DRS 1 filename1.htm Draft Registration Statement
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As confidentially submitted to the Securities and Exchange Commission on February 8, 2018

Registration No. 333 –                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Puxin Limited

(Exact name of Registrant as specified in its charter)

 

 

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

Cayman Islands   8200   Not Applicable
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
 

(I.R.S. Employer

Identification Number)

Floor 16, Chuangfu Mansion, No. 18 Danling Street, Haidian District,

Beijing, 100080, the People’s Republic of China

+86 10 8260 5578

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Li He, Esq.
Davis Polk & Wardwell LLP

2201 China World Office 2

No. 1 Jian Guo Men Wai Avenue

Chaoyang District, Beijing 100004

People’s Republic of China

+86 10-8567-5000

 

James C. Lin, Esq.
Davis Polk & Wardwell LLP

c/o 18th Floor

The Hong Kong Club Building
3A Chater Road, Central
Hong Kong
+852 2533-3300

 

Dan Ouyang, Esq.

Weiheng Chen, Esq.

Wilson Sonsini Goodrich & Rosati

Suit 1509, 15F, Jardine House

1 Connaught Place, Central

Hong Kong

+852 3972-4955

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933. Emerging growth company  ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☒

†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of each class of

securities to be registered

  Proposed
maximum aggregate
offering price(3)
  Amount of
registration fee

Ordinary shares, par value US$0.00005 per share(1)(2)

  US$           US$        

 

 

(1) American depositary shares issuable upon deposit of the ordinary shares registered hereby will be registered pursuant to a separate registration statement on Form F-6 (Registration No. 333-            ). Each American depositary share represents              ordinary shares.
(2) Includes ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and also includes shares that may be purchased by the underwriters pursuant to an over-allotment option. These ordinary shares are not being registered for the purpose of sales outside the United States.
(3) Estimated solely for the purpose of computing the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where such offer or sale is not permitted.

 

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED            , 2018

American Depositary Shares

 

LOGO

Puxin Limited

Representing              Ordinary Shares

 

 

This is the initial public offering of American depositary shares, or ADSs, of Puxin Limited. We are offering              ADSs. [The selling shareholders are offering              ADSs. We will not receive any proceeds from the sale of shares by the selling shareholders.] Each ADS represents              ordinary shares, par value US$0.00005 per share.

Prior to this offering, there has been no public market for the ADSs or our ordinary shares. We anticipate that the initial public offering price of the ADSs will be between US$             and US$             per ADS.

We [intend to apply/have applied] to have the ADSs listed on the [New York Stock Exchange/NASDAQ Global Market], or [NYSE/NASDAQ], under the symbol “            .”

We are an “emerging growth company” under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements.

 

 

Investing in the ADSs involves risks. See “Risk Factors” beginning on page 13 of this prospectus.

 

 

 

Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

     Per ADS      Total  

Initial public offering price

   US$                   US$               

Underwriting discount and commissions(1)

   US$                   US$               

Proceeds, before expenses, to the Issuer

   US$                   US$               

[Proceeds, before expenses, to the selling shareholders]

   US$                   US$               

 

  (1) For a description of compensation payable to the underwriters, see “Underwriting.”

The underwriters have an option to purchase up to an aggregate of              additional ADSs from us [and the selling shareholders] at the initial public offering price, less underwriting discounts and commissions.

The underwriters expect to deliver the ADSs against payment in U.S. dollars on                 , 2018.

 

 

 

Citigroup   Barclays   Haitong International   CICC

 

 

Prospectus dated             , 2018


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TABLE OF CONTENTS

 

 

 

     PAGE  

Prospectus Summary

     1  

The Offering

     8  

Summary Consolidated Financial and Operating Data

     10  

Risk Factors

     13  

Special Note Regarding Forward-Looking Statements

     50  

Use of Proceeds

     52  

Dividend Policy

     53  

Capitalization

     54  

Exchange Rate Information

     55  

Dilution

     56  

Enforceability of Civil Liabilities

     58  

Corporate History and Structure

     60  

Selected Consolidated Financial and Operating Data

     67  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     70  

Industry Overview

     90  

Business

     95  

Regulation

     118  

Management

     135  

Principal [and Selling] Shareholders

     141  

Related Party Transactions

     143  

Description of Share Capital

     144  

Description of American Depositary Shares

     155  

Shares Eligible for Future Sale

     165  

Taxation

     167  

Underwriting

     173  

Expenses Relating to This Offering

     182  

Legal Matters

     183  

Experts

     184  

Where You Can Find Additional Information

     185  

Index to Consolidated Financial Statements

     F-1  

 

 

We have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on our behalf or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, the ADSs only in jurisdictions where such offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or the sale of any ADS.

We have not taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who came into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of this prospectus outside of the United States.

Until             , 2018 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

This summary highlights information appearing elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. You should carefully read this entire prospectus, including the “Risk Factors” section and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and the financial statements and the related notes, before deciding whether to invest in our ADSs. This prospectus contains information from an industry report commissioned by us and prepared by Frost & Sullivan, a third-party research firm, to provide information regarding our industry and market position in China. We refer to this report as the Frost & Sullivan report.

Our Mission

We believe that education inspires personal growth and opens up opportunities. Our mission is to empower people to build better lives through learning. We are committed to providing high quality education services to students, as well as upgrading the service quality in China’s after-school education industry by applying our acquisition and integration expertise.

Overview

We are a successful consolidator of the after-school education industry in China. We have strong acquisition and integration expertise to effectively improve the education quality and operational performance of acquired schools. Through acquisitions and organic growth, we have grown rapidly and became the third largest after-school education service provider in China in 2017 in terms of student enrollments, according to the Frost & Sullivan report. Since our inception, we had acquired 48 schools and built a nationwide network of 400 learning centers across 35 cities in China as of December 31, 2017. Our total student enrollments increased 180.4% to 1,275,723 in 2017 from 454,945 in 2016, representing the fastest growth among major after-school education service providers in China, according to the Frost & Sullivan report.

We offer a full spectrum of K-12 tutoring and study-abroad tutoring programs designed to help students achieve academic excellence, as well as prepare for admission tests and applications for top schools, universities and graduate programs in China and other global destinations. In addition to classroom-based tutoring, we have also developed online and mobile applications to increase students’ after-class exposure to our services and enhance their learning experience.

Market Opportunity

China’s after-school education market is fast-growing. Its market size reached RMB483.4 billion in 2017 and is expected to grow substantially to RMB804.9 billion in 2022, according to the Frost & Sullivan report. At the same time, this market is highly fragmented and competitive. According to the Frost & Sullivan report, as of December 31, 2017, there were over 100,000 K-12 after-school tutoring service providers in China, among which the top five players only had less than 4% market share in 2017 in terms of revenue. Many service providers operate limited number of learning centers, often at a loss, and lack the scale or management expertise necessary to invest in curriculum development, instructor training and technology necessary to improve students’ academic results and attract more students.

The continued growth of China’s after-school education market is driven by a number of factors, including rapid economic growth, intensified competition for high-quality educational resources and the increasing demand for overseas education and experience.

Chinese culture attaches great importance to education as a means of enhancing an individual’s worth and promoting his or her career and social status. Given the pressure to excel on entrance exams to high schools and



 

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universities, the shortened school hours required by recent government policies and the limited supply of quality schools, an increasing number of parents and students turn to private after-school tutoring services to complement the public school education. According to the Frost & Sullivan report, the average hours spent on after-school tutoring by urban students in China was 10.6 hours per week in 2017. The demand for study-abroad test preparation and consulting services has also benefited from the growing number of Chinese students pursuing higher education abroad.

We believe that this large and fragmented market presents an attractive consolidation opportunity for us to leverage our acquisition and operational expertise, strong teaching quality, brand and reputation.

Our Solutions

We have developed a business model effectively combining strategic acquisitions and organic growth achieved through successful post-acquisition integration, which has differentiated us from other after-school education service providers in China. This approach has enabled us to achieve rapid growth and capture consolidation opportunities in China’s fragmented after-school education market.

We have adopted a systematic and disciplined approach towards acquisitions. We screen and evaluate potential acquisitions through a set of rigorous criteria, including the targets’ geographic location, reputation in the local market, growth potential, synergies with our existing schools and the probability of successful integration. Since our inception, we identified and contacted over 1,000 targets, of which we acquired 48 schools. These acquisitions enabled us to penetrate our target markets with relatively low customer acquisition and marketing costs by leveraging the well-established presence of our acquired schools in local markets.

We are able to efficiently complete our acquisitions and rapidly improve the operations and management of the acquired schools because of our superior post-acquisition management and operational capabilities. In all acquired schools, we implement our modular management system, Puxin Business System, or PBS. It is designed in-house by our core management team reflecting over 15 years of accumulated management experience in China’s education industry. PBS incorporates the best practices of operating after-school learning centers in a standard, common collection of business processes and process improvement methodologies. It covers over 3,000 management processes and we use PBS tools to analyze schools’ growth potential and formulate improvement plans.

We are committed to providing our students with high quality services and outstanding learning experience. Our commitment is reflected in recruitment, training and retaining the best teachers, developing and improving our curriculum and course materials, as well as standardizing operating procedures and learning practices throughout our network. This focus on quality has led to a high level of student satisfaction and strong academic results, enabling us to reach high student retention rate and contributing to student recruitment. As a result, most of our acquired schools achieved robust organic growth under our operations.

We believe that our track record of successful acquisitions and post-acquisition integration has not only created network effects attracting increasing number of independent after-school operators seeking potential exit, but also created entry barriers for potential competitors. We have established “Puxin” as one of the most-recognized brand names among industry participants and built up our first-mover advantage to capture consolidation opportunities in China’s after-school education market.

Our Strengths

We believe the following strengths contribute to our success and differentiate us from our competitors:

 

    leading position in China’s after-school education market;


 

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    modular and evolving management system;

 

    track record of disciplined acquisitions;

 

    established reputation underpinned by teaching quality; and

 

    visionary management team and sophisticated talent system.

Our Strategies

We plan to pursue the following strategies to expand our business and further strengthen our leadership in the education market in China:

 

    expand our network and geographic coverage;

 

    improve performance, scale and profitability of schools;

 

    cultivate and acquire talent;

 

    promote online initiatives and invest in technology; and

 

    enhance our brand name.

Risks and Uncertainties

Investing in our ADSs involves a high degree of risk. You should carefully consider the risks and uncertainties summarized below, the risks described under “Risk Factors” beginning on page 13 of, and the other information contained in, this prospectus before you decide whether to purchase our ADSs:

 

    our ability to achieve and maintain profitability;

 

    our ability to attract and retain students to enroll in our courses and study-abroad consulting programs;

 

    our ability to effectively manage our business expansion and successfully integrate businesses we acquire;

 

    our ability to continue to recruit, train and retain a sufficient number of qualified teachers and consultants;

 

    our ability to improve the content of our existing courses or to develop new courses;

 

    our ability to comply with the relevant laws and regulations in the PRC; and

 

    our ability to exercise effective control over our variable interest entity structure.

Corporate History and Structure

We are an exempted company with limited liability incorporated in the Cayman Islands. In September 2014, Puxin Education Technology Group Co., Ltd. (formerly known as Beijing Puxin Education Technology Co., Ltd.), or Puxin Education, was incorporated in Beijing, China. We operate our business through Puxin Education and its subsidiaries in China.

Beginning in March 2017, we underwent a restructuring in contemplation of this offering. In particular:

 

    Incorporation of the listing entity. In March 2017, we incorporated Puxin Limited under the laws of the Cayman Islands as our proposed listing entity in the Cayman Islands.

 

   

Incorporation of Hong Kong and PRC subsidiaries. In April 2017, we established a wholly-owned subsidiary in Hong Kong, Prepshine Holdings Co., Limited, or Prepshine Holdings, to be our



 

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intermediate holding company and to facilitate our initial public offering in the United States. In January 2018, we also established a wholly-owned subsidiary in China, Purong (Beijing) Information Technology Co., Ltd., or Purong Beijing, through which we obtained control over Puxin Education based on a series of contractual arrangements entered into on February 5, 2018.

 

    Contractual arrangements. Due to PRC legal restrictions on foreign ownership in education services, we carry out our business in China through Puxin Education and its subsidiaries. In February 2018, we, through our PRC subsidiary, Purong Beijing, entered into a series of contractual arrangements with (i) Puxin Education and its subsidiaries, and (ii) the shareholders of Puxin Education, to obtain effective control of our variable interest entity.

Subsequent to the establishment of Puxin Education, we acquired and established a number of entities to grow our business. From 2015 to 2017, the total number of our learning centers increased from 99 as of December 31, 2015 to 231 as of December 31, 2016, and further increased to 400 as of December 31, 2017.

The following diagram illustrates our corporate structure immediately following the completion of this offering, assuming no exercise of the over-allotment option granted to the underwriters:

 

LOGO



 

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(1) Mr. Liang Gao, Mr. Gang Li, Mr. Yun Xiao, Tianjin Puxian Education Technology Limited Partnership and Ningbo Meishan Bonded Port Area Zhimei Phase V Equity Investment Limited Partnership hold a 5.698%, 3.419%, 1.140%, 18.233% and 7.267% equity interest in Puxin Education, respectively.

Corporate Information

Our corporate headquarters is located at Floor 16, Chuangfu Mansion, No. 18 Danling Street, Haidian District, Beijing, the People’s Republic of China. Our telephone number at this address is +86 10 8260 5578.

Our registered office in the Cayman Islands is located at the offices of Osiris International Cayman Limited, Suite #4-210, Governors Square, 23 Lime Tree Bay Avenue, PO Box 32311, Grand Cayman KY1-1209, Cayman Islands.

Our agent for service of process in the United States is             .

Our website can be found at http://www.pxjy.com. The information contained on our website is not a part of this prospectus.

We are an “emerging growth company” as the term is used in the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act,” and, as such, we are subject to certain reduced public company reporting requirements. We are also eligible for, and intend to rely upon, exemptions from certain listing requirements of [NYSE/NASDAQ] as a “controlled company.” See the applicable disclosure under the section captioned “Risk Factors—Risk Factors Related to Our ADSs and This Offering.”

Implications of Being an Emerging Growth Company

As a company with less than US$1.07 billion in total annual gross revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements compared to those that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of the ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.



 

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Conventions that Apply to this Prospectus

Except where the context otherwise indicates and for the purpose of this prospectus only:

 

    “ADSs” refers to our American depositary shares, each representing              of our ordinary shares, and “ADRs” refer to the American depositary receipts that evidence our ADSs;

 

    “China” or “PRC” refers to the People’s Republic of China, excluding, for purposes of this prospectus, Hong Kong, Macau and Taiwan;

 

    “K-12” refers to the three years before the first grade through the last year of high school;

 

    “K-12 course withdrawal rate” refers to the ratio of the number of students withdrawing from a K-12 course to the total number of students enrolled at the beginning of that course;

 

    “K-12 group class enrollment rate” refers to the number of students enrolled in a K-12 tutoring group class course as a percentage of the maximum number of students for that course;

 

    “K-12 group class student retention rate” refers to the number of students who continue to enroll in K-12 tutoring group class courses (excluding promotional programs) at our learning centers after completing a K-12 tutoring group class course in a particular period as a percentage of the total number of students who complete K-12 tutoring group class courses during the same period;

 

    “learning centers” refers to the physical establishment of an education facility providing K-12 tutoring services, study-abroad test preparation courses or study-abroad consulting services at a specific geographic location, directly owned and operated by our VIE or its subsidiaries. For the avoidance of doubt, references to and calculations of “learning centers” do not include the franchised schools operated under the brand of Global Education;

 

    “ordinary shares” prior to the completion of this offering refers to our ordinary shares, par value US$0.00005 per share, carrying one vote per share;

 

    “RMB” or “Renminbi” refers to the legal currency of China;

 

    “school” or “schools,” with respect to our acquisitions and business, refers to (i) entities providing K-12 tutoring services and study-abroad test preparation services which are required to obtain the private school operation permits in China, and (ii) entities providing study-abroad consulting services or online education services in China;

 

    “student enrollments” refers to the cumulative total number of courses registered and paid for by our students during a given period of time; if one student enrolls in multiple courses, it will be counted as multiple student enrollments;

 

    “tier-1 cities” refers to cities with strong economic development and high per capita disposable income, including Beijing, Shanghai, Guangzhou and Shenzhen;

 

    “tier-2 cities” refers to capital cities in 30 provinces and certain economically developed prefecture-level cities;

 

    “training institution” or “training institutions,” refers to the learning centers providing K-12 tutoring services or study-abroad test preparation services, which are registered as corporate or private non-enterprise entities with relevant PRC government authorities;

 

    “U.S. dollars,” “US$” or “dollars” refers to the legal currency of the United States;

 

    “variable interest entity,” “VIE” or “Puxin Education” refers to Puxin Education Technology Group Co., Ltd., which is a PRC company in which we do not have equity interests but whose financial results have been consolidated into our consolidated financial statements in accordance with U.S. GAAP due to our having effective control over, and our being the primary beneficiary of, such entity;

 

    “we,” “us,” “our company,” “our,” or “Puxin Limited” refers to Puxin Limited, a Cayman Islands company and its subsidiaries, and unless the context requires otherwise, includes its VIE and VIE’s subsidiaries.


 

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The translations from RMB to U.S. dollars and from U.S. dollars to RMB in this prospectus were made at a rate of RMB6.9430 to US$1.00, the exchange rates set forth in the H.10 statistical release of the Federal Reserve Board on December 30, 2016. We make no representation that the RMB or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all. On February 2, 2018, the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board for RMB was RMB6.2984 to US$1.00.



 

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THE OFFERING

 

Offering price

We currently estimate that the initial public offering price will be between US$             and US$             per ADS.

 

ADSs offered by us

             ADSs (or              ADSs if the underwriters exercise their over-allotment option in full).

 

Ordinary shares outstanding immediately after this offering

             ordinary shares (or              ordinary shares if the underwriters exercise their over-allotment option in full).

 

ADSs outstanding immediately after this offering

             ADSs (or              ADSs if the underwriters exercise their over-allotment option in full).

 

The ADSs

Each ADS represents              ordinary shares, par value US$0.00005 per share.

 

  The depositary will hold the ordinary shares underlying your ADSs. You will have rights as provided in the deposit agreement, the form of which is filed as an exhibit to the registration statement that includes this prospectus.

 

  If we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares, after deducting its fees and expenses.

 

  You may turn in your ADSs to the depositary in exchange for ordinary shares. The depositary will charge you fees for any exchange.

 

  We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended.

 

  To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, the form of which is filed as an exhibit to the registration statement that includes this prospectus.

 

Over-allotment option

We have granted to the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to an additional              ADSs.

 

Use of proceeds

Our net proceeds from this offering will be approximately US$             million, assuming an initial public offering price per ADS of US$            , the midpoint of the estimated public offering price range, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and assuming no exercise of the underwriters’ over-allotment option.


 

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  We intend to use the net proceeds from this offering for the following purposes:

 

    [financing potential strategic acquisitions and launch of new schools in China];

 

    [marketing and brand promotion];

 

    [upgrading our information technology systems and promote online platforms]; and

 

    the remaining amount to fund [working capital and for other general corporate purposes].

 

  See “Use of Proceeds” for additional information.

 

Lockup

We, our officers and directors, [certain of our employees, certain of our shareholders and certain option and warrant holders] have agreed with the underwriters, without the prior written consent of [the underwriters], not to sell, transfer, dispose of or hedge any of our ordinary shares, ADSs, or any securities convertible into or exchangeable for our ordinary shares for a period of 180 days after the date of the prospectus. See “Shares Eligible for Future Sale” and “Underwriting” for more information.

 

Proposed [NYSE/NASDAQ] symbol

We [intend to apply/have applied] to have the ADSs listed on the [NYSE/NASDAQ] under the symbol “            .” Our ADSs and ordinary shares will not be listed on any other stock exchange or traded on any automated quotation system.

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of The Depository Trust Company on             , 2018.

 

Depositary

 

[Reserved ADSs

At our request, the underwriters have reserved for sale, at the initial public offering price, up to              ADSs offered by this prospectus to our directors, officers, employees, business associates and related persons. We do not know if these persons will choose to purchase all or any portion of these reserved ADSs, but any purchases they do make will reduce the number of ADSs available to the general public. Any reserved ADSs not so purchased will be offered by the underwriters to the general public on the same terms as the other ADSs.]

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of risks that you should carefully consider before investing in our ADSs.


 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

We present below our summary consolidated financial data for the period indicated. The following summary consolidated statement of operations data for the year ended December 31, 2016 and the summary consolidated balance sheet data as of December 31, 2016 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

The summary consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical results are not necessarily indicative of our results for any future periods.

Consolidated Statements of Operations Data

 

     For the Year Ended December 31,  
     2016  
     RMB      US$  
     (in thousands)  

Net revenues

     439,181        63,255  

Cost of revenues

     257,995        37,159  
  

 

 

    

 

 

 

Gross profit

     181,186        26,096  
  

 

 

    

 

 

 

Operating expenses:

     

Selling expenses (including share-based compensation expenses of RMB991)

     123,370        17,769  

General and administrative expenses (including share-based compensation expenses of RMB50,272)

     185,496        26,717  
  

 

 

    

 

 

 

Total

     308,866        44,486  
  

 

 

    

 

 

 

Operating loss

     (127,680      (18,390
  

 

 

    

 

 

 

Interest income

     464        67  

Loss before income taxes

     (127,216      (18,323

Income tax expenses

     388        56  
  

 

 

    

 

 

 

Net loss

     (127,604      (18,379
  

 

 

    

 

 

 

Less: Net loss contributable to noncontrolling interest

     (48      (7

Net loss attributable to equity shareholders of Puxin Education Technology Group Co., Ltd.

     (127,556      (18,372


 

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Consolidated Balance Sheet Data

 

     As of December 31,  
     2016  
     RMB      US$  
     (in thousands)  

Current assets

     

Cash and cash equivalents

     100,109        14,419  

Prepaid expenses and other current assets

     36,262        5,223  

Amounts due from a related party

     9        1  

Total current assets

     136,380        19,643  
  

 

 

    

 

 

 

Non-current assets

     

Restricted cash

     5,409        779  

Property, plant and equipment, net

     33,723        4,857  

Intangible assets

     55,167        7,946  

Goodwill

     346,972        49,974  

Deferred tax assets

     637        92  

Rental deposit

     15,829        2,280  

Total non-current assets

     457,737        65,928  
  

 

 

    

 

 

 

Total assets

     594,117        85,571  
  

 

 

    

 

 

 

Accrued expenses and other current liabilities

     173,395        24,975  

Income taxes payable

     2,925        421  

Deferred revenue

     318,319        45,847  

Amounts due to related parties

     3,048        439  

Deferred tax liabilities

     13,734        1,978  

Total liabilities

     511,421        73,660  
  

 

 

    

 

 

 

Total mezzanine equity

     120,000        17,284  
  

 

 

    

 

 

 

Total shareholders’ deficit

     (37,202      (5,358
  

 

 

    

 

 

 

Non-controlling interests

     (102      (15
  

 

 

    

 

 

 

Total deficit

     (37,304      (5,373
  

 

 

    

 

 

 

Total liabilities, mezzanine equity and total shareholders’ deficit

     594,117        85,571  

Non-GAAP Financial Measures

To supplement our consolidated financial statements which are presented in accordance with U.S. GAAP, we also use adjusted EBITDA and adjusted net loss as additional non-GAAP financial measures. We present these non-GAAP financial measures because they are used by our management to evaluate our operating performance. We also believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our consolidated results of operations in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies.

Adjusted EBITDA and adjusted net loss should not be considered in isolation or construed as an alternative to net loss or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to compare the historical non-GAAP financial measures with the most directly comparable GAAP measures. Adjusted EBITDA and adjusted net loss presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.



 

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Adjusted EBITDA represents net loss, which excludes depreciation, amortization, interest expenses and income tax expenses, before share-based compensation expenses. The table below sets forth a reconciliation of our net loss to adjusted EBITDA for the period indicated:

 

     For the Year Ended December 31,  
     2016  
     RMB      US$  
     (in thousands)  

Net loss

     (127,604      (18,379

Add:

     

Income tax expenses

     388        56  

Depreciation of property, plant and equipment

     3,735        538  

Amortization of intangible assets

     10,158        1,463  

EBITDA

     (113,323      (16,322

Add:

     

Share-based compensation expenses

     51,263        7,383  
  

 

 

    

 

 

 

Adjusted EBITDA

     (62,060      (8,939
  

 

 

    

 

 

 

Adjusted net loss represents net loss before share-based compensation expenses. The tables below set forth a reconciliation of our net loss to adjusted net loss for the period indicated:

 

     For the Year Ended December 31,  
     2016  
     RMB      US$  
     (in thousands)  

Net loss

     (127,604      (18,379

Add:

     

Share-based compensation expenses

     51,263        7,383  
  

 

 

    

 

 

 

Adjusted net loss

     (76,341      (10,996
  

 

 

    

 

 

 

Key Operating Data

The following table presents our key operating data for the periods indicated:

 

     For the Year Ended December 31,  
     2016     2017  

Student enrollments(1)

    

K-12 tutoring services

     451,353       1,238,070  

Study-abroad tutoring services

     3,592       37,653  

Number of learning centers(2)

     231       400  

K-12 group class student retention rate(3)

     65.1     70.1

K-12 course withdrawal rate(4)

     4.7     4.7

 

(1) Refers to the cumulative total number of courses registered and paid for by our students during a given period of time; if one student enrolls in multiple courses, it will be counted as multiple student enrollments.
(2) Refers to the total number of locations of our premises providing educational services.
(3) Refers to the number of students who continue to enroll in K-12 tutoring group class courses (excluding promotional programs) at schools operating under our management for over 12 months after completing a K-12 tutoring group class course in a particular period as a percentage of the total number of students who complete K-12 tutoring group class courses during the same period.
(4) Refers to the number of students withdrawing from a K-12 course as a percentage of the total number of students enrolled in that course at the beginning.


 

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RISK FACTORS

Investing in the ADSs entails a significant level of risk. Before investing in the ADSs, you should carefully consider all of the risks and uncertainties mentioned in this section, in addition to all of the other information in this prospectus, including the financial statements and related notes. We may face additional risks and uncertainties aside from the ones mentioned below. There may be risks and uncertainties that we are unaware of, or that we currently do not consider material, that may become important factors that adversely affect our business in the future. Any of the following risks and uncertainties could have a material adverse effect on our business, financial condition, results of operations and prospects. In such case, the market prices of the ADSs could decline and you may lose part or all of your investment.

Risk Factors Related to Our Business and Industry

We have limited operating history and our historical financial and operating results, growth rates and profitability may not be indicative of future performance.

We began to provide K-12 tutoring services in May 2015 and study-abroad tutoring services in June 2015. In 2016 and 2017, we had 451,353 and 1,238,070 student enrollments in our K-12 courses and 3,592 and 37,653 student enrollments in our study-abroad tutoring programs, respectively. Despite the rapid growth in our business size and operation scale in the recent years, we incurred operating losses of RMB127.7 million (US$18.4 million) in 2016. We expect that both our cost and our operating expenses will increase as we continue our business expansions and that we may face difficulties in achieving or maintaining profitability. As we plan to continue to expand our business, we may need to devote substantial resources to planning for acquisitions of new schools or entities, integrating newly acquired schools, upgrading our services and programs and marketing our brands and recruiting teachers. Any failure to realize anticipated revenue growth could result in further operating losses. Thus, we cannot assure you that we will achieve or maintain profitability or that we will not incur losses in the future.

We may not be able to effectively manage our business expansion and increasingly complicated operations and successfully integrate businesses we acquire, which could harm our business.

We have expanded rapidly through both acquisitions and internal growth, and we plan to continue to expand our operations in different geographic areas as we address growth in our customer base and market opportunities. Since the commencement of our operations in May 2015, the number of our directly operated learning centers increased to 231 and 400 as of December 31, 2016 and 2017, respectively. Our rapid expansion has resulted, and will continue to result, in substantial demands on our management, personnel, operational, technological and other resources. The sustainable post-acquisition organic growth is largely dependent on our ability to integrate operations, system infrastructure and management philosophies of acquired schools. The integration of acquired schools is extremely complicated and time-consuming and requires significant resource commitment, standardized integration process, and adequate planning and implementation. The main challenges involved in integrating acquired schools include the following:

 

    implementing standardized integration process and performance management systems to ensure management philosophies, group-wide strategies and evaluation benchmarks can be effectively carried out at each acquired school;

 

    demonstrating to students of our acquired schools that the acquisitions will not result in adverse changes in the service quality and business focus;

 

    retaining qualified education professionals of our acquired schools;

 

    integrating and streamlining different system infrastructure;

 

    consolidating service offerings of different acquired schools;

 

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    preserving strategic, marketing or other important relationships of the acquired schools;

 

    coordinating and optimizing research and development activities to launch new products and technologies with reduced cost; and

 

    integrating our data management system in newly acquired schools.

We may not successfully integrate the schools we acquire in a timely manner and may not effectively and efficiently manage our expansion, which would have a material adverse effect on our financial condition and results of operations.

In addition, we need to be registered as the sponsor or shareholders of sponsor companies of the acquired schools. We are in the process of being registered with local authorities as the sponsor or shareholders of sponsor companies of ten acquired schools. In July 2017, we entered into an equity transfer agreement to acquire 100% equity interest in ZMN International Education Consulting (Beijing) Co., Ltd., or ZMN Education, and we have not yet completed all the necessary registrations with local government authorities as the shareholder of ZMN Education. Although pursuant to our acquisition agreements with original sponsors or shareholders of the acquired schools, the original sponsors or shareholders have obligations to cooperate with us to complete such registrations with local competent authorities, we cannot assure you that we are able to complete such registration in a timely manner.

Failure to attract and retain students to enroll in our courses and study-abroad consulting programs may have a material adverse impact on our business and prospects.

The success of our business depends heavily on the number of student enrollments in our courses and study-abroad consulting programs. Our ability to continue to attract students to enroll in our courses and consulting programs is critical to the continued success and growth of our business. This ability is dependent on a variety of factors, including our ability to acquire schools that create synergies and complement our businesses, develop new programs and improve our existing programs to respond to changes in market trends and student demand, continually develop high-quality educational content and consultation services, expand our geographic reach, manage our growth while maintaining consistent and high teaching quality, effectively market our programs to a broader base of prospective students and respond effectively to competitive pressures.

Our ability to retain existing students and their parents by improving students’ academic performance and delivering a satisfactory learning experience is also critical to the success of our business. Our ability to improve the academic performance of our students is largely dependent upon the learning ability, attitude, efforts and time and resource commitments of each student, which are beyond our control. Students may feel dissatisfied with our services or fail to perform up to expectation after attending our programs. In addition, our programs may not be able to satisfy all of our students or their parents’ requirements. Satisfaction with our services may be affected by a number of factors, many of which may not relate to the quality or effectiveness of our course or consultancy program curriculum and content. If students or parents feel that we are not providing them the learning experience they have subscribed for, they may choose to withdraw from or not to renew their existing courses. For our K-12 group classes and study-abroad test preparation courses, we usually offer refunds for remaining classes to students who decide to withdraw from a course. For our K-12 personalized courses, we offer refunds to students who decide to withdraw from a course for all the remaining classes. For our study-abroad consulting services, we usually offer refunds of the consulting fees to the students who fail to gain any admission or obtain the relevant visa, which is consistent with market practices. Although we have not experienced any significant refund requests in the past, if an increasing number of students request refunds, our cash flow, revenues and results of operations may be adversely affected. In addition, the students who fail to improve their performance after attending our programs or have unsatisfactory learning experiences with us may also choose not to refer other students to us, which in turn may adversely affect the number of student enrollments.

 

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If we are unable to attract and retain students to enroll in our courses and study-abroad consulting programs, our revenues may decline, which may have a material adverse effect on our business, financial condition and results of operations.

We may not be able to effectively identify or pursue targets for acquisitions as we did in the past several years, and even if we are able to identify suitable targets, we may not be able to complete such transactions in a cost-effective manner, which may cause us to lose anticipated benefits from such acquisitions.

Historically, we have significantly expanded our network by selected acquisitions of new schools and businesses. We expect to continue to selectively acquire or invest in new schools or businesses that complement our existing operations. We may not, however, be able to identify suitable candidates for acquisitions or investments in the future due to a decrease in the amount of small and medium-sized targets or an increase in the number of acquirers. Even if we are able to identify suitable candidates, we may be unable to complete a transaction on terms commercially acceptable to us or finance the transaction. If we fail to identify appropriate candidates or complete the desired transactions, our growth and expansion may be impeded.

We are subject to uncertainties brought by the amended Law on the Promotion of Private Education Law of the PRC.

Our business is regulated by, among others, the Law on the Promotion of Private Education of the PRC. On November 7, 2016, the Standing Committee of the National People’s Congress promulgated the Decision on Amending the Law on the Promotion of Private Education of the PRC, or the Amended Private Education Law, which became effective on September 1, 2017. The Amended Private Education Law classifies private schools into non-profit schools and for-profit schools by whether they are established and operated for profit-making purposes. The sponsors of private schools may at their own discretion choose to establish non-profit or for-profit private schools, but are not allowed to establish for-profit private schools that are engaged in compulsory education.

On December 30, 2016, the Implementation Regulations for Classification Registration of Private Schools, or the Classification Registration Regulations, were promulgated by five PRC government authorities, including the MOE. According to the Classification Registration Regulations, the existing private schools are required to choose to register as non-profit or for-profit private schools with competent government authorities. If a private school elects to register as for-profit school, it is required to (i) undertake financial liquidation, (ii) clarify the ownership of land, school premises and properties, (iii) pay relevant taxes and duties, and (iv) re-apply for a new private school operation permit and re-register with relevant authorities. See “Regulation—Regulations on Private Education in the PRC—Implementation Regulations for Classification Registration of Private Schools.”

We expect that the Amended Private Education Law, accompanied with its relevant implementation rules and regulations, will bring significant changes to the compliance regime that we are subject to, including but not limited to school registration, student recruitment, premises conditions and qualification requirements for teachers. We plan to register all of our training institutions as for-profit private schools pursuant to the Amended Private Education Law and obtain new licenses and permits or renew existing licenses and permits. However, the local specific requirements and procedures for when and how existing training institutions can be registered as for-profit schools and complete filings for their tutoring branches remain unclear in most cities in China. As of the date of this prospectus, it remains uncertain how the Amended Private Education Law will be interpreted and implemented and impact our business operations. There is no assurance that we will be able to operate our business in full compliance with the Amended Private Education Law or any relevant regulations in a timely manner or at all. Should we fail to fully comply with the Amended Private Education Law or any relevant regulations as interpreted by the relevant government authorities, we may be subject to administrative fines or penalties, an order to suspend the operation and refund the tuition fee or other negative consequences which could materially and adversely affect our brand name and reputation, and our business, financial condition and results of operations.

 

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We are required to obtain various operating licenses and permits and to make registrations and filings for our tutoring services in China; failure to comply with these requirements may materially and adversely affect our business operations.

Under PRC laws and regulations, training institutions are required to obtain a number of licenses, permits and approvals from, and make filings or complete registrations with, relevant government authorities in order to provide tutoring services. Pursuant to the Amended Private Education Law which became effective on September 1, 2017 and the Implementing Rules on the Supervision and Administration of For-Profit Private Schools which became effective on September 1, 2017, or the Implementing Rules, each training institution that operates for profit shall be registered as a corporate entity and apply for the private school operation permit and obtain a business license. In addition, their tutoring branches are required to complete the required filings for permits or registrations.

As of the date of this prospectus, we have 100 training institutions which are required to obtain school operation permits and 319 tutoring branches which are required to complete filings for permits or registrations. Among these training institutions and tutoring branches, 24 training institutions do not possess the private school operation permits and 238 tutoring branches have not completed the required filings with the local education authorities. While we intend to obtain the required permits and licenses pursuant to the Amended Private Education Law and the Implementing Rules, most of local government authorities have not begun to accept applications or issue permits for for-profit training institutions or accept filings for tutoring branches as of the date of this prospectus because the local implementing rules and regulations of the Amended Private Education Law have not been published to the public and the application procedures have not been formulated by local government authorities in most cities. See “Regulations—Regulations on Private Education in the PRC—Law on the Promotion of Private Education of the PRC and Implementation Rules for the Law on the Promotion of Private Education of the PRC” for further details on the license requirements applicable to our training institutions and tutoring branches.

Given the significant amount of discretion owned by local PRC authorities in interpreting, implementing and enforcing relevant rules and regulations, as well as other factors beyond our control, we may not be able to obtain and maintain all requisite licenses, permits, approvals and filings or pass all requisite assessments. If any of our current or future training institutions or their tutoring branches fail to receive the requisite licenses, permits and approvals, make the necessary filings, or complete all requisite registrations, that training institutions or their tutoring branches may be subject to penalties. These may include fines, orders to promptly rectify the non-compliance, or if the non-compliance is deemed by the regulators to be serious, the school may be ordered to return tuition and fees collected and pay a multiple of the amount of returned tuition and fees to regulators as a penalty or may even be ordered to cease operations.

We face intense competition in our industry, and if we fail to compete effectively, we may lose our market share and our profitability may be adversely affected.

The private education market in China is highly fragmented and competitive, and we expect competition to persist and intensify. We face competition in each type of services we offer, including in on-line and off-line forms, and in each geographic market in which we operate.

Some of our competitors may have more resources than we do and may be able to devote greater resources than we can to the development, promotion and sale of their programs, services and products and respond more

 

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quickly than we can to changes in student needs, exam materials, admission standards, market trends or new technologies. As a result, our student enrollments may decrease due to intense competition. In addition, in contrast to our comprehensive program offerings, some of our competitors focus on a single area of our business, and may be able to devote all of their resources to that business line. These companies may be able to more quickly adapt to changing technology, student preferences and market conditions in these markets than we can. As a result, certain of our competitors may, therefore, have a competitive advantage over us with respect to these business areas.

The increasing use of the Internet and advancement in technologies, such as web video conferencing and online testing simulators, are eliminating geographic and physical facility-related entry barriers to providing private education services. Although we have launched online services for our businesses and plan to expand our online service offerings, the pace at which we promote and expand our online services may not be as fast as our competitors. As a result, many international brands or local smaller service providers may be able to use the Internet to quickly and cost-effectively offer their programs, services and products to a large number of students with less capital expenditure than previously required. Consequently, we may be required to reduce course fees or increase spending in response to competition in order to retain or attract students or pursue new market opportunities, which could result in a decrease in our revenues and profitability. We will also face increased competition as we expand our operations. We cannot assure you that we will be able to compete successfully against current or future competitors. If we are unable to maintain our competitive position or otherwise respond to competitive pressure effectively, we may lose our market share and our profitability may be adversely affected.

We may not be able to continue to recruit, train and retain a sufficient number of qualified teachers and consultants.

Teachers and study-abroad consultants help us maintain the quality of our education and services, as well as our brand and reputation. Our ability to continue to attract teachers and consultants with the necessary experience and qualifications is a key factor in the success of our operations. We seek to hire experienced teachers and consultants who are dedicated to teaching and are able to follow our teaching and consulting service protocols and deliver effective instructions. The market for teacher recruitment in China is competitive, and we must also provide continued training to ensure that our teachers and consultants stay abreast of changes in student demands, teaching methodologies and other necessary changes. Further, the Measures of Punishment for Violation of Professional Ethics of Elementary and Secondary School Teachers, promulgated by the Ministry of Education, or the MOE, on January 11, 2014, prohibits teachers of elementary and secondary schools from providing paid tutoring in schools or in out-of-school training institutions. Some of our part-time teachers are teachers of public schools. If such part-time teachers cannot continue to teach courses in our schools due to the foregoing regulation, we may have to recruit full-time teachers to maintain our class offerings. In addition, we hire foreign teachers and we need to apply for work and residence permits for them in China. If we cannot obtain such permits for our foreign teachers, we may have to terminate our employment relationship with them.

In order to recruit experienced full-time teachers, we must provide candidates with competitive compensation packages and offer attractive career development opportunities. Although we have not experienced major difficulties in recruiting or training qualified teachers and consultants in the past, we cannot guarantee we will be able to continue to recruit, train and retain a sufficient number of qualified teachers and consultants in the future, which may have a material adverse effect on our business, financial condition and results of operations.

Our business and financial performance may suffer if we fail to successfully develop and launch new education services.

The future success of our business depends partly on our ability to develop new education services. The planned timing or launch of new education services is subject to risks and uncertainties. Actual timing may differ materially from any originally proposed timeframe. For example, we only recently launched certain web-based

 

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and mobile-based services such as Puxin Superior Classes, Puxin Dual-Teacher Classrooms, Recorded Lectures, foreign teacher classes and Puxin Teacher & Student App. While we have not experienced material technological difficulties in these newly launched services, we cannot assure you there will not be system outages or errors for these new online services in the future. Unexpected operational, technical or other issues could delay or prevent the launch of one or more of our new education services or programs. In addition, significant investment of human capital, financial resources and management time and attention may be required to successfully launch features of our new education programs. If we fail to manage the expansion of our portfolio of education services cost-effectively, our business could be negatively affected.

We cannot assure you that any of our new services will achieve market acceptance or generate incremental revenue or that our operation of such new services or programs will comply with our business scope or applicable licensing requirements. If our efforts to develop, market and sell our new education services and programs to the market are not successful, our business, financial position and results of operations could be materially and adversely affected.

We have limited operating history with our study-abroad test preparation courses and study-abroad consulting services. Our newer courses and services may not be as attractive as our K-12 tutoring services.

Prior to the acquisitions of Global Education and ZMN Education in 2017, a significant majority of our revenue and operations was derived from K-12 tutoring services. We have limited operating history with our study-abroad test preparation courses and study-abroad consulting services. As we plan to continue to dedicate resources to integrating and expanding our study-abroad test preparation courses and study-abroad consulting services, our efforts to improve, expand, and promote our study-abroad test preparation courses and study-abroad consulting services may not be successful and we may not achieve comparable profitability to our K-12 tutoring services, or at all.

We may not be able to improve the content of our existing courses or to develop new courses on a timely basis and in a cost-effective manner.

We regularly and constantly update the content of our existing courses and develop new courses to meet students’ demands and the latest market trends. We also closely follow any changes in curriculum, examination systems, testing materials, admission standards and technologies. Admission and assessment tests in China and overseas countries constantly undergo changes and development in terms of tested subjects, skill focus, question types and manners of test administration. For example, most of the major English tests, such as TOEFL and IELTS, are increasingly being offered in a computer-based testing format, and there are certain universities in China that have been allowed to admit a small portion of their students through independently administered examinations and admission procedures. These changes require us to continually update and enhance our course materials and our teaching methods. Furthermore, offering new courses or modifying existing courses may require us to have more input into curriculum and course development, train new teachers or provide continued training to existing teachers, increase marketing efforts and re-allocate resources. We may have limited experience with new course content and may need to modify our systems to incorporate new courses into our existing course offerings. If we cannot respond effectively to changes in market demands or launch new courses on a timely basis and in a cost-effective manner, our results of operations and financial condition could be adversely affected.

Our success depends on the continuing efforts of our senior management team and other key personnel and our business may be harmed if we lose their services.

Our success depends in part on the continued application of services, efforts and motivation of our senior management team and key personnel, in particular, our founder, chairman and chief executive officer, Mr. Yunlong Sha. If one or more of our senior management members or key personnel are unable to continue in their present positions, we may not be able to find suitable replacements, and our business may be disrupted.

 

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We will need to continue to hire additional personnel as our business grows. A shortage in the supply of personnel with requisite skills could negatively impact our ability to manage our existing products and services, launch new services and expand our operations. Competition for experienced management personnel in the private education industry is intense with a small pool of qualified candidates, and we may not be able to retain services of our senior executives, experienced principals of our schools or other key personnel, or attract and retain high-quality senior executives or key personnel in the future. Although we have established an internal training and promotion system to develop good candidates for senior management team and principals, the number of these candidates and the speed of training these candidates to be capable and qualified to their prospective positions may not align with our rapid growth. In addition, if any member of our senior management team, principals or any of our other key personnel joins a competitor or forms a competing company, we may lose teachers, students and staff members. Each of our executive officers and key employees is subject to the duty of confidentiality and non-competition restrictions. However, if any disputes arise between any of our senior executives or key personnel and us, it may be difficult to successfully pursue legal actions against these individuals because of the uncertainties in China’s legal system.

Any damage to the brand and reputation of our learning centers may adversely affect our overall business, prospects, results of operations and financial condition.

We believe that market awareness of our “Puxin,” “Global Education,” “ZMN Education,” and other brands and our solid reputation in the K-12 tutoring and study-abroad tutoring industry have contributed significantly to the success of our business. We also believe that maintaining and promoting our brands are critical to sustaining our competitive advantage. Our brand and reputation could be adversely affected under many circumstances, including the following:

 

    our students are not satisfied with our services and their learning experience;

 

    we fail to maintain the quality and consistency of our service standards as we expand our course offerings into different subjects and extend our geographic or product reach;

 

    our learning center facilities do not meet the standards expected by parents and students;

 

    our teachers, study-abroad consultants or staff fail to provide students and their parents with prompt feedback and adequate attention;

 

    our teachers, study-abroad consultants or staff behave or are perceived to behave inappropriately or illegally;

 

    we lose a license, permit or any other governmental authorization to operate a learning center; and

 

    operators of learning centers with lower quality abuse our brands or those with brand names similar to ours conduct fraudulent activities and create confusion in the market.

The likelihood of any above-mentioned circumstances increases as we expand our network of learning centers. These events could influence the perception of our learning centers not only by our students and their parents, but also by other constituencies in the education sector and the general public.

In addition, Global Education also has franchised schools. Our control over our franchisees is based on the contracts with them and our standardized supervision and monitoring procedures, which may not be as effective as direct ownership. Although we maintain comprehensive and rigorous supervisory procedures, set standards to guide our franchisees on operations of their learning centers and require all teachers and management personnel of our franchise teaching facilities to complete our mandatory trainings, our franchisees manage their businesses independently and are therefore responsible for the day-to-day operation of the franchise facilities. Furthermore, it is the franchisees and their teachers and employees that interact directly with students and their parents. In the event of any unsatisfactory performance or illegal actions by the franchisees or their employees or any incidents

 

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or operational issues in the franchise facilities, we may suffer reputational or financial damage which in turn might adversely affect our business as a whole. As we mainly rely on word-of-mouth referrals to attract prospective students, if our brand name or reputation deteriorates, our overall business, prospects, financial condition and results of operations could be materially and adversely affected.

Furthermore, third-party service providers with whom we have a business relationship could damage our reputation and brands due to their unsatisfactory or illegal actions arising from the interactions with our students. We have close cooperation relationships with third-party service providers, such as printers that provide services to print course materials, organizations that host events or organize mathematics or other science competitions, and overseas education service providers that provide overseas study tours and summer and winter camps. These third-party service providers may directly interact with our students in providing their services. Although we selectively establish cooperation relationships with reliable and reputational service providers, we cannot assure you that these third-party service providers will not conduct any unsatisfactory, inappropriate or illegal actions that will damage our reputation and brands, which consequently could cause our business to be harmed.

Accidents or injuries suffered by our students or other people on our premises may adversely affect our reputation, subject us to liability and cause us to incur substantial costs.

In the event of accidents or injuries or other harm to students or other people on our premises, including those caused by or otherwise arising from the actions or negligence of our employees or contractors on our premises, our facilities may be perceived to be unsafe, which may make parents unwilling to allow their children to attend our classes. We could also face negligence claims for inadequate maintenance of our facilities or lack of supervision of our teachers and other employees. Although we have not encountered any injury to our students on our premises that has materially and adversely affected our business or financial condition, we cannot assure you that there will not be any in the future. Our insurance coverage may not be adequate to fully protect us from all kinds of claims. See “—We have limited liability insurance coverage and do not carry business disruption insurance.” A liability claim against us or any of our employees or independent contractors could adversely affect our reputation and ability to attract and retain students. Even if such claim is unsuccessful, it could create unfavorable publicity, cause us to incur substantial expenses and divert the time and attention of our management.

Failure to control rental costs, obtain leases at desired locations at reasonable prices or comply with relevant regulation regarding our leased premises could materially and adversely affect our business.

Substantially all of our offices and learning centers are presently located on leased premises. At the end of each lease term, we must negotiate an extension of the lease. If we are not able to negotiate an extension on terms acceptable to us, we will be forced to move to a different location, or the rent may increase significantly given that the real estate prices in China have kept rising for years. This could disrupt our operations and adversely affect our profitability. We also compete with many other businesses for sites in certain highly desirable locations and some landlords may have entered into long-term leases with our competitors for prime locations. As a result, we may not be able to obtain new leases at desirable locations or renew our existing leases on acceptable terms or at all, which could adversely affect our business.

We have not been able to receive copies of the valid title certificates or proof of authorization to lease properties to us from the lessors of some of our leased properties. Our use of some of leased properties does not comply with the approved use stipulated in the title certificates of such properties or the lease agreements. As of the date of this prospectus, we are not aware of any actions, claims or investigations threatened against us or our lessors with respect to the defects in our leasehold interests. However, if any of our leases are terminated as a result of challenges by third parties or governmental authorities for lack of title certificates or proof of authorization to lease, we do not expect to be subject to any fines or penalties but we may be forced to relocate the affected learning center and incur additional expenses relating to such relocation. If we fail to find suitable

 

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replacement sites in a timely manner or on terms commercially acceptable to us, our business and results of operations could be materially and adversely affected.

In addition, under the applicable PRC laws and regulations, we are required to register and file executed leases with the relevant government authorities, but we have failed to do so in certain instances. While the lack of registration will not affect the validity and enforceability of the lease agreements under the PRC Law, a fine ranging from RMB1,000 to RMB10,000 may be imposed on the parties for each non-registered lease, if the requirement of registration failed to be fulfilled after a period of time demanded by a relevant local authority.

A significant portion of our training institutions are not in compliance with fire safety regulations.

According to the PRC fire safety laws and regulations, construction projects and decoration projects are generally required to obtain fire safety permits or complete fire safety filings except for certain statutory exemptions. See “Regulations—Regulations on Fire Safety” for further details on the fire safety regulations applicable to our business premises. As of the date of this prospectus, we have leased 584 business premises for our training institutions and their tutoring branches, and we have complied with the foregoing fire safety permit and filing requirements for 394 of these premises. We have arranged inspections for 60 premises by local fire control authorities and obtained written records of passing the fire safety inspections. As advised by Tian Yuan Law Firm, our PRC counsel, for these 60 premises, the risk that we will be subject to material administrative penalties imposed by such local fire control authorities for our failure to comply with the fire safety permit or filing requirement is relatively low. Besides, the construction units have obtained the fire safety permits in connection with the construction of the buildings where another 79 premises are located, and we are in the process of completing further fire safety filings with respect to the interior decoration of such premises, which represented             % of our revenues in 2017. However, as of the date of this prospectus, we have neither obtained the fire safety permits or written evidence for passing the fire safety inspection nor made the requisite fire safety filings for the remaining 51 leased business premises, which represented             % of our revenues in 2017. We cannot assure you that we may be able to obtain the fire safety permits, rectify our non-compliance or otherwise fully comply with the relevant fire safety laws and regulations at all of our current locations in a timely manner or at all, and we may be subject to fines and orders to rectify within a specified period of time or to suspend operations for our non-compliance. As a result, we may not be able to occupy certain of our current locations and may be ordered to relocate our operations to other locations that comply with the relevant fire safety laws and regulations, and we cannot assure you that such alternative locations will be available on commercially reasonable terms or at all, which could materially and adversely affect our business, results of operations and financial conditions.

In addition, according to PRC fire safety laws and regulations, venues for children’s activities generally may not be located above the third floor of a building, depending on its fireproof conditions. As of the date of this prospectus, 125 of our business premises for children’s activities, including certain sections of our K-12 and study-abroad programs that target children are located above the third floor of a building. Nevertheless, we have either complied with the fire safety filing requirement or arranged fire safety inspections by the local fire control authorities and obtained written records of passing the fire safety inspections for 55 business premises. We generated approximately             % of our revenues from the remaining 70 business premises in 2017. We may be subject to fines and orders to suspend operations if these 70 business premises are inspected and found to be in violation of the fire safety regulations, which could materially and adversely affect our business, results of operations and financial condition.

Moving training institutions and their tutoring branches in order to comply with fire safety regulations would require us to terminate or break our existing leases and pay any associated termination or breakage costs in addition to the costs of relocation, renovation and decoration, and it may also disrupt our scheduled courses and force us to postpone or cancel some courses and refund the related tuition fees, all of which could materially and adversely affect our financial results.

 

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We may face risks and uncertainties with respect to the licensing requirements for our online platforms.

We may be required to obtain additional licenses or permits for our operations because the interpretation and implementation of current PRC laws and regulations are still evolving, and new laws and regulations may also be promulgated. For example, the content we use on our websites and mobile apps, including course materials and audio-visual content, may be deemed as “Internet cultural products,” and our use of such content may be regarded as “Internet cultural activities.” Thus, our VIE and its subsidiaries may be required to obtain an Internet culture business operating license for provision of such content through our websites or mobile apps as currently there is no further official or publicly available interpretation of whether such content would be deemed “Internet cultural products.”

In addition, we offer certain audio-visual content on our websites as supplementary course materials. If the governmental authorities determine that our relevant activities fall within the definition of “Internet audio-visual program service” under the Administrative Measures Regarding Internet Audio-Visual Program Services, our VIE and its subsidiaries may be required to obtain a license for disseminating audio-visual programs through Internet. Moreover, we may be required to obtain the online publishing services permit for our online educational products, such as Puxin Superior Classes, Puxin Dual-Teacher Classrooms and GEDU online. We are in the process of applying for the Internet Content Provider License, or ICP License. If we are not able to obtain such licenses, we may further be subject to fines, legal sanctions or an order to suspend our on-line courses providing service.

No material fines or other penalties have been imposed on us for non-compliance with licensing requirements for our online platforms in the past. However, if we are not able to comply with all applicable legal requirements, we may be subject to fines, confiscation of the gains derived from our non-compliant operations, suspension of our non-compliant operations or revocation of the operation permits of the non-compliant schools, any of which may materially and adversely affect our business, financial condition and results of operations.

We may need to record a significant charge to earnings if our goodwill or intangible assets arising from acquisitions become impaired, which would adversely affect our results of operations.

In accordance with U.S. GAAP, we account for our acquisitions using the acquisition method of accounting, and such acquisitions have resulted in significant goodwill and intangible assets. These assets may become impaired in the future, which could have a material adverse effect on our results of operations following such acquisitions. We are required under U.S. GAAP to review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment annually, or more frequently, if facts and circumstances warrant a review. Factors that may be considered a change in circumstances indicating that the carrying value of our amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization and slower or declining growth rates in our industry. In the future, we may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, which could have a material adverse effect on our results of operations.

In 2016, we did not recognize any impairment loss in relation to goodwill or intangible assets arising from our acquisitions. In the future, we may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, which could have a material adverse effect on our results of operations.

If we fail to protect our intellectual property rights, our brand and business may suffer.

We consider our copyrights, trademarks, trade names and Internet domain names invaluable to our ability to continue to develop and enhance our brand recognition. Unauthorized use of our copyrights, trademarks, trade names and domain names may damage our reputation and brand. Our major brand names, logos and domain

 

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names are registered in China. Our proprietary curricula and course materials are protected by copyrights. Unauthorized use of any of our intellectual property by third parties may adversely affect our business and reputation. We rely on a combination of copyright, trademark and trade secrets laws and confidentiality agreements with our employees and contractors to protect our intellectual property rights. We also regularly monitor any infringement or misappropriation of our intellectual property rights. Nevertheless, third parties may still obtain and use our intellectual property without due authorization, and enforcement of intellectual property rights by Chinese regulatory agencies involves uncertainty. We may need to resort to litigation and other legal proceedings to enforce our intellectual property rights. Any such action, litigation or other legal proceedings could be difficult, costly and time-consuming and divert our management’s attention and resources. In addition, we cannot assure you that we will be able to enforce our intellectual property rights effectively or otherwise prevent others from the unauthorized use of our intellectual property. If we are unable to adequately protect our trademarks, copyrights and other intellectual property rights in the future, we may lose these rights, our brand name may be harmed and our business, financial condition and results of operations may be adversely affected.

We may encounter disputes from time to time relating to our use of the intellectual property of third parties.

We cannot assure you that our trademarks, logos, trade names, technologies, products, courseware, course materials or any intellectual property developed or used by us do not or will not infringe the intellectual property rights held by third parties. We and our schools have been involved in disputes with third parties claiming infringement of intellectual property rights by us, and we may be subject to such disputes in the future. On July 7, 2017, Beijing Global Education & Technology Co., Ltd., or Beijing Global Education, which we acquired in August 2017, received a letter issued by the legal counsel of IDP Education Limited, The Chancellor Masters and Scholars of the University of Cambridge Acting by the University of Cambridge Local Examination Syndicate and the British Council (collectively the “IDP Claimants”). In such letter, the IDP Claimants alleged that Beijing Global Education infringes their trademark rights and requested Beijing Global Education and all of its schools and learning centers to deregister and stop the use of any trademarks that contain the words of “IELTS,” “YASI,” “ LOGO ” and “ LOGO ” and remove these words from their trade names and logos. On July 24, 2017, Beijing Global Education sent a response letter to the IDP Claimants in which Beijing Global Education raised its arguments against certain of the IDP Claimants’ claims and agreed to conduct investigations on the trademarks used by its schools and learning centers. We are in the process of negotiating with the IDP Claimants to reach an agreement. As of the date of this prospectus, the IDP Claimants have not initiated any litigations or legal proceedings against Beijing Global Education or us. However, there is no assurance that we would eventually be able to reach an agreement with the IDP Claimants to resolve such claims or that the IDP Claimants would not initiate any litigations or legal proceedings against Beijing Global Education or us in the future.

In August 2017, Beijing Global Education received a cease-and-desist letter from Pearson (Beijing) Management Consulting Co., Ltd., or Pearson Beijing, alleging that Beijing Global Education and certain of its franchised schools have infringed the intellectual property of Pearson PLC, including but not limited to “ LOGO /Longman” trademarks and certain other trademarks and brands, and demanding that the infringers immediately cease the infringement. Beijing Global Education has subsequently ceased the alleged infringement and sent a letter to all franchise schools involving the use of the intellectual property of Pearson PLC, requesting them to cease the alleged infringement. We cannot guarantee that these franchise schools will cease the alleged infringement in a timely manner, or at all, or that our corrective measures will prove to be satisfactory to Pearson Beijing or Pearson PLC. As of the date of this prospectus, neither Pearson Beijing nor Pearson PLC has taken any further action, including legal proceedings, against Beijing Global Education or us for the alleged infringement. However, there is no assurance that Pearson Beijing or Pearson PLC would not initiate any legal proceedings against Beijing Global Education or us in the future.

If any of the above-mentioned parties or other third parities initiate litigation against us alleging infringement upon their intellectual property rights, defense against any of these or other claims would be both costly and time-consuming, and could significantly divert the efforts and resources of our management and other

 

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personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require us to seek licenses from third parties, pay ongoing royalties, or subject us to injunctions prohibiting the distribution and marketing of the relevant brand or services. To the extent that licenses are not available to us on commercially reasonable terms or at all, we may be required to spend considerable time and resources sourcing alternative technologies or designing alternative trademarks or brands, if any, or we may be forced to delay or suspend the sale of the relevant services or the promotion of the relevant brand. We may incur substantial expenses and require significant attention of management in defending against these third-party infringement claims, regardless of their merit. Protracted litigation could also result in our customers or potential customers deferring, reducing or canceling their use of our services. In addition, we could face disruptions to our business operations as well as damage to our reputation as a result of such claims, and our business, financial condition, results of operations and prospects could be materially and adversely affected.

Our business is subject to seasonal fluctuations, which may cause our results of operations to fluctuate from quarter to quarter and result in the volatility in the price of our ADSs.

Our industry generally experiences seasonality, primarily due to seasonal changes in service days and student enrollments. Seasonal fluctuations have affected, and are likely to continue to affect, our business. In general, we generate higher revenues during summer breaks as more students are enrolled in our courses. We also generally experience lower revenues in the first quarter as we deliver fewer classes during the winter breaks due to the Chinese New Year holiday and the relatively short length of winter breaks. Because we recognize revenues from K-12 tutoring courses and study-abroad test preparation courses based on the delivery of services, we expect our revenues in certain months to be negatively impacted by such seasonality factors. Our costs and expenses, however, do not necessarily correspond with changes in our student enrollments, service days or net revenues because we incur expenses and costs on marketing and promotion, teacher recruitment, teacher training and course development throughout the year. Overall, although the historical seasonality of our business has been relatively mild, we expect to continue to experience seasonal fluctuations in our results of operations. These fluctuations may result in volatility in and adversely affect the price of our ADSs.

Failure to make adequate contributions to various mandatory social security plans as required by PRC regulations may subject us to penalties.

PRC laws and regulations require us to pay several statutory social welfare benefits for our employees, including pensions, medical insurance, work-related injury insurance, unemployment insurance, maternity insurance and housing provident fund contributions. Local governments usually implement localized requirements as to mandatory social security plans considering differences in economic development in different regions. Our failure in making contributions to various mandatory social security plans and in complying with applicable PRC labor-related laws may subject us to late payment penalties. We may be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.

We have limited liability insurance coverage and do not carry business disruption insurance.

We are exposed to various risks associated with our business and operations, and we have limited insurance coverage. See “Business—Insurance” for more information. We are exposed to risks including, among other things, accidents or injuries in our learning centers, loss of key management and personnel, business interruption, natural disasters, terrorist attacks and social instability or any other events beyond our control. The insurance industry in China is still at an early stage of development, and as a result insurance companies in China offer limited business-related insurance products. We do not have any business interruption insurance or key-man life insurance. The coverage of our liability insurance may not be adequate to fully protect us from all kinds of claims, and we cannot guarantee that we will be able to obtain sufficient liability insurance in the future on commercially reasonable terms or at all. Any business disruption, legal proceeding or natural disaster or other

 

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events beyond our control could result in substantial costs and diversion of our resources, which may materially and adversely affect our business, financial condition and results of operations.

Any disruption or interruption to our information technology systems or a leak of student data could damage our reputation and disrupt our operations.

The successful development, stable operation and effective maintenance of our systems and information technology infrastructure, such as our CRM system, ERP system, Puxin Teacher & Student App and a variety of cloud-based online products and services, is critical to the attractiveness of our online and offline programs and the management of our business operations. Thus, any material breakdown of our information technology systems, any interruptions or malfunctions to our information technology systems or any loss of the right to use the programs licensed from third parties could cause interruption to our business. In addition, we would suffer economic and reputational damage if a technical failure of our systems causes a leak of student data, including identification or contact information. As of the date of this prospectus, our information systems have not encountered material errors or technical issues and there is no material leak of student data which could damage our reputation and disrupt our operations. If we encounter errors or other service quality or reliability issues, or if we are unable to design, develop, implement and utilize information systems, our ability to realize our strategic objectives and our profitability could be adversely affected, and may harm our reputation and brand names and materially and adversely affect our business and results of operations.

Our relationships with overseas education service providers may deteriorate.

We collaborate with various overseas publishers on content development and overseas schools and institutions to provide overseas study tours and summer and winter camps to students. For example, for our English for Children programs, we cooperated with Macmillan Younger Learners and introduced “Happy Campers” series of American English learning materials to provide memorable and positive learning experience for our students. These relationships allow us to offer more diverse programs and classes and charge a premium for the programs we offer with other overseas education service providers. We can also enhance our brand and reputation and have more exposure to international education methods and experiences through these relationships.

If our relationships with any of these overseas education service providers deteriorate or are otherwise damaged or terminated, or if the benefits we derive from these relationships diminish, whether as a result of our own actions, actions of our partners, actions of any third party, including our competitors, or of regulatory authorities or other entities beyond our control, our business, prospects, financial condition and results of operations could be adversely affected.

We operate schools and provide after-school education services under several brands, which may have a dilutive effect on brand recognition among our students and their parents.

We operate substantially all of our K-12 after-school tutoring schools and a small portion of our study-abroad tutoring schools under the co-brand names, such as “Puxin-YESSAT” and “Puxin-Fubusi.” We operate the majority of our study-abroad tutoring schools under multiple different brands, such as ZMN Education, Global Education and Milestone Education. Maintaining multiple brands may have a dilutive effect on brand recognition among our students and their parents and increase our overall marketing expenses as we need to allocate resources among different brands. In the long term, we intend to promote a unified brand “Puxin” to foster our corporate image, which represents the entire spectrum of education services we offer. We may seek to transition our co-brand names and different brands to “Puxin” in the future if the market responds favorably to our new corporate image. We cannot assure you, however, that our prospective students will embrace our new brand given its limited market exposure and recognition. We may incur significant financial resources for, and divert considerable management attention to, the integration of our existing brands with our new corporate image, which may adversely affect our business, results of operation and financial condition.

 

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We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

The education industry is vulnerable to health epidemics such as the outbreak of avian influenza, severe acute respiratory syndrome, or SARS, Ebola or other epidemics. Additionally, our business could be disrupted or otherwise adversely affected by severe weather conditions, such as snow, storm or hurricane, and natural disasters, such as earthquakes. These occurrences could cause cancelations of student enrollment and require the temporary or long-term closure of our learning centers while we may still remain obligated to pay rent and other expenses for these facilities. We may also face litigation and have to incur extra expenses if we are found negligent in the prevention and control of health epidemics in our facilities. Any outbreak of health epidemics and any occurrence of natural disasters in China therefore may severely disrupt our business operations and materially and adversely affect our liquidity, financial condition and results of operations.

If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately or timely report our results of operations or prevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In the course of auditing our consolidated financial statements for the year ended December 31, 2016, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting as well as other control deficiencies as of December 31, 2016, in accordance with the standards established by the Public Company Accounting Oversight Board of the United States.

The material weakness identified relates to our lack of comprehensive accounting policies and procedures manual in accordance with U.S. GAAP. We have implemented and are continuing to implement a number of measures to remedy this material weakness and the other control deficiencies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.” We have also adopted measures to improve our internal control over financial reporting. We cannot assure you, however, that these measures may fully address these deficiencies in our internal control over financial reporting or that we may conclude that they have been fully remedied.

Upon the completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the year ending December 31, 2018. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial

 

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reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. Generally speaking, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions.

We have granted and will continue to grant share options and other equity incentives in the future, which may result in increased share-based compensation expenses.

Puxin Education adopted the 2014 Great Talent Share Incentive Plan in December 2014, and granted an aggregate of 142,783,400 options from 2015 to 2017 under this plan. We [adopted] the 2018 Grand Talent Share Incentive Plan in              2018, which permits granting of share options to purchase our ordinary shares. The maximum aggregate number of ordinary shares that may be issued pursuant to all awards under the 2018 Grand Talent Plan is             .We are required to account for share based compensation in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 718, Compensation—Stock Compensation, which generally requires a company to recognize, as an expense, the fair value of share options and other equity incentives to employees based on the fair value of equity awards on the date of the grant, with the compensation expense recognized over the period in which the recipient is required to provide service in exchange for the equity award. In 2016, we incurred share-based compensation expense of RMB51.3 million (US$7.4 million). Expenses associated with share-based compensation awards granted under our share incentive plans may materially reduce our future net income. However, if we limit the size of grants under our share incentive plan to minimize share-based compensation expenses, we may not be able to attract or retain key personnel.

Risk Factors Related to Our Corporate Structure

If the PRC government finds that the agreements that establish the structure for operating our business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.

PRC laws and regulations currently require any foreign entity that invests in the education business in China to be an educational institution with relevant experience in providing education services outside China. Our Cayman Islands holding company is not an educational institution and does not provide education services. Due to these restrictions, we operate our K-12 tutoring business and study-abroad tutoring business in China primarily through Puxin Education Technology Group Co., Ltd, or Puxin Education or VIE, and its subsidiaries. We entered into a series of contractual arrangements with Puxin Education, its shareholders and its subsidiaries. Our VIE and its subsidiaries are the entities that hold certain licenses and permits relating to the K-12 tutoring business and study-abroad tutoring business in China. We have been and expect to continue to be dependent on our VIE and its subsidiaries to operate our business. See “Corporate History and Structure—Our Corporate Structure” for more information.

 

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If our ownership structure and contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, or we fail to obtain any of the required licenses and permits, the relevant PRC regulatory authorities including the MOE, which regulates the education industry in the PRC, the Ministry of Commerce, or the MOFCOM, which regulate the foreign investments in China, the Ministry of Civil Affairs, which regulates the registration of non- profit private schools in the PRC after the Amended Private Education Law became effective, and the State Administration of Industry and Commerce, or the SAIC, which regulates the registration and operation of for-profit private schools in the PRC after the Amended Private Education Law became effective, would have broad discretion in dealing with such violations, including:

 

    revoking the business and operating licenses held by our PRC subsidiaries and/or our VIE and its subsidiaries;

 

    discontinuing or restricting the operations of any related-party transactions among our PRC subsidiaries, our VIE and its subsidiaries;

 

    confiscating the income of our VIE and its subsidiaries;

 

    imposing fines, penalties or other requirements with which we, our PRC subsidiaries, or our VIE and its subsidiaries may not be able to comply;

 

    requiring us to restructure the relevant ownership structure or operations, terminate the contractual arrangements with our VIE or deregister the pledges on the equity interest in our VIE, which in turn would affect our ability to consolidate, derive economic interest from or exert effective control over our VIE;

 

    restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China; or

 

    restricting the use of financing sources by us or our VIE and its subsidiaries, or otherwise restricting our or their ability to conduct business.

As of the date of this prospectus, similar ownership structure and contractual arrangements have been used by many China-based companies listed overseas, including in the United States. However, we cannot assure you that penalties will not be imposed on any other companies or us in the future. If any of the above fines or punishments is imposed on us, our business, financial condition and results of operations could be materially and adversely affected.

If any of these penalties results in our inability to direct the activities of Puxin Education and its subsidiaries, or results in our failure to receive the economic benefits from Puxin Education and its subsidiaries, we may not be able to consolidate Puxin Education and its subsidiaries in our financial statements in accordance with U.S. GAAP. However, we do not believe that such actions would result in the liquidation or dissolution of our company, our wholly-owned subsidiary in the PRC, Purong Beijing, Puxin Education or its subsidiaries.

We face uncertainties with respect to the interpretation and implementation of the Draft Foreign Investment Law, which proposes significant changes to the PRC foreign investment legal regime and has a material impact on businesses in China controlled by foreign-invested enterprises primarily through contractual arrangements, such as our business.

On January 19, 2015, the MOFCOM published the Draft Foreign Investment Law for public review and comments. At the same time, the MOFCOM published an accompanying explanatory note of the Draft Foreign Investment Law, which contains important information about the Draft Foreign Investment Law, including its drafting philosophy and principles, main content, plans to transition to the new legal regime and treatment of business in China controlled by foreign-invested enterprises, or FIEs, primarily through contractual arrangements. The Draft Foreign Investment Law is intended to replace the current foreign investment legal regime consisting of three laws which are the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-

 

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Foreign Cooperative Joint Venture Enterprise Law and the Foreign Owned Enterprise Law, as well as detailed implementing rules. The Draft Foreign Investment Law proposes significant changes to the PRC foreign investment legal regime and may have a material impact on Chinese companies listed or to be listed overseas. The Draft Foreign Investment Law is to regulate FIEs in the same way as PRC domestic entities, except for those FIEs that operate in industries deemed to be either foreign “restricted” or “prohibited.” The Draft Foreign Investment Law also provides that only FIEs operating in foreign restricted or prohibited industries will require entry clearance and other approvals that are not required of PRC domestic entities. As a result of the entry clearance and approvals, certain FIEs operating in foreign restricted or prohibited industries may not be able to continue their operations through contractual arrangements.

The specifics of the application of the Draft Foreign Investment Law to variable interest entity structures have yet to be proposed, but it is anticipated that the Draft Foreign Investment Law will regulate variable interest entities.

The MOFCOM suggests both registration and approval as potential options for the regulation of variable interest entity structures, depending on whether they are “Chinese” or “foreign-controlled.” One of the core concepts of the Draft Foreign Investment Law is “de facto control,” which emphasizes substance over form in determining whether an entity is “Chinese” or “foreign-controlled.” This determination requires considering the nature of the investors that exercise control over the entity. “Chinese investors” are natural persons who are Chinese nationals, Chinese government agencies and any domestic enterprise controlled by Chinese nationals or government agencies. “Foreign investors” are foreign citizens, foreign governments, international organizations and entities controlled by foreign citizens and entities. In its current form, the Draft Foreign Investment Law will make it difficult for foreign financial investors, including private equity and venture capital firms, to obtain a controlling interest of a Chinese enterprise in a foreign restricted industry.

We face uncertainties with respect to the interpretation and implementation of the Draft Foreign Investment Law, which proposes significant changes to the PRC foreign investment legal regime and has a material impact on businesses in China controlled by foreign-invested enterprises primarily through contractual arrangements, such as our business.

We rely on contractual arrangements with our VIE and its shareholders for our operations in China, which may not be as effective in providing operational control as direct ownership.

We have relied and expect to continue to rely on the contractual arrangements with our VIE, its shareholders and its subsidiaries to operate our K-12 tutoring and study-abroad tutoring businesses. For a description of these contractual arrangements, see “Corporate History and Structure—Our Corporate Structure.” However, these contractual arrangements may not be as effective as direct equity ownership in providing us with control over our VIE and its subsidiaries. Any failure by our VIE, its shareholders or its subsidiaries to perform their obligations under the contractual arrangements would have a material adverse effect on the financial position and performance of our company. For example, the contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with arbitral procedures as contractually stipulated. The commercial arbitration system in the PRC is not as developed as in some other jurisdictions, such as the United States.

As a result, uncertainties in the commercial arbitration system or legal system in the PRC could limit our ability to enforce these contractual arrangements. In addition, if the legal structure and the contractual arrangements were found to violate any existing or future PRC laws and regulations, we may be subject to fines or other legal or administrative sanctions.

If any government action causes us to lose our right to direct the activities of our VIE and its subsidiaries or lose our right to receive substantially all the economic benefits and residual returns from our VIE and its

 

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subsidiaries and we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of our VIE and its subsidiaries.

Our VIE or its shareholders may fail to perform their obligations under the contractual arrangements.

If Puxin Education, any of its subsidiaries or schools or any of its shareholders fails to perform its obligations under the contractual arrangements, we may have to incur substantial costs and resources to enforce our rights under the contracts, and rely on legal remedies under the PRC law, including seeking specific performance or injunctive relief and claiming damages, which may not be effective. For example, if the shareholders of Puxin Education were to refuse to transfer their equity interest in Puxin Education to us or our designee when we exercise the call option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

All the material agreements under our contractual arrangements are governed by the PRC law and provide for the resolution of disputes under the agreements through arbitration in Beijing. Accordingly, these contracts would be interpreted in accordance with the PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would incur additional expenses and delay. In the event that we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our VIE and its subsidiaries, and our ability to conduct our business may be negatively affected.

The shareholders of our VIE may have actual or potential conflicts of interest with us and not act in the best interests of our company.

The shareholders of Puxin Education, namely, Mr. Yunlong Sha, Mr. Liang Gao, Mr. Gang Li, Mr. Yun Xiao, Ningbo Meishan Bonded Port Area Zhimei Phase V Equity Investment Limited Partnership, or Ningbo Zhimei, and Tianjin Puxian Education Technology Limited Partnership, or Tianjin Puxian, may have actual or potential conflicts of interest with us. These shareholders may refuse to sign or breach, or cause our VIE and its subsidiaries to breach or refuse to renew the existing contractual arrangements, which would have a material and adverse effect on our ability to effectively control our VIE and its subsidiaries and receive economic benefits from them. For example, these shareholders may be able to cause our agreements with our VIE and its subsidiaries to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

We rely on dividends, fees and other distributions paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could hinder our ability to conduct our business.

We are a holding company and rely principally on dividends and fees paid by our PRC subsidiaries for our cash needs, including paying dividends and other cash distributions to our shareholders to the extent we choose to do so, servicing any debt we may incur and paying our operating expenses. The income for our PRC subsidiaries in turn depends on the service fees paid by our VIE. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with

 

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Chinese accounting standards and regulations. Under the applicable requirements of PRC law, our PRC subsidiaries may only distribute dividends after they have made allowances to fund certain statutory reserves. These reserves are not distributable as cash dividends. After our schools are registered as for-profit private schools pursuant to the Amended Private Education Law, each of such schools is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Furthermore, if our PRC subsidiaries or our VIE incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any such restrictions may materially affect such entities’ ability to make dividends or make payments as service fees or other fees to us, which may materially and adversely affect our business, financial condition and results of operations.

Contractual arrangements between our VIE and us may be subject to scrutiny by the PRC tax authorities who may find that we or our VIE and its subsidiaries owe additional taxes.

Under PRC laws and regulations, transactions between related parties should be conducted on an arm’s-length basis and may be subject to audit or challenge by the PRC tax authorities. We could face material adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among our wholly-owned PRC subsidiary Purong Beijing, our VIE, its shareholders and its subsidiaries are not conducted on an arm’s-length basis and adjust the income of our VIE and its subsidiaries through the transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in, for PRC tax purposes, increased tax liabilities of Purong Beijing, our VIE and its subsidiaries. In addition, the PRC tax authorities may require us to disgorge our prior tax benefits, and require us to pay additional taxes for prior tax years and impose late payment fees and other penalties on Purong Beijing, our VIE and its subsidiaries for underpayment of prior taxes. To date, similar contractual arrangements have been used by many public companies, including companies listed in the United States, and, to our knowledge, the PRC tax authorities have not imposed any material penalties on those companies. However, we cannot assure you that such penalties will not be imposed on any other companies or us in the future. Our net income may be reduced if the tax liabilities of our VIE and its subsidiaries materially increase or if they are found to be subject to additional tax obligations, late payment fees or other penalties.

If any of our VIE and its subsidiaries becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy assets held by such entity, which could materially and adversely affect our business, financial condition and results of operations.

We currently conduct our operations in the PRC through a series of contractual arrangements among our wholly-owned PRC subsidiary Purong Beijing, our VIE, its shareholders and its subsidiaries. As part of these arrangements, substantially all of our education-related assets that are critical to the operation of our business are held by our VIE and its subsidiaries. If any of these entities goes bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If any of our VIE and its subsidiaries undergoes a voluntary or involuntary liquidation proceeding, its equity owner or unrelated third-party creditors may claim rights relating to some or all of these assets, which would hinder our ability to operate our business and could materially and adversely affect our business, our ability to generate revenues and the market price of our ADSs.

The custodians or authorized users of our controlling non-tangible assets, including chops and seals, may fail to fulfill their responsibilities, or misappropriate or misuse these assets.

Under PRC law, legal documents for corporate transactions, including agreements and contracts that our business relies on, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant PRC industry and commerce authorities.

 

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In order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to authorized employees. Although we monitor such authorized employees, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees could abuse their authority, for example, by entering into a contract not approved by us or by seeking to gain control of our subsidiaries, our VIE or any of its subsidiaries. If any employee obtains, misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve and divert management from our operations.

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries, our VIE and its subsidiaries, which could harm our liquidity and our ability to fund and expand our business.

In utilizing the proceeds of this offering in the manner described in “Use of Proceeds,” we may (1) make loans to our PRC subsidiaries, our VIE and its subsidiaries, (2) make additional capital contributions to our PRC subsidiaries, (3) establish new PRC subsidiaries and make capital contributions to them, and (4) acquire offshore entities with business operations in the PRC in an offshore transaction. However, most of these uses are subject to PRC regulations and approvals. For example:

 

    loans by us to our PRC subsidiaries, our VIE and its subsidiaries cannot exceed a statutory limit and shall be filed with the State Administration of Foreign Exchange of the PRC, or the SAFE, after the loan agreement is signed and at least three business days before the borrower makes any drawdown under the loan; and

 

    capital contributions to our PRC subsidiaries shall be filed with the MOFCOM or its local counterparts and also be registered with the local banks authorized by the SAFE.

The maximum aggregate amount that we can loan to the PRC subsidiaries, our VIE and its subsidiaries may vary with changes in the relevant entities’ net assets at the time of calculation.

In addition, on March 30, 2015, the SAFE promulgated the Circular on Reforming Management of the Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises, or Circular 19, a regulation regarding the conversion by a foreign-invested company of its capital contribution in foreign currency into Renminbi. Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capital of foreign-invested enterprises and allows foreign-invested enterprises to settle their foreign exchange capital at their discretion, but continues to prohibit foreign-invested enterprises from using the Renminbi fund converted from their foreign exchange capital for expenditures beyond their business scopes. In June 2016, the SAFE promulgated the Notice on Reforming and Standardizing the Administrative Provisions on Capital Account Foreign Exchange Settlement, or Circular 16. Circular 19 and Circular 16 continue to prohibit foreign-invested enterprises from, among other things, using the Renminbi fund converted from its foreign exchange capital for expenditure beyond its business scope, investment and financing (except for security investment or guarantee products issued by bank), providing loans to non-affiliated enterprises or constructing or purchasing real estate not for self-use. As we expect to use the proceeds of this offering in China in the form of RMB, our PRC subsidiaries, our VIE and our VIE’s subsidiaries will need to convert any capital contributions or loans from U.S. dollars to RMB before using such capital contribution or loans. As a result, Circular 19, Circular 16 and relevant foreign exchange rules may significantly limit our ability to convert the net proceeds from this offering in US dollar to RMB and transfer the net proceeds to our VIE and its subsidiaries through our PRC subsidiaries, which may adversely affect our ability to expand our business.

 

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Risk Factors Related to Doing Business in the PRC

PRC economic, political and social conditions, as well as changes in any government policies, laws and regulations, could adversely affect the overall economy in China or the education services market.

Substantially all of our operations are conducted in China, and substantially all of our revenue is derived from China. Accordingly, our business, prospects, financial condition and results of operations are subject, to a significant extent, to economic, political and legal developments in China.

The PRC economy differs from the economies of most developed countries in many respects. Although the PRC economy has been transitioning from a planned economy to a more market-oriented economy since the late 1970s, the PRC government continues to play a significant role in regulating the industry. The PRC government continues to exercise significant control over China’s economic growth through allocating resources, controlling the incurrence and payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Changes in any of these policies, laws and regulations could adversely affect the economy in China or the market for educational services, which could harm our business. For example, recent policy changes in certain cities indicate that the scope of after-school tutoring services may be further regulated. From June 2017 to January 2018, Shanghai and Chengdu promulgated local regulations and policies, which, among others, prohibit private tutoring service providers from providing elementary education services to pre-school children and from enrolling full-time students at compulsory education stage except during winter and summer breaks. We cannot assure you that such restrictions will not be imposed at national level or any future changes in laws, regulations and policies would not adversely affect our business and results of operations.

While the PRC economy has experienced significant growth in the past two to three decades, growth has been uneven, both geographically and among various sectors of the economy. Demand for our educational services depends, in large part, on economic conditions in China. Any significant slowdown in China’s economic growth may cause our potential students to delay or cancel their plans to enroll in our schools, which in turn could reduce our revenue. In addition, any sudden changes to China’s political system or the occurrence of social unrest could have a material and adverse effect on our business, prospects, financial condition and results of operations.

Uncertainties with respect to the PRC legal system could adversely affect us.

The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions in a civil law system may be cited as reference but have limited precedential value. Since 1979, PRC laws and regulations have significantly enhanced the protections of interest relating to foreign investments in China. However, given the short history of these laws and regulations and the rapid evolvement of the PRC legal system, the interpretations of such laws and regulations may not always be consistent, and the enforcement of these laws and regulations involves significant uncertainties, any of which could limit the available legal protections. Another uncertainty is that the PRC administrative and judicial authorities have significant discretion in interpreting, implementing or enforcing statutory rules and contractual terms, and it may be more difficult to predict the outcome of administrative and judicial proceedings and the level of legal protection we may enjoy in the PRC than under some more developed legal systems. These uncertainties may affect our decisions on the policies and actions to be taken to comply with PRC laws and regulations, and may affect our ability to enforce our rights. In addition, the regulatory uncertainties may be exploited through unmerited legal actions or threats in an attempt to extract payments or benefits from us. Such uncertainties may therefore increase our operating expenses and costs, and materially and adversely affect our business and results of operations.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named in the prospectus based on foreign laws.

We are a company incorporated under the laws of the Cayman Islands. We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, all our senior executive

 

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officers reside within China for a significant portion of the time and most are PRC nationals. As a result, it may be difficult for our shareholders to effect service of process upon us or those persons inside mainland China. In addition, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Therefore, recognition and enforcement in China of judgments of a court in any of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible.

Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.

Substantially all of our revenues is denominated in Renminbi. As a result, restrictions on currency exchange may limit our ability to use revenues generated in Renminbi to fund any business activities we may have outside the PRC in the future or to make dividend payments to our shareholders and ADS holders in U.S. dollars. Under current PRC laws and regulations, Renminbi is freely convertible for current account items, such as trade and service-related foreign exchange transactions and dividend distributions. However, Renminbi is not freely convertible for direct investment or loans or investments in securities outside the PRC, unless such use is approved by SAFE. For example, foreign exchange transactions under our PRC subsidiaries’ capital accounts, including principal payments in respect of foreign currency-denominated obligations, are subject to significant foreign exchange controls and the approval requirement of SAFE. These limitations could affect our ability to obtain foreign exchange for capital expenditures.

Our PRC subsidiaries are permitted to declare dividends to our offshore subsidiary holding their equity interest, convert the dividends into a foreign currency and remit to its shareholder outside the PRC. In addition, in the event that our PRC subsidiaries liquidate, proceeds from the liquidation may be converted into foreign currency and distributed outside the PRC to our overseas subsidiary holding its equity interest. Furthermore, in the event that Puxin Education liquidates, Purong Beijing may, pursuant to a power of attorney it has entered into with Mr. Yunlong Sha, Mr. Liang Gao, Mr. Gang Li, Mr. Yun Xiao, Ningbo Zhimei and Tianjin Puxian, respectively, require Mr. Yunlong Sha, Mr. Liang Gao, Mr. Gang Li, Mr. Yun Xiao, Ningbo Zhimei and Tianjin Puxian to transfer all assets they might receive in connection with the liquidation of Puxin Education to Purong Beijing at no consideration or the minimum consideration as permitted under PRC laws. Purong Beijing then may distribute such proceeds to us after converting them into foreign currency and remit them outside the PRC in the form of dividends or other distributions. Once remitted outside the PRC, dividends, distributions or other proceeds from liquidation paid to us will not be subject to restrictions under PRC regulations on its further transfer or use.

Other than the above distributions by and through our PRC subsidiaries which are permitted to be made without the necessity to obtain further approvals, any conversion of the Renminbi-denominated revenues generated by our VIE for direct investment, loan or investment in securities outside the PRC will be subject to the limitations discussed above. To the extent we need to convert and use any Renminbi-denominated revenues generated by our VIE and its subsidiaries not paid to our PRC subsidiaries and revenues generated by our PRC subsidiaries not declared and paid as dividends, the limitations discussed above will restrict the convertibility of, and our ability to directly receive and use such revenues. As a result, our business and financial condition may be adversely affected. In addition, we cannot assure you that the PRC regulatory authorities will not impose more stringent restrictions on the convertibility of Renminbi in the future, especially with respect to foreign exchange transactions.

We may be required to obtain prior approval of the CSRC of the listing and trading of our ADSs on the [NYSE/NASDAQ].

On August 8, 2006, six PRC regulatory authorities, including the MOFCOM, the State Assets Supervision and Administration Commission, the State Administration of Taxation, or the SAT, China Securities Regulatory Commission, or the CSRC, SAIC and SAFE, jointly issued the Regulations on Mergers and Acquisitions of

 

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Domestic Enterprises by Foreign Investors, or the M&A Rules, which were subsequently amended on June 22, 2009. This regulation, among other things, requires that the listing and trading on an overseas stock exchange of securities in an offshore special purpose vehicle formed for purposes of holding direct or indirect equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals be approved by the CSRC. On September 21, 2006, the CSRC published on its official website the procedures for such approval process. In particular, certain documents are required to be filed with the CSRC as part of the approval procedures and it could take several months to complete the approval process.

While the implementation and interpretation of the M&A Rules and its later amendments remains unclear, we believe, based on the advice of Tian Yuan Law Firm, our PRC counsel, that approval by the CSRC is not required for this offering because we are not a special purpose vehicle formed for listing purpose through acquisition of domestic companies that are controlled by our PRC individual shareholders, as we acquire contractual control rather than equity interests in our VIE in the PRC. However, we cannot assure you that the relevant PRC regulatory authorities, including the CSRC, would reach the same conclusion as our PRC counsel. If the CSRC or other PRC regulatory authority subsequently determines that we need to obtain the CSRC’s approval for this offering, we may face sanctions by the CSRC or other PRC regulatory authorities. In such event, these regulatory authorities may, among other things, impose fines and penalties on or otherwise restrict our operations in the PRC or delay or restrict any remittance of the proceeds from this offering into the PRC. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to suspend or terminate this offering before settlement and delivery of the ADSs. Any such or other actions taken could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs.

Certain PRC regulations, including the M&A Rules and national security regulations, may require a complicated review and approval process which could make it difficult for us to pursue growth through acquisitions in China.

The M&A Rules established additional procedures and requirements that could make merger and acquisition activities in China by foreign investors more time-consuming and complex. For example, the MOFCOM must be notified in the event a foreign investor takes control of a PRC domestic enterprise. Although the amendment to the M&A Rules in 2016 generally eased the restrictions imposed on merger and acquisition activities, certain acquisitions of domestic companies by offshore companies that are related to or affiliated with the same entities or individuals of the domestic companies, are still subject to approval by the MOFCOM. In addition, the Implementing Rules Concerning Security Review on Mergers and Acquisitions by Foreign Investors of Domestic Enterprises, issued by the MOFCOM in August 2011, require that mergers and acquisitions by foreign investors in “any industry with national security concerns” be subject to national security review by the MOFCOM. In addition, any activities attempting to circumvent such review process, including structuring the transaction through a proxy or contractual control arrangement, are strictly prohibited.

There is significant uncertainty regarding the interpretation and implementation of these regulations relating to merger and acquisition activities in China. In addition, complying with these requirements could be time-consuming, and the required notification, review or approval process may materially delay or affect our ability to complete merger and acquisition transactions in China. As a result, our ability to seek growth through acquisitions may be materially and adversely affected.

In addition, if the MOFCOM determines that we should have obtained its approval for our entry into contractual arrangements with our VIE and its shareholders, we may be required to file for remedial approvals. We cannot assure you that we would be able to obtain such approval from the MOFCOM. We may also be subject to administrative fines or penalties by the MOFCOM that may require us to limit our business operations in the PRC, delay or restrict the conversion and remittance of our funds in foreign currencies into the PRC or take other actions that could have material and adverse effect on our business, financial condition and results of operations.

 

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PRC regulations relating to foreign exchange registration of overseas investment by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into the PRC subsidiaries, limit PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

The SAFE has promulgated regulations, including the Notice on Relevant Issues Relating to Foreign Exchange Control on Domestic Residents’ Investment and Financing and Round-Trip Investment through Special Purpose Vehicles, or Circular 37, effective on July 4, 2014, and its appendices, that require PRC residents, including PRC institutions and individuals, to register with local branches of the SAFE in connection with their direct establishment or indirect control of an offshore entity for the purpose of overseas investment and financing with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in Circular 37 as a “special purpose vehicle.” The term “control” under Circular 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by the PRC residents in the offshore special purpose vehicles by such means as acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required registration with the SAFE, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Further, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion.

On February 13, 2015, the SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or Notice 13, which became effective on June 1, 2015. Under Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under Circular 37, will be filed with qualified banks instead of the SAFE. The qualified banks will directly examine the applications and accept registrations under the supervision of the SAFE.

These regulations apply to our direct and indirect shareholders who are PRC residents and may apply to any offshore acquisitions or share transfers that we make in the future if our shares are issued to PRC residents. However, in practice, different local SAFE branches may have different views and procedures on the application and implementation of SAFE regulations, and since Circular 37 was recently issued, there remains uncertainty with respect to its implementation.

As of the date of this prospectus, all PRC residents known to us that currently hold direct or indirect interests in our company have completed the necessary registrations as required by Circular 37. We cannot assure you that any shareholders or beneficial owners of our company who are PRC residents will be able to successfully complete the registration or update the registration of their direct and indirect equity interest as required in the future. If any of them fail to make or update the registration, our PRC subsidiaries could be subject to fines and legal penalties, and the SAFE could restrict our cross-border investment activities and our foreign exchange activities, including restricting our PRC subsidiaries’ ability to distribute dividends to, or obtain loans denominated in foreign currencies from, our company, or prevent us from contributing additional capital into our PRC subsidiaries. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.

Higher labor costs in the PRC may adversely affect our business, financial conditions and results of operations.

Labor costs in the PRC have increased with the PRC’s economic development. According to the National Bureau of Statistics of China, the average wage of private education institution employees in urban cities in

 

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China increased at a CAGR of 10.8% nationwide between 2011 and 2016. We expect that our labor costs, including wages, various statutory employee benefits, including those for full-time and part-time teachers, consultants and administrative staff, will continue to increase. Unless we are able to pass on these increased labor costs to our students by increasing prices for our services, our profitability and results of operations may be materially and adversely affected.

Employee participants in our share incentive plan who are PRC citizens may be required to register with the SAFE. We also face regulatory uncertainties in the PRC that could restrict our ability to grant share incentive awards to our employees who are PRC citizens.

Pursuant to the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in a Stock Incentive Plan of an Overseas Publicly-Listed Company issued by the SAFE on February 15, 2012, or Circular 7, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with the SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas listed company, and complete certain other procedures. Such PRC individuals’ foreign exchange income received from the sale of shares and dividends distributed by the overseas listed company and any other income shall be fully remitted into a collective foreign currency account in the PRC opened and managed by the PRC domestic agent before distribution to such individuals. In addition, such domestic individuals must also retain an overseas entrusted institution to handle matters in connection with their exercise of share options and their purchase and sale of shares. The PRC domestic agent also needs to update registration with the SAFE within three months after the overseas-listed company materially changes its share incentive plan or make any new share incentive plans.

From time to time, we need to apply for or update our registration with the SAFE or its local branches on behalf of our employees who receive options or other equity-based incentive grants under our share incentive plan or material changes in our share incentive plan. However, we may not always be able to make applications or update our registration on behalf of our employees who hold any type of share incentive awards in compliance with Circular 7, nor can we ensure you that such applications or update of registration will be successful. If we or the participants of our share incentive plan who are PRC citizens fail to comply with Circular 7, we and/or such participants of our share incentive plan may be subject to fines and legal sanctions, there may be additional restrictions on the ability of such participants to exercise their share options or remit proceeds gained from sale of their shares into the PRC, and we may be prevented from further granting share incentive awards under our share incentive plan to our employees who are PRC citizens.

Fluctuations in the value of the Renminbi could have a material and adverse effect on your investment.

The change in value of the Renminbi against the U.S. dollar and other currencies is affected by various factors such as changes in political and economic conditions in the PRC. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

Any significant appreciation or revaluation of the Renminbi may have a material adverse effect on the value of, and any dividends payable on, our ADSs in foreign currency terms. More specifically, if we decide to convert our Renminbi into U.S. dollars, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. To the extent that we need to convert U.S. dollars we receive from our initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. In addition,

 

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appreciation or depreciation in the exchange rate of the Renminbi to the U.S. dollar could materially and adversely affect the price of our ADSs in U.S. dollars without giving effect to any underlying change in our business or results of operations.

Under the PRC Enterprise Income Tax Law, or the EIT Law, we may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.

The PRC Enterprise Income Tax Law and its implementing rules provide that enterprises established outside of the PRC whose “de facto management bodies” are located in the PRC are considered “resident enterprises” under PRC tax laws. The implementing rules define the term “de facto management bodies” as a management body which substantially manages, or has control over the business, personnel, finance and assets of an enterprise. On April 22, 2009, the SAT issued Circular 82, which provides that a foreign enterprise controlled by a PRC company or a group of PRC companies will be classified as a “resident enterprise” with its “de facto management body” located within the PRC if all of the following requirements are satisfied: (1) the senior management and core management departments in charge of its daily operations function are mainly in the PRC; (2) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (3) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (4) at least half of the enterprise’s directors with voting right or senior management reside in the PRC. The SAT issued a bulletin on July 27, 2011 to provide more guidance on the implementation of Circular 82. The bulletin clarifies certain matters relating to resident status determination, post-determination administration and competent tax authorities. Although both the circular and the bulletin only apply to offshore enterprises controlled by PRC enterprises and not offshore enterprises controlled by PRC individuals, the determination criteria set forth in the circular and administration clarification made in the bulletin may reflect the general position of the SAT on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises and how the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals.

From the year in which the entity is determined as a “resident enterprise,” any dividend, profit and other equity investment gain shall be taxed in accordance with the PRC Enterprise Income Tax Law and its implementing rules.

We believe we are not a PRC resident enterprise for PRC tax purposes. As the tax resident status of an enterprise is subject to the determination by the PRC tax authorities, if we are deemed as a PRC “resident enterprise,” we will be subject to PRC Enterprise Income Tax on our worldwide income at a uniform tax rate of 25%, although dividends distributed to us from our existing PRC subsidiaries and any other PRC subsidiaries which we may establish from time to time could be exempt from the PRC dividend withholding tax due to our PRC “resident recipient” status. This could have a material adverse effect on our overall effective tax rate, our income tax expenses and our net income. Furthermore, dividends, if any, paid to our shareholders and ADS holders may be decreased as a result of the decrease in distributable profits. In addition, if we were to be considered a PRC “resident enterprise,” dividends we pay with respect to our ADSs or ordinary shares and the gains realized from the transfer of our ADSs or ordinary shares may be considered income derived from sources within the PRC. In such case, we may be required to withhold a 10% tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to PRC tax at a rate of 10% on gains realized on the sale or other disposition of ADSs or ordinary shares. Furthermore, if we are deemed a PRC resident enterprise, dividends paid to our non-PRC individual shareholders (including our ADS holders) and any gain realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% (which, in the case of dividends, may be withheld at source). Any PRC tax liability may be reduced by an applicable tax treaty. However, it is unclear whether non-PRC shareholders would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs or ordinary shares.

 

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There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our PRC subsidiaries, and dividends paid by our PRC subsidiaries to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.

Under the PRC Enterprise Income Tax Law and its implementation rules, the profits of a foreign-invested enterprise generated through operations, which are distributed to its immediate holding company outside the PRC, will be subject to a withholding tax rate of 10%. Pursuant to a special arrangement between Hong Kong and the PRC, such rate may be reduced to 5% if a Hong Kong resident enterprise owns more than 25% of the equity interest in the PRC company. Our PRC subsidiaries are wholly owned by our Hong Kong subsidiary.

Moreover, under the Notice on Issues regarding the Administration of the Dividend Provision in Tax Treaties promulgated by the SAT on February 20, 2009, the taxpayer needs to satisfy certain conditions to enjoy the benefits under a tax treaty. These conditions include: (1) the taxpayer must be the beneficial owner of the relevant dividends, and (2) the corporate shareholder to receive dividends from the PRC subsidiaries must have continuously met the direct ownership thresholds during the 12 consecutive months preceding the receipt of the dividends. Further, the SAT promulgated the Notice on Issues Related to the “Beneficial Owner” in Tax Treaties on February 3, 2018, which sets forth certain detailed factors in determining the “beneficial owner” status.

Entitlement to a lower tax rate on dividends according to tax treaties or arrangements between the PRC central government and governments of other countries or regions is subject to inspection or approval by the relevant tax authorities. As a result, we cannot assure you that we will be entitled to any preferential withholding tax rate under tax treaties for dividends received from our PRC subsidiaries.

We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

On February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or Bulletin 7, which partially replaced and supplemented previous rules under the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the SAT on December 10, 2009. Under Bulletin 7, an “indirect transfer” of assets by non-PRC resident enterprises, including transfers of equity interests in a PRC resident enterprise, may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets” include assets attributed to an establishment in the PRC, immoveable properties in the PRC, and equity investments in PRC resident enterprises. In respect of an indirect offshore transfer of assets of a PRC establishment, the relevant gain is to be regarded as effectively connected with the PRC establishment and therefore included in its enterprise income tax filing, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties in the PRC or equity investments in a PRC resident enterprise, which is not effectively connected to a PRC establishment of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. In addition, Bulletin 7 has introduced safe harbors for internal group restructurings and purchases and sales of equity through a public securities market.

On October 17, 2017, the SAT issued the Announcement on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or Bulletin 37, which came into effect on December 1, 2017 and abolished Circular 698. The Bulletin 37 further clarifies the practices and procedures for the withholding of the non-PRC resident enterprise income tax.

We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructurings, sales of the shares in our offshore subsidiaries

 

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and investments. Our company may be subject to filing obligations or taxes if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under SAT Bulletin 7 and SAT Bulletin 37. For transfers of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filings under Bulletin 7 and Bulletin 37. As a result, we may be required to expend valuable resources to comply with Bulletin 7 and Bulletin 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial conditions and results of operations.

The audit report included in this prospectus is prepared by auditors who are not fully inspected by the Public Company Accounting Oversight Board, and as such, you are deprived of the benefits of such inspection.

Our independent registered public accounting firm issues the audit report included in this prospectus filed with the Securities and Exchange Commission, or the SEC. As auditors of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, our independent registered public accounting firm, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in China, a jurisdiction where PCAOB is currently unable to conduct full inspections without the approval of the Chinese authorities, our auditors are not currently inspected by PCAOB.

Inspections of other firms that PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of full PCAOB inspections in China prevents PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

The inability of PCAOB to conduct full inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

If additional remedial measures are imposed on the Big Four PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

Beginning in 2011, the Chinese affiliates of the “big four” accounting firms (including our independent registered public accounting firm) were affected by a conflict between the U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in China, the SEC and PCAOB sought to obtain access to the audit work papers and related documents of the Chinese affiliates of the “big four” accounting firms. The accounting firms were, however, advised and directed that, under Chinese law, they could not respond directly to the requests of the SEC and PCAOB and that such requests, and similar requests by foreign regulators for access to such papers in China, had to be channeled through the CSRC.

In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. In January 2014, the administrative law judge made an initial decision to impose penalties on the firms, including a temporary suspension of their right to practice before the SEC. The accounting firms filed a petition for review of the initial decision. On February 6, 2015, before a review by the commissioners of the SEC took place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be

 

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made to the CSRC. The firms will receive matching Section 106 requests, and are required to follow a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC has authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.

In the event that the SEC restarts administrative proceedings, depending upon the final outcome, listed companies in the U.S. with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in China, which could result in their financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against the firms may cause investor uncertainty regarding China-based, U.S.-listed companies, including our company, and the market price of our shares may be adversely affected.

If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our shares from the [NYSE/NASDAQ] or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our shares in the United States.

Risk Factors Related to Our ADSs and This Offering

We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies, including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we remain an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

An active trading market for our ordinary shares or our ADSs may not develop and the trading price for our ADSs may fluctuate significantly.

Prior to this offering, there has been no public market for our ADSs or the ordinary shares underlying our ADSs. We intend to apply for listing our ADSs on the [NYSE/NASDAQ], but we cannot assure you that a liquid public market for our ADSs will develop. If an active public market for our ADSs does not develop following the completion of this offering, the market price and liquidity of our ADSs may be materially and adversely affected. The initial public offering price for our ADSs was determined by negotiation among us and the underwriters based upon several factors, and the trading price of our ADSs after this offering may decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs due to insufficient or a lack of market liquidity of the ADSs.

 

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The trading price of our ADSs is likely to be volatile, which could result in substantial losses to investors.

The trading price of our ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, akin to the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. A number of Chinese companies have listed or are in the process of listing their securities on U.S. stock markets. The securities of some of these companies have experienced significant volatility, including price declines in connection with their initial public offerings. The trading performances of these Chinese companies’ securities after their offerings may affect the perception and attitudes of investors toward Chinese companies listed in the United States in general and consequently may impact the trading performance of our ADSs, regardless of our actual operating performance.

In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile due to a number of factors, including the following:

 

    regulatory developments affecting us or our industry, and customers of our education services;

 

    actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;

 

    changes in the market condition, market potential and competition in education services;

 

    announcements by us or our competitors of new education services, expansions, investments, acquisitions, strategic partnerships or joint ventures;

 

    fluctuations in global and Chinese economies;

 

    changes in financial estimates by securities analysts;

 

    adverse publicity about us;

 

    additions or departures of our key personnel and senior management;

 

    release of lockup or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and

 

    potential litigation or regulatory investigations.

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.

In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

Substantial future sales or perceived potential sales of our ADSs in the public market could cause the price of our ADSs to decline.

Sales of substantial amounts of our ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs. In connection with this offering, [we and our officers, directors, shareholders and certain option and warrant holders] have agreed not to sell any ordinary shares or ADSs for 180 days after the date of this prospectus without the prior written

 

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consent of the underwriters, subject to certain exceptions. Upon the completion of this offering, we will have              ordinary shares outstanding, including              ordinary shares represented by              ADSs, assuming the underwriters do not exercise their option to purchase additional ADSs. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act. The remaining ordinary shares outstanding immediately after this offering will be available for sale, upon the expiration of the 180-day lockup period, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. In addition, the underwriters may exercise the discretion to release the securities held by the parties subject to the lockup restriction prior to the expiration of the lockup period. If the securities subject to lockup are released before the expiration of the lockup period, their sale or perceived sale into the market may cause the price of our ADSs to decline. Furthermore, certain of our convertible notes holders have the right to elect to convert the convertible notes into our ordinary shares after this offering. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of the ADSs. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

In addition, certain of our shareholders will have the right to cause us to register the sale of their shares under the Securities Act upon the occurrence of certain circumstances. See “Description of Share Capital—Registration Rights.” Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the public market could cause the price of our ADSs to decline.

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.

The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades our ADSs or publishes inaccurate or unfavorable research about our business, the market price for our ADSs would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to decline.

Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on a price appreciation of our ADSs for a return on your investment.

We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

Our board of directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. We cannot guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

 

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Because the initial public offering price is substantially higher than the pro forma net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase ADSs in this offering, you will pay more for each ADS on a per share basis than the corresponding amount paid by existing shareholders for their ordinary shares. As a result, you will experience immediate and substantial dilution of approximately US$             per ADS. This number represents the difference between our pro forma net tangible book value US$             per ADS as of             , 2017, after giving effect to this offering and the assumed initial public offering price of US$             per ADS, which is the mid-point of the estimated range of the initial public offering price shown on the cover page of this prospectus. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon the completion of this offering.

There can be no assurance that we will not be a passive foreign investment company, or PFIC, for 2018 or any other taxable year, which could result in adverse U.S. federal income tax consequences to U.S. investors in our ADSs or ordinary shares.

In general, a non-U.S. corporation is a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income or (ii) 50% or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income. For purposes of the above calculations, a non-U.S. corporation that owns at least 25% by value of the shares of another corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Cash is a passive asset for purposes of the PFIC rules. Goodwill that is associated with an active income-producing activity of a non-U.S. corporation is generally an active asset unless, for U.S. federal income tax purposes, the non-U.S. corporation is a controlled foreign corporation, or CFC, which is not publicly traded “for the taxable year.” We were a CFC during a portion of the first quarter of 2018, but do not expect to be a CFC for the remainder of 2018.

Because we were both non-publicly traded and a CFC during a portion of 2018, it is not clear whether we can use the value of our assets rather than their tax basis in determining our PFIC status for 2018. We believe it is reasonable to use our assets’ value for this purpose. Assuming this position is respected, and based upon the nature of our business, the composition of our income and assets and the estimated value of our assets, (which is based on the expected price of our ADSs), we do not expect to be a PFIC for 2018 or in the foreseeable future. However, in light of the uncertainty as to whether the value of our assets (rather than their tax basis) can be taken into account in determining our PFIC status for 2018, and because in any event we have significant cash balances (taking into account the expected proceeds from this offering), it is not clear whether we will be a PFIC for 2018.

In addition, our PFIC status for any taxable year is a factual determination that can be made only after the end of such year, and will depend on the composition of our income and assets and the value of our assets for such year. Moreover, because we hold, and may continue to hold, a significant amount of cash, our PFIC status for any taxable year may depend on the value of our goodwill which may be determined, in part, by reference to the market price of our ADSs, which may change from time to time. In addition, it is not entirely clear how the contractual arrangements between us and our VIE will be treated for purposes of the PFIC rules. If it were determined that we are not the owner of the stock of our VIE for U.S. federal income tax purposes, we could be treated as a PFIC. In light of the foregoing, there can be no assurance that we will not be a PFIC for the current or any future taxable year.

If we were a PFIC for any taxable year during which a U.S. investor holds ADSs or ordinary shares, certain adverse U.S. federal income tax consequences could apply to such U.S. investor. See “Taxation—U.S. Federal Income Tax Consequences—Passive Foreign Investment Company Rules.”

 

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Our memorandum and articles of association that will become effective immediately prior to the completion of this offering contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.

We plan to adopt second amended and restated memorandum and articles of association that will become effective immediately prior to the completion of this offering. Our post-offering memorandum and articles of association contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority subject to any resolution of the shareholders to the contrary, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADSs or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (as amended) of the Cayman Islands and the common law of the Cayman Islands. The rights of our shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

The Cayman Islands courts are also unlikely (i) to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws, or (ii) to impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.

There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by our management, members of our board of directors or our large shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of certain significant differences between the provisions of the Companies Law (as amended) of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”

 

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Certain judgments obtained against us by our shareholders may not be enforceable.

We are a Cayman Islands company and all of our assets are located outside of the United States. Substantially all of our current operations are conducted in the PRC. In addition, a majority of our current directors and officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and the PRC, see “Enforceability of Civil Liabilities.”

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.

Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

 

    the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC;

 

    the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;

 

    the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

 

    the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

In addition, we intend to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of the [NYSE/NASDAQ]. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which would be made available to you, were you investing in a U.S. domestic issuer.

As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the [NYSE/NASDAQ] corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the [NYSE/NASDAQ] corporate governance listing standards.

As a Cayman Islands company listed on [NYSE/NASDAQ], we are subject to the corporate governance listing standards under the [NYSE/NASDAQ]. However, [NYSE Listed Company Manual/NASDAQ Stock Market Rules] permits a foreign private issuer like us to follow the corporate governance practices of its home country.

Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the corporate governance listing standards under the [NYSE/NASDAQ]. Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

 

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Certain corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies incorporated in other jurisdictions such as the United States. To the extent we choose to follow home country practice with respect to corporate governance matters, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your ordinary shares.

As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying ordinary shares in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting. Under our post-offering amended and restated memorandum and articles of association that will become effective immediately prior to the completion of this offering, the minimum notice period required for convening a general meeting is seven days.

When a general meeting is convened, you may not receive sufficient advance notice to withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.

The depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests and the ability of our shareholders as a group to influence the management of our company.

Under the deposit agreement for the ADSs, if you do not give voting instructions to the depositary to direct how the ordinary shares underlying your ADSs are voted, the depositary will give us a discretionary proxy to vote the ordinary shares underlying your ADSs at shareholders’ meetings unless:

 

    we have failed to timely provide the depositary with notice of meeting and related voting materials;

 

    we have instructed the depositary that we do not wish a discretionary proxy to be given;

 

    we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

 

    a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

 

    the voting at the meeting is to be made on a show of hands.

The effect of this discretionary proxy is that if you do not give voting instructions to the depositary to direct how the ordinary shares underlying your ADSs are voted, you cannot prevent the ordinary shares underlying your ADSs from being voted, except under the circumstances described above. This may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

 

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You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.

You may experience dilution of your holdings due to the inability to participate in rights offerings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act.

The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

You may be subject to limitations on the transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

Upon completion of this offering, we will become a public company and expect to incur significant accounting, legal and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the [NYSE/NASDAQ], have detailed requirements concerning corporate governance practices of public companies. As a company with less than US$1.07 billion in revenues for the year ended December 31, 2016, we qualify as an “emerging growth company” pursuant to the

 

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JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also permits an emerging growth company to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We expect these rules and regulations applicable to public companies to increase our accounting, legal and financial compliance costs and to make certain corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. Our management will be required to devote substantial time and attention to our public company reporting obligations and other compliance matters. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. Our reporting and other compliance obligations as a public company may place a strain on our management, operational and financial resources and systems for the foreseeable future.

In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. The forward-looking statements are contained principally in, but not limited to, the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

    our goals and strategies;

 

    our ability to retain and increase our student enrollments;

 

    our ability to offer new courses and services;

 

    our ability to engage, train and retain new teachers and consultants;

 

    our ability to maintain and improve technology infrastructure necessary to operate our online platform;

 

    our future business development, financial condition and results of operations;

 

    expected changes in our revenues, costs or expenditures;

 

    growth of and competition trends in our industry;

 

    our expectations regarding demand for, and market acceptance of, our services and our brand;

 

    our expectation regarding the use of proceeds from this offering;

 

    general economic and business conditions in the markets in which we operate;

 

    relevant government policies and regulations relating to our corporate structure, business and industry; and

 

    assumptions underlying or related to any of the foregoing.

In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the heading “Risk Factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.

This prospectus also contains certain data and information, which we obtained from various government and private publications. Although we believe that the publications and reports are reliable, we have not independently verified the data. Statistical data in these publications includes projections that are based on a number of assumptions. If any one or more of the assumptions underlying the market data is later found to be incorrect, actual results may differ from the projections based on these assumptions.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Although we will become a public company after this

 

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offering and have ongoing disclosure obligations under United States federal securities laws, we do not intend to update or otherwise revise the forward-looking statements in this prospectus, whether as a result of new information, future events or otherwise.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$             million if the over-allotment option is not exercised, and US$             million if the over-allotment option is exercised, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. [We will not receive any of the proceeds from the sale of the ADSs being sold by the selling shareholders.]

We anticipate using the net proceeds of this offering for the following purposes:

 

    [financing potential strategic acquisitions and launch of new schools in China];

 

    [marketing and brand promotion];

 

    [upgrading our information technology systems and promote online platforms]; and

 

    the remaining amount to fund [working capital and for other general corporate purposes].

The foregoing represents our current intentions with respect to the use and allocation of the net proceeds of this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in applying the net proceeds of this offering. The occurrence of unforeseen events or changed business conditions may result in application of the proceeds of this offering in a manner other than as described in this prospectus.

In utilizing the proceeds from this offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions, and to our VIE and its subsidiaries only through loans, and only if we satisfy the applicable government registration and approval requirements. We cannot assure you that we will be able to meet these requirements on a timely basis, if at all. See “Risk Factors—Risk Factors Related to Our Corporate Structure—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries, our VIE and its subsidiaries, which could harm our liquidity and our ability to fund and expand our business.”

 

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DIVIDEND POLICY

We have not previously declared or paid cash dividends and we have no intention to declare or pay any dividends in the near future on our shares or the ADSs representing our ordinary shares. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

Our board of directors has complete discretion in deciding whether to distribute dividends. Even if our board of directors decides to pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors.

If we pay any dividends, our ADS holders will be entitled to such dividends to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

We are a holding company with no material operations of our own. We conduct our operations primarily through our subsidiaries in China. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by our subsidiaries. If our existing subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us.

 

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CAPITALIZATION

The following table sets forth our total capitalization as of December 31, 2016:

 

    on an actual basis; and

 

    on a pro forma basis to reflect the automatic conversion of 11,917,880 Series A preferred shares into ordinary shares on a one-for-one basis immediately prior to the completion of this offering; and

 

    on a pro forma as adjusted basis to reflect (i) the automatic conversion of 11,917,880 Series A preferred shares into ordinary shares on a one-for-one basis immediately prior to the completion of this offering, and (ii) the issuance and sale of              ordinary shares in the form of ADSs by us in this offering at an initial public offering price of US$             per ADS, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us (assuming the underwriters do not exercise their option to purchase additional ADSs).

You should read this table together with our consolidated financial statements, the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

           As of December 31, 2016  
     Actual     Pro Forma      Pro Forma as Adjusted(1)  
     RMB     US$     RMB      US$      RMB      US$  
     (in thousands)  

Mezzanine equity

               

Equity interest with preferential feature

     120,000       17,284             
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Shareholders’ deficit

               

Paid-in capital

     30,500       4,393             
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Additional paid-in capital

     214,598       30,909             
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Accumulated deficit

     (282,300     (40,660           
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total Puxin Education shareholders’ deficit

     (37,202     (5,358           
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Non-controlling interest

     (102     (15           
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total Shareholders’ deficit

     (37,304     (5,373           
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total mezzanine equity and equity

     82,696       11,911             
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Pro forma as adjusted information discussed above is illustrative only. Our additional paid-in capital, accumulative deficit, accumulative other comprehensive loss, total shareholder’s equity and total capitalization following the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing.
(2) Assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, a US$1.00 increase (decrease) in the assumed initial public offering price of US$             per ADS would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by US$             million.

 

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EXCHANGE RATE INFORMATION

We conduct substantially all of our operations in China. All of our revenue, costs and expenses are denominated in Renminbi. This prospectus contains translations of certain Renminbi amounts into U.S. dollars at specified rates. Unless otherwise stated, the translation of Renminbi into U.S. dollars has been made at the rate of RMB6.9430 to US$1.00, the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board on December 30, 2016. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes controls over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On February 2, 2018, the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.2984 to US$1.00.

The following table sets forth information concerning the rates of exchange of US$1.00 into RMB for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you.

 

     Noon Buying Rate  

Period

   Period End      Average(1)      Low      High  
     (RMB per US$1.00)  

2013

     6.0537        6.1412        6.2438        6.0537  

2014

     6.2046        6.1704        6.2591        6.0402  

2015

     6.4778        6.2869        6.4896        6.1870  

2016

     6.9430        6.6549        6.9580        6.4480  

2017

     6.5063        6.7350        6.9575        6.4773  

August

     6.5888        6.6670        6.7272        6.5888  

September

     6.6533        6.5690        6.6591        6.4773  

October

     6.6328        6.6254        6.6533        6.5712  

November

     6.6090        6.6200        6.6385        6.5967  

December

     6.5063        6.5932        6.6210        6.5063  

2018

           

January

     6.2841        6.4233        6.5263        6.2841  

February (through February 2)

     6.2984        6.2977        6.2984        6.2969  

 

Source: Federal Reserve Statistical Release

Notes:

(1) Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.

 

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DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the assumed initial public offering price per ordinary share is substantially in excess of the net tangible book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.

Our net tangible book value was approximately US$             million, or US$             per ordinary share and US$             per ADS as of December 31, 2016. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities, intangible assets and goodwill. Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to the proceeds we will receive from this offering, from the assumed initial public offering price per ordinary share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Without taking into account any other changes in net tangible book value after December 31, 2016, other than to give effect to our sale of the ADSs offered in this offering, the midpoint of the estimated range of the initial public offering price, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of December 31, 2016 would have been US$             million, or US$             per outstanding ordinary share, and US$             per ADS. This represents an immediate increase in net tangible book value of US$             per ordinary share and US$             per ADS, to the existing shareholders and an immediate dilution in net tangible book value of US$             per ordinary share and US$             per ADS, to investors purchasing ADSs in this offering. The following table illustrates such dilution:    

 

     Per ordinary share      Per ADS  

Initial public offering price per ordinary share

   US$               US$           

Net tangible book value

   US$               US$           

Pro forma net tangible book value per ordinary share after giving effect to the automatic conversion of all of our outstanding preferred shares

   US$               US$           

Pro forma net tangible book value per ordinary share as adjusted after giving effect to the automatic conversion of all of our outstanding preferred shares and this offering

   US$               US$           

Amount of dilution in net tangible book value to new investors in this offering

   US$               US$           

A US$1.00 increase (decrease) in the assumed public offering price of US$             per ADS (the mid-point of the estimated initial public offering price range on the cover page of this prospectus) would increase (decrease) our pro forma net tangible book value after giving effect to the offering by US$             million, the pro forma net tangible book value per ordinary share and per ADS after giving effect to this offering by US$             per ordinary share and US$             per ADS and the dilution in pro forma net tangible book value per ordinary share and per ADS to new investors in this offering by US$             per ordinary share and US$             per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses payable by us. The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

The following table summarizes according to the pro forma as adjusted basis described above as of December 31, 2016, the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of ADSs or ordinary shares) purchased from us, the total consideration paid and the average price per ordinary share/ADS paid before deducting estimated underwriting discounts and

 

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commissions and the estimated offering expenses. The total number of ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the over-allotment option granted to the underwriters.

 

     Ordinary Shares
Purchased
     Total Consideration      Average
Price Per
Ordinary
Share
     Average
Price Per
ADS
 
     Number      Percent      Amount      Percent        

Existing shareholder

               US$               US$           

New investors

               US$               US$           
  

 

 

    

 

 

    

 

 

    

 

 

       

Total

                 
  

 

 

    

 

 

    

 

 

    

 

 

       

 

(1) Assumes an initial public offering price of US$             per ADS, the midpoint of the estimated range of the initial public offering price.

A US$1.00 increase (decrease) in the assumed public offering price of US$             per ADS (the mid-point of the estimated initial public offering price range on the cover page of this prospectus) would increase (decrease) total consideration paid by new investors by US$             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

The discussion and tables above assume no exercise of any outstanding share options and no vesting of any share awards as of December 31, 2016. As of December 31, 2016, there were              ordinary shares issuable upon the exercise of outstanding share options granted to the eligible persons at a weighted average exercise price of US$             per ordinary share and              ordinary shares issuable upon the vesting of share awards granted to our eligible persons at a weighted average price of US$             . See “Management—Share Incentive Plans.” To the extent that any of these awards are exercised or vested, there will be further dilution to new investors.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

Cayman Islands

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws as compared to the United States and provides less protection for investors. In addition, Cayman Islands companies may not have standing to sue before the federal courts of the United States.

Our constitutional documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be subject to arbitration.

Substantially all of our assets are located outside the United States. In addition, most of our directors and executive officers are nationals or residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or these persons, or to enforce judgments obtained in U.S. courts against us or them, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. It may also be difficult for you to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors.

We have appointed             , as our agent to receive service of process with respect to any action brought against us in the U.S. District Court for the Southern District of New York in connection with this offering under the federal securities laws of the United States or of any State in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York in connection with this offering under the securities laws of the State of New York.

Walkers, our counsel as to Cayman Islands law, has advised us that there is uncertainty as to whether the courts of the Cayman Islands would (i) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers that are predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (ii) entertain original actions brought in the Cayman Islands against us or our directors or officers that are predicated upon the civil liability provision of the securities laws of the United States or any state in the United States.

Walkers has informed us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment in personam obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (i) is given by a foreign court having jurisdiction over the defendant according to Cayman Islands conflict of law rules, (ii) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (iii) is final and conclusive, (iv) is not in respect of penalties or taxes or a fine or similar fiscal or revenue obligations or, in certain circumstances, for in personam non-money relief, and (v) was not obtained in a manner, nor is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature.

 

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Because such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands.

People’s Republic of China

Tian Yuan Law Firm has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions.

Tian Yuan Law Firm has advised us further that under PRC law, a foreign judgment, which does not otherwise violate basic legal principles, state sovereignty, safety or social public interest, may be recognized and enforced by a PRC court, based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. As there existed no treaty or other form of reciprocity between China and the U.S. or Cayman Islands governing the recognition and enforcement of judgments as of the date of this prospectus, including those predicated upon the liability provisions of the U.S. federal securities laws, there is uncertainty whether and on what basis a PRC court would enforce judgments rendered by United States courts or Cayman Islands courts.

 

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CORPORATE HISTORY AND STRUCTURE

Our History

We are an exempted company with limited liability incorporated in the Cayman Islands. In September 2014, Puxin Education Technology Group Co., Ltd. (formerly known as Beijing Puxin Education Technology Co., Ltd.), or Puxin Education, was incorporated in Beijing, China. We operate our business through Puxin Education in China.

Beginning in March 2017, we underwent a restructuring in contemplation of this offering. In particular:

 

    Incorporation of the listing entity. In March 2017, we incorporated Puxin Limited under the laws of the Cayman Islands as our proposed listing entity in the Cayman Islands.

 

    Incorporation of Hong Kong and PRC subsidiaries. In April 2017, we established a wholly-owned subsidiary in Hong Kong, Prepshine Holdings Co., Limited, or Prepshine Holdings, to be our intermediate holding company and to facilitate our initial public offering in the United States. In January 2018, we also established a wholly-owned subsidiary in China, Purong (Beijing) Information Technology Co., Ltd., or Purong Beijing, through which we obtained control over Puxin Education based on a series of contractual arrangements entered into on February 5, 2018.

 

    Contractual arrangements. Due to PRC legal restrictions on foreign ownership in education services, we carry out our business in China through Puxin Education and its subsidiaries. In February 2018, we, through our PRC subsidiary, Purong Beijing, entered into a series of contractual arrangements with (i) Puxin Education and its subsidiaries, and (ii) the shareholders of Puxin Education, to obtain effective control of our VIE.

Subsequent to the establishment of Puxin Education, we acquired and established a number of entities to grow our business. See “—Our Corporate Structure.” From 2015 to 2017, the total number of our learning centers increased from 99 as of December 31, 2015 to 231 as of December 31, 2016, and further increased to 400 as of December 31, 2017.

 

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Our Corporate Structure

The following diagram illustrates our corporate structure immediately following the completion of this offering, assuming no exercise of the over-allotment option granted to the underwriters:

 

LOGO

 

(1) Mr. Liang Gao, Mr. Gang Li, Mr. Yun Xiao, Tianjin Puxian Education and Technology Limited Partnership and Ningbo Meishan Bonded Port Area Zhimei Phase V Equity Investment Limited Partnership hold a 5.698%, 3.419%, 1.140%, 18.233% and 7.267% equity interest in Puxin Education, respectively.

The following table presents information about Beijing Meitong Education Consulting Co., Ltd. Shanghai Global Career Education & Technology Holdings Limited, ZMN International Education Consulting (Beijing) Co., Ltd. and other 39 directly and wholly-owned subsidiaries of Puxin Education.

 

Name of Wholly-owned Subsidiary  

Time of Acquisition* or
Establishment

 

Brand Name

1   Beijing Meitong Education Consulting Co., Ltd.   Established in July 2015   Meitong
2   Shanghai Global Career Education & Technology Holdings Limited   Acquired in August 2017   Global Education
3  

ZMN International Education Consulting (Beijing) Co., Ltd.(1)

  Acquired in July 2017   ZMN Education

 

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Name of Wholly-owned Subsidiary  

Time of Acquisition* or
Establishment

 

Brand Name

4   Beijing Shangxin Education Technology Co., Ltd.   Established in September 2014  

Shangxin

Beijing Hope

Beijing Quakers Education

5   Taiyuan Puxin Culture and Arts Co., Ltd.  

Acquired in April 2015

  Taiyuan Fubusi
6   Guangzhou Yingxun Lixiang Education Information Consulting Co., Ltd.   Acquired in May 2015  

Guangzhou Lixiang

Guangzhou Yingxun

7   Beijing Meikaida Education Technology Co., Ltd.   Established in June 2015   —  
8   Taiyuan Puxin Culture Communication Co., Ltd.   Acquired in June 2015   Taiyuan Mercan Education
9   Tianjin Xinsiyuan Culture Communication Co., Ltd.   Acquired in June 2015  

Tianjin Shengjia

10   Beijing Puda Education Technology Co., Ltd.   Established in August 2015   —  
11   Dalian Puxin Education Technology Co., Ltd.   Acquired in August 2015   Dalian Oriental Magic Arts
12   Shenyang Meitong Education Information Consulting Co., Ltd.   Acquired in August 2015  

Shenyang Oriental Magic Arts

Shenyang Being

13   Beijing Pule Education Technology Co., Ltd.   Established in September 2015   —  
14   Jinan Puxin Education Technology Co., Ltd.   Acquired in October 2015   Jinan Daozhen
15   Beijing Ruibao Tongqu Education Consulting Co., Ltd.   Acquired in November 2015   Beijing Ruibao
16   Guizhou Puxintian Education Technology Co., Ltd.   Acquired in November 2015   Guiyang Tiantian
17   Lighthouse Education Technology Co., Ltd.   Acquired in November 2015   Lighthouse Beijing
18   Beijing Jiameixin Education Consulting Co., Ltd.   Acquired in December 2015   Beijing YESSAT
19   Jinan Pude Education Technology Co., Ltd.   Acquired in December 2015   Jinan Delin
20   Jinan Qifa Education Consulting Co., Ltd.   Acquired in January 2016   Jinan Qiru
21   Nanjing Diyu Investment Management Co., Ltd.   Acquired in January 2016   Nanjing Innovation
22   Shaoxing Puxin Education Consulting Co., Ltd.   Acquired in January 2016   Shaoxing Lingxian
23   Yunnan Pude Education Information Consulting Co., Ltd.   Established in January 2016   —  
24   Ningbo Puxin Education Technology Co., Ltd.   Acquired in February 2016   Ningbo Wei’en
25   Chengdu Qidi Wanjuan Education Consulting Co., Ltd.   Acquired in March 2016   Chengdu Shucai
26   Nanjing Dreams & Stars Information Consulting Co., Ltd.   Acquired in March 2016   Nanjing Zhumengtang
27   Tianjin Puxing Education Technology Co., Ltd.   Established in March 2016   —  

 

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Name of Wholly-owned Subsidiary  

Time of Acquisition* or
Establishment

 

Brand Name

28   Shenzhen Davis Information Consulting Co., Ltd.   Acquired in April 2016   Shenzhen Daiweisi
29   Shanghai Pukuan Education Technology Co., Ltd.(2)   Acquired in May 2016   Shanghai Xinkebiao
30   Luoyang Pucai Education Technology Co., Ltd.   Acquired in July 2016   Luoyang Caihong
31   Beijing Pule Travel Co., Ltd.   Established in August 2016   —  
32   Dalian Pude Education Consulting Co., Ltd.   Acquired in November 2016   Dalian Tongfang
33   Xi’an Shanghe Culture Development Co., Ltd.   Acquired in November 2016   Xi’an Yangjian
34   Luzhou Puxin Culture Communication Co., Ltd.   Acquired in December 2016   Luzhou Hanlin
35   Beijing Xuezong Tianxia Education Technology Co., Ltd.   Acquired in January 2017   Beijing Puxing
36   Shenyang Puxin Yingcai Education Consulting Co., Ltd.   Established in February 2017   Shenyang Yingcai
37   Chongqing Puxin Technology Co., Ltd.(3)   Acquired in April 2017   Chongqing Wuyou
38   Shenyang Pude Education Technology Co., Ltd.   Acquired in May 2017   Shenyang Zhongying Yulong
39   Jilin Puxin Education Technology Co., Ltd.   Acquired in June 2017   Jilin Shiji Dongfang
40   Yancheng Tiantian Xiangshang Education Training Co., Ltd.(4)   Acquired in June 2017   Yancheng Tiantian Xiangshang
41   Fuzhou Pude Education Technology Co., Ltd.   Acquired in July 2017   Fuzhou Xueyoufang
42   Hangzhou Puxin Technology Co., Ltd.(5)   Acquired in September 2017  

Hangzhou Feiyue

Hangzhou Yulan

 

* Time of acquisition refers to the time when we obtained effective control over the operations and management of the entities acquired.
(1) Puxin Education is in the process of being registered with local government authorities as shareholder of ZMN International Education Consulting (Beijing) Co., Ltd.
(2) Puxin Education is in the process of being registered with local government authorities as shareholder of Shanghai Pukuan Education Technology Co., Ltd.
(3) Puxin Education is in the process of being registered with local government authorities as shareholder of Chongqing Puxin Technology Co., Ltd.
(4) Puxin Education is in the process of being registered with local government authorities as shareholder of Yancheng Tiantian Xiangshang Education Training Co., Ltd.
(5) Puxin Education is in the process of being registered with local government authorities as shareholder of Hangzhou Puxin Technology Co., Ltd.

Contractual Arrangements with Puxin Education

PRC laws and regulations place certain restrictions on foreign investment in and ownership of private education businesses. We conduct our operations in the PRC principally through our VIE, namely Puxin Education, and its subsidiaries. We have effective control over our VIE and its subsidiaries through a series of contractual arrangements among our wholly-owned PRC subsidiary Purong Beijing, our VIE and its shareholders.

The contractual arrangements, as described in more detail below, collectively allow us to:

 

    exercise effective control over each of our VIE and its subsidiaries;

 

    receive substantially all of the economic benefits of our VIE and its subsidiaries; and

 

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    have an exclusive call option to purchase all or part of the equity interests in and/or assets of each of our VIE and its subsidiaries when and to the extent permitted by PRC laws.

As a result of these contractual arrangements, we are the primary beneficiary of our VIE and its subsidiaries, and, therefore, have consolidated the financial results of our VIE and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.

Below is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary Purong Beijing, our VIE and its shareholders.

Exclusive Management Services and Business Cooperation Agreement

Pursuant to the exclusive management services and business cooperation agreement among Purong Beijing, our VIE and the shareholders of our VIE, Purong Beijing has the exclusive right to provide or designate any third party to provide, among other things, education management consultancy services, permission of intellectual property rights, technological support and business support to our VIE and its subsidiaries. In exchange, our VIE and its subsidiaries pay service fees to Purong Beijing in an amount at Purong Beijing’s discretion. Without the prior written consent of Purong Beijing, our VIE and its subsidiaries cannot accept services provided by or establish similar cooperation relationship with any third party. Purong Beijing owns the exclusive intellectual property rights created as a result of the performance of this agreement unless otherwise provided by PRC laws or regulations. The agreement was entered into on February 5, 2018 and became effective on February 5, 2018 and will remain effective unless unanimously agreed by the parties concerned or unilaterally terminated by Purong Beijing with a written notice. Unless otherwise required by applicable PRC laws, our VIE and its shareholders do not have any right to terminate the exclusive service agreement.

Exclusive Call Option Agreement

Under the exclusive call option agreement among Purong Beijing, our VIE and its shareholders, each of the shareholders of our VIE irrevocably granted Purong Beijing a right to purchase, or designate a third party to purchase, all or any part of their equity interests in our VIE at a purchase price equal to the lowest price permissible by the then-applicable PRC laws and regulations at Purong Beijing’s sole and absolute discretion to the extent permitted by PRC law. The shareholders of our VIE shall promptly give all considerations they received from the exercise of the options to Puxin Education, Purong Beijing or a designated third party of Purong Beijing. Without Purong Beijing’s prior written consent, our VIE and its shareholders shall not enter into any major contract or transfer any equity of our VIE. Without Purong Beijing’s prior written consent, our VIE and its shareholders shall not sell, transfer, license or otherwise dispose of any of our VIE’s assets or allow any encumbrance of any assets, except for the disposal or the encumbrances of the assets that are treated as necessary for their daily business operations with the value of the assets involved in a single transaction not exceeding RMB100,000. Our VIE shall not be dissolved or liquidated without the written consent by Purong Beijing. This agreement was entered into on February 5, 2018 and became effective on February 5, 2018 and shall remain in effect upon expiry or early termination of this agreement.

Equity Pledge Agreement

Under the equity interest pledge agreement among Purong Beijing, our VIE and its shareholders, our VIE’s shareholders pledged all of their equity of our VIE to Purong Beijing as security for performance of the obligations of our VIE and its shareholders under the exclusive call option agreement, the exclusive management services and business cooperation agreement, the powers of attorney and the loan agreement. If any of the specified events of default occurs, Purong Beijing may exercise the right to enforce the pledge immediately. Purong Beijing may transfer all or any of its rights and obligations under the equity pledge agreement to its designee(s) at any time. The equity pledge agreement is binding on our VIE’s shareholders and their successors. The equity pledge agreement became effective on February 5, 2018 and the pledge under the equity pledge

 

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agreement became effective on February 5, 2018 and will remain in effect until the fulfillment of all the obligations under the exclusive call option agreement, the exclusive management services and business cooperation agreement, the powers of attorney and the loan agreement.

Powers of Attorney

Pursuant to the powers of attorney executed by our VIE and our VIE’s shareholders, each of them irrevocably authorized Purong Beijing to act on their respective behalf as exclusive agent and attorney, to the extent permitted by law, with respect to all rights of shareholders concerning all the equity interest and sponsor interest held by each of them in our VIE or its subsidiaries, including but not limited to proposing to convene or attend shareholder meetings, board meetings or council meetings, signing the resolutions and minutes of such meetings, exercising all the rights as shareholders or sponsors (including but not limited to voting rights, nomination rights, appointment rights, the right to receive dividends and the right to sell, transfer, pledge or dispose of all the equity or the sponsor interest held in part or in whole).

Spousal Consent Letters

Pursuant to the spousal consent letters executed by the spouses of certain shareholders of our VIE, the signing spouses confirm and agree to the execution of the exclusive call option agreement, the exclusive management services and business cooperation agreement, the powers of attorney and the equity pledge agreement described above by the applicable shareholders. They further undertake not to hinder the disposal of the equity and not to make any assertions in connection with the equity of our VIE held by the applicable shareholders, and confirm that the applicable shareholders can perform the relevant transaction documents described above and further amend or terminate such transaction documents without the authorization or consent from such spouse. The spouse of each applicable shareholder agrees and undertakes that if he/she obtains any equity of our VIE held by the applicable shareholders for any reasons, he/she would be bound by the transaction documents described above.

Letters of Commitment

Pursuant to the letters of commitment executed by the partners of Tianjin Puxian Education and Technology Limited Partnership, or Tianjin Puxian, and Ningbo Meishan Bonded Port Area Zhimei Phase V Equity Investment Limited Partnership, or Ningbo Zhimei, which are the shareholders of our VIE, all the partners of Tianjin Puxian and Ningbo Zhimei irrecoverably promise that they will not pledge, sell or dispose of the partnership interest in Tianjin Puxian and Ningbo Zhimei held by them, grant a security interest or a priority right in such partnership interest to any third party or enter into any transactions with the same economic results that may affect the priority of the equity pledge and the stable implementation of structural contracts, including the exclusive call option agreement, the exclusive management service and business cooperation agreement, the equity pledge agreement, the powers of attorney and the loan agreement.

Loan Agreement

Pursuant to the loan agreement among Purong Beijng and Ningbo Zhimei, Purong Beijing has granted an interest-free loan to Ningbo Zhimei, the shareholder of our VIE, which may only be used for the purpose of acquiring its equity interests in the VIE. Purong Beijing may require acceleration of repayment at its absolute discretion. When Ningbo Zhimei makes early repayment of the outstanding amount, Purong Beijing or a third party designated by it may purchase the equity interests held by Ningbo Zhimei in our VIE at a price equal to the outstanding amount of the loan, subject to any applicable PRC laws, rules and regulations. Ningbo Zhimei undertakes not to enter into any prohibited transactions in relation to our VIE, including the transfer of any business, material assets or equity interests in our VIE to any third party.

In the opinion of Tian Yuan Law Firm, our PRC legal counsel, the contractual arrangements among Purong Beijing, Puxin Education and its shareholders are valid, binding and enforceable under current PRC law.

 

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However, these contractual arrangements may not be as effective in providing control as direct ownership. There are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. For a description of the risks related to our corporate structure, please see “Risk Factors—Risk Factors Related to Our Corporate Structure.”

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

We present below our selected consolidated financial data for the period indicated. The following selected consolidated statement of operations data for the year ended December 31, 2016 and the selected consolidated balance sheet data as of December 31, 2016 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

The selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results are not necessarily indicative of our results for any future periods.

Consolidated Statement of Operations Data

 

     For the Year Ended December 31,  
     2016  
     RMB      US$  
     (in thousands)  

Net revenues

     439,181        63,255  

Cost of revenues

     257,995        37,159  
  

 

 

    

 

 

 

Gross profit

     181,186        26,096  
  

 

 

    

 

 

 

Operating expenses:

     

Selling expenses (including share-based compensation expenses of RMB991)

     123,370        17,769  

General and administrative expenses (including share-based compensation expenses of RMB50,272)

     185,496        26,717  
  

 

 

    

 

 

 

Total

     308,866        44,486  
  

 

 

    

 

 

 

Operating loss

     (127,680      (18,390
  

 

 

    

 

 

 

Interest income

     464        67  

Loss before income taxes

     (127,216      (18,323

Income tax expenses

     388        56  
  

 

 

    

 

 

 

Net loss

     (127,604      (18,379
  

 

 

    

 

 

 

Less: Net loss contributable to noncontrolling interest

     (48      (7

Net loss attributable to equity shareholders of Puxin Education Technology Group Co., Ltd.

     (127,556      (18,372

 

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Consolidated Balance Sheet Data

 

     As of December 31,  
     2016  
     RMB      US$  
     (in thousands)  

Current assets

     

Cash and cash equivalents

     100,109        14,419  

Prepaid expenses and other current assets

     36,262        5,223  

Amounts due from a related party

     9        1  

Total current assets

     136,380        19,643  
  

 

 

    

 

 

 

Non-current assets

     

Restricted cash

     5,409        779  

Property, plant and equipment, net

     33,723        4,857  

Intangible assets

     55,167        7,946  

Goodwill

     346,972        49,974  

Deferred tax assets

     637        92  

Rental deposit

     15,829        2,280  

Total non-current assets

     457,737        65,928  
  

 

 

    

 

 

 

Total assets

     594,117        85,571  
  

 

 

    

 

 

 

Accrued expenses and other current liabilities

     173,395        24,975  

Income taxes payable

     2,925        421  

Deferred revenue

     318,319        45,847  

Amounts due to related parties

     3,048        439  

Deferred tax liabilities

     13,734        1,978  

Total liabilities

     511,421        73,660  
  

 

 

    

 

 

 

Total mezzanine equity

     120,000        17,284  
  

 

 

    

 

 

 

Total shareholders’ deficit

     (37,202      (5,358
  

 

 

    

 

 

 

Non-controlling interests

     (102      (15
  

 

 

    

 

 

 

Total deficit

     (37,304      (5,373
  

 

 

    

 

 

 

Total liabilities, mezzanine equity and total shareholders’ deficit

     594,117        85,571  

Non-GAAP Financial Measures

To supplement our consolidated financial statements which are presented in accordance with U.S. GAAP, we also use adjusted EBITDA and adjusted net loss as additional non-GAAP financial measures. We present these non-GAAP financial measures because they are used by our management to evaluate our operating performance. We also believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our consolidated results of operations in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies.

Adjusted EBITDA and adjusted net loss should not be considered in isolation or construed as an alternative to net loss or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to compare the historical non-GAAP financial measures with the most directly comparable GAAP measures. Adjusted EBITDA and adjusted net loss presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

 

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Adjusted EBITDA represents net loss, which excludes depreciation, amortization, interest expenses and income tax expenses, before share-based compensation expenses. The table below sets forth a reconciliation of our net loss to adjusted EBITDA for the period indicated:

 

     For the Year Ended December 31,  
     2016  
     RMB      US$  
     (in thousands)  

Net loss

     (127,604      (18,379

Add:

     

Income tax expenses

     388        56  

Depreciation of property, plant and equipment

     3,735        538  

Amortization of intangible assets

     10,158        1,463  

EBITDA

     (113,323      (16,322

Add:

     

Share-based compensation expenses

     51,263        7,383  
  

 

 

    

 

 

 

Adjusted EBITDA

     (62,060      (8,939
  

 

 

    

 

 

 

Adjusted net loss represents net loss before share-based compensation expenses. The tables below set forth a reconciliation of our net loss to adjusted net loss for the period indicated:

 

     For the Year Ended December 31,  
     2016  
     RMB      US$  
     (in thousands)  

Net loss

     (127,604      (18,379

Add:

     

Share-based compensation expenses

     51,263        7,383  
  

 

 

    

 

 

 

Adjusted net loss

     (76,341      (10,996
  

 

 

    

 

 

 

Key Operating Data

The following table presents our key operating data for the periods indicated:

 

     For the Year Ended December 31,  
     2016     2017  

Student enrollments(1)

    

K-12 tutoring services

     451,353       1,238,070  

Study-abroad tutoring services

     3,592       37,653  

Number of learning centers(2)

     231       400  

K-12 group class student retention rate(3)

     65.1     70.1

K-12 course withdrawal rate(5)

     4.7     4.7

 

(1) Refers to the cumulative total number of courses registered and paid for by our students during a given period of time; if one student enrolls in multiple courses, it will be counted as multiple student enrollments.
(2) Refers to the total number of locations of our premises providing educational services.
(3) Refers to the number of students who continue to enroll in K-12 tutoring group class courses (excluding promotional programs) at our schools operating under our management for over 12 months after completing a K-12 tutoring group class course in a particular period as a percentage of the total number of students who complete K-12 tutoring group class courses during the same period.
(4) Refers to the number of students withdrawing from a K-12 course as a percentage of the total number of students enrolled in that course at the beginning.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Data and Operating Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a successful consolidator of the after-school education industry in China. We have strong acquisition and integration capabilities to effectively improve the education quality and operational performance of acquired schools. Through acquisitions and organic growth, we have grown rapidly and became the third largest after-school education service provider in China in 2017 in terms of student enrollments, according to the Frost & Sullivan report. Since our inception, we have acquired 48 schools and built a nationwide network of 400 learning centers across 35 cities in China as of December 31, 2017. Our total student enrollments increased 180.4% to 1,275,723 in 2017 from 454,945 in 2016, representing the fastest growth among major after-school education service providers in China, according to the Frost & Sullivan report.

We offer a full spectrum of K-12 tutoring and study-abroad tutoring programs designed to help students achieve academic excellence, as well as prepare for admission tests and applications for top schools, universities and graduate programs in China and other global destinations. In addition to classroom-based tutoring, we have also developed online and mobile applications to increase students’ after-class exposure to our services and enhance their learning experience.

Major Factors Affecting Our Results of Operations

We operate in China’s after-school education market, and our results of operations and financial condition are significantly affected by general factors driving this market. China’s rapid economic growth and higher per capita disposable income have led to both increased spending on after-school education services and intensified competition for high-quality education resources.

Furthermore, we expect to benefit from the positive effect of China’s new population policies. In recent years, China has relaxed its “One-Child Policy.” Starting from 2015, each family is allowed to have two children. We believe in coming years this change in policy will drive the growth of K-12 student population and in turn the demand for after-school education services.

We are also affected by the regulatory environment governing the PRC after-school education industry, including the qualification and licensing requirements for entities providing education services.

In addition to general economic conditions and industry factors, we believe the following company-specific factors have had, and will continue to have, a significant impact on our results of operations.

 

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Number of Student Enrollments

Our revenues primarily consist of tuition from students enrolled in our courses and consulting programs, which is directly driven by the increase in student enrollments. In 2016, our total student enrollments was 454,945. Our growth in student enrollments is directly affected by our ability to recruit new students and retain our current students.

Our ability to attract new students is largely dependent on our reputation and brand recognition and the varieties of our courses and service offerings. Our reputation and brand recognition were primarily driven by the proven academic performance of our students and the high-quality of our teaching faculty. Besides, we have expanded our service offerings to a full spectrum of after-school education services to students of all age groups in various class formats since establishment. Currently, our course and service offerings cover all core subjects in China’s school curricula at each grade level of the K-12 system, as well as certain extra-curricular courses, such as painting and calligraphy. We initially offered group class tutoring services and personalized tutoring services in May 2015 and began offering online courses in August 2017. We started study-abroad test preparation courses and study-abroad consulting services in July 2015 and September 2015, respectively. By acquiring Global Education in August 2017, we have further expanded our course and service offerings and strengthened our brand recognition.

In addition, a high K-12 group class student retention rate has also contributed to our total student enrollment growth. In 2016, the K-12 group class student retention rate of our schools operating under our management for over 12 months reached 65.1%, as a result of our high-quality services and the high satisfaction rate of our current students and their parents. Besides, our expansion of courses and service offerings also allows us to conduct cross-selling, improve student stickiness to realize synergies across business lines and maximize student lifetime value for our long-term growth.

We expect our student enrollments will continue to grow and our net revenues will continue to grow. We believe that the after-school education market is less sensitive to changes in economic conditions, and we therefore do not expect the changes in macro-economic conditions to have any immediate significant impact on our business.

Network of Learning Centers

Our ability to expand our network of learning centers is one of the most important factors affecting our results of operations. The table below shows the number of our learning centers in operation throughout the period indicated and the number of our newly acquired centers during each period.

 

     For the Year Ended December 31,  
     2016      2017  

Learning centers at the beginning of the period

     99        231  

Newly acquired learning centers during the period

     119        155  

Newly constructed learning centers during the period

     33        46  

Closed or suspended learning centers during the period

     (20      (32
  

 

 

    

 

 

 

Learning centers at the end of the period

     231        400  
  

 

 

    

 

 

 

We have expanded our network primarily through acquisitions. This approach enables us to acquire large student base in a new market with lower customer acquisition and marketing costs by leveraging the well-established reputation of the acquired schools in local markets. We plan to continue to grow our network of learning centers primarily through acquisitions, which will enable us to enlarge our nationwide coverage, penetrate target markets where we do not have presence currently and enhance our market position where we already operate in.

 

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Pricing

Our revenues and profitability are directly affected by the pricing for our services. For K-12 tutoring and study-abroad test preparation courses, we typically charge students tuition based on the hourly rate of the student’s course type and the total number of class hours the student takes. We set hourly rates for our courses based on a number of factors, including class size, course type, customer segmentation, geographic location of the course offered and our competitors’ fee rates for similar offerings. For study-abroad consulting services, we charge students fees based on the overall services we provide to them, such as preparing application materials based on their target schools and universities, making study plans and preparing visa applications.

In addition to courses we offer at our regular prices, we also offer promotional K-12 tutoring programs to attract new students primarily during the summer and winter breaks, as well as the Labor Day and National Day holidays in China. The prices for such promotional programs are usually at a substantial discount of our regular tuition fees. As a result, the profit margin of our promotional tutoring programs is lower than our regular tutoring programs, and the mix of our regular tutoring programs and promotional tutoring programs affects our profitability.

For each acquired school, we usually continue to follow its tuition fee standards prior to our acquisition to maintain the stable student retention and operations of the school. We may adjust the tuition fees for new contracts when the acquired school’s product and service quality has been improved. The tuition fee levels of our schools remained relatively stable in 2016 and 2017. In the long run, we seek to gradually increase our tuition fee level without compromising our student enrollments.

Our Ability to Control Costs and Improve Our Operating Efficiency

Our profitability depends significantly on our ability to control our costs and improve our operating efficiency.

Our cost of revenues consists primarily of teaching staff costs, rental and facility maintenance expenses for our learning centers. Teaching staff costs depend on the number of our teaching staff and their level of compensation. We offer attractive compensation to our teachers to attract and retain the best teaching talent. The number of our full-time teachers and consultants increased from 1,914 as of December 31, 2016 to 4,388 as of December 31, 2017, in line with our efforts to enhance our teaching quality, the growth of student enrollments and the expansion of our network and course offerings. We are able to improve our operating efficiency and operating leverage through increased classroom utilization and increased number of courses that each teacher instructs, which allows us to increase our gross margin.

Our operating expenses consist of sales and marketing expenses, and general and administrative expenses. Historically, we have incurred relatively low sales and marketing expenses primarily because we expanded student base through acquisitions of schools and relied on word-of-mouth referrals to recruit new students.

Going forward, we expect that our total costs and expenses will increase in line with the expansion of our network and education service offerings and additional costs and expenses associated with becoming a public company. However, this increase is likely to be partially offset by our increasing economies of scale and improved operating efficiency.

Results of Operations

The following table sets forth a summary of our consolidated results of operations, both in absolute amounts and as a percentage of total net revenues, for the period indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. Our limited

 

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operating history makes it difficult to predict our future operating results. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

 

     For the Year Ended December 31,  
     2016  
     RMB      US$      %  
     (in thousands, except for percentages)  

Net revenues

     439,181        63,255        100.0  

Cost of revenues

     257,995        37,159        58.7  
  

 

 

    

 

 

    

 

 

 

Gross profit

     181,186        26,096        41.3  
  

 

 

    

 

 

    

 

 

 

Operating expenses

     308,866        44,486        70.3  
  

 

 

    

 

 

    

 

 

 

Selling expenses(1)

     123,370        17,769        28.1  

General and administrative expenses(2)

     185,496        26,717        42.2  
  

 

 

    

 

 

    

 

 

 

Operating loss

     (127,680      (18,390      (29.1
  

 

 

    

 

 

    

 

 

 

Interest income

     464        67        0.1  

Loss before income taxes

     (127,216      (18,323      (29.0

Income tax expenses

     388        56        0.1  
  

 

 

    

 

 

    

 

 

 

Net loss

     (127,604      (18,379      (29.1
  

 

 

    

 

 

    

 

 

 

 

(1) Includes share-based compensation expenses of RMB991,000
(2) Includes share-based compensation expenses of RMB50,272,000

Net Revenues

Our net revenues primarily consist of revenues generated from (i) K-12 tutoring services, and (ii) study-abroad tutoring services, consisting of study-abroad test preparation services and study-abroad consulting services. In 2016, we derived substantially all of our net revenues from tuition that we charge our students for these services.

In 2016, we generated net revenues of RMB439.2 million (US$63.3 million). The following table sets forth the breakdown of our total net revenues, both in absolute amounts and as a percentage of total net revenues, for the period indicated.

 

     For the Year Ended December 31,  
     2016  
     RMB      US$      %  
     (in thousands, except for percentages)  

Net revenues:

        

K-12 tutoring services

     370,712        53,394        84.4  

Study-abroad tutoring services(1)

     68,469        9,861        15.6  
  

 

 

    

 

 

    

 

 

 

Total net revenues

     439,181        63,255        100.0  
  

 

 

    

 

 

    

 

 

 

 

(1) Consists of study-abroad test preparation services and study-abroad consulting services.

K-12 Tutoring Services

In 2016, our net revenues from K-12 tutoring services were RMB370.7 million (US$53.4 million), representing 84.4% of our total net revenues. We typically collect tuition from students in advance for the classes that they purchase and recorded the tuition initially as deferred revenues. We recognize tuition as revenues proportionally as the tutoring services are delivered.

 

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For group class courses, we offer tuition refunds to the students who withdraw from the course after attending the first few classes. For personalized tutoring courses, we offer refunds for undelivered classes to students who withdraw from the courses at any time. Historically, we did not experience material refunds for our K-12 tutoring services. Refunds are deducted from deferred revenues and have no material impact on recognized revenues.

Study-abroad Tutoring Services

Our study-abroad tutoring services consist of study-abroad test preparation services and study-abroad consulting services. In 2016, our net revenues from study-abroad tutoring services were RMB68.5 million (US$9.9 million), representing 15.6% of our total net revenues.

We collect tuition from students in advance for the study-abroad test preparation classes that they purchase and initially recorded the tuition as deferred revenues. We recognize tuition as revenue proportionally as the tutoring services are delivered. Our refund policies for study-abroad test preparation services are generally same as those for K-12 tutoring services. Historically, we did not experience material refunds for our study-abroad tutoring services. Refunds are deducted from deferred revenues and have no material impact on recognized revenues.

We charge each student consulting fees in advance based on the scope of study-abroad consulting services requested by the student and recognize such consulting fees as revenue when the consulting services are delivered. Consistent with market practices, we offer refunds of the consulting fees, excluding a small portion to cover the costs in connection with the services we delivered, to the students who fail to gain any admission or obtain the relevant visa. Historically, we did not experience material refunds for our study-abroad consulting services. Refunds are deducted from deferred revenues and have no impact on recognized revenues.

Cost of Revenues

Our cost of revenues consists primarily of (i) teaching staff cost, primarily including salaries, bonuses, social insurance and benefits for our teaching staff, (ii) rental expenses for classroom, (iii) facility maintenance expenses for classroom, and (iv) course material expenses. Our cost of revenues accounted for 58.7% of our net revenues in 2016. The following table sets forth the components of cost of revenues, both in absolute amount and as a percentage of net revenues, for the period indicated.

 

     For the Year Ended December 31,  
     2016  
     RMB      US$      %  
     (in thousands, except for percentages)  

Net revenues

     439,181        63,255        100.0  
  

 

 

    

 

 

    

 

 

 

Cost of revenues:

        

Teaching staff cost

     178,919        25,770        40.7  

Rental expenses

     53,663        7,729        12.2  

Facility maintenance expenses

     10,454        1,506        2.4  

Others

     14,959        2,154        3.4  
  

 

 

    

 

 

    

 

 

 

Total cost of revenues

     257,995        37,159        58.7  
  

 

 

    

 

 

    

 

 

 

Teaching staff cost is the largest component of our cost of revenues. We rely on our teachers to deliver educational services. Our teachers consist of both full-time teachers and part-time teachers. Compensation and benefits of our full-time teachers consist primarily of base salary, teaching fees based on hourly rates, performance-linked bonuses, as well as social insurance and benefits. Compensation of our part-time teachers is comprised of teaching fees based on hourly rates and teaching hours.

 

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The following table sets forth the breakdown of our cost of revenues by our business segments, both in absolute amounts and as a percentage of total net revenues, for the period indicated.

 

     For the Year Ended December 31,  
     2016  
     RMB      US$      %  
     (in thousands, except for percentages)  

Net revenues

     439,181        63,255        100.0  
  

 

 

    

 

 

    

 

 

 

Cost of revenues:

        

K-12 tutoring services

     217,797        31,369        49.6  

Study-abroad tutoring services(1)

     40,198        5,790        9.1  
  

 

 

    

 

 

    

 

 

 

Total cost of revenues

     257,995        37,159        58.7  
  

 

 

    

 

 

    

 

 

 

 

(1) Consists of study-abroad test preparation services and study-abroad consulting services.

We anticipate that our total cost of revenues will continue to increase as we continue to acquire schools to expand our network and hire additional teachers.

Gross Profit

As a result of the foregoing, our gross profit was RMB181.2 million (US$26.1 million) and our gross margin was 41.3% in 2016. The following table sets forth the breakdown of our gross profit by our business segments for the period indicated.

 

    For the Year Ended December 31,  
    2016  
    RMB     US$  
    (in thousands)  

K-12 tutoring services

    152,915       22,024  

Study-abroad tutoring services(1)

    28,271       4,072  
 

 

 

   

 

 

 

Gross profit

    181,186       26,096  
 

 

 

   

 

 

 

 

(1) Consists of study-abroad test preparation services and study-abroad consulting services.

Operating Expenses

Our operating expenses consist of selling expenses and general and administrative expenses. The following table sets forth the components of operating expenses, in absolute amounts and as a percentage of total net revenues, for the period indicated.

 

     For the Year Ended December 31,  
     2016  
     RMB      US$      %  
     (in thousands, except for percentages)  

Net revenues

     439,181        63,255        100.0  
  

 

 

    

 

 

    

 

 

 

Operating expenses:

        

Selling expenses(1)

     123,370        17,769        28.1  

General and administrative expenses(2)

     185,496        26,717        42.2  
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     308,866        44,486        70.3  
  

 

 

    

 

 

    

 

 

 

 

(1) Includes share-based compensation expenses of RMB991,000
(2) Includes share-based compensation expenses of RMB50,272,000

 

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Selling Expenses

Selling expenses consist primarily of (i) salaries, performance-based bonuses and employee benefits for our sales and marketing personnel, (ii) office rental and general expenses associated with the sales and marketing of our business, (iii) advertising and promotion expenses, and (iv) traveling and communication expenses associated with the sales and marketing. We expect that our selling expenses will continue to increase as we further expand into new geographic locations and enhance our brand recognition.

General and Administrative Expenses

General and administrative expenses consist primarily of (i) salaries, employee benefits and other headcount-related expenses associated with the administration of our business, (ii) office rental and others, (iii) professional service fees, (iv) depreciation and amortization expenses associated with the office space used in our general and administrative activities, and (v) traveling and communication expenses associated with office and administrative functions. We expect that our general and administrative expenses will continue to increase in the near term as we hire additional personnel and incur additional costs in connection with the expansion of our business and with being a public company, including costs to enhance our internal controls.

Our operating expenses include share-based compensation charges. See “—Critical Accounting Policies—Share-Based Compensation.”

Taxation

Cayman Islands

We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.

Hong Kong

Our wholly-owned subsidiary in Hong Kong, Prepshine Holdings Co., Limited, or Prepshine Holdings, is subject to an income tax rate of 16.5% for taxable income earned in Hong Kong. No Hong Kong profit tax has been levied as we did not have assessable profit that was earned in or derived from our wholly-owned Hong Kong subsidiaries during the period indicated. Hong Kong does not impose a withholding tax on dividends.

PRC

Our subsidiaries and consolidated VIE in China are companies incorporated under PRC law and, as such, are subject to PRC enterprise income tax on their taxable income in accordance with the relevant PRC income tax laws. Pursuant to the EIT Law, which became effective on January 1, 2008, a uniform 25% enterprise income tax rate is generally applicable to both foreign-invested enterprises and domestic enterprises, except where a special preferential rate applies. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.

We are subject to business tax before May 2016. Since May 2016, VAT was phased in to replace the business tax that was previously applicable to the services we provide. We are subject to VAT at a rate of 6% on the services we provide, less any deductible VAT we have already paid or borne. We are also subject to surcharges on VAT payments in accordance with PRC law. In addition, some of our subsidiaries in China that participated in the non-diploma education service industry choose the simplified method of taxation where the VAT collection rate is 3%.

As a Cayman Islands holding company, we may receive dividends from our PRC subsidiaries through Prepshine Holdings. The PRC Enterprise Income Tax Law and its implementing rules provide that dividends

 

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paid by a PRC entity to a non-resident enterprise for income tax purposes is subject to PRC withholding tax at a rate of 10%, subject to reduction by an applicable tax treaty with China. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to apply the reduced withholding tax rate: (i) it must be a company; (ii) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (iii) it must have directly owned such required percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. In August 2015, the State Administration of Taxation promulgated the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatment under Tax Treaties, or SAT Circular 60, which became effective on November 1, 2015. SAT Circular 60 provides that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax. Instead, non-resident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file the necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. Accordingly, Prepshine Holdings may be able to benefit from the 5% withholding tax rate for the dividends it receives from Purong Beijing, if it satisfies the conditions prescribed under SAT Circular 81 and other relevant tax rules and regulations. However, according to SAT Circular 81 and SAT Circular 60, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future.

If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the EIT Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%, which could result in unfavorable tax consequences to us and our non-PRC shareholders. See “Risk Factors—Risk Factors Related to Doing Business in the PRC—Under the PRC Enterprise Income Tax Law, or the EIT Law, we may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”

Internal Control Over Financial Reporting

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal control over financial reporting. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting.

In the course of auditing our consolidated financial statements as of December 31, 2016 and for the year ended December 31, 2016, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting and other control deficiencies as of December 31, 2016. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

The material weakness identified relates to our lack of comprehensive accounting policies and procedures manual in accordance with U.S. GAAP. We do not believe that this material weakness or the other control deficiencies had a significant impact on our financial reporting. To remedy the identified material weakness and the other control deficiencies, we have implemented, and plan to continue to develop, a full set of U.S. GAAP accounting policies and financial reporting procedures as well as related internal control policies, including implementing a comprehensive accounting manual to guide the day-to-day accounting operation and reporting work and measures to improve controls over our information systems. We intend to remediate this material weakness and the other control deficiencies in multiple phases and expect that we will incur certain costs for

 

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implementing our remediation measures. The implementation of the measure, however, may not fully address the material weaknesses and the other control deficiencies identified in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. See “Risk Factors—Risk Factors Related to Our Business and Industry—If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately or timely report our results of operations or prevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.”

Critical Accounting Policies and Estimates

We prepare our financial statements in accordance with U.S. GAAP, which requires our management to make judgment, estimates and assumptions. We continually evaluate these judgments, estimates and assumptions based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and various assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements. You should read the following description of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and other disclosures included in this prospectus.

Revenue Recognition

We provide K-12 tutoring services, study-abroad test preparation services and study-abroad consulting services to students. We recognize revenues when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the service has been performed and received by the customer, (iii) the amount of fees from the customer is fixed or determinable, and (iv) collectability is reasonably assured.

Our revenue represents amounts receivable for services provided in the normal course of our business, net of discounts and sales-related tax. The primary sources of our revenues are as follows:

K-12 Tutoring Services

We provide various types of after-school tutoring services to help students ranging from ages three to 18 to improve their academic performance and enroll in their desired schools and universities. The after-school tutoring services primarily consist of after-school group class courses and personalized tutoring courses. Tuition fees are generally collected in advance and are initially recorded as deferred revenue. Such deferred revenue is recognized as revenue proportionally as the tutoring sessions are delivered.

Study-abroad Test Preparation Services

We provide study-abroad test preparation services to help students prepare for admission tests for high schools, universities and graduate programs primarily in English-speaking countries. Tutoring fees are collected in advance and are initially recorded as deferred revenue which is recognized proportionately as the tutoring sessions are delivered.

Study-abroad Consulting Services

We provide study-abroad consulting services to offer quality advisory guidance for students who intend to study abroad. We charge each student upfront prepaid consulting service fees based on the scope of consulting services requested by the student and recognize revenue as the services are delivered.

 

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Business Combinations

Business combinations are recorded using the acquisition method of accounting. The purchase price of the acquisition is allocated to the tangible assets, liabilities, identifiable intangible assets acquired and non-controlling interest, if any, based on their estimated fair value as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. Acquisition-related expenses and restructuring costs are expensed as incurred.

In order to recognize the fair value of assets acquired and liabilities assumed, mainly consisting of intangible assets, goodwill and warrants granted to the shareholders of the entities acquired as acquisition consideration, we used valuation techniques such as discounted cash flow analysis, ratio analysis in comparison to comparable companies in similar industries under the income approach, market approach and cost approach. Major factors considered include historical financial results and assumptions including future growth rates, an estimate of weighted average cost of capital and the effect of expected changes in regulation. Most of the valuations of our acquired businesses have been performed by independent valuation specialists under our management’s supervision. We believe that the estimated fair value assigned to the assets acquired and liabilities assumed are based on reasonable assumptions and estimates that market participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. Intangible assets with finite lives are amortized over their estimated useful lives. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to future cash flows.

We test goodwill for impairment annually at the end of the fourth quarter, or sooner if impairment indicators arise. In the evaluation of goodwill for impairment, we may perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is not, no further analysis is required. If it is, a two-step goodwill impairment test is performed to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit, if any.

The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.

Based on the results of our annual goodwill impairment tests, as of testing date, no impairment was identified for all the periods presented.

Acquired intangible assets other than goodwill consist of student base, which are carried at cost, less accumulated amortization and impairment. The amortization period for student base is 2.5 to 7.0 years.

Income Taxes

Current income taxes are provided for in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and

 

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their reported amounts in the financial statements. Net operating loss carry forwards and credits are applied using enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized. The impact of an uncertain income tax position is recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Interest and penalties on income taxes will be classified as a component of the provisions for income taxes.

Fair Value of Ordinary Shares

Prior to our initial public offering, we were a private company with no quoted market prices for our ordinary shares. We therefore needed to make estimates of the fair value of our ordinary shares at various dates for the purpose of determining the fair value of our ordinary shares at the date of the grant of share-based compensation awards to our employees to determine the grant date fair value of the award.

The following table sets forth the fair value of our ordinary shares estimated at different times prior to our initial public offering with the assistance from an independent valuation firm:

 

Date

  

Class of Shares

   Fair Value
per Share
     DLOM     Discount Rate    

Purpose of Valuation

          (RMB)                   

March 31, 2016

   Ordinary shares      3.881        20     16.0   To determine the fair value of share option grant

June 30, 2016

   Ordinary shares      4.037        20     16.0   To determine the fair value of share option grant

September 30, 2016

   Ordinary shares      4.443        15     16.0   To determine the fair value of share option grant

December 31, 2016

   Ordinary shares      4.629        15     16.0   To determine the fair value of share option grant

The valuations of our ordinary shares were performed using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Audit and Accounting Practice Aid Series: Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the AICPA Practice Guide. The determination of the fair value of our ordinary shares requires complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of valuation. The option-pricing method was used to allocate our equity value to preferred shares or other senior securities and ordinary shares, taking into account the guidance prescribed by the AICPA Practice Guide. This method treats ordinary shares and preferred shares or other senior securities as call options on the equity value, with exercise prices based on their respective payoffs upon a liquidity event.

In determining our equity value, we applied the discounted cash flow analysis based on our projected cash flow using our best estimate as of the valuation date. The major assumptions used in calculating the fair value of our equity include:

 

    Discount Rates. The discount rates listed out in the table above were based on the weighted average cost of capital, which was determined based on a number of factors including risk-free rate, comparative industry risk, equity risk premium, company size and non-systemic risk factors.

 

    Comparable Companies. In deriving the weighted average cost of capital used as the discount rate under the income approach, seven publicly traded companies were selected for reference as our guideline companies. The guideline companies were selected based on the following criteria: (i) Chinese companies operate in the education service industry and (ii) their shares are publicly traded in the United States and Hong Kong.

 

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    Discount for Lack of Marketability, or DLOM. We applied DLOM to reflect the fact that there is no ready market for shares in a closely-held company like us. When determining the DLOM, the Black-Scholes option pricing model was used. Under this option-pricing method, the cost of the put option, which can hedge the price change before the privately held shares can be sold, was considered as a basis to determine the discount for lack of marketability. This option pricing method was used because it takes into account certain company-specific factors, including the timing of the expected initial public offering and the volatility of the share price of the guideline companies engaged in the same industry.

The increase in the fair value of our ordinary shares from RMB3.881 per share as of March 31, 2016 to RMB4.037 per share as of June 30, 2016, RMB4.443 per share as of September 30, 2016 and RMB4.629 per share as of December 31, 2016 was primarily attributable to our strategic acquisitions and continuous organic growth of our business.

Share-based Compensation

We measure the cost of employee share options based on the grant date fair value of the award and recognizes compensation cost over the period during which an employee is required to provide services in exchange for the award, which generally is the vesting period. For the graded vesting share options, we recognize the compensation cost over the requisite service period for each separately vesting portion of the award as if the award is, in substance, multiple awards. When no future services are required to be performed by the employee in exchange for an award of equity instruments, the cost of the award is expensed on the grant date.

The following table sets forth certain information regarding the share options granted to our employees at different dates in 2015 and 2016:

 

Grant Date

  Number of
Options
Granted
    Weighted Average
Exercise Price per
Option
    Weighted Average Fair
Value per Option at
the Grant Dates
    Intrinsic Value per
Option at the
Grant Dates
    Type of Valuation
          (RMB)     (RMB)     (RMB)      

March 1, 2015

    7,050,000       0.040       0.834       0.832     Retrospective

June 30, 2015

    52,200,000       0.040       0.835       0.835     Retrospective

September 30, 2015

    12,600,000       0.044       2.115       2.113     Retrospective

December 31, 2015

    35,400,000       0.043       2.273       2.273     Retrospective

March 31, 2016

    4,900,000       0.050       3.833       3.831     Retrospective

June 30, 2016

    2,950,000       0.084       3.955       3.953     Retrospective

September 30, 2016

    3,045,500       0.096       4.351       4.347     Retrospective

December 31, 2016

    4,509,000       0.100       4.532       4.529     Retrospective

The valuation was performed retrospective valuations instead of contemporaneous valuations because, at the time of the valuation dates, the financial and limited human resources were principally focused on business development efforts. This approach is consistent with the guidance prescribed by the AICPA Audit and Accounting Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid.

In determining the value of share options, we have used the binomial option pricing model, with assistance from an independent third-party valuation firm. Under this option pricing model, certain assumptions, including the risk-free interest rate, the expected dividends on the underlying ordinary shares, and the expected volatility of the price of the underlying shares for the contractual term of the options are required in order to determine the fair value of our options.

 

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The fair value of an option award is estimated on the date of grant using the binomial option pricing model that uses the following assumptions:

 

     Grant Date
     2015    2016

Risk-free rate of interest(1)

   2.37%-2.68%    1.94%-2.92%

Volatility(2)

   48%-53%    47%

Dividend yield(3)

   —      —  

Exercise multiples(4)

   2.2-2.8    2.2-2.8

Life of options (years)(5)

   7.0    7.0

 

(1) We estimate risk-free interest rate based on the daily treasury long term rate of U.S. Department of the Treasury with a maturity period close to the expected term of the options, plus the country default spread of China.
(2) We estimated expected volatility based on the annualized standard deviation of the daily return embedded in historical share prices of comparable companies with a time horizon close to the expected expiry of the term.
(3) We have never declared or paid any cash dividends on our capital stock, and we do not anticipate any dividend payments on our ordinary shares in the foreseeable future.
(4) The expected exercise multiple was estimated as the average ratio of the stock price to the exercise price as at the time when employees would decide to voluntarily exercise their vested options. As we did not have sufficient information of past employee exercise history, it was estimated by referencing to a widely-accepted academic research publication.
(5) Extracted from option agreements.

Non-GAAP Financial Measures

To supplement our consolidated financial statements which are presented in accordance with U.S. GAAP, we also use adjusted EBITDA and adjusted net loss as additional non-GAAP financial measures. We present these non-GAAP financial measures because they are used by our management to evaluate our operating performance. We also believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our consolidated results of operations in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies.

Adjusted EBITDA and adjusted net loss should not be considered in isolation or construed as an alternative to net loss or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to compare the historical non-GAAP financial measures with the most directly comparable GAAP measures. Adjusted EBITDA and adjusted net loss presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

 

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Adjusted EBITDA represents net loss, which excludes depreciation, amortization, interest expenses and income tax expenses, before share-based compensation expenses. The table below sets forth a reconciliation of our net loss to adjusted EBITDA for the period indicated:

 

     For the Year Ended December 31,  
     2016  
     RMB      US$  
     (in thousands)  

Net loss

     (127,604      (18,379

Add:

     

Income tax expenses

     388        56  

Depreciation of property, plant and equipment

     3,735        538  

Amortization of intangible assets

     10,158        1,463  

EBITDA

     (113,323      (16,322

Add:

     

Share-based compensation expenses

     51,263        7,383  
  

 

 

    

 

 

 

Adjusted EBITDA

     (62,060      (8,939
  

 

 

    

 

 

 

Adjusted net loss represents net loss before share-based compensation expenses. The tables below set forth a reconciliation of our net loss to adjusted net loss for the period indicated:

 

     For the Year Ended December 31,  
     2016  
     RMB      US$  
     (in thousands)  

Net loss

     (127,604      (18,379

Add:

     

Share-based compensation expenses

     51,263        7,383  
  

 

 

    

 

 

 

Adjusted net loss

     (76,341      (10,996
  

 

 

    

 

 

 

Liquidity and Capital Resources

To date, our principal sources of liquidity have been cash generated from operating activities, and to a lesser extent, proceeds from the issuance of our convertible notes.

As of December 31, 2016, we had RMB100.1 million (US$14.4 million) in cash and cash equivalents, substantially all of which were held by our PRC subsidiaries, our VIE and its subsidiaries in China. Our cash and cash equivalents consist primarily of bank deposits which are primarily denominated in Renminbi. We believe that our current cash and cash equivalents and anticipated cash flow from operating and financing activities will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next 12 months without considering the proceeds from this offering.

We incurred net loss of RMB127.6 million (US$18.4 million) in 2016. As of December 31, 2016, we had accumulated deficit of RMB282.3 million (US$40.7 million) and total shareholders’ deficit of RMB37.3 million (US$5.4 million). As of December 31, 2016, we had net current liability of RMB342.0 million (US$49.3 million), primarily due to our deferred revenue of RMB299.0 million (US$43.1 million). In addition, as of December 31, 2016, the consideration payable in connection with our business acquisitions was RMB93.6 million (US$13.5 million). We believe that our cash and anticipated cash flow from operating and financing activities will be sufficient to meet our anticipated cash needs for at least the next 12 months, including:

 

    We had net cash generated from operating activities in 2016;

 

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    Pursuant to a convertible debt investment agreement dated June 15, 2017 among Jiangyin Huazhong Investment Management Co., Ltd., or Huazhong, Mr. Yunlong Sha and Puxin Education, Huazhong agreed to provide a credit facility in an amount up to RMB300 million (US$43.2 million) to Puxin Education. As of the date of this prospectus, Puxin Education has drawn down a principal amount of RMB190 million (US$27.4 million) under this credit facility;

 

    In August and September 2017, Puxin Limited raised US$50 million and US$23 million through issuing notes to Haitong International Investment Holdings Limited and CICC ALPHA Eagle Investment Limited, respectively.

We intend to finance our future working capital requirements and capital expenditures from cash generated from operating activities and financing activities, including the net proceeds we will receive from this offering. We may, however, require additional cash resources due to changing business conditions or other future developments, including acquisitions or investments we may decide to selectively pursue. If our existing cash resources are insufficient to meet our requirements, we may seek to issue equity or debt securities or obtain credit facilities. The issue of additional equity securities, including convertible debt securities, would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.

The following table sets forth a summary of our cash flows for the period indicated:

 

     For the Year Ended
December 31,
 
     2016  
     RMB      US$  
     (in thousands)  

Net cash generated from operating activities

     81,409        11,721  

Net cash used in investing activities

     (89,259      (12,856

Net cash generated from (used in) financing activities

     70,000        10,082  
  

 

 

    

 

 

 

Net increase in cash and cash equivalents, and restricted cash

     62,150        8,947  

Cash and cash equivalents, and restricted cash at beginning of the period

     43,368        6,251  
  

 

 

    

 

 

 

Cash and cash equivalents, and restricted cash at end of the period

     105,518        15,198  
  

 

 

    

 

 

 

Operating Activities

Net cash generated from operating activities amounted to RMB81.4 million (US$11.7 million) in 2016, which was primarily attributable to (i) an increase in deferred revenue of RMB107.5 million (US$15.5 million) as a result of the increased advance payments from our students in line with our growth of student enrollments, and (ii) an increase in accrued expenses and other current liabilities reflecting increased consideration payable for acquisitions and increased salaries and welfare payables, which were partially offset by the net loss of RMB127.6 million (US$18.4 million). This was positively adjusted for certain non-cash expense consisting primarily of the share-based compensation of RMB51.3 million (US$7.4 million).

Investing Activities

Net cash used in investing activities amounted to RMB89.3 million (US$12.9 million) in 2016, which was primarily attributable to (i) payments for the schools we acquired in 2016 in the amount of RMB68.2 million (US$9.8 million), and (ii) property refurbishment and purchase of teaching equipment in the amount of RMB21.1 million (US$3.0 million) to support our business growth.

 

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Financing Activities

Net cash generated from financing activities in 2016 amounted to RMB70.0 million (US$10.1 million) in 2016, attributable to the proceeds from the capital injection by Shanghai Trustbridge Investment Management Co., Ltd.

Capital Expenditures

Our capital expenditures are incurred primarily in connection with renovation of facilities, purchase of educational equipment and investment in IT infrastructures. Our capital expenditures were RMB21.1 million (US$3.0 million) in 2016.

Contractual Obligations

We lease certain offices and schools under non-cancelable operating leases that expire at various dates. In 2016, we incurred rental expenses for all operating leases amounted to RMB74.2 million (US$10.7 million). The following table sets forth our future minimum payments under non-cancelable operating leases related to offices and schools at December 31, 2016.

 

     Payment due by period  
     Total      Less than 1 year      1 – 3 years      More than 3 years  
     (RMB in millions)  

Operating lease commitments(1)

     272.9        86.3        133.1        53.5  

 

(1) Represents minimum payments under non-cancelable operating leases related to offices and schools.

Other than the above, we did not have any significant capital and other commitments, long-term obligations, or guarantees as of December 31, 2016.

Off-Balance Sheet Commitments and Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.

Holding Company Structure

Puxin Limited is a holding company with no material operations of its own. We conduct our operations primarily through our subsidiaries (Purong Beijing and Beijing Global Education & Technology Co., Ltd.), our consolidated VIE (Puxin Education) and its subsidiaries in China. As a result, our ability to pay dividends depends upon dividends paid by our subsidiaries and fees paid by our VIE to Purong Beijing. If our subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us.

In addition, our subsidiaries in China are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with the Accounting Standards for Business Enterprise as promulgated by the Ministry of Finance of the PRC, or PRC GAAP. Under PRC law, each of our PRC subsidiaries, our VIE and its subsidiaries which is not a private school is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory surplus reserve until such reserve reaches 50% of its registered capital and to further set

 

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aside a portion of its after-tax profit to fund the reserve fund at the discretion of our board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. In addition, prior to the effectiveness of the Amended Private Education Law, at the end of each fiscal year, each of our private schools in China was required to allocate a certain amount out of its annual net income, if any, to its development fund for the construction or maintenance of the school or procurement or upgrade of educational equipment. For our schools which have elected to require reasonable returns, this amount shall be no less than 25% of the annual net income of the school, and for our schools which have elected not to require reasonable returns, this amount shall be equivalent to no less than 25% of the annual increase in the net assets of the school, if any. When our schools are registered as for-profit private schools pursuant to the Amended Private Education Law, each of such schools is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Our PRC subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations.

As an offshore holding company, we are permitted under PRC laws and regulations to provide funding from the proceeds of our offshore fund raising activities to our PRC subsidiaries only through loans or capital contributions, and to our consolidated affiliated entity only through loans, in each case subject to the satisfaction of the applicable government registration and approval or filing requirements. See “Risk Factors—Risk Factors Related to Our Corporate Structure—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries, our VIE and its subsidiaries, which could harm our liquidity and our ability to fund and expand our business.” As a result, there is uncertainty with respect to our ability to provide prompt financial support to our PRC subsidiaries and consolidated VIE when needed. Notwithstanding the forgoing, our PRC subsidiaries may use its own retained earnings (rather than Renminbi converted from foreign currency denominated capital) to provide financial support to our consolidated affiliated entity either through entrustment loans from our PRC subsidiaries to our consolidated VIE or direct loans to such consolidated affiliated entity’s nominee shareholders, which would be contributed to the consolidated variable entity as capital injections. Such direct loans to the nominee shareholders would be eliminated in our consolidated financial statements against the consolidated affiliated entity’s share capital.

Quantitative and Qualitative Disclosure about Market Risk

Foreign Exchange Risk

Substantially all of our revenue and expenses are denominated in Renminbi, which is the functional currency of our subsidiaries, our VIE and its subsidiaries in the PRC. Therefore, we have limited exposure to foreign exchange risk for operational activity and we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. Although in general, our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars and Renminbi because the value of our business is effectively denominated in Renminbi, while the ADSs will be traded in U.S. dollars.

The Renminbi is not freely convertible into foreign currencies for capital account transactions. The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

 

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Changes in the exchange rate between the U.S. dollar and Renminbi will affect the value of the proceeds from this offering in Renminbi terms. We estimate that we will receive net proceeds of approximately US$             million from this offering, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, based on the initial offering price of US$             per ADS. Assuming that we convert the full amount of the net proceeds from this offering into Renminbi, a 10% appreciation of the U.S. dollar against Renminbi, from a rate of RMB6.9430 to US$1.00, the rate in effect as of December 30, 2016, to a rate of RMB             to US$1.00, will result in an increase of RMB             million in our net proceeds from this offering. Conversely, a 10% depreciation of the U.S. dollar against the Renminbi, from a rate of RMB6.9430 to US$1.00, the rate in effect as of December 30, 2016, to a rate of RMB             to US$1.00, will result in a decrease of RMB             million in our net proceeds from this offering.

Interest Rate Risk

Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. We have not used any derivative financial instruments to manage our interest risk exposure. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. However, our future interest income may be lower than expected due to changes in market interest rates.

Inflation Risk

Since our inception, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent change in the consumer price index for December 2016 was an increase of 2.1%. Although we have not in the past been materially affected by inflation since our inception, we can provide no assurance that we will not be affected in the future by higher rates of inflation in China.

Recent Accounting Pronouncements

Newly adopted accounting pronouncements

In February 2015, FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 modifies existing consolidation guidance related to (1) limited partnerships and similar legal entities, (2) the evaluation of variable interests for fees paid to decision makers or service providers, (3) the effect of fee arrangements and related parties on the primary beneficiary determination, and (4) certain investment funds. These changes are expected to limit the number of consolidation models and place more emphasis on risk of loss when determining a controlling financial interest. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015. Early adoption is permitted. We have adopted the new standards in 2016, which did not have a material impact on the consolidated financial statements.

In September 2015, FASB issued ASU 2015-16 related to the accounting for measurement period adjustments recognized in a business combination. Under the previous standard, when adjustments were made to amounts previously reported as part of a business combination during the measurement period, entities were required to revise comparative information for prior periods. Under the new standard, entities must recognize these adjustments in the reporting period in which the amounts are determined rather than retrospectively. We adopted the new standard in 2016, which did not have a material effect on the consolidated financial statements.

In November 2015, FASB issued ASU 2015-17 Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this ASU require that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. The amendments in this ASU apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets

 

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of a taxpaying component of an entity be offset and presented as a single amount is not affected by the amendments in this ASU. For public business entities, the amendments in this ASU are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments in this ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We adopted this guidance in 2016, retroactively. The adoption of this guidance did not have a material effect on the consolidated financial statements.

In March 2016, FASB issued ASU 2016-09 related to stock compensation to facilitate improvements to Employee Share-Based Payment Accounting, which is intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (1) income tax consequences; (2) classification of awards as either equity or liabilities; (3) accruals of compensation costs based on the forfeitures; (4) classification on the statement of cash flows. For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The adoption of this guidance did not have a material effect on the consolidated financial statements.

In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. We early adopted the amendments on a retrospective basis and restricted cash has been presented as part of cash and cash equivalents for the year ended December 31, 2016. As of December 31, 2016, restricted cash of RMB5,409 is included in cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statement of cash flows.

Recent accounting pronouncements not yet adopted

In May 2014, Financial Accounting Standards Board, or FASB, issued Accounting Standards Updates, or ASU, 2014-09, Revenue from Contracts with Customers (Topic 606), to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. An entity has the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this standard recognized at the date of initial application. ASU2014-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2016, and early adoption is not permitted. In August 2015, FASB updated this standard to ASU 2015-14, the amendments in this ASU defer the effective date of ASU 2014-09, that the ASU should be applied to annual reporting periods beginning after December 15, 2017 and earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. In May 2016, FASB issued ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments in this ASU affect only the narrow aspects of Topic 606. The areas improved include: (1) Assessing the Collectability Criterion in Paragraph 606-10-25-1(e) and Accounting for Contracts That Do Not Meet the Criteria for Step 1; (2) Presentation of Sales Taxes and Other Similar Taxes Collected from Customers; (3) Noncash Consideration; (4) Contract Modifications at Transition; (5) Completed Contracts at Transition; and (6) Technical Correction. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by ASU 2014-09). We expect to adopt ASU 2014-09 under the modified retrospective method in the first quarter of 2018. We have substantially

 

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completed a review of the impacts of the new standard to our existing portfolio of customer contracts. We do not believe the adoption of ASU 2014-09 would have a material impact on the amount or timing of our K-12 tutoring services and study-abroad test preparation services revenues, but will be required to assess variable consideration included in our study-abroad consulting service contracts and make judgments and estimates throughout the applicable periods. Certain additional financial statement disclosure requirements are mandated by the new standard including disclosure of contract assets and contract liabilities as well as a disaggregated view of revenue. Based on our review, the adoption of this guidance will not have a material effect on our consolidated financial statements.

In February 2016, FASB issued ASU 2016-02 related to Leases. Under the new guidance, lessees will be required to recognize all leases (with the exception of short-term leases) at the commencement date including a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessees (for capital and operating leases) and must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted. We are in the process of evaluating the impact of the standard on our consolidated financial statements.

In January 2017, FASB issued ASU No. 2017-04: Simplifying the Test for Goodwill Impairment. Under the new accounting guidance, an entity will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity will perform its goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value but not to exceed the total amount of the goodwill of the reporting unit. In addition, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment, if applicable. The provisions of the new accounting guidance are required to be applied prospectively. The new accounting guidance is effective for our company for goodwill impairment tests performed in fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests performed after January 1, 2017. We are in the process of assessing the impact on its consolidated financial statements from the adoption of the new guidance.

 

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INDUSTRY OVERVIEW

Certain information, including statistics and estimates, set forth in this section and elsewhere in this prospectus has been derived from an industry report commissioned by us and independently prepared by the Frost & Sullivan report in connection with this offering. We believe that the sources of such information are appropriate, and we have taken reasonable care in extracting and reproducing such information. We have no reason to believe that such information is false or misleading in any material respect or that any fact has been omitted that would render such information false or misleading in any material respect. However, neither we nor any other party involved in this offering has independently verified such information, and neither we nor any other party involved in this offering makes any representation as to the accuracy or completeness of such information. Therefore, investors are cautioned not to place any undue reliance on the information, including statistics and estimates, set forth in this section or similar information included elsewhere in this prospectus.

China’s After-school Education Market

Overview

China’s after-school education market for academic purposes is a large, growing and fragmented market, which consists of K-12 after-school tutoring, study-abroad tutoring and consulting sectors. According to the Frost & Sullivan report, the total revenue of China’s after-school education market has grown rapidly from RMB263.8 billion in 2012 to RMB483.4 billion in 2017, representing a compound annual growth rate, or CAGR, of 12.9%. This massive market size is expected to grow substantially to RMB804.9 billion in 2022, representing a CAGR of 10.7% from 2017 to 2022.

Different from schools and universities in the United States, where both academic grades and extracurricular activities have a comprehensive effect on admissions, schools and universities in China’s formal education system are primarily based on students’ academic performance. In addition, there is a gap between the huge number of students and the limited number of quality schools and universities. According to the Frost & Sullivan report, in 2017, there were 13.1 million high school graduates in China, among which 9.4 million attended Gaokao. Only 3.7 million students were admitted to universities and 1.2 million students were admitted to 1st-tier universities. The pressure of being admitted into a quality college extends down to high schools, middle schools, and even the lower grades of the K-12 education system. This generates demands for additional courses, such as English courses for children as young as three years old.

In addition, Chinese parents typically attach great importance to their children’s education. The diagram below compares China’s per capita private expenditure on education in 2016 as percentage of per capita annual expenditure, in comparison with that of the Unites States, United Kingdom, Japan and South Korea.

Comparison of Per Capita Private Expenditure on Education in 2016

 

LOGO

 

Source: Frost & Sullivan report

 

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While China has a lower absolute amount of per capita private expenditure on education of US$112.3 in 2016, compared to US$539.6 of the United States in 2016, its per capita private expenditure on education as percentage of per capita annual expenditure reached 4.2%, higher than 2.4% of the United States.

With growing pressure of quality education and high aspirations of better academic performance, an increasing number of parents choose after-school tutoring services to better prepare their children for entrance exams from the very beginning of K-12 education. According to the Frost & Sullivan report, after-school education has become the second largest category among all kinds of expenditures on academic education, after formal education, representing 41.7% of China’s household expenditure on education in 2016.

Facing the scarcity of education resources and fierce competition in entrance examinations in China, Chinese students see studying abroad as an alternative channel for better education and greater career opportunities. Furthermore, China’s ongoing involvement in globalization, Chinese families’ steadily growing disposable income and the emphasis for global vision contribute to the trend of studying abroad.

Currently, China’s after-school education market remains highly fragmented. According to the Frost & Sullivan report, the total revenue of K-12 after-school tutoring service market reached RMB465.3 billion in 2017, yet the top five players in K-12 after-school tutoring market only accounted for approximately 3.9% of the total revenue in 2017.

Growth Drivers of After-school Education Market

We believe the following drivers have contributed to, and are expected to continue to fuel the growth of China’s after-school education market:

China’s Steady Growth in GDP and Disposable Income

China’s nominal GDP of RMB82.7 trillion in 2017 represents a steady year on year growth rate of 11.2% and ranks second in the world. China’s disposable income per capita is expected to grow at a CAGR of 7.0% from 2017 to 2022, showing Chinese families’ potential growing purchasing power on after-school tutoring and overseas study.

Increased Number of Affluent Families

A significant rise in the number of affluent families drives the growth of China’s after-school education market. According to the Frost & Sullivan report, 13.2% of Chinese families had an annual income of above RMB250,000 in 2017 and such percentage is expected to reach 27.7% in 2022. Due to their stronger financial background and greater appreciation for quality education, most affluent families have stronger willingness to spend on after-school tutoring and send their children to study abroad.

Growing Household Expenditure on Education

Chinese families place great emphasis on children’s education. In concert with the constant growth of nominal GDP per capita and disposable income per capita, the total household expenditure on education in China experienced significant growth from RMB735.6 billion in 2012 to RMB1,114.3 billion in 2017 and is expected to reach RMB1,743.4 billion in 2022.

Rapid Urbanization

China’s rapid urbanization further supports growth in China’s after-school education market. Increasing number of people in urban areas compete for jobs, pushing up pressure in job hunting and career advancement. There is growing recognition that higher education and better academic performance may lead to better future career prospects and higher income, distinguishing one from his/her competitors. Thus, rapid urbanization serves as an important factor for the growing demand in China’s after-school education market.

 

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Relaxation of the “One-Child Policy”

China implemented the “Two-Child Policy” in 2015 and officially lifted the “One-Child Policy,” which was implemented approximately 40 years before phasing out in the early 2010s. This policy stimulates China’s population growth, pushes number of newborn babies rising from 16.3 million in 2012 to 17.2 million in 2017, representing a CAGR of 1.1%, according to the Frost & Sullivan report. This policy is expected to contribute to the growth of China’s after-school education market as the K-12 school-age population is expected to reach 269.9 million in 2022, representing a CAGR of 1.3% from 253.5 million in 2017, according to the Frost & Sullivan report.

China’s After-school K-12 Tutoring Market

Overview

On top of traditional classroom learning, K-12 after-school tutoring complements formal education in schools to nurture the development of well-rounded students. Asian families culturally value K-12 after-school tutoring as it equips their children with competitive edge that can maximize the possibility to achieve their academic aspirations. The revenue of K-12 after-school tutoring market in China had been growing at a CAGR of 12.7% from 2012 to 2017, and is expected to continue to grow at a CAGR of 10.6% from 2017 to 2022.

Key Drivers for K-12 After-school Tutoring Market

We believe the following drivers have contributed to the K-12 after-school tutoring market:

Inadequate Quality Education Resources

In China, quality education resources at all levels are scarce. According to the Frost & Sullivan report, in 2017, there were 13.1 million high school graduates in China, among which only 1.2 million students were admitted to 1st-tier universities, representing an admission rate of approximately 9.2%. According to the Ministry of Education in China, or the MOE, there were approximately 178,000 regular elementary schools in China in 2016, which decreased by 6.3% from 2015. During the same period, the enrollment of regular elementary schools in China increased by 2.3%, or 220,000 people from 2015. Middle school enrollment displayed the same pattern in 2016, with a decreasing total number of schools and a steady increase in total enrollments. As a result, this trend may result in lower teacher-to-student ratios, over-worked teachers, inadequate student interaction and limited personalized instruction in middle schools and high schools.

Government Policy to Alleviate Academic Burden at Schools

The MOE has been working on alleviating the academic burden on elementary school, middle school and high school students since 2000. The MOE has issued rules and regulations to prohibit elementary schools from scheduling classes during weekends and public holidays are extending course hours beyond schedules. In December 2017, the MOE issued administrative standards for elementary, middle and high schools to reduce the burden of homework and to enable students to have adequate exercise, sleeping hours and spare time after classes. This policy left students with plenty of spare time to participate in K-12 after-school tutoring courses, creating demand for K-12 after-school education market.

China’s Study-abroad Tutoring Market

Overview

China’s study-abroad tutoring market, consisting of study-abroad test preparation market and study-abroad consulting services market, is an emerging market with rapid growth in the past decade. In order to address the scarcity of quality education and intensified competition in China’s education system, more and more students choose to study abroad for global vision and better career opportunity in the international market, instead of

 

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taking Gaokao and attending graduate schools in China. According to the Frost & Sullivan report, there were approximately 587,000 Chinese students who commenced their study abroad in 2017. The number is expected to increase to approximately 830,500 in 2022, representing a CAGR of 7.2% from 2017 to 2022.

Total Number of Chinese Students Commencing Overseas Education (2012-2022E)

 

LOGO

 

Source: Frost & Sullivan report

Note: “Others” illustrated in the chart include students enrolled in K-12, junior college, diploma, vocational training and other undergraduate or lower level studies

Study-abroad Test Preparation Market

Language proficiency tests, including but not limited to SAT, TOEFL and IELTS, are prerequisites to studying abroad for both communication and application purposes. As a result, there is an increasing number of students taking the language tests in recent years. According to the Frost & Sullivan report, the number of students enrolled in study-abroad test preparation courses grew at a CAGR of 8.9% from 2012 to 2017.

Total Number of Student Enrollments in Study-abroad Test Preparation in China (2012-2022E)

 

LOGO

 

Source: Frost & Sullivan report

According to the Frost & Sullivan report, total revenue of the study-abroad test preparation market increased from RMB5.2 billion in 2012 to RMB12.5 billion in 2017, representing a CAGR of 19.2%. The total revenue of

 

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this market is expected to grow further at a CAGR of 16.6% from 2017 to 2022, reaching RMB26.9 billion in 2022.

Study-abroad Consulting Services Market

According to the Frost & Sullivan report, total revenue of the study-abroad consulting services market increased from RMB7.5 billion in 2012 to RMB16.5 billion in 2017, representing a CAGR of 17.1%. The revenue is expected to grow further at a CAGR of 14.9% from 2017 to 2022.

Key Drivers for China’s Study-abroad Tutoring Market

Growing Student Population Pursuing Overseas Education at a Younger Age

Along with China’s rapid globalization, a greater number of Chinese students are choosing to pursue education abroad at a younger age. The number of students pursuing undergraduate degree grew at a CAGR of 10.9% from 2012 to 2017, significantly higher than that of the number of students pursuing a graduate degree, which was 5.1% from 2012 to 2017. Such number is expected to continue growing at a CAGR of 8.2% from 2017 to 2022.

Increasing Wealth of Chinese Families

China continues to experience high economic growth which has resulted in increasing disposable income per capita. This has led to an increase in wealth for Chinese families and the number of wealthy people in the country has grown tremendously in recent years. Given the widely held belief that education from a globally recognized institution improves career prospects, Chinese families have a relatively higher tendency to spend on overseas education. This phenomenon, in turn, drives the steady growth in China’s study abroad tutoring market.

Limited Guidance on Overseas Application from Formal Education

Public schools in China do not provide direct guidance or support related to study-abroad applications and related language tests. Vast number of students who desire to study abroad have to seek help from service providers of study-abroad test preparation and consulting services, supporting the continuing growth in this market.

Competition and Expected Consolidation in China’s After-school Education Market

China’s after-school education market remains highly fragmented with a large number of market players of various sizes, lacking sizable players with nationwide coverage and dominant market share. Our major competitors in K-12 tutoring services include TAL, New Oriental and certain local players. Our major competitors in study-abroad tutoring services include New Oriental.

Given the significant economies of scale in China’s after-school education market, there are promising opportunities for industry consolidation. Most of the major market participants have taken up this opportunity to penetrate into more cities and businesses in recent years through establishing new learning centers, increasing franchised schools and acquiring local existing institutions, in an attempt to enlarge their market shares. A less fragmented market will provide consumers with more stable and predictable services, and more importantly, will significantly reduce the cost of operation, increase operating leverage and improve the quality of services.

We believe that industry players with strong integration capabilities are well-positioned to deliver quality services and maintain reputable brand names, while expanding their student network. Therefore, these players are most likely to further capture consolidation opportunities and gain larger market share in China’s after-school education landscape.

 

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BUSINESS

Our Mission

We believe that education inspires personal growth and opens up opportunities. Our mission is to empower people to build better lives through learning. We are committed to providing high quality education services to students, as well as upgrading the service quality in China’s after-school education industry by applying our acquisition and integration expertise.

Overview

We are a successful consolidator of the after-school education industry in China. We have strong acquisition and integration capabilities to effectively improve the education quality and operational performance of acquired schools. Through acquisitions and organic growth, we have grown rapidly and became the third largest after-school education service provider in China in 2017 in terms of student enrollments, according to the Frost & Sullivan report. Since our inception, we have acquired 48 schools and built a nationwide network of 400 learning centers across 35 cities in China as of December 31, 2017. Our total student enrollments increased 180.4% to 1,275,723 in 2017 from 454,945 in 2016, representing the fastest growth among major after-school education service providers in China, according to the Frost & Sullivan report.

We offer a full spectrum of K-12 tutoring and study-abroad tutoring programs designed to help students achieve academic excellence, as well as prepare for admission tests and applications for top schools, universities and graduate programs in China and other global destinations. In addition to classroom-based tutoring, we have also developed online and mobile applications to increase students’ after-class exposure to our services and enhance their learning experience.

Market Opportunity

China’s after-school education market is fast-growing. Its market size reached RMB483.4 billion in 2017 and is expected to grow substantially to RMB804.9 billion in 2022, according to the Frost & Sullivan report. At the same time, this market is highly fragmented and competitive. According to the Frost & Sullivan report, as of December 31, 2017, there were over 100,000 K-12 after-school tutoring service providers in China, among which the top five players only had less than 4% market share in 2017 in terms of revenue. Many service providers operate limited number of learning centers, often at a loss, and lack the scale or management expertise necessary to invest in curriculum development, instructor training and technology necessary to improve students’ academic results and attract more students.

The continued growth of China’s after-school education market is driven by a number of factors, including rapid economic growth, intensified competition for high-quality educational resources and the increasing demand for overseas education and experience.

Chinese culture attaches great importance to education as a means of enhancing an individual’s worth and promoting his or her career and social status. Given the pressure to excel on entrance exams to high schools and universities, the shortened school hours required by recent government policies and the limited supply of quality schools, an increasing number of parents and students turn to private after-school tutoring services to complement the public school education. According to the Frost & Sullivan report, the average hours spent on after-school tutoring by urban students in China was 10.6 hours per week in 2017. The demand for study-abroad test preparation and consulting services has also benefited from the growing number of Chinese students pursuing higher education abroad.

We believe that this large and fragmented market presents an attractive consolidation opportunity for us to leverage our acquisition and operational expertise, strong teaching quality, brand and reputation.

 

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Our Solutions

We have developed a business model effectively combining strategic acquisitions and organic growth achieved through successful post-acquisition integration, which has differentiated us from other after-school education service providers in China. This approach has enabled us to achieve rapid growth and capture consolidation opportunities in China’s fragmented after-school education market.

We have adopted a systematic and disciplined approach towards acquisitions. We screen and evaluate potential acquisitions through a set of rigorous criteria, including the targets’ geographic location, reputation in the local market, growth potential, synergies with our existing schools and the probability of successful integration. Since our inception, we identified and contacted over 1,000 targets, of which we acquired 48 schools. These acquisitions enabled us to penetrate our target markets with relatively low customer acquisition and marketing costs by leveraging the well-established presence of our acquired schools in local markets.

We are able to efficiently complete our acquisitions and rapidly improve the operations and management of the acquired schools because of our superior post-acquisition management and operational capabilities. In all acquired schools, we implement our modular management system, Puxin Business System, or PBS. It is designed in-house by our core management team reflecting over 15 years of accumulated management experience in China’s education industry. PBS incorporates the best practices of operating after-school learning centers in a standard, common collection of business processes and process improvement methodologies. It covers over 3,000 management processes and we use PBS tools to analyze schools’ growth potential and formulate improvement plans.

We are committed to providing our students with high quality education services and outstanding learning experience. Our commitment is reflected in recruitment, training and retaining the best teachers, developing and improving our curriculum and course materials, as well as standardizing operating procedures and learning practices throughout our network. This focus on quality has led to a high level of student satisfaction and strong academic results, enabling us to reach high student retention rate and contributing to student recruitment. As a result, most of our acquired schools achieved robust organic growth under our operations.

We believe that our track record of successful acquisitions and post-acquisition integration has created network effects attracting increasing number of independent after-school operators seeking potential exit, enabling us to maintain robust acquisition pipeline and sustainable growth trajectory. We have established “Puxin” as one of the most-recognized brand names among industry participants and built up our first-mover advantage to capture consolidation opportunities in China’s after-school education market.

Our Strengths

We believe the following strengths contribute to our success and differentiate us from our competitors.

Leading position in China’s after-school education market

We are the third largest after-school education service provider in China in terms of student enrollments in 2017, according to the Frost & Sullivan report. As of December 31, 2017, we had a network of 400 directly operated K-12 learning centers and study-abroad learning centers across 35 cities in 19 provinces in China. As one of the very few providers in China that offer a full spectrum of tutoring services and products, we provide full K-12 curriculum tutoring, English for children, study-abroad test preparation and study-abroad consulting services. We offer our services to students in multiple forms, including offline group classes and personalized tutoring classes, as well as online programs. According to the Frost & Sullivan report, in 2017, we ranked the third largest provider for K-12 tutoring services in terms of student enrollments and the third largest provider for study-abroad test preparation services in China in terms of net revenues.

We have grown our business rapidly. From 2016 to 2017, the number of learning centers in our network increased to 400 as of December 31, 2017 from 231 as of December 31, 2016. Our total student enrollments

 

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increased 180.4% from 454,945 in 2016 to 1,275,723 in 2017, representing the fastest growth among after-school education service providers in China, according to the Frost & Sullivan report.

Modular and evolving management system

We have strong and effective operation capabilities and a proven system for acquiring and integrating schools.

We implement a modular management system, PBS, which is a standard, common collection of business processes and process improvement methodologies. PBS is designed in-house by our core management team reflecting over 15 years of accumulated experience in China’s education industry. It covers over 3,000 operation and management processes, including organizational structure, financial management, operating manuals, product development, student recruitment, teacher management, marketing, human resources and knowledge management. For our acquisitions, we apply PBS tools to analyze the growth potential of the target and formulate improvement plans as early as during the due diligence process. PBS also provides us with guidance for formulating corporate strategies and allocating our resources based on customers’ demand. In our daily operations, we carry out effective and efficient execution by following comprehensive and detailed task lists set forth in PBS.

The PBS is a dynamic and forward-looking system which evolves with inputs from multiple levels of our leadership teams across the enterprise. We have established an open, forward-looking and result-oriented culture and built ourselves into a learning organization. We encourage our management and employees to seek continuous improvement in operations and share their firsthand experience within our group. Our PBS continually incorporates the best practices and eliminates outdated or inefficient practices throughout our network, which makes it an inclusive and evolving system containing industry-leading practices.

By implementing our standardized and centralized operation management system, we have achieved industry-leading operating performance. For schools operating under our management for over 12 months, our K-12 group class student retention rate reached 70.1% in 2017, higher than 64.1%, the average of the seven major players in China’s K-12 after-school tutoring service market of, and our average K-12 group class enrollment rate achieved 68.6% in 2017, higher than 64.6%, the average of these seven major players, according to the Frost & Sullivan report.

Track record of disciplined acquisitions

Our acquisition driven business model and strong post-acquisition integration capabilities enable us to achieve rapid growth and claim first-mover advantages to capture the consolidation opportunities in China’s fragmented after-school education market.

We have adopted a systematic and disciplined approach towards acquisitions. We apply a set of rigorous criteria, including the target’s geographic location, reputation in the local market, growth potential, synergies with our existing schools and the probability for successful integration, as key considerations for acquisitions. Leveraging our modular management system and our management’s strong execution capabilities, we are able to efficiently complete the acquisitions and rapidly improve the operations and management of the acquired schools. Since our inception, we identified and contacted over 1,000 targets in China as our potential acquisition targets of which we acquired 48, including Global Education.

In all acquired schools, we implement PBS to improve every aspect of its operations. We formulate a detailed 100-day execution plan for all post-acquisition operations and management functions and set forth 21 post-acquisition milestones, through which we can monitor the integration process of each acquired school in a

 

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timely manner and ensure our group-wide operation methodologies and corporate culture implemented effectively. This systematic approach underpins robust organic growth of the acquired schools. For K-12 tutoring schools we acquired prior to 2017, we have achieved a growth in student enrollments in regular-price courses of 662,958 in 2017 compared to 441,375 in 2016, implying a growth rate of 50.2% on a comparable basis. For these schools, the K-12 group class student retention rate in regular-price courses also increased from 57.7% in the first quarter post acquisition to 70.1% after 12 months post acquisition.

As a result, we have established “Puxin” as a well-recognized brand among industry participants. According to a survey conducted by Frost & Sullivan, 70.8% of respondents chose Puxin as one of the preferred partners or buyers when they seek potential acquirors of their business. Our strong brand name among industry participants provides us with access to a large number of high-quality acquisition targets. In 2017, more than 100 after-school education service providers reached out to us to explore potential transactions. Our successful track record of improving operations and growing student enrollments reinforces our brand recognition, which in turn attracts more high-quality management and teaching talent to join us.

We believe that our successful track record of acquisitions and post-acquisition management and operation has not only created network effects for us to attract increasing number of school operators seeking potential acquirors of their business but also created entry barriers for potential competitors, which enable us to maintain a sustainable and rapid growth in the future.

Established reputation underpinned by teaching quality

We believe most of our schools have strong reputation in local markets. Our acquired schools have an average operating history of ten years, with the longest about 27 years of operation history before our acquisition. According to the brand recognition survey conducted by Frost & Sullivan, our Puxin-branded and co-branded schools are ranked top three in nine cities among the 23 cities where we provide K-12 after-school tutoring services. We adopt a co-branding strategy to operate our acquired K-12 tutoring schools, which not only enables us to leverage the established reputation of the acquired schools but also promotes the recognition of our “Puxin” brand in local markets. In addition, we believe our “Puxin” brand has been strengthened through acquisitions of premium high quality brands, such as Global Education, in the study-abroad tutoring market in China.

Our strong reputation is underpinned by our consistently high teaching quality and standards. We have developed our “Nine Steps” methodology, which standardizes our teachers’ teaching activities such as class preparation, before-class assessment for students, in-class teaching and after-class review and evaluation. The Nine Steps methodology enables our teachers to obtain critical information about students’ learning pattern, aptitude and performance, which help them refine their course contents. We take many measures to ensure our teaching quality, including selective teacher hiring process, continued teacher training and rigorous evaluation, competitive performance-based compensation and opportunities for career advancement.

Our teaching quality for K-12 tutoring services has been recognized by parents. The K-12 group class student retention rate of schools operating under our management for over 12 months reached 65.1% and 70.1% in 2016 and 2017, respectively, which we believe can reflect the parents’ satisfaction with our tutoring services. In addition, according to our survey of parents conducted in 2017, 89.9% of parents indicated that their children’s academic results improved since attending our classes. In 2017, 95.3% of our students enrolled in study-abroad test preparation courses improved their test scores on such tests, including TOEFL, IELTS, SAT and GRE. In 2017, 766 students who enrolled in our study-abroad consulting programs and applied for overseas universities were admitted into the global top 50 institutions, as ranked by either the QS World University Rankings or U.S. News, including Princeton University, Harvard University, Yale University and Columbia University.

Visionary management team and sophisticated talent system

We have an innovative and entrepreneurial management team with a passion for education and extensive operational experience. Our founder and chief executive officer, Mr. Yunlong Sha, previously served as senior

 

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vice president at New Oriental Education. With 20 years of operational experience in the education sector, Mr. Yunlong Sha has in-depth-knowledge in operations and integration of schools. Our core management, including Mr. Peng Wang as chief financial officer, Mr. Liang Gao in charge of our group’s teaching activities, Mr. Hongwei Zhang as head of our study-abroad business, Mr. Ruguo Zhang as compliance head, Mr. Zhong Zhuang in charge of our operations in Shanghai, and Mr. Yun Xiao as head of our K-12 group class business, are leaders and pioneers in the industry with an average of over 16 years of experience in the education industry. Under our management team’s leadership, we have successfully executed our growth strategies to focus on after-school education services and have become an industry leader.

We are focused on attracting, developing and retaining talent which underpins our successful execution of PBS and strategic acquisitions. We have launched systematic career advancement programs, including “Puxin Star” for top teachers, “Puxin Talents” for mid-level management and “Puxin Leadership” for senior management, to build a talent reserve for our long-term growth. We provide participants in these programs with guidance for qualification exam preparations, career coaching and advanced training to enhance their teaching and management skills. All our school principals undergo rigorous internal training to ensure their command of our academic and operational best practices. Part of our school principals’ compensation is in a form of share incentive plan aligning their interests to our performance. We enjoy strong corporate loyalty evident in our 100% retention rate among our school principals since starting of our business.

Our Strategies

We plan to pursue the following strategies to expand our business and further strengthen our leadership in the education market in China.

Expand our network and geographic coverage

We intend to further strengthen our market position and capture new market opportunities by expanding our network of directly operated learning centers. We plan to acquire additional schools in cities where we already have presence to increase our market share in the local market. We will also seek to acquire schools to penetrate into new cities where we currently do not have presence and the demand for tutoring services is growing rapidly while markets are underserved. We may also consider build learning centers by ourselves if it is cost-efficient and offers us good opportunities to expand into markets where no suitable targets are available.

In addition, we seek to acquire companies that are complementary to our business, including education technology companies, Internet platforms and content providers. We target to invest in companies upstream and downstream from our business.

Improve performance, scale and profitability of schools

We will continue to implement PBS to strengthen lean management over daily operations of our schools and learning centers to promote our organic growth. With PBS, we can eliminate inefficiencies and improve our schools’ performance to realize synergies created through acquisitions.

We intend to continue cross-selling across business lines to realize synergies and maximize our students’ lifetime value for our long-term growth. Currently, the majority of our students are elementary school and middle school students. The panoramic range of our service and product offering allows us to maximize the lifetime value of these enrollments by satisfying the entire breadth of our student’s educational needs. By offering a wide array of high-quality education services for almost all K-12 subjects, we continue to increase the number of courses that each student enrolls. In the meantime, with a younger age of students studying abroad, we also continue to cross-sell our study-abroad tutoring services to K-12 student base, and vice versa, extending our presence in students’ academic careers. In addition, we also strive to maximize synergies across different business lines within our group and improve our overall operational efficiency through resources sharing.

 

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We will take various measures to improve key performance indicators, such as K-12 group class enrollment rate, K-12 group class student retention rate and K-12 course withdrawal rate, to maintain the rigor of our service quality. Our centralized management system for curriculum development, academic training, and information technology will help us concentrate capabilities and simplify core processes.

We plan to further improve our education quality and consulting services. We will refine our “Nine Steps” methodology to enhance the effect of our teaching activities and improve students’ academic results.

Cultivate and acquire talent

We believe that the recruitment, retention, motivation and nurturing of talented and experienced management team and teaching faculties are critical to our success. We will continue to invest in our people and attract, cultivate and retain talent.

We will strengthen our performance-based incentive mechanism. We will improve our remuneration system commensurate with position and performance, which can motivate our employees in a scientific, reasonable and effective manner. We plan to continue to increase lateral hires by providing competitive compensation and benefits, ongoing training and better promotion opportunities to attract and retain managerial talent and qualified teachers. We plan to continue our “Puxin Talents” and “Puxin Leadership” programs to identify managerial talents and develop mid-level managers who have demonstrated management capabilities and leadership. Through internal development programs and lateral hires, we will continue to strengthen our multi-level and extensive talent cultivation system to attract, nurture and incentivize employees and offer them growth and development opportunities.

Promote online initiatives and invest in technology

We have launched an array of online education services, such as Puxin Superior Classes, Puxin Dual-Teacher Lectures, Recorded Lectures, Foreign Teacher Classes and Puxin Teacher & Student App, to increase students’ after-class exposure to our services and facilitate reasonable allocation of education resources. We plan to continue devoting additional resources to our online platforms to diversify our revenue sources, enhance customer stickiness and attract potential customers. The online collection of data on student enrollments, study motivations and learning pattern through our web- and mobile-based applications also enables us to efficiently design course contents, schedule classes and arrange classrooms in advance for the purpose of improving the teaching effectiveness and the utilization rate of our teaching facilities and resources.

We intend to upgrade our management systems, including ERP system, CRM system and knowledge management system, to further optimize our management efficiency. We plan to build our ERP system into a platform for data-driven decisions. In addition, we plan to build PBS into our ERP system to monitor the execution of tasks in PBS to further strengthen lean management.

We will invest in artificial intelligence and intelligent learning tools which can collect and analyze data of students and generate accurate profiles of the students. Based on the analysis of student profiles, we can design the educational materials and plan the suitable delivery methods for each student, therefore improve adaptive teaching and learning of teachers and students.

Enhance our brand name

We intend to enhance our brand-name recognition among students and parents through various marketing initiatives. We plan to maintain a consistent corporate image across all of our learning centers and further promote our brand recognition through word-of-mouth marketing. We plan to continue to maintain the established brand names of acquired schools to benefit from their brand recognition in local markets. After the successful integration and expansion to a certain scale, we will use co-branded names for the acquired school to promote our “Puxin” brand. We will continue to focus on improving our education quality and customer service quality to enhance the recognition of our brand.

 

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Our Services and Programs

We offer a variety of educational services and products to students to improve their academic performance and reach their potential. Our educational services consist of K-12 tutoring services and study-abroad tutoring services. In 2016, 84.4% and 15.6% of our net revenue was derived from K-12 tutoring services and study-abroad tutoring services, respectively.

K-12 Tutoring Services

We offer comprehensive after-school tutoring services designed to help students ranging from ages three to 18 to achieve academic excellence and enroll in top schools and universities in China. Our K-12 tutoring services primarily include K-12 after-school tutoring services and English for children program.

K-12 After-school Tutoring Services

Our K-12 after-school tutoring services provide result-oriented educational services in group class settings and through personalized tutoring sessions to help students enhance their academic results, including scores for PRC high school entrance exams, or Zhongkao, and university entrance exams, or Gaokao. We provide a study plan tailored to fit a student’s aptitude, grade level, past academic performance, future academic goals, and other pertinent factors.

Our curricula cover all K-12 academic subjects, including mathematics, English, Chinese, physics, chemistry, biology, politics science, geography and history. The following table provides a list of our current course offerings:

 

     Kindergarten      Elementary School      Middle School      High School  
     K      1      2      3      4      5      6      7      8      9      10      11      12  

Mathematics

     —                                                                                

English

     Ù                                                                                 

Chinese

     —                                                                                

Physics

     —          —          —          —          —          —          —          Ù                             

Chemistry

     —          —          —          —          —          —          —          Ù        Ù                      

Biology

     —          —          —          —          —          —          —                                      

Political Science

     —          —          —          —          —          —          —                                      

Geography

     —          —          —          —          —          —          —                                      

History

     —          —          —          —          —          —          —                                      

 

: Currently offered by us.
: Not offered at the corresponding grade level in public schools in China.
Ù : Currently offered by us but not offered at the corresponding grade level in public schools in China due to high demand of learning ahead of the curricula in public schools.

Group Class Courses

Group class courses are our main form of service offering in terms of the number of student enrollments. We typically enroll a maximum of 50 students for group classes. Group class courses typically range from two to six course hours per week during spring and fall school semesters, and 12 to 16 course hours per week during summer and winter breaks. We charge tuition fees for K-12 courses based on the type of the subject, level of sophistication of the course, geographical region and customer segmentation. The average course fee for our regular group class courses of each school range from RMB22 to RMB133 per hour depending on the type of the subject, level of sophistication of the course, customer segmentation and geographical region. We generally allow students to withdraw from courses and refund tuition for undelivered classes.

 

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As of December 31, 2016 and 2017, we offered group classes at 201 and 239 K-12 learning centers, respectively. We had 373,243 and 1,089,117 student enrollments in our K-12 tutoring group class courses, respectively, in 2016 and 2017. For schools operating under our management for over 12 months, the K-12 group class student retention rate reached 70.1% and the K-12 group class enrollment rate achieved 68.6% in 2017.

For each new student, we evaluate the student’s past and current academic performance and future academic goals, and provide course recommendations based on subjects, grade level, as well as timing and budget, to meet his or her learning need. Many of our courses for the same subject and grade level are offered at different levels of pace and sophistication. For example, we offer K-12 mathematics tutoring at three different levels, including: (1) Standard Courses, which are taught at a pace similar or slightly faster than formal public school curriculum with a focus on solidifying students’ understanding of the fundamental concepts; (2) Advanced Courses, which are taught at a pace significantly faster than formal public school curriculum and include certain contents beyond school curriculum, such as curriculum mixing math competition and formal school materials; and (3) Elite Courses, which are our most advanced courses with a curriculum designed for exceptional students focusing on mathematics competitions. Students are required to pass admission tests to enroll in advanced courses and elite courses. We periodically assess our students’ progress, and based on the results of such assessment, reassign students to different classes on an as-needed basis to help them progress to the best of their ability.

We strive to provide a supportive learning environment to our students by efficient and responsive communications. Our teachers and teaching assistants keep track of each student’s performance and progress and regularly communicate with our students and their parents. Each class is assigned a teaching assistant who is in close contact with the students and parents to provide comprehensive supporting services, such as class scheduling, homework assignments and collection of feedback on teaching quality. We also seek to involve the parents of our students in each stage of the tutoring process. During the tutoring sessions and throughout our service period, we periodically communicate with the parents, encourage them to provide feedback and suggestions on our courses and update them on the progress that their children have achieved in our courses.

Personalized Tutoring Courses

In addition to group classes, we also offer personalized K-12 tutoring courses to adapt to each student’s learning pace, pattern and approach. Our personalized tutoring courses typically consist of no more than six students per session to ensure each student can improve their academic performance by, among other things, addressing weaknesses in particular subjects or topics, strengthening test-taking skills and fostering studying habits and incentives. Our students enroll in a personalized tutoring course two to three times per week during each spring and fall school semester and four to five times per week during each winter and summer break, with each class lasting for approximately two hours. Course fees for our regular personalized tutoring courses typically range from RMB100 to RMB510 per course hour, depending on the level of sophistication of the course and geographical region. We generally allow students to withdraw from courses at any time and refund tuition for undelivered classes.

As of December 31, 2016 and 2017, we offered personalized tutoring services at 148 out of our 212 K-12 learning centers and 173 out of our 281 K-12 learning centers, respectively, mainly in tier-1 and tier-2 cities in China. In 2016 and 2017, we had 10,448 and 32,152 student enrollments in our K-12 personalized tutoring classes.

Our personalized tutoring services generally comprise of three main components: (i) assessment and study plan formation, (ii) personalized tutoring and (iii) monitoring and tracking of an individual student’s progress. For each new student, we commence with a consultation followed by a comprehensive assessment designed to evaluate the student’s existing academic knowledge, test-taking skills and learning patterns. Our professional consultants and teachers use the results of the assessment to analyze each student’s academic strengths and weaknesses, and craft customized study plan based on each student’s aptitude and learning needs. Based on the customized study plans, our teachers will provide individualized sessions to the students to enhance their

 

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understanding of the subjects and practice test-taking skills. We have a designated team which continuously monitors and tracks an individual student’s progress to ensure personalized tutoring courses are tailored to the pace and learning pattern of each student.

English for Children Program

We provide English tutoring services for children in kindergarten through grade six. Our English for children courses are designed to cultivate children’s English skills outside the primary schools’ English curricula and guide and inspire them to develop self-motivated learning skills. We use course materials published by international education content providers and publishers while tailor the contents to adapt to children’s abilities and needs. We teach students to master the basics of the language in various fun ways, including interactive games, activities and cultural studies.

Our English for children classes are divided into classes of approximately five to 30 students per class. Students attend class one to five times per week during each spring and fall school semesters and one to seven times per week during each winter and summer breaks for 45 minutes to two hours per class. Course fees for our regular English for children courses typically range from RMB26 to RMB120 per course hour, depending on the size of class, level of sophistication and geographical region.

In 2016 and 2017, we had 67,662 and 116,801 student enrollments in our English for children program.

Other Services

In addition to the K-12 after-school tutoring services and English for children program, we also offer certain extra-curricular courses to students, such as painting, calligraphy, music, debate and science. Our courses are designed to inspire students’ creativity, enhancing their critical thinking and problem-solving abilities and enriching their life experience.

As of December 31, 2017, we have two schools providing extra-curricular education courses.

Study-abroad Tutoring Services

Our study-abroad tutoring services are designed to help students prepare for admission tests and applications for high schools, universities and graduate programs primarily in English-speaking countries. We offer study-abroad test preparation courses and study-abroad consulting services through our learning centers located in 25 cities. In addition to our directly operated learning centers, we also have franchised schools operated under the brand of Global Education.

Study-abroad Test Preparation Courses

We offer study-abroad test preparation courses to students taking language and entrance exams used by educational institutions in the United States and Commonwealth countries, such as the United Kingdom, Australia and New Zealand. We offer test preparation courses for major overseas exams, including IELTS, SSAT, SAT, TOEFL, AP, ACT, A-level, GRE and GMAT.

Our test preparation courses focus on quality instruction and test-taking techniques designed to help students achieve high scores on the admissions and assessment tests. Our experienced teachers generally teach in small and medium-sized classes ranging from one to 26 students. Course fees for our test preparation courses typically range from RMB73 to RMB1,500 per course hour, depending on the size of class, level of sophistication of the course and geographical region. In 2016 and 2017, we had 3,254 and 35,718 student enrollments in our study-abroad test preparation courses.

 

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IELTS preparation courses. Our IELTS preparation courses target students who choose to pursue undergraduate and graduate degrees in countries that predominately refer to IELTS scores for school and university admissions, such as the United Kingdom, Australia and New Zealand. We provide IELTS courses in various forms, such as large classroom lectures, small seminar, one-on-one tutoring, and online tutoring. Our IELTS courses generally range from 40 to 202 course hours. Course fees for our regular IELTS preparation courses typically range from RMB73 to RMB234 per course hour.

TOEFL / SAT / SSAT preparation courses. Our TOEFL, SAT and SSAT preparation courses are targeting middle school, high school and college students who desire to pursue education in the United States or Canada. We offer a range of basic and advanced TOEFL courses, and courses for the SAT and SSAT subject tests. Our TOEFL, SAT and SSAT preparation courses generally range from 40 to 183 course hours. Course fees for our regular TOEFL, SAT and SSAT preparation courses typically range from RMB130 to RMB547 per course hour.

Other test preparation courses. We offer test preparation courses for students who take subject-based AP and A-Level exams to supplement their application for universities in the United States and United Kingdom. We also offer preparation courses for GRE and GMAT for students who wish to continue graduate studies in the United States or Canada. We currently operate an international school in Hangzhou to offer internationally accredited education programs, including A-Level, to meet the demands of students who seek to pursue higher education in the United Kingdom.

Study-abroad Consulting Services

We provide quality guidance for students and working adults who intend to study in United States or Commonwealth countries. In 2016 and 2017, we had 338 and 1,935 student enrollments in our study-abroad consulting services, respectively. In 2017, 766 students who enrolled in our study-abroad consulting programs and applied for overseas universities were admitted into the global top 50 institutions, as ranked by either the QS World University Rankings or U.S. News, including Princeton University, Harvard University, Yale University and Columbia University.

We provide one-on-one customized comprehensive one-stop plan for each student, including:

 

    Profiling and Positioning: To ensure that we accurately advise on the best country, university and major, we first conduct a comprehensive profiling exercise for each student. We assign to each student a professional admission consultant who has in-depth knowledge and experience in admission application for overseas schools and universities. Based on students’ academic qualifications, career goals, financial status and work experience, our consultants will help them choose the optimal target schools that address their aspirations and goals.

 

    Application Guidance: We offer comprehensive guidance for our students throughout the application process. Leveraging their own overseas studying experience and comprehensive expertise of the application requirements and procedures, our consultants provide guidance tailored for each student on their application packages. To help students prepare for the school interviews, we also offer a number of interview preparation sessions. The interview preparation sessions are conducted by professionals who have extensive experience in interview techniques and are well versed with the nature and scope of interview questions that universities usually ask candidates.

 

    Visa Assistance: We assist students in preparing for visa applications and interviews.

Fees for our study-abroad consulting services vary among our learning centers throughout China as well as among service packages, depending on, among other things, local market conditions, type and length of the service, and consultant costs. Consistent with market practices, our service fees, excluding a small portion to cover our costs incurred, are generally refunded if a student fails to gain any admission or obtain the relevant visa.

 

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Online Platforms

In addition to classroom-based educational services and products, we also provide a variety of in-house developed online learning platforms to accommodate our students’ individual learning habits and objectives.

We developed both web-based and mobile-based platforms for K-12 tutoring services.

Mobile Application

We launched our mobile application, Puxin Teacher & Student App, in February 2017. Our Puxin Teacher & Student App is a one-stop mobile platform among students, teachers and parents.

Through our Puxin Teacher & Student App, we offer Puxin Superior Classes to our students with an engaging learning experience. Puxin Superior Classes provide students with additional courses in a variety of subjects which can be subscribed based on the students’ interest. Students can view lecture videos online anytime or download for offline viewing based on their own schedules or studying paces. In addition, Puxin Superior Classes make it convenient for students to communicate with teachers. Students can view assignments online, raise questions or obtain teachers’ review on their coursework. For teachers, our Puxin Teacher & Student App allows them to bring the classroom on iOS and Android devices. Teachers can use our mobile application to upload their lecture videos and course materials, collect assignments from students, organize group discussions, provide feedback and track students’ progress.

In addition, our students’ parents can enroll in new courses and make payments through Puxin Teacher & Student App, which allows us to allocate our teaching recourses in advance according to the data collected online. As of December 31, 2017, in schools which adopted Puxin Teacher & Student App for over three months, 100% of our teachers and 81.0% of our enrolled students had opened their accounts on Puxin Teacher & Student App.

Online Products and Services

In addition to our mobile application, we offer a variety of cloud-based products and services for K-12 tutoring and study-abroad tutoring services.

Puxin Dual-Teacher Classrooms. We offer live streaming classes where a teacher from one of our learning center partners with another teacher located in other learning centers to jointly conduct online lectures to students.

Recorded Lectures. We offer recorded lectures online for students to access lectures anytime and anywhere. Online recorded lectures primarily target students from tier-3 and tier-4 cities where we have not yet established learning centers.

Foreign Teacher Classes. We offer online interactive classes for students to interact with native speakers of foreign languages. Our foreign teacher classes are mostly one-on-one classes.

GEDU Online. GEDU Online is the web-based platform of Global Education for students to enroll in online recorded IELTS or other study-abroad test preparation courses. The primary audience for GEDU Online is students in tier-3 and tier-4 cities where we have not yet established presence.

Our Network

We deliver our educational services to students through an extensive network of directly operated learning centers. Our physical network of learning centers comprises K-12 learning centers, study-abroad test preparation

 

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learning centers and study-abroad learning centers. As of December 31, 2017, we had 400 learning centers in 35 cities in China. Certain of our K-12 learning centers and study-abroad learning centers share business premises.

The following map and table set forth the total number of directly operated learning centers we operate in each province as of December 31, 2017.

 

LOGO

 

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     Number of Learning
Centers
 
     K-12
Tutoring
     Study-abroad
Tutoring
 

Beijing

     3        29  

Shanghai

     9        15  

Tianjin

     23        3  

Chongqing

     12        1  

Guangdong Province

     5        17  

Jilin Province

     11        1  

Liaoning Province

     52        9  

Shandong Province

     21        2  

Shanxi Province

     29        1  

Jiangsu Province

     12        15  

Zhejiang Province

     17        5  

Henan Province

     21        3  

Fujian Province

     2        —    

Shaanxi Province

     14        5  

Hubei Province

     —          5  

Hunan Province

     —          1  

Guizhou Province

     27        —    

Yunnan Province

     7        2  

Sichuan Province

     16        5  
  

 

 

    

 

 

 

Total

     281        119  
  

 

 

    

 

 

 

We provide K-12 tutoring services through directly operated learning centers. Each of our directly operated learning centers is administered by a private school or a corporation. Each school or corporation is managed by a principal, who is responsible for daily operations, sales and marketing, academic support and customer services for all the learning centers of the private school or the corporation.

Most of our learning centers have classroom facilities to serve students who attend our courses. Our K-12 learning centers are generally located near elementary schools, middle schools or residential areas. Our study-abroad test preparation learning centers are generally located near colleges and universities or testing centers. Each of our learning centers includes office and classroom space, ranging from 94.4 to 10,153.2 square meters in site area. We lease substantially all of our facilities, office and classroom spaces for each learning centers.

For our study-abroad tutoring services, in addition to our directly operated learning centers, we have franchised schools which are franchisees of Global Education. As of December 31, 2017, we had 254 franchised learning centers operated by the franchisees of Global Education. We charge franchise fees every year ranging from RMB10,000 to RMB300,000 as consideration for the right we granted to the franchisees and do not share any revenue that franchised schools generate. After all of the existing franchise agreements expire or are terminated, we do not plan to grant any rights to third parties to conduct the business of educational services under any of our brands or trademarks.

Centralized and Standardized Management

We have implemented centralized and standardized management throughout our school network to consistently manage key aspects of their operations by applying our Puxin Business System, or PBS. PBS is a

 

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standard, common collection of business processes and process improvement methodologies. Designed by our core management team, PBS has reflected our management’s accumulated experience in the education industry and incorporated the best practices in the operations and management of our schools.

PBS is the prime methodology that we apply throughout the entire operating process, covering strategy deployment, budget planning and management, internal reporting and communication, execution control, and performance review and management. It covers as many as over 3,000 operation and management processes, including, among others, organizational structure, financial management, operating manuals, product development, student recruitment, teacher management, marketing, human resources and knowledge management. PBS sets forth task lists for each operation and management process and contains more than 10,000 tasks that our schools are required to perform during day-to-day school operations. With PBS, our management can monitor the management and operating performance of each school on a timely manner and ensure our group-wide strategies and principles are implemented effectively.

Our PBS is supported and constantly updated by our knowledge management system. We encourage our management and employees to seek continuous improvement in operations and share their firsthand experience within our group. Our knowledge management system at the headquarters collects experience and knowledge submitted in various forms, including weekly, monthly and quarterly work reports, local market surveys, study and research on specific topics, as well as audio and video materials. The dedicated knowledge management staff at our headquarters and the head of each business line periodically review the information submitted by our schools and identify the good practices which will be incorporated into our PBS and followed by our schools during their operations. Our PBS continually incorporates the best practices and eliminates outdated or inefficient practices throughout our schools, which makes it an ever-evolving system containing industry-leading practices.

Our Acquisitions

We have grown our business through strategic acquisitions of businesses. Since our inception, we have acquired 48 schools in China through equity or assets purchases. We have strong capabilities of and rich experiences in successful acquisitions and integration of schools. Through our acquisitions, we have realized significant economies of scale by increasing student enrollments, enlarging our team of teachers and consultants and expanding our geographic reach. Leveraging our comprehensive product and service offerings, we are able to achieve synergies by cross-selling across business lines, sharing facilities and resources and streamlining management and administrative functions.

 

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The following tables list our acquisitions:

 

2015

Acquisitions(1)

  

Principal office
location

  

Service offerings

  

Time of
acquisitions(2)

Taiyuan Fubusi ( LOGO )

  

Taiyuan

  

K-12 tutoring

  

April 2015

Guangzhou Yingxun Lixiang ( LOGO )

  

Guangzhou

  

K-12 tutoring

  

May 2015

Tianjin Shengjia ( LOGO )

  

Tianjin

  

K-12 tutoring

  

June 2015

Taiyuan Mercan ( LOGO )

  

Taiyuan

  

K-12 tutoring; study-abroad tutoring

  

June 2015

Dalian Oriental Magic Arts ( LOGO )

  

Dalian

  

K-12 tutoring

  

August 2015

Shenyang Oriental Magic Arts ( LOGO )

  

Shenyang

  

K-12 tutoring

  

August 2015

Jinan Daozhen ( LOGO )

  

Jinan

  

K-12 tutoring

  

October 2015

Beijing Ruibao ( LOGO )

  

Beijing

  

K-12 tutoring

  

November 2015

Guiyang Tiantian ( LOGO )

  

Guiyang

  

K-12 tutoring

  

November 2015

Lighthouse Beijing ( LOGO )

  

Beijing

  

Study-abroad tutoring

  

November 2015

Beijing YESSAT ( LOGO YESSAT)

  

Beijing

  

Study-abroad tutoring

  

December 2015

Jinan Delin ( LOGO )

  

Jinan

  

K-12 tutoring

  

December 2015

Tianjin Kexin ( LOGO )

  

Tianjin

  

K-12 tutoring

  

December 2015

 

2016

Acquisitions(1)

  

Principal office
location

  

Service offerings

  

Time of
acquisitions(2)

Jinan Qiru ( LOGO )

  

Jinan

  

K-12 tutoring

  

January 2016

Nanjing Innovation ( LOGO )

  

Nanjing

  

K-12 tutoring

  

January 2016

Shaoxing Lingxian ( LOGO )

  

Shaoxing

  

K-12 tutoring

  

January 2016

Ningbo Wei’en ( LOGO )

  

Ningbo

  

K-12 tutoring

  

February 2016

Chengdu Shucai ( LOGO )

  

Chengdu

  

K-12 tutoring

  

March 2016

Nanjing Zhumengtang ( LOGO )

  

Nanjing

  

Study-abroad tutoring

  

March 2016

Shenzhen Daiweisi ( LOGO )

  

Shenzhen

  

Study-abroad tutoring

  

April 2016

Guangzhou Butong ( LOGO )

  

Guangzhou

  

K-12 tutoring

  

May 2016

Shanghai Xinkebiao ( LOGO )

  

Shanghai

  

K-12 tutoring

  

May 2016

Guangzhou Qiji ( LOGO )

  

Guangzhou

  

Study-abroad tutoring

  

June 2016

Beijing Hope ( LOGO )

  

Beijing

  

Study-abroad tutoring

  

June 2016

Jinan Jinmenqiao ( LOGO )

  

Jinan

  

Study-abroad tutoring

  

July 2016

Luoyang Caihong ( LOGO )

  

Luoyang

  

K-12 tutoring

  

July 2016

Beijing Quakers ( LOGO )

  

Beijing

  

Study-abroad tutoring

  

August 2016

Shenyang Being ( LOGO )

  

Shenyang

  

K-12 tutoring

  

August 2016

Dalian Tongfang ( LOGO )

  

Dalian

  

K-12 tutoring

  

November 2016

Xi’an Yangjian ( LOGO )

  

Xi’an

  

K-12 tutoring

  

November 2016

Dalian Zhemei ( LOGO )

  

Dalian

  

Study-abroad tutoring

  

December 2016

Luzhou Hanlin ( LOGO )

  

Luzhou

  

K-12 tutoring

  

December 2016

 

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2017

Acquisitions(1)

  

Principal office
location

  

Service offerings

  

Time of
acquisitions(2)

Shenyang Yingcai ( LOGO )

  

Shenyang

  

K-12 tutoring

  

January 2017

Beijing Puxing ( LOGO )

  

Beijing

  

K-12 tutoring

  

January 2017

Tianjin Juming ( LOGO )

  

Tianjin

  

K-12 tutoring

  

February 2017

Nanjing Baifenbi ( LOGO )

  

Nanjing

  

K-12 tutoring

  

April 2017

Fanzhuan Chengdu ( LOGO )

  

Chengdu

  

Online education

  

April 2017

Chengdu Wuyou ( LOGO )

  

Chengdu

  

K-12 tutoring

  

April 2017

Chongqing Wuyou ( LOGO )

  

Chongqing

  

K-12 tutoring

  

April 2017

Beijing Zhihuasheng ( LOGO )

  

Beijing

  

Online education

   May 2017

Shenyang Zhongying Yulong ( LOGO )

  

Shenyang

  

K-12 tutoring

  

May 2017

Jilin Shiji Dongfang ( LOGO )

  

Jilin

  

K-12 tutoring

  

June 2017

Yancheng Tiantian Xiangshang ( LOGO )

  

Yancheng

  

K-12 tutoring

  

June 2017

Fuzhou Xueyoufang ( LOGO )

  

Fuzhou

  

K-12 tutoring

  

July 2017

ZMN Education ( LOGO )(3)

  

Beijing

  

Study-abroad tutoring

  

July 2017

Global Education ( LOGO )

  

Beijing

  

Study-abroad tutoring

  

August 2017

Hangzhou Feiyue ( LOGO )

  

Hangzhou

  

K-12 tutoring

  

September 2017

Hangzhou Yulan ( LOGO )

  

Hangzhou

  

Study-abroad tutoring

  

September 2017

 

(1) Acquisitions include equity purchase or assets purchase conducted by our VIE, Puxin Education, and its subsidiaries.
(2) Time of acquisitions refers to (i) with respect to equity acquisitions, the time when we obtained the control over the operations and management of the entities acquired, and (ii) with respect to assets acquisitions, the time of closing of the acquisition.
(3) Puxin Education is in the process of being registered with local government authorities as shareholder of ZMN International Education Consulting (Beijing) Co., Ltd.

Target Selection and Execution of Acquisitions

We have adopted a systematic approach towards acquisitions. We have a dedicated acquisition team systematically screen, evaluate and track the potential target schools in China. We initiate the process by conducting extensive market research to identify high-quality targets in a specific city or province. We apply a set of rigorous criteria, including the target’s geographic location, reputation in the local market, growth potential, synergies with our existing schools and the probability for successful integration, as key considerations for acquisitions. Since our inception, we identified and contacted over 1,000 targets in China as our potential acquisition targets, among which we have acquired equity interests in or assets of 48 schools, including Global Education.

When we identify proper target schools, we conduct thorough and rigorous due diligence on these schools covering business operations, financial management, human resources and marketing of the target schools. During such due diligence process, we identify both the weakness and potentials of the target schools and therefore determine whether to acquire the target schools and propose appropriate development strategies for such schools. Leveraging our effective centralized management model and our management’s strong execution capability, we are able to efficiently complete the acquisitions and effectively integrate the operations and management of the acquired schools.

Integration of Acquired Schools

As early as during the pre-acquisition due diligence of a target school, our acquisition project team identifies key operating indicators to be improved and proposes growth plan for the target school. We usually assign the

 

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acquired school a principal who has extensive experience in operating other schools in our group. Before starting his responsibility, the principal will visit the school to understand the operational status and conduct his comprehensive research covering the local market landscape, operations of competitors, as well as economic and demographic conditions of the city where the acquired school is located. All of these lay a solid foundation for effective post-acquisition integration.

We implement our PBS at each acquired school to effectively integrate it into our management system and improve its operating performance. Our senior management conduct on-site training to the acquired schools’ management team and teachers to familiarize them with our culture and operation management system. Based on the methodologies of PBS, we formulate a detailed 100-day execution plan and set forth 21 post-acquisition milestones for each acquired school covering every key operational aspects:

 

    Student recruitment and marketing: Based on our thorough pre-acquisition due diligence and market research, we take various marketing measures to increase the acquired schools’ student enrollments. We focus on increasing the existing students’ retention rate and the number of courses enrolled by each student. In addition, we proactively encourage students and their parents to make referrals to other students and offer classes with promotion prices to attract new students. We also make specific marketing plans for the acquired schools.

 

    Curriculum and service offering: Each acquired school will adopt our unified curricula and course materials to provide courses with consistent quality. We formulate full-year syllabi based on the schedules of admission tests of elementary schools, middle schools, Zhongkao and Gaokao to ensure well-organized teaching activities at each acquired school. We also require the acquired schools to implement our standardized student service protocol to offer better services to students and their parents.

 

    Teachers: We provide comprehensive training for the existing teachers of the acquired schools so that they can adopt and apply our teaching methodologies in their teaching activities. Based on the need of each school, we recruit new teachers and provide them with training on teaching skills and techniques. We conduct systematic performance reviews for existing teachers and provide them with better incentive and career development prospects to ensure the stability of the outstanding teaching staff of the acquired schools.

 

    IT systems: We usually integrate the key aspects of an acquired school into our IT systems within three months. Each acquired school is required to apply our unified ERP system, CRM system and knowledge management system.

 

    Financial management: Our headquarters perform centralized financial management over acquired schools. We set forth budget plans for each school in relation to the number of classes and student enrollments, as well as performance targets.

During the entire integration process, our dedicated acquisition team at the headquarters oversees the executions at the acquired schools and provides guidance to the principal. The principal is required to submit daily, weekly and monthly reports about the day-to-day operations of the acquired school to our headquarters for at least three months.

Our systematic integration approach underpins robust post-acquisition growth of the acquired schools. For K-12 tutoring schools we acquired prior to 2017, we achieved a growth in student enrollment in regular-price courses of 662,958 in 2017 compared to 441,375 in 2016, representing a growth rate of 50.2% on a comparable basis. For these schools, the K-12 group class student retention rate in regular-price courses also increased from 57.7% in the first quarter post acquisition to 70.1% after 12 months post acquisition.

Course Material Development

We emphasize the quality of our course materials which is crucial to effectiveness of our teaching methodologies. Most of our K-12 tutoring curricula and course materials are developed and updated at the course

 

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research and development centers in Beijing and Taiyuan with a focus on the universal academic and examination requirements in the PRC education system. Our schools can adopt these curricula and course materials with modifications to satisfy local requirements and demands. We encourage all teachers and consultants to actively participate in our course materials development activities and contribute their talents and experiences. In addition, we had a dedicated team of over 300 as of December 31, 2017, which is responsible for developing, updating and improving our curricula and course materials. All the team members have solid education background, extensive teaching experience and research achievements in the field of a certain subject.

We have devoted significant resources to course material development to ensure that our course offerings are up-to-date, engaging and effective. We review and make reference to recent teaching and testing materials of leading public schools’ curriculum. To address different educational requirements and needs of our students at each grade level, we have also developed curricula and course materials tailored for classes of different difficulty levels based on students’ learning ability as well as their strengths and weaknesses.

We update our K-12 tutoring and study-abroad tutoring course materials periodically to keep up with the ongoing changes in the standard K-12 curriculum and admission tests for overseas countries. We also look into each year’s examination papers of Zhongkao and Gaokao and IELTS, TOEFL, SAT and SSAT to update our practice question database and course materials. Our updated course materials are reviewed by an expert group consisting of teachers of public schools, teaching researchers and our own teachers who have significant teaching experience in the subject. At the end of each course’s term, we evaluate, update, and improve course materials based upon feedback from teachers, students and parents as well as student performance in their examinations.

Currently, we offer children’s English courses to children in kindergarten through grade six. Our course materials for the children’s English are largely based on materials originally published by international education content providers and publishers.

Our Teachers and Consultants

Our teachers are critical to maintain the quality of our services and to promote our brand and reputation. We have a team of dedicated and highly qualified teachers with enthusiasm for education, whom we believe are essential to maintaining our consistent and high teaching quality. This commitment is reflected in our highly selective teacher hiring process, our emphasis on continued teacher training and rigorous evaluation, our adoption of a performance-based compensation plan, and our offering of a promising career path.

We recruit K-12 teachers based on their teaching experience, learning ability and commitment to working with us in the long term. We hire teachers for the group classes and the personalized services separately. We routinely recruit teachers graduated from universities in China and experienced teachers with a solid track record and strong reputation from local public schools. We look for candidates who have a strong sense of purpose and possess certain level of sales skills. We had 1,778 and 3,207 full-time K-12 teachers, 1,527 and 2,405 part-time teachers and 688 and 1,433 teaching assistants as of December 31, 2016 and 2017, respectively.

We hire highly qualified teachers with strong English and teaching skills for our study-abroad test preparation courses. Our study-abroad test preparation teachers are generally specialized in teaching particular courses, such as reading, writing, speaking or listening for IELTS or TOEFL. We had 107 and 976 full-time study-abroad test preparation teachers and 63 and 1,425 part-time teachers as of December 31, 2016 and 2017. As of December 31, 2017, 32.3% of our test preparation teachers had overseas studying experience and 38.7% held a master’s or doctor’s degree.

We hire consultants who are familiar with comprehensive study-abroad application procedures for our study-abroad consulting services. Our consultants had an average of over three years of consulting experience in this industry. We had 29 and 205 full- time consultants, as of December 31, 2016 and 2017, respectively. As of December 31, 2017, 27.5% of our consultants had overseas studying experience.

 

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The quality of our educational services is critical to our business and our brand and is key to our continued growth and success. We have developed our “Nine Steps” methodology, which standardizes our teachers’ teaching activities to implement the best practices across our learning centers to ensure consistent teaching quality. We require our teachers to carry out nine steps in their teaching activities, including (i) class preparation, (ii) before-class assessment, (iii) in-class orientation, (iv) in-class lectures, (v) in-class recaps, (vi) in-class quizzes, (vii) after-class review, (viii) checking homework, and (ix) collecting feedback, and set forth standards for each step. The Nine Steps methodology enables our teachers to obtain critical information about students’ learning pattern, aptitude and performance which help them refine their course offering. It also stimulates our students to achieve academic excellence.

Each of our newly hired full-time teachers and consultants is required to undergo rigorous training and must continue to participate in periodic training programs that focus on education content, teaching or consulting skills and techniques as well as our corporate culture and values. Our teachers’ retention, compensation and promotion are to a large extent results oriented. We regularly evaluate the classroom performance and teaching results of our teachers and consultants. Our evaluation takes into consideration various factors, including (i) the K-12 group class enrollment rate, (ii) the K-12 group class student retention rate, (iii) the number of students who enroll additional courses, and (iv) the number of students who withdraw from the courses.

We offer our teachers and consultants competitive and performance-based compensation packages and provide them with prospective career development within the company. We have established a remuneration system with clear and detailed performance indicators to evaluate the performance of our teachers, consultants and other staff, which can motivate our employees in a scientific, reasonable and effective manner. We have launched systematic career advancement programs, including “Puxin Star” for top teachers, “Puxin Talents” for mid-level management and “Puxin Leadership” for senior management to build up a talents reserve for our long-term growth. We provide the participants in these programs with career advice, advanced training and team building activities with a purpose to broadening their access to growth and development opportunities.

Student Recruitment

We offer comprehensive K-12 tutoring services to students aging from three to 18. Our study-abroad tutoring services are designed to help middle school students, high school students and college students prepare for admission tests and applications for overseas study. As of December 31, 2016 and 2017, approximately 42.7% and 38.4%, respectively, of our total enrolled students for K-12 tutoring services were elementary school students and 35.9% and 46.4%, respectively, of our total enrolled students for K-12 tutoring services were middle school students. Our full K-12 curriculum allows us to maximize the lifetime value of these enrollments by satisfying the entire breadth of our student’s educational needs. In the meantime, with lowering age of students studying abroad, we are able to cross-sell our study-abroad tutoring services to K-12 student base, and vice versa, extending our presence in students’ academic careers.

We focus on retaining existing students who have enrolled in our courses, as well as attracting new students. We recruit new students through both online and offline channels, such as distributing leaflets, organizing seminars and advertising online. We believe that the greatest contributor to our success in student recruitment has been word-of-mouth referrals by our students and their parents who share their learning experiences at our learning centers with others. Students in our learning centers have significantly improved their results on Zhongkao and Gaokao practice exams, SAT, TOEFL or IELTS, which we believe has enhanced our reputation and increased our word-of-mouth referrals in the markets that we participate in.

In addition to courses we offer at our regular prices, we also offer promotional K-12 tutoring programs to attract new students and at the same time attract existing students to subscribe for more subjects, primarily during the summer and winter breaks, as well as the Labor Day and National Day holidays in China. The prices for such promotional programs are usually at a substantial discount of our regular tuition fees. In 2017, there were

 

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172,772 student enrollments in our promotional programs, 49,435 of which chose to enroll in our regular K-12 courses after the promotional programs.

Branding and Marketing

Branding

We have established “Puxin” as a well-recognized brand among industry participants which has positioned us a leading player with successful integration experience in China’s after-school education sector. According to a selected survey conducted by Frost & Sullivan, we are named as one of the preferred partners or buyers by 70.8% of the interviewees when they seek potential acquirors of their business.

For our acquired K-12 tutoring schools, we generally continue to use their original brand names to assure stable operations of these schools in the local markets. Once these acquired schools are fully integrated into our group, we operate them under a co-brand with our own “Puxin” brand, such as “Puxin-Lingxian.” For our study-abroad tutoring services, we operate under the existing brands of the acquired entities, including Global Education, and manage their brand names as sub-brands within our group.

Marketing

We use a variety of marketing and recruiting methods to attract students and increase student enrollments of our learning centers. We recruit our students primarily through word-of-mouth referrals. Our learning centers generally enjoy high local reputation which has greatly facilitated our student recruitment. Moreover, we engage in a range of marketing activities to enhance our brand recognition among prospective students and their parents.

We place online and mobile advertisements mainly on Baidu.com, Sogou.com and other search engines in China. We also cooperate with innovative media platforms and place advertisements or advertorials on education-focused platforms and mobile apps. Furthermore, we have established online WeChat groups with existing and prospective students and their parents. We regularly place our advertisements and share education-related information in our WeChat groups to keep close interactions with potential students and their parents.

In addition to the centralized marketing team working at our headquarters, we also have a sales force in each of our learning centers in different cities. We place outdoor display advertisements or distribute leaflets at public transportation terminals, in schools and in residential areas in selected cities. We distribute informational brochures, posters and flyers to students and parents at locations close to schools and residential areas. We also conduct extensive free information sessions to introduce our programs to our target markets. We regularly conduct information sessions, seminars and workshops to provide prospective students and their parents with opportunities to learn about the products and services that we offer. We also give calls to the parents of our existing students to inform them of our class schedule and relevant promotions.

Competition

The private education market in China is highly fragmented and