Caixin
May 04, 2017 02:25 PM
BUSINESS & TECH

Media Group Makes Landmark Private-School Purchase

Chengdu No. 7 Experimental Middle School, in Chengdu, Sichuan province, China, on April 9, 2009. Photo: IC
Chengdu No. 7 Experimental Middle School, in Chengdu, Sichuan province, China, on April 9, 2009. Photo: IC

(Beijing) — A state media group has become the first publicly traded company in China to buy a first-through-12th-grade private school, with a goal of floating the independently funded school on the Hong Kong bourse.

The enthusiasm that a government-controlled corporation has shown for branching into privately funded education comes on the cusp of a new private-school law that will prohibit schools that provide the compulsory first nine years of education from seeking profit. The new law takes effect on Sept. 1.

Textbook publisher Wanxin Media revealed plans to take public a prestigious primary and secondary school in Chengdu within the next five years, according to a company statement Monday on the Shanghai bourse.

Board Secretary Wu Wei acknowledged during an investors call on Tuesday, while responding to comments following the completion of the nearly 2 billion yuan ($290 million) buyout of the school, that the company had “discussed and consulted with authorities plans to list Experimental Chengdu No. 7 Middle School.”

His comments indicate that the pending law will not prove a real obstacle to listing these schools on public exchanges.

“The fact that primary and junior-high private schools must be nonprofit does not mean that they cannot go public,” Wu said during the investors call.

Wanxin Media would be following many of its private-school-holding predecessors in giving a full-time school an initial public offering (IPO), as the fast-growing but underregulated private-school sector has shown satisfying returns.

Several private-school operators interviewed by Caixin said their profits have soared 20% to 50% each year after factoring in government subsidies they received. Lawyers familiar with the industry said that privately funded schools have seen their asset values surge exponentially over the past two decades.

Hong Kong-listed Wisdom Education, which operates six primary and junior high schools, and Hailiang Education group, which debuted on the Nasdaq Stock Market in 2015, are among several that have succeeded in raising cash via the market.

Such companies have skirted existing restrictions on securitization of schools by transferring the school’s tuition proceeds into a separately established “education consulting firm” in the form of payment for nominal consulting services. The consulting company is the entity that goes public, and becomes a way to indirectly invest in the private school, people in an education company that operates under such a model told Caixin.

The revision to the 2002 education act, The Law on the Promotion of Non-Public Schools, approved in November, states that private primary and junior high schools should be nonprofit, and that residual proceeds must go into education. It does not specify that remaining proceeds cannot be used to purchase goods and services.

Wanxin’s acquisition and proposed listing of the 6,000-pupil school shows that the model may stand intact in the future, and the listing of nonprofit primary and junior high schools will continue unabated, said a person in a similar education company.

Even so, the industry is waiting until the laws come into effect in September to assess the impact on schools’ bottom lines, as policies on subsidies, tax breaks and land-use fees may all change.

For Wanxin Media, however, buying the middle school could be a solid investment, at least in the short term. According to agreements made between the two, Chengdu No. 7 Experimental Middle School will bring in financial gains totaling 300 million yuan over the next three years, and the former stake-owners in the school, a Chengdu investment firm, must make up for the difference and pay Wanxin in cash.

“We believe there won’t be hurdles in our path to making the school a public company,” said board Secretary Wu — though he admits that as a state-controlled enterprise, Wanxin might have more difficulty using a variable interest entity (VIE) arrangement, a corporate structure typically used by Chinese companies looking to list overseas to comply with Chinese laws on foreign ownership of domestic companies.

If problems do arise within five years in seeking a public offering for the school — a scenario that Wu said is unlikely — Wanxin will consider spinning off the nonprofit primary and junior high divisions and feeding the earnings into the high school and international school departments, which are allowed to seek profit under the new laws.

Contact reporter April Ma (fangjingma@caixin.com)

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