Kaiwen Education Reply to a June 2019 Inquiry
from the Shenzhen Stock Exchange
from the Shenzhen Stock Exchange
6/28/19
Since the Fall of 2018 Beijing Kaiwen DexinEducation Technology Co., Ltd. (Kaiwen Education)has received at least three inquiries, with questions to answer, from China’s security regulators, each expressing on behalf of key company stakeholders – shareholders, employees, lenders, suppliers, families – concern about the company’s continuing and significant unprofitability. In the spring we published a report on the second of these.
Here, we report on the most recent inquiry, this one received by Kaiwen on June 3 from the “Management Department of the Small and Medium-sized Board Company” of China’s Shenzhen Stock Exchange (SMBC). On June 20, 2019 and online, Kaiwen published its reply to the questions it had been asked by this group – questions prompted by the company’s 2018 Annual Report and its financial report for the first quarter of this year.
Obviously, because of Kaiwen’s precarious financial condition and very uncertain future noted by regulators, and for very many other reasons we have previously identified, Kaiwen has been and remains a most unsuitable choice as a future Westminster owner and operator. In reference to the issue of due diligence, it is important to note that Kaiwen was selected as Westminster’s future owner by Rider University’s president and board of trustees when it was still primarily an unprofitable and unsuccessful steel fabricating business, and well before the company could establish itself as a going concern in theeducation field.
SMBC Concerns, Kaiwen Responses, and Other Highlights from the Reply
Here, we report on the most recent inquiry, this one received by Kaiwen on June 3 from the “Management Department of the Small and Medium-sized Board Company” of China’s Shenzhen Stock Exchange (SMBC). On June 20, 2019 and online, Kaiwen published its reply to the questions it had been asked by this group – questions prompted by the company’s 2018 Annual Report and its financial report for the first quarter of this year.
Obviously, because of Kaiwen’s precarious financial condition and very uncertain future noted by regulators, and for very many other reasons we have previously identified, Kaiwen has been and remains a most unsuitable choice as a future Westminster owner and operator. In reference to the issue of due diligence, it is important to note that Kaiwen was selected as Westminster’s future owner by Rider University’s president and board of trustees when it was still primarily an unprofitable and unsuccessful steel fabricating business, and well before the company could establish itself as a going concern in theeducation field.
SMBC Concerns, Kaiwen Responses, and Other Highlights from the Reply
- The SMBC, referencing Kaiwen Education’s revenue, net losses, and primarily negative operating cash flows – the surplus or negative cash generated by its basic business – for the years 2016-2018 and the first quarter of 2019, first asksthe company to explain these negative results. Using data from our previous reports, eliminating non-recurring company revenue and expenses, the revenue and net losses for these periods, respectively, are 318.1 million Yuan (29% net loss); 616.2 million Yuan (20% net loss); 238.7 million Yuan (45% net loss); and, for the first quarter of 2019, 77.4 million Yuan (27% net loss).
Kaiwen continues to be almost entirely reliant for its revenue on K-12 school enrollment. In explaining these losses Kaiwen cites low school enrollment, and growth in enrollment that was less than expected. The company also states that by 2018 construction of its second and newest school, Beijing Chaoyang, was complete. This, and completion of the renovation of the swimming pool at its other school, led to large depreciation and amortization charges against revenue in 2018.
Not cited as a factor but certainly one is the poor performance by other Kaiwen Education subsidiaries, profit centers that serve both its schools and the general public. Data on subsidiary performance appears later in the Reply and will be discussed below. Also, in other recent Kaiwen reports the company cites high interest expenses as a contributor to its losses, a consequence of the loans it has required to remain a going concern.
- The SMBC expresses concern that Kaiwen losses are continuing in 2019 and asks the company to identify specific measures that will be taken to improve business performance. In its reply Kaiwen indicates that its Beijing Haidian school became profitable in 2018, but indicates that achieving this for its newer and larger school, Beijing Chaoyang, in the short-term will be a challenge. Kaiwen’s wholly-owned Wenkaixing subsidiary owns and runs this school, and Kaiwen states that key to Wenkaixing’s future profitability is the rental income it charges the campus, which rises with student enrollment. The Purchase and Sale Agreement signed by Kaiwen and Rider permits Kaiwen to impose rental fees on Westminster Choir College in the future.
Kaiwen’s plan for business improvement offered in this section has largely been taken from its response to a Fall 2018 inquiry from another Chinese regulatory agency. While Westminster is not specifically mentioned here it is clear that the College is being referred to in such sentences as: “(We will) cooperate with well-known art platforms and sport resources at home and abroad”; and, “The company will promote…the global layout of the education business…and will extend the company’s business chain to higher education”. The purpose of these initiatives, Kaiwen states, is to “enhance the company’s brand value”, primarily in China, where it faces stiff competition. This section and similar ones we have seen in other Kaiwen replies and reports makes it clear that, in large measure, Westminster is being acquired to build Kaiwen’s status and business in China. - The Reply and Kaiwen’s 2018 Annual Report suggest that three of the five major Kaiwen educational subsidiaries are not currently profitable. The SMBC identifies the three, and despite its request that the company provide specific measures that will improve each business,Kaiwen provides none. Instead, it chooses to either offer reasons for unprofitability – e.g., “the school has not reached full capacity”, and “income is not enough to cover overall operating costs” – or offers reassurances that profitability will be achieved – e.g., “the continuous expansion of enrollment (will) turn loses into profits”. The three major and unprofitable subsidiaries are:
-- Wenkaixing, the subsidiary that owns and runs Kaiwen’s Beijing Chaoyang school. In 2017 the revenue of this subsidiary was 12.2 million Yuan and the net loss for the year was 32.0 million Yuan, a net loss of 261.8%. In 2018 the revenue and net loss were 78.6 million Yuan and 70.6 million Yuan, respectively, a net loss of 89.9%.
-- Kai Literature offers sports training and sports-related services to Kaiwen Education, to other schools, and to the public. It also organizes and runs sports camps. In 2017 the revenue of this subsidiary was 606,800 Yuan and the net loss for the year was 6.2 million Yuan, a net loss of 1000.2%. In 2018 the revenue and loss were 8.2 million Yuan and 13.2 million Yuan, respectively, a net loss of 161.5%.
-- Wenhau Xuexin offers course system design, education R&D, and education operations consulting. This subsidiary signed the Purchase and Sale Agreement with Rider. Though revenue is not reported for this subsidiary in 2018 it posted a net loss of 16.7 million Yuan .
The two profitable subsidiaries are Kevin Zhixin, which owns and runs the Beijing Haidian school, and Kevin Ruixin, which provides language training for study abroad; training for the SAT, TOEFL, and AP exams; and related services. In 2018, Kevin Zhixin (Haidian school) earned a net profit of 20.7 million Yuan (U.S. $3.1 million) on revenue of 140.2 million Yuan, a 14% return. Kevin Ruixin in 2018 earned net profit of 8.3 million Yuan (U.S. $1.2 million) on revenue of 16.1 million Yuan, a return of 51.6%. - A section of a previous AAUP report discussed the competitive standing of Kaiwen’s two K-12 schools in China. In its inquiry the SMBC asks Kaiwen to compare itself to others in its industry. In response, Kaiwen choses to compare its gross profit to similar companies in China for the years 2017 and 2018. Gross profit is calculated by subtracting from company revenue the costs of providing its goods or services - in Kaiwen’s case, instructional services. (Net profit is calculated by deducting from gross profit sales, marketing, administrative and other peripheral expenses and taxes.)
The following table, taken from the Reply, shows the gross profit margin for Kaiwen and a selection of its competitors. Gross profit margin is calculated by dividing gross profit by company revenue, and multiplying the result by 100 to obtain a percentage figure
Company Name |
2018 |
2017 |
Maple Leaf Education |
46.53% |
49.84% |
Real Education |
42.92% |
47.66% |
Ruijian Education |
44.22% |
45.94% |
Weichuang Shares |
56.81% |
57.88% |
Tuowei Information |
53.17% |
60.51% |
Average of the above |
48.73% |
52.37% |
Kaiwen Education |
-6.75% |
-17.15% |
--Kevin Zhixin (Haidian School) |
28.05% |
-2.78% |
--Kevin Ruixin |
78.41% |
73.59% |
--Kai Literature |
-120.81% |
-737.46% |
--Wenkaixing (Chaoyang School) |
-62.08% |
-122.44% |
As can be seen, Kaiwen’s gross profit margins, with one exception, are negative or significantly lower than those of other companies in the industry.