ATA Creativity Global

Greetings. Welcome to ATA Creativity Global's third quarter 2022 financial results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Alice Zhang of the Equity Group. Please go ahead.

Thank you, Sherry. And hello, everyone. Thank you for joining us. The press release announcing ATA Creativity Globals, or ACGs, results for the third quarter ended September 30th, 2022, 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 would also be made available at ACJ'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 state public provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terms such as anticipate, believe, could, estimate, expect, forecast, future, intent, look forward to, outlook, plan, should, will, and similar terms 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 prospect, and subsequent business activities, market demand for and market acceptance and competitiveness of ACG's portfolio training programs, and other education services. the impact of the COVID-19 pandemic on ACG and its operations, and ACG's planned 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 risk associated with investing in ACG is included in 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 forelooking statements as a result of new information for 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 US dollar amounts in this conference call relating to financial results for third quarter ended September 30th, 2022 are converted from RMB using an exchange rate of 7.1135 RMB to one US dollar. The noon buying rate as of September 30th, 2022. All historical conversions are accurate as of the time reported unless otherwise noted. The company reports its financial results under U.S. GAAP in RMB, and all percentages calculated in the presentation are based on RMB unless otherwise noted. For those of you following along with accompanying a PowerPoint presentation, there is an overview of the company on slide three. In addition, we're more than happy to take investor questions during today's Q&A session or via email to the company. If you wish to ask questions, you can send your emails to the email address azhang at equityny.com, and please specify whether you would like to have your name read during the Q&A session. On today's call, the company's CFO, Mr. Ruobai Sima, will provide a brief overview of operating and financial highlights for the third quarter of 2022. 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 CFO, Mr. Ruobai Sima. Please go ahead, Mr. Sima.

Thank you, Alice, and welcome everyone. Good evening to those in America. We appreciate your time. We remain focused on providing quality arts education and services for our students during third quarter 2022, which is when the busy overseas study application season begins. Total revenue for the period was impacted by decreased contributions from portfolio training services as a result of periodical lockdowns in some of our key cities in response to local COVID-19 resurgence. However, demand for our research-based learning programs remained steady as students have consistently expressed how important personalizing their creative education experience to them with money regarding it as part of their unique overseas study application package. Our primary offering, the portfolio training program, enrolled 616 students during the period, which is stable compared to the same period last year. We delivered 36,031 credit hours for portfolio training programs a decrease from the prior year period primarily due to the occasional lockdowns in key cities such as Shenzhen and Chengdu. Although total credit hours went down, project-based program credit hours increased noticeably as a proportion of total credit hours. As a result of our ongoing efforts to shift more students to project-based versus time-based program credit hours, project-based programs are designed with more flexibility and customization to allow our students to achieve their goals more effectively with potentially fewer credit hours needed in comparison to time-based programs. Therefore, total revenues did not decrease as drastically as the decline in total credit hours. During third quarter 2022, we introduced a new platform for students and teaching staff to keep them managed and track their progress. The platform aims to help both students and ACG teachers follow study goals easier and make timely adjustments. During the period, we also launched multiple new programs in different subject areas. Many of which feature a combination of online and offline study experience and lectures from overseas prestigious art school professors. We expect to make this offering available to students with developing new programs in mind. With that, let's move to financials for the third quarter and fourth nine months of the year. Total net revenue for the third quarter of 2022 were RMB 52.1 million compared to RMB 55.3 million in the third quarter of 2021. The decrease was primarily due to decreased revenue contributions from portfolio training services. caused by the local COVID-19 resurgence and subsequent lockdowns that I noticed earlier. Growth margin was 45.1% during the 2022 third quarter compared to 51.4% in the prior year period, primarily due to decreased revenue from portfolio training services, which is impacted by local COVID-19 resurgence in certain core cities during the quarter. net loss attributed to ACG improved to RMB 12 million, which compared to a net loss attributed to ACG of RMB 26.2 million in the prior year period. This improvement was primarily a result of decreased general and administrative expenses related to the final one-time funding support of RMB 10 million to Tsinghua University that was paid in the prior year period. as well as RMB 6 million impairment loss of investment recorded in the prior year period. During the first nine months of 2022, net revenue was RMB 128.3 million compared to RMB 129.6 million in the same period of 2021. Growth margin was 42.8% compared to 45.7% in the prior year period. Net loss attributed to ACG was RMB 49.9 million, compared to net loss of RMB 31.1 million, primarily due to one-time RMB 33.5 million investment gains resulting from disposal of the company's K-12 education assessment business in June 2021. The investment gain was partially offset by equity and expenses of RMB 10 million related to the funding support to Tsinghua University incurred in prior year period, as well as RMB 6 million impairment loss in relation to investment recorded in the prior year period that I had noticed earlier. Moving back to balance sheet, we believe we are in a solid financial position with US dollar 8.4 million in cash and cash equivalent. Working capital deficit was US$32.7 million, and the total shareholder's equity was US$20 million at September 30, 2022, compared to working capital deficit of US$30.2 million and shareholder's equity of US$30 million, respectively, at December 34, 2021. With that, I'd like to turn it over to Kevin, who will expand upon our outlook and growth strategy.

Thank you so much. We take pride in our students' perseverance over the past couple of years. They have had to overcome a vast and uncertain circumstance due to the pandemic time and again. Their determination to continue pursuing this study has only been made possible by the dedication of our incredible teaching and support staff, as well as our ability to seamlessly transition to a remote course delivery platform as necessary. Due to this ability to act quickly and effectively, we have by and large continued with our regular day-to-day learning activities during this period, particularly when Some of our training center locations were impacted by local lockdowns and had to temporarily shut down due to local COVID-19 resurgence. In light of this, it's truly rewarding to see APG students working harder during this 2022 application season, taking the next exciting steps forward in their QGIS study journey. During the third quarter of 2022, we introduced various programs to help students build a comprehensive application portfolio. These programs include art bins like fine arts, design, animation, and games, and are designed for students at a different stage of their art studies. that are applying for art school offices and those who are interested in exploring their intervening arts these programs include business centers and marketing art and design programs sharda and the national games campus camper and our exclusive and innovative metaverse some schools all of which were delivered in a combination of both in-person and online formats. We have started to observe a gradual opening up of international travel, as many of our students have left home to pursue their start at graduate offices. As we remain vigilant in monitoring the pandemic situation, we hope to see our students' learning experience also retain to the same semblance of a nomadic zone. We remain committed to continuously providing quality curriculum and making sure our portfolio of offerings addresses the needs of our students. We believe our growth strategy is supported by our ability to stay relevant, to understand where creative arts is hated and respected in our pre-term development. We anticipated closing 2022 with a strong fourth quarter, and this period coincided with key application deadline for many of our students, and we are honored to be serving them during this exciting time. I'd now like to hand the floor over to Jun Zhang, ACG's President, provide an update on our current growth initiative. Jun will make his remarks in Mandarin, which will be followed by an English translation. Jun, please go ahead.

Thank you, Kevin. In the third quarter, we will continue to provide flexible classroom options for students, especially students affected by the local epidemic. In addition to providing students with a seamless educational experience, we believe that the commitment to launch new courses in each quarter will help us better meet the needs of students' constant change. We would like to emphasize here that one of the projects launched in this quarter, which is the international art exhibition and training course of UWEE in 2022, is only promoting the same world and the same future. Students who participate will receive 30-hour courses and contact various art styles and school types. All courses are held in a small discussion mode. Students can choose to participate online or face-to-face. Students who participate will be selected for art and will be exhibited at the Louvre Museum and get a certificate and a recommendation letter from the International Artists' Association. We believe this will add extraordinary highlights to students' works of art. In the fourth quarter, we will launch more projects with rich themes, including the visual arts overseas master class taught by a professor at the University of New York, as well as two workshops focusing on the theme of the original universe in the space of healing and post-pandemic times. In addition, we are helping students complete the final stage of the study application. and we look forward to receiving and receiving notifications in 2023 to look forward to the future with them. In the remaining time in 2022, looking forward to 2023, we still maintain an optimistic attitude towards the opportunity in front of us. We continue to benefit from long-term school cooperation and relationship. At this time, we can allow teachers from all over the world to participate in our courses and lectures, and provide high-quality joint courses with top universities around the world. The most important thing is that we believe that for a long time, we have been promoting the history of students achieving positive results, which will make ACG stand out from competitors. We have been exploring new methods to continue enriching students' learning experience. This mission will not change. We believe that ACG has the ability to promote future growth and strive to become an international consumer in the field of multidimensional art experience service. Next is Kevin.

Thank you, Kevin. During the third quarter, we continue to provide flexible course delivery options for our students, particularly those who have been impacted by local resurgences. In addition to our ability to provide a seamless education experience for our students, we believe our commitment to introducing new programs every quarter allow us to better meet the evolving needs of our students. We also launched a program during a quarter that I'd like to highlight here. which is the intensive training class for the 2022 UWEE International Art Exhibition, designed to promote a theme of one world, one future. Participating students spent 30 hours in immersive art creation courses and exposed themselves to various artistic styles and schools. All classes were given in a smaller discussion-type setting that students could choose to take in online or in-person formats. Select artworks from participating students will be exhibited at the Louvre Museum, along with certificates and reference letters from international artists on the competition committee, which we believe adds to a significant highlight to the students' portfolio of artwork. So far during the first quarter, we have launched more programs with diversified topics, including an overseas master class in visual arts lectured by professors from New York University. to workshops focused on topics such as Tokyo urban meditation cabins and the metaverse in the post-pandemic era, with different themes for students to choose from. In addition, we're supporting our students through the final stages of the overseas study application process and look forward to seeing what lies ahead of them when offers begin coming in in 2023. In the remainder of 2022 and as we look ahead into 2023, we remain optimistic about the opportunities before us. We continue to benefit from our long-term institutional partnership, which allows us to have workload teachers give lectures in our programs and provide quality joint programs with top arts institutions around the globe. More importantly, we believe our long history of driving positive student outcomes sets ACG apart from the competitors. We're always exploring new ways in which we can continue to enrich the learning experiences of our students. And this mission will not change. We believe ACG is well positioned to drive future growth as we strive to be a leading international provider of diversified art study experience offerings. With that, I'll turn it back over to Kevin.

Thanks, Jean and Alex. In closing, ACG continues to quote its students first. We have found a way to navigate the uncertainty presented by the ongoing pandemic environment, and we are well positioned to execute on our growth strategy. As the world gradually opens up, we believe this will benefit and the natural growth accrues for our business line. With that operation, Let's open it up for questions.

Thank you. 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. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Alice?

Thank you, Sherry. I appreciate it. At the beginning of the call, we received a number of different questions relating to the company's operations. Specifically, I would ask one to the management team while we wait for the questions to queue up. So the first question I received is this. What are you seeing in terms of demand for overseas art study counseling? Is the demand still there or is it waning? And what trends have you observed over the course of the pandemic? That's my first question.

Okay, and thank you, Alice. Thanks for this question, and despite some due to the ongoing pandemic environment, we're seeing that demand for study abroad is still here among students. Travel restrictions that were implemented in early 2020 at the start of the pandemic inevitably impacted many students' ability to pursue their study abroad option. And as a result, we saw a decrease in demand for our overseas study counseling services. In 2021, we saw students expressing a clear performance to pursuing their studies in the UK versus in the US, which used to be the most popular destination country for ACG students. This change may be attributed to several factors, including COVID-19. with the related travel difficulties and geopolitical tensions. During third quarter of 2022, we went through the Overseas Study Programs application peak season, where we observed a number of students pursuing this path show signs of recovery, though not back to poor pandemic levels. Regardless, our focus is to ensure that our veteran teachings and support staff continue to drive positive outcomes for our students. Despite the short-term setbacks, we remain optimistic about the long-term prospects of our business post-pandemic era, and we remain committed to helping our students achieve their creative study goals, whatever they might be. Thank you.

Thank you, Mr. Sima. I do have a second question. which is that periodic travel restrictions and lockdowns in major cities of China are still there in place. And in that case, how much visibility do you have into the financial outlook for Q4 and into 2023? And do you anticipate any further impact on the financials from the pandemic in the remainder of 2022? Okay, and

It would not be appropriate for us to guess as to what will occur when it comes to the public health situation in China as the confidence remains fluid during the flu season. And this is ongoing pandemic environment. Our experience over the past two years has emphasized that the importance of building reliable remote learning delivery platform that allows us the flexibility, of continuing to provide our quality curriculum students when the situation warrants it. Our teaching staff is well trained and adjusted so that they are able to teach effectively whether they are in person or on computer monitor. We expect our top line to grow quickly from Q3 of 2022 to Q4 and the fourth quarter is typically our strong rates in terms of net revenue from portfolio trading services as key application guidelines for many of our students fall in Q4. There remains some uncertainty surrounding the ongoing pandemic environment, but we will continue to keep the investment community apprised of our outlook as we work on our budget for 2023. Thank you.

Great. Thank you, Ms. Sama. Sherri, that's all the questions we've got. I will now turn the call back to you for live Q&A questions.

Thank you. As a reminder, there's star 1 on your telephone keypad if you would like to ask a question. We will pause for a brief moment to see if any questions come in.

Thanks again to all of you for joining us. If anyone has questions for us, please feel free to reach out directly to us and all our investor relations from the equity group. We are always available to speak to investors and look forward to speaking with you all during our full year 2022 call. Thank you. Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.