First High-School Education Group Co., Ltd. American Depositary Shares

Good day, ladies and gentlemen. Thank you for standing by and welcome to the first high school education group fiscal year 2022 unaudited financial results earnings conference call. Currently, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Now, I will turn the call over to Mr. Tommy Zhou, Chief Financial Officer of the company. Mr. Zhou, please proceed.

Thank you, operator, and greeting investors and friends. Welcome to the First High School Education Group Fiscal Year 2022 Earnings Conference Call. This is Tommy speaking, Chief Financial Officer of the company. and I will lead today's conference call. We released results earlier today prior to market open. The press release is available on the company's IR website at ir.diyi.top as well as from Access Wire and OTC services. A replay of this call will also be available in a few hours on our IR website. Before we continue, please know that today's discussion will contain forward-looking statements made under safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with the SEC. The company does not assume any obligations to update any forward-looking statements except as required under applicable law. Also, please note that unless otherwise stated, all figures mentioned during the conference call are in Chinese . With that, thank you all again for joining us. I will briefly spend the next 20 minutes updating our fiscal year 2022 results. For today's earnings release, all of our financial and operating data will be dated to December 31st, 2022. We also expect to release our F20 annual report near the end of the month. Our external auditor are still working tirelessly to get it finished in time. As soon as it's finished, we will report it through the SEC channel. 2022 was a year of both ups and downs. Starting the year off, During the first quarter's earning call, the company expressed that we shifted our strategy from outward focused to inward focused. We wanted to make sure that before we go out and expand more schools, we should have a solid foundation first, that all of our existing schools will be operating in near perfect conditions, that our operating efficiency academic achievement can be consistent throughout the entire network. And the company did its best to do just that. For the schools that we continuously operate, student admission and student number both increased to new heights of 25,823 students. And academic levels, grade scores, are more balanced between our schools from large cities to small municipalities. In addition to building internally, we did also make three outward expansions. We signed two new schools in Yunnan Province and one new school in Henan Province. These schools are all located in either third or fourth tier cities in line with the Chinese government's rural revitalization initiatives. The company will continue to serve the community at large, but ethically and sustainably develop our business. Throughout the year, we have also donated school supplies to villages, village schools, provided free teaching services to them, and granted scholarships to students with difficult backgrounds. Seeing the success of our students and the community at large is a dream for every one of our employees. Another positive note this year is our controlled short and long-term borrowings. As outlined in our second quarter earning call, the company set out to reduce our overall leverage this year. Just to be safe for sight, of the operation. As of December 31, 2022, our short and long-term combined loans totaled 79.1 million RMB, which is 38% less than last year of the same period, which was 127.5 million RMB. The reduced leverage will give us a larger margin of safety to operate in case for any economic turbulence. Also, for 2022's loans, they are 100% credit-based, all bank-issued loans. Compared with 2021, some of our loans was issued by financial leasing companies, which had much higher interest rate. These pure credit-based bank-issued loans not only translate to a lower interest rate or lower cost for us to bear, but also a signal that banks, the strictest and most conservative financial institutions in China, especially towards private business, has full faith in our business and credibility. On the flip side, notwithstanding 2022, The company did also experience some negatives in our operation. Our net income decreased compared to 2021. The decrease was primarily due to the cost associated with discontinuing three schools and limited recruitment of two others. For both regulatory changes and financial reasons, we had to discontinue schools in Inner Mongolia, Chongqing, and Chengdu. In addition, two of our schools in Kunming, specifically Yunnan Hengshui Experimental Secondary School, Xishan School, and Yunnan Long Spring Foreign Language Secondary School, faced limited student admission quotas from the local governing authority. Adjusting to these changes was not easy. The company had to deal with a large number of issues from rental fee disputes to staffing relocations to communication with the local authority. And ultimately, the termination and the adjustment cost associated with these changes had a negative impact on our profitability. Thus, it resulted in a lower net income number compared to last year. More details of our positives and negatives will be available in our upcoming F20 annual report. For today, it is a snapshot of our unaudited earnings release. Lastly, the company has already put these unfavorable events in the past and dealt with them already. What is important is that the company is confident on the road ahead We will continue to operate our schools with high quality and solid academic results. Concurrently, the company will always explore, innovate, and expand. We thrive for any opportunity that will grow the business and the community, and we aspire to become a stronger player in the industry. So that concludes the highlight section. And now I will go through our line-by-line financial highlights for fiscal year 2022. Again, please know that all numbers presented are in RMB unless otherwise stated. All percentage changes are on a year-over-year basis unless otherwise specified. Detailed analysis is contained in our earning press release, which is already available on our IR website access water services. For fiscal year 2022, for continuing operations, total revenue was $342.5 million, an increase of 1.5% from $337.3 million in 2021. The increase was primarily due to a mix of factors, including recruitment and discontinuous and limited operation of some schools in our network. Revenues from customers were $300.4 million, an increase of 0.1% from $300.1 million in 2021. Again, the increase was primarily due to a mix of factors, including recruitment and the discontinuance of limited operations in some schools. Revenue from government cooperative agreements was $42.1 million, an increase of $13.1 from $37.2 million in 2021. The increase was primarily due to an increased number of publicly sponsored students we are currently serving. Cost of revenues were $213.6 million, an increase of 2.9% from $207.6 million in 2021. The increase was primarily due to undertaking a greater portion of publicly sponsored teachers' compensation. Gross profit was 128.9 million, a decrease of 0.6% from 129.7 million in 2021. Gross margin was 37.6 compared with 38.5 in 2021. The slight decrease was due to fluctuations in first, school operating efficiency, such as utility usage and budget control, and two, number of staff and their compensation levels. Net operating expense was $55.7 million, an increase of 8.8% from $51.1 million in 2021, of which selling and marketing expense was $3.1 million, a decrease of 51.8% from $6.4 million in 2021. The decrease was primarily due to the decreased expense in brand promotion and marketing activities. for our relatively mature school operations. Our general and administrative expense was $54.6 million, an increase of 14.5% from $47.7 million in 2021. The increase was primarily due to discontinuance and limited operations of some schools in our network, and partially also because of the expense related with new business expansions. Government grants were $2 million, a decrease of 31.4% from $3 million in 2021. The decrease was primarily due to the government's tight fiscal budget resulting in delayed payments made by the government. Income from operations was $73.2 million, a decrease of 6.8% from $78.5 million in 2021. Then income from continuing operations was $46.1 million, a decrease of 20.2% from $57.8 million in 2021. And that loss from discontinued operations was $7.7 million compared with a loss of $5.1 million in 2021. Net income was $38.4 million, a decrease of 27.1% from $52.7 million in 2021. Adjusted net income Non-GAAP measure was $38.4 million, a decrease of 27.1% from $52.7 million in 2021. And the above is my financial highlights briefing. Like I said previously, we do expect our F-20 annual report to be filed soon and more details will be available. Both the CEO, Mr. John, and myself wish to thank everyone for your time and participating today. And let's open the call for questions. Operator, please go ahead and proceed to the Q&A.

Thank you, Tommy. At this time, we will now be conducting our question and answer session. If you would like to ask a question, please press star 1 on your phone keypad. A confirmation tone will indicate your line is in the queue. You may press star 2 if you want to remove your question from the queue. For participants using any speaker equipment, it may be necessary to pick up your handset before you press the keys. Please hold a moment whilst we poll for any questions.

As a reminder, if you have any questions, please press star 1 on your phone keypad now.

Okay, we don't appear to have any questions in the queue as yet. I will now hand back over to Tommy for any closing remarks.

Yeah, it's okay. I mean, if anyone has any questions, they can send to us privately through our email, which is also listed on our IR website. Again, thank you, operator, and we thank everyone again for participating on today's call, for your further support. We appreciate everyone's interest in the company and greatly look forward to reporting to you again next quarter on our progress. Thank you.

Thank you all again. This does conclude the call. You may now disconnect.