Filing summary
Filing and period: The supplied filing is RISE Education Cayman Ltd’s annual report on Form 20-F for the fiscal year ended December 31, 2017, with audited results for 2015–2017. It is not a 2016 Q4 filing, and the company named in the request, Naas Technology Inc., does not match the registrant identified in the filing.
RISE operates English-language education programs for children in China through self-owned and franchised learning centers. It reported 270 centers at year-end 2017, including 64 self-owned and 206 franchised centers. ADSs began trading on Nasdaq in October 2017. Financial figures below are in RMB millions unless otherwise stated; the filing’s tables generally report amounts in thousands.
Financial results and liquidity
| Metric | 2016 | 2017 | Change or context |
|---|---|---|---|
| Revenue | 711.0 | 969.3 | Up 36.3% |
| Gross profit / margin | 347.4 / 48.9% | 517.1 / 53.3% | Margin increased 4.4 percentage points |
| Operating income (loss) | 70.8 | (0.6) | 2017 included substantial IPO-related, one-off and share-based costs |
| Net income (loss) | 50.8 | (53.6) | 2017 loss included RMB52.9 million income tax expense |
| Net income (loss) attributable to RISE | 53.9 | (48.0) | 2017 basic and diluted loss per share: RMB0.47 |
| EBITDA (non-GAAP) | 142.3 | 56.1 | EBITDA margin fell from 20.0% to 5.8% |
| Adjusted EBITDA (non-GAAP) | Not provided | 242.5 | 25.0% margin; excludes IPO-related, one-off and share-based compensation costs |
| Cash from operating activities | 240.1 | 345.3 | Increase was supported in part by higher customer advances |
| Cash and cash equivalents at year-end | 640.0 | 1,056.0 | Restricted cash was a further RMB28.9 million in 2017 |
| Long-term loan at year-end | 371.3 | 623.4 | 2017 balance-sheet amount; US$100 million principal remained after US$10 million prepayment |
Educational-program revenue rose 34.4% to RMB831.1 million, primarily on enrollment growth, additional self-owned centers and higher course fees. Franchise revenue increased 57.4% to RMB100.0 million, with the network expanding from 167 to 206 centers. Other revenue grew 31.0% to RMB38.2 million, including online, study-tour and Edge acquisition revenue. Self-owned student enrollments increased 37.9% to 49,894.
Cost of revenue was 46.7% of revenue in 2017, compared with 51.1% in 2016. Reported operating expenses rose to RMB517.7 million, or 53.4% of revenue; general and administrative expense alone increased to RMB339.7 million, or 35.0% of revenue. Management stated that excluding share-based compensation, IPO-related and one-off costs, 2017 operating income was RMB185.8 million and adjusted EBITDA was RMB242.5 million. These are non-GAAP measures and should be considered alongside GAAP results.
Operating cash flow benefited from a RMB201.0 million increase in deferred revenue and customer advances, which reached RMB812.8 million at year-end. This largely reflects prepaid tuition and franchise fees, not yet recognized revenue. Investing cash use was RMB53.1 million, including RMB50.3 million for property and equipment. Financing cash inflow was RMB129.0 million, reflecting IPO proceeds and borrowings, partly offset by a RMB571.8 million shareholder distribution. The company reported current assets of RMB1,142.4 million and current liabilities of RMB1,030.7 million.
Material changes and unusual items
- Revenue growth continued, but GAAP profitability reversed: RISE moved from 2016 operating and net income to a small operating loss and a RMB53.6 million net loss in 2017.
- 2017 included RMB95.3 million in share-based compensation, RMB52.9 million in IPO-related expenses and RMB38.2 million in one-off expenses. The IPO also triggered recognition of previously unrecorded option compensation.
- The company raised RMB437.8 million net from its IPO, drew on a restructured CTBC facility and paid an US$87.0 million dividend to its shareholder in September 2017. It used US$30 million of IPO proceeds to repay the short-term facility and prepaid US$10 million of long-term principal in December.
- The Edge education-consulting business was acquired in November 2017 for consideration of approximately RMB26.0 million, including cash and shares. The filing recorded RMB30.8 million of goodwill from the acquisition; reported post-acquisition and pro forma operating effects were described as insignificant.
- ASC 606 adoption was planned for January 1, 2018 using the modified retrospective method. Management expected initial franchise fees to be recognized over the generally five-year franchise term and estimated the cumulative adoption adjustment would increase accumulated deficit by approximately 4.0%.
Outlook, risks and contingencies
Management expected enrollment and the center network to expand, planned further self-owned center openings and franchise growth, and anticipated higher costs as the business expanded. It believed available cash would cover ordinary working-capital and capital-expenditure needs for the next 12 months. The filing gives no numerical revenue or earnings guidance. Management also noted seasonality, with generally higher third-quarter revenue from summer study tours and lower first-quarter revenue around the Chinese New Year holiday.
- Licensing and fire-safety compliance: As of the report date, self-owned centers lacking certain required permits, registrations, education-authority filings or fire approvals collectively accounted for 15.0% of 2017 revenue. The company disclosed that penalties could include fines, tuition refunds, or closure. A reasonably possible loss estimate was not available.
- VIE and China regulatory exposure: The VIE and its subsidiaries generated approximately 94% of 2017 revenue. The offshore parent relies on contractual arrangements rather than direct ownership; enforceability and future regulatory treatment remain uncertain.
- Liquidity and debt: The US-dollar, floating-rate loan was guaranteed by group entities and the VIE, with certain subsidiary shares pledged and cash set aside for interest payments. The company disclosed foreign-exchange exposure and no hedging of the loan. A 1% rate change would change annual interest expense by approximately RMB6.5 million at year-end debt levels.
- Commitments: Future minimum operating lease payments totaled RMB635.9 million, including RMB156.5 million due within one year; leasehold-improvement commitments were RMB3.1 million.
- Controls and audit access: The filing reported two significant deficiencies in internal control over financial reporting as of year-end and stated that remediation was ongoing. Management assessed disclosure controls as effective, but the auditor did not audit internal-control effectiveness. The filing also warns that the China-based auditor was not fully inspected by the PCAOB.
- Other material risks: Competition, student retention, teacher recruitment, franchise quality, data security, currency conversion and transfer restrictions, tax exposures, and potential changes to private-education rules. No material legal proceeding was reported as pending.
Important facts for investors to verify
- Confirm the requested issuer and period: the source is RISE Education’s FY2017 20-F, not Naas Technology Inc.’s 2016 Q4 filing.
- Reconcile the IPO share-count descriptions: the filing’s narrative, use-of-proceeds discussion and financial-statement share issuance disclosures do not appear consistent on the number of ADSs or ordinary shares issued.
- Assess the quality and persistence of earnings by reconciling GAAP losses with management’s adjusted EBITDA and non-GAAP net income, particularly the exclusions for IPO costs, one-off expenses and share-based compensation.
- Track licensing and fire-safety remediation, the 15.0% revenue exposure cited for affected self-owned centers, and implementation of the amended private-education law.
- Review debt repayment and interest terms, the large prepaid-customer balance, lease commitments, and whether cash can be moved from PRC operations to offshore entities.
- Monitor remediation of internal-control deficiencies and the limits on PCAOB inspection of the auditor.