Hailiang Education Group Inc.
Q4 2018 Earnings Call Transcript

Published: 19 Oct 2018

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Hailiang Education Group's Fiscal Year 2018 Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. This conference has been recorded today, Friday, October 19, 2018. Joining us today from the Hailiang Education Group are the Company's Chairman and CEO, Mr. Ming Wang; the Company's Chief Financial Officer, Mr. Jianguo Yu; and Company's Board Secretary, Mr. Litao Qiu. I would like to remind our listeners who are on this call, management's prepared remarks contain forward-looking statements which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions therefore the company claims the protection of the Safe Harbor for forward-looking statements as contained in the Private Securities and Litigation Reform Act of 1995. Hailiang Education is under no obligation to update or alter its forward-looking statements whether as a result of new information, future events, or otherwise. At this time, I will turn the call over to Mr. Ming Wang, Chairman and CEO of Hailiang Education Group. His opening remarks will be delivered in English by the translator Mr. Wang. Please go ahead.

[Ming Wang:]

[Foreign Language]. Thank you, operator, and thanks everyone for joining Hailiang Education fiscal year 2018 earnings conference call today. We are pleased to report strong financial results for fiscal year 2018. Our revenue increased by 37% to RMB1.1693 billion and net profit increased by 37.7% to RMB230.9 million compared with the same period of last year as we increased revenue across both our basic education program and international program as well as our new management services. Our strong operational execution and strategic timing have helped enjoy profitability and cash flow generation to record levels. [Foreign Language]. We continue to benefit from the growing demand for high quality private education in China. This demand has been sealed by overall economic growth. The rise in household disposal income and household spending on education as well as an improvement in the education system and qualities relating to K-12 education in China. And totally, an investor study conducted by Frost & Sullivan indicates that the total number of student enrollment of private K-12 education in China has increased from 33.1 million in 2013 to 42.7 million in 2017 and the percentage of students in private K-12 schools among the total number of students in K-12 schools also increased from 16.5% to 19.9% during the same period. We anticipate that the demand for private K-12 education in China will continue to grow which we expect will provide us with tremendous opportunities to expand our business. [Foreign Language]. This demand was reflected in our education service as our seven affiliated schools international program student enrollment was 3,816 and basic educational programs student enrolment was 18,250 for the year ended June 30, 2018. In addition to benefit from the growing demand for high quality private education in China, we have endeavored to recruit more ask for teachers, to refine our curriculum, increase our reputation, and to provide superior education results to attract top tier students. These initiatives have been rewarded by a strong response from students, parents, and the industry. We are honored by the awards we have received in the private education industry and in publications such as Pub China. [Foreign Language]. We adopted our SLI strategy to provide education and management service to more students. During the year ended June 30, 2018, we provided various management services including logistics, catering, and consulting to 16 private schools in Zhejiang, Hubai, and Shanxi, provinces from June 30, 2018 to the present. We started providing education and management service to another seven schools. As buyers and encouraged by parents and students trust and confidence we will continue to enhance market leadership in the private K-12 educational service industry in China. These successful expansion has demonstrated our well known brand reputation, outstanding educational management ability, and continuously increased profitability. [Foreign Language]. In conclusion, we believe that the growth drivers for private education demand in China will remain strong as a result of urbanization, increasing levels of household disposable income, and government policy support for the private education system. All of these factors have formed a favorable environment to accelerate the development of high quality personalized private education where Hailiang Education is well-positioned to capture these strong demands with our exceptionally high quality faculty, customized curriculum, and strong international partnership that differentiates us from our competitors. We look forward to improving the quality of our faculty and administration attracting more talented students and expanding our management service offerings in the new fiscal year as we strive to provide the best possible education and management service for the students in China. Thank you again for all your support and attention. Next, I will turn the call over to Mr. Jianguo Yu, our CFO, who will summarize our fiscal year 2018 financial results. On behalf of the management team, Mr. Yu, please go ahead.

[Jianguo Yu:]

Thank you, Mr. Wang, and good morning everyone. Next, on behalf of management team, I will summarize some of the key financial results for the fiscal year 2018. For the fiscal year 2018, our total revenue increased by 37% to RMB1.1639 billion from RMB853.3 million for the same period of last year. The increase in total revenue was mainly due to the increase in revenue from both basic educational program and international program as well as new management services and other revenue. Revenue from basic educational program increased by 16.1% to RMB764.2 million for the 12 months ended June 30, 2018, from RMB657.9 million for the same period of last year. It was mainly driven by a increase in average tuition charge for students during the same period. Revenue from the international program increased by 60.8% to RMB329.8 million for the 12 months ended June 30, 2018, from RMB195.4 million for the same period of last year, primarily driven by a increase in number of students enrolled in our international program as well as a increase in average tuition charge in our international program. Revenue from our management services segment was RMB90 million and revenue from our other segment was RMB56.4 million for the 12 months ended June 30, 2018, respectfully. Cost of revenue increased by 24.1% to RMB804.7 million for the 12 months ended June 30, 2018, from RMB640.5 million for the same period of last year. The increase was mainly driven by a increase in the labor costs resulting from a increase in total number of teachers and education staff and the general increase in compensation levels. Our increase in student related costs resulting from the increase in number of student enrolled and the increase the cost of student canteen service. Furthermore, the newly launched study trip business and the study abroad consulting business in 2018 fiscal year resulted in a increase in other costs. Gross profit increased by 70.1% to RMB364.7 million for 12 months ended June 30, 2018, from RMB204.8 million for the same period of last year. Gross margin was 31.2% for 12 months ended June 30, 2018, compared to 24% for the same period of last year. Selling expenses increased by 12% to RMB24.5 million for the 12 months ended June 30, 2018, from RMB21.9 million for the same period of last year. The increase was primarily driven by increased student enrolment reward on the recruitment. Administrative expenses increased by 123.3% to RMB63.4 million for the 12 months ended June 30, 2018, from RMB28.4 million for the same period of last year. The increase was primarily due to the increase in labor costs resulting from a increase in total number and the compensation level of office and administrative staff. Increase in professional service fees, increasing other general operational expenses generated from newly established subsidiaries and selling entities. As a result, the operating expenses increased by 74.8% to RMB87.9 million for the 12 months ended June 30, 2018, from RMB50.3 million for the same period of last year. Net finance income increased by 65.3% to RMB11.4 million for the 12 months ended June 30, 2018, from RMB6.9 million for the same period of last year, mainly driven by the increase in the interest income caused by more funds we deposited with a related party in 2018 fiscal year compared to 2017 fiscal year. Net profit increased by 37.7% to RMB230.9 million for the fiscal year 2018 from RMB167.7 million for the same period of last year. Basic and the diluted earnings per share were RMB0.54 for the 12 months ended June 30, 2018, compared with a basic and diluted earnings per share of RMB0.41 for the same period of last year. Now for a quick summary of our balance sheet and cash flows. As of June 30, 2018, the company had cash and cash equivalent of RMB812.6 million compared to RMB77.8 million as of June 30, 2017. Net cash provided by operating activities was RMB587.9 million for the 12 months ended June 30, 2018, compared to RMB287 million for the same period of last year. Now I would like to turn to discuss and over to the operator for any questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions]. And today's first question will be from Catherine Long. Please go ahead. Catherine Long, your line is now open. Perhaps your phone is on mute.

[Catherine Long:]

[Foreign Language]

[Jianguo Yu:]

Thanks for the questions. Just wanted to share with you some of the highlights of our 2000 fiscal year. Our revenue income for the fiscal year 2018 was RMB1.169 billion consists of RMB1.094 billion for K-12 educational services, and the RMB19.02 million from our management services, and RMB56.39 million for other incomes, accounting for 93.6%, 1.6%, and 4.8%, of total revenue income respectfully. K-12 educational service revenue is derived from tuition fees charge to our student enrolled in the affiliate schools. In fiscal year 2018 K-12 educational service revenue was RMB1.094 billion a increase of 28.2% from RMB853 million in the same period of last year. The year-on-year growth was mainly attributed to a growth in student enrollment and increase of average tuition. The average tuition fee for basic education and international education for the fiscal year 2018 was RMB40,880 and RMB83,170 respectfully. The increase of 13% and 20% from RMB36,229 and RMB69,161 for the fiscal year 2017 respectfully. In addition a significant increase in proportion of students enrolled in our international program also contributed to the increase in operating income which were evidenced by increase of 37% from 2,825 students as of June 30, 2017, to 3,860 students as of June 30, 2018. The basic educational program revenue increased from RMB658 million in fiscal year 2017 to RMB764 million mainly attributed to a higher average tuition fees. Revenue derived from international program rose 68.8% from RMB195 million in fiscal year 2017 to RMB330 million in fiscal year 2018 due to a increase in number of students enrolled in our international programs and higher average tuition fee. The revenue derived from management service in exchange of providing education and management service for our 16 managed schools. In fiscal year 2018 management service revenue was mainly derived from providing management consulting and logistic service to our 16 managed schools which accounted RMB12.275 million. Thank you.

[Catherine Long:]

[Foreign Language].

[Operator:]

[Operator Instructions]. Today's next question will be from [indiscernible]. Please go ahead.

[Unidentified Analyst:]

[Foreign Language]

[Jianguo Yu:]

Thank you for your question. I just want to like to answer that Hailiang Education has always been a focus on the business development, while pay extra attention to the internal control. And we are happy to report for the fiscal year ended June 30, 2018 Hailiang Education's internal control over financial reporting is effective. We remedied the fiscal year ended 2017, identified one material weakness through hiring a new CFO with the extensive IFRS and the SAS 404 compliance experience. In addition all key financial personnel's are from big four accounting firms were having ability to respond to financial reporting issues and the complex accounting transactions in timely and responsive manner. We will continue to improve our internal control systems to better meet the requirements of compliance bodies' requirements and to protect the interest of all shareholders. Thank you very much.

[Unidentified Analyst:]

Thank you.

[Operator:]

[Operator Instructions]. And today's next question will be from Suzie Cai. Please go ahead.

[Suzie Cai:]

So this is private individual -- private is after [indiscernible]. So the company has any future expansion plan?

[Ming Wang:]

[Foreign Language]. Well, thank you for your question. I'm more than happy to answer these questions following June 30, 2018; our company has sponsored, acquired, operated, and managed, a number of schools.

[Ming Wang:]

[Foreign Language]. On August 28, 2018, we entered into an operation and management agreement with the Ministry of Education of Hangzhou, Binjiang District presumes to the agreement we provided education and management service to two public schools namely Hangzhou Changzhou Primary School and Hangzhou CC Middle School. The two schools can accommodate up to a total number of approximately 2,500 students and both of the two schools are currently in operation.

[Ming Wang:]

[Foreign Language]. In September 2018 we enter into an agreement with to acquire 51% equity interest in Zhejiang High School of Arts Company. The school is a full process private school with approximately 200 students enrollment and a capacity for approximately 1,000 students. The school provides art programs including but not limited to painting, music, and media with a variety of specialized modules and seminars. The school has been in operation in September 1, 2018. Currently we are still in the change process of operating permit and business registration.

[Ming Wang:]

[Foreign Language]. On October 10, 2018, we entered into a cooperation agreement with Hailiang Investments Group Company to provide education and management service to three public schools in Binjiang District, Hangzhou City, namely the Binjiang Primary School, Binjiang Number 2 Primary School, Binjiang Middle School. The three schools can accommodate up to a total number of more than 3,000 students and currently the three public schools are all in operation.

[Ming Wang:]

[Foreign Language]. We have published these agreements, all the above agreements in our Annual Report; please if you are interested in this information please check our Annual Report.

[Ming Wang:]

[Foreign Language]. As of June 30, 2018, we provided education and management service to an aggregate number of 54,684 students. In the future, we will continue to expand our network across China through fostering and operating all managing schools. Hailiang Education will continue to adopt asset-life strategy, seek opportunities to offer top tier private schools and collaborate with public schools by ramping their school facilities. Meanwhile we will make a good use of our advantages in the large scale business brand repetition and a virtual platform to provide more students with higher quality value added service such as RSCs study consultant service and study chips.

[Ming Wang:]

[Foreign Language]. Thank you for your questions.

[Operator:]

Seeing no further questions let me turn the call back over to Mr. Yu for any closing remarks.

[Jianguo Yu:]

Thank you, Operator. On behalf of the entire management team, I would like to thank everyone again for joining us today for our conference call. If you have any questions, please contact through e-mail at [e-mail] or reach our IR counsel Ascent Investor Relations at [e-mail]. Management will respond to your question as soon as possible. We appreciate your interest and support in Hailiang Education and looking forward to speaking with you again next time. Operator, please go ahead.

[Operator:]

I want to thank everyone again for attending Hailiang Education Group's fiscal year 2018 earnings conference call. This concludes our call today and we want to thank you all for listening in. Have a great day and good-bye.

[Ming Wang:]

Good-bye and thank you very much.