A Lesson in Profits: When Education Meets Market Adaptation

Education is one of our stewardship priorities, and is an area where our Committee believe there is a strong investment case, as education contributes towards a more skilled workforce and better economic outcomes. 

Education as a theme applies to all companies, in the form of training and development, as well as investments directly in companies that provide education services. In this article we have investigated two holdings in the education services sector, both of which are held within our emerging markets multi-asset portfolio, managed by Ninety One.

Case study - New Oriental Education (WPF holding c.£1.3m)

New Oriental Education is a provider of private educational services in China.  The company has undergone some major transformations over the last few years, as a result of needing to adapt to the changing regulatory environment in the sector.  The company's core business model has historically been heavily focussed on after-school tutoring, however in 2021 regulatory changes introduced huge challenges to this business model. 

From September 2021, the Chinese authorities banned for-profit tutoring, which lead to widespread job losses within the private education sector.  For New Oriental, this led to 60,000 staff members being let go, and a decrease of 80% in operating revenue.  The company responded by diversifying into e-commerce, which provides more resilient revenue streams, as well as changing their approach to education provision.  The company embraced government policy promoting extracurricular activities, and launched non-academic courses offering non-core subjects like art, music, and sports, alongside online learning for wider reach and flexibility. Additionally, adult education programs in vocational training and professional development were introduced.

We were keen to understand more about how New Oriental is positioned going forward.  Ninety One have said that they believe the company is well-positioned to deliver strong growth from its newer businesses such as its live streaming e-commerce platform and vocational training programs, its ability to navigate through a tough policy environment, and international expansion.

The impact of these challenging times can be seen in New Oriental's share price over the last 5 years.  WPF became investors in March 2023, when the company moved into a recovery phase, and over that period we have experienced a doubling in the share price, showing that by investing in an adaptable company, we are able to earn both strong returns and continue to support the delivery of educational services.

Case study - YDUQS (WPF holding c.£75k)

 Ninety One have recently added a small investment in another educational services company to our portfolio, YDUQS.  Although only a small holding, due to our interest in this sector we were keen to understand more about the market so we reached out to Ninety One for more information.  YDUQS is a leading company in private higher education in Brazil, with a focus on distance learning. YDUQS operates through three main divisions: on-campus learning, digital learning (distance learning centres in partnership with local players), and premium operations (including medical schools and business schools).

Brazil faces a significant skills gap. Whilst ~32m people have a high school education, only about 8m have higher education. Higher education has proven worthwhile as on average someone with higher education can double their salary. Campus education is expensive, consuming almost half of the average person's monthly salary - but distance learning is a far more affordable alternative and is growing in popularity in Brazil. The Brazilian government has historically sought out ways to close the skills gap through scholarships and funding programmes.

However, in spite of these programmes, the education sector in Brazil has been under a lot of pressure, due to wider economic difficulties in Brazil in 2016 and 2018, and then the pandemic in 2020.  As a result of these problems, the funding programmes are no longer a driver of earnings for education companies.

YDUQS has adapted, and now serves more self-funded students, as well as offering more higher-margin degrees, which have made the course mix more resilient.  The company has also invested significantly in digital transformation and technologies.  Brazil is currently experiencing cuts in interest rates, and this is benefitting YDUQS, making its own balance sheet debt more affordable, as well as improving affordability for the students who make up its customer base.

Conclusion

Investing in education offers a compelling investment case, underscored by our exploration of two distinct entities within the education services sector. In looking at New Oriental and YDUQS, we have observed the resilience and adaptability of companies in facing regulatory changes and economic challenges. New Oriental's strategic pivot towards e-commerce and diverse educational offerings demonstrates the potential for innovation and growth in response to adversity. Similarly, YDUQS's focus on distance learning and digital transformation highlights the opportunities within the education sector to meet evolving market demands and bridge the skills gap. These investments align with our stewardship priority of investing in education, which is foundational for building a skilled workforce and fostering better economic outcomes globally.