Bright Scholar(US:BEDU)2020-12-23 21:20PART I KEY INFORMATION This section presents selected financial data and details key risks associated with the company's business, corporate structure, operations in China, and publicly traded ADSs Selected Financial Data The company experienced strong revenue growth from 2016 to 2020, reaching RMB 3.37 billion, alongside consistent asset expansion, despite volatile net income which decreased to RMB 164.2 million in 2020 Selected Financial Data | Fiscal Year Ended August 31, | 2018 (RMB) | 2019 (RMB) | 2020 (RMB) | 2020 (USD) | | :--- | :--- | :--- | :--- | :--- | | Revenue | 1,718,871 | 2,563,005 | 3,366,503 | 491,647 | | Gross Profit | 628,276 | 976,991 | 1,221,717 | 178,421 | | Operating Income | 272,162 | 300,526 | 307,729 | 44,941 | | Net Income | 248,903 | 252,758 | 164,174 | 23,976 | | Net Income Attributable to Ordinary Shareholders | 246,969 | 241,099 | 161,005 | 23,513 | | Basic EPS (RMB) | 2.02 | 1.97 | 1.34 | 0.20 | | Diluted EPS (RMB) | 2.02 | 1.97 | 1.34 | 0.20 | Financial Position | As of August 31, | 2018 (RMB) | 2019 (RMB) | 2020 (RMB) | 2020 (USD) | | :--- | :--- | :--- | :--- | :--- | | Total Assets | 4,666,481 | 7,787,637 | 10,823,309 | 1,580,643 | | Total Liabilities | 1,654,882 | 4,704,369 | 7,698,928 | 1,124,356 | | Total Equity | 3,011,599 | 3,083,268 | 3,124,381 | 456,287 | Risk Factors The company faces significant risks across its business, corporate structure, operations in China, and its securities, including regulatory changes, VIE arrangement uncertainties, and potential delisting due to auditor inspection issues - The company's ability to operate for-profit schools providing compulsory education (grades 1-9) is significantly limited by the Amended Law on the Promotion of Private Education, which requires such schools to be non-profit, potentially leading to a material impact on revenue and profitability from a significant portion of its student base31 - The business is heavily concentrated in Guangdong province, which generated 41.7% of total revenues in fiscal 2020, with its flagship school, Guangdong Country Garden School, alone accounting for 13.8% of total revenues, posing a significant geographical concentration risk66 - The company's corporate structure relies on contractual arrangements (VIE structure) to control its schools in China due to foreign ownership restrictions, and this structure is subject to interpretation by PRC authorities, risking non-compliance and severe penalties154156158 - The company's independent auditor is located in China, a jurisdiction where the PCAOB is unable to conduct inspections, which could lead to the delisting of the company's ADSs from U.S. exchanges under the Holding Foreign Companies Accountable Act (HFCAA) if the PCAOB cannot inspect the auditor for three consecutive years232236 INFORMATION ON THE COMPANY This section details the company's history, business operations, and organizational structure, highlighting its global K-12 education services, synergistic relationship with Country Garden, and reliance on a VIE structure in China History and Development of the Company Bright Scholar, founded in 1994, operates in China via a VIE structure due to foreign ownership restrictions, completed its NYSE IPO in 2017, and issued US$300 million in senior notes in 2019 - The company operates its domestic schools in China through a series of contractual arrangements (VIE structure) with BGY Education Investment and its shareholders due to PRC laws prohibiting foreign ownership in compulsory education and restricting it in other areas299300301 - The company completed its IPO on the NYSE on May 18, 2017, and a follow-on offering on March 2, 2018, raising net proceeds of approximately US$174.7 million and US$181.4 million, respectively303 - In July 2019, the company issued US$300.0 million in senior notes with a 7.45% interest rate, maturing on July 31, 2022, which are listed on the Stock Exchange of Hong Kong305 Business Overview Bright Scholar is a leading global K-12 education service provider, operating domestic and overseas schools with strong academic outcomes, leveraging a synergistic relationship with Country Garden for expansion - The company operates 94 schools in China and 8 overseas schools in the UK and US as of the report date, with an average of 51,825 students enrolled during the 2020 school year308 - The company has a strong academic track record: 93.6% of its 2020 graduating class from key international programs were admitted to global top 50 universities310 - A key business strategy involves close collaboration with Country Garden, a related party and leading residential property developer in China, which provides a scalable model for launching new schools with lower upfront capital expenditures312 Average Student Enrollment by School Type | School Type | Avg. Enrollment (2018) | Avg. Enrollment (2019) | Avg. Enrollment (2020) | | :--- | :--- | :--- | :--- | | International Schools | 7,366 | 9,350 | 10,584 | | Bilingual Schools | 15,620 | 18,132 | 20,189 | | Kindergartens | 13,693 | 16,742 | 17,840 | | Total Domestic K-12 | 36,679 | 44,224 | 48,613 | Organizational Structure The company, a Cayman Islands holding entity, operates its PRC business through a Variable Interest Entity (VIE) structure, using contractual arrangements to control affiliated entities and consolidate financial results - Due to PRC restrictions on foreign ownership in education, the company uses a VIE structure to control its domestic schools, achieved through contractual arrangements rather than direct ownership477478 - Key contractual agreements include a Call Option Agreement, Powers of Attorney, an Exclusive Management Services and Business Cooperation Agreement, and an Equity Pledge Agreement, which collectively give the company effective control over the VIEs480481482483 - The revenue from affiliated entities (VIEs) accounted for 63.3% of the company's total revenues in the 2020 fiscal year, highlighting the critical importance of the VIE structure to the company's operations303 OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes the company's financial performance, highlighting 31.3% revenue growth in FY2020 to RMB 3.37 billion, a decline in net income to RMB 164.2 million due to higher costs and impairments, and strong liquidity Operating Results In FY2020, revenue increased 31.3% to RMB 3,366.5 million, driven by acquisitions and enrollment growth, but net income decreased to RMB 164.2 million due to higher interest expense and impairment losses Key Financial Metrics (RMB million) | Metric | FY 2019 (RMB million) | FY 2020 (RMB million) | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | 2,563.0 | 3,366.5 | +31.3% | | Gross Profit | 977.0 | 1,221.7 | +25.0% | | Operating Income | 300.5 | 307.7 | +2.4% | | Net Income | 252.8 | 164.2 | -35.0% | | Adjusted Net Income | 322.6 | 267.7 | -17.0% | - The increase in revenue for FY2020 was primarily driven by a 359.9% increase in revenue from overseas schools (due to acquisitions) and growth in student numbers at domestic international and bilingual schools573574577 - The company recorded significant one-off and non-cash charges in FY2020, including an impairment loss on goodwill of RMB 68.7 million and an impairment loss on operating lease right-of-use assets of RMB 12.8 million562 - Net interest expense was RMB 159.4 million in FY2020, a sharp reversal from a net interest income of RMB 24.3 million in FY2019, primarily due to interest on the senior notes issued in July 2019589 Liquidity and Capital Resources The company's liquidity is primarily funded by operations and financing, with cash and equivalents reaching RMB 4.42 billion in FY2020, despite a decrease in net cash from operating activities Cash Flow Summary (RMB thousands) | Cash Flow Summary (RMB thousands) | FY 2018 | FY 2019 | FY 2020 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 554,216 | 864,988 | 491,227 | | Net cash (used in)/from investing activities | (472,460) | (2,256,009) | 72,567 | | Net cash from financing activities | 1,092,604 | 1,479,533 | 675,703 | | Cash and equivalents at end of year | 3,164,081 | 3,265,014 | 4,423,937 | - As a holding company, its ability to pay dividends and meet obligations depends on dividends from its PRC subsidiaries, which are subject to PRC regulations on profit distribution and statutory reserves624 - Capital expenditures were RMB 149.8 million (US$21.9 million) in fiscal year 2020, mainly for construction, maintenance, and renovation of school facilities623 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the company's leadership, compensation, and employee base, noting the significant voting power held by founders through a dual-class share structure and the growth in total employees to 11,499 in FY2020 Compensation In FY2020, total cash compensation for directors and executive officers was RMB 20.8 million, with a negative share-based payment expense of RMB 10.6 million due to cancelled options - Aggregate cash compensation for directors and executive officers in fiscal year 2020 was approximately RMB 20.8 million (US$3.0 million)656 - The company recorded a negative share-based payment expense of RMB 10.6 million in FY2020, mainly from reversing expenses for cancelled options where performance conditions were not met658 Employees The company's employee base grew steadily to 11,499 in FY2020, with teachers and instructors comprising the largest category at 6,358 Employee Count by Category | Employee Category | FY 2018 | FY 2019 | FY 2020 | | :--- | :--- | :--- | :--- | | Teachers and instructors | 4,297 | 5,602 | 6,358 | | Managerial staff | 469 | 660 | 1,062 | | Educational and administrative staff | 1,012 | 1,629 | 1,403 | | Supporting staff | 2,113 | 2,475 | 2,676 | | Total | 7,891 | 10,366 | 11,499 | Share Ownership As of December 15, 2020, Ms. Huiyan Yang holds 92.51% of the aggregate voting power due to a dual-class share structure, resulting in highly concentrated share ownership - As of December 15, 2020, Ms. Huiyan Yang beneficially owns 77.93% of the aggregate ordinary shares, which translates to 92.51% of the aggregate voting power due to the dual-class share structure682686 - The company has a dual-class share structure, where each Class A ordinary share has one vote, while each Class B ordinary share has 20 votes and is convertible into one Class A share682 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details major shareholders and extensive related party transactions, primarily with Country Garden and entities controlled by Ms. Huiyan Yang, highlighting the synergistic and dependent relationship - The company has school operation agreements with Country Garden, where Country Garden provides school premises and facilities, and Bright Scholar is responsible for school operation and management690 - Bright Scholar licenses the "Country Garden" trademark from Country Garden free of charge under agreements expiring in 2028 or 2030691 - In fiscal year 2020, the company purchased approximately RMB 11.2 million in materials and services from related parties controlled by Ms. Huiyan Yang694 FINANCIAL INFORMATION This section covers the company's financial statements, legal proceedings, and dividend policy, noting cash dividends declared in 2019 and 2020, but no fixed future dividend plan - The company declared a cash dividend of US$0.10 per ordinary share on September 18, 2019, and US$0.12 per ordinary share on July 23, 2020707 - The company currently intends to retain most of its available funds and future earnings to operate and expand its business and does not have a fixed plan for future dividends707 CONTROLS AND PROCEDURES Management concluded disclosure controls were effective as of August 31, 2020, despite identifying a significant deficiency in internal control over financial reporting related to acquired overseas businesses, for which remediation steps are underway - Management concluded that disclosure controls and procedures were effective as of August 31, 2020768 - A significant deficiency in internal control over financial reporting was identified in fiscal year 2020, related to a lack of segregation of duties and insufficient review over financial data in certain acquired overseas businesses774 - The company is taking remediation steps, including recruiting more qualified financial professionals, providing training, and establishing a UK-based shared service center to unify processes for overseas schools775776 PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS The company actively repurchased its ADSs through two programs, with the 2018 program repurchasing US$77 million and the 2019 program repurchasing US$9.4 million by its expiration in November 2020 - The company had a US$100 million share repurchase program that expired in April 2019, under which it repurchased approximately US$77 million of its ADSs785 - A subsequent US$30 million share repurchase program was initiated in September 2019; during the 2020 fiscal year, the company repurchased 1.2 million ADSs for approximately US$9.4 million under this program786787 FINANCIAL STATEMENTS This section presents the company's audited consolidated financial statements for fiscal years 2018-2020, prepared under U.S. GAAP, including balance sheets, statements of operations, and cash flows, along with the independent auditor's report Consolidated Balance Sheet (RMB thousands) | Consolidated Balance Sheet (As of Aug 31, 2020) | Amount (RMB thousands) | | :--- | :--- | | Total Current Assets | 4,700,630 | | Total Assets | 10,823,309 | | Total Current Liabilities | 3,695,043 | | Total Liabilities | 7,698,928 | | Total Equity | 3,124,381 | Consolidated Statement of Operations (RMB thousands) | Consolidated Statement of Operations (FY 2020) | Amount (RMB thousands) | | :--- | :--- | | Revenue | 3,366,503 | | Gross Profit | 1,221,717 | | Operating Income | 307,729 | | Net Income | 164,174 |