2014Q1 China Online Education Industry

2014Q1

China Online Educaion Industry

March 2014

Contents

2

A. General Information

B. Current Situation

C. Cultural Highlights, User Preferences

D. Trends, Key Players

E. Recommendations to Foreign Enterprises

F. Appendices

Focusing on a unique direction and forming an effective marketing

strategy are crucial to win

3

> Facing an influx of internet vendors, the E-learning industry is more prosperous than ever. The

market is reckoned to be highly lucrative because of the willingness to pay and the huge user scale.

- Now the industry has over 580 startups specializing in a surprisingly diverse range of online applications

- In fact, online courses are quite acceptable for post-85s/90s who grew up in digital and internet era

> Numerous (large amount of financing) examples show the trends:

- Training agencies continue to shift their service capacity toward online - Customers require cost effective,

immediate improvement

- Entrepreneurs are making significant progress by reforming traditional curricula and pedagogy

- Internet firms have launched marketplaces to help corporations or individuals to distribute products

- Premium suppliers begin to attract outstanding faculty from abroad and real-world experts from top

corporations

> To compete with domestic firms, foreign enterprises who want to share the cake therefore need to

offer a unique resource either to the consumers or to the domestic co-op partners. Remember that

online and offline ought to be connected much more closely than you thought before – and define the

right countermeasures and partners, especially when you lack essential offline resources that your

competitors have.

EXECUTIVE SUMMARY

4

> Educational resources was never meant to be fair enough; therefore parents have to send their

children to extracurricular tutorial classes provided by private training agencies

- National education funding accounts for the proportion of GDP at 4%, which was not reached utill 2012,

however is still much lower than that of developed countries, even lower than that of other BRICs

- Governmental education spending per capita is $42 in China, compared to $2684 in US, 1:64

- Children are sent by parents to learn skills as early as 3 years old -“expecting better chance than others”

- 70% of 200 million K12 students have at least once attended after-school tutoring programs

- 15 million to 20 million Chinese couples are eligible to have a second child as “one-child” policy is loosened.

> The hottest courses are English and Mathematics for K12; Occupational training for adults

- English accounts for 20% score in K12’s ultimate test - Gaokao (university entrance examination)

> 38% of Senior Highs, 51% of Undergraduates and 5% of Postgraduates intend to study abroad

- The intention is most likely immigration, or higher starting salary whether they plan to come back or not

> Internet access and bandwidth are not troubles anymore

- The number of mobile phone subscribers is over 1.2B; 34% of them use 3G network as of Jan, 2014. The

number of 3G subscribers is still increasing by over 17M per month.

- Mainstream no-contract smartphones manufactured by Huawei and Xiaomi, etc. are priced as low as $129

Facts about Chinese education system and Internet Penetration

A. GENERAL INFO

Source: Ministry of Education, Ministry of Industry and Information Technology of PRC

Facing an influx of internet vendors, the online education industry is

more prosperous than ever

5

1990s 2000s 2010s

Private

Training Agency

New

Winners

Learning

Purpose

Secondary School,

College, University

and Non-government

funded education

Internet Vendors

Degree Qualification Test Extremely Diverse

A. GENERAL INFO

Development history of Chinese online education industry

The market is reckoned to be highly lucrative because of the

willingness to pay and the huge user scale

6 Source: Netease, Inc. “2013-2014 The trends of China's online education”; Ministry of Education, PRC.

Monthly Education Spending for Students

100 100

80

123

191

119

Pre- Primary JuniorHigh

SeniorHigh

PostSecondary

Average

1) 1 USD = 6.1 RMB

Incl. tuition and fees

N=3,453

Unit:USD1)

Before 6 6-11 12-14 15-17 18-21

AGE:

Number of Enrolled Students

Unit: Millions

55 18%

208 68%

43 14%

Preschool K12 Post Secondary

A. GENERAL INFO

All parents would be willing to buy a better chance for their children

The overall financial performance of the Chinese key main private

educational suppliers remains bullish

7

Key supplier performance indicators 2009 - 2013e (n=4 top suppliers1))

Revenue Growth [2009=100] ARPU Growth2) [2009=100] Net Margin [%]

1)Stock Symbol: EDU, XRS, XUE, DL; 2)Average Revenue Per User Yearly (USD), for only top 2 suppliers

Source: Company Financial Report; Analyst forecasts

100

119

140

159

180

09 10 11 12 13e

16.3 15.4

13.0 11.7

16.0

09 10 11 12 13e

100

153

216

272

342

09 10 11 12 13e

1,921M USD 321 USD

A. GENERAL INFO

Top 4’s average recent year stock return is 150%

8

Market Value (US$):

− EDU: 4.23B

− XRS: 1.91B

− DL: 682M

− XUE: 360M

Specialization:

− EDU: Oversea study

− XRS: K12

− DL: Accounting

− XUE: K12, one-on-

one tutoring

As of Mar 17, 2014

A. GENERAL INFO

Source: Google Finance

However online education just gets started, compared with offline

9 Source: Public information

Online Business as % of Total Revenue Expected %

Consumers are not completely accustomed to learning not from a real instructor

B. CURRENT SITUATION

100%

3-5% 10%

40%

Currently in 2-3 years in 5-6 years

The capital market has presented an optimistic judgment

10

2.4

12.1

16.4

22.3

29.1

37.2

47.7

35.7% 36.4%

30.4%

27.9% 28.2%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

10

20

30

40

50

60

2004 ~ 2012 2013E 2014E 2015E 2016E 2017E

USD ($B) Y/Y Growth Rate

CAGR= 22.5%

CAGR=

31.7%

Market Size (in USD1)) Forecast of China Online Education, 2013 - 2017

~

~


Source: Essence Securities, Oct 2013

1) 1 USD = 6.0 RMB

Now the industry has over 580 startups specializing in a surprisingly

diverse range of online applications

11

Number of Financed Startups As of Mar 20, 2014

Amount (USD1)) of Financing Activities As of Mar 20, 2014

Source: Itjuzi Database, StartuptoChina Analytics 2014


101 out of 580 (~17%) startups we tracked have got financed by at least angels

43

39

9

4 3 3

Angels Series A Series B

Series C Acquired Going Public

~135M

~240M

Whole Year of

2013

Single Quarter of

2014

1) 1 USD = 6.1 RMB

47 Cases 14 Cases

Now the industry has over 580 startups specializing in a surprisingly

diverse range of online applications (cont’)

12

Number% of New Startups by Segments in 2013 As of August, 2013

24%

17%

6% 22%

7%

5%

4%

15%

Preschool

K12

Certificates

Language

Overseas

IT

Interests

Others

Number% of Startups which got funded in 2013 As of August, 2013

39%

9% 4%

25%

6%

6%

4% 7% Preschool

K12

Certificates

Language

Overseas

IT

Interests

Others

Source: Itjuzi Publication, 2013


Venture capitals are more fond of unconventional fields such as preschool education, which

is expected to grow exponentially because the post-80s, who account for a large proportion

of middle class, are giving birth now

In general, education is deemed utilitarian; people used to only pay

for something that could quickly come into effect

13

Post

Secondary

K12

Career

Interests

Parents say “we cannot let our child

lose at the starting line” or “we must

make our child go to the best university”

Students say “we need a degree or a

diploma to find a job because otherwise

the employers would not hire us”

Employees say “we need that certificate

to be qualified for higher level job”

People say “If we CANNOT find some

FREE substitutes elsewhere, then …”

PAY FOR EXPLICIT AIMS OFFLINE DOMINATES

7

24

267

269

335

409

1065

1493

0 500 1000 1500 2000

ATAI

DL

AMBO

XRS

EDU

CEDU

XUE

NED

Average Revenue (US$) Per User As of Sep 30, 2012

Offline, one

on one or

small size

class

Offline, medium to

large size class

Online Trainings

for Occupational

Qualification

C. CULTUAL HIGHLIGHTS

Source: Imeigu, Inc. ‘2012 WHITE BOOK FOR CHINESE EDUCATION INDUSTRY’

But what if online courses become more enjoyable than what the

students had expected before?

14 Source: Webpage screenshots


PAST NOW

And what if the students pay significantly less for online than offline?

15 Source: Official Website of DL (China Distance Education Holdings Ltd)


An Example of Accountant Qualification Test

> Award-winning Lecturers

> 10 Minutes per Session

> Anytime Anywhere Accessible

> All Devices Supported

> Tangible Certificates

> Easy Payment

> Downloadable

> Available until the test is over

> Extremely low price <$1 / hour

Features

In fact, online courses are quite acceptable for post-85s/90s who

grew up in digital and internet era

16

C. USER PREFERENCE

2013 Taobao Classmates1) GMV Share Average GMV per User

Source: Taobao

Typical User Characteristics: Age 23-27; Male; Over 50% of them are employed

1) http://xue.taobao.com/ is marketplace for corporate or individual educators to sell all kinds of resources, including online, offline and textbooks

74 43%

40 24%

57 33%

Online Offline Textbooks

Total GMV: 171 Million USD

46

114

11

Online Offline Textbooks

Unit: USD

http://xue.taobao.com/

http://xue.taobao.com/

On an average, working adults would like to spend $39 a month on

part-time study

17

What aspects do you primarily put money into?

C. USER PREFERENCE

Source: Netease, Inc. “2013-2014 The trends of China's online education”; Ministry of Education, PRC.

N=3453

65%

84%

78% 81% 83%

63%

57%

25%

31%

44% 46% 43% 44%

32%

15% 12%

18%

38%

51%

62%

66%

0% 5% 7%

15%

27%

39%

65%

<100 100~500 501~1,000 1,001~2,000 2,001~4,000 4,001~10,000 > 10,000

Books Online Courses/Services Offline Training Agencies School Tuition

Factors which working adults value most and skills they need most

18

C. USER PREFERENCE

Source: Nielson&Sina and Netease Surveys 2013

Which factors do you value most? Which skills do you need most?

Quality and ESL (especially daily oral English - 75%) are always their priority

N=1,150 N=3453

7.9%

18.9%

26.7%

35.7%

50.5%

59.3%

79.8%

Others

Server condition

Brand

Public praise

Price

Lecturer

Quality

16.8%

17.7%

19.7%

20.3%

22.3%

33.9%

68.4%

Natural science

Computer software

Business administration

Education & Psychology

Financial planning

Professional skills

English

The most likely profitable segments and main factors of weakening

E-learning effect, perceived by industry insiders

19

Which sector are most likely profitable? Which factors weaken the effect most?

12%

30%

32%

32%

37%

41%

76%

Others

Requirement of bandwidth

Cost of contents

Unwillingness of learning

Autonomy of learning

Promotion efforts and efficiency

Lack of rich and simple function

5%

6%

21%

22%

22%

33%

37%

40%

41%

62%

No idea

Others

Post secondary

Moocs

IT skills

Preschool

K12

Staff training

Foreign language

Exam skills

Which segments are industry insiders in favor of? (according to a survey of insiders)

Source: International Online Education Summit 2013. ‘Online Education Prospects and Hot Spot Analysis Report’.

C. USER PREFERENCE

Training agencies continue to shift their service capacity toward

online - Customers require cost effective, immediate improvement

20

EDU (#1 in ESL Training) XRS (#1 in K12 Training)

Recent merge & acquisition of top 2 suppliers1)


D. TRENDS, KEY PLAYERS

1)Stock Symbol: EDU, XRS; 2) Mar 18, 2014; 3)As of Nov 30, 2013, Currency in USD

Mkt Cap 4.53B2), Cash, Equiv and ST Invest. 1,092M3) Mkt Cap 1.92B2), Cash, Equiv and ST Invest. 333M3)

Jan, 2014 shicha.com has been integrated in

66xue.com owned by EDU

Overseas Study and

Recruitment Community

Jan, 2014

24.5M USD

Dec, 2013

8.5M USD

Leading Parenting Community

Postgraduate Entrance Examination

Information & Materials

Entrepreneurs are making significant progress by reforming

traditional curricula and pedagogy

21

Evolution of teaching and learning approach and behavior



PAST TODAY

> Primary approach is to understand what the

teachers said in class by doing a lot

exercises after class

> Weak learning process management and lack

of efficiency: often allocating resources

without acknowledging capability differences

> Focus on innovative pedagogy:

- Invest in practical and scientific tools

- Act like a private tutor

- Conduct statistical analysis

- Provide access to resources of elite schools

Is it really necessary? (e.g.) Assignments Management Tool

Total $35M Financing, $100M Valuation

Internet firms have launched marketplaces to help corporations or

individuals to distribute courses and relevant materials

22

Everybody in the world could be an instructor based on dozens of open platforms



Platforms Features Owner or Financed

Baidu

Alibaba

Netease

Sina

NASDAQ:YY

> 1M USD

> 10M USD

> 3M USD

Live Class, Freemium ESL

“Priceline” Model

“Amazon” Model

MOOC, Translation

MOOC, Translation

Live Class

MOOC, Chinese

Overseas Study and Application Advisory

Premium training service suppliers begin to attract outstanding

faculty from abroad and real-world experts from top corporations

23

Thousands of foreign English teachers and industry experts have joined the community



Platforms Features Financing1)

1) Unit: USD, 1USD=6.1RMB

100M

20M

Tencent

> 12M

> 4M

~ 1M

1V1; 1,500 foreign teachers

Mobile / Cloud Computing experts

Internet technology experts

1V1; low price; foreign teachers

1VN; foreign teachers

Foreign advisors who help with application

Potential niche sectors and possible traps for foreign startups

24

Slightly Favorable Trap Very Favorable Good Excellent

Advanced

ESL

Preschool

Computer

Skills

Mobile

Apps

Featured

Certificate

Oral

English

Business

Skills

Working Adults

K12

University

E. RECOMMENDATIONS TO FOREIGN ENTERPRISES

Legend:

2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014

What should do and should NOT do

25

> Focus! Be a upstream supplier offering a

UNIQUE and valuable product that domestic

companies are not good at, e.g. Copyrighted

Foreign Enterprise Staff Training Courses.

> If your products are not that unique and rare,

you had better try FREEMIUM first for the

sake of branding and taking credit from

prospective consumers.

> CRM is extremely important; keep in close

touch with your customers using SOCIAL

NETWORK. Best to have a user experience

and customer service team in China.

> Map the social RELATIONS of users from

offline to online; Invest in research!

> Do NOT rely on only one platform to

promote, try to upload your products to as

many platforms as you can. Looking for co-

op partners is the most important work.

> Do NOT try to establish platform on your

own, or you will be struggling with traffic.

> K12 is NOT recommended for the time being

UNLESS your have resources to reach

students who intend to go abroad before

college, which means, you could offer a

whole set of application services.

> Avoid similar courses or features that can be

provide by MOOCs such as Coursera, KHAN

Academy, etc.

DO DON’T

E. RECOMMENDATIONS TO FOREIGN ENTERPRISES

Insights from insiders 2013 (slightly pessimistic)

26

Zhang, Bangxin

Founder & CEO

TAL Education

Group (K12)

“We have put a lot of effort into exploring the internet field since 2010. We

calmed down a little bit in 2013 because there was not yet any special

pattern of success came out in two years.

“The requirement of current online education is still improvement of the

social attribute – certificate or diploma. The needs between online and

offline are consistent. When there is no fundamental change in demand, the

experience and effect of offline are better. That is why online has not yet

boomed. Only till when we do not care about diploma anymore, which

means, we want to meet the demands of self-improvement, the boom will

come and internet will essentially transform the education”

“Educational recourses are stubborn, accepting new things pretty slowly.

Therefore online education would not overturn the traditional ones as

rapidly as e-commerce.”

Chen, Guangtao

Founder & CEO

duobei.com/

F. FOR YOUR REFERENCE

Source: http://tech.163.com/13/1112/14/9DG3QJBH000915BF.html

http://en.100tal.com/




http://www.duobei.com/


Insights from insiders 2013 (optimistic or neutral)

27

Li, Xin

Vice President

yuantiku.com

“We have exchanged ideas with many senior teachers, who believed what

education is meant mostly to do but is never able to do is teaching students

in accordance with their aptitude. The reality of class size makes this issue

quite difficult to tackle because it would infinitely increase the work load of

teachers. However recently we feel it can be completely solved by data

processing technology along with solid internet infrastructure. Thus we

decide to provide question bank products to implement one-on-one

intelligent training through individualizing user needs based on big data

matching.”

“Online education ought to attract user traffic utilizing long tail effect in the

early stage due to low ARPU. Developers should not merely sell lecture or

courseware; instead, try best to build a learning atmosphere. Interaction

and service experience should be highly targeted and offline social

connections should be entirely migrated to the online world.

Jin, Wenji

Vice President

Legend Capital

F. FOR YOUR REFERENCE

Source: http://learning.sohu.com/s2013/yuantiku/; http://v.youku.com/v_show/id_XNjA5NjMzOTQ4.html

http://yuantiku.com/

http://www.legendcapital.com.cn/en/index.shtml

Please contact us for further information

28

F. CONTACT

http://ca.linkedin.com/in/zhouhaiquan/ http://www.startuptochina.ca/

Insights. Solutions. Programs. Get real-world advice for startup success.

We help international high grade startups successfully engage with Chinese huge and potentially lucrative market from the very beginning.

http://ca.linkedin.com/in/zhouhaiquan/

http://ca.linkedin.com/in/zhouhaiquan/

http://www.startuptochina.ca/

Disclaimer

29

DISCLAIMER

This presentation was prepared by StartuptoChina.ca (“SC”) exclusively for the benefit and

internal use of our clients and solely as a basis for discussion of certain topics related to the

online educational service provider described herein.

Without the prior written authorization by SC, this presentation is strictly confidential, i.e.,

you cannot reproduce, summarize or disclose it, in whole or in part.

This presentation is of a purely informative nature and does not imply any trade

recommendations on securities issued by any of the companies mentioned herein.

This document may include forward-looking statements, which may be provided by SC and

other 3rd party research institutions and thus could differ materially from actual results due

to subjective judgement analysis and objective uncertainty.

Some of the facts and inferences may refer to subjective opinions of key persons or entities

in the online education industry in China. Therefore there is no guarantee that all the

information included herein may not change significantly over a short period of time.

Please notice that the contents contained in this presentation are merely for you to better

understand the current market conditions. We assume no obligation to your decision-making

and subsequent movements if you are not our clients.

Disclaimer

30 Disclaimer