China’s Private Schools Get a Gold Star

Mar 3, 2017 by

Nisha Gopalan –

Not-for-profit industries are hardly associated by most investors with rising returns. Not so in China, whose private-school sector has become initial public offering gold in Hong Kong.

Two of the city’s five biggest IPOs so far this year have been of Chinese nonprofit school operators: China Yuhua Education Corp., which made its trading debut this week, and Wisdom Education International Holdings Co.

That brings the number of Hong Kong-traded Chinese school companies to four. China Maple Leaf Educational Systems Ltd. was the first to float, in 2014, followed by Virscend Education Co. last year. Maple Leaf’s shares have climbed 76 percent since listing and Virscend has gained 113 percent. Yuhua has risen almost 3 percent from its IPO price this week, while Wisdom is little changed since its January debut.

The companies are proving winners in the aggregate even though Chinese private schools aren’t allowed to distribute profits or pay dividends. The reason? Use of offshore vehicles and service contracts that enable income to be funneled out of the mainland.

All private schools in China are nominally nonprofit, though some have been permitted to remit “reasonable returns” to their providers of capital, according to law firm Hogan Lovells. What exactly constitutes reasonable remains unclear.

Operating through that gray area, private school companies have tapped into a lucrative business. China’s education needs are huge, and the rigid curriculum of state schools has prompted parents to seek alternatives. Beijing has been encouraging private providers to fill the gap. right to offer education for children in grades 1-9 (the compulsory years) along with other government privileges. Wisdom, which says it hasn’t yet decided whether to convert, noted in its IPO filing that private operators may enjoy less support than not-for-profit schools.

Source: China’s Private Schools Get a Gold Star – Bloomberg Gadfly

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