Hailiang Education Group Inc.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Highline Education Group's Fiscal Year 2020 Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. This conference has been recorded today, Thursday, October 15, 2020. Joining us today from Highline Education Group are the company's Chairman and CEO, Mr. Jun Wei Chen, the company's Vice President, Mr. Peng Fang, the company's Chief Financial Officer, Mr. Jian Gou Yu, and the company's Board Secretary, Mr. Li Taoshu. I would like to remind our listeners who are on this call, management's prepared remarks contain forward looking statements, which are subject to risk and uncertainties. And management may make additional forward looking statements in response to your questions. Therefore, Therefore, the company claims the protection of the safe harbor for forward-looking statements as contained in the Private Security and Litigation Reform Act of 1995. Highline 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 call over to Mr. Junwei Chen, Chairman and CEO of Highline Education Group. Mr. Chen, please go ahead.

Thank you, operator, and everyone for joining High Down Education's fiscal year 2020 earnings conference call today. Before we start, I would like to introduce myself briefly, as this is the first time I attend this call as chairman and CEO of High Down Education. I was appointed as chairman and CEO of High Down Education Group on June 23, 2020. Prior to that, I was vice president of High Down Group and the President of Heilong Education Management Group. I personally hold a Ph.D. degree in Energy and Resources Engineering from Peking University, one of the top two universities in China. During my time at Peking University, I also served as the 38th Chairman of the university's Postgraduate Student Association. I appreciate your continuous support and attention to Heilong education. And I welcome all of you to visit Hai Liang Education and meet in person in the future. Now move back to our business review. In the past fiscal year, our performance has been strong and stable, demonstrating our continued progress in executing and innovating our growth strategy and highlighting the resilience of our underlying business. despite temporary disruption and a short-term impact on our business caused by the COVID-19 pandemic. For the fiscal year 2020, our revenue was RMB RM1,482.6 million, slightly decreased by 1.1% year-over-year from RMB RM1,499 million. However, the decline was mainly due to non-K-12 education services, which was impacted by COVID-19. And our revenue from K-12 educational services was人民비 1,308,000,000, increased from 1,217,000,000 year-on-year. Our net profit attributable to company's shareholders was人民비 370.8 million, increased by 26.4% year-on-year from人民비 293.4 million, Our gross profit margin was 33.7% and the net profit margin was 25%, increased from 31.5% and 19.6% respectively. In addition, we are pleased to have the celebration of our 25th anniversary in 2020. We have received awards such as the Best China Concept Stock in Education Sector 2020 by Zhitong Caijin a leading financial media agency in China. Top 10 influential brands of Chinese education enterprises award by 2020 China Brand Boao Summit. As of June 30, 2020, the scale of the company's school network has expanded to 37 schools. The aggregate number of enrollments in both our affiliated and managed schools was 66,344 students, which included 23,716 students enrolled in our affiliated schools. The number of students enrolled in basic education programs of our affiliated schools was 18,867, and the number of students enrolled in the international programs of our affiliated schools was 4,869. As of the date of our annual report on 20F, filed October 14, 2020, there were four new affiliated schools that started operations or was acquired in September 2020. They were Lanzhou Hailiang Experimental School, Wuhu Hailiang Experimental School, Hailiang Overseas Chinese School, and the Jinhua Hailiang Foreign Language School. For the fourth semester of fiscal year 2021, as of September 20, 2020, the aggregated number of students enrolled in our affiliated schools increased to 26,865, which included 2,542 students enrolled in four new affiliated schools that started operation or was acquired in September 2020. The number of students enrolled in the basic educational programs of our affiliated school was 20,864, and the number of students enrolled in the international programs of our affiliated schools was 6,001. Such number of students enrolled in our affiliated schools represented a 13% increase, demonstrating a strong prospect of our performance in fiscal year 2021. As of the date of our annual report on 20F filed on October 14, 2020, We have facilitated the development and application of smart campus and smart classroom by establishing an experienced team composed of education professionals and IT developers, and cooperating with top-tier Chinese universities and leading enterprises. With the integration of IoT, cloud, and big data technology, and the innovation of education and management experiences, we have launched a variety of applications and IT infrastructures such as iClass, Star Classroom, Star Teacher Training, and online registration system to improve efficiency of our standardized management and quality of teaching and learning. When outbreak of COVID-19 first appeared, with careful and proactive arrangements and deployments, We regarded the safety and health of all of our students and employees as top priority and made appropriate short-term adjustments to our business operations when needed. To reduce the negative impacts of COVID-19 on planned teaching progress of the spring semester, we launched a high-down VIP cloud virtual classroom in February 2020. to ensure that our students could continue their courses as planned before the outbreak of COVID-19 via online live classes. Benefiting from our abundant educational services, outstanding facility capabilities, and the technical advantages in IT infrastructure, our online education services and smart campus platform have thrived during the outbreak of COVID-19. Despite this pandemic, our enrolled students still hit a record. Students enrollment of 72,839 for the fourth semester of 2020 or the fourth semester as of September 20, 2020, up approximately 9.5% compared to 66,543 students for the same period of last year. The increase in enrollment has effectively confirmed that the impact of COVID-19 on the company is very limited. As of the date of our annual report on 20F, filed on October 14, 2020, we have 13 affiliated schools and provide education and management services for 29 private and public schools. The company will continue to diversify business model, increase the proportion of auxiliary education services, Invest in the application and development of education technology and improve the ability of teachers and management team to improve our education quality, maximize academic performances, optimize management efficiency, support our school network expansion, and diversify our education services offerings. In the future, we are expected to further explore international expansion strategies and build or invest or acquire private schools in one belt in one road countries, and develop the countries with strategic synergies. Thank you again for all your support and attention. Next, I will turn this call over to Mr. Jian Guo Yu, our CFO, who will summarize our fiscal year 2020 financial results on behalf of the management team. Mr. Yu, please go ahead.

Thank you, Mr. Chen, and good morning, everyone. Now, on behalf of management team, I would like to summarize some of the key financial results for the fiscal year 2020. For the fiscal year 2020, our revenue was 1.482 billion RMB or 209.8 million US dollars, slightly decreased by 1.1% from 1.499 billion RMB Our gross profit was 499.4 million RMB or 70.7 million US dollars, an increase of 5.8% from 472.1 million RMB. Our net profit was 366 million RMB or 51.9 million US dollars, an increase by 16.1% from 315.8 million RMB. Our gross profit margin was 33.7% and that the net profit margin was 24.7% increase from 31.5% and 21.1% respectfully. Compared to the same period of last year, our net profit attributed to the company's shareholder was 370.8 million RMBs or 52.5 million US dollars, increased by 26.4% from 293.4 million RMBs. Basic and the diluted earning per share was 0.9 RMBs or 0.13 US dollars compared to 0.71 RMBs for the same period of last year. Our revenue mainly derived from K-12 educational service, educational training service, study trip service, education and management service. Revenue from K-12 Basic Educational Program was 859.2 million RMBs or 121.6 million US dollars, an increase of 6.6% from 805.7 million RMBs for the same period of last year. Revenue from K-12 International Program was 449 million RMBs or 63.6 million US dollars, an increase of 9.2% from 411.3 million RMBs for the same period of last year. Revenue from educational training service was 53.7 million RMBs or 7.6 million US dollars, a decrease of 62.6% from 144.2 million RMBs for the same period of last year, mainly due to the liquidation of Jiangxi Highball Educational Management Corporation Limited. Revenue from study trip service was 56.4 million RMBs or $8 million, a decrease of 30.8% from $81.5 million for the same period of last year, mainly due to the restriction on traveling because of COVID-19 outbreak, which affect the study trip services in the second half of fiscal year 2020. Revenue from education and management services was 48.3 million RMBs or 6.8 million US dollars, an increase of 18.1% from 40.9 million RMBs for the same period of last year. Other revenue, mainly represented revenue derived from overseas study consultations, consulting services, hotel management services, other revenue was 16 million RMBs or 2.3 million US dollars, an increase of 3.9% from 15.4 million RMBs for the same period of last year. The cost of revenue was 983 million RMBs or $139.2 million, a decrease of 4.3% of 1.26 billion RMBs for the same period of last year. The decrease was primarily due to the steep decrease in the transportation cost related to K through 12 educational service and study trip services as a result of outbreak of COVID-19. And a slight decrease in labor costs of our teachers and the teaching staffs. Selling expense was 29 point, 26.9 million RMBs or 3.8 million US dollars, an increase of 7.6% from 25 million for the same period of last year. The increase was mainly attributed to an increased student enrollment reward on the recruitment. Administrative expenses were 77.5 million RMBs or $11 million. An increase of 6.7% from 72.7 million RMBs for the same period of last year. Other income was 72.8 million RMBs or 10.3 million RMBs million U.S. dollars, an increase of 189.9% from 25.1 million RMBs for the same period of last year, primarily due to an increase in government rent subsidy we received from the local government. Finance income was 25.1 million RMBs or 3.6 million U.S. dollars, a slight increase of 0.8% for the same period of last year. The finest cost was 4.4 million RMBs or 0.6 million US dollars, which represented interest on relief liability upon the adoption of IFRS 16. Income tax expense was 121.9 million US dollars RMBs or 17.3 million US dollars. million US dollars compared with 108.7 million RMDs for the same period of the last year, which was driven by the growth of tax profit. Our effective tax rate in the fiscal year 2020 was 25% compared with 25.6% fiscal year 2019. Now for a quick summary of our balance sheet and cashflow as of June 30th, 2020. we had cash and cash equivalent of 503 million US RMBs or 71.2 million US dollars compared with a 260.7 million RMBs as of June 30th of 2019. Net cash provided by operating activity was 431 million RMBs or 61 million US dollars compared with 690.3 million RMBs for the same period of last year. The net cash used in the investing activities was 127.8 million RMBs or 18.1 million US dollars compared with 1.234 billion RMBs for the same period of last year. The net cash used in financing activities was 61.4 million RMBs, or 8.7 million U.S. dollars, compared with 7.3 million RMBs for the same period of last year. Now I would like to turn the discussion over to the operator for any questions.

Thank you. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star and two. Today's first question comes from Aaron Hsu, a private investor. Please go ahead. Hello, Aaron Hsu. Your line is open. Sorry, I was muted.

Sorry. Can you hear me right now? Hello?

Yes. Yes, we can hear you.

Thank you. Thank you. Good morning, management. Congratulations on another outstanding year. Actually, my question is I noticed that the Highline Education recently released two strategic projects which are project of invigorating education with talents and the project of revitalizing education through technology. So my question is what are the specific implementation matters and what's the significance for the future development of Highline Education? Thank you.

Thank you for your question. This is Dr. Chen and I'm going to take this question. I am very glad that you noticed this and happy to share my thoughts of this. These two strategic projects are indeed our core strategy in the future and might lead HLG to a brighter future. As our founder always said, talent development determines the future of an enterprise. And one of our core missions is to bring talented people to educate our students. Within the next five years, we expect to have 120 teachers with professor equivalent titles or exceptional teacher titles or Golden Olympia competition training coaches. We expect to have 250 teachers graduated from the top two universities in China i.e. Peking University and Tsinghua University. And by then, most of our teachers will hold master's degree or above. We are committed to attracting more Hialeah alumni to join Hialeah education, which is in fact a reform on the supply of talents, creating a full life cycle talent training plan to our alumni. The full life cycle talent training plan will start from the junior year at high school when we will provide our students career plan evaluation to guide their future career decisions. During college stage, we will continue to monitor our graduates' development and enhance their comprehensive and professional capability through study trips, internships. For those who join Hialeah Education after graduation, we will provide on-the-job mentoring and training to shorten the time to adapt to their new position at Haliang Education. In order to facilitate this strategy in the next three years, Haliang Education will cooperate with 10 to 20 top-tier universities in China, including normal universities and universities with strong education majors, and connect with 30 to 50 foreign universities to achieve that. Secondly, Haliang Education will continue to take advantage of science and technology to lead the reform of China's basic education, form our own core competitiveness, and undertake the important task of education plus technology, with the mission of making school operations easy for everyone. As the master designer and school operation management expert of Haliang Education, our Haliang Education Research Institute will leverage our strong research team sophisticated professional capabilities, and accumulated education experiences, and high-end strategic partners to offer our students with happier learning experiences, healthier bodies, more knowledgeable minds, and more ideal university destinations. Hainan Education combines 25 years of education management experience with technology and it cooperates with partners like Tsinghua University, Peking University, and Alibaba Dharma Academy to form a powerful pool of resources, curriculum, big data, experiences, and technologies. With the full cooperation and the full support of all departments and schools of high-level education, we will strive to complete the research and development of high-level education's know-how of school operation to reduce the headcount of a standard school by one-third. to standardize our school operations for future export of management, and to improve our brand and education quality, and to fully support the future development of high-level education. I hope the above points can address your questions.

Thank you.

Thank you very much. Our next question today comes from Amy Zhuang, a private investor. Please go ahead.

Hello. I'm Amy. Thank you, operator, and good day. My question is the current development situation of the educational training industry is relatively good. And I would like to know, Hai Liang Education's future development and expectations for the educational training business. Thank you.

Okay, thank you. This is Li Taochiu. I'm the board secretary. Let me answer your question. Actually, current Hai Liang Mingyou Company, which is our educational training company, currently provides a training platform system to support thousands of our students interactive online studies. Currently, we also have three learning centers located in Tzu Chi and Hangzhou, which is in the Zhejiang province. And we plan for year 2020, we actually already have around 22,000 student attendance. From a short, long perspective, we plan to open new learning centers in more cities where our K-12 schools are already located, as a result of which we could avoid significant selling expenses and also have a better profit margin compared with other players in the same educational training sector. Year 2021, we plan to open 10 learning centers each fiscal year based on our internal financial model. Mingyu's business will undoubtedly be one of many key revenue growth drivers in the next few years. Thank you.

Our next question today comes from Maggie Shen with Canfor Investments. Please go ahead.

Thank you, operator. Good evening, management. This is Maggie from Canfor Investments. We would like to know what is the impact of COVID-19 on companies' financial performance for this fiscal year. Thank you.

Hi, I am Thomas Yu. I am the CFO. I will answer this question. Thank you very much. The outbreak of COVID-19 has impacted our business lines, especially on our K-12 educational service and the study services. For our K-12 educational services, we launched online education and the tutoring platform. which enabled our teachers and our educational staff to provide original curriculums to their students online where our schools were not allowed to operate in-person teaching classes. As a result, the only refund of accommodation and transportation services was accrued for 29.5 million RMBs, which has been a limited impact on our revenue from K-12 educational services. Besides, the revenue from K-12 educational services for high school level of 32.3 million RMBs was deferred to the next fiscal year due to the delay of school year and the middle and the primary school was not significantly impacted. For study trip services, the revenue was decreased by 30.8% or 25.1 million RMBs year to year. Due to the current regulation and the travel restrictions imposed by the Chinese government and authority, the revenue from on-site education training services declined to a certain extent due to the suspension of a physical class during the pandemic period. Despite of the pandemic, our gross profit increased by 5.8% or to 499.4 million RMBs. The net profit attributed to our shareholder increased by 26.4% to 370.8 million RMBs in the fiscal year 2020. I hope that answered your question and thank you very much

Thank you. Our next question comes from Eric Lee, a private investor. Please go ahead.

Thank you, operator. Hi, my name is Eric, who is a private investor. So we know that the company has a certain number of the related party transactions. How does the company ensure the fairness of the related party transactions? Thank you.

Hi, I am Tom Siu, the CFO. Let me answer this question for you. Thank you very much. To improve the transparency and fairness of related product transactions, we are taking the following steps to address your concern. We will make a price of a related product transaction according to the market price of similar product or services and conduct internal evaluation of the pricing We will involve a third party to make assessment on the pricing or the fairness. The management will issue formal management opinion on all related party transactions and all related party transactions are viewed and approved by our audit committee and board of directors in advance. We disclose the detail for all our related party transactions in our financial statements. annually to all our investors. And thank you very much for the questions, and we're looking forward to meet you again. Operator.

Our next question comes from Ivy Wong with Universe Securities. Please go ahead.

Thank you, Operator. Hi, I'm Ivy Wong from Universe Securities, and I have several questions. So my first question is, are there any detailed points or achievements made for revitalizing education in underdeveloped regions, or are there any plans or strategic acquisitions to expand our school network across first year and the capital cities? Thank you.

Thank you. This is Dr. Chen, and I will take this question. Yes, the education revitalization of underdeveloped regions will be one of the three key actions to be launched in the coming fiscal year. While the education resources in underdeveloped regions are well below the average of China, China Education has a very good position to export our experiences, education, and management system and education technology to these regions. By liaising with Hai Liang Group, we could establish K-12 schools in underdeveloped regions without spending heavy capital expenditures and form a career platform to attract graduates from top universities to work in these underdeveloped regions. And as a result, we could improve education quality of local schools and fuel the application of our education technology and ancillary education services with a student and teacher platform composed of a vast population of students in public and private schools of underdeveloped regions. And at the same time, our business model can be expanded and replicated to these regions successfully. At the same time, Expansion in first tier or large cities in China is also one of our key options in the next few years. As what we did before, we will continue to evaluate and explore opportunities in the developed or large cities in China and potentially acquire, establish or operate and manage additional schools in these cases, in these regions to expand our school network in China. I hope I can answer your questions.

Yeah, thank you. That's good to know. So my second question is, I know you have already moved to online classes. So what processes are in place? Are you looking to implement to maintain your standards of teaching? Thank you.

Okay. First of all, this is Lee Hao-Chul. I'm the board secretary. Let me answer your question. First of all, all our student and teaching activities are already actually returned back to normal. But during the outbreak of COVID-19 period, we launched the Highland VIP Cloud virtual classroom in February 2020 to ensure that our students could continue their courses as planned before the outbreak of COVID-19 via the online life-size classes. All teachers were trained to master online education platform and standard training courseware and methods were implemented across our affiliated and managed schools. I hope this can answer your question. Thank you.

Yeah. Yeah, thank you. So, like, can you give us some updates on sports or other after-school activities you have when we were under online classes? Thank you.

Oh, okay. As I just mentioned, all our student and teaching activities already back, returned to normal. But during the outbreak of COVID-19 heavy periods, We actually deliver our after-school activities via the online interactive system. And according to the feedback from the students, they are quite happy with this arrangement. Yes, thank you.

Yeah, thanks a lot. So thank you a lot. My next question is about our Singapore expansion. So do you view the international expansion as another growth segment for our company to move forward? And if so, is Asia the focus for international growth? Thank you.

This is Dr. Chen, and I will take this question. Yes, international expansion is also one of our three strategic actions in the next five years. Regarding our international expansion strategies, we will expand outside China in two different aspects. For one aspect, we will continue to look at opportunities in some developed countries, which are the destination countries of our international programs, including UK, Singapore, Australia, and potentially US. By expanding into these countries, we will acquire some boutique K-12 schools there to achieve some synergy with our existing business in China. We can send our existing students to have study trips in these overseas schools and send some of our students to study in these schools in high school grades. Also, on the other side, these schools can provide improvement to our existing international curriculum and also help training international teachers in our existing network. That's one aspect. And for the other aspect, we will continue to explore opportunities in the Road and Belt Initiative countries. Currently, we have observed that there are great demands of studying in China or studying China, studying curriculums with some China elements in these Road and Belt Initiative countries. Right now, we have an international graduate student's college in our Zhuji campus. Most of these students are from families in these Road and Belt Initiative countries. We believe that by establishing schools in these countries, Haiyang can quickly export our education philosophy and principles in these countries and generates substantial interest from citizens in these countries. That's a brief summary of our international expansion strategies.

Yeah, thank you very much for the detailed explanation. So my last question is about our educational training services. So what can you attribute to the high rate of growth for this sector before the shutdown of the Jiangxi Hyper-Education Management? Do you expect this growth to continue in the future? And thank you very much. OK.

Yeah, I will also take this question. Yes, the educational training service segment will continue to be a main growth driver for our business in the next few years. In the past few months, we have successfully established three learning centers in Zhuji and Hangzhou, where our K-12 schools have already located. In the upcoming fiscal year, we will continue to replicate these business models in regions that are adjacent to our existing schools. By taking this strategy and achieve synergy with our existing schools, including cost sharing, student recruitment, et cetera, we believe that our new established learning centers can generate a relatively high growth and a net margin to our entire group. So with the contribution of these new offline and online training centers, these segments of business will continue to generate a substantial contribution to our overall financial performances. We are very positive to the development of this sector in the upcoming fiscal year.

Yeah, thank you. That's all my questions. Thank you very much.

Thank you. Seeing no further questions, let me turn the call over to Mr. Litao Xu, our board director, for closing remarks.

Okay. Thank you. Thank you, operator. On behalf of our containment management team, I would like to thank everyone again for joining us today for our conference call. Additionally, I would like to remind you that certain statements by Highland Management during this meeting may consist forward-looking statements which are made under the safe harbor provisions of U.S. private security dedication reform as of 1995. All statements other than statements of historical facts in this announcement 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 education, no services and providers of such services. Health epidemics and other outbreaks in China. The company's business plans. The company's further business development. Result of operation and financial condition. Expected changes in the company's revenue and certain costs 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 the school, the successful integration of appointed 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 higher intellectual property, the outcome of outgoing or any other further litigation or arbitration, including those relating to copyright and other intellectual property rights and other research details in the company's filing with the U.S. periodic reports to the SEC. In its annual report adds to shareholders in press release and other written materials and in oral statements made by its officers, directors or employees to third parties. Statements that are not historical facts and expectations are forward-looking statements. Forward-looking statements enforce inherent risks and uncertainties, whether known or unknown, and are based on current expectations and projections about the events and financial trends that company beliefs may affect its financial conditions, result 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, release, potential, contiguous, endeavor to, is unlikely to, or other similar expressions. Further information regarding those or other risks is included in our annual report on Form 28 and other filings with the SEC. All information provided in this press release is as of the day of this press release and highlight education may be required under applicable law. If you have any questions, please contact us through email at ir.highlandeducation.com or reach us on our IR console at sendinvestorrelations at tina.sharpe.com. questions as soon as possible. We appreciate your interest and support in Highline Education and look forward to speaking with you again next time. Operator, please go ahead. Thank you.

Thank you again for attending Highline Education Group's fiscal year 2020 earnings conference call. This concludes our call today and we thank you all for listening in.