Sunlands Technology Group annual report, Q4 FY2020

Sunlands Technology Group — FY2020 Form 20-F Summary

Reporting period: Fiscal year ended December 31, 2020. The filing is an annual Form 20-F and does not provide a separate fourth-quarter-only financial presentation. Sunlands is a Cayman Islands holding company operating an online post-secondary and professional education business in China through subsidiaries and consolidated variable interest entities (VIEs).

Business Context

Offers live-streaming and recorded online courses, primarily for Self-taught Higher Education Examination (STE) programs, professional certification, professional skills and general-interest education.
Students increased to 1,130,650 from 1,039,733 in 2019; new student enrollments increased to 434,240 from 363,013.
The company continued diversifying away from STE programs toward professional skills, general-interest courses and overseas university partnerships.
Substantially all revenue and operations are in China, with the online education operations conducted partly through VIE contractual arrangements.

Financial Performance and Key Metrics

Metric	FY2020	FY2019	Change
Net revenue	RMB2,203.8 million	RMB2,193.9 million	Up 0.5%
Gross billings, non-GAAP	RMB2,350.4 million	RMB2,358.5 million	Down 0.3%
Gross profit	RMB1,816.5 million	RMB1,797.6 million	Up 1.1%
Gross margin	82.4%	81.9%	Up 0.5 percentage points
Loss from operations	RMB649.0 million	RMB459.7 million	Loss increased
Net loss	RMB431.0 million	RMB395.2 million	Loss increased 9.1%
Net loss attributable to Sunlands	RMB430.5 million	RMB394.8 million	Loss increased
EBITDA, non-GAAP	Negative RMB405.1 million	Negative RMB401.4 million	Loss increased modestly
Net loss per ordinary share	RMB63.74 loss	RMB57.81 loss	Loss per share increased

Professional certification and professional skills revenue rose to RMB268.1 million from RMB154.9 million, while STE revenue declined to RMB1,471.7 million from RMB1,766.9 million.
STE courses represented 66.8% of revenue, 53.1% of gross billings and 46.2% of new enrollments, down substantially from 2019.
Sales and marketing expense increased 18.5% to RMB2,123.6 million. Marketing spending was RMB1,101.8 million, and the marketing effectiveness ratio increased to 46.9% from 40.2%.
General and administrative expense decreased 24.2% to RMB275.4 million; product development expense decreased 34.6% to RMB66.5 million.
Other income increased to RMB203.2 million, primarily because of RMB156.5 million of COVID-19-related value-added tax relief.
Refund payments were RMB335.5 million, compared with RMB345.9 million in 2019. Refund liability at year-end increased to RMB232.9 million from RMB128.5 million.
Deferred revenue was RMB3,024.4 million at year-end, including RMB1,463.2 million expected to be recognized over the next 12 months.

Cash Flow, Liquidity, Debt and Capital Resources

Cash and cash equivalents were RMB760.7 million at December 31, 2020, down from RMB1,402.2 million at year-end 2019. Short-term investments were RMB517.8 million.
Operating cash flow was negative RMB188.6 million, compared with negative RMB533.5 million in 2019.
Investing cash flow was negative RMB349.3 million, mainly reflecting purchases of short-term investments exceeding maturities and RMB27.0 million of capital expenditures.
Financing cash flow was negative RMB59.1 million, including RMB32.5 million of bank-debt repayment and RMB26.6 million of share repurchases.
Total debt was approximately RMB193.1 million, consisting of RMB32.5 million current and RMB160.6 million non-current debt. The loans are secured by buildings and mature over eight years.
Working capital was negative RMB641.4 million, primarily because of deferred revenue. Management stated that existing cash and anticipated operating cash flow were expected to fund working capital and capital expenditures for at least the next 12 months.
Total shareholders’ deficit was RMB1,212.1 million at year-end, compared with RMB738.4 million at year-end 2019.
The company had no off-balance-sheet arrangements disclosed as of December 31, 2020.

Material Changes Versus FY2019

Revenue was broadly stable, but operating losses widened because higher sales and marketing spending more than offset modest gross-profit improvement.
Enrollment growth and course mix shifted materially toward professional skills, certification and general-interest courses.
Cash declined by RMB641.5 million, and operating cash flow remained negative despite the smaller net loss compared with 2018.
COVID-19 postponed STE examinations and disrupted certain operations, while government VAT relief provided a significant benefit to reported other income.
The company entered into additional VIE arrangements during 2020 and terminated and restructured certain Tianjin contractual arrangements as part of corporate streamlining.
Share-based compensation increased to RMB29.7 million from RMB3.0 million, principally due to awards granted to employees.

Guidance, Outlook, Risks and Unusual Items

No quantitative revenue, earnings or enrollment guidance is provided in the filing. Management expects to broaden course offerings, improve learning through artificial intelligence and continue developing partnerships with overseas universities.
Management identifies continued investment in student acquisition, technology, course content and market-share expansion, with no assurance of near-term or eventual profitability.
Key regulatory exposures include the lack of a private school operating permit for online education services, the lack of teaching licenses for a substantial majority of teachers, uncertainty over internet publishing and audio-visual licensing, and other potentially required approvals or filings.
The VIE structure is essential to operations but may be challenged under evolving PRC foreign-investment and education regulations. Loss of control over VIEs could prevent consolidation and materially impair operations.
The company’s auditor is located in China and was not subject to PCAOB inspection at the filing date. The filing warns of potential HFCA Act trading restrictions or delisting risks.
A securities class action related to alleged misstatements and omissions in the 2018 IPO registration statement remained pending. A motion to dismiss was denied on March 31, 2021; potential losses could not be estimated.
The company does not maintain business liability, property, business interruption or key-person insurance.
Student financing exposure declined: the student-loan coverage ratio fell to 54.9% from 70.4%, and interest payments to credit providers fell to RMB83.3 million from RMB118.0 million.
The company does not expect to pay dividends in the foreseeable future.

Important Facts for Investors to Verify

Whether professional-skills and general-interest enrollment growth can offset declining STE revenue and maintain gross billings.
Whether sales and marketing spending can be reduced relative to billings without weakening enrollment growth.
The sustainability of liquidity given negative operating cash flow, negative working capital and continued net losses.
The status of required PRC education, online publishing, audio-visual, live-streaming and teacher licensing approvals.
The enforceability and continued operation of the VIE contractual arrangements under evolving PRC regulations.
The expected financial impact and timing of the securities class action and any other refund, regulatory or litigation contingencies.
The company’s future auditor-inspection status and compliance with HFCA Act requirements.
The composition, availability and liquidity of the RMB517.8 million of short-term investments and the restrictions affecting cash transfers from PRC subsidiaries and VIEs.