Correction: Fitch Affirms Bright Scholar at 'BB-'; Outlook Stable

(The following statement was released by the rating agency)

Fitch Ratings-Hong Kong-07 February 2021:

This is a correction of a press release published on 2 February 2021. It includes the Corporate Rating Criteria and Country-Specific Treatment of Recovery Ratings Criteria that were omitted in the original release.

Fitch Ratings has affirmed Bright Scholar Education Holdings Limited's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BB-'. The Outlook on the Long-Term IDR is Stable. The 'BB-' rating on the company's USD300 million 7.45% senior notes due 2022 has also been affirmed.

The affirmation and Stable Outlook reflect our expectation that Bright Scholar will maintain a solid financial profile as the resilient domestic K-12 business provides buffer against deterioration in overseas operations caused by the coronavirus pandemic. However, rating headroom has reduced following its overseas expansion, which increased leverage and weakened cash flow generation.

We believe Bright Scholar's business will be able to recover to pre-Covid-19 levels given the strength of its brand, close relationship with Chinese homebuilder Country Garden Holdings Company Limited (BBB-/Stable) and positive industry dynamics.

The ratings on Bright Scholar reflects the company's solid market position as the largest operator of international and bilingual schools that cover kindergarten to 12th grade in China by enrolment. The ratings also incorporate the education industry's positive growth prospects and stable cash flow generation, the company's synergistic relationship with Country Garden. The ratings are constrained by the company's relatively small operating scale and lower cash flow generation.

Key Rating Drivers

Resilience on K-12 Education: Fitch believes steady growth in Bright Scholar's domestic K-12 education business will support its cash flow and make its credit profile more resilient against disruptions in its overseas operations due to the pandemic. Its unutilised capacity of around 25% as of September 2020 and additional capacity from new schools will provide ample room for growth.

Increase in Enrolments Domestically: Bright Scholar's close strategic relationship with Country Garden and operation of most of its K-12 schools on Country Garden properties supply the education company with new students. Student enrolment in its K-12 schools continued to grow over the past few years. The number of students in its international schools rose by 10.5% in the first quarter of the financial year ending August 2021 (FY21), in its bilingual schools by 8.4% and in its kindergartens by 16.3%.

Covid-19 Impact: The coronavirus pandemic in the UK has a large impact on Bright Scholar's overseas school operations as seven of its eight overseas schools are in the UK. We expect revenue from overseas schools to drop sharply in FY21 as a result of a 30% decrease in student enrolment and loss of the majority of boarding and meal fees due to the closure of campuses.

In contrast, Bright Scholar's school operations in China returned to normal in June 2020. We expect revenue to grow by the low single digits in FY21, driven by stable growth in the domestic K-12 business and complementary education services.

Positive FCF: Fitch expects Bright Scholar to generate positive free cash flow (FCF) despite the impact of the coronavirus. This is supported by stable and recurring cash flow from its domestic K-12 schools, growth in its complementary education services and moderate expansion of schools under an asset-light model, which limits capex. The company has a clear deleveraging path after the pandemic, with FFO adjusted net leverage trending towards 2x along with the recovery in its overseas operations.

Profitability Under Pressure: Fitch expects weakness in the overseas operations to weigh on Bright Scholar's overall profitability, with EBITDA margin narrowing by 3pp to 14.3% in FY21 by our estimate. The increasing number of low-profit kindergartens in the portfolio will pressure profitability in the medium term. The company has taken steps to reduce costs and improve operational efficiencies, while utilization increased with the ramp-up of new schools. These will partly offset the impact of lower margins from its overseas schools and kindergartens.

Slower Acquisitions: Fitch expects Bright Scholar to be financially conservative and reduce acquisitions in the next year or two due to uncertainty related to the coronavirus. The company's recently acquired businesses overseas have diversified its portfolio, but weighed on its financial profile given deteriorating performance amid the Covid-19 pandemic. In the medium term, we expect the company to seek growth opportunities in complementary education and overseas schools to complement its K-12 education services.

Regulatory Uncertainty: The private education sector in China is highly regulated and subject to stringent scrutiny. Fitch expects current regulations to have limited impact on Bright Scholar's existing school operations, but regulatory risk exists as the rules are evolving rapidly.

Proposed regulations will limit Bright Scholar's ability to acquire kindergartens and schools providing compulsory education as it is a listed company. In addition, tightened restrictions over kindergartens' pursuit of profits and the government's goal of increasing the number of low-profit kindergartens to 80% of the total will negatively affect the margin of Bright Scholar's kindergarten business.

Derivation Summary

Bright Scholar has slightly smaller EBITDAR scale and weaker profitability than Chinese private-school operator Wisdom Education International Holdings Company Limited (BB-/Stable). Bright Scholar is more diversified than Wisdom Education in terms of school locations and education formats, but its overseas operation has been disrupted by the coronavirus and weighs on Bright Scholar's cash flow generation.

Bright Scholar has stronger FCF generation due to its asset-light model, supporting its deleveraging path after the pandemic, while Wisdom Education's leverage is likely to stay high due to negative FCF.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

- Single-digit revenue growth in FY21, improving to low-teens in FY22, driven by organic growth and recovery in overseas operations

- EBITDA margin of 14% in FY21 due to the impact of the coronavirus pandemic, and gradually improve to 19% by FY24 (FY20: 17.1%)

- CNY300 million in capex in FY21 and CNY500 million-600 million per year in FY22-FY24 (FY20: CNY150 million)

- Acquisition payment of CNY50million in FY21

- No dividend payment

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Positive rating action is not expected in the medium term until Bright Scholar achieves a substantially larger operating scale without material deterioration in its financial profile

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Significant deterioration in operating performance

- FFO adjusted net leverage sustained above 3.0x (FY20: 2.3x)

- FFO fixed-charge coverage sustained below 2.0x (FY20: 2.2x)

- Evidence of greater government, regulatory or legal intervention leading to an adverse change in the company's operating and business profile

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Strong Liquidity: Bright Scholar had CNY3.8 billion of cash and short-term investments as of November 2020, which is more than sufficient to cover its short-term bank borrowings of CNY945 million. Bright Scholar has demonstrated access to offshore capital markets. It completed an equity placement in 2018 and issued a USD300 million bond in 2019.

Summary of Financial Adjustments

Fitch has chosen to use the multiple approach to capitalise leases for Bright Scholar and assess leverage on an adjusted leverage basis. We think the multiple approach is more appropriate for education services companies under the Generic Navigator, like Bright Scholar, as leasing school and facility premises form a core element of its operations. A multiple of 8x was used as the company is based in China.

Bright Scholar typically collects tuition and fees at the beginning of the semester and there is usually a large "contract liabilities" on its balance sheet. We have classified part of cash that is not expected to generate EBITDA (i.e. contract liabilities * (1-EBITDA margin)) as "not readily available", and this amount is excluded from net debt calculations.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

Bright Scholar Education Holdings Limited; Long Term Issuer Default Rating; Affirmed; BB-; Rating Outlook Stable
----senior unsecured; Long Term Rating; Affirmed

Contacts:
Primary Rating Analyst
Crystal Guo, CFA, CPA
Associate Director
+852 2263 9608
Fitch (Hong Kong) Limited
19/F Man Yee Building 60-68 Des Voeux Road Central
Hong Kong

Secondary Rating Analyst
Cathy Chao, CFA
Director
+852 2263 9967

Committee Chairperson
Kalai Pillay,
Managing Director
+65 6796 7221

Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: alanis.ko@thefitchgroup.com
Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com

Additional information is available on www.fitchratings.com
Applicable Model
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Additional Disclosures For Unsolicited Credit Ratings
Endorsement Status
Endorsement Policy

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR WHICH THE LEAD ANALYST IS BASED IN AN ESMA- OR FCA-REGISTERED FITCH RATINGS COMPANY (OR BRANCH OF SUCH A COMPANY) CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH RATINGS WEBSITE.

Copyright © 2021 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001
Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.