IPO Preview: Skillful Craftsman Education Technology Pursues U.S. IPO

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Skillful Craftsman Education Technology (NGJY) intends to raise $15 million in an IPO of its common stock, according to a registration statement filed with the SEC.

The firm has created a website service that provides a variety of education services to individuals in China.

NGJY has grown revenue and is profitable, but its revenue growth rate is decelerating sharply.

Wuxi, China-based Skillful was founded to provide primarily vocational education for a wide range of subjects including mechanics, electrical, auto repair and construction.

Management is led by founder, Chairman and CEO Mr. Xiaofeng Gao, who was previously Business General Manager of Wuxi Gaoda Environmental Technology and has an engineering background.

Skillful’s business partners include Higher Education Press and China Adult Education Association, to both of which the company provides various cloud technology services in return for promotional communications to their audiences.

The firm’s primary course offerings include:

  • Lifelong Education Public Service - 200 free courses
  • Vocational Training Platform - 407 courses for fee paying members
  • Virtual Simulation Experimental Training - 9 programs for fee paying members

The company has received at least $1.6 million from investors including founder & Chairman Mr. Gao, who owns 43% of the company pre-IPO and Mr. Lugang Hua, who owns 10%.

Skillful pursues members through online and offline channels. Offline channels include relationships that it seeks to develop with local colleges.

Management believes its avoidance of expensive television and newspaper advertising and focus on social media has been a cost-effective way to grow its customer base.

The firm intends to increase its attendance at industry events and on social media services such as Wechat and Toutiao.

Selling and Marketing expenses as a percentage of total revenue have been dropping as revenues have increased.

The Selling and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling and Marketing spend, dropped to 3.0x in the most recent reporting period.

Average Revenue per Member has been dropping as the number of members has grown.

According to a 2019 market research report by ResearchandMarkets, the market for education in China is expected to reach an estimated $573 billion by 2023.

This represents a forecast 11.3% from 2018 to 2023.

The main drivers for this expected growth are a growing urban population, increasing income available for education, growing government spending on education, innovative delivery of education such as the through the Internet, and higher demand for massive open online courses [MOOC].

Also, the emergence of the dual-teacher model which combines the online lecturer with a local assistant teacher, has become popular for improving student retention and results.

Major competitive vendors include:

  • TAL Education
  • New Oriental Education
  • OneSmart International Education
  • Sunlands Technology
  • Tianli Education
  • China Distance Education

Management says the Chinese education system is still highly fragmented. Recently, demand for online programs has increased dramatically as a result of the Covid19 pandemic.

However, Chinese consumers are price sensitive and competitors also realize the opportunity ahead, leading to pricing pressures on all market participants as they seek to gain market share.

Skillful’s recent financial results can be summarized as follows:

  • Growing topline revenue, but at a decelerating rate
  • Increased gross profit, but also decelerating growth
  • High but dropping gross margin
  • Increasing operating profit but uneven margin
  • Variable but positive cash flow from operations

Below are the firm's recent operating results:

skillfulpl
Skillful Craftsman F-1 Filing

As of September 30, 2019, Skillful had $12 million in cash and $22.7 million in total liabilities.

Free cash flow during the twelve months ended September 30, 2019, was $7.9 million.

Skillful intends to raise $15 million in gross proceeds from an IPO of its ordinary shares.

Foreign firms usually sell American Depositary Shares to U.S. investors to simplify share administration, so the absence of this feature is a negative signal.

Management says it will use the net proceeds from the IPO as follows:

  • 30% for development of 1+X online courses;
  • 20% for development of additional virtual simulation experimental programs;
  • 20% for development of mobile application for vocational education services; and
  • 30% for development of vocational education interaction platform and career advice services platform.

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are The Benchmark Company and Axiom Capital Management.

Commentary

Skillful is seeking to go public on U.S. markets at a challenging moment for non life science companies due to overall market volatility.

Additionally, Chinese firms have an increasingly difficult time developing a receptive investor audience in the U.S., as many previous IPOs have performed poorly.

Skillful’s financials show a company that is growing and profitable, but the rate of revenue growth has slowed markedly.

Selling and Marketing expenses as a percentage of total revenue are dropping as revenues increase.

The firm’s Selling and Marketing efficiency rate has dropped to 3.0x and the firm is generating lower average revenue per member as it grows, both negative signals.

The market opportunity for online education in China is large and expected to grow enviably, especially in the aftermath of the Covid19 pandemic and its effects on students seeking education in a safe environment.

The Benchmark Company is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (17.7%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

On the legal side, like many Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity.U.S. investors would only have an interest in an offshore firm with contractual rights to the firm’s operational results but would not own the underlying assets.

This is a legal gray area that brings the risk of management changing the terms of the contractual agreement or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

When we learn more details about management’s pricing and valuation assumptions for the IPO, I’ll provide an update.

Expected IPO Pricing Date: To be announced.

(I have no positions in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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