ATA Inc. ( 27-01-2008 )

Business

Company is the China based company which began its business in 1999 as a computer based testing service provider and later expanded into providing career-oriented educational services and test preparation solutions. In 2002, it began offering career-oriented course programs, which it market to Chinese educational institutions. In March 2006, company began offering pre-occupational training programs, which allow students to obtain practical skills for specific job requirements.

Company's clients principally include Chinese governmental agencies, professional associations, well known IT vendors and Chinese educational institutions as well as individual test preparation services consumers. The China Banking Association and Chengdu Shiguang Co., Ltd., a distributor of its NTET Tutorial Platform software, accounted for 19.5% and 10.8%, respectively, of company's total net revenues for the six months ended September 30, 2007. The PRC Ministry of Labor accounted for 12.3% of its total net revenues for the fiscal year ended March 31, 2007.

In relation to computer-based testing services, company compete with domestic Chinese and international computer-based testing service providers. Prometric and Pearson VUE are main competitors in China. In relation to career-oriented educational services, it face competition from international companies, such as Aptech Limited and NIIT Limited. Traditional Chinese test preparation material providers, such as publishing companies, indirectly compete with company's test preparation solutions.

Revenue

Company generate revenue from following segments:

(Six Months Ended September 30)

Company's current market position

• Company delivered 2,065,249 tests For the Six Months Ended September 30, through its test center network comprised 1,810 authorized test centers located throughout China.

• As on Sept 30 2007 company's 74 degree major course programs and 49 single course programs are offered in nearly 135 and 118 schools respectively.

• Since November 2006, company also sells NTET Tutorial Platform software which comprises a comprehensive set of training materials for preparing teachers for certification under the NTET test.

Financials

Company's financial year ends on March 31.

 (in thousand RMB)

Company is showing significant growth in revenues (nearly 23% and 135% in FY 2007 and H1, 2008 respectively as compare to corresponding periods) as well as in gross profit (nearly 25% and 219% in FY 2007 and H1, 2008 respectively as compare to corresponding periods) but its operating expenses are also rising and fluctuating significantly mainly due to some non cash expenditures like stock option plans which are likely to stabilize in near future.

Valuation/Offer value ($ in million)

At offer price of $10.5 per ADS⁺⁺ company ADS's are available at PE of nearly 105 (annualizing First half FY 2008)

⁺⁺⁺ After deducting tax at @10% but without considering any exchange fluctuation.

⁺⁺Each ADS represents two ordinary shares.

Points to consider before investing at current price

• Estimated financials till December 31, 2007.

• Expected loss for next two quarters.

• Current US economic outlook as any slowdown in US will effect the Chinese economy to some extent.

• Company has not yet finalize the use for most part of proceeds.

• Current fluctuation in stock markets

• Small size of company

• Recent under performance of Chinese education related companies in stock market. 

Company/Industry expectations

(these are just assumptions and company can perform differently)

• With rise in Chinese economy the demand for talent will rise and online testing should become best way to gather quality talent from vast geographical spread of China.

• With rising popularity of computer and internet the online testing will become more accepted and preferred way than traditional mediums.

• Due to its leading position and establish relationships company should be able to make most out of growing opportunities.

• With expected rise in revenues the operating profit margins are expected to rise.

Negatives

• Complex corporate structure.
  As for most China based companies the corporate/organizational structure is complex as required by local (China) regularities.

• Results can vary significantly from quarter to quarter.
  Results of company varies significantly from quarter to quarter with second and third quarter normally being best and forth quarter normally being worst.

• Dependence on Chinese market.
  Company generate all of its revenues from Chinese market and any slowdown in Chinese economy will adversely affect the company.

• Gross margins are high and can come under pressure with rising competition.

• Company currently enjoy tax holidays for almost all of its operations, in future any change in tax law can revoke this tax holiday.

• Slow/negative growth trends.
  Although company has shown significant financial growth during six months ended Sept 2007 but has shown some negative growth trends in some of its business in same period particularly in degree major course programs

Positives

• History of high growth.

• Leading position in industry.

• High gross margins.

• Vast reach, existing relationships.
  Company's biggest strength is it's vast network of 1,810 testing centers and existing relationships with customers which is a big entry barrier for any newcomer and increases company's competitive position.

• Company generate all its revenues from china which not only is the fastest growing economy in world but also is the world's largest online testing market.

• Growth/entry in high margin business.
  Company's is earning more and more revenues from it's Test preparation solutions where margins are higher than other segments.

• Proceeds will be used by company to enhance its existing business and for any possible acquisitions and will make balance sheet more strong.

Recent Developments

Company has also provided the estimates of results for quarter ended 31 December 2007 as under :- 

• Total net revenues were between RMB63.0 million ($8.4 million) and RMB67.5 million ($9.0 million), compared to RMB36.3 million for the three months ended December 31, 2006;

• Net income was between RMB10.6 million ($1.4 million) and RMB12.0 million ($1.6 million), compared to RMB6.9 million for the three months ended December 31, 2006.

Although company has also estimated the possibly of loss in quarter ended March 31, 2008 and June 30, 2008 due to seasonality of its business.

This article reflects personal view of the author about the company and one must read offer prospectus and consult its financial adviser before making any investment decision