Lixiang Education Holding Co., Ltd. — FY2020 Form 20-F
Period and scope: This is an annual report for the fiscal year ended December 31, 2020, not a standalone fourth-quarter filing. Financial statements are audited and prepared under U.S. GAAP; amounts below are in RMB unless otherwise noted. The company operates private primary and middle schools in Lishui, Zhejiang, through a variable interest entity (VIE) structure.
Financial performance and position
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net revenue | RMB159.2 million (US$24.4 million) | RMB152.1 million | +4.7% |
| Gross profit / margin | RMB45.1 million / 28.3% | RMB54.0 million / 35.5% | Profit down 16.5%; margin down 7.2 percentage points |
| Operating income / margin | RMB25.9 million / 16.2% | RMB44.7 million / 29.4% | Down 42.1% |
| Net income / margin | RMB33.6 million (US$5.1 million) / 21.1% | RMB47.2 million / 31.1% | Down 28.9% |
| Operating cash flow | RMB49.5 million (US$7.6 million) | RMB58.8 million | Down 15.9% |
| Cash and cash equivalents | RMB212.8 million (US$32.6 million) | RMB24.7 million | Up substantially, largely reflecting IPO financing |
| Short-term bank borrowings | RMB39.7 million (US$6.1 million) | RMB83.6 million | Down RMB43.9 million |
Tuition, meal and accommodation services generated 96.1% of revenue; tuition alone generated 78.8%. Cost of revenue rose 16.3%, with teacher salaries and benefits increasing 19.7% to RMB84.9 million. General and administrative expenses more than doubled to RMB19.2 million, mainly due to IPO and listing audit and review costs. Other income rose to RMB9.8 million, primarily from increased government grants. No income tax expense was recorded in 2020.
Cash flow from investing activities was RMB19.8 million, including proceeds from maturing short-term investments and related-party loan repayments. Financing activities generated RMB126.8 million, including IPO proceeds, partly offset by debt repayments and offering costs. Capital expenditures were RMB13.1 million. Year-end total assets were RMB460.0 million, total liabilities RMB92.5 million, and shareholders’ equity RMB367.5 million. The company reported net current assets of RMB124.7 million.
Cash location is important to liquidity: RMB200.1 million was held overseas, primarily in the Cayman Islands, and RMB12.7 million in China. Access to PRC cash and transfers across borders may be constrained by regulation and the VIE arrangements. Bank debt is short term, secured by buildings and land-use rights, and supported by related-party personal guarantees.
Material changes versus prior periods
- Revenue grew modestly, primarily as enrollment increased. Total enrollment reached 4,855 at September 1, 2020, up from 4,558 a year earlier. Yijing Campus enrollment rose from 184 to 362; its utilization rate increased to 48.3%. Baiyun Campus utilization was about 99% for both primary and middle school.
- Profitability weakened as compensation and staffing costs rose faster than revenue. The company attributed the gross-margin decline primarily to higher teacher compensation and increased teacher numbers.
- Net income also reflected higher IPO-related administrative expenses. Lower interest expense, following bank debt repayments, and higher government grants partly offset these pressures.
- The October 2020 IPO raised approximately US$26.2 million net. The filing states that none of the proceeds had been used by December 31, 2020; proceeds were intended for the uses described in the IPO registration statement.
- The company did not renew its high-school cooperation agreement with Qingtian High School after it expired in June 2020 and did not recruit new high-school students thereafter. The existing students were to continue through graduation; the division’s revenue contribution was immaterial.
- The company disposed of its kindergarten business in 2018 and focused on primary and middle school education.
Outlook, commentary, risks and unusual items
- Outlook: Management expects student enrollment to grow steadily subject to school capacity and believes available cash, operating cash flow and financing sources will meet working-capital and debt needs for the next 12 months. The filing provides no quantified revenue or earnings guidance. Management said the long-term financial impact of COVID-19 could not be reasonably estimated.
- COVID-19: Campuses closed from February 2020 for about three months, and online instruction was provided with a third-party provider. Normal operations resumed in April. No students withdrew due to the outbreak; meal and accommodation revenue declined slightly, partly offset by enrollment growth. Further outbreaks or restrictions remain a risk.
- Regulation and VIE structure: Compulsory education must be operated as non-profit under PRC law, and foreign investment is prohibited in compulsory education. The company depends on contractual arrangements, rather than equity ownership, to control its school and access its economic benefits. Regulations and interpretations concerning private-school fees, related-party service arrangements, and VIEs remain uncertain. If authorities restrict service fees or find the arrangements noncompliant, business operations and financial results could be materially affected.
- Concentration and capacity: Operations are concentrated in one school and one city. Baiyun Campus is near capacity, which may constrain growth; Yijing is growing but remains underutilized. The business also depends on regulated tuition, student retention, reputation and teacher recruitment.
- Controls and audit access: Management concluded disclosure controls were ineffective at year-end 2020 because of a material weakness: insufficient accounting and financial-reporting personnel with U.S. GAAP expertise. Remediation was planned, but completion was not assured. The filing also states the China-based auditor was not then subject to PCAOB inspection, creating a potential U.S. listing risk under the HFCA Act.
- Other items: Foreign-currency translation produced a 2020 comprehensive-income loss of RMB8.0 million; comprehensive income was RMB25.6 million. The company declared no dividends and had no material litigation, purchase commitments or capital commitments reported at year-end. Related-party loans were made during 2020, although the year-end amount due from related parties was nil; the company said it had adopted a policy to end advances and loans to the controlling shareholder’s close family members.
Important facts for investors to verify
- Whether education-fee and private-school regulations will permit the current VIE arrangements and service-fee flows to continue, especially for a non-profit compulsory-education school.
- How much of reported cash is readily available to the offshore holding company, given cash-location, foreign-exchange and PRC remittance restrictions.
- Whether margins stabilize after the sharp increase in teacher compensation and whether Yijing’s enrollment growth can improve campus utilization.
- Progress in remediating the material weakness in financial reporting controls and the auditor-inspection and potential delisting risks.
- Use of IPO proceeds, related-party transactions and lending, and the terms and continuing support behind secured short-term borrowings.