HONG KONG – Becoming a police officer, a tax official or a Customs agent in China is tough. Candidates need to have a post-high school degree and go through a national exam that takes place once a year with a pass rate of less than 1.5 per cent.

Ms Lu Zhongfang and her son, Mr Li Yongxin, made a fortune helping students prepare for that test. Then, they lost almost all of it because of a quirk in their business model.

Once worth almost US$21 billion (S$28 billion), Ms Lu and Mr Li’s combined fortune has now fallen below US$1 billion, according to the Bloomberg Billionaires Index. Shares in their Offcn Education Technology, which offers tutorials and training for the gruelling exam, have plunged 87 per cent from a November 2020 peak.

Offcn targets adults who aspire to become civil servants – jobs nicknamed “iron rice bowls” in Chinese because they ensure lifetime employment with good conditions.

Since its students are older, Offcn was not directly affected by a crackdown on the education industry. The company’s downfall was, in fact, of its own making.

Its premium course guaranteed up to a full fee refund should students fail the test. This initially helped woo customers, but things turned sour a couple of years ago, when Covid-19 disrupted economic growth and the broader clampdown on private enterprises pushed people to look for more stable jobs, making the civil service exam even more competitive.

“The crackdowns in the private sector have made many people lose their jobs, and young Chinese people now are generally conservative in their career choices,” said Associate Professor Alfred Wu of the National University of Singapore (NUS), who studies China’s public service system. “When the number of young people signing up for the exam is growing faster than the offerings, there is not much Offcn can do.”

In December, 2.6 million people signed up for the civil servants exam with some 37,000 open spots, compared with fewer than one million who competed for 24,000 positions in November 2019.

For Offcn, the exam’s growing popularity led to an average refund rate of almost 70 per cent two years ago, up from 44 per cent in 2019, according to its latest disclosure in June. The company posted a loss of 2.4 billion yuan (S$460 million) in 2021 and 1.1 billion yuan in 2022, with about 60 per cent of its revenue coming from courses targeting the exam, which many sit to join government departments and public institutions.

In some cities, Offcn did not have enough cash to return all the money and had to pay in instalments, state media reported.

At the peak, Ms Lu and Mr Li held as much as 61 per cent of Offcn. But they have recently started selling shares to raise cash in a bid to save the firm’s operations.

The duo still own one-fifth of the company and remain its controlling shareholders.

Born in 1976, Mr Li graduated from Peking University with a bachelor’s degree in law in 1999. He founded the predecessor of Offcn the same year, using his mother’s savings as seed funds.

In 2010, Ms Lu invested 6 million yuan in the company and later acquired more shares as Mr Li’s proxy, becoming the main shareholder. Around that time, demand for vocational exam training surged, and Mr Li launched Offcn’s premium class, which cost more but offered a refund policy.

This turned out to be a hit. Revenue peaked at 11.2 billion yuan in 2020, almost tripling from that of 2017. Offcn’s shares, which listed in Shenzhen via a reverse merger in February 2019, more than quadrupled through their peak. They are now worth less than when they began trading.

Offcn has since altered its course structure, offering fewer classes with refunds. This helped it post 24 million yuan in profit in the first quarter of 2023.

The firm has also pledged to streamline its personnel and invest more in technology to provide classes with online and offline access to tap new customers.

“The company has turned profitable again in the first quarter of 2023, and it has a long-term strategic plan in technology development,” Soochow Securities analyst Wu Jincao wrote in a May 4 report. “As a leader in the sector, Offcn could have an advantage in developing new business streams with its existing scale, experience and channels.”

Yet, challenges remain. China has set a modest economic growth outlook after reopening to the world following years of pandemic isolation. A record 11.6 million students will graduate from universities and colleges this summer, adding pressure to the job market, with more of them likely to try their luck at the civil service exam.

“China’s economy is not as promising as it used to be, and people are accepting this new norm,” NUS’ Prof Wu said. “The trend of more people competing in the civil servants exam will continue in the next few years.” BLOOMBERG