HONG KONG - A Chinese vocational school initial public offering is tapping job anxiety. China East Education, which claims to be the country's largest training provider, has priced its Hong Kong IPO at HK$11.25 per share, according to Reuters reports, implying a market value of $3.1 billion. Beijing’s push to retrain millions of laid-off workers as growth slows could be good for the bottom line, but the market is fragmented, and earnings have been volatile. The price implies very optimistic growth expectations.

The company, which offers training for culinary arts, information technology and automobile repair, has raised $625 million, per the report. It will use the funds to expand its campuses, invest in curriculum research and business operations. In fact it is in turnaround mode. In 2018 earnings fell 21% to 510 million yuan ($74 million), which analyst Zhen Zhou Toh, who publishes on SmartKarma, blamed on upfront investments in new facilities. This share price represents a multiple of around 22.3 times the company’s estimated forward earnings, a source with direct knowledge told Reuters. Rival China Education Group 0839.HK trades at around the same ratio, but to hit that number CEE’s profit would have to double in one year.

The company is profitable, and high growth is not unprecedented in China. As new schools open for business, revenue will rise. Policy winds are very supportive. As the population ages, the supply of skilled workers has shrunk. At the same time state-owned heavy industries are shedding headcount, as are exporters as U.S. tariffs bite. As a result there is a mismatch between labourers entering the market and the skills employers need. In April Beijing pledged to subsidise vocational training for more than 50 million people within the next three years, and the country's cabinet earmarked 100 billion yuan ($14 billion) to finance the effort. This theoretically makes CEE a strong counter-cyclical play.

But competition for government handouts is likely to be intense. CEE says it has only 1.7% total market share in terms of average students enrolled. It has thousands of competitors, and its performance has been uneven. Revenue growth at all of its major units decelerated in 2018 - for car repair it more than halved. The company will need to hit the books if it wants to pass next year's test.

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CONTEXT NEWS

- Vocational training company China East Education Holdings raised $625 million after pricing shares within the upper half of an indicated range, Reuters reported on June 5, citing sources. The Hefei-headquartered company is the largest vocational training education provider in China by average student enrollments and revenue in 2017, according to information cited in its draft prospectus. Shares will start trading on June 12.

- BNP Paribas is the sponsor of the float. Along with the bank, CICC and Haitong Securities are joint global coordinators.

- China’s State Council approved a plan in late April to increase higher vocational college enrollment by one million this year, Xinhua reported on May 8.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

 

(Editing by Pete Sweeney and Katrina Hamlin) ((sharon.lam@thomsonreuters.com; Reuters Messaging: sharon.lam.thomsonreuters.com@reuters.net))