 8 months of last year, Virscend Edu's education revenue was 0.253 billion yuan, with tuition and boarding fees accounting for 81% and 12% respectively. Therefore, significantly reducing operating schools will have a significant negative impact on overall performance.

Although the company has stated that it will increase the utilization rate and tuition fees of its existing school network in the future, the tuition fees for its high schools and international high schools have already reached as high as 0.058 million yuan and 128,000 yuan per year, increasing prices may lead to counterproductive results.

The reason why Virscend Edu can charge high tuition fees in the southwestern region is due to the excellent college entrance examination scores of its schools. In the past three years, the admission rates of the company's three major high schools to first-class national universities were 95.1%, 96.6%, and 87.5% respectively.

However, in 2020, universities in Sichuan and other provinces began to admit students based entirely on centrally managed college entrance examination scores. This means that previous alternative fast-track options were closed, which previously provided another "back door" for entry into top universities, not conducive to Virscend Edu's excellent university admission record.

Light-asset operation

Affected by the Implementation Regulations of the Private Education Promotion Law, Hong Kong-listed private K-12 stage education enterprises all experienced huge losses. Relevant annual reports show,$MAPLELEAF EDU (01317.HK)$By the end of the fiscal year as of August last year, the revenue from continuing operating businesses was 0.94 billion yuan, with a net loss of 0.67 billion yuan;$WISDOM EDU INTL (06068.HK)$The net loss for the same period was 2.28 billion yuan, far below the net income of 0.5 billion yuan a year ago.

After the divestiture of the main business, how can private K-12 education groups survive? The first option is to expand the business to online education and higher education, establish private universities, and Wisdom Edu Intl has made this choice; the other option is to expand through output operation management, adopting the "light assets" model.

This model refers to cooperating with the government or real estate developers, with the other party providing land and being responsible for the construction of the school, while the education group provides operation and management services. Soochow believes that this model can allocate more resources to school management operation and teacher training, improve the quality of education; on the other hand, it can reduce school operating costs, achieve rapid expansion of school network, and help increase income.

As stated in the annual report of Virscend Edu, it plans to cooperate with business partners in a light asset mode to establish new high schools. It is expected that after 2022, there will be 6 cooperative high schools operating under this model. At the same time, providing educational management and consulting services for K-12 schools, but in the first 8 months of 2021, Virscend Edu only received 1.8 million yuan in revenue from this business.

Under strict policies, all three companies are struggling to avoid losses. From the perspective of price-to-sales ratio, excluding the affected businesses, as of this Monday, Virscend Edu predicts a ps ratio of about 3.04 times, Mapleleaf Edu about 2.4 times, and Wisdom Edu Intl the highest, reaching 4.7 times. It can be seen that the valuation of Virscend Edu is in the mid-range of the industry, perhaps due to its stocks being suspended and not reflecting a decline, or reflecting investors' wait-and-see attitude.

However, Chu Zhaohui, a researcher at the China Institute of Education Sciences, believes that private education groups are unlikely to sustain profitability simply by providing operation and management services to other schools. The related income may be difficult to maintain the company's survival. In the long run, whether the light asset operation is feasible still needs to be tested by the market.

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