ATA Creativity Global

Greetings and welcome to the ATA Creativity Global Second Quarter 2021 Financial Results Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Caroline Song. Thank you, Caroline. You may begin.

Thank you, Operator, and hello, everyone. Thank you for joining us. The press release announcing ATA Creativity Global, or ACG's, results for the second quarter ended June 30, 2021 is available at the IR section of the company's website at www.atai.net.cn. As part of this conference call, the company has an accompanying slide presentation available on its website. A replay of this broadcast will also be made available on ACG's website for the next 90 days. Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contain certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terms such as anticipate, believe, expect, future, plan, outlook, and will, and include, among other things, statements regarding ACG's future growth and results of operations, ACG's plans for mergers and acquisitions generally, ACG's growth strategy, anticipated growth prospects, and subsequent business activities, market demand for ACG's portfolio training programs and other education services, the impact of the COVID-19 pandemic and the guidelines on ACG and its operations, and ACG's plan and anticipated benefits of the measures implemented in response to the COVID-19 pandemic. Although the company believes that the expectations reflected in its forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected. There can be no assurance that those expectations will prove to be correct. Information about the risks associated with investing in ACG is included in its filings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise except as required by law. Regarding the disclaimer language, I would also like to refer you to slide two of the conference call presentation for further information. All U.S. dollar amounts in this conference call relating to financial results for second quarter ended June 30th, 2021 are converted from RMB using exchange rate of 6.4566 RMB to one U.S. dollar. The noon buying rate as of June 30th, 2021. All historical conversions are accurate as of the time reported unless otherwise noted. The company reports its financial results under U.S. GAAP and RMB, and all percentages calculated in the presentation are based on RMB unless otherwise noted. For those of you following along with the company PowerPoint presentation, there is an overview of the company on slide three. In addition, we are more than happy to take investor questions during today's Q&A session or via email to the company. On today's call, the company's CFO, Ms. Amy Tung, will provide a brief overview of operating financial highlights for the second quarter and first half of 2021. Chairman and CEO Mr. Kevin Ma and President Mr. Jun Zhang will follow with an update on the company's outlook and its long-term growth strategy before opening the floor for questions. With that, I'll turn the call over to ACG's CFO, Ms. Amy Kao. Please go ahead, Amy.

Go ahead, Amy. Thank you, Caroline, and welcome everyone. Good evening to those in America. We appreciate everyone's time. We are pleased to have continued our growth into the year, reporting a 36.1% increase in total student enrollment to 1,051 students in the second quarter of the year. We believe the momentum we have seen in enrollment in the first half of the year bodes well for revenue growth in the second half. During the second quarter, we saw significant year-over-year enrollment growth across our major programs, portfolio training, overseas study counseling, research-based learning, and foreign language training. Our primary offerings The portfolio training program enrolled 561 students during the period, up 26% from 444 in the same period last year. We delivered 28,445 credit hours for portfolio training programs, which is a slight increase from Q2 2020. As we have made a conscious effort in recent years to shift our portfolio training mix to project-based programs versus time-based programs. Project-based program credit hours increased over 20% year-over-year during the second quarter, although total credit hours delivered stayed relatively flat. With our conscious shift to project-based programs, we have also restructured our full-time instructor's compensation to be more focused on the number of projects completed. instead of the credit hours delivered. This grants instructors greater autonomy and flexibility in completing projects and has consequently resulted in improved operating and cost efficiencies while maintaining the same level of quality education and support for our students. This shift has not only contributed to our top line growth but also our bottom line improvement. We do anticipate credit hours delivered for the portfolio training programs to gradually along with enrollments as the increased shift to project-based programs eventually stabilizes over time, with project-based programs credit hours comprising the majority of overall portfolio training credit hours. At this time, we are working closely with overseas partner institutions in delivering our summer programs. We were pleased to offer themed domestic tours similar to those we held last summer, internships, academic projects, as well as various online bootcamps and on-site workshop programs in partnership with our overseas partners. With that, let's move on to financials for the second quarter and first half of the year. Total net revenues for the second quarter of 2021 increased 39.4% to RMB36.8 million from RMB26.4 million in the second quarter of 2020. This was primarily driven by increased contributions from portfolio training and other educational services for which we delivered more services when compared with the prior year period when more restrictions on service delivery were in place due to the COVID-19 pandemic. Gross margin improved to 43.4% during the 2021 second quarter, up from 25.1% in the prior year period, The improvement was contributed by the increasing shift to a project-based program in portfolio training, which has led to improved operating efficiencies and cost optimization in service delivery. Net income attributable to ACG was RMB 14.1 million, which compares to a net loss attributable to ACG of RMB 32.1 million in the prior year period. This was primarily a result of the increase in net revenues and decreased operating expenses related to the deferral of the final RMB 10 million that will be used to fund our research project with the Research Institute of Future Education and Assessment of Tsinghua Project, as well as decreased professional fees, which was partially offset by increased selling expenses related to sales performance bonuses. Turning to the first half of 2021, Net revenue was RMB 74.4 million, up 25.9% from RMB 59.1 million in the same period of 2020. Gross margin improved to 41.5% from 31.1% in the prior year period. Net loss attributable to ACG improved to RMB 4.9 million compared to RMB 52.5 million. Moving to the balance sheet, We continue to be in a solid financial position with US$14.2 million in cash and cash equivalents, working capital deficits with US$28.4 million, and total shareholders' equity with US$34.1 million at June 30, 2021, compared to working capital deficits of US$23.6 million and shareholders' equity of US$30.5 million, relatively. at December 31, 2020. With that, I would now like to turn it over to Kevin, who will expand upon our outlook and growth strategy. Kevin.

Thank you, Amy. We are pleased to see the positive traits surrounding elements continue into the second quarter of 2021. We achieved over 36 percent year-over-year growth in total elements as a result of increase across all our lines of business, which bodes well for the remainder of the year. The public health situation in China remained stable during the second quarter, and we were able to see the tangible results yielded by our new sales management platform across several of our business lines during this period. However, the Delta variant has introduced some uncertainty as we have seen certain outbreaks in China in late July and early August, which coincides with our usual peak season for research-based learning service. We are monitoring the situation very carefully and are mindful of putting our students and employees safety first. As with last summer, we did not offer international study abroad programs this summer, given the lingering impact of the pandemic. However, we are very pleased with the demand and the positive reception of the alternative programs we have developed. Mainly in cooperation with our international partner institutions, we successfully launched several deemed the most domestic travel programs with one of our longstanding international school partners in Junai. One of those tours was a visit to Pingyao City in Shaanxi Province, one of the most ancient cities in Chinese history. Students had the opportunity to conduct their own research and study the design of ancient buildings in old China. We have also developed various on-site workshops, programs on topics such as the future of design, culture, relics, research, restoration, and others. I do not like to take a moment to address the significant events that have impacted the education industry in China over the past few weeks. The guidelines jointly issued on July 24 by the General Office of the Communist Party of China Central Committee and the General Office of the State Council were primarily focused on companies providing after-school academic tutoring service for grad school students. As we shared a week ago, ACG believes that there will be no material advice impact on our business given our focus on creative arts education and experiential learning. We continue to monitor the situation closely and are committed to remaining in compliance with all applicable rules and regulations in providing education service in China and the countries where SAG's partner institutions are located. I would now like to hand the floor over to Jun Zhang, SAG's president, to provide an update on our current growth initiatives. Jun will make his remarks in Mandarin, which will be followed by an English translation. Jun, please go ahead.

Thank you, Carol. In the summer of this year, we continue to cooperate with the domestic prestigious universities to provide a series of high-quality elective courses, and we are very happy to receive positive feedback from participants. In the second quarter, ACG strategically decided to sell and store the K12 education evaluation service business, which allows us to focus on our core creative education and experience learning business. We believe that the various courses and projects provided by ourselves are different from those of many peers. Although these typical academic subjects such as reading, writing, math, science, history, etc. are important for a person's educational development, the comprehensive development of students in art and classroom learning has also been proven to be important. Compared to the same period last year, after the COVID-19 epidemic gradually recovered, our product demand continues to increase, Combined with the development of our sales management platform and the increase in sales and marketing activities, we see that the number of students is actively growing. We will continue to expand our course settings for students who are interested and can help us achieve the benefits of studying abroad. Although the Delta virus has some uncertainties, we are still optimistic about global economic recovery. Thank you Kevin.

Thank you, Kevin. We have continued to offer quality alternative programs this summer, partnering with reputable domestic and overseas institutions, and are pleased to have received positive feedback from our students. During the second quarter, ACG made the strategic decision to sell one of its legacy businesses and K-12 education assessment services. This will enable us to focus on our core creative education and experiential learning business. We believe the curriculum and various programs we offer differentiate us from many of our peers, and while typical academic subjects of reading, writing, math, science, history, et cetera, are critical to one's education, the arts and learning outside of the classroom have been demonstrated to be just as important to a student's overall development. We're seeing increased demand for our offerings during the gradual post-pandemic recovery compared with the prior year period and combined with the development of our centralized sales platform and increased promotional and marketing activities, we are seeing a positive impact on our enrollment numbers. We continue working to expand our course offerings, looking to our students to see what interests them and would be most beneficial to them as they work toward their goal of pursuing studies at overseas institutions. We remain optimistic about the global recovery despite some uncertainties introduced by the Delta variant. We will continue to work closely with our partners around the globe while prioritizing the safety and well-being of our students and staff. We are also remaining watchful as uncertainties impact the after-school academic tutoring industry, given the recent guidelines released by the government. With that, I'll turn it back over to Kevin.

Thanks, June and Carrie. In closing, ACE believes we will position it to execute on our growth initiative, particularly as the effects of the pandemic continue to diminish over time. We are pleased to continue to be an organization that students trust and recognize for its quality education and excellent support, both during the worst of the pandemic and as the world recovers. Our students continue to inspire us with their determination and perseverance through these challenges, and we look forward to serving a growing population of students looking to enrich themselves with creative art and experiential learning opportunities. Everyone, please stay safe and health. With that operate, let's open it up for questions.

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from Louis Fan with The Benchmark Company. Please proceed with your question.

Hi, thanks for taking my call. First of all, congratulations on a very solid quarter. My first question is with regard to your operation numbers. I've noticed that you've achieved a positive net income for the quarter as opposed to a net loss over a year ago. So in this context, could you please provide some estimate or color if this positive net income is going to become a trend going forward, or if we will have more volatilities in the upcoming quarters.

Thank you, Louis, for the question. Well, the positive net income realized in Q2 2021 was actually mainly contributed by going to be 33.5 million investment income recognized upon the deconsolidation of our legacy K-12 education assessment services. Our core business was still at a net loss status but has shown improvement compared with the prior year period. Given the uncertainty caused by the global pandemic and Delta variant resurgence in China in summer, it would not be prudent for us to make predictions about when we might approve achieve profitability at this stage. But we do believe we will see marked improvement over the course of the year.

Great. That's fair enough. Thank you. Thank you. My second question is more about the macro environment. Over the past month or so, we all saw there have been some new guidelines issued by the Chinese government with regard to the after-school education industry. So I know the management has already had some comments on this. But could you please provide some additional colors on your view of this new guideline's overall impact on the Chinese after-school education industry, and more specifically, what it might mean for ACG?

Certainly. Thank you, Louis, for your question again. The guidelines actually are focused on school homework and after-school tutoring for academic courses. and ACG's primary business focus is on creative education and experimental training. We do not expect our operations to be materially affected by the guidelines in this regard. We will continue to monitor and comply with all applicable rules and regulations in China and all other jurisdictions where we conduct businesses, while remaining committed to providing quality education and support services to our students. We anticipate companies most directly affected by the guidelines will look for ways to adjust their businesses, including seeking non-academic content for service delivery to avoid needing to issue refunds. We see these changes as an opportunity for ACG to explore new partnerships and potential avenues for growth. So we will remain tuned for what's coming on in the future period.

OK. All right. Thank you. Thank you. Yeah, just one more question. So could you tell us a bit more about the industry landscape? More specifically, who are your major competitors? And how does ACG differentiate itself from its competition? And that's all my questions. Thank you.

Thank you again, Louis, for your questions. Well, there are a few competitors of ACG in the art training market in China. such as SIA, Sphinx, and PS1. Together with ACG, the four companies accounted for around 50% to 60% of the market share in China. SIA has been expanding very aggressively in recent years by selling courses at big discount and providing classroom with luxury decoration. Sphinx is a subsidiary being acquired by the New Oriental Group in 2016. PS1 is a young company with about less than 10 years experience, but growing rapidly in the market. Compared with these three competitors, ACG has the longest history in China for international education, since commencing businesses in the international art education in 2006. It has the most number of training centers in China, And it's renowned for cultivating students to unleash their potential in art, even with zero-based background. So I think I can answer your questions. Louis?

Yes. Yeah, that's very helpful. Thank you very much. Thank you very much.

Thank you for your questions.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for any closing comments.

Thanks again to all of you for joining us. If anyone has questions for us, please feel free to reach our director to us or our investor relations firm, the ActiGroup. We are always available to speak to investors and look forward to speaking with you all during our next quarterly call. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.