First High-School Education Group Co., Ltd. (FHS) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, ladies and gentlemen. Thank you for standing by, and welcome to the First High-School Education Group First Half 2021 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. . Now I will turn the call over to Susie Wang, Director of the Blueshirt Group. Ms. Wang please proceed.
Susie Wang: Thank you, operator. And hello everyone. Welcome to the First High-School Education Group first half 2021 earnings conference call. Joining us today are Mr. Zhang Shaowei, Chief Executive Officer and Benjamin Zhu , Co-Chief Financial Officers; Lillian Liu, Head of Investor Relations. We released the results earlier today. The press release is available on the company's IR website at ir.diyi.top as well as from Newswire services. A replay of this call will be also available in a few hours on our IR website. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risk and uncertainties. As such the company's actual results may be materially different from 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 obligation 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 RMB. With that, let me now turn the call over to our CEO, Mr. Zhang will speak in Chinese and then our Co-CFO will translate his comments to English. After that our Co-CFO Mr. Benjamin Zhu will discuss our operations and financial highlights. Please go ahead Mr. Zhang.
Shaowei Zhang : Hello, everyone. Thank you for joining our earning conference call today. In the first half of 2021, our improved number of student enrollments translated into healthy top-line growth with 24.8% year-over-year growth to RMB231.9 million or total revenue. Facing tough regulatory environment, we remain committed to driving rapid rolls with further operational expansion, while improving utilization rate for our existing schools. During this period, we had eight new school programs opened in multiple provinces, including 3 new high school programs, three new Gaokao repeater school programs, 1 new public school management service program and 1 middle school program. As of September 1, 2021 we are running 36 school programs with a total of over 35,000 students across Yunnan Province, Guizhou province, Shanxi province, Shaanxi province, Inner Mongolia Autonomous Region, Sichuan province and Chongqing, with the utilization rate of 62.3% compared to 55.3% as of December 31, 2020. First, we are operating 17 high school programs with a total of over 18,500 students and school utilization rate of approximately 53.4% and 7 Gaokao repeater school programs with a total of over 1,600 students as school utilization rate of approximately 62%. We're cooperating with local government in multiple provinces to provide management services for poor public schools with a total of over 5,500 students. And thirdly, we are operating eight middle school programs with a total of over 9,700 students and school utilization rate of approximately 82.7%. Complying with relevant regulatory guidelines, we look forward to further solidify our leading position in China's private high-school and Gaokao repeater school program sectors. We also aim to expand into new geographical markets with strong demands. In addition, to the 36 fully operated school programs, we have also entered into agreements to secure more school opening next year. One particular example worth highlighting, is that in late September, we entered into an agreement to lease newly constructed school premises and facilities to sponsor a high-school with capacity for over 2,800 student beds in Sichuan province. As the leased school premises was previously designed for K-9 education and was recently leased to us primarily due to the owners’ operation difficulties amid the changing regulatory environment, and importantly, our strong brand name in operating high-schools. This agreement marks our high-school business entrance into Sichuan Province, where we aim to explore and satisfy the large market demand with similar arrangements. We also achieved meaningful progress in enhancing our education resources and services. On June 1, 2021, we announced our majority stake acquisition in Beijing Long-Spring Future Plus Education Technology Company Limited or Beijing Long-Spring Future Plus. This company is a technology-driven education company, providing premium full-time live AI online teaching services. This combination will further improve the overall quality of our entire education system, especially for China's central and western region where there are strong demands for high quality high-school and Gaokao repeater school programs. This system will allow us to further empower our existing business in operating private high school program for Gaokao. repeater, management services and for all public-school needs. We're highly confident in the market opportunities for China's private high-school and Gaokao repeater school program. Therefore, in mid-September, we announced a strategic partnership with Sichuan Fuhang Capital, aiming to jointly set up an education goals fund dedicated to supporting the rapid expansion of our school network. We believe the above milestone will further strengthen our leading position and competitiveness in China's private high-school and Gaokao repeater school program sectors. Looking at ahead, the company will continue investing in technology and education quality to provide premium and authentic educational services to satisfy each student and the parent we serve. We believe that the education market in China will continue to see steady growth, and that the current education companies will play a very important role in the education sector. We're confident that our company will reach potential beyond our responsibility and mission. Okay, now, let me turn the call over to our CFO, Benjamin, who will provide details on our business and financial performance. Thank you.
Benjamin Zhu : Thank you, Mr. Zhang. Thank you everybody for joining our call today. Before I go through our financial highlights for the first half of 2021, I would like to announce a new member to our executive team, . This guy will assume the position of our co-CFO. He will help myself in capital markets matters. This arrangement can enable myself to focus on the growth strategy.
Unidentified Company Representative: Hi, it is an honor to join First High-School Education. I am longtime friend of the company and the management team as I fully participated in its entire IPO underwriting process. Prior to joining First High-School, I worked as an Investment Banker at Templeton Security, Investment Director at China Innovative Capital, Investment Manager , also various accounting duties and Northwestern Mutual in United States and Canada. I received my bachelor's degree from University of British Columbia, and an MBA from George Washington University. As a team, I look forward to working closely with Mr. Zhu and to further streamline First High-School's operation and drive our top-line growth. Lastly, we understand the importance of creating shareholder value. And I assure everyone in our firms will be fully devoted to be doing just that.
Benjamin Zhu : Now, please allow myself to go through our financial highlights for this first half of the year. Before I go into details, please note our numbers presented are in RMB unless stated otherwise. All percentage presented are year-over-year business unless otherwise specified. Detailed analysis is contained in our earnings press release, which is available on our IR website. As for the total value, our total revenue was RMB232 million increased by 25%, while the last fiscal period revenue was RMB186 million. For revenues from customers were over RMB224 million increased by 34%. Well, the last fiscal period revenue was RMB168 million. And revenue from the government cooperative agreements were RMB8 million decreased about 16 month bond. Well, the last fiscal period was the RMB18 million. This decrease was primary cause by the delayed payment from government for the relevant cooperative arrangement. In extended period, we noticed that some local governments are facing serious financial income difficulties and thus they largely delayed payments to us. For the conservative programs, we did not recognized these delayed payments as our revenue accrual basis. Instead, we account for them on a cash basis. Fortunately, on September 26, we received such a delayed payment of RMB9 million. Our total revenue increase was the primary driver by one, greater student enrollments due to the opening of new schools and increased students enrollments in our existing schools. Two, increased average tuition fee in most of our existing schools. Three, higher boarding fees due to the increased number of our students. As for the cost of revenue, our cost of revenue were RMB170 million increased by 41% year-over-year. This increase was primarily due to the overstocking our opened school network and either leased premise and facilities. At the beginning of this year, we picked up the Gaokao School Network expansion plan. But China local education authorities are either in file on the top K-9 education regulation environment. And such authorities slows down the output of our high school and Gaokao children school opening plan. Our pillar to new school openings called overtopping and idled leased privately funded facilities. As for gross profits, our gross profit was RMB62 million, decreased by 4% from last fiscal period RMB65 million. Gross margin for this first half a year was 47%, compared with 35% in the last fiscal period. The decrease in the gross margin raise was primarily due to the higher cost of our revenue resulted from one, increase the staff cost described as above. Two, increased school operating expenses, especially for the new schools with relatively lower cost efficiency than our existing schools. As for our general and administrative expenses. General and administrative expenses were RMB60 million, increased by 109% from the last fiscal period RMB29 million. While this increase was mainly incurred by one, we got one-off expenses of RMB25 million. This amount this amount include IT related expense of RMB10 million and warrant related final value of passage of RMB50 million. And two additional expenses of RMB6 million deriving from the acquired entities which happened in the last the same period. As for the selling and the market expenses, our selling and marketing expenses were RMB3 million, increased by 98% from the last fiscal period RMB1 million. This increase was primarily due to the marketing activities in addition to the aggressive school opening plan made at the beginning of this year. As for the government grants, our government grants were RMB5 million increased by 196% from last fiscal period RMB2 million. This increase was due to one the layered distribution process made by some government this year, as such government the grant in previous years were usually distributed in the second half of the year. Two, the increase in government subsidies in line with the increase of our students and our new school attendance. As for interest excess, our interest expense was RMB9 million increased by 800% from the last fiscal period RMB1 million. Such a huge increase was incurred by the volume and the financing arrangement with original rule amounting RMB100 million which was used for the purchase plan into the equity interest plan to our public listing and other related interest expense amounted to RMB6 million. The last item for our net loss. Net loss was RMB4 million compared to net income of RMB32 million in the last fiscal period. Such loss was mainly incurred by one-off amounting RMB25 million and other expenses amounting to RMB11 million, both of which not happened in the last the same period. Also on September 25, we received the delayed payments from government amounting to RMB9 million. As we address these expense and the received payment, the comparable net income of the first half a year will be net income of RMB41 million increased by 38% compared with the last fiscal period. Here is my presentation to you. And thank you for your time. That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead.
Operator: Thank you. We will take our first question from Long Lin . Please go ahead. Your line is open.
Unidentified Analyst : Hello, hi. Yeah, good evening management Thank you for taking my question. So my first question is about the implications of the recent regulations on the company. How would that impact the company's business strategy and the growth outlook, especially on the tutorial school part in second half of 21 and beyond? So it seems like the regulation said the high-school education or afterschool education should also follow the similar guidelines. So just wondering how that impacts the tutorial school? It's seems like that your capacity expansion for the school openings for the afterschool -- for the high school tutorial school seems slower than expected in the first half. Just wondering if there's any strategy change or any change in the capacity expansion plan for the second half? That's my first question. Thank you.
Shaowei Zhang: Okay, the chairman will answer the question and I'll help translate. So, the current regulations not impact senior high-school, and also does not have material impact on the Gaokao repeater schools. For some provinces, the proportion of private degree has been clarified. The proportion at provincial level for private schools is controlled at 5%, and district and counties is controlled at 15%. Therefore, in some provinces, such as Hunan for example, current privatization is up 30%, which is affected, but in many provinces it's lower than 10%, some 9%, some 15%. And these provinces are not much impacted by the current regulation. Thank you. So due to the regulation we spoke, which is the promoting private education of PRC, and also the 2 minus regulation, the approval process for schools authorization license is a lot lower. But moreover, the approval for K-9 education is virtually stopped. And that the answer for this question, thank you.
Unidentified Analyst : Thank you. So I just have follow up on that. So does it mean like -- since the company thinks there's no mature impact on your business doesn't mean your revenue guidance for the full year ‘21 of 73% to 84% year-over-year growth remains unchanged. Also, what about your capacity expansion plan? Like you opened about 8 new schools in the first half. So just wondering, what's your expansion plans for the second half of the year, especially on the high- tutoring school -- tutorial school? What's the plan? How many schools do you plan to open in the second half? Thank you. That's my follow up.
Benjamin Zhu : From our measurement viewpoint, we think for this year, our newly opened the schools number increase compared with our original plan. So we think for this full year, we think the total revenue will be literally decrease. But we also we also actively seek potential quick acquisition targets. So hopefully, we think by this, that is the second half a year if we succeed in acquisition target, we think we can keep the strong revenue growth. This is my answer.
Unidentified Analyst : Thank you. So my second question is about your revenue growth of 24.8% in the first half. What percentage of that growth comes from student enrollment? And what percentage comes from the tuition increase -- part of growth comes from the tuition increase? What is your average tuition per student in the second half -- in the first half of the year compared with the first half of 2020?
Benjamin Zhu : Our total revenue increase mainly derived from a students’ number and the tuition fee increase and boarding fees. As for our current statistics, as you know our student enrollment increased by over 32%. As for the tuition fee, which were discussed for the last year financial report, we think for this new school year, our tuition fee increase rate is still keep a 15%. Certainly, with the large increase in student enrollment, our boarding fee keep the same percentage increase. That is my answer.
Unidentified Analyst : Okay, thank you. So, will you talk about the -- like an aim to make up your revenue growth in the second half? Does it include the revenue contribution from the acquisition, the new acquisition that you recently made -- like the acquisition Beijing Tomorrow Future Plus Education Technology or do you plan to acquire more companies?
Benjamin Zhu : As disclosed in our earnings press release, actually, in this first half year we completed the three companies' acquisition. Besides this, we actually are seeking other potential acquisition targets. So hopefully in this second half a year, we can complete the other acquisition high school networks. As for this purpose, in the mid-September we set up the partnership with one equity capital raise the Education Growth Bond to fuel our potential acquisition. Yes.
Unidentified Analyst : Okay. So for your acquisitions, what kind of company do look for? How your new companies will supplement or complement your company's existing business?
Unidentified Company Representative: So during the acquisition process, we really look for the technology factor. For example, for the Beijing Future Plus, the company can provide service to our entire network that is teaching and classroom service. This kind of online service can help increase the quality of our teaching and also reduce the teacher shortage or similar issues in our schools across the board and also help to reduce cost. So from the school's actual usage level, technology is able to provide better resources and also save human capital. From the national level, currently the regulators gave a lot of promotion to using technology to enhance physical schools provided actually a few example in how technology is being used and developed in actual schools. So we also believe in the same fashion where technology is able to provide actual use for our schools. So another example is our 3D teacher classroom process, which helped us a lot in the human resource sector. We were able to recruit and allow teachers -- excellent teacher from Beijing and overcast their ability across all provinces and our schools. Thank you.
Unidentified Analyst : Thank you.
Unidentified Company Representative: That answers the question.
Unidentified Analyst : Thank you. That's very helpful. That's all my questions. And I will get back to queue.
Operator: We will take the next question from TF Securities. Please go ahead.
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Operator: We will now take the next question from Huawei Securities. Please go ahead.
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Operator: There are no further questions in the queue. I will now hand call back to Susie.
Susie Wang: Well, thank you operator. I guess and thank everyone else for participating the call and for your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress. Thank you, operator.
Operator: Thank you that will conclude today's conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.
