Kaiwen Education:
Report on Company Performance
​Through the Third Quarter 2018

​The following represents key information available from Kaiwen Education’s “Full Report of the Third Quarter 2018" supplemented by previously issued reports issued by the company and by other sources http://vip.stock.finance.sina.com.cn/corp/view/vCB_AllBulletinDetail.php?stockid=sz002659&id=4822366.

As currently available online the third-quarter report lacks the detailed information and explanations available in the company’s 2018 Semi-annual Report. However, more detailed financial information is now available on U.S. financial web sites that provide more insight on current company decisions and performance. 
http://finance04.com/sbdm/stock/share,disc,2018-08-08,002659,0000000000000ltho6.shtml
http://financials.morningstar.com/balance-sheet/bs.html?t=002659&region=chn&culture=en-US&platform=sal
 https://quotes.wsj.com/CN/XSHE/002659/financials/quarter/income-statement

  1. Kaiwen Education has posted net losses from operations in eight of the past ten quarters. For the first three quarters of 2018 Kaiwen Education reports a total Net Loss of 71.5 million Yuan on Revenues of 156.9 million Yuan, a very significant loss of 45.5%.Kaiwen reports a Net Loss for each of the three quarters of 2018, and the Net Loss for each quarter, expressed as a percentage of Revenue for the quarter, is -74.5%, -44.3%, and -29.1%, respectfully.

    In the third quarter a government subsidy of 595,900 Yuan was received. Without it, the Net Loss as a percent of Revenue for the third quarter would have been -30%.

  2. For the 2018 fiscal year ending in December Kaiwen Education projects a Net Loss of from 85 to 98 million Yuan, very realistic given the company’s performance in the year’s first three quarters.  

    Earlier in the year the company had forecast a net profit for 2018 of 30 million Yuan and Earnings per Share (EPS) of .06 Yuan. Through the first three quarters of 2018, EPS is -.14 Yuan.  a decline of 800% in EPS since the end of 2017. 

    Kaiwen had also forecast ending last year with a net profit but was only able to notch a small profit in 2017 in the very last quarter, by selling assets from its unprofitable previous business – a steel bridge fabricator. Otherwise, it would have had a 20% net loss for the year.  Kaiwen had a net loss of 31% in 2016.

  3. The per share price of Kaiwen Education stock has declined 44% in the last twelve months, and 32% in 2018 alone. This reflects the company’s inability to meet its projections, its continued and significant unprofitability (see above), and an extraordinary reliance on debt to maintain its solvency (see below). https://www.morningstar.com/stocks/xshe/002659/quote.html 

    Kaiwen stock is trading at its lowest level for at least the past three years. Its stock declined significantly following the August release of the company’s 2018 Semi-annual Report, reporting financial results through June 30.The report announced a Net Loss of 51.7 million Yuan on Revenues of 89.4 million Yuan for the first half of 2018, a loss of 57.8%, and forecast a net loss for the period January through September.In the two week period, October 15 through October 26, Kaiwen shares declined almost 15%, to the lowest price for this stock in at least three years – to 8.48 Yuan per share or U.S.$1.22. A stock trading at this level in the U.S. is considered a very risky and unwise investment. http://finance04.com/sbdm/stock/share,disc,2018-08-08,002659,0000000000000ltho6.shtml
    https://quotes.wsj.com/CN/XSHE/002659(click on 3Y)
    https://quotes.wsj.com/CN/XSHE/002659/historical-prices

    An important indicator for investors is the total return percentage, which shows the actual rate of return of an investment over a period of time. The respected financial site Morningstar reports that the one-year total return percentage for Kaiwen is -44.30% and the year-to-date percentage is -32.88%. In contrast, the similar figures for Morningstar China, an index of stocks that Morningstar tracks, are -11.96% and -13.91%, respectively (10/30/2018). As we have indicated before, for an investor there clearly are many better places for her/his money in China than Kaiwen. https://www.morningstar.com/stocks/xshe/002659/quote.html

    Morningstar continues to rate the uncertainty surrounding the company as “Very High” based on the unreliability of its cash flow, and continues to assess Kaiwen as having no protective “moat” – that is, enjoying an advantage in the marketplace over the offerings of similar organizations.  https://www.morningstar.com/stocks/xshe/002659/quote.html(subscription to site required)

    Kaiwen’s low share price and an attempt underway to raise 1 billion Yuan through the non-public issuance of new shares, not to exceed in number 20% of its existing shares, makes unlikely Kaiwen’s additional use of the market to raise new and needed cash.  Kaiwen has announced that it will use the 1 billion Yuan to improve its K-12 programs in the middle and upper grades, and to develop software and services it can offer to other public and private K-12 schools in China. http://finance04.com/sbdm/stock/share,disc,2018-08-08,002659,0000000000000ltho6.shtml
    ​
  4. In the third quarter Kaiwen Education acquired significant new debt and, for us, a new source of concern - a 1 billion Yuan long-term bank loan. Not identified is the collateral for the loan or the loan’s source. Kaiwen’s balance sheet for the third quarter indicates that proceeds from the loan were used to pay outstanding short-term obligations (380 Million Yuan) and to amend its cash account. This is the first quarter in the past ten that Kaiwen Education had sufficient cash and cash equivalents on hand to satisfy its current liabilities – short-term debts and accounts payable.In the previous nine quarters Kaiwen’s current liabilities were on average, and remarkably, five times larger than the cash on hand to settle them. For one quarter, current liabilities were ten times larger.http://financials.morningstar.com/balance-sheet/bs.html?t=002659&region=chn&culture=en-US&platform=sa

    This new debt is of concern because of the considerable debt that already burdens the company. Reflective of its size and through September 30, 2018, the interest on debt paid by Kaiwen Education consumed 14% of its total revenue and was 28% of its operating expenses.
    http://financials.morningstar.com/income-statement/is.html?t=002659&region=chn&culture=en-US&platform=sa

    The third quarter report or Kaiwen’s 2018 Semi-annual Report lists these other obligations. With the relevant page numbers from the Semi-annual Report in parentheses, these obligations are: 
  • A short-term loan of 249.5 million Yuan, with the source of the loan not identified (p.15, 39-40);
  • Other current payables of 397 million, including a sizable loan re-payment of 193.1 million Yuan to Kaiwen’s controlling company, Badachu Holdings Group (p. 102);
  • Additional loans from Badachu of 2.29 billion Yuan for three Kaiwen Education subsidiaries payable, according to the June 30 semi-annual report, “within a year” (p.133). The required payment by one of the subsidiaries, Wenhua Xuexin, which signed the Purchase and Sale Agreement with Rider, is 1.34 billion Yuan, or 58% of the loans;
  • Three additional Badachu loans or lines of credit to Kaiwen that total 190 million Yuan; and
  • A 1.3 billion Yuan line of credit for two Kaiwen wholly-owned subsidiaries, from the Industrial and Commercial Bank of China Co., Ltd., Haidian Sub-branch. One subsidiary is Wenhua Xuexin and the collateral for the line of credit is “a 100% equity interest in the company” (p. 29).  http://finance04.com/sbdm/stock/share,disc,2018-08-08,002659,0000000000000ltho6.shtml
 
Additionally, Kaiwen Education remains a guarantor on two loans or lines of credit for its financially unsuccessful predecessor company, Jiangsu Zhongtai Bridge Steel Structure Company, that total 915.2 million Yuan (p. 28). As a guarantor, Kaiwen is liable for payment if Jiangsu defaults on the repayment of borrowed funds. The two guarantees represent a very significant sum. Together, they are 42.5% of Kaiwen’s total Net Worth as an organization,which is determined by subtracting the company’s total liabilities from its total assets (p. 41).

Clearly, Kaiwen today is not independent of Jiangsu Zhongtai.