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Edited Transcript of HLG earnings conference call or presentation 19-Oct-18 1:00pm GMT

Full Year 2018 Hailiang Education Group Inc Earnings Call

HANGZHOU Oct 23, 2018 (Thomson StreetEvents) -- Edited Transcript of Hailiang Education Group Inc earnings conference call or presentation Friday, October 19, 2018 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 the Hailiang Education Group's Fiscal Year 2018 Financial Results Conference Call. (Operator Instructions)

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 the company's Board Secretary, Mr. Litao Qiu.

I'd 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 the 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 it's a result of new information, future events or otherwise.

At this time, I'd 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 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 RMB 1.1693 billion. And net profit increased by 37.7% to RMB 230.9 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 planning have helped drive 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 fueled by overall economic growth. The rise in household disposal -- disposable income and household spending on education as well as an improvement in the education system and policies relating to K-12 education in China. Anecdotally, an industry study conducted by Frost & Sullivan indicates that the total number of student enrollments of private K-12 education in China has increased from RMB 33.1 million in 2013 to RMB 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 7 affiliated schools' international program student enrollment was 3,860. And basic educational program student enrollment 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 expert 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 the 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 Frost China.

(foreign language)

We adopted our asset-light 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, Hubei and Jiangxi provinces.

From June 30, 2018 to the present, we started providing education and management service to another 7 schools. Inspired 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.

This 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 partnerships that differentiate 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 our 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.

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

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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 RMB 1.1639 billion (sic) [RMB 1.1693 billion] from RMB 853.3 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 new management services and other revenue.

Revenue from basic educational program increased by 16.1% to RMB 764.2 million for the 12-month ended June 30, 2018, from RMB 657.9 million for the same period of last year. It was mainly driven by an increase in average tuition charged per student during the same period.

Revenue from the international program increased by 68.8% to RMB 329.8 million for the 12 months ended June 30, 2018, from RMB 195.4 million for the same period of last year, primarily driven by an increase in number of students enrolled in our international program as well as an increase in average tuition charged in our international program.

Revenue from our management services segment was RMB 19 million. And revenue from our other segment was RMB 56.4 million for the 12 months ended June 30 of 2018, respectfully.

Cost of revenue increased by 24.1% to RMB 804.7 million for the 12 months ended June 30, 2018, from RMB 648.5 million for the same period of last year. The increase was mainly driven by an increase in labor costs, resulting from an increase in total number of teachers and educational staff and a general increase in compensation levels. An increase in student-related costs, resulting from the increase in number of students enrolled and the increased cost of student catering service.

Furthermore, the newly launched study trip business and the study abroad consulting business, in 2018 fiscal year, resulted in an increase in other costs.

Gross profit increased by 78.1% to RMB 364.7 million for 12 months ended June 30 of 2018 from RMB 204.8 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 RMB 24.5 million for the 12 months ended June 30, 2018, from RMB 21.9 million for the same period of last year. The increase was primarily driven by increased student enrollment reward of the recruitment.

Administrative expenses increased by 123.3% to RMB 63.4 million for the 12 months ended June 30, 2018, from RMB 28.4 million for the same period of last year. The increase was primarily due to the increase in labor costs resulting from an increase in total number and the compensation level of office and administrative staff, an increase in professional service fee, increase in other general operational expenses generated from newly established subsidiaries and affiliate entities.

As a result, the operating expenses increased by 74.8% to RMB 87.9 million for the 12 months ended June 30, 2018, from RMB 50.3 million for the same period of last year.

Net finance income increased by 65.3% to RMB 11.4 million for the 12 months ended June 30, 2018, from RMB 6.9 million for the same period of last year, mainly driven by the increase in the interest income caused by more fund we deposited with a related party in 2018 fiscal year compared to 2017 fiscal year.

Net profit increased by 37.7% to RMB 230.9 million for the fiscal year 2018 from RMB 167.7 million for the same period of last year.

Basic and diluted earning per share were RMB 0.54 for the 12 months ended June 30, 2018 compared with the basic and diluted earnings per share of RMB 0.41 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 equivalents of RMB 812.6 million compared to RMB 77.8 million as of June 30 of 2017. Net cash provided by operating activities was RMB 587.9 million for the 12 months ended June 30 of 2018 compared to RMB 287 million for the same period of last year.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And today's first question will be from Catherine Wong.

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Unidentified Analyst, [2]

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(foreign language)

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

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Thank you for your questions. Just wanted to share with you some of the highlights of our fiscal year. Our revenue income for the fiscal year 2018 was RMB 1.169 billion, consist of RMB 1.094 million for K-12 educational services. And the RMB 19.02 million from our management services and RMB 56.39 million for other incomes, accounting for 93.6%, 1.6% and 4.8% of total revenue income, respectfully.

K-12 education service revenue is derived from tuition fees charged to our student enrolled in our affiliated schools. In fiscal year 2018, K-12 education service revenue was RMB 1.094 billion, an increase of 28.2% from RMB 853 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 RMB 40,880 and RMB 83,170, respectfully, the increase of 13% and 20% from RMB 36,229 and RMB 69,161 for the fiscal year 2017, respectfully.

In addition, a significant increase in proportions of students enrolled in our international program also contributed to the increase in the operating income, which were evident by an increase of 37% from 2,825 students as of June 30 for 2017 to 3,860 students as of June 30, 2018. The basic educational program revenue increased from RMB 658 million in fiscal year 2017 to RMB 764 million, many attributed to a higher average tuition fees. Revenue derived from international programs rose 68.8% from RMB 195 million in fiscal year 2017 to RMB 330 million in fiscal year 2018 due to an increase in number of students enrolled in our international programs and higher average tuition fees. 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 RMB 12.275 million. Thank you.

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Operator [4]

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(Operator Instructions) Today's next question will be from [Angel Zhou].

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Unidentified Analyst, [5]

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(foreign language)

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

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Thank you for your question. I just want to like to answer that. Private education has always been focused on the business development, while paying extra attention to the internal control. And we're happy to report for the fiscal year ended June 30, 2018, Hailiang Education's internal control over financial reporting is excessive.

We remedied the fiscal year ended 2017, identified one material weakness through hiring a new CFO with the extensive IFRS and SOX404 compliance experience. In addition, all key financial personnels are from big 4 accounting firms, well 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 body's requirements and to protect the interest of our shareholders.

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Operator [7]

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(Operator Instructions) And today's next question will be from [Suzy Khai].

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Unidentified Analyst, [8]

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(foreign language)

I'm interested if the company has any future expansion plans?

(foreign language)

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Ming Wang, Hailiang Education Group Inc. - Chairman & CEO [9]

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(foreign language)

Well, thank you for your question. I am more than happy to answer this question. Following June 30, 2018, our company has sponsored, acquired, operated and managed a number of schools.

(foreign language)

On August 28, 2018, we entered into an operation and management agreement with the Ministry of Education of Hangzho, Binjiang district. Presumed to the agreement, we provided education and management service to 2 public schools, namely Hangzhou Chunhui Primary School and Hangzhou Xixing Middle School. The 2 schools can accommodate up to a total number of approximately 2,500 students, and both of the 2 schools are currently in operation.

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Ming Wang, Hailiang Education Group Inc. - Chairman & CEO [10]

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(foreign language)

In September 2018, we entered into an agreement with -- to acquire 51% equity interest in Zhenjiang Jianghe High School of Arts company. The school is a full-profit private school with approximately 200 student enrollments and a capacity for approximately 1,000 students.

The school provides arts programs, including but not limited to, painting, music and media with a variety of specialized modules and seminars. The school has been in operation since September 1, 2018. Currently, we are still in the change process of operating permits and business registration.

(foreign language)

On October 10, 2018, we entered into a cooperation agreement with Hailiang Investment Group company to provide education and management service to 3 public schools in Wenyan District, Hangzhou City, namely the Wenyan Primary School, Wenyan No. 2 Primary

School and Wenyan Middle School. The 3 schools can accommodate up to a total number of more than 3,000 students. And currently, the 3 public schools are all in operation.

(foreign language)

We have public this -- the agreement -- all the above agreements in our annual report. Please -- if you are interested in this information, please check our annual report.

(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 sponsoring and operating all managing schools.

Hailiang Education will continue to adopt asset-light strategy, seek opportunities to operate top-tier private schools and collaborate with public schools by renting their school facilities.

Meanwhile, we will make a good use of our advantages in the large-scale business brand reputation and a virtual platform to provide more students with higher-quality, value-added service such as overseas study consulting service and study trips.

(foreign language)

Thank you for your question.

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Operator [11]

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I'm seeing no further questions. Let me turn the call back over to Mr. Yu for any closing remarks.

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

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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 ir@hailiangeducation.com or reach our IR Counsel, Ascent 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 speaking with you, again, next time. Operators, please go ahead.

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Operator [13]

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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 goodbye.

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Ming Wang, Hailiang Education Group Inc. - Chairman & CEO [14]

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Goodbye. Thank you very much.