Kaiwen Education 2018 Annual Report
The following is our summary of Kaiwen's 2018 annual report, which you can find here.
An earlier report presented preliminary 2018 financial results for Kaiwen Education, its fiscal year ending December 31, 2018. On April 18 an audited and final year-end report for 2018 was issued by the company, and the following are selected results from that report. Page numbers in parentheses refer to the annual report, which you can access in the above link.
Kaiwen reports a significant net loss for 2018 and has projected a net loss for the first quarter of this year. To provide some perspective, in 2017 and 2018 Kaiwen was unprofitable in seven out of eight financial quarters.
In the Annual Report and elsewhere Kaiwen acknowledges that it is still establishing its brand and reputation
in China as a newcomer in a very competitive field. Recently, it revised its strategy, recognizing that it does not have the funds to create additional K-12 schools. It hopes its new direction – establishing extracurricular training centers for 4-18 year olds – will lead to solvency and more certainty as an organization. Already burdened by loans, this initiative will rely on funds from a new private issue of stock, which requires the approval of the China Securities Regulatory Commission (CSRC). The CSRC is skeptical of Kaiwen’s plans because the company has missed past projections and has failed to achieve the results promised from projects undertaken with proceeds from a previous and significant stock issue.
Kaiwen reports a significant net loss for 2018 and has projected a net loss for the first quarter of this year. To provide some perspective, in 2017 and 2018 Kaiwen was unprofitable in seven out of eight financial quarters.
In the Annual Report and elsewhere Kaiwen acknowledges that it is still establishing its brand and reputation
in China as a newcomer in a very competitive field. Recently, it revised its strategy, recognizing that it does not have the funds to create additional K-12 schools. It hopes its new direction – establishing extracurricular training centers for 4-18 year olds – will lead to solvency and more certainty as an organization. Already burdened by loans, this initiative will rely on funds from a new private issue of stock, which requires the approval of the China Securities Regulatory Commission (CSRC). The CSRC is skeptical of Kaiwen’s plans because the company has missed past projections and has failed to achieve the results promised from projects undertaken with proceeds from a previous and significant stock issue.
Westminster in the 2018 Annual Report
Kaiwen discusses the acquisition of Westminster Choir College solely in terms of how it will help its current and planned business activities in China. It does not acknowledge the College’s history, indicate its commitment to continue the academic programs, policies, and practices that have built its reputation, does not refer to or discuss those programs, and does not offer its vision for the College going forward.
This is not surprising as Kaiwen is a for-profit asset holding company, like its primary and controlling shareholder, Badachu Holdings, and not at its heart an educational institution. Kaiwen Education lists eleven wholly-owned subsidiaries or assets responsible for its profit in the 2018 annual report (p. 2, 3). Of the four largest that contribute most to Kaiwen profits, three had significant net losses in 2018 (p. 26).
Kaiwen says this about its acquisition of Westminster:
"This acquisition is the beginning and key to the global layout of the company’s education business, and plays an important role in enhancing the company’s cross-cultural capabilities, enhancing brand value and competitiveness. After the completion of the acquisition, the company’s business chain will be extended to the higher education stage. The advantages of the company’s international school art quality training will be further consolidated, the management level and sustainability will be further enhanced, and the high-end quality education brand image will be further highlighted (p.16).
Selected Findings from the 2018 Annual Report
- Following four significantly unprofitable quarters, Kaiwen’s net loss for 2018 was 98 million Yuan (U.S. $14.6 million) on revenues of 238 million Yuan, a net loss of 41.2%. When non-recurring income is removed, the net loss for the year is 106 million Yuan, or 45% of revenue (p. 4,5).
- In late March Kaiwen published preliminary results for the first quarter of 2019, and projected a loss for that quarter of from 18 to 23 million Yuan on revenue for the quarter of 72.2 million Yuan - a net loss of from 25% to 32%.
- Government subsidies received by the company in 2018 totaled 1.6 million Yuan, considerably more than the subsidies received in 2016 and 2017 – 250,000Yuan and 127,300 Yuan, respectively (p. 6).
- The Kaiwen subsidiary operating the Beijing Haidian school earned a net profit of 20.7 million Yuan (U.S. $3.1 million) on revenue of 140.2 million Yuan in 2018, a 14% return. However, its liabilities or financial obligations exceeded its assets by 17.3 million Yuan (p. 26).
Other major Kaiwen subsidiaries posted losses. Wenhua Xuexin, the subsidiary that signed the Purchase and Sale Agreement with Rider, posted a net loss of 16.7 million Yuan in 2018 and its liabilities exceeded its assets by 4.1 million Yuan. Wenhua Xuexin revenue was not reported. The Kaiwen subsidiary operating the Beijing Chaoyang school had a net loss of 70.6 million Yuan on revenue of 78.6 million Yuan, a significant net loss of 90%. The Kaiwen Letter subsidiary had a net loss of 13.2 million Yuan on revenues of 8.2 million Yuan, a remarkable net loss of 161% (p. 26) - Tuition and fees from Kaiwen’s two K-12 schools (191.2 million Yuan) accounted for 79% of total company revenues. Training fee income, that is, fees associated with supplementary sports, arts, and other training, and camps was 17.5 million Yuan, or 7% of revenue, while rental income of 33 million Yuan – from housing rented to students and school staff – was 14% of revenue (p. 17).
Between 2017 and 2018 training fee income, which Kaiwen hopes will constitute most of its income in the future, rose 50.4%, from 11.6 million Yuan to 17.5 million Yuan, not the 100% growth estimate the company provided to the China Regulatory Commission in a report dated January 11, 2019. That report also projected a 50% annual growth in training revenue going forward and a projected training revenue of 50 million Yuan for 2019. However, applying the 50% to 2018’s training revenue yields a projected training revenue for 2019 of only 26.3 million Yuan, not 50 million Yuan. - In 2018 Kaiwen acquired through the Industrial and Commercial Bank of China a long-term loan of $1.3 billion Yuan (U.S. $ 193.3 million), and the collateral for that loan was 100% equity interest in the Kaiwen subsidiary that operates and owns its Beijing Chaoyang school (p. 49). Kaiwen applied it, in part, to pay vendors and settle short-term debt. These accounts show considerable reduction in 2018. Across all of the quarters in 2016 and 2017 Kaiwen had carried current liabilities – accounts payable and short-term loans – that were, on average, five times larger than the cash on hand to settle them.
At the end of 2018, Kaiwen reports a long-term debt of 990 million Yuan (U.S. $147.2 million), which is almost 60% of all company liabilities and 37% of tangible assets – some of which are pledged as collateral for that loan. Kaiwen also reports short-term debt at the end of 2018 of 199 million Yuan. Short- and long-term debt, then, comprise a remarkable 70% of all company liabilities - Kaiwen Education has had to borrow and receive government subsidies to remain a going concern. The company identifies a high interest expense as a significant factor in its reported loss for the year. Interest payments consumed 18% of company revenue in 2018 and were almost 20% of all company cash operating costs, that is, total operating costs less the non-cash “costs” of depreciation and amortization.
- The Annual Report reveals that Kaiwen purchased 40.5 million Yuan worth of goods and services – 18% of Kaiwen’s purchases in 2018 – from companies entirely or partially owned by its largest and controlling shareholder, Badachu Holdings. Of this amount, 18.2 million Yuan worth of goods and services were provided by companies owned or controlled by a Badachu company director (p. 165-166). In the United States, a director profiting from his or her position on a board is widely prohibited on moral and legal grounds.
5/20/19