ATA: China's Leading Online Educational Testing Provider

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

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

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

ATA's current market position

• The company delivered 2,065,249 tests for the six months ended September 30, through its test center network comprising 1,810 authorized test centers located throughout China.

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

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

Financials

ATA's financial year ends on March 31.

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

Valuation/Offer value ($ million)

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

Points to consider before investing at current price

• Estimated financials till December 31, 2007.

• Expected loss for next two quarters.

• Current U.S. economic outlook, as any slowdown in U.S. will affect the Chinese economy to some extent.

• ATA has not yet finalized the use of the most part of proceeds.

• Current fluctuation in stock markets

• Small size of company

• Recent under performance of Chinese education related IPO's in stock market.

Fundamentally company offers "Moderate Risk High Growth" long-term investment opportunity.

Company/Industry expectations

(these are just assumptions and the company may perform differently)

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

• With the rising popularity of computers and internet, online testing will become more accepted and the preferable method.

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

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

Negatives

• Complex corporate structure.

• Results can vary significantly from quarter to quarter..

• Dependence on Chinese market.

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

• ATA currently enjoys tax holidays for almost all of its operations, though any future change in the tax laws could revoke this tax holiday.

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

Positives

• History of high growth.

• Leading position in industry.

• High gross margins.

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

• The company generates all its revenues from China which not only is the fastest growing economy in the world, but also is one of the world's largest online testing markets.

• The company earns more and more revenues from its test preparation solutions where margins are higher than other segments.

• Proceeds will be used by ATA to enhance its existing business and for any possible acquisitions, which will strengthen its balance sheet.

Recent Developments

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

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

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

The company though has also estimated the possibility of a loss in the quarters ended March 31, 2008 and June 30, 2008 due to the seasonality of its business.