Networking Q&a
1.Perspectives on the Governance and Investment of Extracurricular Training.
The Ministry of Education issued the Regulations on the Administration of Off-campus Training (Draft for Comments) on the 8th, which refines the legal management of off-campus training institutions after the "double reduction" document in 2021 and the interim punishment measures for off-campus training in 2023. China's extracurricular training institutions originally evolved from cram schools run by teachers privately. The core of its governance logic lies in the fact that in recent years, some off-campus training institutions have formed the so-called "shadow education", which has developed in parallel with school education, challenging the dominance of school education and the fair distribution of educational resources, especially in the compulsory education stage of public service.
Next, we will review the historical development of policy governance in the off-campus training industry in stages, so that you can deeply understand the background logic of the current policy and more accurately judge the future development trend of the industry.
First of all, the first stage was from 1992 to 2012, which some scholars called the "weak governance stage" of the off-campus training industry, and others called it the "preparatory governance stage". Before 1993, the format of off-campus training did not attract widespread attention. However, in fact, in order to increase the rate of admission to higher education, primary and secondary schools have begun to charge fees for make-up classes outside of normal teaching hours, and the phenomenon of teachers working part-time to make up classes also occurs from time to time. In 1993, the Ministry of Education (then the State Education Commission) issued a document proposing that schools and teachers should not use holidays to give students group make-up classes or new classes, which can be regarded as the starting point for the standardized management of off-campus training.
In 1999, a large-scale expansion of the college entrance examination took place, which led to a significant increase in the gross enrolment ratio of higher education and a consequent increase in the willingness to go on to higher education. At the same time, the unified examination for the transition from primary school to junior high school has been cancelled, which has intensified the pressure of competition in the junior high school and middle school examinations to a certain extent. In addition, selection methods such as point recruitment and special recruitment in first-tier cities have become popular, and Olympiad has become one of the main criteria for selection in many schools. At that time, some Olympiad training institutions actually had links with schools. Therefore, although the unified examination for elementary and junior high schools has been abolished, the pressure on students and parents who want to pursue high-quality educational resources has increased.
It is worth noting that Olympiad training emerged in large numbers in the 90s, and was initially limited to the selection of prestigious schools in first-tier cities. In 2000, the Ministry of Education issued an urgent circular to reduce the academic burden of primary school students, which clearly stated that no department, group, institution or school may organize primary school students to participate in various competitions and reading activities without the approval of the education administrative department.
2.Analysis of off-campus training policies and investments.
At this stage, the promulgation of the Law on the Promotion of Private Education in 2023 has become an important legal development. The law partially recognizes the profitability of private education, so that education with private schools as the main body has achieved rapid development at this stage, including private education and training institutions. It is worth noting that New Oriental was founded in 1993, and Xueersi was founded in 2003. It can be seen that the development of the industry is closely linked to the evolution of policies.
In 2012, ** issued an opinion on further promoting the balanced development of compulsory education, which proposed to prohibit schools from holding various training courses for the purpose of selecting students, either alone or jointly with social training institutions. First-tier cities have also successively tightened the management of competition and school selection. Summarizing the management period from 1992 to 2012, it is obvious that the relationship between off-campus training and schools is relatively close, which affects the equity of on-campus education to a certain extent. At this stage, industry norms mainly rely on self-discipline, and no specific special governance policies have been introduced.
The second phase is from 2013 to 2017, marking the starting point of the initial exploration of industry governance. In that year, the Ministry of Education and other five departments issued implementation opinions on standardizing education fees and controlling arbitrary fees, one of the key tasks was to control the problem of arbitrary fees for make-up classes in primary and secondary schools, and proposed to strictly investigate the behavior of schools and teachers organizing or participating in arbitrary fees for make-up classes. By 2015, the Ministry of Education had banned primary and secondary school teachers and in-service primary and secondary school teachers from paying to make up classes, thus cutting off the chain of interests between off-campus training institutions and in-service teachers. According to relevant literature, by 2016, the number of teachers in China's remedial education institutions had reached 7 million to 8.5 million.
Teachers' make-up classes as individuals are also one of the main reasons for the high fragmentation of the market in the off-campus training industry. The industry at this stage is characterized by decentralization, complexity, and regionality. Looking back at the management phase from 2013 to 2017, school make-up classes and teachers' make-up classes are still the focus of policy attention, and governance is attempted. In terms of reducing the burden on and off campus, the focus of the policy at that time was still on the school as the main body, and the characterization and governance of independent off-campus institutions were not clear.
The third stage, from 2018 to the present, has really begun to systematically govern the off-campus training industry. In 2018, the Opinions on Regulating the Development of Off-campus Training Institutions issued by the General Office of ** were the first systematic document proposed to regulate the development of off-campus training institutions at the national level in China, which marked that off-campus training was separately listed as an educational field for management.
3.Policy interpretation and investment opportunities.
Until July 2021, the double reduction policy issued has built a relatively complete governance system for the off-campus training industry. In terms of special rectification of training institutions, the policy implements hierarchical management according to the characteristics of different types and forms of training institutions, and strictly approves and standardizes training behaviors. It is particularly noteworthy that the policy strictly restricts discipline training institutions in the compulsory education stage, requiring such institutions to register as non-profit and cut off capitalization channels; Business cannot be carried out on statutory holidays, rest days, winter and summer vacations. At the same time, the document concludes by mentioning that high school subject training should be implemented by reference, indicating that the boundary between high school subject training and compulsory education has not yet been clarified. In addition to being familiar with the double reduction policy itself, it is also necessary to pay attention to the relevant supporting measures outside the policy, which are committed to improving the governance details of K9 subject training.
For example, in June 2021, the Department of Supervision of Off-campus Training was established, and in July of the same year, the double reduction policy was officially introduced. In September, the "Measures for the Administration of Employees of Extracurricular Training Institutions", "Measures for the Management of Extracurricular Training Materials for Primary and Secondary School Students", and "Notice on Strengthening the Supervision of Fees for Extracurricular Training in the Compulsory Education Stage" respectively refined the governance methods from the perspectives of personnel, training content and fees. The "Notice on Doing a Good Job in the Control of Advertisements for Off-campus Training" issued in November strengthened the control of advertising. The December 2022 Opinions on Regulating Non-academic Extracurricular Training for Primary and Secondary School Students, and the October 2023 Interim Measures for Administrative Penalties for Extracurricular Training have further improved the regulatory system. Judging from these policies, the industry is making steady progress on the road to compliance.
In the newly edited draft of the Regulations on the Administration of Off-campus Training for Solicitation of Comments, there are several key content changes. First of all, it clarifies the basic positioning of extracurricular training as a useful supplement to school education. This point was previously mentioned in the non-disciplinary management policy in December 2022, and this draft once again emphasizes the complementary role of off-campus training, showing a positive attitude towards business development under the framework of legal compliance with regulations, and emphasizing that regulations should meet the reasonable training needs of parents. This means that as long as training institutions can operate within the policy framework, they can be an effective complement to schooling and maintain a healthy space for development.
Secondly, the classification management of disciplines and non-disciplines is further clarified, the boundary between the two is drawn more clearly, and a large space for the healthy development of non-disciplines is left. In terms of high school and non-subject training, it is slightly different from the double reduction document, which mentions that new high school subject training institutions will not be approved after detailing the restrictions on K9 subject training, while the draft clarifies the details of the restrictions on high school subject training after classified management. This suggests that, from a policy perspective, the boundaries between high school subject training and K9 subject training are clearer.
Overall, the draft is a continuation of the existing policy and makes the management direction clearer, so that training institutions in the industry can better understand the scope and standards within which they can conduct business.
4.Analysis of off-campus training policy and investment
To sum up, our summary of the process of deductive process of out-of-school training policies from the 90s to the present is that most of the key nodes of each policy are due to the excessive development of the industry that has had some negative impact on traditional school education. Therefore, the out-of-school training policy has always been based on ensuring the dominance of schooling and promoting educational equity, with the goal of promoting the development of the industry in the direction of formalization. With the rapid changes in business forms, practitioners, and capital participation, the focus of policy management is constantly adjusting with industry changes. As long as the main public service function of school education is not compromised, the extracurricular training industry still has a broad space for development.
Next, let's talk about the investment opportunities in the industry. Our view of the industry remains very positive and we see this as a positive development for the industry leaders. After years of policy evolution and systematic management in recent years, the industry leaders who can survive are the winners of the industry. They can not only meet the requirements of national planning and development, but also meet the needs of parents and students for diversified training, thus forming a beneficial supply.
Especially after the two important governance policies in 2018 and 2021, especially the double reduction policy in 2021, the competitive landscape of the industry has changed dramatically. Before the double reduction policy, off-campus training institutions mainly relied on K9 subject training business oriented by entrance examinations, supplemented by quality improvement. After the implementation of the policy, the leading institutions basically stopped or divested the K9 subject training business, and only retained the subject training for the high school level.
Since 2022, leading institutions have begun to develop literacy education courses for K9 students. Although these courses are related to the content and system of traditional disciplines, they are no longer simple test-taking teaching, but pay more attention to the cultivation of basic abilities such as thinking, providing new supply for the industry and conforming to the positioning of "beneficial supplement". Most of those institutions that lack the ability to develop literacy education and remain test-oriented have withdrawn from the market. As a result, the supply structure has been significantly optimized, and those leading institutions that are ready to transform will reap the full benefits.
5.The recovery of the education and training industry and investment opportunities.
Therefore, from the perspective of actual business development, since the beginning of 2023, literacy training has replaced the demand for pure discipline training to a certain extent, and has achieved very rapid growth. Industry leaders such as New Oriental and Good Future have restarted their outlets and steadily expanded in the past few quarters, and the industry has shown a trend of recovery development. Since the beginning of 2023, we have also witnessed inflection point opportunities in the secondary market, with a very rapid double recovery in performance and valuation.
After the issuance of this consultation draft, we can be more confident that the existing industry leaders will meet the specifications.
Both high school subject training and non-subject training are operated under the framework of legal compliance. On the question of whether competition will intensify in the future, we believe that first of all, after the gradual clarification of industry governance, the technical threshold of the industry will actually continue to increase. At present, the requirements for license approval, employee qualifications and capital supervision have significantly increased the start-up cost of compliance business development. Therefore, we do not expect a large number of institutions to return quickly, and the existing industry leaders will have sufficient time window to consolidate their advantages.
Although 2023 has undergone a round of valuation repair, the valuation of the sector is still significantly discounted compared to before the implementation of the double reduction policy. In our view, this is due to market concerns about tighter policy. However, the policy has been moving in the direction of compliance and continues to tighten. In the process of tightening, the policy leaves enough room for the development of a healthy industry, and the competitive landscape is favorable to the leader. We believe that under the current policy framework, the performance of the leading companies is expected to achieve rapid recovery growth. The clearer the policy, the more beneficial it is to the leading companies. Therefore, at this point in time, it is worth investing in both from the perspective of buying performance and valuation.
We focus on recommending A-share Xueda Education, which has obvious advantages in high school training, and pay attention to the leading training companies in the US and Hong Kong stocks, such as New Oriental, Good Future, Excellence Education Group, Scholar Education and Gaotu.
Minutes**: Wen Bagu Research] Mini Program