ATA Creativity Global (ATA Inc.) — Form 20-F Summary
Reporting period: Fiscal year ended March 31, 2017, filed June 29, 2017. The source is an annual Form 20-F, not a standalone 2016 fourth-quarter filing. ATA later changed its fiscal year-end from March 31 to December 31, with a transition report planned for the period April 1, 2017 through December 31, 2017.
Business context
ATA provides computer-based testing, test administration, online education, assessment and related services primarily in China. Testing services represented 91.0% of fiscal 2017 net revenue. The company operated 3,147 authorized test centers and delivered approximately 12.2 million tests, including 12.1 million billable tests. Its three largest customers were CICPA, AMAC and CBA, which together represented 49.5% of fiscal 2017 revenue.
Financial performance and liquidity
| Metric | FY2016 | FY2017 | Change |
|---|---|---|---|
| Net revenue | RMB 417.1 million | RMB 472.4 million | +13.2% |
| Testing services revenue | RMB 384.8 million | RMB 430.1 million | +11.8% |
| Online education revenue | RMB 4.9 million | RMB 7.5 million | +52.4% |
| Gross profit | RMB 209.1 million | RMB 232.5 million | +11.2% |
| Gross margin | 50.1% | 49.2% | Down 0.9 percentage points |
| Operating income | RMB 51.7 million | RMB 71.5 million | +38.3% |
| Net income attributable to ATA | RMB 26.1 million | RMB (9.7) million | Turned to loss |
| Basic and diluted EPS | RMB 0.57 | RMB (0.21) | Turned to loss |
| Cash flow from operations | RMB 64.5 million | RMB 61.5 million | Down 4.6% |
| Capital expenditures | RMB 3.1 million | RMB 9.9 million | Increased |
| Cash and cash equivalents | RMB 247.7 million | RMB 222.4 million | Down 10.2% |
Fiscal 2017 operating income improved despite a modest gross-margin decline. Reported net loss was driven primarily by RMB 32.2 million of impairment losses on long-term investments, RMB 16.1 million of equity-method investment losses and RMB 22.6 million of deferred withholding tax expense on undistributed PRC earnings.
Net cash used in investing activities increased to RMB 94.0 million, principally because of RMB 89.9 million of long-term investments and RMB 9.9 million of capital expenditures. Financing activities provided RMB 7.3 million, including RMB 34.0 million of third-party investment prepayments, partly offset by RMB 30.0 million placed as collateral for a standby letter of credit. The short-term loan was repaid and the restricted cash was released in June 2017.
As of March 31, 2017, total liabilities were RMB 127.4 million and shareholders’ equity was RMB 392.5 million. The filing states that ATA had no outstanding debt, debt securities, contingent liabilities, mortgages or liens as of the filing date; a temporary RMB 3.4 million short-term loan outstanding at March 31, 2017 was fully repaid in June 2017.
Material changes versus the prior period
- Revenue growth reflected higher test volumes for CICPA and AMAC, new National Tour Guide and Housing and Urban-Rural Construction qualification exams, and additional exam volume. Billable tests increased from 10.3 million to 12.1 million.
- The increase was partly offset by the loss of the SAC exam, which generated RMB 67.0 million of revenue in fiscal 2016.
- Gross margin decreased because of higher labor costs and a less favorable revenue mix.
- Operating income improved as general and administrative expenses fell 11.8%, partly because fiscal 2016 included expenses related to ATA Online’s New Third Board listing and higher share-based compensation.
- Sales and marketing expense increased 12.1% and research and development expense increased 18.9%, including spending on K-12 initiatives.
- ATA invested in several online education and K-12 businesses. Master Mind and Satech were impaired by RMB 22.3 million and RMB 9.9 million, respectively.
- ATA acquired 60% of Puhua Technology for RMB 2.0 million in September 2016; the acquisition generated RMB 71,349 of revenue and RMB 633,513 of net loss through March 31, 2017.
- ATA declared a post-period cash dividend of US$0.205 per common share, or US$0.41 per ADS, totaling approximately US$10.0 million.
Guidance, outlook, risks and unusual items
The filing provides no quantitative revenue or earnings guidance. Management stated that current cash and expected operating cash flow were sufficient for anticipated working capital and capital expenditures, while noting that acquisitions, investments or changed business conditions could require additional financing.
- Customer concentration: Government-controlled entities generated 69.8% of fiscal 2017 revenue. CICPA, AMAC and CBA individually represented 19.1%, 18.6% and 11.8%, respectively.
- Seasonality: Testing revenue is generally higher in the quarters ending June 30 and December 31 and lower in the quarters ending September 30 and March 31. The December 2016 quarter generated RMB 273.5 million of revenue versus RMB 65.1 million in the September 2016 quarter.
- Investment risk: New online education and K-12 investments have produced continuing losses and required substantial impairment charges. Further impairment is possible.
- Regulatory risk: Operations depend on evolving PRC rules covering education, online content, cybersecurity, privacy, foreign exchange, foreign investment and taxation.
- Tax risk: The company depends partly on preferential 15% HNTE tax rates, some of which require renewal. Loss of those rates could increase tax expense. The company also recorded RMB 22.6 million of deferred withholding tax liabilities.
- Liquidity and cash transfer risk: PRC subsidiaries are subject to statutory reserve requirements and restrictions on transferring funds offshore. RMB 55.2 million was held in restricted general reserves at March 31, 2017.
- Technology and data security: System failures, test integrity issues, cybersecurity incidents or privacy violations could result in client losses, regulatory penalties and litigation.
- Capital markets and governance: ADS trading volume was low, the ADS price was volatile, and Kevin Xiaofeng Ma beneficially owned approximately 50% of common shares as of June 22, 2017. ATA also relied on Cayman Islands home-country practices for certain Nasdaq governance requirements.
- Contingencies: The company reported no litigation or administrative proceeding expected to have a material adverse effect and no off-balance-sheet arrangements. Contractual obligations included RMB 37.7 million of operating leases and RMB 6.1 million of purchase obligations.
Important facts for investors to verify
- Confirm the distinction between the requested “2016 Q4” period and the filed fiscal year ended March 31, 2017.
- Assess whether revenue concentration among CICPA, AMAC, CBA and other government-controlled entities remains elevated.
- Track operating cash flow, cash balances and the effect of the approximately US$10 million dividend on holding-company liquidity.
- Review the performance, funding needs and impairment exposure of Master Mind, Satech, Zhishang, Brilent and the newer K-12 and online education investments.
- Verify renewal of ATA Testing’s HNTE certificate and the resulting effective tax rate.
- Monitor the financial and operating impact of the fiscal year-end change and subsequent transition period.
- Review the timing and terms of the ACT agreement, the extended TOEIC agreement and the CBA online education platform.
- Confirm that the short-term loan was repaid and the RMB 30.0 million restricted cash was released in June 2017.