Online education faces a paradox: Shares rise, but big profits elusive

The Chinese online education sector is caught between "fire" and "ice", industry insiders said.

Listed companies' shares are sparkling but big profits are elusive, they said.

"Shares of education companies are shining on both domestic and foreign bourses. The online education segment, in particular, will likely witness multiple leaders," said Sun Haiyang, an education analyst from TF Securities.

According to an industry report, over 10 online education platforms raised 10 billion yuan ($1.5 billion) in all from capital markets and other funding channels in the first two months of this year.

This compares well with 15 billion yuan raised in the first half of last year.

In late March, Koolearn Technology Holding Ltd, a subsidiary of New Oriental Education and Technology Group Inc, debuted on the Hong Kong Stock Exchange at HK$10.68 ($1.36) and has since risen steadily to reach HK$11.16 on Friday.

"Frequent fund infusions and a listing frenzy reflect a booming online education market," said Lyu Senlin, founder and chief researcher at the Learneasy Times Online Education Research Institute, an industry research consultancy.

They also mirror the fierce competition for market share that's building, which will likely "push small firms out", he said.

According to market consultancy iiMedia Research, China's online education market will continue to grow rapidly. Some 296 million users, equivalent to one-fifth of the nation's population, are expected by 2020.

But challenges are mounting. Profits are hard to come by. The cost of user acquisition is rising.

Yu Min, president of SanHao, an online education startup, said profits are in jeopardy because of "blind expansion" and inadequate ability to serve the big and still growing market.

Unlike e-commerce, online education is a long-term bet. The process of nurturing a student is not exactly standardized, and needs a high degree of personalized tutoring, he said.

"So, it's just a start if a company gets money", because that in itself cannot make the company sustainable. Life time value, or "LTV", is the most important factor driving high profit growth, he said.

To earn sustainable profits, online learning firms need to leverage technologies and link more teachers and students. If the teacher: student ratio is too high, students will drop out due to lack of individual attention, which will drive up marketing costs, Yu said.

"So, a firm must gain a competitive edge for strong word of mouth as users pay more attention to it while choosing products."