Sector financial performance:

This china-based company, who primarily provide computer-based testing services in China, has been grouped into testing centers sector in education industry.

Growth in sales of companies in this sector (China market) seems to have been fast in the past several years but growth seems to be slowing down since 2017. The growth in tests taken has been driven by the some large exams such as AMAC and CICPA in the past several years. However, it seems that companies in this sector need to find new drivers.

Due to increased expenses in test centers, which mainly come from higher labour costs, gross margins were harmed (a typical gross margin was 47% in 2017). In addition, the SG&A as percentage of sales, due to the deleverage of slowing increase in revenues, increased and caused the  operating margin to be down to 9% in 2017. As a result of decline in operating margin, companies’ income and cash flow decrease significantly in 2017.

According to our analysis, the companies’ enterprise price/sales ratio was 37 with an interest/EBITDA ratio of 0% before sales were finished.

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Company performance:

The growth in the number of tests taken has been increasing fast in the past several years as indicated by annual growth rate of about 12-20%. But the pace seems to be slowing down.

The first six months of fiscal 2018 compared with same period of 2017(ended 20180630)

Its core asset testing service was sold.

The fiscal 2018 compared with 2017(ended 201701231)

Revenue increased by about 12% primarily due to the increase of about 12% in testing services as a result of increase in the number of tests taken (CICPA and AMAC mainly).

The first six months of fiscal 2018 compared with same period of 2017(ended 20170930)

Revenue increased by about 5%. The number of tests taken decreased.

Fiscal 2017 compared with 2016(ended 20170331)

Revenue increased by about 13% primarily due to the increase of about 12% in testing services as a result of increase in the number of tests taken (CICPA and AMAC mainly).

Fiscal 2016 compared with 2015

Revenue increased by about 19% primarily due to the increase of about 20% in testing services as a result of increase in the number of tests taken (CCTAA and AMAC mainly).

Its gross margin went down to about 47% in 2017 since 2016 primarily due to the increase in labor costs.  During the same time, its SG&A as percentage of sales has been down largely probably as a result of deleverage slower increase in revenue and rising costs. And this actually caused its operating margin down to 9% in 2017 (based on 12 months trailing data).

Stock price

This stock had a companies’ enterprise price/EBI ratio of 37 before its core asset was sold. We think that its stock is being relatively fairly valued considering that while slowing down growth in revenue the whole favourable environment in China’s education sector can support its price/cash flow ratio of 37.