Ambow Education Holding Ltd. — FY2019 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone 2019 fourth-quarter report. Financial statements are prepared under U.S. GAAP; amounts below are RMB unless otherwise stated. U.S. dollar figures are filing translations.
Business context
Ambow provides K-12 education, tutoring, career-enhancement and related services, primarily in China, and operates Bay State College in the United States. Its two reportable segments are K-12 Schools and College Preparation & Career Enhancement (CP&CE) Programs. At year-end, it reported 60 schools and centers, including three directly operated K-12 schools. Much of its China education business is conducted through variable interest entities (VIEs) under contractual arrangements rather than direct ownership.
Financial performance and position
| Metric | FY2018 | FY2019 |
|---|---|---|
| Net revenue | RMB 531.5 million | RMB 583.9 million (US$83.9 million), up 9.9% |
| Gross profit / margin | RMB 193.4 million / 36.4% | RMB 195.0 million / 33.4% |
| Operating income (loss) | RMB 15.4 million | RMB (97.7) million |
| Net income (loss) | RMB 44.9 million | RMB (100.4) million (US$14.4 million) |
| Net loss attributable to ordinary shareholders | RMB — | RMB (99.9) million; basic and diluted loss per share RMB 2.30 |
| Operating cash flow | RMB 25.4 million provided | RMB 10.2 million used |
| Cash and cash equivalents | RMB 211.4 million | RMB 157.6 million |
| Total assets / liabilities / equity | RMB 910.2 / 647.4 / 262.8 million | RMB 1,020.8 / 857.2 / 163.6 million |
FY2019 cost of revenues rose 15.0% to RMB 388.9 million. Operating expenses increased 64.4% to RMB 292.7 million, including a RMB 38.8 million impairment charge for goodwill and intangible assets. The filing reports gross margin declines were driven by investment in new programs and technology; CP&CE gross margin fell to 29.0% from 37.1%, while K-12 margin rose to 37.2% from 35.7%.
K-12 revenue increased to RMB 313.7 million, up from RMB 277.8 million; CP&CE revenue increased to RMB 270.2 million, up from RMB 253.7 million. Intellectualized operational services revenue declined to RMB 1.2 million from RMB 6.4 million.
Current assets were RMB 399.6 million and current liabilities RMB 609.0 million, a working-capital deficit of RMB 209.3 million. Cash and cash equivalents plus short-term investments totaled approximately RMB 246.1 million. The company had no third-party borrowings outstanding at year-end: its interest-free US$6.0 million borrowing was repaid in 2019, and the linked RMB loan receivable was collected. Lease liabilities were RMB 269.6 million, including RMB 53.5 million current; undiscounted operating lease obligations totaled RMB 342.2 million.
Material changes and unusual items
- Revenue grew on higher student enrollment in K-12 schools and CP&CE, but the company moved from profit to a substantial loss as operating costs rose and impairment was recorded.
- CP&CE recorded RMB 33.7 million of goodwill impairment; the filing also reports RMB 5.0 million of intangible-asset impairment. The business suspended some underperforming units. Total impairment loss was RMB 38.8 million.
- Other income fell to RMB 10.2 million from RMB 33.1 million, partly because FY2018 included RMB 15.2 million from derecognition of liabilities. FY2019 included RMB 1.8 million of gains from subsidiary deregistrations and RMB 1.3 million from a change in contingent consideration fair value.
- The company changed its reportable segments in 2019 to K-12 and CP&CE; comparative segment data for 2017 and 2018 was restated accordingly.
- In 2019, the company acquired operating control of ten tutoring centers through an operating agreement. It also paid RMB 40 million plus accrued interest for a six-year lock-up deposit relating to a potential investment in Hebi School. In April 2020, it reported a term sheet to convert outstanding loans and interest due from the counterparty into part of consideration for a proposed acquisition of at least 51%; final terms remained subject to agreement.
- The company closed its acquisition of NewSchool of Architecture and Design in March 2020. The estimated closing purchase price was US$1, subject to later adjustment; final purchase-price accounting was still under evaluation.
Outlook, management commentary and risks
- Management said cash, short-term investments and expected cash flows should cover anticipated needs for at least 12 months after issuance of the financial statements, and prepared the statements on a going-concern basis. It also noted a need for additional capital for its longer-term plan and gave no assurance that financing would be available.
- Management planned to prioritize core cash-generating operations and tighten spending from 2020, including staffing reductions, stricter purchase approvals and suspending some cash-consuming activities. No quantified revenue or earnings guidance is provided.
- COVID-19 did not affect FY2019 results. From early 2020, China school and training-center closures and Bay State College’s move to online courses could affect revenue, tuition collections, receivables and asset values. The filing states the financial impact could not then be reasonably estimated; response measures included online offerings, cost reductions, rent relief discussions and seeking credit facilities.
- Key risks include dependence on student enrollment and regulated tuition, competition, education-sector regulatory changes, and the enforceability of VIE contracts. PRC restrictions may also limit cash transfers and dividends. Property-title defects, uncertain tax positions and the ability to meet obligations amid the working-capital deficit merit attention.
- Bay State College’s FY2019 composite financial-responsibility score was 1.5, the stated minimum score for meeting the Department of Education’s standard; its Title IV revenue share was approximately 62%. Its most recently reported three-year cohort default rate was 6.5%.
- The auditor issued an unqualified opinion on the consolidated financial statements. Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2019; the auditor was not engaged to attest to internal-control effectiveness.
Most important facts for investors to verify
- Whether enrollment growth and revenue can translate into improved margins and operating cash flow, particularly in CP&CE.
- Cash availability and access to short-term investments, including their maturity, liquidity and credit risk, against the RMB 209.3 million working-capital deficit and RMB 342.2 million of undiscounted lease obligations.
- Progress on COVID-related reopening, tuition collections, cost reductions and financing, and any subsequent effects on receivables or asset impairment.
- Execution and final terms of the Hebi School transaction and the NewSchool purchase-price adjustment.
- Potential consequences of VIE, private-education, tax and property-title regulatory matters, and the extent to which cash held by VIEs can support the listed parent.