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ANALYSIS: Puxin Grows Unevenly in Difficult Education Industry

Puxin has shown some growth since its IPO but faces a difficult environment amid a challenging economy and regulatory pressures.

Donovan Jones
    Jul 07, 2019 5:10 AM  PT
ANALYSIS: Puxin Grows Unevenly in Difficult Education Industry

Short Take

Puxin Ltd. (NYSE: NEW) has recently reported financial results for its first quarter of 2019.

The firm provides K-12 education in offline facilities and more recently via an online offering.

NEW's financial results have been challenged by an uncertain economic environment and negative developments by regulators on its ability to expand its offline facilities.

Company

Beijing-based Puxin was founded in 2014 to develop or acquire after-school education facilities for the K-12 education segment.

Management is headed by founder and CEO Yunlong Sha, who was previously SVP at New Oriental Education & Technology Group.

Below is a map showing the firm's offline locations and other statistics:

(Source: Puxin F-1/A)

Puxin is primarily an offline-oriented education services provider. Management says that in the future it ‘may' invest in online service offerings.

Puxin has been aggressively acquiring facilities to expand its operations. It seeks to attract new students through word of mouth, online and mobile advertising and a sales force at each of its learning centers.

Market

According to a 2017 report by DBS Vickers Securities, it forecasted overall education spending market in China to grow by a CAGR 6.7 percent ‘in the foreseeable future due to multiple drivers:'

  • End of the one-child policy will increase student number growth

  • Rising income to support a continued increase in household spending

  • Increased parent willingness to pay for education

The group expects the total market value for education and training to reach $474 billion by 2025, with the K-12 sector accounting for most of the demand.

Looking historically, the chart below shows the tremendous rise in education spending by households along with spending growth:

(Source: DBS Vickers Securities)

Puxin's scale has afforded it some advantages in that it can provide a larger suite of service offerings when compared to smaller, local facilities.

Recent Performance

Puxin's topline revenue by quarter since its IPO has trended upward but in an uneven trajectory:

(Source: Seeking Alpha)

Gross profit by quarter has also been markedly uneven:

(Source: Seeking Alpha)

Operating losses by quarter have improved somewhat from early 2018 but are still significant:

(Source: Seeking Alpha)

Earnings per share (diluted) have improved but results have fluctuated significantly:

(Source: Seeking Alpha)

In the past 12 months, Puxin's stock price has fallen 65.6 percent vs. Bright Scholar's (BEDU) drop of 37.7 percent, as the chart below indicates:

(Source: Sentieo)

Commentary

Puxin has faced a difficult operating environment since going public in early 2018.

The education sector has seen damaging headlines about substandard care for early-age students.

Additionally, regulators have clamped down on private companies acquiring or partnering with public facilities, delivering a significant blow to the private education industry's expansion plans.

Puxin has been directly affected by this, as management has scaled back its acquisition efforts in response.

However, management has touted a continued increase in enrollments and an 81.6 percent retention rate.

Also, the firm finally launched its online education business in Q4 2018 and seeks to build what it calls an Online-Merge-Offline or OMO model to provide seamless integration between digital and real-world education opportunities.

Despite a challenging economic environment in China as a result from U.S. trade tensions, management continues to execute on its business plan.

The question is whether, given all the challenges it faces on economic and regulatory fronts, Puxin will be able to produce profits any time soon.

(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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