Source: Google

It is not just about profits or where these companies get listed

Most of the news coverage on the EdTech sector in China is focused on the fact that the Chinese EdTech companies may not be allowed to make profits or choose the locations for their listing. But there are other constraints as well which could fundamentally alter the structure of this industry. The news reports talk about major concerns such as that, apart from ‘no profits’, the EdTech companies may not be allowed to raise capital or go public. The prominent challenges could be:

• The listed firms may not be allowed to invest in or acquire education firms teaching school subjects
• In the EdTech space, there will be no permission for foreign capital to come in and what it effectively means is that the foreign listings may become a thing of the past.

Issues on ethics and concerns on the business model

For the Chinese Government, the explosive growth in the EdTech sector has also become a cause of concern. The biggest fear is that these firms are creating unnecessary pressure on parents to spend more on things that may not be needed. They adopt questionable tactics for boosting the enrolments and play to the ‘Fear of Missing Out’ or FOMO emotion. In essence, these firms give an unfair advantage to people with deep pockets and this goes against the spirit of ‘level playing field’.

It is likely that the local Chinese regulators may not allow;

• New platforms offering tutoring on the compulsory syllabus
• Vacation and weekend tutoring on school subjects

Not just listed entities, but there is an impact on investor sentiment on very large unlisted companies like Zuoyebang (an online education company that targets students in primary and high school) and Yuanfudao (Yuanfudao is an online live course platform servicing primary and secondary school students). These are big companies backed by large investors.

EdTech does not have a problem in China alone

In many developing countries, good professional education is a prerequisite for a decent career. Parents spend huge amounts of money to ensure that their kids get into good colleges. As a result, the EdTech space has seen huge growth. Take for case, India. The most well-known name in the space is Byju’s. It is an Indian EdTech company, headquartered in Bangalore. It was founded in 2011 by Byju Raveendran and Divya Gokulnath. As of June 2021, Byju’s is valued at $16.5 billion, making it one of the world’s most valuable EdTech companies.

But, Byju’s also has had issues that come under ESG or Sustainability parameters;

1. Work culture – There have been times when internal telephone recordings by their employees were leaked in public, indicating a bad work culture.
2. Allegations of false claims – There are several allegations and controversies around aggressive advertising and false claims.
3. Lawsuits – Some of the acquisitions like WhiteHat Jr have a history of lawsuits and allegations of throttling dissent on social media platforms.
4. Acquisitions – There has been a scorching pace of acquisitions and there are controversies that some of them are not aligned geographically or are not in tandem from the core business perspective.
5. Profitability not a priority – There are allegations that Byju’s focus is on chasing growth and not that much on financial viability or profitability because of funding being pumped in.

How EMAlpha can help Asset Managers

There is, undoubtedly, a profound ESG movement going all over the globe right now. From countries to asset managers, from millennial investors to the old school stalwarts, everybody’s counting on the ESG chip for a better future and a better return on investment. Also, ESG is not applicable for listed entities alone and the portfolio managers will need to ensure that all their Assets Under Management (AUMs) get aligned. This includes private investments as well.

The Asset Managers need to have a clear picture of what the unlisted companies are doing on ESG and how they are preparing for a public issue. For example, EMAlpha’s proprietary AI-ML tools pick up increasing activity from the company in ESG communication. This could mean an impending IPO in the near term. The tools are also helpful in understanding the issues which are in focus. For example, large EdTech players like the Chinese companies and Byju’s are very much criticised over their social impact.

In general, EMAlpha with its proprietary AI-ML techniques becomes useful for investors to gauge companies on the ESG front. As we have discussed, the changes in perception on the ESG track record of a company and reactions from institutional investors have become an important driver of stock prices, and especially in cases where the volatility is high, it matters even more. From individual stocks to a portfolio, the complexity increases even more and EMAlpha AI-ML is a helpful tool for Asset Managers in evaluating progress for their portfolios and taking corrective measures, as and when required.

It is also interesting to note here that EMAlpha believes that it is never enough to focus just on official or company-reported information for a holistic ESG analysis. Hence, this analysis was done mostly based on what is available from public sources. EMAlpha AI-ML has used 100% information from sources that are not official. For the ESG analysis, the information source will make a big difference in drawing the right inferences from the perspective of asset managers.