ATA Creativity Global (AACG) 2022 Q3 法說會逐字稿

Greetings. Welcome to ATA Creativity Global's Third Quarter 2022 Financial Results. (Operator Instructions) 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 Global's, or ACG's, results for the third quarter ended September 30, 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 will also be made available at 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 contains 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, could, estimate, expect, forecast, future, intend, 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 prospects 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 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 the 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 like to refer you to Slide 2 of the conference call presentation for further information. All U.S. dollar amounts in this conference call relating to financial results for third quarter ended September 30, 2022, are converted from RMB using an exchange rate of RMB 7.1135 to USD 1, the noon buying rate as of September 30, 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 PowerPoint presentation, there is an overview of the company on Slide 3. In addition, we're more than happy to take investor questions during today's Q&A session or via e-mail to the company. If you wish to ask questions, you can send your e-mail to the e-mail address azhang@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's CFO, Mr. Ruobai Sima. Please go ahead, Mr. Sima.

Thank you, Alice, and welcome, everyone. Good evening to those in America. We appreciate everyone's 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 trading 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 many 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 Program, 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 were 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 to 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 procedures 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 first 9 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 noted earlier. Gross margin was 45.1% during the 2022 third quarter compared to 51.4% in the prior year period primarily due to decreased revenues from portfolio training services, which is impacted by local COVID-19 resurgence in certain core cities during the quarter.

Net loss attributable to ACG improved to RMB 12 million, which compared to a net loss attributable 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 -- onetime 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 9 months of 2022, net revenue was RMB 128.3 million compared to RMB 129.6 million in the same period of 2021. Gross margin was 42.8% compared to 45.7% in the prior year period. Net loss attributable to ACG was RMB 49.9 million compared to net loss of RMB 31.1 million primarily due to onetime RMB 33.5 million investment gain resulting from disposal of the company's K-12 education assessment business in June 2021. The investment gain was partially offset by decreased G&A 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 noted earlier.

Moving back to balance sheet. We believe we are in a solid financial position with USD 8.4 million in cash and cash equivalents. Working capital deficit was USD 32.7 million, and total shareholders' equity was USD 20 million at September 30, 2022, compared to working capital deficit of USD 30.2 million and shareholders' equity of USD 30 million, respectively, at December 31, 2021.

With that, I'd like to turn it over to Kevin, who will expand upon our outlook and growth strategy. Kevin?

Thank you, Sima. We take pride in our students' exuberance over the past couple of years. They have had to overcome adversity and [very uncertain circumstance] due to the pandemic time and again. Their determination to continue pursuing their 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 ACG's students working harder during this 2022 application season, taking the next exciting steps forward in their creative study journey.

During the third quarter of 2022, we introduced various programs to help students build a comprehensive application portfolio. These programs include art themes like fine arts, design, animation and games and are designed for students at different stage of their art studies, both those that are applying for art school overseas and those who are interested in exploring their [interest in] arts. These programs include (inaudible) Central Saint Martins art and design programs, Sheridan animation and games summer camp and our exclusive and innovative Metaverse summer school, all of which we delivered in a combination of both in-person and online formats.

We have started to observe a greater opening up of international travel as many of our students have left home to pursue their art studies overseas. As we remain [vigilant] in monitoring the pandemic situation, we hope to see our students' learning experience also return to same [standards of normal zone]. We remain committed to continuously providing quality curriculum and making sure our portfolio offering address the needs of our students. We believe our growth strategy is supported by our ability to stay relevant, to understand where creative arts studies is headed and reflected that in our curriculum development. We anticipate closing 2022 with a strong fourth quarter as this period coincide with key application deadline for many of our students, and we are [on] to be serving them during this exciting time.

I'd now like to hand the floor over to Jun Zhang, ACG'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, Kevin. (foreign language)

[Interpreted] 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 the quarter that I'd like to highlight here, which is the Intensive Training Class for the 2022 UWEE International Art Exhibition designed to promote the 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 format. Selected artworks from participating students will be exhibited at the Louvre Museum, along with certificates and reference letter from international artists on the Competition Committee, which we believe adds to a significant highlight to the student's portfolio of artwork.

So far during the [third] quarter, we have launched more programs with diversified topics, including an Overseas Master Class in Visual Arts lectured by professors from New York University, 2 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 are 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 world-class 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 offering.

With that, I'll turn it back over to Kevin.

Thanks, Jun and Alice. In closing, ACG continues to put 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 the natural growth across all our business lines.

With that, operator, let's open it up for questions.

(Operator Instructions) 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. Thank you, Alice. Thanks for the question. And [it's tied] from challenges due to the ongoing pandemic environment. But I think that demand for study abroad is still here. (inaudible) travel restrictions that were implemented in early 2020 at the start of 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 preference to pursuing their studies in the U.K. versus in the U.S., which used to be the most popular destination country for ACG students. This change may be attributable to several factors, including COVID-19 with the related travel difficulties and geopolitical tensions.

During third quarter 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 pre-pandemic levels. Regardless, our focus is to ensure that our veteran teachers and support staff continue to drive positive outcomes for our students. Despite the short-term setback, we remain optimistic about the long-term prospects of our business in a post-pandemic era. And we remain committed to helping our students achieving 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 prudent 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 2 years has emphasized the importance of building reliable remote learning delivery platform that allowed us the flexibility of continuing to provide our quality curriculum to students when the situation warranted. Our teaching staff is well trained and adjusted so that they are able to teach effectively whether they are in-person or on a computer monitor.

We expect our top line to grow quickly from Q3 of 2022 to Q4. And the fourth quarter is typically our strongest in terms of net revenue from portfolio training services as key application deadlines 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 apprise of our outlook as we work on our budget for 2023. Thank you.

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

(Operator Instructions)

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/or 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.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]