Rumours began to circulate online over the weekend that Hujiang, a leading Shanghai-based online education site, had fired 95% of its staff in what was called "a failed valuation adjustment mechanism”.
In response, Hujiang issued a denial on Wednesday. Although it did admit that there were some job cuts, it said not only that the scale had been greatly exaggerated but also that the company remained on course to IPO.
The response calmed some doubters, but it remains a concern that Hujiang has remained loss-making since 2015.
Capital keeps pouring into the education sector, but it appears harder for education companies that are focused on adults to generate a profit than those focused on kindergarten to 12th grade (K-12).
Sunlands, a New York-listed online education company, has reported a net loss of $113 million from January to September last year. And LAIX, another New York-listed Chinese online education company, more than doubled its net loss to $20.7 million for Q3 2018.
It is tough for online education firms that are targetted at adults to generate revenues. The Chinese are not enthusiastic about education expenses for themselves when the could spend it on their children. It is relatively easy for K-12 firms, especially the leading ones, to make a profit, as one education investor said.
Two-thirds of Hujiang's business is aimed at adults and college students. The K-12 element only makes up 6.8% of its business. Indeed when Hujiang was founded as an English learning material site in 2001, it was to serve grown-ups. It was not until 2017, that the company finally set up an independent K-12 business department.
It is also hard for online education sites to turn a profit when operating costs increase and regulations tighten. According to a notice issued by Chinese Ministry of Education in November last year, online training institutions need to register their teachers with the local government, and teachers must also pass the national qualification test if they are working with children of compulsory education age. This is a significant cost for online education companies. Although the regulations have not yet been implemented, it remains a warning for all online education companies that China intends to scrutinise them strictly.
No one is questioning the prospects for online education. The total market is expected to grow 15% a year and reach Rmb454 billion (US$67.7 million) by 2024, according to third-party research firm Qianzhan.
But not only will the momentum lie more in third to fourth-tier cities, it also remains with K-12 companies. Education for adults (which include including professional training and education provided to college students) grew only 6.7% in 2017 compared to 11.4% for the K-12 sector. No wonder then that K-12 education took almost a quarter of all online education investment last year.
Hujiang raised $159 million between early 2007 and 2015. Investors include big backers such as Baidu, Softbank and Shunwei Capital. Even though it remains loss-making, it filed for an IPO in Hong Kong in July last year. The company remains committed to the IPO process, but it really needs to make more effort to build a profitable business.