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Hailiang Education Group Inc. (NASDAQ:HLG)
Q2 2020 Earnings Call
Mar 25, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Hailiang Education Group's First Six Months of Fiscal Year 2020 Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. This conference is being recorded today, Wednesday, March 25th, 2020.

Joining us today from Hailiang Education Group are the Company's Chairman and CEO, Mr. Ming Wang; the Company's Chief Financial Officer, Mr. Jianguo Yu; and the Company's Board secretary Mr. Litao Qiu.

I would like to remind our listeners who are on this call, management's prepared remarks contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions.

Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements as contained in the Private Security and Litigation Reform Act of 1995.

Hailiang Education is under no obligation to update or alter its forward-looking statements whether as a result of new information, future events or otherwise.

At this time, I would like to turn the call over to Mr. Ming Wang, Chairman and CEO of Hailiang Education Group. Mr. Wang, please go ahead.

Ming Wang -- Chairman of the Board of Directors and Chief Executive Officer

Thank you, operator, and everyone, for joining Hailiang Education's first six months of fiscal year 2020 earnings conference call today. We are pleased to report a strong financial results. For the first six months of fiscal year 2020, our revenue increased by 12.9% to RMB736.7 million. Net profit increased by 52.5% to RMB197.6 million compared to the same period of last year, as revenue increased across both our Basic Educational Program and International Program as well as our student -- our Study Trip Services and Overseas Study Consulting Services.

Our strong operational execution and strategical planning have helped drive profitability generation to newer levels. As of December 31, 2019 we sponsored and managed 38 schools. The aggregate number of enrollments in both our affiliate and the managed schools were 67,821 students.

We have enhanced -- we have endeavored to recruit more professional teachers to prepare our curriculum, increased our reputation on the providing excellent academic performance, in order to attract top key students.

We have received awards such as Barron's Top 30 [Phonetic] Investment-Worthy Chinese stock in 2019. We adhere to the hybrid development strategy, which combines asset-light model, with self-construction and strategical acquisitions. As of December 31, 2019, 10 of 38 schools we affiliate schools that we sponsored and 28 of 38 schools were managed schools that we provide education and the management services.

We will continue to enhance the market leadership in the private K-12 education services industry in China. We look forward to expanding our affiliate on the managed schools network among major metropolitan in China and overseas. We see this improve the quality of our faculty, attracting more current year that face by our educational services offerings in the future. Hailiang Education's job is to provide excellent K12 education services to our students.

Thank you again, for your support and attention. Next, I will turn the call over to Mr. Jianguo Yu, our CFO, who will summarize our first six months of fiscal year 2020 financial results on behalf of management team.

Mr. Yu, please go ahead.

Jianguo Yu -- Chief Financial Officer

Thank you, Mr. Wang. Good evening, everyone. Next, on the behalf of the management team, I would like to summarize some of the key financial results for the first six months of fiscal year 2020. For the first six months of fiscal year 2020, our revenue was RMB736.7 million or $105.8 million, increased by 12.9% from RMB652.7 million.

Our gross profit was RMB237.8 million or $34.2 million, an increase of 20.3% from RMB197.7 million. Our net profit was RMB197.6 million or $28.4 million, increased by 52.5% from RMB129.6 million. Our gross profit margin was 32.3% and net profit margin was 26.8%, increased from 30.3% and 19.9% respectively. Compared to the same period last year, the basic and diluted earnings per share was RMB0.49 or $0.07 compared with RMB0.29 for the same period of last year.

Our revenue is mainly derived from k-12 Educational Services, Educational Training Services, Study Trip Services, and Education and Management Services. Revenue from K-12 basic educational program was RMB411.8 million or $59.1 million, an increase of 16% from RMB355.1 million for the same period of last year.

Revenue from K-12 International Programs was RMB212.7 million or $30.6 million, increase of 12.5% from RMB189 million for the same period of last year.

Revenue from Educational Training Services was RMB43.4 million or $6.2 million, a decrease of 27.4% from RMB59.8 million for the same period of last year, mainly due to the termination of our educational training businesses in Jiangxi Province.

With expansions of our Study Trip Services, the revenue reached RMB43.1 million or $6.2 million, an increase of 62.6% from RMB26.5 million for the same period of last year. We provide various education and the management service to our school located in Jiangxi, Zhejiang, Jiangsu Hubei and Shandong provinces and revenue was RMB17.4 million or $2.5 million for the first six months of fiscal year 2020.

Cost of revenue was RMB498.9 million or $71.7 million, an increase of 9.6% from RMB455 million for the same period of last year. The increase was primarily due to the increased compensation levels of employees and increased costs related to Study Trip Services.

Selling expense was RMB15.1 million or $2.2 million, an increase of 52.5% from RMB9.9 million for the same period of last year. The increase was mainly attributed to the increasing sales compensation payment related to educational training services.

Administrative expenses were RMB31.6 million or $4.5 million, a slightly decrease 3.1% from RMB32.6 million for the same period of last year. Other income was RMB49.8 million or $7.2 million, an increase of 403% from RMB9.9 million for the same period of last year, primarily due to the increase in the government grants.

Finance income was RMB13.9 million or $2 million, an increase of 11.2% from RMB12.5 million for the same period last year. The finance cost was RMB3.9 million or $0.6 million, which represented interest portions of operating lease payment upon adoptions of IFRS 16. Income tax expenses were RMB53.1 million or $7.6 million compared with RMB48.0 million for the same period of last year, which was driven by the growth of educational services were subject to income tax.

Now, a quick summary of our balance sheet and cash flows. As of December 31st, 2019. We have cash and cash equivalents of RMB228.2 million or $32.8 million compared with RMB260.7 million as of June 30th of 2019. Net cash provided by operating activity was RMB476.1 million or $68.4 million, a decrease of 26.4% from RMB646.9 million for the same period last year. The decrease was primarily due to the more income tax and a labor cost paid during this year and a larger amount of tuition of fiscal year 2020 received before June 30th of 2019 compared with the same period of last year.

The Net cash used in the investment activity was RMB457.1 million or $65.7 million compared with RMB211.5 million for the same period last year. The increase was mainly due to the prepayment of lease rentals and partially offset by the increase of term deposits withdrawn upon the maturity from the related party finance entity compared with the same period last year.

Net cash used in financing activities was RMB51.8 million or $7.4 million, compared with RMB7.3 million for the same period last year. The increase was mainly due to more dividends paid by a subsidiary of HLG to non-controlling interests and loan repayment to a related party.

Now, I would like to turn the discussion over to the operator for any questions, operator?

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] First question today comes from Ivan Yu [Phonetic], a Private Investor. Please go ahead, sir.

Ivan Yu -- Private Investor

Good day management. I'm Ivan, an individual investor. As we all know, that COVID-19 continues to spread and affect lots of industries. Could you please introduce the impact of HLG and the education industry? Thank you.

Litao Qiu -- Board Secretary

Okay. Let me answer this question. This is Litao Qiu. I'm the Board Secretary. Thank you for your question. Well, due to the COVID-19 epidemic issue, we were actually informed by the local government to postpone the new term onsite class study. So instead we provide Internet -- Internet real time class lessons to our students by each subject teacher based on each original class.

Thanks for the great IT strategy and support and our strong teaching team, comprehensive teaching material, as of February 2020 we have more than 2,000 teachers and nearly 38,000 students who are participating in our real-time lessons by using our jointly developed Hailiang VIP Cloud Virtual Classroom software platform.

Since we do not receive any official notice about the new term start date and end date of this semester, so we cannot provide the actual figures on the business impact at this moment. But we are continuously to monitor the progress of the epidemic and timely disclosed the impact result of the outbreak on our business. Thank you.

Operator

The next question comes from Simon Chang [Phonetic], a Private Investor. Please go ahead.

Simon Chang -- Private Investor

We note that the Company's net profit margin increased by 6.9 percentage points compared to the same period of the last year, what is the specific reason?

Jianguo Yu -- Chief Financial Officer

Hi, I'm Jianguo Yu, I'm the Company's CFO. I will answer this question. Thank you. This is mainly due to the steady growth of our business income, the improvement of our Company's cost control capabilities and as well as the government grant that we received this first six months of this fiscal year 2020.

More specifically, as we mentioned in our 6-K, our revenue increase by 12.9%, while our cost and expenses would only increase by 9.7%. The increase in revenue was mainly due to the 4.6% increase in the number of students being enrolled and the 9.7% increase in the average tuition and the expansion of our Study Trip and Overseas Study Consulting Services.

Meanwhile, we received the government grant of discretionary and non-conditional subsidies from our local government amount of RMB49.8 million for the six months of fiscal year 2020. And we are glad to see our development of the Company and thanks again for your questions. Thank you.

Operator

[Operator Instructions] Your next question comes from Wendy Kim [Phonetic], a Private Investor. Please go ahead.

Wendy Kim -- Private Investor

Thank you, operator and Mr. Wang and Thomas for guiding us through this conference call. Mr. Wang, I'm Wendy Kim from South Korea and I'm also an individual investor and I have a question for you, what would be the propensity of the investment decisions in the future for Hailiang Education?

Ming Wang -- Chairman of the Board of Directors and Chief Executive Officer

Thank you for your questions. I'm glad to answer your question in Chinese, [Foreign Speech] the future development strategies and really focused on four aspects.

[Foreign Speech] And firstly, we shall focus on building our brand and reputation as a global leading K-12 Education integrated service provider.

[Foreign Speech] Our second strategy is to strengthen our market leadership by increasing education quality and scale, while improving academic performance.

[Foreign Speech] Thirdly, we will continue to focus quality K-12 educational training services and develop online education to diversify our offerings.

[Foreign Speech] The last one is we shall implement hybrid development strategy, which combines asset light approach construction and strategic acquisition to expand our affiliate and managed school network in China and overseas countries. Thank you for your question.

Operator

[Operator Instructions] The next question comes from Jack Yu [Phonetic] Private Investor. Please go ahead.

Jack Yu -- Private Investor

Okay, thank you. As a new media workers, I want to know what is the strategy of the Company's online education? Thank you.

Litao Qiu -- Board Secretary

Okay. This is Litao Qiu, I'm the Board Secretary. Let me answer this question. Actually our company's online education strategy is mainly in three key areas. The first one is the technology side. This, we have a fully prepared a system. So during the outbreak of the COVID-19, we actually launched the Hailiang VIP Cloud Virtual Classroom to all the students. We have set up more than 1,500 virtual classrooms running more than 67,000 lessons with a great result.

Actually, the biggest single classroom lesson, we had more than 1 million participants which was conducted by our executive principals Mr. Ye a few weeks ago. The new system not only helped to keep our student's study progress in line with the schedule, but also to speed up at least one to two years of the cloud systems deployment time among the education group.

And the second area, which is the curriculum and teaching resources side. During the break -- the outbreak of COVID-19, our online education has covered almost 100% of the compulsory class lessons. In addition, we have more than 200 elective courses and other specified courses delivered by 15 of our golden Olympiad competition training coaches and also 133 senior teachers. The comprehensive curriculums will expand our online teaching resources in the future.

And the third part is the teaching innovation side. We will advantage of the flexibility of online education system, increase the proportion of the online lessons and leave more time for students to communicate with their teachers and classmates, enables teachers to give students and target guidance. We can also integrate high quality domestic and foreign teaching resources teachers in China or overseas through online education platform to deliver excellent lessons to local and foreign country students.

So in short, online education service is one of the key focus of our business. We continue -- we will continue invest on the technology development of the software platform to enrich the teaching contents and also to innovate our Hailiang OMO, which is Online-Merge-Offline new teaching approach to quickly increase the number of online students in our school, as well as other school students to improve our future revenues. So this is my answer to your question. Thank you.

Operator

Seeing no further questions, let me turn the call over to Mr. Litao Qiu, our Board Secretary for any closing remarks.

Litao Qiu -- Board Secretary

Okay. Thank you, operator. On behalf of our entire management team, I would like to thank everyone, again, for joining us today for our conference call. If you have any questions, please contact us through email at ir@hailiangeducation.com or reach our IR Counsel Ascent Investor Relations at tina.xiao@ascent-ir.com.

Management will respond to your question as soon as possible. We appreciate your interest and support in Hailiang Education and look forward to speaking with you again next time. Operator, please go ahead.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Ming Wang -- Chairman of the Board of Directors and Chief Executive Officer

Jianguo Yu -- Chief Financial Officer

Litao Qiu -- Board Secretary

Ivan Yu -- Private Investor

Simon Chang -- Private Investor

Wendy Kim -- Private Investor

Jack Yu -- Private Investor

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