Evan Heng gave up a chance to study in London, so that he could concentrate on growing his tuition centre business, Zenith Education Studio. “If I did go to the UK, I will live with the regret of not knowing how this business opportunity would have panned out,” recalls Heng of the decision he made four years ago, in an interview with The Edge Singapore.
From a one-man show, Heng has expanded his company into a 100-strong force currently and is slated to open five more centres later this year, bringing his total to nine. Revenue is set to way surpass the $6.7 million generated last year.
This isn’t just yet another story of a young entrepreneur, it is also a sign of how seriously education is taken here in Singapore, and for investors, how this industry can be a potentially interesting one with deals and investment opportunities plentiful.
The government is already spending north of $10 billion per year on education, making sure that the mainstream schools are properly staffed and equipped.
In the private sector, spending on education similarly runs into the billions. According to the Department of Statistics, Singapore households spent about $1.4 billion on tuition classes from October 2017 to September 2018. Frost & Sullivan estimates the industry is growing at a CAGR of 3.3% between 2021 and 2025. The way Heng of Zenith Education Studio sees it, the growth is driven by the strong “kiasu” or “scared to lose” culture, even though the public education system is already consistently ranked among the top internationally.
The focus on education — and willingness on the part of parents to spend — is certainly not just Singapore’s alone. Within the Asia Pacific (Apac) region, the education sector has also been showing promising growth. According to EY Asean Education Leader Rishi Gajendra in a podcast titled Investing in education: Is now a good time?, in 2020 and 2021, the total annual deal volume in Apac for education and education technology (edtech) was about US$15 billion, comprising the three largest markets of China, India and Australia. These two years were all-time highs, and the corresponding number in 2022 was about US$6 billion ($8 billion).
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Ironically, the nearly unbridled spending has resulted in some backlash, to the detriment of market participants. According to Gajendra, historically, about 60% to 70% of the total deal volume within this sector in the Apac region was in China. However, this proportion has dropped to just a third, no thanks to regulatory changes that occurred around 2020, when China clamped down on private school companies that have become hot favourites among international investors.
Some of China’s new regulations include policies that would reduce children’s academic pressures, including a ban on for-profit off-campus tutoring and online tutoring for all children younger than senior secondary school age. The new policies would also see existing licensed institutions be turned into non-profit organisations.
While China’s harsh education reform had shaken its US$70 billion industry, education providers like locally listed MindChamps Preschool CNE were forced to put their expansion plans to China on hold and search for new growth elsewhere instead.
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There’s plenty of potential besides China and Singapore. According to Gajendra, Vietnam and Malaysia are also two markets worth keeping an eye on. Vietnam, for example, has witnessed the emergence of multisector education platforms and large education companies that operate in segments such as schools, universities and the edtech sector. KinderWorld International, which runs schools in Vietnam, has grown to a size where it is considering an IPO.
Malaysia, on the other hand, for about a decade, has seen private equity investment in universities as well as K-12 schools, while Singapore — perhaps the most well-developed education market in the region — presents pockets of opportunity for investors to keep an eye on.
Impact investing
Many recognise that education is tied to a range of positive social outcomes, from health to social mobility. Hence, the education sector is commonly watched by impact investors.
For-profit education companies will see that their contribution to educational achievement often aligns with financial success. According to non-profit consulting group Bridgespan Group, the education sector has been attractive for impact investors since 2016, as it typically comprises about 20% of the 1,200 potential investments in privately held companies, mostly in private equity.
Bridgespan looks into three specific areas within the education sector for investors to consider zooming in on are edtech, early childhood and income-share agreements (ISA).
The education landscape today has somewhat changed thanks to the Covid-19 pandemic. Edtech and online learning has become more common but with economies reopening and physical classes resuming, schools are pushing towards a hybrid sort of learning for students — providing them with physical classes for engagement, as well as online classes to access when they are at home.
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Edtech saw a boom during the height of the pandemic, as EY’s Gajendra points out that 2020 and 2021 saw a heightened amount of business-to-business (B2B) deal activity in the edtech space. “As a result of that, valuations increased dramatically in many cases, and over the last year or so, we are seeing a correction to what was built up through the Covid-19 years,” he says.
“To some extent, the correction we have seen in valuations is also a function of what is seen in the wider tech landscape. Over the next one to two years, it would be interesting to see how things pan out for the other segments where there’s still a fair amount of investor interest and activity and growth as well,” says Gajendra.
Adding on, Abhinav Mital, managing director, LINC Education Services, is of the view that B2B edtech solutions have lots of potential and will continue to grow because the pandemic has proven the need for digital infrastructure and all formats of education.
For example, Mital notes that tertiary education has especially embraced the changes brought about by the pandemic and has continued with the changes, in comparison to K-12 (which refers to the period from kindergarten till grade 12l, or the end of secondary school). The use of technology in the tertiary education space has also opened has opened up a new and fast-growing student target market, which is that among continuing learners and professionals. They are also using an online mode of delivery to enhance the experience of more traditional school leavers who get into university, either as an international student or a domestic student.
Research done by Bridgespan has shown that the return on investment (ROI) of investing in the early years can be especially high. Not just because the formative years of children’s lives are key to their development, but the early childhood workforce is also predominantly female, so the right kind of investment can help strengthen and expand that workforce.
There has also been an increasing demand for a trained workforce, especially in technical fields. With that, there is a rise in education-to-employment pathway programmes, such as online certifications, many of which have employed income-share agreements (ISAs). ISAs are a form of education financing to traditional student loans. Repayments for ISAs on tuition are based on a student’s future income; if students have no income upon graduation, they are not required to make payments.
ISAs are now being offered by several educational institutions and companies. For companies that offer ISAs, the students will typically “pay back” the funding with a percentage of future earnings after they graduate and start working for the company. Bridgespan sees this structure as one to be used by private sector companies to make ISAs more attractive to impact investors.
Separately, with the physical classes resuming, several international schools are seeing a recovery in their latest intakes, as students seek out overseas education or expat parents move overseas for work opportunities and bring their children with them.
“After a couple of really tough years, the international student market has resurged in the second half of 2022 going into 2023,” says Mital, adding that the UK is already seeing numbers higher than pre-Covid times, while markets like Australia, Canada and the US are close to 2019 levels.
Locally-listed Centurion Corp OU8 , for one, has reported revenue of $44.2 million for its student dorm business for FY2022 ended Dec 31 2022, up 38% from FY2021.
The way Mital sees it, 2022 is a landmark year for the global education sector. For the first time, subcontinental students have become the largest incoming cohort or student community in all of the key markets like Australia, the UK, Canada and the US.
“At the same time, universities are also looking at the region — Southeast Asia, South Asia, and other parts — more closely to see what they can do in-country because they feel that’s a good hedging factor or a hedging opportunity to have some operations within these countries as well,” says Mital.
Investing in education
Given the size of the global education industry, it is no surprise that there are plenty of listed companies in this sector, with market values running into the billions (see table).
However, Singapore-based investors have a much tinier pool to fish from. There used to be a handful of education stocks listed on the Singapore Exchange (SGX) S68 , which has decreased to just a couple. Investors with longer time spent in the market might recall the former high-flying Informatics Education, which, for years, did a roaring business providing IT courses in an era when there was a seemingly insatiable demand for computing knowledge. The company, however, was felled by accounting irregularities back in 2004 and never recovered from it. The company, under various new controlling shareholders, was eventually delisted from the exchange earlier this year.
TMC Education, another high-profile private school, in 2018 saw a new controlling shareholder, property tycoon Koh Wee Meng, who acquired the stake from the previous executive chairman Chin Kon Yuen, who in turn, bought over the education business. The listed entity, renamed Global Dragon , shifted its focus to property and hospitality and Koh is taking it private. TMC Academy, now privately held, remains operational, run out of some shophouses near Paya Lebar Quarter.
For some years in the early 2000s, Raffles Education Corp NR7 was a popular, high-margin, high-growth stock, focusing on the niche but popular areas of design and business. From its base in Singapore, it has also expanded into markets ranging from China to India and Australia.
In recent years, the company was dogged by a long-running dispute between its chairman and CEO Chew Hua Seng and his one-time business associate, notable investor Oei Hong Leong.
For the most recent 1HFY2022 ended Dec 31, 2022, Raffles Education reported earnings fell 28% y-o-y to $8.72 million, while revenue saw a 1% y-o-y gain to $53. 8 million. No dividends were declared.
Raffles Education, in its earnings commentary, says that the pandemic has hurt the recruitment of foreign students. “The challenging global education environment, with increasing competition and restrictive policies in the countries that we operate in, and an uncertain global economy will continue to affect the group.” The company, which operates in China too, warns that it “may have been” impacted by the change in education policies.
MindChamps Preschool, the first preschool operator to list on SGX, also saw earnings in FY2022 ended Dec 31, 2022, grow 22% y-o-y to $2.94 million. Revenue however dipped 2% y-o-y to $61.5 million, mainly due to currency exchange loss, as the Australian dollar depreciated against the Singapore dollar.
Its founder, CEO and executive chairman David Chiem says he is now in expansion mode and will be opening up more of its schools in new markets via its franchise business model in the coming few years. Chiem is also looking into edtech to extend the reach of the MindChamps brand worldwide.
Soon-to-be-delisted construction and property group Chip Eng Seng Corp has been dabbling in the education sector as well. Back in March 2018, it announced plans to diversify into the education sector. Through its wholly-owned subsidiary Sing-Ed Global Schoolhouse, the group invests in K-12 and corporate education in the Apac region.
In addition, it invests in educational technology which includes teaching software, online education as well as education training and consulting services in Singapore and China. Some of its schools include Invictus International School, Primus Schoolhouse by Invictus, The Perse School, Repton Malaysia International School, William Penn Academy (Shanghai), Amdon Consulting Group and more.
While education and healthcare are often said to be the two resilient industries that can ride through economic cycles, this isn’t necessarily so. When the pandemic hit, thousands of expatriate families decamped, affecting enrolment at the various international schools here. The situation has reversed.
One such counter that has seen improved results thanks to the reopening of the economy is Overseas Education RQ1 , the operator of Overseas Family School (OFS), an international school located in Pasir Ris with around 5,000 students across various levels.
The company has two controlling shareholders: its two founders, one David Alan Perry, who is no longer actively involved, and Irene Wong Lok Hiong, the company’s CEO and executive director. As indicated in the company’s FY2021 annual report, they each hold 31.75% of the shares.
In its latest 2HFY2022 ended Dec 31, 2022, results earnings were 22.6% higher y-o-y at $2.43 million from $1.99 million a year ago, while revenue was 6.8% higher y-o-y at $37.5 million. On a full-year basis, FY2022 earnings were however down by 16.7% y-o-y to $5.28 million, while revenue increased by 1.9% y-o-y to $73.9 million.
The increase in revenue for both periods was thanks to an uptick in student enrolment in 2HFY2022 with expatriate families returning to Singapore as most international borders are now fully reopened post-Covid. Despite the higher 2HFY2022 earnings, Overseas Education has trimmed its final dividend to 1.1 cents, versus 1.3 cents paid for the preceding FY2021 Back in FY2020, when the company earned $10.3 million, it paid 2.3 cents in dividends.
Overall, as described in its earnings commentary, Overseas Education is upbeat about its prospects. Barring any setback from a further wave of the pandemic, the group is cautiously optimistic that student enrolment will also increase in tandem with the inflow of expatriate families entering and living in Singapore. However, it expects the foreign system schools’ space and operating environment to remain competitive and challenging amid rising costs and a high inflationary environment.
Evidently, the market has ignored the better prospects articulated by the company. Over the preceding 12 months, its shares, typically thinly traded, dipped by 11.54% to last trade at 23 cents on March 24, valuing the company at $95 million and a historical P/E of 18.1x.
The public markets aside, the education sector has seen its fair share of interest and deals. The Learning Lab, another high-profile tuition chain, has been in the news over the last couple of years, reportedly because the owner, Boston-based Advent International, is looking for takers at the region of US$500 million. Advent International, on its part, bought its undisclosed stake reportedly for around $300 million back in 2014.
In June 2020, Hong Kong-listed China Maple Leaf Educational Systems paid $680 million to buy over the Singapore Canadian International School from Southern Capital Group and HPEF Capital Partners. Now, if industry whispers are right, there are interested parties actively eyeing acquisitions within the private education industry here.
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