Bright Scholar Education Holdings Ltd (BEDU) 2020 Q3 法說會逐字稿

Good morning, and thank you for standing by for Bright Scholar's 2020 Third Fiscal Quarter 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 Counsel.

Thank you, operator. Good morning, and good evening. Welcome to Bright Scholar's third fiscal quarter ended May 31, 2020, earnings call. Joining me today are Mr. Jerry He, our Executive Vice Chairman; Ms. Wanmei Li, our Co-CEO; Mr. Zi Chen, our Co-CEO; and Ms. Dora Li, our Chief Financial Officer.

As a reminder, today's conference call is being broadcasted live via webcast. In addition, a replay 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 22, 2020, after market close Eastern Time. If you have not, it is available on the IR section of our website.

Before we get started, let me remind you that today's call may contain forward-looking statements within the meaning of section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, the company's business plans and development, which can be identified by terminology such as may, will, expect, anticipate, aim, estimate, intend, plan, believe, potential, continue, is so, likely to or other similar expressions.

Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict, many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding this and other risks, uncertainties or factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law.

During this call, we will 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 as a substitute for net income attributable to company or other consolidated statements of comprehensive income data prepared in accordance with U.S. GAAP.

Please note 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 Executive Vice Chairman, Jerry He. Jerry?

Thanks, Ruby. Good morning and good evening. Welcome to Bright Scholar's Third Quarter Fiscal 2020 Earnings Call. During this difficult time with the continuation and the resurgence of COVID-19 around the world, our (inaudible) was affected by this unprecedented crisis. We extend our sympathies to those who are suffering personally from the impact of the pandemic, and our deepest gratitude to those help fighting the pandemic on the front line. In the face of so many challenges, I'm incredibly proud of our teams around the globe showing exemplary dedication in ensuring our student's education journey to be least disruptive.

Let's begin our earnings report. For those who are new to our company, we have included in our earnings presentation a brief corporate introduction from Slide 5 to 13, which you can download from our IR website. Again, all numbers are in RMB and all comparisons refer to year-over-year unless otherwise stated.

I will go through the prepared remarks on behalf of the senior management team, then turn the call over to Dora to provide more details to our financials before we take your questions.

Please turn to Slide 15 for the highlights of our third fiscal quarter and the 9 months performance with detailed breakdown by respective business in Slide 16 and 17. Despite disruptions and the short-term impact from COVID-19 pandemic, Bright Scholar's performance during the third fiscal quarter has demonstrated our continued progress in executing our growth strategy and highlighted the resilience of our underlying business.

The revenue for the quarter was RMB 739.4 million, representing a year-over-year increase of 6.7%. Our net income was RMB 68 million, which was negatively impacted by the mandatory closure of our schools, kindergartens and the learning centers. For the 9-month period, the revenue was RMB 2.714 billion, representing a year-over-year increase of 46.6%. The adjusted gross profit, adjusted operating income, adjusted EBITDA increased by 41.9%, 23.9% and 37.3% year-over-year, respectively.

We are confident in the strength of our well-positioned growth platforms, namely domestic K-12 schools, overseas schools, Complementary Education Services and education technology. We are building good momentum as we accelerate the execution of our [manifest] growth strategy.

A brief update as follows. First, our domestic K-12 business, the demand for our K-12 education has continuously been strong in spite of the pandemic, as shown in Slide 18. In comparison to the 9 months of last fiscal year, the average student enrollment increased by 10.6% year-over-year, underpinning the strong demand for our K-12 education services, our consistent industry-leading academic performance, as you may refer to in Slide 19.

As of May 22, 2020, 93.6% of students in the 2020 graduating class of our international schools in China have received the offers from the top 50 institutions including 3 from Oxford, 3 from Cambridge, 4 from the University of Chicago and 12 from University of California Berkeley.

One of our key growth strategy is to expand our nationwide network with asset-light models through our strategic partnership and deep collaboration with Country Garden. As of the release date, we have entered agreements with Country Garden and other partners to add 61 kindergartens and 8 schools to our school network with a total capacity of approximately 35,500 students in China.

Second, our overseas school business, with our education service providers. The business in the third quarter was impacted by COVID-19 related to school closing mandated by government, mainly with the refund of boarding and the meal fees. While the full impact of this global pandemic remains uncertain for our overseas schools, we have taken measures to minimize disruptions and also put an initiative in place to reduce costs and to improve efficiency of the business during this challenging time and in anticipation of any potential resurgence for an extended period. Our global network of schools offers our students options to complete their study at different locations in the coming school year along with our virtual global school.

Third, our Complementary Education Services has adapted its business strategy and taken actions to help mitigate any adverse impact on business and operation during the COVID-19 pandemic. We are pleased to report that class resumed to close to 80% for some of the business units. In addition, we have realigned a redirect resources to domestic market of which pandemic has been contained to expand our business. We believe it's an opportune time to capitalize on post-pandemic market opportunities with new products and services for the summer.

Fourth, education technology, our new business segment as shown in Slide 13. The adoption of emerging technology has profound impact on education industry. As a student-centered company, Bright Scholar has continuously been evolving to meet the changing needs of our students, as well navigated unprecedented situation of COVID-19. While these changes present challenges in the short term, we are focused on the significant opportunities presented to us by new technology and learning behavior.

In the quarter, we announced 2 strategic initiatives to capitalize on those opportunities. Early in May, we announced the acquisition of 51% equity interests in Linstitute. Linstitute will provide high-quality and outcome-focused online training service, including academic Olympiad, a comprehensive selection of academic courses as well as other world-recognized international courses.

In June, we announced the launch of our virtual Future Global School with online-merge-offline, OMO, model, which will be in operation from the beginning of fiscal '21. The virtual school will deliver high-quality international curriculum through an interactive and intelligent learning management system. It creates a new blended learning experience combining the best of classroom and online education that offers human connection between teachers and students around the world. The expansion of our service offers -- offerings in utilizing technology to enhance access to high-quality education will further strengthen our market leadership in the face of pandemic as we usher a new age of learning.

While the pandemic is causing uncertainty and near-term impact, our revenue and profit continued to grow in the first 3 quarters and our long-term goals and strategy remain unchanged. We expect most of our business was -- will bounce back stronger post COVID-19. Key secular megatrends driving our business remain intact, and we remain committed to balancing operational discipline with continued investment in key strategic areas to drive long-term growth.

Our prudent financial management enabled us to have the financial flexibility to continue to invest in our business and return value to our shareholders. The Board of Directors have approved -- declared a cash dividend of $0.12 per ADS, a 20% increase from the last fiscal year.

With that note, I will turn the call over to Dora.

Thank you, Jerry. Let's turn back to our financials. 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 press release for detailed information of our comprehensive comparative financial performance on a year-over-year basis.

Please turn to Slide 21. Although heavily impacted by COVID-19, we still delivered solid results with top line up 6.7% to RMB 739.4 million for the quarter, and up 46.6% and to RMB 2,714.4 million for the 9 months of fiscal 2020. The change in revenue is primarily contributed by an increase in overseas schools revenue, which was acquired in July of 2019, partially offset by the decreased revenue in kindergartens due to the temporary mandatory closure of schools.

Domestic K-12 schools includes international schools, bilingual schools and the kindergartens was down 24.8% for the quarter and up 3.7% on a 9-month basis, as mentioned, primarily due to decrease in boarding and meal fees revenue for Q1 to K-12 and the tuition revenue decreased for kindergartens as a result of mandatory school closure impacted by COVID-19.

For our international schools, revenue for the quarter at -- up 7.6%, primarily due to 12.9% increase of student enrollment. On a 9-month basis, revenue was up 17.7% due to a 13.9% increase in student enrollment.

Our bilingual schools, revenue for the quarter was down 4.9% due to decrease in meals and boarding fees. On a 9-month basis, revenue up 10.3%, mainly attributed to 11.8% increase in student enrollment.

Kindergartens. Revenue for the quarter and a 9-month basis was down 96% and 26.7%, primarily due to decrease in tuition fees, meals as a result of mandatory school closure.

Overseas schools. Overseas schools is an important part of global strategy. The revenue was RMB 210.4 million for the quarter, accounted for 28.5% of total revenue. On a 9-month basis, revenue was RMB 766.8 million, accounted for 28.2% of total revenue. Overseas schools grew 2,204% in revenue and 2,467% in gross profit in the 9-month basis for fiscal 2020. Average number of students was 3,219 for the quarter and 3,246 for the 9-month basis. The year-over-year growth in revenue and gross profit was primarily due to the inclusion of the acquired overseas schools during the comparable period.

Revenue from complementary education was down 3.2% for the quarter due to COVID-19 impact on training business, including Elan and Hangzhou Impression, as well as study tour and camps business. On a 9-month basis, revenue was up 23.1%.

On Slide 22, cost of revenue for the quarter was 60.5% of total revenue compared to 54.1% in the same quarter of last fiscal year. On a 9-month basis, cost of revenue was 60.5% of total revenue compared to 58.7% in the same period last fiscal year. The increase in cost of goods sold for the quarter and the 9 months was primarily due to the inclusion of the acquired overseas business on a comparable basis.

Teaching staff cost, the primary cost contributor, accounted for 34.3% of total revenue, down from 35.3% for the quarter. On the 9-month basis, teaching staff cost was 32.8%, down from 38.4%. Our domestic K-12 schools average student-teacher ratio for the 9 months of fiscal 2020 was 9.0 compared to 8.9 in the same period of last fiscal year.

On Slide 23, our gross profit and margin. Gross profit was down 8.2% for the quarter and up 40.2% on a 9-month basis. And gross margin was down 6.4 percentage points to 39.5% for the quarter. And on a 9-month basis, gross margin was down 1.8 percentage points to 39.5%.

Continuing on Slide 24. For the third fiscal quarter, adjusted SG&A as a percentage of total revenue was up to 26.9% from 19.5% in the same quarter last fiscal year. On a 9-month basis, adjusted SG&A, as a percentage of total revenue was, 22.8% compared to 20.9% in the same period of last fiscal year. The increase in SG&A expenses for the quarter and 9 months was primarily due to the inclusion of the acquired overseas business on a comparable basis.

Adjusted SG&A as a percentage of revenue for domestic K-12 schools for the quarter was up 9.4% from 8.4% in the same quarter last year, primarily due to the preopening expenses for the new international school planned to open in the coming fiscal -- in the coming school year. On a 9-month basis, adjusted SG&A, as a percentage of revenue, for domestic K-12 schools was 7.7%, down from 10.7% in the same period of last fiscal year.

As a percentage of group revenue, adjusted unallocated corporate expenses, mainly headquarter expenses, for the quarter was 5.5%, up from 3.7%. On a 9-month basis, it was 3.6%, down from 5.1%. Adjusted unallocated corporate expenses for the quarter was RMB 40.4 million compared to RMB 24.9 million last year due to a onetime auction expenses adjustment. On a 9-month basis, it was RMB 99 million compared to RMB 94.8 million in the same period last fiscal year.

To elaborate more on the adjusted SG&A expenses, please refer to Slide 25.

Continuing to Slide 26. Adjusted EBITDA for the quarter, down 25.5% to RMB 164.5 million. Adjusted EBITDA margin was 22.2% compared to 31.9%. On a 9-month basis, adjusted EBITDA, up 37.3% to RMB 669.4 million. Adjusted EBITDA margin was 24.7% compared to 26.3%.

Adjusted net income for the quarter down 70.9% to RMB 46.6 million. Adjusted net margin was 6.3% compared to 23.1%. On a 9-month basis, adjusted net income down 7.3% to RMB 333.6 million. Adjusted net margin was 12.3% compared to 19.4%.

On Slide 27 are our cash and bank balance. As of May 31, 2020, our cash and cash equivalent and restricted cash totaled RMB 2,092 million as compared to RMB 2,433 million in February 29, 2020. We also have a short-term investment of RMB 1,966 million as of May 31, 2020.

Moving on to Slide 29. Underscoring the strong confidence in the company's future prospects, the company continues to execute its second share repurchase program and recent insider purchase has been made from the open market by our Chair Lady, Executive Vice Chairman and Independent Director. Following the cash dividend of $0.10 per ADS in September 2019, the Board of Directors has declared the second cash dividend for $0.12 per ADS.

Continuing to Slide 30, we are reaffirming our revised guidance for fiscal year 2020. For the fiscal year ending August 31, 2020, we expect our total revenue in the range of RMB 3.37 billion and RMB 3.47 billion, representing a growth of 31% to 35% based on existing business and without potential acquisitions.

We also expect average student enrollment to be between approximately 51,800 and 52,800, representing an increase of 11% to 13%. We are also in preparation to open 17 kindergartens and 1 international school for fiscal 2021. Beyond fiscal 2021, we have 7 schools and 44 kindergartens contracted for operation.

Please refer to table in Slide 32 and 33 for the condensed income statement.

Slide 34 shows the reconciliations from -- for SG&A, EBITDA and net comp on GAAP to non-GAAP results.

Slide 35 shows our balance sheet and cash flow statement. For the 9 months ended May 31, 2020, the company's capital expenditure was approximately RMB 107.3 million, up 2.1% compared to the same period of last fiscal year.

And on Slide 36, shows our average student enrollment and average tuition fee across our network.

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

Thank you, Dora. Our transformative business model, [manifest] growth strategy, global school network, diversified portfolio, technology-enabled OMO offerings and, most importantly, our exceptional group of employees will enable us to fulfill our mission with distinction and position us well into the future. We look forward to keeping you apprised of our continued progress as we execute our growth strategy to enhance value for both students and stakeholders.

This concludes our prepared remarks, and I would like to open the call for questions. Operator?

(Operator Instructions) The first question comes from the line of Sheng Zhong with Morgan Stanley.

I have 2 questions. First one is, can you give more color about your OMO strategy? What this will be -- what the OMO will be upside on your school or on the supplementary services?

And the second question is because of the pandemic, a lot of institutions actually are in a very difficult situation. Do you see more M&A opportunity in this current stage?

Thank you for asking questions. I would address both of them. This is Jerry. For the OMO, we are doing right now, we are actually developing a platform that we'll open for business for the first quarter of fiscal 2021. So that program will combine our experience from off-line schools and also offer a mix of curriculum online for students around the globe. For example, we're going to offer 8-hour classes for students anywhere, if they're in China or in U.K. or any other part of the world, can take a class online. Of course, for those who are in China, they also have the advantage to take some of the class off-line in our physical schools.

For students who are attending to our U.K. school, for example, the -- because of the pandemic, if they cannot go back to the U.K., they have the option to take some classes online with their teachers in U.K., but also they can do sports and other things off-line in our physical schools. We are going to start with A Level and English tutoring as well. But we intend to have a more broad selection of curriculum down the road, including AP curriculum as well.

So you also asked about the complementary education. So because of the pandemic, we already moved some of those online already. For example, the English tutoring, we already moved online. Most of the students are taking classes online during the close of the learning centers. But the platform we are developing are more sophisticated than the tutors center would require because the learning management is interactive. So they actually can keep track of the students' learning records across the entire school year or over the number of school years. That's for the OMO.

And also, you're absolutely right. This pandemic presents a lot of opportunities for acquisition because many of the other businesses are suffering, many of them are actually in the brink of closing down. So, we have been contacted by a number of organizations that are experiencing financial difficulties. Without help, they're probably going to go to some kind of closure or bankruptcy process. We are actively looking into some of those opportunities, but we believe the best opportunity to take action would be the next fiscal year, not right now. And the valuation would come down significantly, of course.

Understood. So just a follow-up about the M&A opportunity. Do you see more opportunity in the supplementary education service side or you mean the schools?

Actually both. To give you maybe some color, if you look at what -- for overseas business in the U.K. and the U.S., for example, many of the private schools, because of the closure, they don't have a strong balance sheet as we do. As Dora mentioned, that was cash and cash equivalent or also next to cash is a short-term investment. We have almost RMB 4 billion, which is somewhere about USD 570 million or USD 580 million. So we're going to be fine for -- to go through the pandemic without any problems. But many of them don't have a balance sheet like that. They're literally without the income, they're going to go down. So they're asking for help.

Those schools, K-12 schools, can be bought at, obviously, compared to last year, maybe half of the price in some cases or even less. So we -- once we are on a fair footing, because our business is also impacted, we are taking the opportunity to make it more efficient and screen our business. But once we go through this, because we are still in the pandemic right now. But once we go through this, we are on very strong footing, then I think that's the time to take up some opportunities overseas.

In China, particularly for K-12 schools, there are also some opportunities. The valuation, as I mentioned, came down significantly compared to, let's say, the same time last year. But China, as you know, has reasonably controlled the pandemic. So I think most likely, other than maybe some particular areas or cities, most of the country is going back to normal for this coming school year. So there will be some opportunities.

The schools are doing fine, as you know, even though students may not go back to school for boarding and meals, but they continue to enroll either online or off-line for the schools. So school business is doing fine. So there are some opportunities to cater off schools there as well. But there are huge opportunities for complementary part of it because many of the -- if I have to estimate, we don't have the specifics, but we have seen weakness in a lot of them, potentially, I would say, maybe like half of them really experiencing problems. And we, of course, have seen some opportunities came to us at a very attractive valuation relative to the normal situation without pandemic.

The next question is from the line of Christine Cho with Goldman Sachs.

Two quick questions. So one is, I know the situation remains quite fluid, but do you have a sense of kind of what you're expecting for the overseas schools in the next few quarters?

And secondly, I know you're preparing for the opening of Fettes College in Guangzhou. And I was wondering how the preparations are going for the opening in September.

Sure. Again, this is Jerry. For overseas schools, we have 7 schools in the U.K. and 1 school in the U.S. The 7 schools in the U.K., there are 2 buckets, 3 of them are independent schools. Most of the students are local students. When I say local, it means students that are born in U.K. So there are less impacts just like any local schools, in most -- they maybe stay at home, but still taking classes, okay, out of the school. Of course, just like the school we have in China, you would not be able to charge them on boarding and the meals, but the tuition is still there.

And I think relative to the U.S., U.K. has done a better job in terms of controlling the pandemic. We are looking at -- I just got an update last week. We're looking at the entire country has maybe 300 to 400 new cases a day and also by clusters. So -- of course, I don't know that for sure, but most likely, the schools are going to be back to be opened in the fall for the school.

So the independent schools, again, our schools take most students from U.K., I think, they are going to be fine. But there are 4 schools that take most students actually international students. Depends on where the students are. It's hard to say they're going to come back. I think a percentage of those students would not go back to the U.K. for school. But for those schools, we have somewhere between 20% to 40% students coming from China.

If they are not going back to the U.K., they can remain registered and continue their study in one of our campus in China. So we will not lose those students, but if somebody come from, let's say, Brazil or Russia or Vietnam, we don't have exact information whether or not they would come back or not. Of course, we have some commitment already but given the situation in the U.K., it's still unclear, we don't know for sure yet, but we would expect there would be some losses of students for the coming quarter.

But relative to other -- to our competitors, many of them actually are shutting down. We are in a much better position because, one, we have our China campus to support the students from China; and two, we have virtual schools to support the students. And we also have other programs for the students as well.

The schools in the U.S. is a little bit troubling. It's in Massachusetts. (inaudible) doing a better job than other states in the U.S., but it really depends on what are the actions they are going to take from the U.S. government and local government or whether or not that school is going to open or not. Or the students from other country were back to the U.S. remain, again, uncertain at this point of time. We do expect our students will come back depending on where they are. For example, maybe in Brazil if actually the situation is even worse than what it is in Massachusetts, maybe they would come back. Most of the Chinese students may decide to go to schools to our China campus or do that online.

But I would think -- regardless, I would think most of students will continue to study. Maybe more than half -- at least half of them were doing it online. But some of the students may be lost. But I would think, as the situation become more clear, we would have a better idea. We're -- sorry. But either way, we are prepared for resurgence of the COVID-19 and prefer to take again all the students when they come to our campus. So we have sent our -- kept our parents posted as to how we take actions to protect our students. We sent out more than 50 pages of kind of procedure, outlined everything from the point that students get off the airplane and students on what happens if -- what are the kind of tests they have to go through to make sure that we take care of students. We launched a campaign called "We Care" that's specifically for that.

For Fettes College Guangzhou, we are slated to open that in September for sure. We are in the final inning of recruiting the students and, of course, push for the opening. That's a definitive opening in September.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Jerry He for any closing remarks. Thank you.

Thank you. Thank you very much for joining this conference call. Please feel free to contact us if you have any further questions. We wish everybody a good day and stay healthy.

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