Golden Sun Education Dismantles VIE: Track Harvest Certainty Performance is declining

21st Century Business Herald reporter Wang Feng Beijing reported that Golden Sun Education (NASDAQ: GSUN), the first listed education company after the "double reduction", recently released its fiscal year 2022 annual report.

According to the annual report, as of September 30, 2022, the company's revenue was US$10.815 million, down 28% year-on-year; Net loss was US$2.1 million, a year-on-year turn.

Many people will ask, who is Golden Sun Education?

This is not the Nanchang-based Jiangxi Golden Sun Education Group, an established cultural industry company that provides basic education products such as books and test papers.

The U.S.-listed company Golden Sun Education is generally strong on the surface, and its annual report shows that its business includes three child and adult training institutions, a training institution that provides language courses in cooperation with high schools, and a company that provides logistics services.

But in fact, Golden Sun Education was founded in 1997 and is a leading private education group in Wenzhou, Zhejiang Province. In 2012, the headquarters was moved to Shanghai, and the national expansion began, and more than 800 private schools and kindergartens were held or participated in through multiple modes such as direct management, franchise and cooperation. The business of listed companies is only the "tip of the iceberg" of the entire system of Golden Sun Education.

Golden Sun Education IPO on NASDAQ in June 2022 with an offering price of $4 and raising $17.6 million. Golden Sun Education's share price fluctuated sharply, opening at $19 on the first day, up 375% from the issue price, and the stock price triggered circuit breakers twice. In the following months, Golden Sun Education's share price once reached $95, becoming a "monster stock" that shocked Chinese concept stocks.

But as of the close of trading on February 22, the share price was only $2.28, with a market value of about $41.85 million.

Although the business volume of listed companies is small, the 2022 annual report reveals an important information: Golden Sun Education no longer adopts the VIE structure, which is extremely rare in education concept stocks, and may represent a trend in the capitalization of education companies.

Fiscal 2022 performance declined across the board

Founded in 1997, Golden Sun Education is a long-established education and training institution. After listing, Golden Sun Education's stock price soared, reaching $95 at one point, confusing the outside world.

But in August 2022, Golden Sun Education released its first semi-annual report after listing, tearing off the gorgeous coat on its body. According to the financial report, Golden Sun Education's revenue was $7.2 million, down 3% year-on-year; Net income was $0.4 million, down 75% year-over-year.

Golden Sun Education's share price has plummeted since then, even falling below $1 late last year.

According to the annual report, in fiscal 2022, Golden Sun Education achieved revenue of US$10.815 million, down 28% year-on-year. Gross profit decreased by approximately $4.0 million or 45% to approximately $4.8 million. Overall gross margin decreased significantly by 15 percentage points from 59% in fiscal 2021 to 44%. Net loss was $2.1 million, compared to a net profit of approximately $1.3 million for fiscal 2021.

The scale of revenue is relatively small, which is related to its business volume. Golden Sun Education's business includes Yangfushan Gaofu School, a college entrance examination repeat school located in Wenzhou; Shangwai High School is a secondary school entrance examination and college entrance examination repeat school located in Hongkou District, Shanghai; Zhouzhi Culture is two small language training schools located in Shanghai and Hangzhou; Diligent education, providing small language training for high schools; Lilong Logistics, providing logistics management, consulting and catering services.

Among them, the training business accounted for 86% of the revenue in fiscal 2022, and the logistics service business accounted for 14%.

In fiscal 2022, the year-on-year revenue of the training business decreased by US$4.2 million, or approximately 31%, dragging down the overall revenue of Golden Sun Education.

Affected by the epidemic, the number of students in Golden Sun's education and training business decreased from 9,719 in FY2021 to 7,900 in FY2022, a decrease of 1,819. In addition, the average income per student decreased by $216 from $1,391 in FY 2021 to $1,175 in FY 2022.

The biggest impact is the cooperation with high schools to train diligent education in small languages. According to the annual report, the number of partner schools of Qinshang Education decreased from 64 in FY2021 to 58 in FY2022, and although the number of enrolled students increased from 2,682 to 3,041, fewer new students were enrolled in FY2022, resulting in a decrease of about 30% in revenue from US$4.8 million to US$3.3 million.

An important aspect affecting Golden Sun education is also the turmoil in teachers. According to the annual report, as of the end of fiscal 2022, its annual teacher retention rate was only 25.2%, far lower than the 73.8% and 80.4% in fiscal 2021 and 2020.

That is, compared to the number of teachers at the beginning of FY2022, 74.8% of teachers left during the year.

In fiscal 2022, Golden Sun Education had 377 employees, a decrease of 16.96% over the previous year.

Of course, the main reason for the decrease is the restructuring in September 2021, which has had a significant impact on Golden Sun Education.

Outliers in education stocks

Golden Sun Education has coveted the capital market for a long time. According to reports, in August 2018, Golden Sun Education held a signing ceremony for "going public in the United States" in Wenzhou. At that time, Weng College, chairman of Golden Sun Education Group, revealed at the signing ceremony, "The listing bell of Golden Sun Education Group will ring on the NASDAQ Stock Exchange in the United States. ”

A month later, its listed entity, Golden Sun Education Group Limited, was incorporated in the Cayman Islands.

But since then, the road to market has been full of twists and turns. In May 2021, Golden Sun Education submitted a prospectus, and its main business at that time included two private schools - Wenzhou Ouhai District Art School and Wenzhou Chongwen Middle School. These two schools, together with Yangfushan Gaofu School, run through the basic education sequence of elementary school, junior high school and high school.

However, the Implementing Regulations of the Private Education Promotion Act were promulgated in April 2021 and came into force in September 2021. The implementing regulations of the People's Promotion Law stipulate that no social organization or individual may control private schools that carry out compulsory education or non-profit private schools that carry out preschool education through mergers and acquisitions, control by agreement, or other means.

As a result, Golden Sun Education was reorganized in September 2021 and spun off Wenzhou Ouhai Art School and Wenzhou Chongwen Middle School. In fiscal years 2021 and 2020, the two school entities accounted for approximately 32% and 45% of total revenue, respectively.

Domestic education companies listed on the US and Hong Kong stocks have now completed the divestment of private compulsory education school assets.

In the past, private compulsory education schools were listed on the US stock market and Hong Kong stock market under the VIE structure. To divest the two schools, Golden Sun Education sold its entire stake in Shanghai Golden Sun Education Technology Co., Ltd., the entity that agreed to control Wenzhou Chongwen Middle School. At present, the shareholders of Shanghai Golden Sun Company are two natural persons, and the controlling shareholder is Weng College, chairman of Golden Sun Education Group.

In addition, Golden Sun Education also demolished the VIE agreement between its subsidiary, Zhejiang Golden Sun Education Technology Group Co., Ltd., and Ouhai Art School.

The annual report shows that since the reorganization, Golden Sun Education no longer operates private compulsory education schools and no longer uses the VIE structure.

No longer use the VIE structure, making it an outlier for concept stocks in education. At present, the vast majority of dozens of U.S. and Hong Kong listed education companies use VIE structures.

The VIE structure is characterized by the separation of the overseas listed entity from the domestic operating entity, and the overseas listed entity controls the domestic operating entity through a series of exclusive service agreements.

The basic part of the VIE structure is that the domestic investor registers a B.V.I company in an overseas offshore investment center (generally the British Virgin Islands), and a B.V.I company establishes a shell company A in the overseas offshore investment center (generally the Cayman Islands). Shell company A is an entity listed on the US stock market and Hong Kong stocks, but generally has no actual business and is only a holding company. Next, Shell Company A establishes wholly owned shell company B in Hong Kong, China, and Hong Kong Company B establishes a wholly foreign-owned company in the Mainland.

The Hong Kong-funded company, also known as WFOE, finally controlled certain operating entities in China through a series of control and profit shifting arrangements (rather than equity investments), obtained relevant revenues, and reversed them to shell companies B and A.

After the completion of the restructuring, the WFOE of Golden Sun Education was Zhejiang Golden Sun Education Technology Group Co., Ltd. (hereinafter referred to as "Zhejiang Golden Sun"), but the annual report shows that Zhejiang Golden Sun did not control specific business operation companies through an agreement arrangement, but directly invested equity in each operating company.

In other words, Golden Sun Education is no longer listed in the VIE structure, but directly listed in the "red chip" model.

For-profit or not-for-profit

The VIE structure has been controversial because it circumvents the regulatory mechanism to a certain extent.

Among the categories related to education in the Catalogue for the Guidance of Foreign Investment Industries (revised in 2017) issued by the Ministry of Commerce, only non-academic vocational training institutions are encouraged to encourage foreign investment, preschool, ordinary high schools and higher education institutions are all restricted investment fields, while compulsory education institutions are listed as prohibited areas for foreign investment.

However, some companies have used the VIE structure to list after 2017 to incorporate WFOE companies in China and substantially control domestic preschool education, compulsory education, and ordinary high school private schools through agreement control, thereby circumventing the restrictive regulations on foreign investment entering the education field.

Prior to this, only Hong Kong listed Minsheng Education did not adopt the VIE structure to list. Minsheng Education operates many private colleges and universities and private secondary vocational schools in Sichuan, Inner Mongolia and other places.

According to industry insiders, there are historical factors in the listing of Minsheng Education in a non-VIE structure. When it invested in its private universities and private secondary vocational schools in the form of Sino-foreign joint ventures, it complied with the Catalogue for the Guidance of Foreign Investment Industries in force at that time, which listed higher education as an encouraged category, and at the same time did not explicitly stipulate that secondary vocational education was restricted or prohibited.

Nowadays, Golden Sun Education has not built a VIE structure in the middle school entrance examination review school and non-English minority language training business, which has released a positive signal that there is no restriction on foreign capital and private capital investment in these fields, which is undoubtedly good for the entire private education industry.

However, the structure of Golden Sun Education is still controversial. The nature of its operating entities includes both companies, for-profit private schools, and non-profit private schools.

According to the annual report, its Hongkou Tutoring School will be registered as a non-profit private school before 2022, and the main body of the school is Shanghai Hongkou District Practice Foreign Chinese Training School. At the end of 2021, all business was transferred to Shanghai Xianjin Technology Development Co., Ltd., a secondary subsidiary of Zhejiang Golden Sun.

Its small language training institution located in Hangzhou is registered as a for-profit private school, and the main body of the school is Hangzhou Jicai Training School Co., Ltd., which was renamed Hangzhou Jicai Education Technology Co., Ltd. in 2021, which is a third-level subsidiary of Zhejiang Golden Sun.

Its small language training institution in Shanghai has also undergone a transfer of organizers, initially running the school as Shanghai Yangpu District Jicai Education Training School, a non-profit institution, but in 2022 it was transferred to Shanghai Zhouzhi Culture Communication Co., Ltd., a subsidiary of Zhejiang Golden Sun.

However, Yangfushan Gaofu School, which is the most important listed asset of Golden Sun Education, is still a non-profit private school.

According to the official website information, the full name of Yangfushan Gaofu School is Wenzhou Ouhai District Yangfushan Cultural Tuition School, founded in 1987, formerly known as Wenzhou Normal College Gaofu class, Wenzhou Middle School Gaofu class, is a famous school in Zhejiang Province, the 2015-2017 school year ranked the top two in Zhejiang Province, and the scale of school in 2018 still ranked in the forefront of similar schools.

According to the annual report, Weng College acquired Yangfushan Gaofu School in 2008 and transferred it to Golden Sun Education in 2018.

As for why Yangfushan Gaofu School is still registered as a non-profit private school, the annual report said that according to relevant regulations, changing the registration of a non-profit school to a for-profit school first requires liquidating the school's property, which will disrupt the school's operation. In March 2021, Golden Sun Education decided not to re-enroll existing nonprofit schools as for-profit schools.

However, according to relevant laws, the organizers of non-profit schools cannot "dividends" from the income from running schools. This also means that Golden Sun Education receives income from Yangfushan High School, and it is bound to carry out related party transactions through agreement arrangements.

According to reports, Weng College said after the company's listing that the listing is not the end, but a new starting point, to further improve the company's core competitiveness and profitability. After an unexpectedly important restructuring, Golden Sun Education experienced business damage, but also gained certainty.

For more information, please download 21 Finance APP