Business Context and Reporting Period
ATA Inc. (now ATA Creativity Global) filed an audited Form 20-F for the fiscal year ended March 31, 2016, prepared under U.S. GAAP. The filing covers a full fiscal year, not a standalone 2015 fourth quarter; the request metadata’s “2015 Q4” does not match the filing period. ATA provides computer-based testing, online education and related services primarily in China. Its ADSs trade on Nasdaq under “ATAI,” with each ADS representing two common shares.
- Testing services represented 92.2% of fiscal 2016 revenue.
- The company delivered 10.38 million tests, including 10.26 million billable tests, up from 8.77 million billable tests in fiscal 2015.
- ATA had 3,035 authorized test centers and 446 employees as of March 31, 2016.
Financial Performance and Key Metrics
| Metric | FY2015 | FY2016 | Change |
|---|---|---|---|
| Net revenue | RMB350.2 million | RMB417.1 million | Up 19.1% |
| Testing services revenue | RMB319.1 million | RMB384.8 million | Up 20.6% |
| Online education revenue | RMB5.7 million | RMB4.9 million | Down 14.3% |
| Gross profit | RMB177.6 million | RMB209.1 million | Up 17.7% |
| Gross margin | 50.7% | 50.1% | Down 0.6 percentage points |
| Operating income | RMB31.8 million | RMB51.7 million | Up 62.9% |
| Operating margin | 9.1% | 12.4% | Improved |
| Net income | RMB23.1 million | RMB26.1 million | Up 13.0% |
| Net margin | 6.6% | 6.2% | Down 0.4 percentage points |
| Basic and diluted EPS | RMB0.49 | RMB0.57 | Up 16.3% |
U.S. dollar amounts in the filing use RMB6.4480 per US$1.00. Fiscal 2016 revenue was US$64.7 million, operating income was US$8.0 million and net income was US$4.0 million.
- Cash and cash equivalents increased to RMB247.7 million from RMB240.3 million.
- Accounts receivable, net, increased to RMB50.6 million from RMB48.2 million.
- Total assets were RMB470.5 million; total liabilities were RMB76.2 million; shareholders’ equity was RMB394.2 million.
- The company reported no outstanding debt, debt securities, contingent liabilities, mortgages or liens.
- Operating cash flow was RMB64.5 million, compared with RMB45.9 million in fiscal 2015.
- Investing cash outflow was RMB36.8 million, primarily reflecting equity investments and RMB10.0 million paid in connection with the ATA Online restructuring.
- Financing cash outflow was RMB20.3 million, primarily reflecting share repurchases.
- Fiscal 2016 capital expenditures were RMB3.1 million.
- Cash coverage was strong relative to reported liabilities, but cash accessibility is subject to PRC currency and dividend-transfer restrictions.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by new AMAC and CCTAA examinations, higher volumes in other examinations, and increased CICPA activity. AMAC and CCTAA contributed RMB23.2 million and RMB18.7 million, respectively.
- Billable tests increased 17.0% to 10.26 million.
- Testing revenue from CICPA increased to RMB76.5 million from RMB64.9 million.
- TOEIC and HR Select revenue increased to RMB86.3 million from RMB76.8 million, although the company continued to operate under a non-exclusive TOEIC arrangement after losing its former exclusive distribution rights.
- General and administrative expense increased 21.0% to RMB78.3 million, primarily due to professional fees related to ATA Online’s New Third Board listing and higher share-based compensation.
- Sales and marketing expense declined 5.6% to RMB42.6 million, while research and development expense declined 0.8% to RMB36.5 million.
- Share of losses from equity-method investments increased to RMB8.8 million from RMB2.2 million, reflecting losses at strategic investments.
- Income tax expense increased to RMB18.9 million from RMB9.6 million, principally because of increased valuation allowances on deferred tax assets.
- ATA Online became a wholly owned subsidiary in May 2015, ending the prior VIE contractual structure, and its testing business was restructured for a separate New Third Board listing.
- The company repurchased 1,134,264 common shares during fiscal 2016 for RMB19.5 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide quantitative revenue or earnings guidance. Management stated that existing cash and expected operating cash flow should satisfy working capital and capital expenditure needs for the next 12 months and the foreseeable future, while noting that acquisitions, investments or changed business conditions could require additional financing.
- Revenue is seasonal: quarters ending June 30 and December 31 are typically stronger, while quarters ending September 30 and March 31 are typically weaker. The December 2015 quarter generated RMB221.4 million of revenue versus RMB53.4 million in the September 2015 quarter.
- Customer concentration is substantial. CICPA, SAC and CBA represented 18.3%, 16.1% and 14.7% of fiscal 2016 revenue, respectively; the five largest testing clients represented 63.1%.
- Government-controlled entities generated 72.3% of fiscal 2016 revenue, exposing the company to government budgets, policy changes and payment timing.
- The company continues investing in newer platforms, including MTS and EzTest, as well as online education, training and assessment businesses. These newer markets have uncertain demand and regulatory requirements.
- The filing identifies risks involving PRC regulation, foreign-exchange controls, restrictions on fund transfers, preferential tax treatment, customer concentration, competition, cybersecurity, test integrity, technology failures and intellectual-property protection.
- The College Board canceled the January 2016 SAT administration at 45 centers in China and Macau after exam-security concerns, illustrating the risk of test cancellations.
- ATA had RMB178.6 million of undistributed PRC earnings that it intended to reinvest indefinitely; the related unrecognized deferred tax liability was RMB17.9 million.
- Deferred tax valuation allowances increased to RMB20.0 million, and PRC tax-loss carryforwards totaled RMB88.3 million at March 31, 2016.
- Contractual commitments included RMB47.6 million of operating lease obligations and RMB5.0 million of unconditional purchase obligations.
- Subsequent events included additional investments in Satech, Brilent, Medicine (Beijing) Education Technology, Empower Education Online and ApplySquare; these commitments could materially affect liquidity and investment risk.
- Management and KPMG Huazhen LLP reported effective internal control over financial reporting, and KPMG Huazhen issued an unqualified audit opinion.
Most Important Facts for an Investor to Verify
- Confirm that the intended reporting period is fiscal year ended March 31, 2016 rather than 2015 Q4.
- Assess the sustainability of fiscal 2016 revenue growth given dependence on a few government and industry-association test sponsors.
- Review the performance, carrying values and funding commitments of equity-method investments, particularly Zhishang, Master Mind, Satech and Brilent.
- Verify the implications of ATA Online’s ownership restructuring and New Third Board listing for consolidated earnings, control and ADS-holder exposure.
- Evaluate the effect of the loss of exclusive TOEIC distribution rights and any future changes to test-sponsor agreements.
- Monitor PRC restrictions on dividend payments, foreign-exchange conversion and transfers from operating subsidiaries to the offshore holding company.
- Review tax exposure if preferential 15% HNTE rates expire or if the company is classified as a PRC resident enterprise.
- Consider seasonality when comparing quarterly results and avoid extrapolating the strong December 2015 quarter.
- Check the subsequent investment commitments and whether they were funded after year-end.