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Rating Action:

Moody's revises Bright Scholar's outlook to negative; affirms Ba3 ratings

 The document has been translated in other languages

28 May 2021

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.

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_1263068.

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

No Related Data.
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