Sunlands Technology Group annual report, Q4 FY2021

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Sunlands Technology Group — 2021 Form 20-F Summary

Business context and reporting period

Sunlands Technology Group is a Cayman Islands holding company operating primarily in China through subsidiaries and consolidated variable interest entities (VIEs). It provides online post-secondary, professional certification, skills and interest courses through live-streaming and mobile platforms. The filing is an annual report for the fiscal year ended December 31, 2021, rather than a standalone 2021 fourth-quarter filing. Financial statements are prepared under U.S. GAAP and reported primarily in RMB.

  • Students: 1.105 million at year-end 2021, down from 1.131 million in 2020.
  • New student enrollments: 434,228, broadly unchanged from 434,240 in 2020.
  • VIE-generated revenue represented 21.4% of consolidated revenue in 2021, down from 47.3% in 2020.
  • The ADS ratio changed effective August 31, 2021, from 25 ADSs per Class A ordinary share to two ADSs per Class A ordinary share.

Financial performance and key metrics

RMB millions, except percentages20212020Change
Net revenue2,507.82,203.8+13.8%
Gross billings1,970.02,350.4-16.2%
Gross profit2,131.61,816.5+17.3%
Gross margin85.0%82.4%+2.6 pts
Operating income/(loss)114.3(649.0)Improved
Net income/(loss)212.4(431.0)Improved
Net income attributable to Sunlands219.1(430.5)Improved
EBITDA, non-GAAP225.4(405.1)Improved
Net cash used in operating activities(373.3)(188.6)Higher use
Cash, cash equivalents and restricted cash676.7760.7-11.0%

Net margin was approximately 8.5%, compared with a net loss margin of approximately 19.5% in 2020. Operating margin was approximately 4.6%, compared with negative 29.4% in 2020. The filing attributes the return to profitability primarily to revenue growth in professional certification and professional skills courses, lower sales and marketing costs, and lower general and administrative expenses.

  • Professional certification and skills revenue rose to RMB793.9 million from RMB268.1 million, representing 31.7% of revenue versus 12.2% in 2020.
  • STE revenue declined to RMB1,038.2 million from RMB1,471.7 million, representing 41.3% of revenue versus 66.8% in 2020.
  • Sales and marketing expense declined 17.7% to RMB1,748.4 million; marketing spending declined to RMB819.6 million.
  • Cost of revenue declined 2.9% to RMB376.2 million, while deferred revenue declined to RMB2,348.2 million from RMB3,024.4 million.
  • Refund payments were RMB282.5 million, compared with RMB335.5 million in 2020; refund liability was RMB243.2 million at year-end.

Cash flow, liquidity, debt and commitments

  • Operating cash flow was negative RMB373.3 million. The principal working-capital drag was a RMB646.7 million decrease in deferred revenue, reflecting recognition of previously collected tuition.
  • Investing cash flow was positive RMB342.7 million, primarily from maturity of RMB2,166.9 million of short-term investments, partly offset by RMB1,833.7 million of purchases.
  • Financing cash flow was negative RMB38.9 million, including RMB34.0 million of debt repayment and RMB4.9 million used for share repurchases.
  • Cash, cash equivalents and restricted cash totaled RMB676.7 million, including RMB50.0 million of restricted cash. The restricted deposit was released in January 2022.
  • Total balance-sheet debt was approximately RMB220.6 million at year-end, including RMB38.7 million current and RMB182.0 million non-current. Contractual long-term loan obligations were RMB256.1 million, including interest.
  • Contractual commitments included RMB646.5 million of operating leases and RMB9.8 million of investment commitments.
  • Working capital was negative RMB779.4 million, principally because of deferred revenue. Management stated that existing cash and anticipated operating cash flow should fund requirements for at least the next 12 months.
  • Total shareholders’ deficit was RMB1,014.2 million at December 31, 2021.

Material changes versus the prior comparable period

  • Revenue increased despite lower gross billings, reflecting the shift toward shorter-duration and professional certification and skills courses and revenue recognition from prior-period deferred tuition.
  • Course mix changed substantially: STE courses declined while professional certification, skills and other post-secondary offerings expanded.
  • The company moved from a RMB431.0 million net loss in 2020 to RMB212.4 million net income in 2021.
  • Operating expenses fell 18.2%, primarily because of lower branding, marketing, sales personnel compensation, office and administrative costs.
  • Cash generation weakened: operating cash use increased by RMB184.6 million year over year, and deferred revenue fell by RMB676.3 million.
  • The company disposed of two subsidiaries, received RMB20.0 million of proceeds and recognized a RMB44.0 million gain; the disposals were not treated as discontinued operations.
  • Management authorized a new share repurchase program of up to US$15 million over 24 months. RMB4.9 million was used for repurchases in 2021, and 163,504 ADSs had been repurchased by March 31, 2022.

Guidance, outlook, commentary, risks and unusual items

The filing does not provide quantitative revenue, earnings or enrollment guidance. Management emphasizes continued diversification into professional certification, professional skills, overseas higher education and interest courses, greater use of artificial intelligence, and improved student engagement and operating efficiency.

  • Regulatory risk: The company and certain VIEs do not hold a private school operating permit for online education services, and a substantial majority of teachers do not hold teaching licenses. The filing also identifies uncertainty regarding online publishing, audio-visual transmission, live-streaming and other licenses and filings.
  • Education-policy risk: PRC education regulation tightened materially in 2021. Further rules could require business changes, refunds, additional licensing, fines or suspension of operations.
  • VIE structure: The company does not own equity in the VIEs; it relies on contractual arrangements to control and consolidate them. The arrangements have not been tested in court and could be challenged or become unenforceable.
  • China and listing risk: The PCAOB reported that it was unable to inspect the company’s China-based auditor completely. The company warned that continued non-inspection could lead to ADS delisting under the HFCAA.
  • Litigation: Sunlands and certain directors, officers and IPO underwriters remain defendants in a securities class action concerning the 2018 IPO registration statement. Discovery was stayed pending a motion for judgment on the pleadings; potential loss could not be estimated.
  • Reputation and compliance: The filing discusses refund disputes, alleged misleading marketing, recruitment for an unqualified overseas institution, data privacy, cybersecurity, intellectual-property and teacher-qualification risks.
  • Liquidity and cash-transfer restrictions: The offshore holding company depends on PRC subsidiaries for funds. Dividend and cash transfers are subject to PRC earnings, reserve, foreign-exchange and government-approval restrictions.
  • Unusual items: 2021 results included a RMB44.0 million gain on subsidiary disposals, RMB5.0 million of long-term investment impairment, and a RMB19.6 million income-tax benefit. Wuhan Shangde’s preferential tax status also reduced the effective tax burden.

Most important facts for investors to verify

  1. Whether the improvement in reported profit is sustainable given the decline in gross billings, deferred revenue and operating cash flow.
  2. The quality, duration and refund profile of the expanded professional certification and skills-course portfolio.
  3. The status of all required PRC licenses, permits, app filings and teacher qualifications.
  4. The enforceability of the VIE contractual arrangements and the proportion of future revenue dependent on VIE operations.
  5. The company’s ability to generate positive operating cash flow while meeting lease, debt, refund and investment commitments.
  6. The status and potential exposure of the securities class action and any related insurance coverage.
  7. PCAOB inspection developments, HFCAA status and the continuing NYSE minimum-price compliance risk.
  8. Restrictions on transferring cash from PRC entities to the Cayman Islands parent and the absence of a dividend plan.