China has been in the news recently due to the coronavirus outbreak, and the country’s efforts to contain the spread of the virus. Some economists and experts believe the outbreak out take a bite out of China’s economic growth over the short-term, as quarantines, mandatory curfews and the shutting down of factories, hinder economic normalcy.
Despite the recent health crisis, the Chinese economy will likely be able to continue forward and absorb the outbreak, which as it has during past health scares like SARS. Although there is currently no timeline to when the outbreak could be over, it does provide some potential opportunities for long-term-minded investors.
Urbanization continues to see long-term growth in China, which is driving so-called “supercities,” and the demand for higher education. According to the McKinsey Institute, China could see its urban population nearly double from 520 million in 2005 to 1 million people in 2030. The growing Chinese middle class is expected to contribute to a surge in higher education penetration rates, as technology enables greater access.
One company set to be a major player in the coming Chinese educational boom is EdtechX Holdings (NASDAQ: EDTX).
EDTX: An Overview
EdtechX Holdings is the world’s first publicly-traded education and education technology-focused Special Purpose Acquisition Company (SPAC), which is listed on the Nasdaq stock exchange under the symbol “EDTX.”
On December 12, 2019, EdtechX Holdings entered into a definitive merger agreement with Meten Education (China). The transaction is valued at $535 million and EdtechX “may provide Meten with up to $100 million of capital,” according to the press release.
Meten and its digital education platform, Likeshuo, are considered among the market leaders in English Language Training (ELT) in China. EdtechX aims to help expand Meten and its omnichannel distribution platform further throughout China. The goal is to provide digital and physical education options across 600 cities in China.
“Meten has grown rapidly and profitably to reach $200 million (RMB 1,424m) in revenue and $20.1 million (RMB 144m) in EBITDA in 2018, up from $113.9 million (RMB 802m) in revenue and $2.4 million (RMB 17.1m) in EBITDA in 2016, representing a 2-year revenue CAGR of 33% and 2-year EBITDA CAGR of 190%,” according to the merger announcement.
Citigroup: Edtech, ELT, Private Higher-Ed Among Seven Key Growth Areas in Chinese Education Market
Chinese urbanization is estimated to grow individual wealth and expand aspirations for children to have a successful future. According to Morgan Stanley, China is estimated to reach “high-income status” by 2030, when annual per capita income is expected to come in at $17,800. This is almost double of what China’s current annual per capita income rate of $9,450.
According to a recent Citigroup report, there are seven key areas to watch in the Chinese education boom: Education Technology (Edtech), English Language Learning, Private K-12 schools in Emerging Markets, Supplemental Services in Emerging Markets, Higher Education Infrastructure in China, University Services and Personal Training.
Of the seven key areas noted by Citigroup, EdtechX Holdings focuses on three of the seven: private higher education, English language training (ELT), and Edtech.
Citibank’s recent research report on the Chinese ELT market shows that the investment bank estimates growth to $43 billion during 2020, which represents a compound annual growth rate (CAGR) of 21%. The investment bank notes that its growth estimates are “driven by growing expenditure on education, urbanization, increasing awareness of the importance of English, and technology development,” according to the Citibank report.
Further research published by Morgan Stanley estimates that the fast-paced urbanization of China will drive demand for education, English training, and Edtech services. By 2030, online tutoring could make up over 30% of Chinese in education, rising from 10% currently. Morgan Stanley estimates that the growth represents a $150 billion market.
Morningstar: EdtechX Holdings Fair Value at $11.12
Distinguished and respected equity research firm, Morningstar, rates EdtechX Holdings three stars and gives the company a fair value price of $11.12. While the Morningstar rating does imply an upside of around 8% from its current price, the analysis likely underestimates the emerging Meten merger. The deal is still relatively fresh and the pieces are still coming into place. However, the industry and overall trends support EdtechX and Meten over the long-term.
As of January 31, 2020, EdtechX Holdings was held by three different funds: Amundi Obbl Più a distribuzione A, the Special Opportunities Fund, and Destinations Multi-Strategy Alts I.
Amundi Obbl Più a distribuzione A, an Italian fund, is the largest holder with 164,761 shares or a total of 2.08% of all EDTX shares. The Special Opportunities Fund holds 40,325 shares or 0.51% of EDTX, and the Destinations Multi-Strategy Alts I fund holds 28,503 shares or 0.36% of EDTX. Overall, Morningstar rates the Italian fund and the Special Opportunities Fund both four stars, while the Destinations fund is not rated.
Overall, the Chinese urbanization and rise of its middle class paints a very favorable forecast on the education and education technology industry. EdtechX Holdings’s merger with Meten Education (China) puts the company already among the top contenders within the Chinese market. Meten continues to generate strong revenues and, through the use of strategic capital, has a strong growth outlook.
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