Filing identity and reporting period
Important discrepancy: The request identifies Naas Technology Inc. and 2018 Q4, but the supplied filing is RISE Education Cayman Ltd.’s Form 20-F annual report for the fiscal year ended December 31, 2019, filed April 17, 2020. It is not a Naas Technology filing and does not provide standalone 2018 Q4 results. The summary below covers the filing actually provided.
RISE provides after-school English-language education in China through self-owned and franchised learning centers. Its financial statements are audited and prepared under U.S. GAAP, with Renminbi (RMB) as the reporting currency. Dollar figures below are the filing’s convenience translations.
Financial results and key metrics
| Metric | 2019 | 2018 | Change or context |
|---|---|---|---|
| Revenue | RMB 1,529.4 million | RMB 1,271.9 million | Up 20.3% |
| Gross profit / margin | RMB 834.8 million / 54.6% | RMB 695.4 million / 54.7% | Gross profit up 20.0%; margin broadly flat |
| Operating income | RMB 222.8 million | RMB 207.6 million | Up 7.3%; operating margin declined from 16.3% to 14.6% |
| Net income | RMB 144.6 million | RMB 142.4 million | Up 1.5% |
| Net income attributable to RISE | RMB 148.1 million | RMB 143.0 million | Up 3.6% |
| Adjusted EBITDA | RMB 349.3 million; 22.8% margin | RMB 300.2 million; 23.6% margin | Up 16.4%; margin narrowed |
| Operating cash flow | RMB (39.9) million | RMB 380.0 million | Turned negative |
| Cash, cash equivalents and restricted cash | RMB 1,022.8 million | RMB 1,316.8 million | Down RMB 294.0 million |
Revenue was principally from educational programs, which contributed RMB 1,324.7 million, up 20.7%. Franchise revenue rose 24.9% to RMB 156.5 million; other revenue declined 1.3% to RMB 48.3 million. The filing says growth in education revenue reflected more students in self-owned centers and higher course prices; franchise growth reflected additional centers and fees.
Cost of revenue rose 20.5% to RMB 694.7 million, mainly from higher rent and personnel costs. Selling and marketing expense increased 25.1% to RMB 307.3 million, and general and administrative expense increased 25.8% to RMB 304.6 million. Management cited expanded staffing and marketing incentives, share-based compensation, expansion-related costs, and acquisition and strategic-project fees.
Cash from operations fell to a use of RMB 39.9 million, primarily because deferred revenue and customer advances decreased RMB 331.7 million, which the filing attributes mainly to a change in tuition-collection timing. Investing activities used RMB 114.7 million, including property and equipment purchases, acquisitions, software and a RMB 33.0 million investment. Financing activities used RMB 140.7 million, principally loan repayments and share repurchases.
At year-end, total assets were RMB 2,802.0 million and total liabilities were RMB 2,177.7 million. Current assets were RMB 1,084.9 million against current liabilities of RMB 1,233.5 million. The current-liability balance included RMB 716.6 million of deferred revenue and customer advances. The company reported RMB 504.2 million of total loan principal outstanding, including RMB 134.0 million current and RMB 370.2 million non-current. Lease liabilities recognized in 2019 were RMB 622.2 million; future minimum operating lease payments were RMB 704.6 million.
Material changes versus comparable periods
- Revenue growth slowed from 31.2% in 2018 to 20.3% in 2019. Operating income and net income grew much more slowly than revenue in 2019, while operating and adjusted EBITDA margins declined.
- Operating cash flow changed from positive RMB 380.0 million in 2018 to negative RMB 39.9 million in 2019. Cash balances, including restricted cash, fell by RMB 294.0 million.
- The network expanded to 472 learning centers at year-end 2019, from 380 a year earlier: 89 self-owned and 383 franchised. Regular-course students in class at self-owned centers rose 10.2% to 54,383; new enrollments rose 12.3% to 29,049.
- The company acquired a 51% interest in seven Shijiazhuang learning centers in July 2019 and acquired certain assets and operations of a Changping franchised center later in 2019. Goodwill rose to RMB 665.4 million from RMB 492.0 million; no impairment was recorded.
- Adoption of the new lease standard in 2019 put RMB 610.3 million of operating lease right-of-use assets and RMB 622.2 million of lease liabilities on the balance sheet. Revenue-standard adoption in 2018 reduced opening accumulated equity by RMB 44.1 million, primarily from deferring initial franchise fees over the franchise term.
Outlook, risks and unusual items
- COVID-19: After year-end, offline centers and offices were temporarily closed beginning in late January 2020. Management reported disruption to enrollment, retention, tuition collection and operations, and expected a net loss for 2020. It launched online small-group courses, reduced planned capital spending and operating costs, suspended new center openings, and sought to strengthen liquidity. Management believed available resources would cover at least the following 12 months, but stated the full impact was uncertain.
- Education regulation and permits: The filing states that self-owned centers lacking certain required permits, filings or fire approvals collectively accounted for 7.4% of 2019 revenue. The company was working toward compliance; penalties could include fines, refunds, suspension or closure. It could not estimate reasonably possible losses for the disclosed permitting and fire-safety contingencies.
- VIE and China exposure: The VIE and its subsidiaries and schools generated 94.4% of 2019 revenue. The company relies on contractual arrangements rather than direct ownership to control these operations; enforceability and regulatory treatment are uncertain. PRC law, foreign-investment rules, currency controls and limits on distributions may constrain access to cash held in China.
- Debt and liquidity: The U.S.-dollar loan carries a floating rate; year-end rate was approximately 3.9%, and scheduled principal payments included US$19.25 million in September 2020. Management reported no loan-covenant breach for 2019, but warned that COVID-19 could affect covenant compliance and debt service. A 10% RMB depreciation would reduce the reported U.S.-dollar value of cash, cash equivalents and restricted cash by approximately US$14.0 million.
- Other notable exposures: Goodwill was RMB 665.4 million, and the filing reported RMB 29.6 million of unrecognized tax benefits at year-end. Non-vested equity awards carried RMB 50.1 million (approximately US$7.3 million) of unrecognized compensation cost. The company reported no material litigation and no material off-balance-sheet arrangements.
- Audit and controls: The auditor issued an unqualified opinion on the financial statements. Management concluded internal control over financial reporting was effective; no auditor attestation of internal controls was included. The filing warns that the auditor was not subject to full PCAOB inspection in China.
- Capital returns: The company completed a repurchase program in 2019, buying 1,158,741 ADSs for approximately US$10.0 million at an average US$8.66 per ADS. It paid no dividends in 2018 or 2019 and said it did not expect cash dividends in the foreseeable future.
Most important facts for investors to verify
- Confirm the filing and period: the supplied document is RISE Education’s FY2019 Form 20-F, not Naas Technology’s 2018 Q4 filing.
- Review the 2019 operating-cash-flow reversal and the tuition-collection schedule change; assess whether working capital and cash generation recovered after year-end.
- Check 2020 COVID-19 trading updates, center reopenings, online-course revenue, refunds, franchisee health and liquidity, and actual performance against management’s expected net loss.
- Track the remediation of licensing, filing and fire-safety gaps, including the centers linked to 7.4% of 2019 revenue, and any regulatory actions or estimated contingencies.
- Assess loan maturities, covenant headroom, refinancing options, foreign-exchange exposure, and the availability of cash held in PRC entities.
- Evaluate VIE enforceability and regulatory developments, including the Foreign Investment Law and rules governing private education and online tutoring.
- Reconcile reported GAAP results with adjusted EBITDA and other non-GAAP measures, and monitor goodwill, acquisition accounting, unrecognized tax benefits and share-based compensation.