Latest analysis of online education industry in China

1. 2014Q1
China Online Educaion Industry
March 2014

2. Contents
2
A. General Information
B. Current Situation
C. Cultural Highlights, User Preferences
D. Trends, Key Players
E. Recommendations to Foreign Enterprises
F. Appendices

3. Focusing on a unique direction and forming an effective marketing
strategy are crucial to win
3
> Facing an influx of internet vendors, the E-learning industry is more prosperous than ever. The
market is reckoned to be highly lucrative because of the willingness to pay and the huge user scale.
- Now the industry has over 580 startups specializing in a surprisingly diverse range of online applications
- In fact, online courses are quite acceptable for post-85s/90s who grew up in digital and internet era
> Numerous (large amount of financing) examples show the trends:
- Training agencies continue to shift their service capacity toward online - Customers require cost effective,
immediate improvement
- Entrepreneurs are making significant progress by reforming traditional curricula and pedagogy
- Internet firms have launched marketplaces to help corporations or individuals to distribute products
- Premium suppliers begin to attract outstanding faculty from abroad and real-world experts from top
corporations
> To compete with domestic firms, foreign enterprises who want to share the cake therefore need to
offer a unique resource either to the consumers or to the domestic co-op partners. Remember that
online and offline ought to be connected much more closely than you thought before – and define the
right countermeasures and partners, especially when you lack essential offline resources that your
competitors have.
EXECUTIVE SUMMARY

4. 4
> Educational resources was never meant to be fair enough; therefore parents have to send their
children to extracurricular tutorial classes provided by private training agencies
- National education funding accounts for the proportion of GDP at 4%, which was not reached utill 2012,
however is still much lower than that of developed countries, even lower than that of other BRICs
- Governmental education spending per capita is $42 in China, compared to $2684 in US, 1:64
- Children are sent by parents to learn skills as early as 3 years old -“expecting better chance than others”
- 70% of 200 million K12 students have at least once attended after-school tutoring programs
- 15 million to 20 million Chinese couples are eligible to have a second child as “one-child” policy is loosened.
> The hottest courses are English and Mathematics for K12; Occupational training for adults
- English accounts for 20% score in K12’s ultimate test - Gaokao (university entrance examination)
> 38% of Senior Highs, 51% of Undergraduates and 5% of Postgraduates intend to study abroad
- The intention is most likely immigration, or higher starting salary whether they plan to come back or not
> Internet access and bandwidth are not troubles anymore
- The number of mobile phone subscribers is over 1.2B; 34% of them use 3G network as of Jan, 2014. The
number of 3G subscribers is still increasing by over 17M per month.
- Mainstream no-contract smartphones manufactured by Huawei and Xiaomi, etc. are priced as low as $129
Facts about Chinese education system and Internet Penetration
A. GENERAL INFO
Source: Ministry of Education, Ministry of Industry and Information Technology of PRC

5. Facing an influx of internet vendors, the online education industry is
more prosperous than ever
5
1990s 2000s 2010s
Private
Training Agency
New
Winners
Learning
Purpose
Secondary School,
College, University
and Non-government
funded education
Internet Vendors
Degree Qualification Test Extremely Diverse
A. GENERAL INFO
Development history of Chinese online education industry

6. The market is reckoned to be highly lucrative because of the
willingness to pay and the huge user scale
6Source: Netease, Inc. “2013-2014 The trends of China's online education”; Ministry of Education, PRC.
Monthly Education Spending for Students
100 100
80
123
191
119
Pre- Primary Junior
High
Senior
High
Post
Secondary
Average
1) 1 USD = 6.1 RMB
Incl. tuition and fees
N=3,453
Unit:USD1)
Before 6 6-11 12-14 15-17 18-21
AGE:
Number of Enrolled Students
Unit: Millions
55
18%
208
68%
43
14%
Preschool K12 Post Secondary
A. GENERAL INFO
All parents would be willing to buy a better chance for their children

7. The overall financial performance of the Chinese key main private
educational suppliers remains bullish
7
Key supplier performance indicators 2009 - 2013e (n=4 top suppliers1))
Revenue Growth [2009=100] ARPU Growth2) [2009=100] Net Margin [%]
1)Stock Symbol: EDU, XRS, XUE, DL; 2)Average Revenue Per User Yearly (USD), for only top 2 suppliers
Source: Company Financial Report; Analyst forecasts
100
119
140
159
180
09 10 11 12 13e
16.3
15.4
13.0
11.7
16.0
09 10 11 12 13e
100
153
216
272
342
09 10 11 12 13e
1,921M USD 321 USD
A. GENERAL INFO

8. Top 4’s average recent year stock return is 150%
8
 Market Value (US$):
− EDU: 4.23B
− XRS: 1.91B
− DL: 682M
− XUE: 360M
 Specialization:
− EDU: Oversea study
− XRS: K12
− DL: Accounting
− XUE: K12, one-on-
one tutoring
As of Mar 17, 2014
A. GENERAL INFO
Source: Google Finance

9. However online education just gets started, compared with offline
9Source: Public information
Online Business as % of Total Revenue Expected %
Consumers are not completely accustomed to learning not from a real instructor
B. CURRENT SITUATION
100%
3-5%
10%
40%
Currently in 2-3 years in 5-6 years

10. The capital market has presented an optimistic judgment
10
2.4
12.1
16.4
22.3
29.1
37.2
47.7
35.7% 36.4%
30.4%
27.9% 28.2%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
10
20
30
40
50
60
2004 ~ 2012 2013E 2014E 2015E 2016E 2017E
USD ($B) Y/Y Growth Rate
CAGR= 22.5%
CAGR=
31.7%
Market Size (in USD1)) Forecast of China Online Education, 2013 - 2017
~
~
B. CURRENT SITUATION
Source: Essence Securities, Oct 2013
1) 1 USD = 6.0 RMB

11. Now the industry has over 580 startups specializing in a surprisingly
diverse range of online applications
11
Number of Financed Startups
As of Mar 20, 2014
Amount (USD1)) of Financing Activities
As of Mar 20, 2014
Source: Itjuzi Database, StartuptoChina Analytics 2014
B. CURRENT SITUATION
101 out of 580 (~17%) startups we tracked have got financed by at least angels
43
39
9
4 3 3
Angels Series A Series B
Series C Acquired Going Public
~135M
~240M
Whole Year of
2013
Single Quarter of
2014
1) 1 USD = 6.1 RMB
47 Cases 14 Cases

12. Now the industry has over 580 startups specializing in a surprisingly
diverse range of online applications (cont’)
12
Number% of New Startups by Segments in 2013
As of August, 2013
24%
17%
6%22%
7%
5%
4%
15%
Preschool
K12
Certificates
Language
Overseas
IT
Interests
Others
Number% of Startups which got funded in 2013
As of August, 2013
39%
9%4%
25%
6%
6%
4% 7%
Preschool
K12
Certificates
Language
Overseas
IT
Interests
Others
Source: Itjuzi Publication, 2013
B. CURRENT SITUATION
Venture capitals are more fond of unconventional fields such as preschool education, which
is expected to grow exponentially because the post-80s, who account for a large proportion
of middle class, are giving birth now

13. In general, education is deemed utilitarian; people used to only pay
for something that could quickly come into effect
13
Post
Secondary
K12
Career
Interests
Parents say “we cannot let our child
lose at the starting line” or “we must
make our child go to the best university”
Students say “we need a degree or a
diploma to find a job because otherwise
the employers would not hire us”
Employees say “we need that certificate
to be qualified for higher level job”
People say “If we CANNOT find some
FREE substitutes elsewhere, then …”
PAY FOR EXPLICIT AIMS OFFLINE DOMINATES
7
24
267
269
335
409
1065
1493
0 500 1000 1500 2000
ATAI
DL
AMBO
XRS
EDU
CEDU
XUE
NED
Average Revenue (US$) Per User
As of Sep 30, 2012
Offline, one
on one or
small size
class
Offline, medium to
large size class
Online Trainings
for Occupational
Qualification
C. CULTUAL HIGHLIGHTS
Source: Imeigu, Inc. ‘2012 WHITE BOOK FOR CHINESE EDUCATION INDUSTRY’

14. But what if online courses become more enjoyable than what the
students had expected before?
14Source: Webpage screenshots
C. CULTUAL HIGHLIGHTS
PAST NOW

15. And what if the students pay significantly less for online than offline?
15Source: Official Website of DL (China Distance Education Holdings Ltd)
C. CULTUAL HIGHLIGHTS
An Example of Accountant Qualification Test
> Award-winning Lecturers
> 10 Minutes per Session
> Anytime Anywhere Accessible
> All Devices Supported
> Tangible Certificates
> Easy Payment
> Downloadable
> Available until the test is over
> Extremely low price<$1 / hour
Features

16. In fact, online courses are quite acceptable for post-85s/90s who
grew up in digital and internet era
16
C. USER PREFERENCE
2013 Taobao Classmates1) GMV Share Average GMV per User
Source: Taobao
Typical User Characteristics: Age 23-27; Male; Over 50% of them are employed
1) http://xue.taobao.com/ is marketplace for corporate or individual educators to sell all kinds of resources, including online, offline and textbooks
74
43%
40
24%
57
33%
Online Offline Textbooks
Total GMV: 171 Million USD
46
114
11
Online Offline Textbooks
Unit: USD

17. On an average, working adults would like to spend $39 a month on
part-time study
17
What aspects do you primarily put money into?
C. USER PREFERENCE
Source: Netease, Inc. “2013-2014 The trends of China's online education”; Ministry of Education, PRC.
N=3453
65%
84%
78%
81% 83%
63%
57%
25%
31%
44% 46%
43% 44%
32%
15%
12%
18%
38%
51%
62%
66%
0%
5% 7%
15%
27%
39%
65%
<100 100~500 501~1,000 1,001~2,000 2,001~4,000 4,001~10,000 > 10,000
Books Online Courses/Services Offline Training Agencies School Tuition

18. Factors which working adults value most and skills they need most
18
C. USER PREFERENCE
Source: Nielson&Sina and Netease Surveys 2013
Which factors do you value most? Which skills do you need most?
Quality and ESL (especially daily oral English - 75%) are always their priority
N=1,150 N=3453
7.9%
18.9%
26.7%
35.7%
50.5%
59.3%
79.8%
Others
Server condition
Brand
Public praise
Price
Lecturer
Quality
16.8%
17.7%
19.7%
20.3%
22.3%
33.9%
68.4%
Natural science
Computer software
Business administration
Education & Psychology
Financial planning
Professional skills
English

19. The most likely profitable segments and main factors of weakening
E-learning effect, perceived by industry insiders
19
Which sector are most likely profitable? Which factors weaken the effect most?
12%
30%
32%
32%
37%
41%
76%
Others
Requirement of bandwidth
Cost of contents
Unwillingness of learning
Autonomy of learning
Promotion efforts and efficiency
Lack of rich and simple function
5%
6%
21%
22%
22%
33%
37%
40%
41%
62%
No idea
Others
Post secondary
Moocs
IT skills
Preschool
K12
Staff training
Foreign language
Exam skills
Which segments are industry insiders in favor of? (according to a survey of insiders)
Source: International Online Education Summit 2013. ‘Online Education Prospects and Hot Spot Analysis Report’.
C. USER PREFERENCE

20. Training agencies continue to shift their service capacity toward
online - Customers require cost effective, immediate improvement
20
EDU (#1 in ESL Training) XRS (#1 in K12 Training)
Recent merge & acquisition of top 2 suppliers1)
Source: Itjuzi Database, StartuptoChina Analytics 2014
D. TRENDS, KEY PLAYERS
1)Stock Symbol: EDU, XRS; 2) Mar 18, 2014; 3)As of Nov 30, 2013, Currency in USD
Mkt Cap 4.53B2), Cash, Equiv and ST Invest. 1,092M3) Mkt Cap 1.92B2), Cash, Equiv and ST Invest. 333M3)
Jan, 2014 shicha.com has been integrated in
66xue.com owned by EDU
Overseas Study and
Recruitment Community
Jan, 2014
24.5M USD
Dec, 2013
8.5M USD
Leading Parenting Community
Postgraduate Entrance Examination
Information & Materials

21. Entrepreneurs are making significant progress by reforming
traditional curricula and pedagogy
21
Evolution of teaching and learning approach and behavior
Source: Itjuzi Database, StartuptoChina Analytics 2014
D. TRENDS, KEY PLAYERS
PAST TODAY
> Primary approach is to understand what the
teachers said in class by doing a lot
exercises after class
> Weak learning process management and lack
of efficiency: often allocating resources
without acknowledging capability differences
> Focus on innovative pedagogy:
- Invest in practical and scientific tools
- Act like a private tutor
- Conduct statistical analysis
- Provide access to resources of elite schools
Is it really necessary?
(e.g.) Assignments Management Tool
Total $35M Financing, $100M Valuation

22. Internet firms have launched marketplaces to help corporations or
individuals to distribute courses and relevant materials
22
Everybody in the world could be an instructor based on dozens of open platforms
Source: Itjuzi Database, StartuptoChina Analytics 2014
D. TRENDS, KEY PLAYERS
Platforms FeaturesOwner or Financed
Baidu
Alibaba
Netease
Sina
NASDAQ:YY
> 1M USD
> 10M USD
> 3M USD
Live Class, Freemium ESL
“Priceline” Model
“Amazon” Model
MOOC, Translation
MOOC, Translation
Live Class
MOOC, Chinese
Overseas Study and Application Advisory

23. Premium training service suppliers begin to attract outstanding
faculty from abroad and real-world experts from top corporations
23
Thousands of foreign English teachers and industry experts have joined the community
Source: Itjuzi Database, StartuptoChina Analytics 2014
D. TRENDS, KEY PLAYERS
Platforms FeaturesFinancing1)
1) Unit: USD, 1USD=6.1RMB
100M
20M
Tencent
> 12M
> 4M
~ 1M
1V1; 1,500 foreign teachers
Mobile / Cloud Computing experts
Internet technology experts
1V1; low price; foreign teachers
1VN; foreign teachers
Foreign advisors who help with application

24. Potential niche sectors and possible traps for foreign startups
24
Slightly FavorableTrap Very FavorableGood Excellent
Advanced
ESL
Preschool
Computer
Skills
Mobile
Apps
Featured
Certificate
Oral
English
Business
Skills
Working Adults
K12
University
E. RECOMMENDATIONS TO FOREIGN ENTERPRISES
Legend:
2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014

25. What should do and should NOT do
25
> Focus! Be a upstream supplier offering a
UNIQUE and valuable product that domestic
companies are not good at, e.g. Copyrighted
Foreign Enterprise Staff Training Courses.
> If your products are not that unique and rare,
you had better try FREEMIUM first for the
sake of branding and taking credit from
prospective consumers.
> CRM is extremely important; keep in close
touch with your customers using SOCIAL
NETWORK. Best to have a user experience
and customer service team in China.
> Map the social RELATIONS of users from
offline to online; Invest in research!
> Do NOT rely on only one platform to
promote, try to upload your products to as
many platforms as you can. Looking for co-
op partners is the most important work.
> Do NOT try to establish platform on your
own, or you will be struggling with traffic.
> K12 is NOT recommended for the time being
UNLESS your have resources to reach
students who intend to go abroad before
college, which means, you could offer a
whole set of application services.
> Avoid similar courses or features that can be
provide by MOOCs such as Coursera, KHAN
Academy, etc.
DO DON’T
E. RECOMMENDATIONS TO FOREIGN ENTERPRISES

26. Insights from insiders 2013 (slightly pessimistic)
26
Zhang, Bangxin
Founder & CEO
TAL Education
Group (K12)
“We have put a lot of effort into exploring the internet field since 2010. We
calmed down a little bit in 2013 because there was not yet any special
pattern of success came out in two years.
“The requirement of current online education is still improvement of the
social attribute – certificate or diploma. The needs between online and
offline are consistent. When there is no fundamental change in demand, the
experience and effect of offline are better. That is why online has not yet
boomed. Only till when we do not care about diploma anymore, which
means, we want to meet the demands of self-improvement, the boom will
come and internet will essentially transform the education”
“Educational recourses are stubborn, accepting new things pretty slowly.
Therefore online education would not overturn the traditional ones as
rapidly as e-commerce.”
Chen, Guangtao
Founder & CEO
duobei.com/
F. FOR YOUR REFERENCE
Source: http://tech.163.com/13/1112/14/9DG3QJBH000915BF.html

27. Insights from insiders 2013 (optimistic or neutral)
27
Li, Xin
Vice President
yuantiku.com
“We have exchanged ideas with many senior teachers, who believed what
education is meant mostly to do but is never able to do is teaching students
in accordance with their aptitude. The reality of class size makes this issue
quite difficult to tackle because it would infinitely increase the work load of
teachers. However recently we feel it can be completely solved by data
processing technology along with solid internet infrastructure. Thus we
decide to provide question bank products to implement one-on-one
intelligent training through individualizing user needs based on big data
matching.”
“Online education ought to attract user traffic utilizing long tail effect in the
early stage due to low ARPU. Developers should not merely sell lecture or
courseware; instead, try best to build a learning atmosphere. Interaction
and service experience should be highly targeted and offline social
connections should be entirely migrated to the online world.
Jin, Wenji
Vice President
Legend Capital
F. FOR YOUR REFERENCE
Source: http://learning.sohu.com/s2013/yuantiku/; http://v.youku.com/v_show/id_XNjA5NjMzOTQ4.html

28. Please contact us for further information
28
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29. Disclaimer
29
DISCLAIMER
This presentation was prepared by StartuptoChina.ca (“SC”) exclusively for the benefit and
internal use of our clients and solely as a basis for discussion of certain topics related to the
online educational service provider described herein.
Without the prior written authorization by SC, this presentation is strictly confidential, i.e.,
you cannot reproduce, summarize or disclose it, in whole or in part.
This presentation is of a purely informative nature and does not imply any trade
recommendations on securities issued by any of the companies mentioned herein.
This document may include forward-looking statements, which may be provided by SC and
other 3rd party research institutions and thus could differ materially from actual results due
to subjective judgement analysis and objective uncertainty.
Some of the facts and inferences may refer to subjective opinions of key persons or entities
in the online education industry in China. Therefore there is no guarantee that all the
information included herein may not change significantly over a short period of time.
Please notice that the contents contained in this presentation are merely for you to better
understand the current market conditions. We assume no obligation to your decision-making
and subsequent movements if you are not our clients.

30. Disclaimer
30Disclaimer