Sunlands Technology Group: FY2018 Form 20-F Summary
Business context and reporting period
Sunlands Technology Group is a Cayman Islands holding company providing online post-secondary and professional education services in China through subsidiaries and consolidated variable interest entities. The filing is an annual Form 20-F for the fiscal year ended December 31, 2018, prepared under U.S. GAAP. It is not a standalone 2018 fourth-quarter filing; the source text does not provide clear quarterly results.
The company transitioned from offline education to an exclusively online model in 2014. Its offerings include Self-taught Higher Education Examination programs, MBA-related programs, professional certification preparation and professional skills courses. As of December 31, 2018, it reported 1,025,959 students, 526,014 new student enrollments, 161 teachers and 640 mentors.
Key financial metrics
| Metric | FY2017 | FY2018 | Change |
|---|---|---|---|
| Net revenues | RMB970.2 million | RMB1,974.0 million | +103.5% |
| Gross billings, non-GAAP | RMB2,381.8 million | RMB3,214.4 million | +35.0% |
| Gross profit | RMB799.9 million | RMB1,643.6 million | +105.5% |
| Gross margin | 82.5% | 83.3% | +0.8 percentage points |
| Loss from operations | RMB927.7 million | RMB1,028.9 million | Loss increased 10.9% |
| Net loss attributable to Sunlands | RMB918.6 million | RMB927.0 million | Loss increased 0.9% |
| EBITDA, non-GAAP | RMB924.2 million loss | RMB969.4 million loss | Loss increased 4.9% |
| Net cash from operating activities | RMB819.5 million | RMB180.5 million | Down 78.0% |
| Cash and cash equivalents | RMB559.5 million | RMB1,248.8 million | +123.2% |
| Total liabilities | RMB2,586.7 million | RMB4,078.1 million | +57.6% |
All amounts are in RMB unless otherwise noted. FY2018 U.S. dollar convenience amounts included net revenue of US$287.1 million, net loss attributable to Sunlands of US$134.8 million and cash and cash equivalents of US$181.6 million.
- Sales and marketing expense rose 59.3% to RMB2,152.8 million and represented approximately 80.6% of total operating expenses.
- Product development expense increased 131.3% to RMB76.0 million, reflecting investment in technology and educational content.
- Cost of revenue increased 94.0% to RMB330.4 million; faculty compensation rose 103.3% to RMB239.8 million.
- Deferred revenue increased to RMB3,286.0 million from RMB2,110.4 million, reflecting upfront tuition collections that will be recognized over course service periods.
- Cash flow benefited from a RMB1,175.6 million increase in deferred revenue but was reduced by a RMB229.0 million increase in deferred costs and a RMB92.3 million increase in prepaid expenses and other current assets.
- Investing cash outflow was RMB1,186.7 million, primarily reflecting RMB4,352.1 million of short-term investment purchases and RMB3,708.8 million of maturities, as well as RMB517.8 million of property and equipment purchases.
- Financing cash inflow was RMB1,587.3 million, including RMB1,109.5 million of net IPO proceeds and RMB260.0 million of bank borrowings.
- Debt consisted primarily of RMB260.0 million of mortgage loans obtained in 2018 for buildings in Wuhan, bearing annual interest of 5.782% and maturing over eight years. The filing does not identify additional material debt.
- Working capital was positive at RMB268.5 million at December 31, 2018, compared with negative working capital of RMB535.6 million at December 31, 2017.
Material changes versus the prior comparable period
- Revenue more than doubled, driven by growth in students, new enrollments and gross billings. The student base increased 55.4%, while new enrollments increased 35.6%.
- Growth was concentrated in degree- and diploma-oriented courses. STE courses represented 85.8% of revenue, 88.3% of gross billings and 80.1% of new enrollments in 2018, versus 80.5%, 89.2% and 80.1%, respectively, in 2017.
- Professional certification and skills courses declined to 8.1% of revenue from 15.0% in 2017.
- Despite higher gross profit and modest gross-margin expansion, operating losses widened because expenses remained substantially above gross profit, particularly sales and marketing costs.
- Operating cash generation fell sharply from RMB819.5 million to RMB180.5 million as the prior-year benefit from deferred revenue growth moderated and deferred customer-acquisition costs increased.
- The company completed its IPO in March 2018, issuing ADSs representing Class A ordinary shares. It received approximately US$176.8 million from the IPO and concurrent private placements, net of expenses.
- Preferred shares converted into Class A, Class B and Class C ordinary shares upon the IPO. The company also repurchased 1,127,055 ADSs in 2018 for RMB34.8 million under a US$50 million repurchase program.
- Tianjin Shangde became a consolidated VIE in May 2018, expanding the contractual-control structure through which the company conducts its China operations.
Guidance, outlook, commentary and risks
Management did not provide specific quantitative revenue, margin or profitability guidance in the filing. Management stated that it expects to continue investing in trial programs, course development, live-streaming teachers, technology, artificial intelligence and the online learning community. The company believes existing cash and anticipated operating cash flow will meet working-capital and capital-expenditure needs for at least the next 12 months and stated that there was no substantial doubt regarding going-concern status.
- Management expects continued spending on sales and marketing, technology infrastructure, course content and personnel, with no assurance that these investments will produce profitability.
- The company developed proprietary live-streaming platforms in 2018 and expected them to enter operation in the third quarter of 2019; execution and scalability remained uncertain.
- Student financing is significant: the student-loan coverage ratio reached 78.3% in 2018, and the company paid RMB159.9 million of student-loan interest and service fees. Higher rates, reduced credit-provider funding or changes in financing support could pressure enrollment and cash flow.
- Refund payments increased to RMB276.4 million in 2018 from RMB150.1 million in 2017. Refund disputes, student dissatisfaction and regulatory changes could adversely affect billings, revenue, liquidity and reputation.
- Key regulatory uncertainties include the lack of a private school operating permit for online education services, the absence of teaching licenses for a substantial majority of teachers, possible Internet publishing and audio-visual licensing requirements, and restrictions affecting the VIE structure.
- Substantially all operations are in China and depend on contractual arrangements with Beijing Sunlands and Tianjin Shangde. If the arrangements were challenged or invalidated, the company could lose control of, or the ability to consolidate, its operating entities.
- Other material risks include intense competition, reliance on STE courses, cyber-security and data-privacy exposure, dependence on third-party live-streaming providers, exchange controls, RMB volatility, unregistered leases, lack of business insurance and the inability of the PCAOB to inspect the company’s China-based auditor.
- The company had no material legal or administrative proceedings known to management and no off-balance-sheet arrangements as of December 31, 2018.
- Contractual obligations included RMB1,081.3 million of operating lease commitments and a RMB25.0 million investment commitment.
Most important facts for an investor to verify
- Confirm the reconciliation between gross billings, deferred revenue, refunds and GAAP revenue, including the effect of long course-service periods.
- Assess whether the sharp decline in operating cash flow is temporary or reflects structurally higher customer-acquisition costs and deferred commissions.
- Monitor sales and marketing efficiency, refund rates, student-loan coverage, interest subsidies and enrollment conversion.
- Verify the status of private school, Internet publishing, audio-visual, teacher-licensing and other PRC operating permits.
- Review the enforceability and regulatory treatment of the VIE agreements, including any effect of the PRC Foreign Investment Law and related education regulations.
- Evaluate the concentration in STE courses and the company’s ability to diversify revenue without sacrificing margins.
- Reconcile consolidated cash with cash held by the parent, subsidiaries and VIEs, and assess restrictions on transfers to the Cayman Islands holding company.
- Track debt amortization, mortgage security, lease commitments and planned capital expenditures, including the proprietary live-streaming platform.
- Consider the effect of the triple-class share structure: Class B shares carry seven votes and Class C shares carry ten votes, limiting the influence of Class A shareholders and ADS holders.
- Verify subsequent-period results, because the filing provides annual FY2018 data rather than clear fourth-quarter 2018 financial statements.