Bright Scholar Education Holdings Ltd (BEDU) 2018 Q3 法說會逐字稿

Good morning, and thank you for standing by for Bright Scholar's Third Fiscal Quarter's 2018 Earnings Conference Call. (Operator Instructions) Today's conference is being recorded.

I would now like to turn the meeting over to your host for today's conference, Ms. Ruby Yim, Investor Relations Council.

Thank you, operator. Good morning and good evening. Welcome to Bright Scholar's 2018 third fiscal quarter ended May 31, 2018 earnings call. With me today on the call is Mr. Junli He, our Chief Executive Officer; and Ms. Dongmei Li, our Chief Financial Officer.

As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available on our website following the call. By now, you should have received a copy of our press release that was distributed on July 25, 2018 after market close Eastern Time. If you haven't, it is available on the IR Section of our website.

Before we get started, let me review the forward-looking statements regarding this conference call, that is statements related to future, not past, events, estimate just, expected future business, and financial performance and financial condition, and often contain words such as will, estimate, projects, predict, believe, expect, anticipate, intend, potential, plan or goal.

Bright Scholar may also make midterm or annual forward-looking statements in other reports, in presentations, in material delivered to shareholders and in press releases. In addition, Bright Scholar's representatives may make annual forward-looking statements. Forward-looking statements by the nature are just matters that are to different degrees uncertain such as statements about the company's growth and strategies, its future business development, financial condition and decisive operations, its ability to retain and grow its customer base and network of schools, and growth of trends in the markets for services in the China, the demand for and market acceptance of this brand and services, competition in this industry in China, relevant government policies and regulations related to the corporate structure, business and industry, fluctuations in general economic and business conditions in China. Further information regarding this and other words is included in Bright Scholar's filing with the Securities and Exchange Commission. Bright Scholar undertakes no duty to update any forward-looking statement, except as required under applicable law.

During this call, we'll be referring to GAAP and non-GAAP financial measures. We use certain non-GAAP measures as supplemental measures to review and assess our operating performance. These non-GAAP financial measures have limitations as analytical tools and investors should not consider them in isolation, or for substitute for net income attributable for to company or other consolidated statement of comprehensive income data prepared in accordance with U.S. GAAP. Please note that all numbers are in RMB and all comparisons refer to year-over-year comparisons, unless otherwise stated.

With that, I'll turn the call over to our CEO, Junli He. Junli?

Thanks, Ruby, and thanks to everyone who is joining us today to review our 2018 third fiscal quarter results. For those who are new to our company, we have included in our earnings presentation a brief corporate introduction from Slide 3 to 8, which you can download from our IR website, and then all numbers are in RMB and all comparisons refer to year-over-year, unless otherwise stated.

I will start today's call with an update on our recent acquisitions before highlight our performance for the third fiscal quarter 2018, and then share some of our key initiatives and developments. Then I'll turn over the call to Dora to provide a more detailed review before we take your questions.

So now turning to Slide 10. We continue to strengthen our market leader position through the execution of our growth strategies, and establish (inaudible) recent completion of 4 acquisitions. We acquired 5 kindergartens from Xinqiao, where to our expanding nationwide network providing quality early year education to our youngest students. In addition, we have completed the transaction of 3 strategic acquisitions to expand our service offers in the Complementary Education Services segment.

Bright Scholar now earn a 70% equity interest in Can-Achieve, a China based education consulting business which represents our 60 -- I'm sorry, our 600 prestigious overseas universities in U.S., Canada and the U.K; a 75% equity interest in Foundation Global Education, the Hong Kong based education consulting company for overseas boarding schools and universities; as well as 51.67% equity interest in Zangxing, an education technology company based in Guangzhou, China.

The transactions (inaudible) foundation and the Shangxue were completely [undue] versus 2018. We are delighted to work on these companies to our extending Bright Scholar family. And we are now working hard to integrate this business to capitalize the synergies with our existing goals.

Let's now move on to the highlights of our business and operation portfolios in Slide 11. Factoring the (inaudible) contribution from the acquisition of Xinqiao and Can-Achieve, the revenue for the third fiscal quarter was RMB 540.9 million, representing a year-over-year increase of 33%. And for the 9 months period, revenue was RMB 1,329 million, representing a 26% year-over-year increase. In light of this acquisitions, we have updated the financial guidance for the full fiscal year 2018 to include 1 year for existing business and investment using new guidance representing a year-over-year growth of 26% to 28%.

Let's move to our detailed breakdown for the respective segments in Slide 12. The top line growth for our respective business segment continue to expand for the quarter with International Schools, Bilingual Schools, Kindergartens and Complementary Education Services grew by 13.7% [sic] [13.4%], 35% and 172% respectively. And 9 months business, they grew over 15%, 29%, 26% and 83% respectively.

Slide 13 shows more details of our network expansion in the revenue increase. We have added a total of 15 new schools including 5 kindergartens for Xinqiao to our nationwide network for the first 9 months of fiscal 2018. With a total of 67 schools, the capacity increased about 25% to 60,551. The average student enrollment for the first 9 months of fiscal 2018 has increased by 19.1% to 35,275 with splendid utilization that was 61.8%.

Turning to Slide 14. We continue to prioritize ramp up of existing school with competitive pricing. I'm pleased to report that although our AST has modestly increase of 9.1% of our Bilingual and 2.4% for our Kindergartens, while AST of International School maintain a similar level.

Before I turn over to Dora to discuss the financial results of the quarter in more details, I would like to provide an update on our (inaudible) performance and share with you a few exciting developments on a business front.

First on extraordinary performance. Please refer to Slide 15 to 16. Our focus on delivering premium education in [level] school to achieve academic excellence, and at a rate at which we are delivering to top universities and in schools continue to grow beyond our expectation. In addition to the outstanding achievement of graduating class for our international school with 90% of our students having received all parts from global top 50 institutions are shown in Slide 15, we recently received our students 2018 Zhongkao, which is China's high school entrance exam results and 80.3% of the grade 9 graduates from our bilingual schools have been accepted into top public schools in the respective region as shown on Slide 16. Academic excellence represented every essence of our brand and our unwavering commitment to deliver premier education services to support the aspiration of our student and staff.

As stated on Slide 16, we recently announced that Bright Scholar has signed agreement to acquire a 70% equity interest in a renowned Zhejiang-based art training institute for a total consideration of RMB 70 million. The institution specialize in preparing students for college entrance exams relating to media and communication as well as music and performance studies. Found in 2009, the institution has 2 main campus which cover 60 -- sorry, 600 students delivering a revenue of RMB 23.7 million and EBITDA of RMB 9 million in 2017. We believe this is strategic investment to further expand our services offerings and have more student in our desired other colleges.

Our expanding network is crucial to accelerating our growth. We had addition of 5 new kindergartens from Xinqiao. We now have a total of 67 schools. Our goal is to expand the expansion and our long-term collaboration with kindergarten provide a strong platform for growing our network. I'm pleased to report that as of July 17, 2018, we have signed contracts to operate 12 kindergartens within Country Garden properties with a total capacity of 3,420 students. This impactful relationship provide us with strong pipeline for expanding our nationwide network and allows a high visibility of revenue as we continue to build scale.

As for partnership with Fettes College, we have secured a site in Guangzhou for international school with capacity of accommodating 2,500 students for age 3 to 18. Back in May, we announced the partnership with Beijing Normal University. (inaudible), the Chairlady of Bright Scholar, has made a personal donation of RMB 80 million to Beijing Normal University education fund for doing the establishment of Huiyan International Education College, which aims to provide international education training for new and existing teachers. Through the partnership, Bright Scholar and Beijing Normal University will jointly own the intellectual property of research in international education which Bright Scholar will provide internship opportunities for college students across its nationwide school networks, and we have the priority to recruit top talents.

Furthermore, underscoring the confidence in the company's prospects, the board has approved a share buyback program of up to USD 100 million on April 26, 2018. As of July 23, 2018, the company has repurchased 195,276 shares with an average price of $15.9 per share. We are proud of progress we have achieved and the consecutive quarterly growth results continue to demonstrate our commitment to accelerating sustainable revenue growth.

With this recent acquisitions and the deepening of partnership with kindergarten, we are ensuring our expanding network and for the further facilities create value for our students. The company remains committed to creating sustainable value to shareholders through operational performance. Our quantitative strategic acquisition continue the execution of our growth strategy and the various share repurchases.

So at this point, I would like to turn the call over to Dora to discuss our financials. Dora?

Thank you, Junli. Please be reminded that all numbers are in RMB and all comparisons refer to year-over-year comparisons, unless otherwise stated. Please also refer to our earnings release for detailed information of our comparative financial performance on a year-over-year basis.

Please turn to Slide 18. Our revenue for the quarter was RMB 540.9 million, up 33%. On a 9-month basis, revenue was RMB 1,329.2 million, up 26.2%. Revenue from International Schools for the quarter was RMB 178.9 million, up 15.4% as compared to RMB 157.8 million. On a 9-months basis, revenue for International Schools was RMB 472.2 million, up 16.1% as compared to RMB 410.1 million. Revenue from Bilingual Schools for the quarter was RMB 161.7 million, up 27.4% as compared to RMB 126.9 million. For the 9 months, revenue was RMB 425.8 million, up 28.9% as compared to RMB 330.3 million.

Revenue from Kindergartens for the quarter was RMB 129.9 million, up 35.2% as compared to RMB 96.1 million. For the 9 months, revenue was RMB 309.1 million, up 25.9% as compared to RMB 245.6 million. Xinqiao kindergartens contributed RMB 12.7 million to revenue for the period.

Revenue from Complementary Education Services for the quarter was RMB 70.4 million, up 171.8% as compared to RMB 25.9 million. On a 9 months basis, revenue was RMB 122.1 million, up 82.5% as compared to RMB 66.9 million. The revenue of élan English learning centers has increased by 2.5% to RMB 24.7 million for the quarter and increased 22.4% to RMB 67.7 million for the 9 months period. Can-Achieve contributed RMB 46.3 million to revenue for the period.

On Slide 19. Cost of revenues for the quarter accounted for 57% of total revenue as compared to 54.8% in the same period last year. On a 9 months basis, cost of revenue accounted for 60.8% of total revenue as compared to 62%. Teaching staff cost, the primary cost contributor, was 37.1% of total revenue for the quarter as compared to 37.7%. On a 9 months basis, staff cost was at 42.2% as compared to 44.2%. Average students-teacher ratio was 9.9 for May 31, 2018, as compared to 9.6 at the same period of last fiscal year.

On Slide 20. Gross profit for the quarter was RMB 232.6 million, up 26.6%. Gross margin down from 45.2% to 43%. The consolidated margin decrease was primarily due to the impact of new bilingual schools, dilution -- and dilution from élan English learning centers, camps and other businesses. On a 9 months basis, gross profit was RMB 521.6 million, up 30.5%. Gross margin was 39.2%, up from 38%. The International Schools gross profit up 19.7% to RMB 80.2 million for the quarter, with gross margins improved from 42.5% to 44.8%. For the 9 months period, gross profit up 35.8% to RMB 193.2 million, with gross margin improved from 34.7% to 40.9%.

For Bilingual Schools, gross profit up 22.5% to RMB 68.6 million for the quarter, with gross margin decreased from 44.1% to 42.4%. For the 9 months, gross profit up 25.9% to RMB 156.5 million, with gross margins at 36.8%, slightly down from 37.6%. The decrease in gross margin was primarily due to the impact from 5 new opened bilingual schools in fiscal 2018 and the gross margin dilution impact was somewhere around 1%.

For Kindergartens, gross profit up 38.2% to RMB 68.7 million for the quarter, with gross margin improved from 51.7% to 52.9%. On a 9 months basis, gross profit up 30% to RMB 141 million, with gross margin improved from 44.2% to 45.6%. For the 9 months of fiscal 2018, we added 10 new kindergartens and the gross margin dilution from the new kindergartens for the 9 months 2018 was somewhere around 0.5%.

For Complementary Education Services, gross profit up 36 points to RMB 15.1 million for the quarter, with gross margin down from 42.9% to 21.4%. On the 9 months basis, gross profit up 25.6% to RMB 30.9 million, with margins down from 36.8% to 25.3%. The reason for the gross margin decrease were mainly due to dilutions from élan's headcount increase, lower margin from camp business and other business, also the impact from Can-Achieve.

Slide 21. Adjusted SG&A expenses for the quarter accounted for 12.9% of total revenue, down from 16%. On the 9 months basis, adjusted SG&A expenses accounted for 17.4%, up from 16.4%. The increase in selling, general and administrative expenses was primarily due to the increase in the compensation and benefit paid to additional general and administrative staff members and employee stock ownership plan related expenses to retain talents, as well as increase in marketing expenses for brand promotion, merger and acquisition and other professional services related expense to support the growing business as a listed company.

Continuing on Slide 22. Adjusted EBITDA for the quarter was RMB 187.6 million, up 29.2%. Adjusted EBITDA margin was 34.7%, down from 35.7%. On the 9 months basis, adjusted EBITDA was RMB 373.9 million, up 26.1%. Adjusted EBITDA margin was 28.1% as compared to 28.2%. Adjusted net income for the quarter was RMB 142.1 million, up 32.2%. Adjusted net margin was 26.3% as compared to 26.4%. On the 9 months basis, adjusted net income was RMB 257 million, up 31.5%. Adjusted net margin was 19.3%, up from 18.6%.

We incurred about RMB 4.1 million foreign exchange gain and RMB 7.1 million foreign exchange loss on the book during third quarter -- [the first six] quarter and the first 9 months of 2018 respectively. The accounting gain and loss was due to moving U.S. dollar denominated currency from offshore company to PRC subsidiary. If these accounting gain and loss was excluded from the adjusted net income, we would have a net income of RMB 138 million or 28.3% increase for the third fiscal quarter and RMB 264.2 million or 35.1% increase for the first 9 months of fiscal 2018.

Please refer to the table in Slide 23 for the condensed income statement and Slide 24 for the reconciliation for SG&A, EBITDA and the net income on a GAAP to non-GAAP basis. A quick note on our cash and bank balance in Slide 25. As of May 31, 2018, the company's cash and cash equivalent and restricted cash totaled RMB 2,702.2 million or USD 421.6 million as compared to RMB 1,906.8 million as of February 28, 2018.

In Slide 27, in conjunction with the completion of the fourth strategic acquisitions, the company updates its financial guidance for fiscal 2018 to include revenue from existing business under the fourth strategic investment. The company expects its revenue to be between approximately RMB 1,674 million to RMB 1,700 million, representing year-over-year growth between 26% and 28%. The primarily guidance for an organic revenue of RMB 1,630 million to RMB 1,660 million, representing year-over-year growth between 23% to 25%. The company also raises its guidance on average students enrollment to be between approximately 35,000 and 36,000 representing an year-over-year increase between 18% and 21%. The primarily guided average student enrollment to be between 34,300 to 35,000, representing year-over-year increase between 15% to 18%.

The company revises its guidance on new school opening and expects 10 new schools openings for fiscal year 2018. The previous guidance was 12 new schools for fiscal 2018. The guidance is based on the current market conditions, and reflects the company's current and preliminary estimate of market and operating conditions and customer demand, which are all subject to change.

This concludes my financial update. Now I will turn to Junli for his closing remarks.

Thank you, Dong. Looking ahead, we are focusing on our key growth initiatives including accelerated velocity of scaling our business both organically and through strategic acquisitions. Thanks to our overall growth and the positive (inaudible) effort, we are ideally positioned to capitalize on a robust pipeline of opportunities in front of us, and we remain focused on achieve our goals as [instruction], thus part of the provider of premium education services.

That's all we have in the formal prepared remarks. And now we will turn it over to Q&A. Operator, please.

(Operator Instructions) Our first question today will come from Terry Weng of Blue Lotus.

I have one question here. Could you share any update with the utilization load of International School and Bilingual School? And what is our plan to improve the utilization rate in the future?

Hi, this is Dora. I'm happy to take your questions. Regarding the utilization, the current utilization for our International School, Bilingual Schools, we are happy to report our International School utilization has been increased from 42.6% of last year to 48.9% as of the 9 months. And for our Bilingual Schools, last year, we have 11 bilingual schools. The utilization rate is close to 76%. And this year we add 5 new more bilingual schools and we increased our capacity. So right now the blended utilization for Bilingual Schools is 61.6%. But, however, our student enrollment also increased for our Bilingual Schools as well. And in terms of how to increase the involvement utilization, yes, that's what we are doing to -- through promotion our brandings to continue to increase ramp up our existing ramp-up school.

Our next question will come from Nicky Ge of China Renaissance.

I have 2 questions here. First question is that our gross margin for Complementary Services this quarter, and what should we see for the next quarter on this number? And then my second question is the timeline for the 12 kindergartens from Country Garden. When do we expect them to kick in?

Maybe I'll take your first question regarding the gross margin for the Complementary segment. For the quarter, we have impression from the margin dilutions from élan and also camp business and also Can-Achieve. But as you know, we will have a peak season for our camp business. From next quarter, we will see more profits coming from camp business. And regarding the timeline for the 12 new contracts kindergartens, you want to take that or...

Sure. For the 12 new kindergarten that we signed the contract with Country Garden, we are still working on the schedule because we secured the sites, but it won't open. It depends on kind of the occupational rate of respective communities. So we're still working on that, but I would say probably at least it will be 3 of them will be open in the next year.

(Operator Instructions) Our next question will come from Sheng Zhong of Morgan Stanley.

I have 2 questions. One is, as now it's already almost August, so do you have any visibility into the involvement of new school year from September 4 or better if you can give some color by school type? And second question is, we have a lot of activities, acquisition in the Complementary Services. So what's management's outlook of view of the Complementary Service as a percentage -- the Complimentary Service contribution to company's total revenue next year or in the 2 or 3 years' time frame?

I'll take those questions. First one is about the enrollment. So we spoke about in the past quarters we have significantly increased the budget of spending and also effort in enrollment -- increase the enrollment of our schools. We do expect that on a year-over-year same school basis for ramp-up schools that we do expect a good increase for what we have done in the past. But as you know for [majority] of schools where the capacity is fixed, of course there is not too much growth from there given that in the past few years, we have opened a number of new schools. Especially this fiscal year, we opened the 5 bilingual schools and now have 5 kindergarten opened. As mentioned by Dora, the 2 -- the originally regarded from -- for '17, regarding now 2 of them will be divided to the next year, but those schools will be -- should be in [the share] next year as well. So we do expect a increase. And the numbers are quite -- compared to just 2 other members, I would say are better. But of course, we wouldn't know the numbers for sure until people actually pay their tuition when they come to schools. And the second question about the percentage of Complementary Education Services as a percentage of our business. With that acquisition, we can fairly -- we needed to figure out our given gross track record. But as we say, acquisition is probably hard to predict. Even though we do have in mind a lot of kind of target around the buy, it's hard to predict the percentage as -- of Complementary Education Services.

Thank you, Jerry. So do we offer the Complementary Service if we don't exclude the acquisitions for now? So for the current one, what do you think?

Well, I would say the specific target around is about 9.2%. And it depends on the gross rate and also the pace of how we open new schools. I think the percentage will change. But I think in the long run, that cover for years as we are looking at more acquisition target, that percentage may change because we might be -- if we buy a large number of K top schools, if at the time being, the percentage of complementary action might drop because of adding more on the other side.

(Operator Instructions) Having no further questions, this will conclude our question and answer session. At this time, I would like to turn the conference back over to Mr. Jerry He for any closing remarks.

Thank you very much for joining the conference call. Please feel free to contact us if you have any further questions. We wish everyone a good day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.