ANALYSIS: China Liberal Education Files Terms for U.S. IPO

China Liberal Education seeks to raise $7 million in a U.S. IPO as the firm faces a transition period for its business model

Author: Donovan Jones   

Short Take

China Liberal Education (CLEU) has filed to raise $7 million in a U.S. IPO.

The firm operates as an educational services provider in China to students and other institutions.

CLEU is transitioning its business model to a more consulting services approach which may not scale to offer investors interesting returns.

Company & Technology

Beijing, China-based China Liberal Education was founded in 2011 as China Liberal (Beijing) Education Technology and provides educational service to education operating under the ‘China Liberal' brand.

Management is headed by Chairman and CEO Jianxin Zhang, who has been with the firm since 2015 and previously served as a partner and attorney at Beijing H&J.

The firm's first branch opened in the Fujan province in 2011 and has since expanded to Hangzhou, Fuzhou and Ji'nan across the east coast of China.

China Liberal Education provides services under Sino-foreign jointly managed academic programs, representing the company's core business, overseas study consulting services, data management and workflow improvement technological consulting services to targeted Chinese universities, as well as tailored job readiness training to graduating students.

The firm's technological consulting services' primary goal is to create a ‘smart campus' and include personalized campus private network buildout, school management software, smart devices, primary Internet of Things (IoT) devices, their installation and testing, as well as school management data collection and analysis services. 

Market & Competition

According to a 2018 market research report by University World News, the total student enrollment in higher education in China reached 37 million in 2016.

Data from Deloitte shows that the Chinese private higher education (CPHE) market was valued at $10 billion in 2012, $13.9 billion in 2016 and is anticipated to reach $20.2 billion by the end of 2021.

In 2015, the CPHE market saw an increase of the total amount of mergers and acquisitions by 165 percent year-over-year, while IPOs increased by 76 percent year-over-year.

The total number of student enrollments in private education in China increased from 5.3 million in 2012 to 6.3 million in 2016 and is expected to further grow to 8 million in 2021.

Major drivers for this market growth include an increase in China's population as well as the rising demand for more affordable and quality education services offered by reliable private education providers.

Major competitors that provide education services in China include:

  • China Maple Leaf Educational Systems (HKG:1317)

  • Beida Jade Bird Group (HKG:8095)

  • Huali University Group

  • Dadi Education Holdings (HKG:8417)

  • China Media Group (SHE:000793)

  • Beijing Lanxum Technology (SHE:300010)

  • Wasu Media Holding (SHE:000156)

  • Newcapec Electronics (SHE:300248)

  • Zhejiang Zhengyuan Zhihui Tech (SHE:300645)

  • Changsha Kaiyuan Instrument (SHE:300338)

Financial Performance

CLEU's recent financial results can be summarized as follows:

  • Growing topline revenue

  • Increased gross profit but decreased gross margin

  • Increased operating profit but decreased operating margin

  • A swing to positive cash flow from operations

As of Dec. 31, 2018, the company had $2.1 million in cash and $716,026 in total liabilities. (Unaudited, interim)

Free cash flow during the 12 months ended Dec. 31, 2018, was $178,301.

Commentary

CLEU is attempting to raise growth capital from a very small U.S. IPO of its ordinary shares.

Typically, Chinese or other foreign firms will sell ADSs to U.S. investors, to minimize administrative requirements to owning shares of a foreign entity, in this case, a Beijing-based company.

The firm's financials show total revenue and gross profit growth as well as comprehensive income and positive cash flow from operations.

However, selling expenses have grown slightly and a full read of the firm's various business lines show management has been deemphasizing certain service offerings due to dropping revenues in those segments. 

Essentially, the firm is growing only by offering overseas study consulting services and ‘smart campus' technology consulting.

So, CLEU is a business that appears to be in transition towards a more consulting model of operation.

The company has produced solid financial results but a concern is whether the focus on consulting services will be able to scale sufficiently to provide investors with attractive financial returns.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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