Hong Kong, November 19, 2021 -- Moody's Investors Service has downgraded Bright Scholar Education
Holdings Ltd's corporate family rating (CFR) and senior unsecured
rating to B1 from Ba3.
The outlook remains negative.
"The downgrade reflects Bright Scholar's expected weaker business
profile and smaller scale as a result of its announced potential disposal
of a number of its schools and kindergartens," says Shawn
Xiong, a Moody's Assistant Vice President and Analyst.
"The negative outlook reflects the uncertainties over the company's
evolving business model and the execution risks involved in restructuring
its business," adds Xiong.
However, Moody's expects the potential disposal of a number
of Bright Scholar's schools and kindergartens will enhance the company's
compliance with new regulations on the sector.
On 14 May 2021, China State Council announced "the Implementing
Regulations of the Private Education Promotion Law", which came
into effect on 1 September 2021.
On 15 November 2021, Bright Scholar announced that it would hold
an extraordinary general meeting of shareholders on 10 December 2021 to
discuss and approve a business disposal plan in response to amendments
to the regulation.
In the Proxy Statement furnished to the United States Securities and Exchange
Commission, the company provided a list of schools and kindergartens
which it will look to dispose through gratuitous donation to a charitable
organization, which will be an unaffiliated entity to be approved
by the company's board of directors. The company estimates
that the revenue of the affected entities was approximately RMB2,235
million for the year ended 31 August 2021.
RATINGS RATIONALE
Bright Scholar's B1 CFR reflects the company's established position in
international and bilingual schools for Chinese students, and its
asset-light business model, good cash flow, net cash
position and relatively diversified operations in China and overseas.
The rating also considers the risks stemming from Bright Scholar's
small scale, its evolving business model and the execution risks
involved in restructuring its business.
Based on Bright Scholar's guided total revenue of RMB3.59
billion-RMB3.69 billion for the fiscal 2021 ended 31 August
2021, the revenues from its affected schools and kindergartens would
account for around 60%-62% of total revenues.
The disposal will significantly reduce the company's scale and shift
its business model to providing management services to the affected schools
and kindergartens. These include consultation for school operations,
catering and accommodation, property management and maintenance,
administrative management, student recruiting and school branding.
Moody's expects Bright Scholar to retain the affected schools and
kindergartens for management services due to their long-standing
relationships with them. However, its contracts with the
schools will be more susceptible to competitive bidding and pricing pressure
over the medium to long term compared with school fees.
Additionally, management services fees, which are received
after services have been rendered, are not as advantageous from
a cash flow perspective compared with school fees, which are collected
in advance.
Notwithstanding the above, Bright Scholar's other business
segments, including its overseas schools, education technology
and complementary education, together contributed around 32%
and 19% of total revenue and gross profit, respectively,
for the nine months ended 31 May 2021.
Bright Scholar has good liquidity. It had a cash balance of around
RMB1.7 billion and short-term investments of around RMB2.5
billion as of the end of May 2021. These cash and cash-like
resources, together with the company's projected operating
cash flow, will be sufficient to cover its short-term debt
of around RMB1.06 billion as of 31 May 2021, its planned
capital spending, payments associated with the schools disposal
and its USD300 million bonds due in July 2022.
Bright Scholar's ratings also considers the following environmental,
social and governance (ESG) factors.
From a social perspective, the recent policy change highlighted
the regulatory risks the company is exposed to, which drove the
rating action.
The company's ownership is concentrated in its founder and chairman,
who held a total stake of 77.9% as of 31 August 2020.
However, this risk is partially tempered by the company's listed
and regulated status.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could return the outlook to stable if (1) Bright Scholar
successfully executes on its business restructuring, such that its
earnings and cash flows do not materially weaken due to the disposal;
and (2) the company maintains a net cash position with continued funding
access.
Moody's could downgrade the ratings if the company's earnings
and cash flows materially weaken following the disposal; or if the
company is unable to access funding or it loses its net cash position.
Prolonged uncertainties around the company's management service
contracts will also be negative to the ratings.
The principal methodology used in these ratings was Business and Consumer
Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Bright Scholar Education Holdings Ltd listed on the New York Stock Exchange
in May 2017. It is one of the largest operators of international
and bilingual K-12 (kindergarten through grade 12) schools in China
in terms of student enrollment. The company established its first
private school, Guangdong Country Garden School, in 1994.
As of 31 May 2021, it operated 107 K-12 schools in China
and eight schools overseas. The family of Country Garden's founder
and chairman owned a 77.9% stake in Bright Scholar as of
August 2020.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity
analysis, see the sections Methodology Assumptions and Sensitivity
to Assumptions in the disclosure form. Moody's Rating Symbols and
Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for
Designating and Assigning Unsolicited Credit Ratings available on its
website www.moodys.com.
Moody's considers a rated entity or its agent(s) to be participating when
it maintains an overall relationship with Moody's. Unless noted
in the Regulatory Disclosures as a Non-Participating Entity,
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.
Moody's general principles for assessing environmental, social and
governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed by
Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main
60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's office
that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed by
Moody's Investors Service Limited, One Canada Square, Canary
Wharf, London E14 5FA under the law applicable to credit rating
agencies in the UK. Further information on the UK endorsement status
and on the Moody's office that issued the credit rating is available on
www.moodys.com.
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.
Shawn Xiong
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
