TRACKER CERTIFICATE ON THE GLOBAL EDUCATION BASKET SSPA Category: Tracker Certificates October 2014
SHIFTING LIFESTYLES: GLOBAL EDUCATION Global education, as reported in 2013, is worth an estimated USD 4.5 5.6 trillion. By 2017, global education is expected to become a USD 6.4 7.8 trillion market. The global education sector (public and private) was worth an estimated USD 4.5trn in 2013; being therefore the second-largest global market after healthcare, according to education consultancy GSV Advisors. Demographic change, greater use of technology and higher spending levels by emerging countries underpin annual growth forecasts of 7% to 2017 (GSV estimate). The high cost of education is placing a burden on cash-strapped governments, which means increasing dependence on private spending and a growing role of for-profit education companies. The focus will be directed towards affordability and results, which is why we believe that the growth drivers for education seem to be coming from e-learning, for-profit education and language learning as well as from emerging markets increasing focus and spending on education overall (notably in China and Brazil). The rising online enrolment in higher education degrees and credit-granting courses is likely to be a key trend shaping higher education into 2020, especially in the US and Brazil. Universities determination to generate additional revenues and to lower operating and student costs are crucial factors increasing their demand for education technology solutions. 2
South Korea Japan UK US France Switzerland Germany Brazil China* OECD average GLOBAL EDUCATION Education is a considerable factor for the potential growth of an economy, critical for innovation and it shows positive spill-over effects on society. Post-secondary education is rising emerging markets with catch-up potenial % share with tertiary education 70% 25-34 years old 25-64 years old 60% 50% 40% 30% 20% 10% 0% GDP per cap levels compared to gross enrolment ratios in tertiary education Gross enrolment ratio (tertiary education) 100 90 80 70 60 50 40 30 20 R² = 0.68 10 * no data for China 25-34y Source: OECD, Julius Baer 0 2 2.5 3 3.5 4 4.5 5 PPP USD GDP per capita, log scale Source: International Monetary Fund, OECD, Oxford Economics, Julius Baer 3
DEMOGRAPHIC TRENDS Apart from China, also India, Indonesia and Brazil will play a larger role in future post-secondary education in terms of student mobility and enrolments. Consumer demand for education is high in emerging markets Despite slowing student growth, house-holds will keep spending on education rebased, age 20-24y milllion of students China 13.1% 160 600 Turkey 11.4% 140 500 India 11.1% 120 400 Brazil 9.8% 100 300 Indonesia 9.5% 80 200 Russia 6.8% 60 100 South Africa US 2.1% 5.5% 40 2000 2010 2020E 2030E 2040E Tert. enrol. (rhs) US 0 UK 1.6% China India 0% 5% 10% 15% % household income spent on education, 2011 Brazil Switzerland Russia Source: Bureau of labour Statistics, Office of National Statistics, Credit Suisse, Julius Baer Source: United Nations Population Statistics, Pearsons, Julius Baer 4
ONLINE EDUCATION Online education will evolve as an incremental segment and cater mainly to students who rely on selfstudy, such as professional skill training and continued education. Number of US college students taking at least one online course The number of online education users in China is expected to surpass 120m by 2017E mn % share mn % 8 40% 140 14-17E 16% CAGR 18% 7 35% 120 16% 6 5 30% 25% 100 14% 12% 4 20% 80 10% 3 15% 60 8% 2 1 0 10% 5% 0% 2002 2004 2006 2008 2010 2012 students taking at least one online course (lhs) 40 20 0 2008 2010 2012 2014E 2016E Online education users (lhs) 6% 4% 2% 0% % of total enrolments (rhs) y/y growth (rhs) Source: Babson survey, Pearson, Julius Baer Source: iresearch, Deutsche Bank, Julius Baer 5
EDUCATION MARKET SIZE The size of the education market is large and growing, especially the for-profit and the elearning segments. Global education expenditure with forecasts (2012, 2015E, 2017E) USD bn 6'000 Global market size on elearning, language and for-profit postsecondary education USD bn 300 5'000 4'000 3'000 2'000 1'000 250 200 150 100 0 2013 2015E 2017E Corporate & Govt. Learning 50 2013 2014E 2015E 2016E 2017E Global for-profit postsecondary Postsecondary Global elearning K-12 Global language learning Source: GSV Advisors, Julius Baer Source: GSV Advisors, Julius Baer 6
SHIFTING LIFESTLYES: GLOBAL EDUCATION We mapped the investment universe for the global education theme across a number of sectors value chains to highlight the diverse range of entry points available to the theme. Sectors K-12 and childcare Post-secondary, colleges and universities Education material and content Online education, EdTech and education hardware Growth drivers Middle-class consumers in the emerging markets tend to invest more in education, either to advance their careers or give their children a good start Increasing dependence on private spending A growing role of for-profit education companies increasing the focus on affordability and results Many emerging markets spending high proportions of household income on education, and this trend is expected to continue Digital is an enabling technology that is transforming the textbook publishing industry, but is also disruptive to traditional business models because it is cheap and easy to distribute. Online learning is increasingly used as a complementing learning tool. Many non-profit institutions are moving from class-room to online learning benefitting education technology (EdTech) enablers. Major equity players (by % sales) China: TAL Education (n.c.) New Oriental Education(n.c.) Nord Anglia Education (n.c.) Brazil: Kroton Educacional (n.c.) Estacio Participacoes (n.c.) United States: Apollo Education Group (n.c.) Grand Canyon Education(n.c.) Pearson (n.c.) Reed Elsevier (Buy) Apple (Hold) Google (Buy) 2U Inc (n.c.) Source: Bloomberg Finance L.P., Julius Baer; n.c. =not covered by Julius Baer, Julius Baer offers no recommendation 7
STOCKS WITH SIGNIFICANT EXPOSURE TO THE THEME We mapped the investment universe for the global education theme across a number of sectors value chains to highlight the diverse range of entry points available to the theme. Company Theme focus TAL Education K-12 Online education JB Rating ISIN Ccy Description n.c. US8740801043 USD The largest pure play on K-12 tutoring in China. The Company offers comprehensive tutoring services to K-12 students covering core academic subjects, including mathematics, English, Chinese, physics, chemistry and biology. New Oriental Education & Technology Group K-12 Online education n.c. US6475811070 USD Largest network of learning centres in China. New Oriental Education & Technology Group offers foreign language training, test preparation courses for admissions and assessment tests mainly in China, primary and secondary school education, educational content, online education. Nord Anglia Education K-12 n.c. KYG6583A1022 USD Nord Anglia operates one of the largest networks of premium private schools (British style K-12 schools) in the world. 35% of premium school revenues (CY13) came from China, 29% from Europe, 18% from Middle East/Southeast Asia and 18% from North America. Apollo Group Inc. Post-secondary Online education n.c. US0376041051 USD Apollo is one of the largest providers of postsecondary education in the US. Its 112 locations enrol over 250,000 students, many of whom work full time. Apollo owns University of Phoenix which is the largest provider of online degrees in the world. Grand Canyon Education Kroton Educacional SA Post-secondary Online education K-12 Post-secondary Online education n.c. US38526M1062 USD Owns the Grand Canyon University, a regionally accredited nondenominational Christian school based in Phoenix. The school offers 120 BA, MA and Doctorate programs, primarily in education, business and healthcare for more than 50,000 students online and at its Phoenix campus. n.c. BRKROTACNOR9 BRL Kroton is one of the largest private education companies in Brazil and the world, operating in the primary, secondary and postsecondary education segments. It has 53 higher education units, with a presence in 39 cities in 10 Brazilian states and 447 distance-learning graduation centres. The company also has 810 associated schools in all Brazilian states, as well as five units in Japan and one in Canada. Source: Bloomberg Finance L.P., Julius Baer; n.c. =not covered by Julius Baer, Julius Baer offers no recommendation 8
STOCKS WITH SIGNIFICANT EXPOSURE TO THE THEME We mapped the investment universe for the global education theme across a number of sectors value chains to highlight the diverse range of entry points available to the theme. Company Estacio Participacoes SA Theme focus Post-secondary Online education JB Rating ISIN Ccy Description n.c. BRESTCACNOR5 BRL Estacio is one of the largest private-sector post-secondary groups in Brazil in terms of number of students enrolled in distance learning and campus programmes of undergraduate and graduate courses. Its network caters to middle and lower middle-income workers through a university, four university centres, 34 colleges, and 52 distance learning units. Pearson Education content Transition from print to digital Reed Elsevier Education content Transition from print to digital n.c. GB0006776081 GBP Pearson s core business areas are educational (83% of revenue and 82% of EBITA in 2013) and consumer publishing, and information services. Pearson has a leading position in the provision of school and college textbooks, digital learning resources, and assessment materials. Buy NL0006144495 EUR Reed Elsevier is a broad-based publishing and information services business. The Elsevier academic publishing unit (35% of revenues) is a global leader in a resilient industry. 2U Inc Education technology n.c. US90214J1016 USD 2U enables non-profit colleges and universities to bring their accredited degree programmes online (in social work, data science, public administration, healthcare, laws and industrial relations) via a cloud-based software-as-a-service (SaaS) platform, with experiences and outcomes that match or exceed on-campus offerings. Apple Education technology Hold US0378331005 USD Apple is a player in education hardware and the integration of technology into classroom instruction. Areas of exposure include Mac (computers and laptops); ipads in education (over 4.5m sold to US-based education institutions in 2013); content (over 50,000 education apps); software (ilife, iworks and itunes U). Google Education technology Buy US38259P5089 USD Google is an education play via its online products (Goole Apps for Education, Google Earth, YouTube for Schools, Search, Google Drive); its effort to digitalise books (Google Books) and its dominant position in many mobile devices (Android platform) used as a learning tool. Source: Bloomberg Finance L.P., Julius Baer; n.c. =not covered by Julius Baer, Julius Baer offers no recommendation 9
SUMMARY LIST OF STOCKS FOR GLOBAL EDUCATION List of selected stocks with significant exposure to Global Education in the areas of K-12, postsecondary education, online education and EdTech (prices as of 27 October 2014). Market Exposure Currency JB Last Price ESG cap Performance (%) Company to theme Country rating price target rating (USD bn) 1M 3M 12M P/E 12m fwd Div yld (%) Global Education ESTACIO PARTICIPACOES SA High BRAZIL BRL n.c. 23.9 n.c. BBB 3.1-5.5-17.2 38.9 12.2 0.8 KROTON EDUCACIONAL SA High BRAZIL BRL n.c. 14.3 n.c. B 9.4-5.0-7.4 78.0 14.1 1.9 PEARSON PLC High BRITAIN GBp n.c. 1'139.0 n.c. AA 15.0-7.6 0.6-16.5 15.0 4.8 REED ELSEVIER NV High BRITAIN EUR Buy 17.3 19 AAA 34.1-2.1 1.2 17.5 14.6 3.2 NEW ORIENTAL EDUCATIO-SP ADR High CHINA USD n.c. 22 n.c. - 3.5 0.9 15.2-17.5 12.6 n.a. TAL EDUCATION GROUP- ADR High CHINA USD n.c. 32.8 n.c. - 2.6-4.6 21.5 75.7 24.8 n.a. NORD ANGLIA EDUCATION INC High HONG KONG USD n.c. 16 n.c. - 1.5-6.9-14.8 n.a. 24.5 n.a. 2U INC High UNITED STATES USD n.c. 17.9 n.c. - 0.7 20.2 24.8 n.a. n.a. n.a. APOLLO EDUCATION GROUP INC High UNITED STATES USD n.c. 25.9 n.c. - 2.8 2.0-10.0-6.2 13.5 n.a. APPLE INC Medium UNITED STATES USD Hold 105.2 106 A 617.2 4.4 7.7 40.0 13.8 1.9 GOOGLE INC-CL A Medium UNITED STATES USD Buy 548.9 640 BBB 369.0-6.6-8.2 8.0 18.2 0.0 GRAND CANYON EDUCATION INC High UNITED STATES USD n.c. 41.2 n.c. - 1.9 0.1-7.9-6.6 16.6 n.a. Source: Bloomberg Finance L.P., Julius Baer; n.c. =not covered by Julius Baer, Julius Baer offers no recommendation 10
TRACKER CERTIFICATE ON THE GLOBAL EDUCATION BASKET Product data Issuer Lead Manager Rating Bank Julius Baer & Co. AG, Zürich Bank Julius Baer & Co. AG, Zürich Moody s A1 Participation 100% Currency Composite USD Fixing date 7 November 2014 Maturity date 7 November 2016 Additional details No dividend reinvestment Listed at the SIX Swiss Exchange Valor / ISIN / Symbol 24202148 / CH0242021480 / JFCHG In subscription until 7 November 2014, 12:00 CET Source: Julius Baer 11
TRACKER CERTIFICATE ON THE GLOBAL EDUCATION BASKET Summary The product suits investors who are looking for alternative source of income intend to participate in a diversified equity portfolio believe in the upside potential of the underlying stocks and have a positive view on the investment theme Global Education have a high risk tolerance. 12
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