Edited Transcript of HLG earnings conference call or presentation 25-Mar-20 1:00pm GMT

——————————————————————————–

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

——————————————————————————–

Thank you, Mr. Wang. Good evening, everyone. Next, on the behalf of the management team, I would like to summarize some of the key financial result for the first 6 months of fiscal year 2020.

For the first 6 months of fiscal year 2020, our revenue was RMB 736.7 million or USD 105.8 million, increased by 12.9% from RMB 652.7 million. Our gross profit was RMB 237.8 million or USD 34.2 million, a increase of 20.3% from RMB 197.7 million. Our net profit was RMB 197.6 million or USD 28.4 million, increased by 52.5% from RMB 129.6 million. Our gross profit margin was 32.3% and net profit margin was 26.8%, increased from 30.3% and 19.9%, respectively. Compared to the same period last year, the basic and diluted earnings per share was RMB 0.49 or $0.07 compared with RMB 0.29 for the same period last year.

Our revenue mainly derived from K-12 educational services, educational training services, study trip services and education and management services. Revenue from K-12 basic educational program was RMB 411.8 million or USD 59.1 million, an increase of 16% from RMB 355.1 million for the same period of last year. Revenue from K-12 international programs was RMB 212.7 million or USD 30.6 million, increase of 12.5% from RMB 189 for the same period of last year. Revenue from educational training services was RMB 43.4 million or USD 6.2 million, a decrease of 27.4% from RMB 59.8 million for the same period of last year, mainly due to the termination from our educational training businesses in Jiangxi province. With expansion to our study trip services, the revenue reached RMB 43.1 million or USD 6.2 million, increase of 62.6% from RMB 26.5 million for the same period of last year. We provided various education and management services to our school located in Jiangxi, Zhejiang, Jiangsu, Hubei and Shandong provinces and the revenue was RMB 17.4 million or USD 2.5 million for the first 6 months of fiscal year 2020.

Cost of revenue was RMB 498.9 million or USD 71.7 million, an increase of 9.6% from RMB 455 million for the same period of last year. The increase was primarily due to the increased compensation levels of employees and increased costs related to study trip services.

Selling expense was RMB 15.1 million or USD 2.2 million, an increase of 52.5% from RMB 9.9 million for the same period of last year. The increase was mainly attributed to the increasing sales compensation payment related to educational training services. Administrative expenses were RMB 31.6 million or USD 4.5 million, a slightly decrease 3.1% from RMB 32.6 million for the same period last year.

Other income was RMB 49.8 million or USD 7.2 million, an increase of 403% from RMB 9.9 million for the same period of last year, primarily due to the increase in the government grant. Finance income was RMB 13.9 million or USD 2 million, an increase of 11.2% from RMB 12.5 million for the same period of last year.

The finance cost was RMB 3.9 million or USD 0.6 million, which represented interest portions of operating lease payment upon adoptions of IFRS 16. Income tax expenses were RMB 53.1 million or USD 7.6 million compared with RMB 48 million for the same period of last year, which was driven by the growth of educational services that were subject to income tax.

Now a quick summary of our balance sheet and cash flows. As of December 31, 2019, we have cash and cash equivalents of RMB 228.2 million or USD 32.8 million compared with RMB 260.7 million as of June 30, 2019. Net cash provided by operating activity was RMB 476.1 million or USD 68.4 million, a decrease of 26.4% from RMB 646.9 million for the same period of last year. The decrease was primarily due to the more income tax and the labor cost paid during the year and a larger amount of tuition of fiscal year 2020 received before June 30, 2019, compared with the same period of last year. The net cash used in the investment activity was RMB 457.1 million or USD 65.7 million compared with RMB 211.5 million for the same period of last year. The increase was mainly due to the prepayment of lease rental and are partially offset by the increase of term deposits withdraw upon the maturity from the related party finance entity compared with the same period of last year. Net cash used in financing activity was RMB 51.8 million or USD 7.4 million compared with RMB 7.3 million for the same period of last year. The increase was mainly due to more dividends paid by the subsidiary of HLG to noncontrolling interest and loan prepayment to the related party.

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

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) First question today comes from [Ivan Yu], a private investor.

——————————————————————————–

Unidentified Participant, [2]

——————————————————————————–

I’m [Ivan], an individual investor. As we all know, the COVID-19 continues to spread and affect lots of industries. Could you please introduce the impact to HLG and in the education industry?

——————————————————————————–

Litao Qiu, Hailiang Education Group Inc. – Board Secretary [3]

——————————————————————————–

Okay. Let me answer this question. This is Litao Qiu. I’m the Board Secretary. Thank you for your question.

Well, due to the COVID-19 epidemic issue, we were actually informed by the local government to postpone the new term on-site class start date. So instead, we provide Internet real-time class lessons to our students by each subject teacher based on each original class. Thanks for the great IT strategy and support and our strong teaching team, comprehensive teaching material, as of February 2020, we have more than 2,000 teachers and nearly 38,000 students who are participating in our real-time lessons by using our jointly developed Hailiang VIP Cloud Virtual Classroom software platform.

Since we do not receive any official notice about the new term start day and end day of this semester, so we cannot provide the actual figures on the business impact at this moment. But we continuously monitor the progress of the epidemic and timely disclose the impact result of the outbreak on our business.

——————————————————————————–

Operator [4]

——————————————————————————–

The next question comes from [Simon Chang], a private investor.

——————————————————————————–

Unidentified Participant, [5]

——————————————————————————–

We note that the company’s net profit margin increased by 6.9 percentage points compared to the same period of the last year. What is specific reason?

——————————————————————————–

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

——————————————————————————–

I’m Thomas Yu. I’m the company CFO. I’ll answer this question. Thank you.

This is mainly due to the steady growth of our business income, the improvement of our company’s cost control capabilities and as well as the government grant we received this first 6 months of fiscal year 2020. More specifically as we’ve mentioned in our 6-K, our revenue increased by 12.9%, while our cost and expenses was only increased by 9.7%. The increase in revenue was mainly due to the 4.6% increase in the number of student enrolled and the 9.7% increase in average tuition and the expansions of our study trips and overseas study consulting services. Meanwhile, we received the government grant of discretionary and the nonconditional subsidies from our local government amount of RMB 49.8 million for the 6 months of fiscal year 2020. And we are glad to see our developments of the company. And thanks again for your questions.

——————————————————————————–

Operator [7]

——————————————————————————–

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

——————————————————————————–

Unidentified Participant, [8]

——————————————————————————–

Mr. Wang, I’m [Wendy Kim] from South Korea, and I’m also an individual investor. And I have a question for you. Well, what’s the propensity of the investment decisions in the future for Hailiang Education?

——————————————————————————–

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

——————————————————————————–

Thank you for your question. I’m glad to answer your question in Chinese.

[Interpreted] The future development strategies are mainly focused on 4 aspects. Firstly, we shall focus on building our brand and reputation as global leading K-12 education integrated service provider.

Our second strategy is to strengthen our market leadership by increasing education quality and scale while improving academic performance. Thirdly, we will continue to focus on quality K-12 educational training services and develop online education to diversify our offerings. The last one is we shall implement hybrid development strategy, which combines asset-light approach, construction and strategic acquisition to expand our affiliate and managed schools network in China and overseas countries. And thank you for your question.

——————————————————————————–

Operator [10]

——————————————————————————–

(Operator Instructions) The next question comes from [Jack Yu], a private investor.

——————————————————————————–

Unidentified Participant, [11]

——————————————————————————–

Okay. As a [new media worker] , I want to know what’s the strategy of the company’s online education.

——————————————————————————–

Litao Qiu, Hailiang Education Group Inc. – Board Secretary [12]

——————————————————————————–

This is Litao Qiu. I’m the Board Secretary. Let me answer this question. Actually, our company’s online education strategy is mainly in 3 key areas. The first one is the technology side. Since we have a fully prepared system, so during the outbreak of the COVID- 19, we actually launched the Hailiang VIP Cloud Virtual Classroom platform to all the students. We have set up more than 1,500 virtual classrooms, running more than 67,000 lessons with a great result. Actually, the biggest single classroom lesson, we have more than 1 million participants, which was conducted by our Executive Principal, Mr. Ye, a few weeks ago. The new system not only helped to keep our student study progress in line with the schedule, but also to speed up at least 1 to 2 years of the cloud system’s deployment time among the education group.

And the second area, which is the curriculum and teaching resource side. During the outbreak of COVID-19, our online education has covered almost 100% of the compulsory class lessons. In addition, we have more than 200 elective courses and other specified courses delivered by 15 of our golden Olympiad competition training coaches, and also 133 senior teachers. Those comprehensive curriculums will expand our online teaching resources in the future.

And the third part is the teaching innovation side. We will take advantage of the flexibility of online education system, increased the proportion of the online lessons and leave more time for students to communicate with their teachers and classmates, enable teachers to give student and target guidance. We can also integrate high quality domestic and foreign teaching resources teachers in China or overseas through online education platform to deliver excellent lessons to local and foreign country students.

So in short, online education service is one of the key focus of our business. We continue — we will continue invest on the technology development of the software platform to enrich the teaching contents and also to innovate our Hailiang OMO, which is online-merge-offline, new teaching approach to quickly increase the number of online students in our school as well as other school students to improve our future revenues. So this is my answer to your question.

——————————————————————————–

Operator [13]

——————————————————————————–

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

——————————————————————————–

Litao Qiu, Hailiang Education Group Inc. – Board Secretary [14]

——————————————————————————–

Okay. Thank you, operator. On behalf of our 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 us 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 question 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.

——————————————————————————–

Operator [15]

——————————————————————————–

Thank you, again, for attending Hailiang Education Group’s First 6 Months of Fiscal Year 2020 Earnings Conference Call. This concludes our call today, and we thank you for listening. Goodbye. You can please disconnect.

——————————————————————————–

Ming Wang, Hailiang Education Group Inc. – Chairman & CEO [16]

——————————————————————————–

Goodbye. Thank you.

——————————————————————————–

Jian guo Yu, Hailiang Education Group Inc. – CFO [17]

——————————————————————————–

Thank you. Bye-bye.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]