Hailiang Education Group Inc. (HLG) Q2 2021 Results - Earnings Call

Hailiang Education Group Inc. (NASDAQ:HLG) Q2 2021 Results Earnings Conference Call March 10, 2021 8:00 AM ET

Company Participants

Junwei Chen - Chairman and Chief Executive Officer

Litao Qiu - Board Secretary

Weixin Xie - Chief Financial Officer

Marcus Zihao Su - Assistant Board Secretary

Conference Call Participants

Operator

Good day, ladies and gentlemen. Thank you for standing by. And welcome to the Hailiang Education Group's Second Quarter and First Half of Fiscal Year 2021 Earnings Conference Call.

During today's presentation, all parties will be in a listen-only mode. This conference has been recorded today, Wednesday, March 10, 2021.

Joining us today from Hailiang Education Group are the company's Chairman and CEO, Mr. Junwei Chen; the company's Chief Financial Officer, Ms. Deborah Lee; and the 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 would like to turn the conference call over to Dr. Junwei Chen, the Company's Chairman and CEO. Dr. Chen, please go ahead.

Junwei Chen

Thank you, operator, and everyone for joining Hailiang Education Group, Inc.'s second quarter and first half of the fiscal year 2021 earnings conference call today.

On our call today, I will give an overview of our performance for the second quarter and the first half of this fiscal year. Mr. Litao Qiu, the Board Secretary, will introduce the company's operational highlights of this quarter. Then our Chief Financial Officer, Ms. Deborah Lee, will share the details of the company's operational and financial review.

Please note that all numbers presented in today's call are in RMB.

Lastly, we will conduct a Q&A session to take your questions.

Although the impact of COVID-19 continues to leave hurdles for business across the globe, we are pleased to announce our financial results in the second quarter and the first half of fiscal year 2021 are in line with our expectations.

In the first half of fiscal year 2021, we recorded a revenue of RMB 937 million, which increased by 25% from RMB 749.4 million for the same period of last year. The net profit attributable to the company's shareholders was RMB 268 million, which increased by 31.3% from RMB 204.1 million for the same period of last year.

As one of the market leaders focusing on improving the quality of primary, middle and high school education services and ancillary education services in China, we are confident that we will gain more market share and drive long-term profitable growth for the shareholders in the future.

Next, Mr. Litao Qiu, our Board Secretary, will share with you the company's operational highlights of this quarter.

Litao Qiu

Thank you, Dr. Chen. Now, let's turn to some achievements of the company in terms of talents of the technology in the second quarter. We believe that the company's rapid development is inseparable from the efficient supply of talent and technology in the future.

Hailiang Education knows that talents are the first vitality of the company's development. We attract talents by delivering teaching concepts, management culture and brand spirit to the society.

To actively build a new life cycle ecosystem for Hailiang Education talent cultivation, thus forming a closed loop for talent supply, it is not only necessary to attract talents, but also to retain talents.

Hailiang Education will integrate existing talent training careers, such as excellent teacher development academy, Cadre Army Academy and the logistic academy to provide a better platform for the training of teachers and management talents. This platform will comprehensively improve the efficiency of cultivating outstanding teachers and management talents, become an all-round talent pool for Hailiang Education's rapid development and fully solves the bottleneck of institutional talent supply.

For example, the Cadre Army Academy now has 150 trainees and the company can efficiently dispatch those 150 management trainees to the new schools, according to the development plan to provide strong management talent support for the expanded development of the Hailiang Education.

In addition, the core guarantee of high quality expansion has established stable and reproducible school running standards. Hailiang Education is ethically developing a detailed and practical school running guide covering all school running segments, such as school size selections, recruitment methods, and student growth.

It is worth mentioning that Hailiang Education has created a smart campus and cooperate with new, with well-known technology companies to develop Hailiang Education's unique integrated software platform.

Turning the traditional teaching system into an all-round and three dimensional education ecological community under the strategic plan of education plus technology, the automated data collection is completed through 5G Internet of Things and non-sensing devices, and various data information in the school is analyzed through AI algorithm models.

Based on those technological supports, we will adjust the direction of teaching and management scientifically and dynamically to achieve more perceptual and precise education solutions.

Hailiang Education's intelligent application system will be continuously launched in the recent years. Taking the second quarter of the fiscal year 2021 as an example, the company launched the teacher growth training platform, staff teacher training, the electronic homework and teaching system, Hailiang cloud exercise, and the home school communication service platform, homeschool co-education. The company will continue to promote the use of education technology in its school network.

These technological and innovative elements not only improve the integrated intelligence level of our existing school, but also provide a guarantee of teaching quality and management standardization with the rapid expansion of Hailiang Education's new schools in the future.

Thank you for your continued support to the company. Next, I will turn the call over to Ms. Deborah Lee, our newly appointed Chief Financial Officer who has over 30 years' experience working with global accounting, tax and advisory firms and strong leadership skills and will lead our global finance, accounting, tax and strategy functions. Welcome again, Deborah Lee, to join the Hailiang Education team.

Now, she will share the company's operation and financial reviews of the second quarter and the first half of fiscal year 2021 on behalf of the management team. Deborah, please go ahead.

Weixin Xie

Thank you, Mr. Qiu, for the nice introduction. Good morning, everyone. On behalf of the management team, I will provide you with a summary of our key operational and financial review for the second quarter and the first half of fiscal 2021.

The company provides primary, middle and high school education services, education and management services, and ancillary education services, such as education training services, study trip services, and overseas consulting services.

For our school network, as of December 31, 2020, we had a total of 41 schools, of which 13 were affiliated schools that we sponsored and we managed 28 schools. The aggregate number of students enrolled in both affiliated and managed school was 72,893, an increase of 7.5%.

For affiliated schools, the number of students enrolled in a basic and international education programs was 21,636 and 5,300 as of December 31, 2020, an increase of 15.4% and 8.7% respectively. The annualized average tuition fees of basic and international education schools was RMB 98,113 and RMB 101,295, an increase of 4.4% and 3.2% respectively.

For the managed schools, we had 45,957 students as of December 31, 2020. We continue developing the managed schools market to more public and private schools to improve their operational efficiency and academic performance utilizing our education plus technology business model.

To improve students' learning experience and enhance their academic performance, we also provide educational training, study trips, and overseas consulting services. We launched online education training in the first quarter of the fiscal year 2021 and have seen its exponential growth.

For the first half of the fiscal year 2021, the educational training business served 54,055 student attendance, of which 28,424 students attended our online training and 25,631 students attended our online training. We expect online training will continue growing for the rest of the fiscal year 2021 and future years. We also plan to open at least five more on-site training centers during fiscal year 2021 and 2022 to 920 training centers in total.

Our focus on recruiting and retention of talented teachers and providing continuing teacher training has demonstrated that our approach is working. For the first half of the fiscal year 2021, our students have won more than 100 provincial and national disciplines in arts and sports competition awards. Our students of the international program have received more than 300 formal and conditional offers from universities as of early February 2020.

About 60% of the students in the VCT class have been formally accepted to the top 50 universities in the world. And about 75% of the students in A-level class had been conditionally accepted to the top 100 universities in the world, such as University College London and University of Manchester.

Now, let's review our financial results in detail. For the second quarter of the fiscal year 2021, our revenue was RMB 638 .5 million, an increase of 22.9%. The gross profit was RMB 316 .9 million, an increase of 29.9%.

Our net profit attributable to the company's shareholders was RMB 241.1 million, an increase of 9.9%. Our gross profit margin was 49.6%, an increase of 2.6 percent points. And the net profit margin was 38.5% compared with 22.2% for the same period of last year.

Our basic and diluted earnings per share were RMB 0.58 compared with RMB 0.53 for the same period of last year.

For the first half of the fiscal year 2021, our revenue was RMB 937 million, an increase of 25% from RMB 749.4 million for the same period of last year.

Our gross profit was RMB 361.4 million, an increase of 50.2%. Our net profit attributable to the company's shareholders was RMB 268 million, an increase of 31.3%. Our gross profit margin was 38.6%, an increase of 6.5 percentage points, and the net profit margin was 28.9%, an increase of 2.2 percentage point.

Basic and diluted earnings per share were RMB 0.65 compared with RMB 0.49 for the same period of last year.

Revenue from primary, middle and high school educational services was RMB 824.6 million for the first half of fiscal year 2021, an increase of 29.1%. The increase was due to the increase in the number of students and the annualized average tuition charged to each students. Additionally, the 2019/2020 school year was ended in July 2020 due to the impact of COVID-19. As a result, revenue of RMB 36 million was deferred and recognized in the first half of the fiscal year 2021.

Revenue from education or training services increased by 36.9% to RMB 39.4 million for the first half of the fiscal year 2021 due to the launch of online education training business.

Revenue from study trips services increased by 74.2% to RMB 11.1 million for the first half of the fiscal year due to travel restrictions because of COVID-19.

Revenue from education and management services increased by 110.8% to RMB 33.1 million for the first half of the fiscal year 2021 due to the company added two new managed schools in Suqian City and expanding our service scope to some of the managed schools.

Other revenue consists of overseas study consulting services and hotel management services. For the first half of the fiscal year 2021, other revenue was RMB 8.8 million compared with RMB 8.4 million for the same period of last year.

Cost of revenue increased by 16.7% to RMB 321.6 million for the second quarter of the fiscal year 2021. Cost of revenue increased by 13.1% to RMB 575.6 million for the first half of the fiscal year 2021. The increase was due to a compensation increase for additional employees, offset by a decrease in study trip services cost resulting from the outbreak of COVID-19.

Other income decreased by 70.6% to RMB 10.2 million for the second quarter of the fiscal year 2021. Other income decreased by 43% to RMB 28.4 million for the first half of the fiscal year 2021. The decrease was primarily due to decrease in subsidies from the local government grants.

Selling expenses increased by 13.5% to RMB 10.9 million for the second quarter of the fiscal year 2021. Selling expenses increased by 30% to RMB 20.3 million for the first half of the fiscal year 2021. The increase was primarily due to the rebate provided to the new registered student to promote education training service business.

Administrative expenses increased by 17.9% to RMB 17.9 million for the second quarter of the fiscal year 2021. The increase was primarily due to the increase in salary expenses for additional office and administrative staff.

Administrative expenses increased slightly by 2.9% to RMB 32.7 million for the first half of the fiscal year 2021. The increase was primarily due to an increase in salary expenses for the additional office and administrative staff, offset by reducing administrative expenses resulting from the liquidation of Jiangxi Haibo Education Management Co., Ltd in the second quarter of fiscal year 2020.

Finance income increased by 84.9% to RMB 10.7 million for the second quarter of the fiscal year 2021. Finance income increased by 39% to RMB 18.3 million for the first half of the fiscal year 2021. The increase was primarily due to an increased interest income derived from term deposits with a related party finance entity.

Finance costs were RMB 0.39 million for the second quarter of the fiscal year 2021 compared with RMB 0.22 million for the same period of last year. Finance costs decreased by 82.9% to RMB 0.7 million for the first half of the fiscal year 2021. The decrease was primarily due to an early payoff on an 18-year lease liability on campus space in Zhuji City in September 2019.

Income tax expenses were RMB 63 million for the second quarter of the fiscal year 2021 compared with RMB 40.1 million compared to the same period of last year. Income tax expense was RMB 83.6 million for the first half of the fiscal year 2021 compared with RMB 53.1 million for the same period of last year. The increase was due to the additional income generated from the education services that were subject to income tax.

The effective tax rate for the first half of fiscal year 2021 was 23.6% compared to 21% for the same period of last year.

Now for a quick summary of our balance sheet and cash flow. On December 31, 2020, we had have cash and cash dividends of RMB 191.3 million compared with RMB 516.3 million on June 30, 2020.

On December 31, 2020, we had term deposit at a related party finance entity of RMB 1,988.3 million compared with RMB 921.6 million as of June 2020.

Net cash provided by operating activities was RMB 835.4 million for the six months ended December 31, 2020, an increase of 75.5% from RMB 476 million for the same period of last year.

Net cash used in investing activities was RMB 1,139.3 million for the six months ended December 31, 2020 compared with RMB 465.2 million for the same period of last year.

Net cash used in financing activities was RMB 19 million for the six months ended December 31, 2020 compared with RMB 53.1 million for the same period of last year.

We are very excited about the financial results we have achieved, which provides solid financials to support our future growth. The achievement is due to our management team diligently implementing our business strategy, utilizing our innovative business model, i.e. occasion plus technology, to achieve operational efficiency that contributes to our revenue growth and cost reduction.

We will continue to grow our business through organic growth as well as mergers and acquisitions. Our organic growth is through the improvement of school utilization rate and the steady rise of tuition, leveraging our strong brand.

We will also look for merger and acquisition opportunities within and outside of China. We are confident that we will continue delivering sound financial results to our investors.

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

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Rosa Chang [ph].

Unidentified Participant

[technical difficulty]

Junwei Chen

[Foreign Language]

I will interpret for Dr. Junwei Chen for the first question. I would like to elaborate on the school network expansion plan from two aspects. The first one is, as of the first half of fiscal year 2021, we have confirmed that the company would open at least two additional affiliate schools in fiscal year 2022, namely Xianghu Future School and Ninghai Public School.

Secondly, from the second half of the fiscal year 2021, we will speed up the school expansion and increase overall investment. We will strive to add more affiliate schools in the fiscal year 2022 aside from currently two schools pipeline.

Looking forward, in the next two to three years, Hailiang Education we will experience a wave of growth. We have formulated a detailed development plan. There are two dimensions of this plan. The first dimension is the choice of location. The company will keep deeply involved in the East China region and simultaneously develop in four major regions, which is Northwest, Southwest, Central, and South and West of China respectively. And we will successively set up regional headquarters in these four areas surrounding our existing schools, such as Xiantao No.1 Middle School in Hubei Province, Zhejiang Hailiang Foreign Language School in Shandong Province, and Hailiang experimental school and the Lanzhou Hailiang Experimental School in Gansu Province, to form and leverage the strong momentum of expanding from the center to surrounding areas to expand the school network.

And the second dimension is the choice of development model. In the future, we will mainly focus on three expansion models. First one is operation and management model. The second one is asset-light sponsorship model, which mainly leverages revitalizing education project. The third model is acquisitions. The asset-light sponsorship model and operation and management model will be the critical pipeline for future school expansion.

[Foreign Language]

For the second question on driving factors for proposing the revitalizing education project. I'd like to talk about the following. The company's revitalizing education project is not only derived from corporate responsibility, but also from the vast ocean of potentials of the education market in countries, especially underdeveloped countries. In other words, the severe shortage of teachers and the flowing out of high quality students and the commonly low quality of education together lead to the bottleneck of economic and social development for these areas. Therefore, local governments are eager to introduce high quality education resources and the people have ardent expectations for good schools.

So, relying on the strong support of Hailiang Group and educational technology and advanced educational concept, we could sponsor schools under the asset-light model in the local area to share our resources, especially our educational concept and the technological achievements in order to quickly and comprehensively improve the local education level.

Moreover, we're also launching a project aiming at attracting talents to these countries, which is named as talent return initiative. This initiative leverages Hailiang's platform and also enables outstanding local graduates, especially those from Tsinghua University, Peking University and other domestic first class universities to return to their hometown to participate in the local education actively, thus to form a closed loop for talent supply for local areas.

As one of the company's long-term major strategies, revitalizing education project will concentrate on Northwest China, Southwest China and other underdeveloped regions. This project will be carried out in small towns and rural areas with backward economic development, lack of educational resources and low proportion of private schools. Moreover, this project will also significantly increase our total number of students. And in the meantime, we also effectively enhance the brand influence and the company's economic benefits. Thank you for your question.

Operator

The next question is from Daisy Joe [ph].

Unidentified Participant

There are two questions from my side. We have noticed that revenue from educational training services in the first half of fiscal year 2021 has increased significantly compared with the same period of last year. So, could you please share with us the reason for the strong growth. And in addition, how is the proportion of revenue from online education training services and onsite educational training services? Thank you.

Weixin Xie

Before the fiscal year 2021, the company's education training business only provided onsite education training. Driven by the COVID-19 pandemic, the company quickly developed technology to grow our online education curriculum. We launched online education planning for students in the first quarter of the fiscal year 2021. It was a blockbuster and has grown exponentially since its inception.

For the first half of the fiscal 2021, the online education training served 28,424 student attendances, accounting for 52% of the total number of students attendances served by our education training business.

Revenue from education training services was RMB 59.4 million for first half of the fiscal year 2021, which increased by 36.9% from RMB 43.4 million for the same period of last year. The revenue proportion from the online education training services and onsite education training services is 66% and 34% respectively.

Our strategy for education training is to integrate online education training with onsite education training to maximize the benefits for the students. We will collaborate with Hailiang Education Research Institute to further develop a localized curriculum system, including all subjects for students at all levels, utilizing technologies such as AI smart technology, big data smart tools. [indiscernible] to create interactive learning and teaching experience for our students and teachers combined, onsite and online training. We believe that education training service will continue to grow and contribute significantly to our positive growth.

Operator

The next question is from Alan Huang [ph].

Unidentified Participant

My question is what's the reason for significant gross profit margin increase for the first half of fiscal year 2021?

Weixin Xie

In the first half of the fiscal year 2021, gross margin was 38.6%, an increase of 6.5 percentage points than the same period of last year. The increase in gross margin was mainly due to the revenue increase from the following circumstances. One, our student enrollment continued to grow and we charged higher average tuition to each student compared to the same period of last year. Second, revenue of study trip services has decreased significantly since the outbreak of COVID-19. And the gross profit margin of this service is much lower than that of the other services. Three, the 2019 and 2020 school years was ended in July 2020 due to the impact of COVID-19. As a result, revenue of RMB 36.4 million was deferred recognized in the first half of the fiscal year 2021.

Operator

The next question is from Jack Well from – a private investor.

Unidentified Participant

We've noticed that the number of international education students in the company has increased compared to the same period last year. Considering the impact of the COVID-19, what's the management's view on the trend of international education developments and what are the competitive advantages of Hailiang Education compared to regional education groups and overseas education groups operating in China in terms of international education business?

Marcus Zihao Su

This is Marcus. Actually, this is a very good question because, for fiscal year 2021, enrollments in our international programs increased 8% compared with last year. This increase was mainly attributable to two aspects. The first one is relying on the company's abundant educational resources, i.e. the curriculums of international programs can be flexibly adjusted. And these diverse programs attracted more students who originally only focused on studying abroad to join our schools, i.e. the basic programs aimed at Gaokao, the Chinese college entrance examination.

The other aspect is the demand for studying abroad still exists. And it's usually three years before students have to make the decision for studying abroad. While the impact of COVID-19 may have receded and notwithstanding the COVID-19 having a negative impact on studying abroad market, we believe in short to medium term, the overseas higher education resources will still hold a prominent position. So, when COVID-19 subsides, we expect demand for studying abroad to go back previous levels sometime in the future.

And for the second question about the competitive advantages of international education that Hailiang Education has compared with other regional and foreign competitors, firstly, Hailiang Education has a relatively larger scale and more educational resources. So, we can achieve effective coordination. Under the influence of COVID-19, many international educational enrollments are facing difficulties. But higher education programs, especially international programs, our education programs cover both international education and basic education, meaning that the new students who prefer to choose basic education programs could easily and conveniently be transferred to other schools, to other programs among our school network.

And secondly, the company's flexibility and its ability to resist risks are relatively stronger. Let me give an example. We can leverage our experience in basic education to open classes that cover both international education and basic education in a short term of period, so as to attract the students who are worried about the future application for overseas universities.

And thirdly, I think competition in the international education market in first and second tier cities has been relatively fierce. While Hailiang Education schools are currently mainly located in third and fourth tier cities, even fourth and even fifth tier small towns and rural markets were more experienced and more competitive compared with these regional/international education groups or foreign education groups.

And fourth, as a comprehensive education service provider, Hailiang Education covers primary, middle and high school basic education programs and international programs and also ancillary educational services such as educational training, study trips and overseas consulting services. So, we may not be back to international education, but we think there is enough space in this target market to support our differentiated accommodation.

I hope this could answer your question. Thank you.

Operator

The next question is from Jessica Zhou [ph].

Unidentified Participant

This is Jessica Zhou. My question is, affected by global COVID-19, how does the company consider its current expansion strategy for overseas markets? And could you please share with us the plan for international development landing? Thank you.

Weixin Xie

Currently, international expansion is our top priority because the education industry has become very competitive in China. Also, China government may tighten current favorable policies and regulations related to the private education industry. If the favorable policies and regulations have changed, our business may be adversely impacted. But to manage the uncertainty, we have to expedite our international expansion plan. We set up a subsidiary in Singapore in April 2020 to explore the international education market. We will expand our online services to the countries under the Belt and Road Initiative through mergers and acquisition or set up new companies locally. The Singapore company will serve as an international headquarters, providing management services for our corporate network outside of China. We have focused on developing international education in the past and send Chinese students to study abroad. At the same time, we provide services to many international students for studying in China. In the future, the newly set up Singapore company will play an essential role in expanding and bridging the inbound and outbound services to the students worldwide.

We are aware of the challenges we are currently facing in light of the COVID-19 pandemic and the global hostile attitude towards China. However, to support our continued growth and strengthen our market share globally, we have set up a long-term plan to strategically position ourselves and manage the risks to grasp the vast opportunities in front of us. Thank you.

Operator

Seeing no further questions, let me turn the call over to Mr. Litao Qiu, the company's Board Secretary for closing remarks.

Litao Qiu

Thank you, operator. On behalf of the entire management team, I'd like to thank everyone again for joining us today for our conference call.

Additionally, I would like to remind you that certain statements by Hailiang management during these meetings may consist forward-looking statements which are made under the Safe Harbor provisions of US Private Securities Litigation Reform Act of 1995.

All statements other than statements of historical facts in these announcements are forward-looking statements including, but not limited to, the following: General economic conditions in China; competition in the education industry in China; the expected growth of the Chinese private education market; Chinese governmental policies relating to private educational services and providers of such services; health epidemics and other outbreaks in China; the company's business plans; the company's future business development; results of operations, and financial condition; expected changes in the company's revenue and certain cost or expense items; its ability to raise additional funding, its ability to maintain and grow its business; variability of operating results; its ability to maintain and enhance its brand; its development and introduction of new products and services; the number of students entrusted by schools; the successful integration of acquired companies, technologies and assets into its portfolio of software and services; marketing and other business development initiatives; dependence on key personnel; the ability to attract, hire and retain personnel who possess the technical skills and experience necessary to meet the requirements of its clients; and its ability to protect its intellectual property; the outcome of outgoing, or any further, litigation or arbitration, including those relating to copyright and other intellectual property rights; and other risks detailed in the company's filings with the US Securities and Exchange Commission.

Hailiang Education may also make written or oral forward-looking statements in its periodic reports to the SEC, in its annual report to shareholders, in press releases and other written materials, and in oral statements made by its officers, directors, or employees to third parties. Statements that are not historical facts, including statements about Hailiang Education's beliefs and expectations are forward-looking statements.

Forward-looking statements involve inherent risks and uncertainties, whether known or unknown, and are based on current expectations and projections about future events and financial trends that the Company believes may affect its financial condition, results of operations, business strategy, and financial needs. Investors can identify those forward-looking statements by words or phrases such as may, will, will make, will be, expect, anticipate, aim, estimate, intend, plan, believe, potential, continue, endeavor to, is/are likely to, or other similar expressions.

Further information regarding those and other risks is included in our annual report on Form 20-F and other filings with the SEC. All information provided in this press release is as of the date of this press release, and Hailiang Education undertakes no obligation to update any forward-looking statements, except as may be required under applicable law.

If you have any questions, please contact us through email at ir@hailiangeducation.com or reach us on our IR Consult 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 look forward to speaking with you again next time.

Operator, please go ahead. Thank you.

Operator

Thank you. Thank you again for attending the Hailiang Education Group's second quarter and first half of fiscal year 2021 earnings conference call. This concludes our call today and we thank you all for listening in. Goodbye.