Hong Kong, July 19, 2019 -- Moody's Investors Service ("Moody's") has assigned
a first-time Ba3 corporate family rating (CFR) to Bright Scholar
Education Holdings Ltd.
At the same time, Moody's has assigned a Ba3 senior unsecured rating
to the proposed USD notes to be issued by Bright Scholar.
The outlook is stable.
The bond rating reflects Moody's expectation that Bright Scholar will
complete the bond issuance upon satisfactory terms and conditions,
including proper registrations with the National Development and Reform
Commission and the State Administration of Foreign Exchange in China (A1
stable).
The proceeds from the bonds will be used to fund overseas business expansion
and for other general corporate purposes.
RATINGS RATIONALE
"Bright Scholar's Ba3 CFR reflects the company status as an
established key service provider in international and bilingual schools
for Chinese students, its asset-light business model,
and its recurring strong cash flows and low leverage," says
Roy Zhang, a Moody's Assistant Vice President and Analyst.
Bright Scholar partners closely with Country Garden Holdings Company Limited
(Ba1 stable) in operating schools in many of the residential properties
developed by Country Garden. The family of Country Garden's
founder and chairman owned approximately 72.5% of Bright
Scholar as of the end of May 2019.
The success of Bright Scholar's business model is underpinned by
its high admissions rate to global top institutions and top domestic high
schools. According to the company's regulatory filings,
92% of the graduating class from its international schools in 2018
received offers from global top 50 institutions, while 80%
of grade 9 graduates from its bilingual schools were accepted into top
public high schools in their respective regions.
The company benefits from strong demand in China for high-quality
education, and it has been able to consistently raise tuition fees
across its school segments -- including international schools,
bilingual schools and kindergartens -- despite close regulatory monitoring
of school pricing. Such price hikes, together with improving
utilization at its new schools, will support the company's
revenue growth and margin expansion.
Bright Scholar has high cash flow visibility, because tuition fees
are paid up front at the start of each semester, while operating
costs are usually spread across each semester. As a result,
working capital is a source of cash as the company expands. Customer
stickiness is also high, with an average annual student retention
rate of over 90% in each of the past three years, leading
to a recurring revenue base. The company's adjusted cash
flow from operations (CFO) reached RMB572 million in FY2018, and
Moody's expects it will grow on average 34% each year between
2018 and 2021.
Bright Scholar's capital spending needs are low because of its asset-light
business model. It partners with property developers such as Country
Garden, operating schools in residential projects while the developers
shoulder the land and building costs. Such arrangements significantly
reduce Bright Scholar's capital spending, while at the same
time allowing the company to expand alongside new projects.
Bright Scholar also has the right of first refusal on school development
projects in connection with new residential properties by Country Garden,
thus ensuring selectivity and flexibility as it expands.
"Bright Scholar's low level of leverage provides a significant
buffer for its Ba3 rating, mitigating risks stemming from its small
size, execution risks from an expansionary business plan,
a short history of listing and profitability, and regulatory uncertainties,"
adds Roy.
Bright Scholar's size is modest relative to its global education
peers, with revenue of only $264 million in 2018, although
projected to grow at an average annual rate of 50% through 2021
by Moody's estimates.
The company is actively executing its acquisition plan to expand its school
network overseas. Its acquisition and expansionary strategy will
raise some execution risk, such as managing a larger school network
across different regions, recruiting and retaining high-quality
teachers and administrators, and attracting high-quality
students to improve the utilization rates at the new schools.
Moody's expects Bright Scholar to execute its plan prudently by
focusing on high-quality assets at reasonable prices. Moody's
also expects any acquired assets will immediately increase the company's
EBITDA and cash flow, such that its leverage -- as measured
by total debt to EBITDA -- will remain low. Assuming around
$450 million of acquisitions by 2020, funded by a mix of
debt and internal resources, the company's adjusted debt/EBITDA
will reach about 1.8x in 2020 and 1.7x in 2021.
Moody's believes that Bright Scholar's overseas expansion
will improve its business profile by increasing its scale and creating
more diversified revenue streams. It also reduces the risks associated
with its exposure to any single regulatory body.
Bright Scholar has turned profitable -- in terms of its adjusted
EBITDA -- only since 2016 and has been publicly listed only
since 2017. As such, its financial and funding track record
are relatively short.
The rating also considers regulatory uncertainties, as China's
education industry is heavily regulated. For instance, the
Ministry of Justice issued a draft education law amendment on 10 August
2018, including additional regulations around related party transactions
and acquisitions of not-for-profit schools.
Moody's expects the impact on Bright Scholar from the draft amendment
will be manageable, as the company's key contractual agreements
and transactions are already audited and disclosed. Bright Scholar's
future expansion will also be predicated more on new self-built
schools rather than acquisitions.
The draft amendment has yet to be finalized, and there could also
be further changes in the future. As such, Moody's
will continue to monitor the sector's regulatory environment.
Bright Scholar has strong liquidity. It had maintained RMB 2.0
billion in cash as of the end of May 2019 while it had reported debt of
RMB50 million.
In terms of environmental, social and governance (ESG) considerations,
in addition to the aforementioned potential regulatory risks, the
ratings also factor in the company's concentrated ownership by its
founder and chairman, who held a total stake of 72.5%
at the end of May 2019. However, such risk is partially mitigated
by its listed and regulated status and by the presence of three independent
board directors.
Bright Scholar's senior unsecured bond rating is not affected by subordination
to claims at the operating company level. This is because the holding
company owns key trademarks to operate its business, which will
support an expected recovery in the holding company's debt. In
addition, the holding company benefits from contractual cash flow
upstreams from its operating companies.
The stable rating outlook reflects Moody's expectation that Bright
Scholar will maintain its (1) relationship and synergies with Country
Garden; and (2) solid business and financial profile while it executes
its expansion plans.
Upward rating pressure could emerge in the medium to long term if the
company (1) significantly increases its scale and develops a track record
of stable operations, solid profitability, liquidity and funding
access; and (2) maintains adjusted debt/EBITDA below 2.5x
on a sustained basis.
The rating would likely be downgraded if (1) the company's new schools
ramp up at a slower rate than expected; (2) if it engages in significant
debt-funded expansion, such that adjusted debt/EBITDA exceeds
3.0x on a sustained basis; (3) its profitability weakens,
with adjusted EBITDA margin declining below 20%; or (4) the
number of total students enrolled declines on a sustained basis.
Material shareholder distributions, unfavorable regulatory changes,
or changes in its relationship with Country Garden could also pressure
its rating.
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
Bright Scholar Education Holdings Ltd (NYSE:BEDU) listed on the
New York Stock Exchange on 18 May 2017, and had a market capitalization
of USD1.3 billion as of 5 July 2019. It is the largest operator
in international and bilingual K-12 schools in China, as
measured by student enrolment. The company established its first
private school (Guangdong Country Garden School) in 1994. As of
the end of May 2019, it operated 78 schools covering K-12
education for students across nine provinces in China and overseas.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. Unless
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the rated entity is participating and the rated entity or its agent(s)
generally provides Moody's with information for the purposes of
its ratings process. Please refer to www.moodys.com
for the Regulatory Disclosures for each credit rating action under the
ratings tab on the issuer/entity page and for details of Moody's
Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Roy Zhang
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
