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Edited Transcript of HLG earnings conference call or presentation 27-Mar-19 1:00pm GMT

Half Year 2019 Hailiang Education Group Inc Earnings Call

HANGZHOU Apr 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Hailiang Education Group Inc earnings conference call or presentation Wednesday, March 27, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jian guo Yu

Hailiang Education Group Inc. - CFO

* Ming Wang

Hailiang Education Group Inc. - Chairman & CEO

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Thank you for standing by. Welcome to Hailiang Education Group's First 6 Months of Fiscal Year 2019 Financial Results Conference Call. (Operator Instructions) This conference has been recorded today, Wednesday, March 27, 2019. Joining us today from Hailiang Education Group are the company's Chairman and CEO, Mr. Ming Wang; the company's Chief Financial Officer, Mr. Jian guo Yu; and the company 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 the new information, future events or otherwise.

At this time, I would like to 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.

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Ming Wang, Hailiang Education Group Inc. - Chairman & CEO [2]

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(foreign language) Thank you, operator, and thanks, everyone, for joining Hailiang Education's First 6 Months of Fiscal Year 2019 Earnings Conference Call today.

(foreign language) We are pleased to report strong financial results for the first 6 months of fiscal year 2019. Our revenue increased by 29.8% to RMB 652.7 million and net profit increased by 66.4% to RMB 129.6 million compared with the same period of last year, as we increased revenue across both our basic educational program and international program and expanded our management, educational training, educational trips and overseas studying services.

(foreign language) Hailiang Education provides education and management services for a total of 36 schools, with an aggregate number of 61,146 students enrolled as of December 31, 2018. Of the 36 schools, we own and sponsor 9 schools, with an aggregate number of 22,589 students enrolled. Hailiang Education manages and operates 27 schools, with an aggregate number of 38,557 students enrolled.

(foreign language) For the first 6 months of fiscal year 2019, the revenue from tuitions of Hailiang Education's 9 affiliated schools reached RMB 544.1 million, an increase of 8.2% from RMB 502.7 million from the same period last year. The annualized average tuition per student of Hailiang Education's affiliated schools was RMB 54,202, an increase of 9.3% from RMB 49,578 from the same period of last year. We note that the revenue from our international programs significantly increased. As of December 31, 2018, the enrollment in Hailiang Education's international programs grew to 4,555, an increase of 12% from 4,066 as of December 31, 2017. The annualized average tuition per student for the international programs reached RMB 93,376, an increase of 11.8% from RMB 83,501 for the same period last year.

(foreign language) We are committed to implementing inter-regional development strategies to promote Hailiang Education's growth through acquisitions. In October 2018, Hailiang Education acquired 51% controlling interest in Zhenjiang Jianghe High School of Art Co., located in Jiangsu Province, the second high school specialized in arts operated by Hailiang Education. We affirmed our asset-light strategy through cooperation with local governments, private educational institutes and by providing management services to both private and public schools across China.

For the first 6 months of fiscal year 2019, Hailiang Education managed and operated an additional 11 managed schools, contributing to the increase in revenue from providing management services for a total of RMB 16.9 million. In addition, we have continued to expand our services offerings through providing value-added services, such as educational training, educational trips and overseas study consulting services. For the first 6 months of fiscal year 2019, the revenue from educational training services was RMB 59.8 million and the revenue from other services, including educational trips and overseas study consulting services, was RMB 31.9 million.

(foreign language) We have operated by firmly rooting our development and reputation in the high-quality academic performances of our students. As of March 22, 2019, 101 students from the 2019 graduating class of our international programs have received, in the aggregate, more than 200 offers from top 100 universities in Australia, the United Kingdom and the United States. In addition, our students have received remarkable achievements in Academic Competition in the PRC, with 55 students from Hailiang Senior Middle School awarded third or higher prizes in the National Math, Physics, Chemistry, Biology and Information Technology Competition. Jiaru Shi, a student enrolled in Hailiang Senior Middle School was awarded the sole gold medal in the National Physics Competition of Shaoxing City and received a conditional offer from Peking University.

(foreign language) Hailiang Education has a mission to provide distinguished, specialized and internationalized education. Hailiang Education will continue to carry out its asset-light strategy, enhance internal and external growth, improve academic performance and provide more diversified, high-quality and satisfactory services to our schools and our students. And we will constantly improve performance and bring returns to our shareholders.

(foreign language) Thank you, again, for all your support and attention. Next I will turn the call over to Mr. Jian guo Yu, our CFO, who will summarize our first 6 months of fiscal year 2019 financial results. On behalf of the management team, Mr. Yu, please go ahead.

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Jian guo Yu, Hailiang Education Group Inc. - CFO [3]

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Thank you, Mr. Wang. Good morning, everyone. Next, on the behalf of management team, I will summarize some of the key financial results for the first 6 months of fiscal year 2019. For the first 6 months of fiscal year 2019, our total revenue increased by 29.8% to RMB 652.7 million or USD 94.9 million from RMB 502.7 million for the same period of last year. The increase in total revenue was mainly due to increase in revenue from both basic education program and international program as well as the new educational training services, new management services and other revenue.

Revenue from basic educational program increased slightly by 0.9% to RMB 355.1 million or USD 51.6 million for the 6 months ended December 31, 2018 from RMB 351.8 million for the same period of last year. Revenue from international program increased by 25.2% to RMB 189 million or USD 27.5 million for the 6 months ended December 31 of 2018 from RMB 150.9 million for the same period of last year, primarily driven by increase in the number of students enrolled in this program as well as an increase in the program's tuitions.

Revenue from educational training services, management services and others were RMB 59.8 million or USD 8.7 million, RMB 16.9 million or USD 2.5 million, and RMB 31.9 million or USD 4.6 million for the 6 months ended December 31, 2018, respectfully (sic) [respectively]. Cost of revenue increased by 17.8% to RMB 455 million or USD 66.2 million for the 6 months ended December 31 of 2018 from RMB 386.1 million for the same period of last year. The increase was mainly driven by higher labor costs associated with our increased employee headcount and a increased compensation levels of employees and increase in other costs, primarily due to the launch of educational trips business and overseas study consulting service business beginning in the second half of fiscal year 2018.

The gross profit increased by 69.6% to RMB 197.7 million or USD 28.8 million for the 6 months ended December 31 of 2018 from RMB 116.6 million for the same period of last year. The gross margin was 30.3% for the 6 months ended December 31 of 2018 compared to 23.2% for the same period of last year. Selling expenses decreased by 51% to RMB 9.9 million or USD 1.4 million for the 6 months ended December 31 of 2018 from RMB 20.2 million for the same period of last year. The decrease was primarily driven by the adoption of IFRS 15 accounting standard and the resulting capitalization of sales commissions.

Administrative expenses increased by 65.5% to RMB 32.6 million or USD 4.7 million for the 6 months ended December 31 of 2018 from RMB 19.7 million for the same period of last year. The increase was primarily due to the increase in administrative staff costs and the increase in other general operational expenses generated from newly established subsidiaries. As a result, operating expenses increased by 6.3% to RMB 42.4 million or USD 6.2 million for the 6 months ended December 31 of 2018 from RMB 39.9 million for the same period of last year.

Net finance income increased by 104.9% to RMB 12.5 million or USD 1.8 million for the 6 months ended December 31 of 2018 from RMB 6.1 million for the same period of last year, mainly driven by an increase in the interest income derived from term deposits held at a related party's finance entity. Net profit increased by 66.4% to RMB 129.6 million or USD 18.8 million for the first 6 months of fiscal year 2019 from RMB 77.9 million for the same period of last year. Basic and the diluted earning per share were RMB 0.29 or USD 0.04 for the 6 months ended December 31 of 2018 compared to basic and the diluted earning per share of RMB 0.19 for the same period of last year.

Now a quick summary of balance sheet and the cash flow. As of December 31 of 2018, the company has cash and cash equivalent of RMB 1.24 billion or USD 181 million compared to RMB 812.6 million as of June 30, 2018. Net cash provided by operating activities was RMB 646.9 million or USD 94.1 million for the 6 months ended December 31 of 2018 compared to RMB 681.3 million for the same period of last year.

Now I would like to turn the discussion over to the operator for any questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And today's first question comes from [Mr. Kay Chen], a private investor.

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Unidentified Participant, [2]

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My name is [Ko Chen] and I'm individual investor. Congratulations on the outstanding performance, especially on the net profit in this year, which had an increase of 66 points more percent compared with the same period last year. So my question is, could you please explain the main driver of the net profit growth? And meanwhile, I have noted that small revenue segments were added like educational training, management service. So my second question is, how will these new segments be contributing to the whole picture in the future?

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Ming Wang, Hailiang Education Group Inc. - Chairman & CEO [3]

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(foreign language) There are mainly 4 reasons. First, the increase of tuition as a result of investments in education quality and brand reputation. For the first 6 months of fiscal year 2019, the annualized average tuition per student of Hailiang Education's affiliated schools was RMB 54,202, an increase of 9.3% from the same period of last year. In addition, the annualized average tuition per student for the international programs reached RMB 93,376, an increase of 11.8% from RMB 83,501 from the same period of last year. (foreign language) Second, the increase of international students enrollment and the change of enrollment structure for the first 6 months of fiscal year 2019, the enrollment in basic educational programs decreased by 1% compared to the same period of last year. The enrollment in Hailiang Education's international programs grew to 4,555, an increase of 12% from 4,066. The revenue from international programs increased by 25.2% compared to the same period last year. The development of international programs will continue to make a huge contribution to our revenue in the future. (foreign language) Third, the development of educational trips, overseas study consulting services and the provision of these services for our managed schools. For the first 6 months of fiscal year 2019, the revenue from educational trips and overseas study consulting services was RMB 30 million. (foreign language) The fourth reason is the increase in the number of our managed schools, which leads to the rise in management fee from providing education and management services, such as financial, student recruitment, IT, HR services. For the first 6 months of fiscal year 2019, the management fees reached RMB 16.9 million. (foreign language) We have also confirmed our strategy to increase revenue in the future. The main drive will be the provision of K-12 education. Secondly, we will continue to develop the following 3 business: educational training, education and management, educational trips and overseas consulting services to increase their contribution to the total revenue in addition to revenue from K-12 education provision.

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Operator [4]

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(Operator Instructions) Today's next question comes from [Wendy Kim], a private investor.

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Unidentified Participant, [5]

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Sorry, can you hear me? Mr. Yu, we saw gross margin increase by 7.10% compared to the same period of last year. So what is the specific reason?

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Jian guo Yu, Hailiang Education Group Inc. - CFO [6]

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Thank you very much for your question. This is mainly due to the steady and rapid growth of our business income as well as the improvement of company's cost control capabilities. More specifically, as we mentioned in our 6-K, the increase in our gross margin was mainly due to the increase in the average tuition and the high profitabilities of our educational training services and our management services. And we expanded our presence through our asset-light approach, which means we will be able to identify and acquire target in a more cost-effective manners, and thank you very much.

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Operator [7]

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Today's next question comes from [Cherry Ming], a private investor.

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Unidentified Participant, [8]

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My name is [Cherry Ming], an individual investor. Congratulations to you for the company's continued growth and strong financial results. I have a quick question for Mr. Yu. I noticed that the company has adopted several new IFRS accounting pronouncements. So could you please introduce the impact on the company's financial statement?

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Jian guo Yu, Hailiang Education Group Inc. - CFO [9]

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Sure. I'm glad to give some additional feedback on your questions. We recently adopted IFRS 9 and 15 in our fiscal year 2019. IFRS 9 is a financial instrument addresses the clarification, measurements and the recognitions of a financial asset and financial liabilities. Introduced new rules of hedging accounting and the new impairment models for the financial assets. We completed our review of IFRS 9 and did not identify any significant impact on the reclassification and the measurements of financial instrument. Regarding on IFRS 15, it is a revenue from contract with customers. Introduced a new model for the revenue recognition that is based on the transfer of control. For our company, the IFRS have the following 2 major impacts. First, is the nature, amount, timing and uncertainty of our revenue are reassessed according to the new revenue standard. And we determine whether the different revenues are recognized at a point of -- in time or over time. Meanwhile, certain commissions and bonuses earned by our employees are considered incremental and the recoverable costs of obtaining a contract with a customer. Those costs are amortized over the expected enrollment period. So we recorded net increase in a open retained earnings approximately about RMB 18.3 million as of July 1 of 2018, and capitalized certain amount of sales commissions on the basis of calculation in fiscal year of 2019. That is my question -- answer.

And thank you, operator. On behalf of the entire management team, I would thank -- like to thank everyone again for joining us today for our conference call. If you have any questions, please contact us through e-mail at ir@hailiangeducation.com or reach us, our IR Counsel, Ascent Investment -- Investor Relations at tina.xiao@ascent-ir.com. Management will respond to your questions as soon as possible. We appreciate your interest and support in Hailiang Education and looking forward to speak with you again next time. Operator, please go ahead.

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Operator [10]

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Thank you, everyone, again for attending Hailiang Education Group's First 6 Months of Fiscal Year 2019 Conference Call. This concludes our call today, and we thank you all for listening in. Goodbye.

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Ming Wang, Hailiang Education Group Inc. - Chairman & CEO [11]

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Bye-bye. Thank you.

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Jian guo Yu, Hailiang Education Group Inc. - CFO [12]

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Thank you.

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Ming Wang, Hailiang Education Group Inc. - Chairman & CEO [13]

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Thank you very much.