教育行业：民办教育舒缓财政支出困境不二之选

1、2019年1月14日Industry ResearchPlease refer to the last page for important disclosuresWe believe the current tax reform will slow fiscal revenue growth for both the central government and local governments in the coming years. Meanwhile, we expect public spending on education to continue to increase ste

2、adily, resulting in growing deficits in the education sector. We think the government will increasingly rely on private-sector investment to meet the incremental demand for public education, and thus roll out more supportive policies. We expect the central government to focus on teaching content reg

3、ulation, while local governments supervise schools operations. As such, we believe private school operators will enjoy further autonomy in the future. We maintain our Overweight rating on the sector.Slowing fiscal revenue growth. We believe the current tax reform will slow fiscal revenue growth for

4、both the central government and local governments in the coming years. With a policy tone skewed toward reducing companies tax burden to stimulate the economy, we expect value-added tax (VAT) revenue as a percentage of GDP to drop from 6.82% in 17A to 5.82% in 22E and Chinas corporate tax rate to be

5、 reduced from 3.88% to 3.38% over the same period. As a result, we expect Chinas tax burden ratio to decrease to the level of other emerging countries. We forecast fiscal revenue growth to decelerate from 10.7% YoY in 17A to 6.4% in 22E. Growing deficits. We expect K-12 and higher education student

6、enrolments to continue to grow, from 285m in 17A to 297m in 22E. As the supportive policy stand remains unchanged, we believe per-student expenditure for public education will continue to increase, leading total expenditure to expand from Rmb3.5tn in 17A to Rmb5.6tn in 22E. With fiscal revenue growi

7、ng at a slower rate, we expect deficits to increase from Rmb520bn in 17A to Rmb1.0tn in 22E.Bridging the gap. We believe private schools bridge the gap between public expenditure and the education budget as tuition fees are collected from students parents rather than the government. With 51.4m priva

8、te school enrolments which required no tuition subsidies, we estimated the total education budget savings at Rmb556bn in 17E. As private school penetration continues to increase, we expect the total budget savings to reach Rmb737bn in 20E, accounting for 15.7% of the total education expenditure for

9、the year.Supportive policies from local governments. We believe the central government, which suffers from budget constraints due to slowing fiscal revenue growth, will not be able to provide substantial financial support to local governments. As a result, we expect local governments to increasingly

10、 rely on, and be more supportive towards, private education. We expect the central government to focus on teaching content regulation, while local governments supervise schools operations. As such, we believe private school operators will enjoy further autonomy in the future. We maintain our Overwei

11、ght rating on the sector.Our top picks. We recommend China Maple Leaf Educational Systems (01317:HK BUY; target price: HK$7.76) for its well-established brand across China as well as unique business model, targeting the growing middle class with a competitive British Colombia curriculum. We also lik

12、e China Yuhua Education (06169:HK BUY; target price: HK$7.50) for its strong merger and acquisition execution capability.Page 12019年1月14日Industry ResearchPlease refer to the last page for important disclosuresSlowing fiscal revenue growthWe believe the current tax reform will slow fiscal revenue gro

13、wth in the coming years. Government spending is classified according the its purpose, with four main budget categories, namely the “general public” budget, the “government fund” budget, the “state-owned capital operation” budget, and the “social insurance” budget. Broadly speaking, the general publi

14、c budget is the largest and most important budget as it is usually used for key missions, such as promoting the countrys economic and social development, and protecting national security.According to the Ministry of Finance, the general public budget is financed through both tax income and non-tax i

15、ncome. In 2017, total revenue reached Rmb17.3tn (+11.4% YoY), accounting for 20.9% of Chinas GDP. Tax income totalled Rmb14.4tn in 2017 (+10.7% YoY). With the implementation of tax reduction policies, tax income has grown at a slower rate. Over the last ten years (2007-17), the proportion of tax inc

16、ome in total government revenue dropped from 88.9% to 83.6%.Source: Wind, SWS ResearchVAT and corporate income tax contributed the most to the governments revenue, making companies the largest taxpayers. We see tax reduction as an effective way to stimulate the economy. Chinas current tax system con

17、tains five major categories and 18 different kinds of taxes. Turnover taxes and income taxes are considered two of the largest categories. In 2017, revenue from turnover taxes accounted for 49.7% of total tax income, while income taxes accounted for 30.5%. More specifically, revenue from VAT and cor

18、porate income tax have been the main source of government revenue, together accounting for over 60% of total tax income.Fig 2: Chinas current taxation systemTurnover TaxesIncome TaxesProperty TaxesResource Taxes“Behaviour Taxes”Non-Tax IncomeExcise TaxCorporate Income TaxReal Estates TaxResources Ta

19、xUrban Maintenance and Construction TaxSpecial IncomeVATIndividual IncomeVehicle and Vessel TaxTaxUrban and Township Land Use TaxStamp DutyAdministrative FeeCustoms DutyVessel Tonnage TaxEnvironmental Protection TaxLand Appreciation TaxConfiscated IncomeArable Land Use TaxDeed TaxOther IncomeTobacco

20、 TaxVehicle Purchase TaxSource: State Administration of Taxation, SWS ResearchFig 1: Government revenueRMB Billion20,00018,00016,00014,00012,00011,72510,38712,92114,03715,227 15,96017,25930%25%20%10,0008,31015%8,0006,0005,1326,1336,85210%4,0005%2,00000%20072008200920102011201220132014201520162017Tax

21、 incomeNon-tax incomeYoYAs % of GDPPage 22019年1月14日Industry ResearchPlease refer to the last page for important disclosuresFig 3: Tax income breakdown in 2017Fig 4: Government revenue breakdown in 2017Source: Wind, SWS ResearchSource: Wind, SWS ResearchSince 1994, China has implemented a tax-sharing

22、 system with tax revenue divided into central tax, local tax, and shared tax. Taxes necessary for national sovereignty and macroeconomic control are classified as central taxes (such as excise tax and customs duties). Taxes directly related to the countrys economic development are classified into sh

23、ared taxes (such as VAT, income tax, resource tax, and stamp duty). Taxes more easily collected by local governments are classified as local taxes (such as property tax and tobacco tax).The “tax-sharing” system has helped the central government increase control over budgeting. The central government

24、s total tax revenue accounted for c.53% of the its total income in 2017 (with 12.9% of central taxes and 40.6% of shared taxes). Meanwhile, using “transfer payments” as a method of income redistribution has given the central government more flexibility on its budget. According to the Ministry of Fin

25、ance, the central governments annual transfer payments to local governments account for 30% of total fiscal revenue. After transfer payments, local governments usually control 80-85% of the total tax income.Fig 5: Tax breakdownFig 6: Local government income and transfer paymentsSource: Wind, SWS Res

26、earchSource: Wind, SWS ResearchOver the last few years, the Chinese government has increased its fiscal deficit in order to meet the growing demand for public welfare and stimulate economic growth. The governments spending- to-income ratio rose from 97% in 2007 to 118% in 2017, implying much higher

27、spending compared to its budget. By breaking down total expenditure, we note most of the budget goes to sectors such as education, social security, community, agriculture, public services, and health care, among which education accounts for the largest part (15% in 2017).Turnover Taxes, 49.67%Income

28、 Taxes, 30.54%Resources Taxes, 3.80%Property Taxes, 2.37%Behavior Taxes, 13.63%VAT, 39.05%Corporate Income Tax, 22.25%Individual Income Tax, 8.29%Excise Tax, 7.08%Other, 23.33%Central Tax, 12.92%Local Tax, 12.00%Central, 40.57%Local, 34.51%Shared Tax, 75.08%20,00015,00010,0005,00002007 2008 2009 201

29、0 2011 2012 2013 2014 2015 2016 2017Local government income Transfer PaymentCentral government income after transfer paymentPage 32019年1月14日Industry ResearchPlease refer to the last page for important disclosuresFig 7: Government income vs spendingFig 8: Public expenditure breakdown in 2017Source: W

30、ind, SWS ResearchSource: Wind, SWS ResearchPast tax reforms show the governments determination to ease companies tax burden. Over the last few years, several tax reforms have been implemented, such as the current VAT reform. Since 2012, government officials have carried out four adjustments on VAT,

31、focusing on lower rates and a simpler structure. VAT (including sales tax) as a percentage of total GDP declined from 7.8% in 2012 to 6.8% in 2017.Fig 9: VAT reformsTimeContentBefore 2012/1/12012/1/1Two different tax rates: 17% (standard rate) and 13% (lower rate)Four different tax rates: maintainin

32、g existing rates and adding 11% (transportation) and 6% (service)Three different tax rates: lower the 13% rate to 11%Two different tax rates: lower the previous rates to 16%, 10%, and 6%, respectively2017/7/12018/5/1Source: SWS ResearchFig 10: VAT as a percentage of GDPSource: Wind, SWS ResearchWe b

33、elieve the current tax reform will slow fiscal revenue growth for both the central government and local governments in the coming years. With a policy tone skewed toward reducing companies tax burden to stimulate the economy, we expect value-added tax (VAT) revenue as a percentage of GDP to drop fro

34、m 6.82% in 17A to 5.82% in 22E and Chinas corporate tax rate to be reduced from 3.88% to 3.38% over the same period. As a result, we expect Chinas tax burden ratio to decrease to the level of other emerging countries. We forecast fiscal revenue growth to decelerate from 10.7% YoY in 17A to 6.4% in 2

35、2E.Non-tax income also plays a crucial role in companies costs. The government has shown a positive attitude towards fee reduction and, as such, we believe non-tax income will follow a similar trend in the future. Therefore, we believe the overall tax and fee rates will decrease to the level of othe

36、r emerging countries.120%115%110%105%100%95%90%85%80%2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Government incomeGovernment spending Spending/Income ratioRMB billion 25000200001500010000500000%20%40%60%80%100%14% 14% 14% 14% 15% 17% 16% 15% 15% 15% 15%2007 2008 2009 2010 2011 2012 2013 20

37、14 2015 2016 2017Social security Public serviceCommunity expense HealthcareEducation Agriculture Other8.5%8.0%7.5%7.0%6.5%6.0%5.5%5.0%4.5%4.0%800070006000500040003000200010000VATSales TaxAs % of GDPPage 42019年1月14日Industry ResearchPlease refer to the last page for important disclosuresFig 11: Govern

38、ment revenue in China vs other countriesSource: IMF, SWS ResearchChinas government revenue has been adjuted for comparison purposesGrowing education demandDemand for education expenditure is primarily driven by two factors: the total number of students and education expenditure per student. We expec

39、t K-12 and higher education student enrolments to continue to grow, from 285m in 17A to 297m in 22E. According to the Ministry of Education (MoE), the total number of students reached 284.9m in 2017, among which kindergarten students, high school students, and higher education students accounted for

40、 16%, 14%, and 19% of the total, respectively. With gross enrolment rates of 79.6%, 88.3%, and 45.7%, respectively, we still see growth potential for kindergartens, high schools, and universities. According to our calculation, the total number of students will reach 297.4m in 22E, representing a Cag

41、r of 0.86%.Fig 12: Total number of studentsSource: MoE, SWS ResearchAs the supportive policy stand remains unchanged, we believe per-student expenditure for public education will continue to increase. On 27 August 2018, the general office of the State Council issued “Opinions on Further Adjusting an

42、d Optimising the Use of Education Funds”. The document clearly states that “the per-student public expenditure on education (should) increase every year”. With such a positive policy tone, we believe education expenditure per student will steadily rise in the near future, with average student expend

43、iture to climb from Rmb12,408 in 17 to Rmb18,885 in 22E.56.5% 52.2% 52.2%44.1%40.3% 38.9% 38.7% 37.5% 37.0% 35.7%34.1% 32.5% 30.1%27.6% 26.6% 24.8%21.3% 21.1% 20.9% 19.6%14.0%10.0%0.0%20.0%30.0%40.0%50.0%60.0%Government revenue as % of GDP in 2017279.52284.91285.12288.12292.97297.37297.4225020015010

44、0500300276.44201620172019E2020E2021E2022E2015Kindergarten High School2018EPrimary School Junior CollegeSecondary School University and CollegeMillion peoplePage 52019年1月14日Industry ResearchPlease refer to the last page for important disclosuresFig 13: Education expenditure per studentSource: MoE, SW

45、S ResearchWith growing student enrolments and increasing per-student expenditure, we believe total education expenditure will increase from Rmb3.5tn in 17A to Rmb5.6bn in 22E. Meanwhile, with the governments budget shrinking amid tax and fee reductions, we expect the deficit to expand from Rmb520bn

46、to Rmb1.0tn over the same period.Fig 14: Total education expenditureSource: MoE, SWS Research250002000015000100005000030000200720082009201020112012201320142015201620172018E2019E2020E2021E2022EKindergarten High SchoolPrimary School Junior CollegeSecondary School University and CollegeRMB yuan20152016

47、20172018E2019E2020E2021E2022EStudent number / Million peopleKindergarten42.6544.1446.0047.0347.4749.1249.7250.85Primary School96.9299.13100.9495.9396.4496.9097.6998.09Secondary School43.4643.5744.5548.0947.9447.9547.8648.17High School40.3839.7039.7138.2937.5037.1637.4137.77Junior College16.5715.9915

48、.9216.0116.7817.5218.0517.30University and College36.4736.9937.7939.7641.9944.3346.6445.25Education expensiture per student/ RMB yuanKindergarten6,1876,6917,1397,6708,2128,8079,43710,116Primary School8,8389,55810,19910,95611,73112,58113,48114,452Secondary School12,10613,41614,64116,10217,64019,36321

49、,23323,295High School10,80712,31513,76915,54317,46119,66322,11724,891Junior College10,95812,22813,27314,60915,96817,51519,17821,018University and College18,14418,74820,29921,47622,98724,46326,10927,825Education expensiture/ RMB BillionKindergarten264295328361390433469514Primary School8579471,0291,05

50、11,1311,2191,3171,418Secondary School5265856527748469281,0161,122High School436489547595655731827940Junior College182196211234268307346364University and College6626937678549651,0841,2181,259Total2,9263,2053,5353,8694,2554,7025,1945,617Page 62019年1月14日Industry ResearchPlease refer to the last page fo

51、r important disclosuresFig 15: Education deficitSource: Wind, SWS ResearchWe believe private schools bridge the gap between public expenditure and the education budget as tuition fees are collected from students parents rather than the government. In recent years, the market size for private educati

52、on has expanded significantly. Students enrolments in private schools no longer need government subsidies as students bear the cost of tuition fees, thus reducing government spending. By multiplying the number of students in the private sector with education expenditure per student, we estimate that

53、 the private sectors contribution to education expenditure increased from Rmb58.4bn in 2007 to Rmb556.2bn in 2017. According to Frost & Sullivan, the market share of private education (by student enrolments) will rise from 16% in 2011 to 25% in 2020F. As private school penetration continues to incre

54、ase, we expect the total budget savings to reach Rmb737bn in 20E, accounting for 15.7% of the total education expenditure for the year.Fig 17: Savings generated by the private sector3,0153,3563,6023,9094,2624,6022,9262,6273,2052,8073,5353,8694,2554,7025,19420001000030004000500060005,6172015201620172

55、020E2021E2022E2018ESupply2019EDemandRMB billion153.86216.39277.13306.41349.70424.85485.50556.24200300400500600121.0590.0210058.40020072008200920102011201220132014201520162017KindergartenPrimary SchoolSecondary SchoolHigh SchoolUniversity and CollegeSource: Wind, SWS ResearchRMB billionFig 16: Total

56、number of students and budget per student2017HigherHigh SchoolSecondary SchoolPrimaryKindergartenTotalEducationSchoolTotal number of students (000)6,5135,2855,7778,14225,72351,440Education budget per student (Rmb)20,29913,76914,64110,1997,13910,813Budget savings (Rmbbn)132.2172.7684.5883.04183.65556

57、.24Source: Wind, SWS ResearchPage 72019年1月14日Industry ResearchPlease refer to the last page for important disclosuresSource: Frost & Sullivan, SWS ResearchSource: Frost & Sullivan, SWS ResearchSupportive policy environmentThe “tax-sharing” system has helped the central government increase control ov

58、er budgeting, using transfer payments to ensure policy implementation at the local level. However, education has received limited financial support from the central government. We expect local governments to use diversified financing channels to meet the local education demand. As such, we believe m

59、ore supportive policies will be implemented at the local level.At present, the most important law on private education is the “Law on Promotion of Privately-run Schools” promulgated in 2017. The basic idea of this law is to promote the development of non- governmental education and protect the right

60、s of private schools and students in China. It focuses on the differentiation between non-profit and for-profit schools. By setting up boundaries and clarifying different paths of development for each kind of school, the industry will be more regulated and the private sector will benefit from a heal