Hong Kong, May 28, 2021 -- Moody's Investors Service has affirmed Bright Scholar Education Holdings
Ltd's Ba3 corporate family rating (CFR) and senior unsecured rating.
At the same time, Moody's has revised the outlook to negative from
stable.
On 14 May 2021, China State Council announced "the Implementing
Regulations of the Private Education Promotion Law", which
will be effective on 1 September 2021.
"The outlook change to negative reflects the uncertainty related
to the regulatory change and implementation, which could adversely
affect Bright Scholar's business expansion and financial performance,"
says Shawn Xiong, a Moody's Assistant Vice President and Analyst.
Moody's will closely monitor the development on regulatory implementation,
which will determine the actual impact on the company.
At the same time, Moody's affirms the company's ratings
on the back of its established market position, recovering and diversified
operations, net cash position and benefits from its close partnership
with property developer, Country Garden Holdings Company Limited
(Country Garden, Baa3 stable).
RATINGS RATIONALE
Bright Scholar's Ba3 CFR reflects the company's established
position in international and bilingual schools for Chinese students,
and its asset-light business model, strong cash flow,
net cash position and diversified operations in China and overseas.
Bright Scholar operates schools in many of the residential properties
developed by Country Garden, significantly reducing Bright Scholar's
capital spending and allowing it to expand quickly alongside Country Garden's
new projects.
The rating also takes into consideration the risks stemming from Bright
Scholar's limited scale, the execution risks of its expansion
and regulatory uncertainties.
Moody's believes the new policy has increased the uncertainty regarding
Bright Scholar's expansion strategy, ability to transfer cash
flow from operating schools to the rated entity, and ongoing control
over its existing school portfolio.
Moody's expects Bright Scholar to proactively adapt to the new policy,
based on the government's guidance. Given the large number
of students, operational stability is critical to both school operators
and the government. Measured implementation will help mitigate
the potential negative impact from the new policy.
At the same time, 25% and 20% of its revenue and gross
profit, respectively, were derived from its overseas operations
in the fiscal year ending 31 August 2020.
The company's operations were affected adversely due to COVID-19
disruptions in 2020. Moody's expects its credit profile to
improve over the next 12-18 months as the pandemic impact eases,
and the company to maintain its net cash position, which provides
some buffer for any material negative impact arising from the policy change.
Bright Scholar has strong liquidity. It had cash balance of around
RMB2.1 billion and short-term investments of around RMB2.2
billion as of the end of February 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
RMB886 million and planned capital expenditure and dividend payment.
Bright Scholar's ratings also takes into account the following environmental,
social and governance (ESG) considerations.
The education sector is exposed to high social risks. demographic
and societal trends pose the greatest social risks Bright Scholar focuses
on K-12 education and benefits from a positive social trend in
which demand for quality private education is growing steadily,
supported by a favorable demographic trend and increasing disposable income.
However, the recent policy change highlighted the regulatory uncertainties
they are exposed to, thus driving the rating action.
The ratings also factor in the company's concentrated ownership
by its founder and chairman, who held a total stake of 77.9%
as of August 2020. However, such risk is partially tempered
by the company's listed and regulated status.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The outlook could return to stable if (1) Moody's assesses the regulatory
impact to the company's credit profile to be limited; (2) the
company maintains a solid net cash position and good funding access;
and (3) school operations gradually recover as Moody's expects.
The ratings could be downgraded if the regulations upon implementation
has a material adverse impact on the company's credit and business
profiles; or its net cash position becomes negative on a sustained
basis.
The ratings could also be downgraded if the company's new schools
ramp up at a slower rate than Moody's expects; it engages in
significant debt-funded expansion; the number of total students
declines on a sustained basis; or its net cash position becomes negative.
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Bright Scholar Education Holdings Ltd (Bright Scholar) 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 year
12) schools in China, measured by student enrollment. The
company established its first private school (Guangdong Country Garden
School) in 1994. As of 31 August 2020, it operated 89 schools
covering K-12 education for students in China and overseas.
The family of Country Garden's founder and chairman owned about
77.9% of Bright Scholar as of August 2020.
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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
