摩根士丹利-中國教育行業(yè)：增長緩慢監(jiān)管風(fēng)險-2021.5.28-32正式版

May28,202102:39PMGMT

May11,202109:20PMGMT

ChinaEducation |AsiaPacific

Correction:SlowGrowth,RegulatoryRisk

K12privateschoolmarketgrowthwillbeaffectedbyalowbirthrateandanunfavorableregulatoryenvironment,especiallyforkindergartenandcompulsoryeducation.WedowngradeWisdomandBrightScholartoUW.

WehavecorrectedthepricetargetofBrightScholartoincludeshort-term

investmentintoitsDCFvalue.ThisarticlewasoriginallypublishedonMay11,2021

at09:20PMGMTandisbeingrepublishedon28May2021.Pricingdataand

disclosuresreflectoriginalpublicationdate.Toreceiveanelectroniccopyofthe

originalversionofthispublication,pleasesendane-mailto

Equity_Research_Publishing@withthepublicationtitleand

date.

Kindergartenmarkettoshrinkinnext10yearswithprivatekindergartensunder

marginpressure:WeexpectthemarketsizeofChina'skindergartenswilldecline3%2021-25eCAGRafterrecoveringfromCOVIDin2021,toreachRmb288bnin2025e.Thisisbecauseofadecliningschoolagepopulationpartiallyoffsetbyanincreasinggrossenrollmentratio(i.e.,no.ofenrolledstudentdividedbyschoolagepopulation)targetedbythegovernment.Furthermore,thegovernmenttargetof90%ofkindergartenenrollmentswillbeininclusiveofkindergartensby2025impliesthenumberofenrollmentsinfor-profitprivatekindergartenswillfurtherdecline12%CAGRin2020-25e,pressuringmarginsofprivatekindergartenoperators.

Compulsoryeducationschoolmarketgrowthwillslowdown,seniorhigh

schoolswillgrowsteadily:Inourview,growthoftheK9(compulsoryeducation)schoolmarketwillslowto4%CAGRin2020-25efrom6%CAGRin2015-20,andto2%in2025-30e–whiletheseniorhighschoolmarketwillseeasteadyat8%CAGRin2020-25evs.7%CAGRin2015-20asthehighschoolenrollmentratiocontinuestoimprove.

UnfavorableregulatoryenvironmentforprivateK9schools:Weseemoredownsideontheregulationside,astheimplementationregulationwillbereleasedsoon.Asthegovernmentpushesforwardthedifferentiatedmanagementoffor-profitandnot-for-profitschools,wedonotexpectcompulsoryeducationschoolstobeallowedtodoconnectedtransactionsandthuswillnotbeabletoconsolidateprofittoalistco.Ontheotherhand,webelievethegovernmentwantstopromoteequalityatthecompulsoryeducation(K9)stage,withsimultaneousrecruitmentinpublicandprivateK9schools,etc.ThesepoliciespreventprivateK9schoolsfromselectingjustthebeststudentsandwillgraduallyremovetheadvantageofprivateschoolsvs.publicschools.

Preferhighereducation:Weremove100%ofcompulsoryeducationschool

MORGANSTANLEYASIALIMITED+

ElsieSheng

EQUITYANALYST

Elsie.Sheng@

+8523963-0475

ShengZhong

EQUITYANALYST

Sheng.Zhong@

+8522239-7821

ChinaEducation

AsiaPacific

IndustryView Attractive

Exhibit1:What'schanged

What'sChanged

From:

To:

Wisdom(6068.HK)

PriceTarget

HK$4.2

HK$1.7

Rating

Equal-weight

Underweight

BrightScholar(BEDU.N)

PriceTarget

US$6.8

US$3.3

Rating

Equal-weight

Underweight

MapleLeaf(1317.HK)

PriceTarget

HK$1.7

HK$1.1

Source:MorganStanleyResearch.

MorganStanleydoesandseekstodobusinesswithcompaniescoveredinMorganStanleyResearch.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofMorganStanleyResearch.InvestorsshouldconsiderMorganStanleyResearchasonlyasinglefactorinmakingtheirinvestmentdecision.

Foranalystcertificationandotherimportantdisclosures,refertotheDisclosureSection,locatedattheendofthisreport.

+=Analystsemployedbynon-U.S.affiliatesarenotregisteredwithFINRA,maynotbeassociatedpersonsofthememberandmaynotbesubjecttoFINRArestrictionsoncommunicationswithasubjectcompany,publicappearancesandtradingsecuritiesheldbyaresearchanalystaccount.?

1

profitfromK12schooloperatorsstartingfromF2022etoreflectregulatory

downside.WedowngradebothWisdomandBightScholartoUW,withPTscutto

HK$1.7andUS$3.3,respectively.WestayUWonMapleLeafwithPTcutto

HK$1.1.WepreferhighereducationoverK12schoolsasprivatehighereducation

ismoresupportedbygovernmentvs.privateK12.

ElsieShengassumescoverageofWisdom,BrightScholarandMapleLeafstockwiththisreport.

2

StockPreference

Exhibit2:Schooloperatorsstockpreference

ChinaEast

Offcn

Yuhua

ChinaNew

ChinaEducation

BEDU

Wisdom

MapleLeaf

RYB

Education

Higher

Group

0667.HK

002607.SZ

6169.HK

2001.HK

0839.HK

BEDU.N

6068.HK

1317.HK

RYB.N

Rating

Overweight

Overweight

Overweight

Overweight

Equal-Weight

Underweight

Underweight

Underweight

Underweight

TradingCurrency

HKD

CNY

HKD

HKD

HKD

USD

HKD

HKD

USD

PriceTarget

20.0

30.0

8.4

7.5

19.4

3.3

1.7

1.1

2.3

CurrentPrice

17.1

25.0

7.1

5.7

18.1

5.2

3.6

1.9

2.5

Upside/(Downside)(%)

17%

20%

18%

32%

7%

-48%

-53%

-42%

-8%

MarketCap(inUSDmm)

5,024.4

23,984.8

3,417.4

1,125.2

5,129.2

625.6

954.5

734.4

69.8

AvgDailyTradedVol(inUSDmm)

7.8

69.6

11.4

4.0

12.7

0.1

2.6

4.3

0.0

StreetView:Ratings

NA

94%

100%

93%

90%

96%

0%

64%

36%

0%

NA

0%

0%

7%

10%

4%

36%

0%

100%

45%

NA

6%

0%

0%

0%

0%

0%

0%

18%

100%

BullCaseValue

25.1

50.0

10.3

9.0

24.8

6.5

4.5

2.2

3.7

Upside(%)

47%

100%

45%

58%

37%

25%

25%

16%

48%

BearCaseValue

12.5

13.0

5.1

4.0

12.8

1.5

1.0

0.8

1.7

Downside(%)

-27%

-48%

-28%

-30%

-29%

-71%

-72%

-58%

-32%

Risk/RewardSkew

1.7

2.1

1.6

1.9

1.3

0.4

0.3

0.3

1.5

MorganStanleyEstimates

FY21e

HKD

CNY

HKD

HKD

HKD

USD

HKD

HKD

USD

Sales

5,896

14,618

3,304

1,858

4,608

563

2,725

2,744

198

EBITDA

2,428

2,841

1,990

863

2,358

106

1,101

805

10

EBIT

1,621

2,644

1,737

699

1,864

65

889

759

3

EPS

0.57

0.29

0.44

0.43

0.77

0.29

0.30

0.25

0.05

FY22e

Sales

7,051

18,042

3,699

2,317

5,553

656

3,206

3,088

217

EBITDA

2,945

4,043

2,220

1,146

2,936

132

1,319

863

10

EBIT

2,004

3,693

1,951

961

2,299

92

1,046

817

3

EPS

0.71

0.42

0.48

0.54

0.91

0.47

0.32

0.25

0.06

FY21MSevs.ConsensusMean

Sales

0.5%

-8.5%

-0.1%

-10.0%

0.8%

-0.7%

0.6%

6.5%

0.0%

EBITDA

12.6%

-26.8%

-5.5%

-4.9%

-0.4%

0.9%

-4.5%

-13.7%

0.0%

EBIT

9.7%

-24.9%

-0.6%

-34.5%

-4.3%

-4.6%

-4.5%

-2.8%

0.0%

EPS

2.1%

-43.4%

-6.7%

-9.7%

2.7%

-30.4%

-13.5%

-4.0%

-2.1%

FY22MSevs.ConsensusMean

Sales

2.8%

-13.5%

1.6%

0.7%

3.5%

-1.1%

1.4%

6.2%

0.0%

EBITDA

13.7%

-21.1%

-4.5%

-16.7%

1.6%

2.4%

-1.7%

-20.1%

0.0%

EBIT

10.3%

-24.7%

0.3%

-14.7%

-3.0%

0.7%

-3.1%

-10.9%

0.0%

EPS

3.4%

-39.0%

-10.5%

-7.4%

-2.0%

-14.7%

-20.2%

-18.1%

-5.2%

ValuationMultiplesatLastClose

FY21e

P/E

29.9x

86.9x

16.0x

13.1x

23.7x

17.6x

11.7x

7.7x

50.8x

EV/EBIT

21.1x

57.1x

15.8x

14.3x

22.9x

4.1x

12.5x

8.6x

15.3x

EV/EBITDA

14.1x

53.1x

13.8x

11.6x

18.1x

2.5x

10.1x

8.1x

4.5x

EV/Sales

5.8x

10.3x

8.3x

5.4x

9.3x

0.5x

4.1x

2.4x

0.2x

FCFYield

5.5%

-0.2%

11.3%

13.6%

-1.9%

10.9%

-12.1%

9.4%

48.4%

FY22e

P/E

24.0x

59.6x

14.6x

10.5x

20.0x

11.0x

11.0x

7.8x

43.8x

EV/EBIT

16.6x

40.0x

13.4x

10.0x

18.2x

1.5x

11.7x

7.4x

12.6x

EV/EBITDA

11.3x

36.5x

11.8x

8.4x

14.3x

1.0x

9.3x

7.0x

3.8x

EV/Sales

4.7x

8.2x

7.1x

4.1x

7.6x

0.2x

3.8x

2.0x

0.2x

FCFYield

6.4%

1.7%

7.3%

9.4%

4.8%

16.8%

-7.7%

43.4%

8.2%

ImpliedMultiplesonMSPriceTarget

FY21e

P/E

35.0x

104.5x

18.9x

17.3x

25.3x

11.2x

5.6x

4.4x

47.0x

EV/EBIT

25.3x

68.9x

18.6x

18.4x

24.4x

2.5x

8.2x

5.4x

13.5x

EV/EBITDA

16.9x

64.1x

16.2x

14.9x

19.3x

1.6x

6.6x

5.1x

4.0x

EV/Sales

6.9x

12.5x

9.8x

6.9x

9.9x

0.3x

2.7x

1.5x

0.2x

FY22e

P/E

28.0x

71.6x

17.3x

13.9x

21.4x

7.0x

5.3x

4.5x

40.4x

EV/EBIT

19.9x

48.4x

15.9x

12.9x

19.4x

1.0x

8.0x

4.5x

10.9x

EV/EBITDA

13.5x

44.2x

14.0x

10.8x

15.2x

0.7x

6.4x

4.2x

3.3x

EV/Sales

5.7x

9.9x

8.4x

5.4x

8.1x

0.1x

2.6x

1.2x

0.2x

StockPricePerformance

1Month

5.2%

(10.6%)

19.0%

30.6%

28.7%

(10.6%)

(8.0%)

(5.9%)

(4.6%)

3Month

(10.5%)

(36.7%)

(0.4%)

3.8%

8.8%

(19.1%)

(8.5%)

(2.5%)

(13.8%)

1Year

36.0%

(4.5%)

(0.3%)

38.6%

37.6%

(25.4%)

12.6%

(13.5%)

(57.7%)

YTD

(8.4%)

(29.0%)

5.0%

17.6%

21.4%

(10.2%)

(5.6%)

(5.9%)

5.1%

Source:Source:MorganStanleyResearch,Refinitiv(consensusmean).e=MorganStanleyResearchestimates

3

StockInvestmentSummary

What'snew

1.

Implementationregulationfinalversionshouldbeoutsoon,andweexpectcompulsoryeducationschools'

profitwillnotbeallowedtobeconsolidatedintoalistco.

2.

GrowthofdomesticK12schoolsisslowingdown.

3.

OutlookforprivateK12schoolsmarketgrowthinChinawillalsobeslower,especiallykindergartensand

compulsoryeducationschools.

What'schanged

1.

WeexcludethecompulsoryeducationprofitcontributionfromthelistcostartingfromF2022etoreflect

regulatoryrisk.

2.

Werevisedownlong-termgrowthofK12schooloperatorstoreflecttheslowergrowthoutlookfortheindustry

inthenext10years.

3.

WedowngradebothWisdomandBrightScholartoUnderweight,andwecutPTstoHK$1.7andUS$3.3,

respectively,onlowerlong-termearningsforecastsandafterremoving100%compulsoryeducationschools

profit.

Whatthemarketismissing

1.

Tighterpotentialregulationonprivatecompulsoryeducationschools.

2.

Impactonlong-termenrollmentgrowthfromalowbirthrateinChina.

Exhibit3:PTafterexcludingcompulsoryeducationprofitfromlistco

Wisdom

BrightScholar

MapleLeaf

%Revenuefromdomesticcompulsoryeducation

54%

45%

35%

tuitionandboardingfeeF22E

Fairvaluebeforetakingoutcompulsoryeducation

HK$3.80

US$6.60

HK$1.80

PT-excludingcompulsoryeducation

HK$1.70

US$3.30

HK$1.1

Source:Companydata,MorganStanleyResearchEstimate.

4

K12PrivateSchoolGrowthSlowingDown

Lowbirthratewillaffectenrollmentgrowthofloweragegroup:ThebirthratehasbeendowninChinasince2016accordingtoNBSdata.The2020newbirthratehasnotbeenannouncedyet,butthe2020newbornpopulationincitiesthathavedisclosedsuchdata,includingBeijing,isdown10-30%YoY,andthenumberofregisterednewbornchildrenattheMinistryofPublicSecurityisdown15%YoYin2020.Thisimpliesthe2020birthratecoulddropfurthertobelow1%.Weexpectschoolagepopulationofkindergartenswillbe-5.6%CAGRin2020-25,andtheschoolagepopulationofcompulsoryeducationwillbeflattishat0.2%CAGRin2020-25e.

Exhibit4:Newbirthratedecliningsince2016...

Chinabirthrateandnewbornpopulation

20.0

1.211.201.191.191.211.211.241.21

1.301.24

1.4

18.0

1.091.05

1.2

16.0

0.92

1.0

people)

14.0

(%)

12.0

0.8

10.0

16.115.915.916.016.316.416.916.6

17.917.2

0.6

(mn

8.0

15.214.612.9

6.0

0.4

4.0

0.2

2.0

-

0.0

Newbornpopulation

Chinabirthrate

Source:NBS,MorganStanleyResearch.

Exhibit5:...Willleadtoadecliningkindergartenschoolagepopulationandflattishcompulsoryeducationschoolagepopulationinthenextfiveyears

SchoolagepopulationYoYgrowth

4.0%

2.9%

0.9%1.0%1.7%

0.7%

2.0%

1.3%0.8%0.3%

-0.2%0.1%-0.1%-0.1%

0.4%

0.0%

0.2%0.3%0.5%0.5%

-1.1%-0.5%

-0.3%

-0.3%

-0.9%

-0.8%

-1.2%

0.0%-0.2%0.1%-0.1%

-2.0%

-1.0%-1.1

-1.5%

-0.6%

-2.3%

-2.5%

-2.8%-2.9%

-4.0%

-2.0%

-2.2%

-6.4%

-3.9%

-3.5%-3.4%

-6.0%

-4.3%

-4.6%

-8.4%

-8.0%

-10.0%

Kindergarten(3-5)

Compulsory(6-14)

Highschool(15-17)

Source:NBS,MorganStanleyResearchestimates.

Decliningkindergartenmarketinthenextfiveyears

KindergartenmarketwillrecoverfromCOVIDin2021,butthendeclineuntil2025e:

WeexpectChina'skindergartenmarketwillrecoverfromCOVIDin2021toRmb322bn,andthengraduallydeclinetoRmb288bnin2025eat-3%2021-25eCAGR.

Thisisbecauseof:1)-6%CAGRofpreschoolagepopulationbasedonlatestbirthrates,partiallyoffsetby2)increasinggrossenrollmentratioofpreschoolagechildren,whichistargetedtoreachabove90%by2025accordingtothe14thFiveYearPlan.

5

Exhibit6:Kindergartenenrollmentswillbedowninthenextfiveyearsbasedonalowerschoolagepopulationandgraduallyincreasingenrollmentratio

Preschoolagepopulationandenrollmentratio

60

120%

2025target:

50

above90%

97%

100%

85%

92%

40

80%

(mn)

75%

30

57

57

2020-25

60%

20

43

48

CAGR:

4138

4039

40%

-5%

10

20%

-

0%

2015

2020E

2025E

2030E

PreschoolschoolagepopulationStudentenrolledinkindergarten

Preschoolenrollmentratio(%)

Source:MoE,NBS,MorganStanleyResearchestimates.

Exhibit7:Kindergartenmarketsizewilldeclineuntil2025afterrecoveryfromCOVIDin2021

Chinakindergartenmarketsizeandgrowth

400

17%16%

20%

350

15%

13%

300

107

11%11%

107

11%

105

106

10%

250

128

135

128

123

113

107

104

104

bn)

107

200

106

119

6%

5%

(Rmb

4%

5%4%

84

94

2%2%

2%

150

69

0%

0%

57

-1%

100

181184194

192

-2%

199211217224230

167175

183

93107121

138151

182

187

-5%

50

-6%

-8%

0

-10%

Kindergarten-public

Kindergarten-private

YoY

Source:MoE,NBS,MorganStanleyResearchestimates.

Exhibit8:Theno.ofenrollmentinfor-profitprivatekindergarten

Percentageofinclusivekindergartensistargetedtorise,putting

willfurtherdeclineat12%CAGRin2020-25,assuming90%inclusive

kindergartentargetisachievedby2025 pressureonprivatekindergartengrowthandmargins:Toprovide

accesstopreschooleducationtoall,thegovernmenttargetstoraise

Preschoolenrollmentbreakdown

thepercentageofenrollmentsininclusivekindergartens,i.e.,public

60.0

90%

100%

73%

76%

85%

kindergartensandnot-for-profitkindergartens,to90%by2025from

50.0

67%

71%

-12%2020-

80%

85%in2020,accordingtothe14thFiveYearPlan.Thisimpliesthatthe

40.0

25CAGR

60%

numberofenrollmentsinfor-profitprivatekindergartenswilldecline

30.0

Inclusive

40%

20.0

at-12%CAGRin2020-25,weestimate.So,someoftheprivate

KG

20%

10.0

kindergartensmaycontinuetobeconvertedtonot-for-profit.

-

0%

2016

2017

2018

2019

2020

2025

Thegovernmentalsotargetstoaddcapacityofinclusivekindergartens

Publickindergartenenrollment

Not-for-profitprivatekindergarten

toover4mnintotalduring2020-25,or8%oftotalkindergarten

For-profitkindergarten

Inclusivekindergarten%

enrollmentsin2020.Thiswilllimitthegrowthoffor-profitprivate

Source:MoE,MorganStanleyResearchEstimate.

kindergartensunderthebackdropofadecliningschoolagepopulation,

andwillpressurethemarginsofprivatekindergartensasthereisatuitionfeecapforinclusivekindergartens,whichisdecidedbylocalgovernmentsandisusuallysetatRmb500-2,000/student/month.

Compulsoryeducationschoolmarketgrowthwillslowdown

Compulsoryeducationmarketgrowthwillslowdowninthecoming10years,asa

lowerbirthrategraduallycovertstoalowerschoolagepopulation:WeexpectthecompulsoryeducationmarketinChinatoseea4%CAGRin2020-25toRmb2.57bn,slowingfrom6%CAGRin2015-20,andfurtherto2%in2025-30e.

Thisisbecause:1)theschoolagepopulationforcompulsoryeducationhasstartedtograduallytrenddownsince2024e,basedonChina'sdecliningbirthrate,and2)netenrollmentratioinprimaryschoolshasreached99.96%andthegrossenrollmentratioinmiddleschoolshasreached102.5%,meansthere'slimitedroomforimprovementinenrollmentratios.Weexpectthecompulsoryeducationenrollmentratiowillstayaroundthecurrentlevelgoingforward.

6

Exhibit9:K9schoolagepopulation

Compulsoryeducationschoolagepopulation

200

1.3%

2.0%

180

172

167

1.5%

162

157

0.8%

160

153

149

1.0%

147

145

144

144

144

145

0.5%

0.5%146

148

149

148

147

144

145

140

0.2%

0.3%

143

141

139

136

0.5%

120

-

0.3%

-

0.5%

0.0%

(mn)

100

-

0.8%

-

0.9%

-

1.1%-

1.1%

-0.5%

-

1.2%

-1.0%

80

-

1.5%

-

1.9%

-

1.8%-

1.7%

-1.5%

-

2.3%

60

-2.0%

40

2.8%-

2.8%-

-

3.0%-

2.9%

-2.5%

20

-3.0%

-

-3.5%

Compulsory(6-14)

YoY

Source:MoE,NBS,MorganStanleyResearchestimates

Exhibit10:K9marketsizegrowthwillslowdown

Chinacompulsoryeducationmarketsizeandgrowth

3,500

9%

10%

3,000

9%

188

8%

7%

8%

7%

167

172

178

183

2,500

163

7%

7%

151

157

143

6%

bn)

2,000

6%6%

124

134

113

6%

5%

5%

(Rmb

100

5%

1,500

66

71

78

88

5%

2,705

4%

53

2,5942,648

49

2,524

4%2,4052,454

2,334

2,255

3%

3%

2,152

1,000

2,044

3%3%

1,961

1,860

1,747

1,634

2%

1,551

2%

2%

1,471

2%

1,348

500

1,258

1,172

1%

-

0%

K9-publicschool

K9-privateschool

YoY

Source:MoE,NBS,MorganStanleyResearchestimates

Exhibit11:Enrollmentratiosofprimaryschoolsandmiddleschools

havereachedsaturationpointof~100%;weexpectenrollmentratio

forcompulsoryeducationtostaystableataroundthecurrentlevel

EnrollmentratioofK12schools

105%

104%

104.1%

104.0%104.0%

103%

103.5%

103.5%

102.6%

102%

102.1%

102.5%

101%

100.9%

100%

100.1%100.1%

99.0%

99.8%

99.9%

99.7%

99.8%

99.9%

99.9%

99.9%100.0%99.9%100.0%

99%99.5%

99.4%

99.7%

98%

98.5%

97%

96%

95%

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

NERofprimaryschool

GERofmiddleschool

Source:MoE,MorganStanleyResearch.Note:GERcouldbeover100%assomeenrolledstudentsarenot

withinschoolagepopulation.

Privatecompulsoryeducationschoolsfaceunfavorableregulatoryenvironment

ConsolidationofprivateK9schoolsprofitintolistcomaynotbeallowed:Thegovernmenthascontinuedtopromotedifferentiatedmanagementoffor-profitandnot-for-profitschools,andweexpecttheimplementationregulationfinalversiontobereleasedsoon.Againstthisbackdrop,wefactorintheriskthatcompulsoryeducationschoolswillnotbeallowedtodoconnectedtransactionsbecausetheycanonlyregisterasnot-for-profit,andsotheprofitfromcompulsoryeducationschoolswillnotbeallowedtobeconsolidatedintoalistco.

WeexcludetheprofitofcompulsoryeducationfromtheK12schooloperatorsstartingfromF22e,basedontheestimated%ofrevenuefromdomesticK9schoolsofeachplayer,assumingthattheprofitsofcompulsoryeducationschoolscannotbeconsolidatedtothelistco.WecutthePTsofWisdom,BrightScholarandMapleLeaftoHK$1.7,US$2.7andHK$1.1,respectively,toreflectthechanges.

7

Exhibit12:PTafterexcludingcompulsoryeducationfromlistco

Wisdom

BrightScholar

MapleLeaf

%Revenuefromdomesticcompulsoryeducationtuitionand

54%

45%

35%

boardingfeeF22E

Fairvaluebeforetakingoutcompulsoryeducation

HK$3.80

US$5.20

HK$1.80

PT-excludingcompulsoryeducation

HK$1.70

US$2.70

HK$1.1

Source:Companydata,MorganStanleyResearchEstimate.

RegulationswillcontinuetopressureprivateK9schooldemand:Thegovernmentpoliciesalsoencourageequalitybetweenprivateandpubliccompulsoryschools,e.g.,simultaneousrecruitmentofpublicandprivatecompulsoryeducationschoolsanda"luckydraw"forallocatingover-demandedschoolseats.Previously,privateschoolscoulduseinterviews,etc.toselecttalentedkids,whichwillnolongerbeallowed.Andfromtheperspectiveofparents,iftheychoosetoapplyforprivateschools,theyfacetheriskthattheyarenotadmittedthroughthe"luckydraw"systemandtheymaybeallocatedtoalower-qualityschool.Actually,we'venoticedthatenrollmentgrowthofprivateK12schoolshasslowedsince2018,andgrowthofpublicK12enrollmentshaveaccelerated,accordingtodatafromtheMinistryofEducation.

TheShanghaiexamplealsoshowsnegativeimpactonprivateK9schooldemandfrom

theregulations:ShanghaiisoneoftheregionsthatprivateK12schoolshavebeenactivelypursuedbyparents.However,sinceShanghaipilotedthesimultaneousrecruitmentofpublicandprivateprimaryschoolsin2018,thenumberofstudentsapplyingforprivateprimaryschoolsinShanghaiimmediatelydroppedfrom37.4kin2017(22%ofall)to19.9kin2018(11%ofall).Furthermore,11.9%ofprivateprimaryschoolsand22.7%ofprivatemiddleschoolsinShanghaiin2020didnotseethenumberofstudentsapplyingexceedtheirenrollmentquota,accordingtotheMoE,showingthatthepolicieshaveanobviousnegativeeffectonthenumberofstudentsapplyingforprivateschools.

Thistrendwillcontinueasregulationsarerolledoutnationally:SincetheMoEmentionedin2019thatthesimultaneousrecruitmentofpublicandprivatecompulsoryeducationschoolsisrequirednationally,andthata"luckydraw"willbeusedforallocatingover-demandedschoolseats,allprovincesinChinahaveimplementeddetailedregulationsandstartedtorolloutthepoliciesfrom2020.WeexpectthiswillcontinuetohaveanimpactonthegrowthofprivateK9schoolenrollmentsnationally.

8

Exhibit13:GrowthofprivateK12enrollmentsslowingdown,publicK12enrollmentgrowthaccelerating

K12enrollmentinChinabypublicandprivate

250,000

15.0%

12.7%

200,000

10.0%

150,000

6.7%5.6%6.4%7.1%6.1%6.6%

5.1%

5.0%

100,000

0.6%

0.9%1.3%

3.

4%

1.7%1.9%

50,000

-0.5%

-0.3%

0.0%

-2.5%-3.8%

-

-5.0%

201120122013201420152016201720182019

PrivateK12enrollment

Publicenrollment

PrivateYoY%

PublicYoY%

Source:MoE,MorganStanleyResearch.

Exhibit14:ThenumberofstudentsinShanghaiapplyingforprivateK9schoolsdroppedafterthepilotofthesimultaneousrecruitmentofpublicandprivateprimaryschoolswaslaunchedin2018,showingnegativeimpactondemandforprivateK9schoolsfromthepolicy

Shanghaino.ofstudentsapplyingforprivateschools

40

23%

20%

20%

25%

30

22%

18%

20%

15%

20

12%

11%

11%

10%

10

5%

0

0%

2017

2018

2019

2020

No.ofstudentsapplyingforprivateprimaryschoolsNo.ofstudentsapplyingforprivatejuniorhighschools

oftotal(primaryschool)

oftotal(juniorhighschool)

Source:ShanghaiEducationBureau,MorganStanleyResearch.

Seniorhighschoolswillbethefastestgrowthsub-sectorofK12schools

SeniorhighschoolmarketwillgrowsteadilyathighsingledigitsYoY:Thedecliningseniorhighschoolagepopulationtrendwillturnaroundin2020-30eduetoastabilizedbirthrateduring2005-2015,andthusseniorhighschoolmarketsizewillseeCAGRsof8%in2020-25eand9%in2025-30evs.7%in2015-20.Ontheotherhand,seniorhighschoolswillbeeligibletoregisterasfor-profitschools,thusseeingfewerlimitsonpricing.Thiswillbethefastestgrowthsub-sectorofK12schools,inourview;howev