Amid increased regulatory scrutiny, tutoring platform seeks to go public

Chinese online tutoring platform Spark Education is seeking an initial public offering on New York's Nasdaq market to raise up to US$100 million, even as Chinese regulators tighten scrutiny over the sector.

The Beijing-based company, incorporated in the Cayman Islands, says it intends to use proceeds of the share sale to improve and broaden course offerings, upgrade technology and expand marketing.

Founded in 2017, Spark Education – known as Huohua Siwei in Chinese – mainly offers tutoring classes in math, Chinese literature and English for preschool through primary school students, according to its website. Each class has four to eight students, with academic coaches provided for "real-time, personalized learning."

Mathematics is the most popular course, accounting for most of the company's revenue.

"Mathematical knowledge is most important," said a staff member of the company. "The main goal is to improve children's logical-thinking ability."

The company feeds off parental obsession about extracurricular education to prepare their children for the intense competition of passing exams to get enrolled in the best high schools and universities. A good education is believed to be the key to career success in later life.

Education authorities, however, have become alarmed by all the pressure imposed on young children to be academic super-achievers. They have been actively seeking to restrain overzealous parents and to ease the financial and emotional burdens of extracurricular studies.

Veronica Zhou, a partner with Blue Elephant Capital, said in a Beyond Unicorn's podcast that in China's major cities – Beijing, Shanghai and Shenzhen – families spend on average 20-30 percent of disposable income on their children's education.

"This trend has been growing over the last few years, and is developing in the second-tier cities in China as well," she said.

The trend puts pressure on many lower-income families to shell out for additional tuition classes provided by tutoring companies in order to keep pace with children from wealthier families.

Whereas parents used to send their children to extracurricular classes on weekends and after school hours, the coronavirus pandemic moved much of that trend online. The size of China's online education market has reached 432.8 billion yuan (US$67.7 billion) and is expected to surpass 500 billion yuan this year, according to a report published by www.100ce.cn.

As of March 31, Spark Education was serving 370,530 students, up from 133,902 a year earlier. In 2020, the company reported revenue of 1.17 billion yuan, an increase of 501 percent over the prior year, according to the prospectus filed with the US Securities and Exchange Commission.

"I signed up for a free trial for my four-year-old daughter," said a 29-year-old mother surnamed Tang. "There was a lot of interaction between teacher and students. It all seemed worthwhile, so I signed her up for a math-tutoring course."

Although such services may be a hit with parents, most are still struggling to make a profit. Spark Education, according to its IPO documents, posted a 951.7-million-yuan loss in 2020, following a 771.1-million-yuan loss in 2019.

Xiong Bingqi, vice president of the Beijing-based 21st Century Education Research Center, said Chinese authorities won't sit idly by and watch the tutoring sector rapidly expand in a disorderly way.

"The government may strictly restrict or even prohibit advertising for both online and offline tutoring businesses," he predicted.

Indeed, the government has already introduced some strict laws and regulations governing the after-school tutoring market, adding to uncertainties about the industry's prospects.

In May, Beijing's market watchdog fined four online education agencies 500,000 yuan each for misleading customers with false advertising.

On June 15, China's Ministry of Education announced the establishment of a new department to supervise the after-school education sector. That watchdog has received numerous complaints about false advertising and deceptive pricing.

"For those unrepentant companies that refuse to address these problems, the regulators will suspend their operations and even revoke their licenses," said Chen Zhijiang, an official of the State Administration for Market Regulation.

Some online education companies, including Tencent-invested Yuanfudao and Alibaba-backed Zuoyebang, have initiated layoffs recently. The companies are heavily involved in helping students prepare for the grueling high school and college entrance exams.

Spark Education claims its curriculum goes beyond exam orientation to provide quality training for students to develop their ability for innovative thinking.

"I don't think the curriculum of mainstream schools creates the all-round development of children," said Cheng Ying, a 33-year-old mother of a two-year-old son.

Unless schools improve their teaching quality and content, parents will always turn to after-school tutoring, she added.

Spark Education founder Luo Jian said the current climate offers an opportunity to pause and think about the future path of the tutoring industry. He has engaged in roadshows to convince investors that the government's crackdown won't affect his company's operations.

The lead underwriters for Spark Education's IPO are Credit Suisse, Citigroup, and China International Capital.