20-F 1 tm2030472-1_20f.htm FORM 20-F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended June 30, 2020
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transition period from to
Commission file number: 001-36907
Hailiang Education Group Inc.
(Exact Name of Registrant as Specified in its Charter)
N/A
(Translation of Registrant’s Name into English)
Cayman Islands
(Jurisdiction of Incorporation or Organization)
1508 Binsheng Road, Binjiang District,
Hangzhou City, Zhejiang 310051People’s Republic of China
(Address of Principal Executive Offices)
Junwei Chen, Chief Executive Officer
1508 Binsheng Road, Binjiang District,
Hangzhou City, Zhejiang 310051People’s Republic of China
Tel: (+86-571) 58121974
Fax: (+86-571) 58121974
E-mail: ir@hailiangeducation.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
American Depositary Shares, each
representing 16
ordinary shares, par value US$0.0001 per
share
Trading Symbol(s)
HLG
Name of Each Exchange on Which
Registered
NASDAQ Global Market
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual
report.
412,450,256 ordinary shares, par value US$0.0001 per share, as of June 30, 2020.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. Yes ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company.
See definition of “large accelerated filer,” accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Non-accelerated filer ¨
Accelerated filer
x
Emerging growth company x
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected
not to use the extended transition period for complying with any new or revised financial accounting standards* provided pursuant to Section 13(a) of
the Exchange Act. ¨
·
The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its
Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ¨ International Financial Reporting Standards as issued by the International Accounting Standards Board x
Other ¨
* If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to
follow. Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
TABLE OF CONTENTS
INTRODUCTION
PART I
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3.
KEY INFORMATION
ITEM 4.
INFORMATION ON THE COMPANY
ITEM 4A.
UNRESOLVED STAFF COMMENTS
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 8.
FINANCIAL INFORMATION
ITEM 9.
THE OFFER AND LISTING
ITEM 10.
ADDITIONAL INFORMATION
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15.
CONTROLS AND PROCEDURES
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
ITEM 16G. CORPORATE GOVERNANCE
ITEM 16H. MINE SAFETY DISCLOSURE
PART III
ITEM 17.
FINANCIAL STATEMENTS
ITEM 18.
FINANCIAL STATEMENTS
ITEM 19.
EXHIBITS
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Unless the context otherwise requires, in this annual report on Form 20-F references to:
INTRODUCTION
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“15 Baishu schools” are to 15 managed schools sponsored or operated by “Nanchang Baishu Technology”, in Jiangxi province, namely,
(i) Nanchang East Lake Sijihuacheng Kindergarten, (ii) Jiulixianghucheng Kindergarten, (iii) Nanchang Baishu Angel City&Fenghuang
Kindergarten, (iv) Nanchang Foreign Language Jiulixianghucheng School, (v) Nanchang Foreign Language Gaoxin School, (vi) Nanchang
Maqiu Senior Middle School, (vii) Nanchang Baishu School, (viii) Yichun Baishu Foreign Language School, (ix) Yichun Baishu Foreign
Language School Xuefulu Campus, (x) Yichun Baishu Angel City&Bilingual Kindergarten, (xi) Yichun Baishu Angel City&Bilingual
Kindergarten Xuefulu Campus, (xii) NanChang Baishu Xingfu Shiguang Kindergarten, (xiii) Nanchang Hualian Foreign Language
Experimental School, (xiv) Nanchang Xihu District Baishu Education Group Teaching Staff Kindergarten, and (xv) Jingdezhen Baishu School;
“ADRs” are to the American depositary receipts, which, if issued, evidence our ADSs;
“ADSs” are to our American depositary shares, each of which represents 16 ordinary shares;
“affiliated entities” are to 11 companies controlled by Hailiang Management, as of June 30, 2020, including (i) Zhejiang Hailiang Mingxin
Education Technology Co., Ltd., (ii) Hangzhou Hailiang Education Management Co., Ltd., (iii)Zhejiang Mingxin International Travel Co., Ltd.,
(iv) Shaoxing Sihai International Travel Co., Ltd., (v)Hangzhou Mingyou Training School Co., Ltd., (vi) Zhuji Tianma Boya Training Center
Co., Ltd., (vii) Jinhua Hailiang Education Technology Co., Ltd., (viii) Zhuji Yuesheng Enterprise Management Consulting Co., Ltd.,
(ix) Lanzhou Hailiang Education Consulting Co., Ltd., (x) Wuhu Hailiang Education Management Co., Ltd., and (xi) Wenzhou Hailiang Juxian
Education Technology Co., Ltd.; and 9 affiliated schools owned and operated by Hailiang Management as of June, 30, 2020, including
(i) Hailiang Experimental High School (previously named Zhuji Private High School), (ii) Tianma Experimental School, (iii) Hailiang Primary
School, (iv) Hailiang Junior Middle School, (v) Hailiang Senior Middle School, (vi) Hailiang High School of Art (previously named “Hailiang
Art Middle School”), (vii) Hailiang Foreign Language School, (viii) Zhuji Hailiang Foreign Language High School Co., Ltd., and
(ix) Zhenjiang Jianghe High School of Art Co., Ltd.;
“affiliated schools” are to 9 schools that we owned and operated by Hailiang Management as of June 30, 2020, including (i) Hailiang Primary
School, (ii) Hailiang Junior Middle School, (iii) Hailiang Senior Middle School, (iv) Hailiang High School of Art, (v) Tianma Experimental
School, (vi) Hailiang Experimental High School, (vii) Hailiang Foreign Language School; (viii) Zhuji Hailiang Foreign Language High School
Co., Ltd., and (ix) Zhenjiang Jianghe High School of Art Co., Ltd.;
“Art Joint Examination” are to art university and college entrance examinations administered in China. Student enrolled in art education
program are required to attend both Art Joint Examination and Gaokao;
“Beize Group” are to “Zhejiang Beize Group Co., Ltd.” (previously named “Zhejiang Zhongyida Investment Co., Ltd.”) a PRC company
controlled by Mr. Feng and is a 0.1% record shareholder of Hailiang Management;
“Dual first-class universities” are to the outstanding universities recognized jointly by the Ministry of Education, the Ministry of Finance, and
the National Development and Reform Commission. This recognition aims to promote the development of higher education for the
establishment of world-class universities and world-class disciplines.
“fiscal year” are to the period from July 1 of each calendar year to June 30 of the following calendar year;
“Gaokao” are to university entrance examinations administered in China;
“Hailiang After-school” are to Zhuji Hailiang After-school Service Co., Ltd., a PRC corporation incorporated on August 2, 2018 as a wholly
owned subsidiary of Ningbo Haoliang;
“Hailiang Finance” are to Hailiang Group Finance Co., Ltd., a PRC corporation and a related party;
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“Hailiang Group” are to Hailiang Group Co., Ltd., a PRC corporation and a related party;
“Hailiang Management” are to “Hailiang Education Management Group Co., Ltd.”, a PRC corporation and an entity in which we do not hold
any equity interests but which we control through various contractual arrangements. Hailiang Management was previously named “Zhejiang
Hailiang Education Investment Group Co., Ltd.”;
“Hailiang Inc.” are to “Hailiang Education Group Inc.,” our listed entity incorporated in the Cayman Islands;
“Hailiang International Studying” are to “Hailiang Education International Studying Service Limited”, Hailiang HK’s wholly owned subsidiary
incorporated on September 26, 2018 in Hong Kong;
“Hailiang Investment” are to “Hailiang Education Investment Group Co., Ltd.”, a PRC corporation controlled by our ultimate controlling
shareholder, Mr. Feng. Hailiang Investment previously was named “Hailiang Education Management Group Co., Ltd.”;
“Hailiang Mingxin” are to Zhejiang Hailiang Mingxin Education Technology Co., Ltd., Hailiang Management’s wholly owned subsidiary
incorporated on August 9, 2017 as a PRC corporation; “Hailiang Sports” are to “Ningbo Hailiang Sports Development Co., Ltd.”, incorporated
on May 18, 2018, as a wholly owned subsidiary of Hailiang Consulting;
“HIEG” are to “Hailiang International Education Group Pte. Ltd.”, Hailiang Inc’s wholly owned subsidiary incorporated on April 29,2020 as a
Singapore corporation;
“Jinhua Education Technology” are to “Jinhua Hailiang Education Technology Co., Ltd.”, Hailiang Management’s wholly owned subsidiary
incorporated on May 21, 2020 as a PRC corporation;
“Juxian Technology” are to “Wenzhou Hailiang Juxian Education Technology Co., Ltd”, a PRC corporation incorporated on May 18, 2020,
which is 51% owned by Hailiang Management;
“K-12” are to kindergarten, primary, middle and high schools for the fiscal year ended June 30,2018 and primary, middle and high schools for
the fiscal year ended June 30,2019 and 2020;
“Lanzhou Hailiang Consulting” are to “Lanzhou Hailiang Education Consulting Co., Ltd.”, Hailiang Management’s wholly owned subsidiary
incorporated on August 7, 2019 as a PRC corporation;
“managed schools” are to schools we operate by providing education and management services, but do not own or sponsor, as of June 30, 2020,
including (i) Nanchang East Lake Sijihuacheng Kindergarten, (ii) Jiulixianghucheng Kindergarten, (iii) Nanchang Baishu Angel
City&Fenghuang Kindergarten, (iv) Nanchang Foreign Language Jiulixianghucheng School, (v) Nanchang Foreign Language Gaoxin School,
(vi) Nanchang Maqiu Senior Middle School, (vii) Nanchang Baishu School, (viii) Yichun Baishu Foreign Language School, (ix) Yichun Baishu
Foreign Language School Xuefulu Campus, (x) Yichun Baishu Angel City&Bilingual Kindergarten, (xi) Yichun Baishu Angel City&Bilingual
Kindergarten Xuefulu Campus, (xii) NanChang Baishu Xingfu Shiguang Kindergarten, (xiii) Nanchang Hualian Foreign Language
Experimental School, (xiv) Nanchang Xihu District Baishu Education Group Teaching Staff Kindergarten, (xv) Jingdezhen Baishu School,
(xvi) Xinchang Nanrui Experimental School, (xvii) Xiantao No.1 Middle School, (xviii) Jinhua Hailiang Foreign Language School,
(xix) Feicheng Hailiang Foreign Language School, (xx) Sihong Second Experimental School, (xxi) Xiaoshan District Wenyan Primary School,
(xxii) Xiaoshan District Wenyan No. 2 Primary School, (xxiii) Xiaoshan District Wenyan Middle School, (xxiv) Hangzhou Chunhui Primary
School, (xxv) Hangzhou Xixing Middle School, (xxvi) Hailiang Kindergarten, (xxvii) Zhuji Hailiang Jinshan Kindergarten, and (xxviii) Tianma
Kindergarten.
“Mingyou Training School” are to “Hangzhou Mingyou Training School Co., Ltd”, Hailiang Management’s wholly owned subsidiary
incorporated on December 9, 2019 as a PRC corporation;
“Mr. Feng” are to Mr. Hailiang Feng, our founder and ultimate controlling shareholder. Mr. Feng served as the chairman and chief executive
officer of our group, held directorships and management roles in our subsidiaries and affiliated entities until November 2014. Mr. Feng is the
founder of Hailiang Group;
“Nanchang Baishu Technology” are to Nanchang Baishu Technology Co., Ltd., a PRC corporation;
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“Ningbo Haoliang” are to Ningbo Haoliang Information Consulting Co., Ltd., a PRC corporation incorporated on June 20, 2017, as a wholly
owned subsidiary of Hailiang Consulting;
“Ningbo Hailiang” are to Ningbo Hailiang Education Logistics Management Co. Ltd., a PRC corporation incorporated on June 22, 2017 as a
wholly owned subsidiary of Hailiang Consulting;
“our company,” “we,” “us,” “our” or “our group” are to Hailiang Inc. and, unless the context otherwise requires, all of their subsidiaries and
affiliated entities;
“our schools” are to both affiliated schools and managed schools that we operated as of June 30, 2020, including (i) Hailiang Primary School,
(ii) Hailiang Junior Middle School, (iii) Hailiang Senior Middle School, (iv) Hailiang High School of Art, (v) Tianma Experimental School,
(vi) Hailiang Experimental High School, (vii) Hailiang Foreign Language School; (viii) Zhuji Hailiang Foreign Language High School
Co., Ltd., (ix) Zhenjiang Jianghe High School of Art Co., Ltd., (x) Nanchang East Lake Sijihuacheng Kindergarten, (xi) Jiulixianghucheng
Kindergarten, (xii) Nanchang Baishu Angel City&Fenghuang Kindergarten, (xiii) Nanchang Foreign Language Jiulixianghucheng School,
(xiv) Nanchang Foreign Language Gaoxin School, (xv) Nanchang Maqiu Senior Middle School, (xvi) Nanchang Baishu School, (xvii) Yichun
Baishu Foreign Language School, (xviii) Yichun Baishu Foreign Language School Xuefulu Campus, (xix) Yichun Baishu Angel
City&Bilingual Kindergarten, (xx) Yichun Baishu Angel City&Bilingual Kindergarten Xuefulu Campus, (xxi) NanChang Baishu Xingfu
Shiguang Kindergarten, (xxii) Nanchang Hualian Foreign Language Experimental School, (xxiii) Nanchang Xihu District Baishu Education
Group Teaching Staff Kindergarten, (xxiv) Jingdezhen Baishu School, (xxv) Xinchang Nanrui Experimental School, (xxvi) Xiantao No.1
Middle School, (xxvii) Jinhua Hailiang Foreign Language School, (xxviii) Feicheng Hailiang Foreign Language School, (xxix) Sihong Second
Experimental School, (xxx) Xiaoshan District Wenyan Primary School, (xxxi) Xiaoshan District Wenyan No. 2 Primary School,
(xxxii) Xiaoshan District Wenyan Middle School, (xxxiii) Hangzhou Chunhui Primary School, (xxxiv) Hangzhou Xixing Middle School,
(xxxv) Hailiang Kindergarten, (xxxvi) Zhuji Hailiang Jinshan Kindergarten, and (xxxvii) Tianma Kindergarten;
“PHIC company” are to “Pate's - Hailiang International College Company Limited”, a PRC corporation and Hailiang International Studying’s
wholly owned subsidiary incorporated on October 9, 2018 in United Kingdom;
“PRC” are to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau for the
purposes of this annual report only;
“RMB” or “Renminbi” are to the legal currency of China;
“school year” are usually to the period from September 1 of each calendar year to June 30 of the following calendar year; the 2019/2020 school
year was extended to July 2020 since the spring semester was delayed due to the outbreak of COVID-19;
“Shanghai Yunhan” are to “Shanghai Yunhan Education Technology Co., Ltd.” incorporated on September 8, 2020, as a wholly owned
subsidiary of Hailiang Management;
“shares” or “ordinary shares” are to our ordinary shares, par value US$0.0001 per share;
“Student attendances” are to the cumulative total number of courses and/or services enrolled in and paid for by our students during a certain
period, including multiple courses and/or services enrolled in and paid for by the same student;
“US$,” “U.S. dollars,” or “dollars” are to the legal currency of the United States;
“Wuhu Management” are to “Wuhu Hailiang Education Management Co., Ltd.”, a PRC corporation and Hailiang Management’s wholly owned
subsidiary incorporated on January 21, 2020 as a PRC corporation;
“Xiantao Logistics” are to “Xiantao Hailiang Education Logistics Management Co., Ltd”, a PRC corporation incorporated on July 23, 2020,
which is 90% owned by Ningbo Hailiang;
“Zhejiang Mingxin International Travel” are to “Zhejiang Mingxin International Travel Co., Ltd.”, a PRC corporation incorporated on
August 2, 2018, as a wholly owned subsidiary of Hailiang Management;
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“Zhenjiang Jianghe High School of Art” are to Zhenjiang Jianghe High School of Art Co., Ltd., a PRC corporation acquired on October 31,
2018, which is 51% owned by Hailiang Management;
“Zhongkao” are to high school entrance examinations administered in China;
“Zhuji Hailiang Foreign Language High” are to “Zhuji Hailiang Foreign Language High School Co., Ltd.”, a PRC corporation incorporated on
August 28, 2018, as a wholly owned subsidiary of Hailiang Management;
“Zhuji Hailiang Logistics” are to “Zhuji Hailiang Logistics Service Co., Ltd.”, Ningbo Hailiang’s wholly owned subsidiary incorporated on
September 26, 2018 as a PRC corporation;
“Zhuji Hailiang Supply” are to “Zhuji Hailiang Supply Chain Management Co., Ltd.”, Ningbo Hailiang’s wholly owned subsidiary
incorporated on September 26, 2018 as a PRC corporation;
“Zhuji Mingyou Training” are to “Zhuji Mingyou Training Center Co., Ltd.”, Hailiang Management’s wholly owned subsidiary incorporated on
July 16, 2020 as a PRC corporation;
“Zhuji Nianxin Lake Hotel” are to Zhuji Nianxin Lake Hotel Co. Ltd., Hailiang Consulting’s wholly owned subsidiary was incorporated on
September 22, 2017 as a PRC corporation;
Names of certain companies provided in this annual report on Form 20-F are translated or transliterated from their original Chinese legal names.
Discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.
This annual report on Form 20-F includes our audited consolidated financial statements as of June 30, 2019 and 2020 and each of the three years ended
June 30, 2018, 2019 and 2020.
This annual report on Form 20-F contains translations of certain Renminbi amounts into U.S. dollars at specified rates. Unless otherwise stated, the
translation of Renminbi into U.S. dollars has been made at RMB7.0651 to US$1.00, the noon buying rate in effect on June 30, 2020 as set forth in the
H.10 Statistical Release of the Federal Reserve bank. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could
be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes
controls over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions
on foreign trade. On October 9, 2020, the noon buying rate was RMB6.6933 to US$1.00.
4
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Part I
Not Applicable.
Item 3. KEY INFORMATION
A. Selected Financial Data
The following selected consolidated statements of profit or loss and other comprehensive income data for the years ended June 30, 2018, 2019 and 2020,
and the selected consolidated statements of financial position data as of June 30, 2019 and 2020, have been derived from our audited consolidated
financial statements included elsewhere in this annual report. The selected consolidated statements of profit or loss and other comprehensive income
data for the years ended June 30, 2016 and 2017 and the selected consolidated statements of financial position data as of June 30, 2016, 2017 and 2018
have been derived from our audited consolidated financial statements that are not included in this annual report. The consolidated financial statements
are prepared and presented in accordance with International Financial Reporting Standards, or IFRSs, as issued by the International Accounting
Standards Board. Historical results are not necessarily indicative of the results for any future periods.
Selected consolidated statements of profit or loss
and other comprehensive income Data:
Revenue
Cost of revenue
Gross profit
Other income, net
Selling expenses
Administrative expenses
Disposal loss of leasehold improvement
Operating profit
Gain on disposal of affiliated entities
Finance income
Finance costs
Profit before tax
Income tax expenses
Net profit
Net profit/(loss) attributable to non-controlling
interests
Net profit attributable to the Company’s
shareholders
Basic and diluted earnings per share
Net profit
Other comprehensive income/(loss), net of nil
income tax
Total comprehensive income
Total comprehensive income/(loss) attributable to
non-controlling interests
Total comprehensive income attributable to the
Company’s shareholders
2016
RMB
2017
RMB
Years Ended June 30,
2019
2018
RMB
RMB
2020
RMB
2020
USD
(In thousands, except per share data)
654,060
(498,944)
155,116
1,756
(16,753)
(36,153)
(10,286)
93,680
—
5,752
—
99,432
—
99,432
853,295
(648,482)
204,813
6,325
(21,902)
(28,385)
—
160,851
—
6,892
—
167,743
—
167,743
1,169,348
(804,674)
364,674
3,689
(24,539)
(63,374)
—
280,450
5,349
11,391
—
297,190
(66,288)
230,902
1,499,025
(1,026,903)
472,122
25,100
(25,003)
(72,661)
—
399,558
—
24,935
—
424,493
(108,713)
315,780
1,482,599
(983,175)
499,424
72,776
(26,899)
(77,536)
—
467,765
—
25,120
(4,363)
488,522
(121,924)
366,598
209,848
(139,159)
70,689
10,301
(3,807)
(10,975)
—
66,208
—
3,556
(618)
69,146
(17,257)
51,889
—
—
8,314
22,359
(4,234)
(599)
99,432
167,743
222,588
293,421
370,832
52,488
0.24
99,432
0.41
167,743
0.54
230,902
0.71
315,780
0.90
366,598
8,437
107,869
2,202
169,945
(2,542)
228,360
3,310
319,090
2,326
368,924
0.13
51,889
329
52,218
—
—
8,314
22,359
(4,234)
(599)
107,869
169,945
220,046
296,731
373,158
52,817
5
2016
RMB
2017
RMB
2018
RMB
2019
RMB
2020
RMB
2020
USD
291,011
1,132,962
921,668
211,294
211,294
77,801
1,399,010
1,101,613
297,397
297,397
812,620
1,884,850
1,334,813
550,037
550,037
260,684
2,502,912
1,689,247
806,395
813,665
503,021
2,788,677
2,035,763
726,399
752,914
71,198
394,712
288,144
102,815
106,568
Selected consolidated Statements of Financial
Position Data:
Cash and cash equivalents
Total assets
Total equity
Current liabilities
Total liabilities
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
Risks Relating to Our Business and Industry
We face risks related to health pandemics, natural disasters, or terrorist attacks in China.
COVID-19, a disease caused by a novel and highly contagious form of coronavirus first appeared in China in December 2019, and later classified as a
pandemic in March 2020 by the World Health Organization. As of the date of this annual report on Form 20-F, COVID-19 is still spreading in
communities in some parts of the world. The pandemic resulted in travel restrictions, massive closure of businesses and schools, and quarantine
measures imposed by governments across the world. Because substantially all of our operations are conducted in China and our students had to remain
home from February to April 2020, the outbreak of COVID-19 has caused a disruption to our business. In April 2020, we resumed in-person lecturing
across our schools. Most of our students, teachers and educational staff, returned to schools after taking nucleic acid tests or respecting mandatory
quarantine, with the exception of some of our foreign teachers who were unable to return to China due to international flight restrictions. Although
China has temporarily controlled the outbreak, we currently are unable to predict the duration and severity of the COVID-19 outbreak, the responses
thereto, and their impact on our business and operations, our results of operations, financial condition, cash flows and liquidity, as these depend on
rapidly evolving developments, which are highly uncertain and will be a function of factors beyond our control. Such factors include, among others, the
continued spread or recurrence of contagion, the implementation of effective preventative and containment measures, the development of effective
medical solutions, and the extent to which governmental restrictions on travel, public gatherings, mobility and other activities remain in place or are
augmented. The COVID-19 outbreak has to some extent, impacted our results of operations and financial conditions and will likely have a continued
adverse impact on our results of operations in 2020.
6
Additionally, our business could be materially and adversely affected by natural disasters, such as earthquakes, floods, landslides, tornados and tsunamis,
and other outbreaks of health epidemics such as avian influenza and severe acute respiratory syndrome, or SARS, and Influenza A virus, such as H5N1
subtype and H5N2 subtype flu viruses, as well as terrorist attacks, other acts of violence or war or social instability in the region in which we operate or
those generally affecting China. If any of these occur, our schools and facilities may be required to temporarily or permanently close and our business
operations may be suspended or terminated. Our students, teachers and staff may also be negatively affected by such event. Our physical facilities may
also be affected. In addition, any of these could adversely affect the Chinese economy and demographics of the affected region, which could cause
significant declines in the number of our students in that region and could have a material adverse effect on our business, financial condition and results
of operations.
We may be unable to charge tuition at a sufficient level to be profitable or raise tuition as planned.
Our results of operations are affected by the pricing of our educational programs and services. We charge tuition and/or service fees based on a student’s
grade level and whether the student attends our basic educational program, international program or other ancillary educational services. Tuition and/or
service fees we charge includes 1) the provision of the curriculum education services, after-school enrichment services, accommodations, transportation
services and other ancillary school activities, 2) delivery of educational books and related materials, and 3) meal catering services. Subject to the
applicable regulatory requirements, we generally determine tuition based on the demand for our educational programs, the cost of our education and
non-education services and the tuition and the fees charged by our competitors. Although we have been able to increase tuition in the past, there is no
guarantee that we will be able to maintain or increase our tuition in the future.
Furthermore, the tuition we charge is subject to a number of other factors beyond our control such as the perception of our brand, the academic success
of our students, our ability to hire qualified teachers and economic conditions generally and particularly in Zhuji city and Zhenjiang City, where, as of
June 30, 2020, our affiliated schools are located. Any significant deterioration in these factors could have a material adverse effect on our ability to
charge tuition at a sufficient level for us to be profitable.
In addition, the tuition we charge for some of our educational programs is subject to regulatory restrictions. See “Item 3 Key Information – D. Risk
Factors - The tuition charged by our affiliated schools and student enrollment at these affiliated schools are subject to regulation by the Chinese
government, and our revenue is highly dependent on the level of these fees and the number of students enrolled.”
We may fail to continue to attract and retain students in our schools.
The success of our business largely depends on the number of students enrolled in our current affiliated schools and in any new schools we may
establish or acquire in the future, as well as on the amount of tuition our students and parents are willing to pay. Therefore, our ability to continue to
attract students to enroll in our schools is critical to the continued success and growth of our business. The success of our efforts to enroll students will
depend on several factors, including without limitation our ability to:
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enhance existing programs to respond to market changes and student demands;
develop new programs that appeal to our students;
expand our geographic reach;
· manage our growth while maintaining the consistency of our teaching quality;
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effectively market our schools and programs to a broader base of prospective students;
develop and license additional high-quality educational content; and
respond to the increasing competition in the market.
In addition, local and provincial government authorities may impose restrictions on the number of students we can recruit or the areas in which we can
recruit students. Our business, financial condition and results of operations could be materially and adversely affected if we cannot maintain or increase
our enrollment as we expand our programs.
We may fail to continue to attract and retain teachers and we may not be able to maintain consistent teaching quality throughout our schools.
Our teachers are critical to maintaining and improving the quality of our educational programs and services, and to supporting the expansion of our
affiliated school network and educational programs and services, thus maintaining our brand and reputation. We must continue to attract qualified
teachers who have a strong command of their subject matters and who meet our qualifications. Currently, there is a well-publicized nationwide shortage
of teachers and other educational professionals in the PRC. There is also a limited number of teachers in China with the necessary experience, expertise
and qualifications that meet our requirements. We also must provide competitive compensation packages to attract and retain qualified teachers.
7
Our teacher retention rates as of June 30, 2018, 2019 and 2020 were 91.5%, 93.3% and 88.8%, respectively. “Retention rate” is calculated as 100%
minus the quotient of the number of teachers who cease being employed during the period by the number of teachers at the beginning of that period (not
including teachers hired during that period). In addition, we plan to increase the proportion of students enrolled in our international program and increase
course offerings. Doing so will require a greater number of foreign teachers. As the market for qualified foreign teachers is extremely competitive, we
cannot guarantee that we can maintain or increase our number of foreign teachers. Shortages of qualified teachers, or significant decreases in the quality
of our educational programs and services, whether actual or perceived in one or more of our schools, or an increase in hiring costs, may have a material
and adverse effect on our business and our reputation. In addition, we may not be able to hire and retain enough qualified teachers to maintain consistent
teaching quality in different locations should we establish and/or acquire additional schools as anticipated. Further, any inability to retain teachers may
adversely affect our Hailiang brand and significantly increasing teacher salaries may have a material adverse effect on our business, financial condition
and results of operations.
Our students’ academic performance may fall and satisfaction with our educational services may otherwise decline.
The success of our business depends on our ability to deliver a satisfactory learning experience and ensure the academic performance of our students.
Our schools may not be able to meet students’ and parents’ expectations for academic performance or help them achieve their college admissions goals.
A student may not experience expected academic improvement and his or her performance may otherwise decline significantly due to reasons beyond
our control. There is no assurance that we can provide learning and school experiences that are satisfactory to all of our students. Student and parent
satisfaction with our services may decline. We may also experience negative publicity or a decrease in word-of-mouth referrals. In addition, we cannot
ensure that our students will be accepted to universities at rates we have experienced in the past, and parents and students may not be satisfied with our
ability to help students gain admission to universities. Any such negative developments could result in a student’s withdrawal from our schools.
Although we have not experienced any significant school withdrawals in the past, if our student retention rate decreases significantly or if we otherwise
fail to continue to attract and recruit students, our business, financial condition and results of operations may be materially and adversely affected.
Our historical results, growth rates and profitability may not be indicative of our future performance.
We have experienced growth in revenue in recent years. Our historical growth was driven by both the expansion of our existing schools as well as by our
acquisition of an additional school in the 2019 fiscal year. In addition, our growth in the past three fiscal years was primarily driven by the increase in
levels of tuition fees we charge our students.
Our financial condition and results of operations may fluctuate due to a number of other factors, such as expansion and related costs in a given period,
our ability to maintain and increase our profitability and to enhance our operational efficiency, increased competition and market perception and
acceptance of any newly introduced educational programs in any given year. In addition, while we plan to increase the proportion of our students
enrolled in our international program, there is no guarantee that we will be able to do so successfully. Furthermore, we may not be successful in
continuing to increase the number of students admitted to the schools we operate, and we may not be as successful as we expect in identifying and
acquiring or sponsoring additional schools.
We may not sustain our past growth rates in future periods, and we may not sustain profitability on a quarterly or annual basis in the future. Our
historical results, growth rates and profitability may not be indicative of our future performance. Our ADSs could be subject to significant price
volatility should our earnings fail to meet the expectations of the investment community. Any of these events could cause the price of our ADSs to
materially decrease.
8
If fewer Chinese students choose to study abroad, especially in the United States, Canada, Australia and the United Kingdom, demand for our
international program may decline.
One of the principal drivers of the growth of our international program is the increasing number of Chinese students who choose to study abroad,
especially in the United States, Canada, Australia and the United Kingdom, reflecting the growing demand for higher education in overseas countries by
Chinese students. As such, any restrictive changes in immigration policy, terrorist attacks, geopolitical uncertainties and any international conflicts
involving these countries could increase the difficulty for Chinese students to obtain student visas to study overseas, or decrease the appeal of studying
in such countries to Chinese students. Any significant change in admission standards adopted by overseas educational institutions could also affect the
demand for overseas education by Chinese students. If overseas educational institutions significantly reduce their reliance on or acceptance of admission
and assessment tests, such as TOEFL, IELTS or the Scholastic Assessment Test, or the SAT, the difficulty for Chinese students to meet the new
admission standards could significantly increase, which could in turn negatively affect the demand for overseas education by Chinese students.
Additionally, Chinese students may also become less attracted to studying abroad due to other reasons, such as improving domestic educational or
employment opportunities associated with increased economic development in China. These factors could cause declines in the demand for our
international program, which may adversely affect our revenue and profitability.
The tuition charged by our affiliated schools and student enrollment at these affiliated schools are subject to regulation by the Chinese government,
and our revenue is highly dependent on the level of these fees and the number of students enrolled.
The regulatory authorities in China, at both the national and local levels, have broad powers to regulate the tuition, accommodation and other fees
charged by K-12 schools as well as the student enrollment levels at these schools. As a result, new regulations could adversely impact the tuition we may
charge for our school programs and the level of student enrollment at our schools. In particular, the regulatory authorities impose a maximum ceiling on
the amount of tuition we can charge. For example, the ceiling on tuition and accommodation expenses we can charge for our basic educational program
in the 2019/2020 school year was set out by the Zhuji branch of the Ministry of Education (“MOE”) in August 2019, RMB62,000 per student,
RMB66,000 per student and RMB74,000 per student for primary school, middle school and high schools respectively. The international program of our
affiliated schools is not currently subject to ceiling limitation on the amount of tuition we can charge as long as the tuitions we charge for our
international program are record-filed with local authorities and approved. Pursuant to the registration documents filed with local authorities for the
2019/2020 school year and 2020/2021 school year, we can charge RMB86,000 to RMB200,000 and RMB102,000 to RMB220,000 respectively for our
international program. In the 2019/2020 school year, we charged an average tuition per student for the primary school, middle school and high school
education under our basic educational program of RMB44,301, RMB45,232 and RMB46,501, and an average tuition per student for international
program of RMB92,398. The tuition limitation is reviewed by regulatory authorities on a periodic basis. See “Item 4. Information on the Company—B.
Business Overview—Regulations—Regulations on Private Education—2016 Private Education Law and The 2004 Implementation Rules for Private
Education Laws.” In addition, the Zhejiang provincial government has set a maximum number of high school students we can admit from cities other
than Zhuji in Zhejiang province to our basic educational program, after consultation with us. In the 2019/2020 school year, the maximum number of
such high school students was set at 620 for Hailiang Experimental High School, 140 for Hailiang Senior Middle School and 220 for Hailiang High
School of Art. We generally recruit students at the maximum level set by the government in Zhejiang province and additional students from other
provinces. We may not admit more than the number that is approved by the regulatory authority. There is currently no limit as to the number of students
we may admit for our international program. In light of the significant increase in tuition and other education-related fees in recent years, regulatory
authorities may impose stricter price control on educational charges in the future. As part of their efforts to regulate the private education industry,
regulatory authorities may also impose stricter student annual enrollment quotas. If the fees were to decrease or were not allowed to increase in line with
increases in our costs, or if student enrollment at our private K-12 schools were otherwise restricted, our business, financial condition and results of
operations may be materially and adversely affected.
9
On January 21, 2020, the Zhejiang Provincial Development and Reform Commission, Zhejiang Provincial Department of Education, Zhejiang
Provincial Department of Human Resources and Social Security and Zhejiang Provincial Market Supervision Administration promulgated the
Administrative Measures for Private Education Fees and on August 17, 2020, the MOE and other four ministries and commissions promulgated the
Opinions on Further Standardization of Education Fee, which further strengthen the regulation of private education fees. If we cannot meet the
requirements of these regulations, our operations may be adversely and materially affected. For example, the Opinions on Further Standardization of
Education Fee stipulate that private schools must publicize the itemized fees and standards at a prominent location in the school and indicate the
itemized fees and standards in the admissions brochure and admission notice. If fees that should be publicized are not publicized, or the content of the
publicity is not in compliance with the relevant policies, students are entitled to refuse the payment of the fees. In addition, the Opinions on Further
Standardization of Education Fee emphasizes that the service fees must be charged based on voluntary and non-profit principles. If the regulatory
authority deems otherwise, our operations may be adversely affected.
Presently, the services we provide to our managed schools are partially but not wholly dependent upon the size of the student population, and are not
dependent upon the tuition levels. We are uncertain how our revenues would be impacted in the event the respective local governments of our managed
schools were to decide to limitations on student numbers.
We are exposed to concentration risks as most of the affiliated schools we own are currently located in a single city.
Most of the affiliated schools we own are currently located in Zhuji city in Zhejiang province. While we continue our expansion into other cities in the
future, we anticipate that a significant part of our business operations in the short-term will continue to be in Zhuji city. As such, we would be materially
and adversely affected if new regulations relating to the private K-12 education business were adopted in Zhejiang province or Zhuji city that placed
additional restrictions or burdens on us.
Our business depends on the strength of our Hailiang brand in the market.
Our business operation and future growth are highly dependent on the awareness and recognition of our Hailiang brand. We believe that maintaining and
enhancing the Hailiang brand is critical to our competitive advantage and to the growth of our business. The consistency and quality of our educational
programs and services are critical to our brand and reputation. As we continue to grow in size, and expand our presence and geographical reach, it may
be more challenging to maintain the quality and consistency of our services. Any negative publicity about our programs, services or schools, regardless
of its veracity, could harm our brand image. In addition, in order to retain existing students and attract new students as well as to recruit and to retain
qualified teachers, we plan to continue to make significant expenditures maintaining and enhancing our positive brand image and brand loyalty. See
“Item 4. Information on the Company—B. Business Overview—Marketing” for a description of such efforts. We may not be able to successfully execute
our brand promotion plan and as a result, our reputation and business may be materially and adversely affected.
The private for-profit K-12 education business is relatively new and may not gain wide acceptance in China.
Our business and results of operations are highly dependent upon the acceptance, development and expansion of the market for private for-profit K-12
educational services in China. The K-12 private school market started to develop in the early 1990s in China and has grown significantly due to
favorable policies enacted by the Chinese government. We founded our first K-12 school in 1995. In 1997, the State Council of the PRC promulgated
the first regulation to promote the private education industry in China. However, investors of private schools were not permitted to retain reasonable
return in China until 2003 when the Law of the People’s Republic of China on the Promotion of Privately-run Schools became effective. The Standing
Committee of the National People’s Congress amended the Law on the Promotion of Private Education (the “2016 Private Education Law”), effective on
September 1, 2017. Pursuant to the 2016 Private Education Law, sponsors of private schools may choose to register their schools as either non-profit or
for-profit schools but sponsors are not permitted to register for-profit schools that provide compulsory education services. Nevertheless, favorable
policies and laws provide continuous support and establish standardization of China’s private education industry, which in turn boosts the confidence of
students and parents in the industry.
We face uncertainty as to whether favorable policies and laws will be adverted by the government. Additionally, as a private education provider, we
charge relatively higher fees for our affiliated schools in comparison with public schools. The development of this market has been accompanied by
significant press coverage and public debate concerning the management and operation of private for-profit schools. Significant uncertainty remains in
China as to public acceptance of this business model. If this model fails to gain wide acceptance among the general public, especially among students
and their parents, our results of operations will be adversely affected.
10
We may fail to successfully develop and introduce new educational programs and services.
One of our growth strategies is to continue to maintain and introduce diversified educational programs and services to our students. We may also need,
from time to time, to introduce additional educational programs and services and to meet market demand. The future success of our business depends
partly on our ability to develop new educational programs and services. The planned timing or introduction of new educational services and programs is
subject to risks and uncertainties. Actual timing may differ materially from any originally proposed timeframes. Unexpected operational, technical or
other issues could delay or prevent the introduction of one or more of our new educational programs and services. In addition, significant investment of
human capital, financial resources and management time and attention may be needed based on a particular feature of our newly introduced educational
programs. If we fail to manage the expansion of our portfolio of educational programs efficiently and cost-effectively, our business could be negatively
affected. Moreover, we cannot assure you that any of our new programs and services will achieve market acceptance or generate incremental revenue or
that our operation of such new programs and services will comply with our business scope or applicable licensing requirements. If our efforts to develop,
market and sell our new educational programs and services to the market are not successful, our business, financial position and results of operations
could be materially and adversely affected.
We may not be able to continually enhance our educational services and adapt them to rapid pedagogical innovations, evolving test methods and
student needs and preferences.
The quality of our educational services and student and parent satisfaction are vital to the success of our business. The educational services market is
characterized by rapid pedagogical innovations, evolving teaching methods and student needs and preferences. We must quickly identify areas for
changes, improvements and enhancements of our programs and services to adapt to any pedagogical innovation, changes in test methods and curriculum
and evolving student needs and preferences.
For example, a significant part of our educational services focuses on middle school and high school education. There are continual changes in the
focuses of the subjects and questions tested on standardized tests, such as the Zhongkao and the Gaokao, the two most significant tests for Chinese
students. These tests are administered by local government authorities and are critical in determining admission into high school, in the case of the
Zhongkao, and college, in the case of the Gaokao. The format of these tests and the manner in which such standardized tests are administered may
change from year to year, especially in Zhejiang province, one of the pioneers in educational reform and innovation. In addition, on a national level,
some top universities in China, including Tsinghua University and Peking University, have been allowed to recruit a certain percentage of students
through independently administered tests and admission procedures in recent years. While college applicants are still required to have a Gaokao score
above a certain threshold, the Gaokao scores for these applicants will not be the sole determining factor in the admission process. In 2019, 90
universities and colleges were allowed to recruit students through independently administered tests and admission procedures. In 2020, 36 universities
launched the “strengthening basic disciplines program”, which mainly selects students who are interested in serving the country's major strategy and
have excellent comprehensive qualities or excel in basic disciplines.
These changes require us to continually update and enhance our curriculum, educational materials and our teaching methods. Any inability to track and
respond to changes in the educational field in a timely and cost-effective manner would make our educational services and programs less attractive to
students, which may adversely affect our students’ academic performance, our reputation and ability to continue to attract and retain students.
Furthermore, we understand that PRC regulatory authorities have reformed and may continue to reform the K-12 curriculum we are required to teach at
our schools. Therefore, school curriculum will likely undergo changes and our services, programs and educational materials will need to adapt to such
changes.
We may not be able to adapt to these planned changes, enhancements and developments in a timely and cost-effective manner. If changes to our
programs and services are delayed or are not aligned with changes in market expectations, needs or preferences, we may lose market share, and our
business, financial condition and results of operations could be materially and adversely affected.
11
We face significant competition and we may fail to compete effectively.
The private K-12 education sector in China is rapidly evolving, highly fragmented and competitive, and we expect competition in this sector to persist
and intensify. See “Item 4. Information on the Company—B. Business Overview—Competition” for more information relating to the competitive
landscape of the industry in which we compete. Competition could result in loss of market share and revenue, lower profit margins and limitations on
our future growth. Some of our competitors, particularly public schools, have governmental support in forms of government subsidies and other
payments or fee reductions. These competitors may devote greater resources, financial or otherwise, than we can to student recruitment, campus
development and brand promotion and respond more quickly than we can to changes in student demands and market needs. Our student enrollment and
retention may decrease due to intense competition. We may be required to reduce tuition and other fees or increase spending in response to competition
in order to attract or retain students or pursue new market opportunities. As a result, our revenue, profit and profit margin may decrease. With respect to
the services we provide to our managed schools, we are one of the pioneers in the industry to provide education and management services but we also
compete with specialized education and non-education service providers who provide services in their respective specialized fields, such as admission,
financial, human resources, IT and internal audit. As such, we may not be able to compete effectively and efficiently. We cannot assure you that we will
be able to compete successfully against current or future competitors, and subject to PRC laws, either party of the education and management service
agreement has the right to dissolve the contract at any time. If we are unable to maintain our competitive position or otherwise fail to respond to
competitive pressures effectively, we may lose market share, including, among other things, the number and student enrollments of our managed
schools, and our business, financial condition and results of operations may be materially and adversely affected.
We have limited experience generating net income from some of our newer service offerings providing education and management services to
schools and may not achieve expected results from these newer service offerings.
We have been engaged to provide various education and management services to our managed schools, and have expanded to provide education and
non-education, ancillary educational services to our affiliated schools. But we have limited experience providing education and management services at
a mass level. We may devote significant resources to our newer service offerings, but fail to achieve expected results from such newer service offerings.
If such newer service offerings are not well accepted, we may not achieve our expected expansion to service offerings. As a result, our overall business
and results of operations, including, among other things, the number and student enrollments of our managed schools, may be materially and adversely
affected.
We may experience declines in our margins due to the expansion of our business and addition of new business models.
Many factors may result in a decline of our margins. For example, our gross margin may decrease as costs incurred in the expansion of our business,
affiliated school network and education and management services increase faster than our revenues. In addition, new investments and acquisitions may
cause our margins to decline before we successfully integrate the acquired businesses into our operations and realize the full benefits of these
investments and acquisitions. In recent years, we have experienced fluctuations in our margins, there can be no assurance that our margins will not
continue to decline in the future.
We may not be able to integrate businesses we acquired or plan to acquire in the future, which may adversely affect our business growth.
We plan to selectively acquire schools that are complementary to our core expertise in K-12 education to expand our network coverage and/or businesses
expansion. We cannot assure you that we will be able to integrate the acquired businesses with our existing operations, and we may incur significant
financial resources to streamline the operation of the acquired businesses under our internal control requirements and divert substantial management
attention to the transition of the acquired businesses before achieving full integration.
12
The main challenges involved in integrating acquired entities include the following:
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consolidating service and product offerings;
retaining qualified education professionals of any acquired entity;
consolidating and integrating corporate information technology and general administrative infrastructure;
ensuring and demonstrating to our students and their parents that the acquisitions will not result in any adverse changes to our brand name,
reputation, service quality or standards;
preserving important business relationships of acquired entity; and
· minimizing the diversion of our management’s attention from ongoing business concerns.
In addition, the businesses and schools we acquire may have operational loss making or have existing liabilities or other risks that we may not be able to
effectively manage or may not be aware of at the time of our acquisition, which may impact our ability to realize the expected benefits from the
acquisition or our financial performance. If we fail to integrate the acquired businesses in a timely manner or at all, we may not be able to achieve the
anticipated financial results or synergy from the acquired businesses, which may adversely affect our business growth.
We may not be able to manage our business expansion and strategic acquisitions effectively.
We plan to continue to expand our presence through organic growth and expansion under the asset-light approach and strategic acquisitions. In
particular, to support our continued growth and to strengthen our market share in the region in which we currently operate, we need to establish or
acquire new schools, and obtain rights to operate new schools. We also need to establish or acquire new schools in other regions to expand
geographically. Expansion has resulted, and will continue to result, in substantial demands on our management and on our operational, technological and
other resources. We intend to expand our asset-light approach, where we operate and manage K-12 schools pursuant to consulting and management
agreements, or act as these schools’ sponsor without acquiring ownership of land and facilities in such schools. However, such expansion is also
associated with substantial risks and uncertainties, including our ability to generate sufficient revenue to offset the costs and expenses of operating and
managing the schools, including the possibility of failure to achieve the intended revenue and other benefits expected from the asset-light model, our
business partners’ capability of procuring lands and constructing facilities as expected for us to establish additional schools under the asset-light
approach, and the diversion of resources and management attention from our existing businesses.
To manage our expected growth, we will be required to expand our existing managerial, operational, technological and financial systems. We also need
to expand, train, manage and retain our growing employee base. Significant financial resources may also be needed to support our planned growth. We
cannot assure you that our current and planned managerial, operational, technological and financial systems will be adequate to support our future
operations, or that we will be able to effectively and efficiently manage the growth of our operations or recruit and retain qualified personnel. There is no
assurance that we will obtain financial resources at commercial terms that are acceptable to us on a timely basis, or at all, to support our planned growth.
Any failure to effectively and efficiently manage our expansion may materially and adversely affect our ability to capitalize on new business
opportunities, which in turn may have a material adverse effect on our financial condition and results of operations.
In addition, as a significant part of our growth strategy, we intend to pursue selective strategic acquisitions and maximize synergies through integration
of acquired entities. Our strategic acquisitions involve substantial risks and uncertainties, including:
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our ability to identify and acquire targets in a cost-effective manner;
our ability to obtain approval from relevant government authorities for the acquisitions and to comply with applicable rules and regulations for
acquisitions, including those relating to the transfer of school properties and facilities relating to the acquisitions;
our ability to obtain financing to support our acquisitions;
our ability to generate sufficient revenue to offset the costs and expenses of acquisitions, including the possibility of failure to achieve the
intended revenue and other benefits expected from the acquisitions;
13
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potential ongoing financial obligations in connection with the acquisitions, including any expenses in connection with impairment of goodwill
recognized in connection with the acquisitions and potential unforeseen or hidden liabilities of any acquired entity, such as litigation claims or
tax liabilities;
the diversion of resources and management attention from our existing businesses; and
potential loss of, or harm to, employee or customer relationships as a result of ownership changes in the acquired entities.
If any one or more of these risks or uncertainties materializes or if any of the strategic objectives we contemplate are not achieved, our strategic
acquisitions may not be beneficial to us and may have a material adverse effect on our business, financial condition and results of operations.
Any deterioration in our relationships with providers of international educational services may adversely affect our business.
We have entered into cooperative relationships with various overseas schools and institutions to provide educational resources for our international
program. We derive direct benefits from these relationships such as the ability to offer more diverse programs and classes, the ability to charge a
premium for the programs we teach with other education service providers and the progress of establishing additional schools cooperated with
international educational service providers. We also derive indirect benefits from these relationships such as enhancement of our Hailiang brand and
reputation, and exposure to overseas educational methods and experiences.
If our relationships with any of these education service providers deteriorate or are otherwise damaged or terminated, or if the benefits we derive from
these relationships diminishes, whether as a result of our own actions, actions of any third-party, including our competitors, or of regulatory authorities
or other entities beyond our control, our business, prospects, financial condition and results of operations would be harmed.
Our business is subject to seasonal fluctuations, which may cause our operating results to fluctuate from quarter to quarter. This may result in
volatility and adversely affect the price of our ADSs.
We have experienced, and expect to continue to experience, seasonal fluctuations in our results of operations, primarily due to seasonal changes in
service days and student enrollments. We recognize revenue from the delivery of curriculum education services over the service period based on the
estimated progress of courses delivery, and recognize revenue from accommodations and transportation services over time evenly over the period with
service provided. However, our costs and expenses vary significantly and do not necessarily correspond with our revenue recognition. We expect
quarterly fluctuations in our revenue and results of operations to continue. These fluctuations could result in volatility and adversely affect the price of
our ADSs.
Our business depends on the continuing services of our senior management team and other key personnel, and our business may be harmed if we
lose their services.
Our future success depends heavily upon the continuing services of the members of our senior management team. Competition for experienced
management personnel in the private K-12 education market is intense, the pool of qualified candidates is very limited, and we may not be able to retain
the services of our senior executives or key personnel, or attract and retain high-quality senior executives or key personnel in the future. If one or more
of our senior executives or other key personnel, including the principals of our schools, are unable or unwilling to continue their services, we may not be
able to replace them in a cost-efficient and timely manner, or at all. In addition, if any member of our senior management team or any of our other key
personnel joins a competitor or forms a competing company, we may lose teachers and we may not be able to maintain or recruit students. If any such
negative development occurs, our business may be materially disrupted and our financial condition and results of operations may be materially and
adversely affected.
14
We may not be able to renew leases or obtain leases for our affiliated schools and companies at reasonable terms.
We operate our affiliated schools under an asset-light approach, where we sponsor our affiliated schools without having to own or acquire the land and
facilities of such schools. Instead, we enter into campus management agreements or lease agreements with our affiliated schools. We may not be able to
renew these agreements at a preferable price or at all at the expiration of a school year or the expiration a lease term, and thus may be forced to relocate
the affected operations to a new location, which could result in substantial rent increases and material business interruption. We lease real properties
used by our affiliated schools and companies with a total site area of approximately 1.52 million square meters as of the date of this annual report,
among which, approximately 1.1 million square meters are rented from Hailiang Investment which is controlled by Mr. Feng, our ultimate controlling
shareholder. See “Item 4. Information on the Company—D. Property, Plants and Equipment” for more information.
The terms of our current leases for campuses in Zhuji city, approximately 1.1 million square meters rented from Hailiang Investment are for nineteen
years from July 1, 2018. The leases contain priority renewal provisions which provide that we have the right of first refusal to renew each lease upon the
expiration of the lease, provided we notify lessor six months in advance. Under the lease agreements, we can terminate the lease at any time without
cause, provided we notify the lessor in writing three months in advance. Hailiang Investment may only terminate the agreements upon a written notice to
us one year in advance for any unapproved sublease by the lessee, unapproved modification to the premises, failure to pay rent for more than 60 days or
use of the properties for illegal activities. To terminate the leases for other causes, Hailiang Investment would have to give us written notice one year in
advance and obtain our consent to such termination. We and Hailiang Investment entered into a series of lease supplemental agreements, pursuant to
which, on September 12, 2019, we made lease prepayments of RMB525.0 million (VAT exclusive, approximately US$74.3 million) regarding the school
buildings and the related facilities on three campuses in Zhuji, China from Hailiang Investment for the remaining lease period until June 30, 2037.
However, there is no assurance that Hailiang Investment will observe its obligations under these lease agreements. As a result, at the end of each year or
the term of the lease, we may fail to continue to lease the properties. We may be forced to relocate the affected operations to a new location, which could
involve substantial rent increases and material business interruption.
In addition, we cannot assure you that the lessor has duly obtained the title certificates of the properties subject to our leases or otherwise has the right to
lease the properties. In particular, Hailiang Investment has failed to provide title certificates to properties associated with Tianma Experimental School
and part of Hailiang Education Park that has an aggregate gross site area of approximately 545,000 square meters, representing 35.96% of all of our
leased properties as of the date of this annual report. If any of our leases were terminated as a result of challenges by third-parties or governmental
authorities, we may be forced to relocate the affected operations and incur significant expenses. We might also be liable or incur costs associated with
potential defects in the properties we lease. We may also be required to pay fines or damages as a result of our use of such properties. There is no
assurance that we may find suitable replacement sites in a timely manner on terms acceptable to us.
As of the date of this annual report, we are not aware of any actions, claims or investigations being contemplated by or pending before any governmental
authorities with respect to our leased properties. We have not received any notice of claim from any third-party for our use of such leased properties.
However, if any of these risks materializes, our business, financial condition and results of operations may be materially and adversely affected. See
“Item 4. Information on the Company—D. Property, Plants and Equipment” for more information.
Accidents or injuries may occur at our schools, which could affect our reputation and student retention and enrollment.
We could be held liable for the accidents or injuries or other harm to students or other people at our schools, including those caused by or otherwise
arising in connection with our school facilities or employees. We could also face claims alleging that we were negligent, provided inadequate
maintenance to our school facilities or supervision to our employees and therefore should be held liable for accidents or injuries suffered by our students
or other people at our schools. In addition, if one of our students commits acts of violence, we could face allegations that we failed to provide adequate
security or were otherwise responsible for his or her actions. For example, there is a shooting range on the campus of Hailiang Education Park. Although
the guns used for practice are air guns and the shooting range is staffed with professional coaches and restricted by tight security, accidents or intentional
misuse of these air guns may still occur. Our schools may be perceived to be unsafe, which may discourage prospective students from attending our
schools. Although we maintain certain liability insurance, this insurance coverage may not be adequate to fully protect us from these kinds of claims. In
addition, we may not be able to obtain liability insurance in the future at reasonable prices or at all. A liability claim against us or any of our employees
could adversely affect our reputation and student enrollment and retention. Even if unsuccessful, such a claim could create unfavorable publicity, cause
us to incur substantial expenses and divert the time and attention of our management.
15
There are risks associated with our use of Hailiang Education Park.
On November 18, 2015, we entered into a lease agreement with Hailiang Investment regarding Hailiang Education Park. The term of the lease is twenty
years and the rental fee in the first year is RMB20.0 million and is subject to a 5% increase in the next three years. The rental fee commencing from the
fifth year is subject to further negotiation between the Company and Hailiang Investment.
In September 2016, Hailiang Investment completed the construction of Hailiang Education Park, which has a total site area of approximately 850,000
square meters and a gross floor area of approximately 550,000 square meters. See “Item 4. Information on the Company—B. Business Overview—
Hailiang Education Park.”
On December 29, 2017, we and Hailiang Investment mutually terminated the above-mentioned lease agreement and entered into five new lease
agreements with Hailiang Investment regarding Hailiang Education Park, in order to allocate lease fees to each school occupying the Hailiang Education
Park according to their respective gross floor areas.
On April 28, 2019, we and Hailiang Investment mutually terminated the above-mentioned lease agreement and entered into eight new lease agreements
with Hailiang Investment regarding Hailiang Education Park, in order to allocate lease fees to the respective schools and subsidiaries according to their
used gross floor area.
Our affiliated schools and subsidiaries entered into eight Supplemental Agreements with Hailiang Investment respectively regarding Hailiang Education
Park, effectively as of July 1, 2019, pursuant to which our eight affiliated schools and subsidiaries prepaid the rental fee for the remaining 18 years
within 30 days from the date of those agreements. See “Item 4. Information on the Company—B. Business Overview—Hailiang Education Park.”
There are certain other risks associated with the utilization of the Hailiang Education Park, including:
·
·
·
·
construction quality issues;
greater investment may be required to utilize Hailiang Education Park than we currently estimate;
any dissatisfaction with Hailiang Education Park on the part of our students, teachers or parents could lead to lower student enrollment or
teacher retention in the future;
the possibility that if there is no increase in enrollment or tuition, our profitability may be impaired; and
Capacity constraints of our school facilities could cause us to lose students to our competitors.
The educational facilities of our affiliated schools are limited in space and size. We may not be able to admit all qualified students who would like to
enroll in our educational programs due to the capacity constraints of our current school facilities. Furthermore, absent additional acquisitions, we may
not be able to expand our capacity at our current campuses or relocate to other facilities in the local area with more space. If we fail to expand our
physical capacity as quickly as the demand for our services grows, or if we otherwise fail to grow by establishing or acquiring additional schools and
campuses, we could lose potential students to our competitors, and our results of operations and business prospects could suffer as a result.
We may not be able to adequately protect our intellectual property.
Unauthorized use of any of our intellectual property may adversely affect our business and reputation. We rely on a combination of copyright, trademark
and trade secrets laws to protect our intellectual property rights. Nevertheless, third-parties may obtain and use our intellectual property without due
authorization. The practice of intellectual property rights enforcement action by Chinese regulatory authorities is in its early stage of development and is
subject to significant uncertainty. We may also need to resort to litigation and other legal proceedings to enforce our intellectual property rights. Any
such action, litigation or other legal proceedings could result in substantial costs and diversion of our management’s attention and resources and could
disrupt our business. In addition, there is no assurance that we will be able to enforce our intellectual property rights effectively or otherwise prevent
others from the unauthorized use of our intellectual property. Failure to adequately protect our intellectual property could materially and adversely affect
our business, financial condition and results of operations.
16
We may be exposed to infringement claims by third-parties, which, if successful, could cause us to pay significant damage awards.
We cannot assure you that materials and other educational content used in our schools and programs do not or will not infringe intellectual property
rights of third-parties. As of June 30, 2020, and as of the date of this annual report on Form 20-F, except as disclosed in “Item 4. Information on the
Company – B. Business Overview – Legal Proceedings” below, we have not experienced any claims for intellectual property infringement. However,
there is no guarantee in the future that third-parties will not claim that we have infringed on their proprietary rights. For example, our educational
materials may include test questions that are developed based on actual questions of tests administered by third-parties or regulatory authorities, who
may allege that our test questions infringe their copyrights. We may also use educational materials designed in conjunction with our overseas partners
and we cannot guarantee that disputes will not arise over the intellectual property rights associated with these materials.
Although we plan to defend ourselves vigorously in any such litigation or legal proceedings, there is no assurance that we will prevail in these matters.
Participation in such litigation and legal proceedings may also cause us to incur substantial expenses and divert the time and attention of our
management. We may be required to pay damages or incur settlement expenses. In addition, in case we are required to pay any royalties or enter into any
licensing agreements with the owners of intellectual property rights, we may find that the terms are not commercially acceptable and we may finally lose
the ability to use the related content or materials, which in turn could materially affect our educational programs. Any similar claim against us, even
without any merit, could also hurt our reputation and brand image. Any such event could have a material and adverse effect on our business, financial
condition and results of operations.
We have limited insurance coverage with respect to our business and operations.
We are exposed to various risks associated with our business and operations, and we have limited insurance coverage. See “Item 4. Information on the
Company—B. Business Overview—Insurance” for more information. We are exposed to risks including, but not limited to, accidents or injuries in our
schools, loss of key management and personnel, business interruption, natural disasters, terrorist attacks and social instability or any other events beyond
our control. The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business-related
insurance products. While we maintain director and officer liability insurance for our executive officers and directors, we do not have any business
disruption insurance, product liability insurance or key-man life insurance. Any business disruption, litigation or legal proceeding or natural disaster or
other events beyond our control could result in substantial costs and diversion of our resources. Our business, financial condition and results of
operations may be materially and adversely affected as a result.
A significant majority of our outstanding ordinary shares are held by our founder, Mr. Feng, and his interests may not be aligned with the interests
of other holders of our ordinary shares and ADSs.
As of June 30, 2020, Mr. Feng beneficially owned approximately 87.28% of our total outstanding ordinary shares. As a result, Mr. Feng has significant
influence in determining the outcome of any corporate transactions or other matters submitted to our shareholders for approval. These matters include
mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. This
concentration of ownership may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an
opportunity to receive a premium for their shares as part of a sale of our company and might result in substantial reduction of the price of our ADSs.
These actions may be taken even if they are opposed by our other shareholders. Our founder, Mr. Feng, is also the founder and a major shareholder of
Hailiang Group and its subsidiaries, with which we have entered into related party transactions. Mr. Feng may from time to time make strategic
decisions that he believes is in the best interests of Hailiang Group as a whole, which may affect us or may not be aligned with the interests of other
holders of our ordinary shares and ADSs. We may not be able to resolve any potential conflicts of interest and, even if we do, the resolution may be less
favorable to us than if we were dealing with an unaffiliated party.
17
As a “controlled company” within the meaning of the Nasdaq listing rules, we may follow certain exemptions from certain corporate governance
requirements that could adversely affect our public shareholders.
As of June 30, 2020, Mr. Feng beneficially owned approximately 87.28% of our total outstanding ordinary shares. Under the Nasdaq listing rules, a
company of which more than 50% of the voting power is held by an individual, group, or another company is a “controlled company” and is permitted
to phase in its compliance with the independent committee requirements. Although we do not intend to rely on the “controlled company” exemptions
even if we are deemed a “controlled company,” we could elect to rely on these exemptions in the future. If we were to elect to rely on the “controlled
company” exemptions, a majority of the members of our board of directors might not be independent directors and our nominating and corporate
governance and compensation committees might not consist entirely of independent directors. Accordingly, if we rely on the exemptions, during the
period we remain a controlled company and during any transition period following a time when we are no longer a controlled company, you would not
have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
We deposit a certain amount of cash with a related party and are subject to credit risks of such related party.
As part of our cash management policy, we have historically deposited and expect to continue to deposit a certain amount of cash generated from our
private education business with Hailiang Finance, a related party finance company controlled by Hailiang Group, in order to earn interest at market rates
with flexible withdrawal terms on our deposits. Since September 2014, Hailiang Group and Mr. Feng have entered into a guarantee agreement with us to
irrevocably and jointly guarantee the timely return of our deposits on behalf of the finance company, and the guarantee has been renewed annually. As of
June 30, 2020, the balance of cash and term deposits we had with Hailiang Finance amounted to RMB1,405.6 million (approximately US$198.9
million). To control our credit exposure with Hailiang Finance, based upon our current policy effective since September 28, 2020, we have set an upper
deposit budget maintained by Hailiang Finance at any given time in fiscal 2021 to be approximately RMB2.5 billion (approximately US$353.9 million),
and any amount above the upper deposit budget must be transferred to a commercial bank within 7 business days.
We do not control nor are we informed of the use of deposits made with the finance company and are subject to credit risks of such finance company.
See “Item 11. Quantitative and Qualitative Disclosures about Market Risk.” In addition, there is no assurance that we will be able to successfully
enforce the guarantee granted by Hailiang Group or Mr. Feng in the event that the finance company defaults on the return of such deposits. The credit
profile of the finance company and guarantors may deteriorate and their ability to return such deposits may be impaired due to various reasons beyond
our control, such as a slowdown in the PRC, regional or local economies, a material decrease of profitability or significant tightening of liquidity with
respect to their respective businesses, loss or material deterioration of relationships with their respective key customers or suppliers, natural disasters or
other force majeure events. Our financial condition and liquidity position could be materially and adversely affected if any of these occur and, as a
result, our business and prospects would be materially and adversely affected.
Worsening economic conditions generally affecting the global or Chinese economy could adversely impact our business.
Beginning in 2008, there was a significant deterioration and instability in the U.S. and global economies. The recovery from such economic downturn
has been negatively affected by various subsequent events, including the European sovereign debt crisis. The growth of the Chinese economy also
slowed down significantly in 2009 and may slow down again in the future. Since we derive substantially all of our revenue in China, any prolonged
slowdown in the Chinese economy, or downturn affecting the global economy generally, may have a negative impact on our business, financial
condition and results of operations. For example, student families may choose schools or programs with lower tuition and other fees, or otherwise
decrease or delay their education spending. As a result, we may experience difficulty in recruiting and retaining students, or expanding our student base
for our newly established or acquired schools. We may also need to reduce our tuition or other fees as a result of the general lower level of spending by
Chinese students, especially those in the region in which we operate. The general economic downturn affecting the Chinese or global economy may also
affect the attractiveness of our international program, which typically charges a higher level of fees for services associated with advanced studies in
overseas educational institutions. Any such negative development could have a material and adverse effect on our business, financial condition and
results of operations.
18
Failure to maintain effective internal control over financial reporting could cause us to inaccurately report our financial results or fail to prevent
fraud and have a material adverse effect on our business, results of operations and the trading price of ADSs.
As a public company in the United States, we are subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 requires
that we include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F.
Our management has concluded that our internal control over financial reporting was effective as of June 30, 2020. See “Item 15. Controls and
Procedures,” for a description of management’s evaluation of our internal control over financial reporting. If we fail to maintain effective internal
control over financial reporting in the future, our management may not be able to conclude that we have effective internal control over financial
reporting at a reasonable assurance level. Moreover, effective internal controls over financial reporting are necessary for us to produce reliable financial
reports and are important to help prevent fraud. As a result, while we have incurred and anticipate that we will continue to incur considerable costs,
management time and other resources in an effort to continue to comply with Section 404 and other requirements of the Sarbanes-Oxley Act of 2002,
any failure to maintain effective internal controls over financial reporting could in turn result in the loss of investor confidence in the reliability of our
financial statements and negatively impact the trading price of our ADSs.
In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting
firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal
control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is
effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not
satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant
requirements differently from us.
During the course of documenting and testing our internal control procedures in the future, in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, we may identify weaknesses and deficiencies in our internal control over financial reporting, and we may not be able to
conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act
of 2002. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements
and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn
limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective
internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from
the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial
statements from prior periods.
Risks Relating to Our Corporate Structure
Our private educational service business is subject to extensive regulation in China. If the PRC government finds that the contractual arrangements
that establish our corporate structure for operating our business does not comply with applicable PRC laws and regulations, we could be subject to
severe penalties.
Our private education service business is subject to extensive regulations in China. The Chinese government regulates various aspects of our business
and operations, such as curriculum content, educational materials, standards of school operations, student recruitment activities and tuition and other
fees. The laws and regulations applicable to the private education sector are subject to frequent changes, and new laws and regulations may be adopted,
some of which may have a negative effect on our business, either retroactively or prospectively.
19
Foreign ownership in educational services is subject to significant regulations in China. The PRC government regulates the provision of educational
services through strict licensing requirements. In particular, PRC laws and regulations currently prohibit foreign ownership of companies and institutions
providing compulsory educational services at primary and middle school levels, and restrict foreign investment in educational services businesses at the
high school level. We are a company incorporated in the Cayman Islands. Our PRC subsidiary, Hailiang Consulting, is a foreign owned enterprise and is
currently ineligible to apply for and hold licenses to operate, or otherwise own equity interests in, our schools with K-12 educational programs. Due to
these restrictions, we conduct our private education business in China primarily through contractual arrangements among (i) Hailiang Consulting, our
operating subsidiary in China, (ii) our affiliated entities, including Hailiang Management and its subsidiaries, and (iii) the shareholders of Hailiang
Management, namely Mr. Feng (our founder and our ultimate controlling shareholder who holds a 99.9% equity interest in Hailiang Management) and
Beize Group (which holds a 0.1% equity interest in Hailiang Management and is controlled by Mr. Feng). We hold the required licenses and permits
necessary to conduct our private education business in China through the schools controlled and held by Hailiang Management. We have been, and
expect to continue to be, dependent on our affiliated entities to operate our private education business. Additionally, with respect to our managed
schools, relevant regulations requiring that service and management fees charged to managed schools be negotiated on an arm’s length basis that
represents genuine service have not become effective as of June 30, 2020. We believe we are currently in compliance with and expect to be in
compliance with the requisite fair value service regulations upon their effectiveness.
If our ownership structure and contractual arrangements are found to be in violation of any PRC laws or regulations, or if we are found to be required
but failed to obtain any of the permits or approvals for our private education business, the relevant PRC regulatory authorities, including—the MOE,
which regulates the education industry in China, the Ministry of Commerce, or MOFCOM, which regulates the foreign investment in China, and the
Civil Affairs Bureau, which regulates the registration of schools in China—would have broad discretion in imposing fines or punishments upon us for
such violations, including:
·
·
·
·
·
·
requiring the Company to restructure its ownership structure and operations in the PRC to comply with the existing or future PRC laws and
regulations;
revoking the affiliated entities’ business and operating licenses;
requiring the affiliated entities to discontinue or restrict operations;
blocking the affiliated entities’ websites;
imposing additional conditions or requirements with which the affiliated entities may not be able to comply; or
taking other regulatory or enforcement actions against the affiliated entities that could be harmful to the affiliated entities’ business.
As of the date of this annual report on Form 20-F, similar ownership structure and contractual arrangements have been used by many China-based
companies listed overseas, including a number of education companies listed in the United States. To our knowledge, none of the fines or punishments
listed above have been imposed on any of these public companies, including companies in the education industry. However, we cannot assure you that
such fines or punishments will not be imposed on us or any other companies in the future. If any of the above fines or punishments is imposed on us, our
business, financial condition and results of operations could be materially and adversely affected.
20
The newly-enacted Foreign Investment Law proposes sweeping changes to the PRC foreign investment legal regime and will likely to have a
significant impact on businesses in China controlled by foreign invested enterprises primarily through contractual arrangements, such as our
business.
There are significant uncertainties under the Draft Foreign Investment Law relating to the status of businesses in China controlled by foreign invested
projects primarily through contractual arrangements, such as our business.
On January 19, 2015, MOFCOM published a draft of PRC law on Foreign Investment (Draft for Comment), or the Draft Foreign Investment Law. At the
same time, MOFCOM published an accompanying explanatory note of the Draft Foreign Investment Law, or the Explanatory Note, which contains
important information about the Draft Foreign Investment Law, including its drafting philosophy and principles, main content, plans to transition to the
new legal regime and treatment of business in China controlled by foreign invested enterprises, or FIEs, primarily through contractual arrangements. The
Draft Foreign Investment Law utilizes the concept of “actual control” for determining whether an entity is considered to be a foreign-invested project,
and defines “control” broadly to include, among other things, voting or board control through contractual arrangements.
The Draft Foreign Investment Law proposes significant changes to the PRC foreign investment legal regime and may have a material impact on Chinese
companies listed or to be listed overseas. The Draft Foreign Investment Law would regulate FIEs the same way as PRC domestic entities, except for
those FIEs that operate in industries deemed to be either “restricted” or “prohibited” in a “negative list”. The Draft Foreign Investment Law also
provides that only FIEs operating in industries on the negative list will require entry clearance and other approvals that are not required of PRC domestic
entities. As a result of the entry clearance and approvals, certain FIE’s operating in industries on the negative list may not be able to continue to conduct
their operations through contractual arrangements. It also states that entities established in China but controlled by foreign investors will be treated as
FIEs, while entities set up outside of China which are controlled by PRC persons or entities, would be treated as domestic projects after completion of
market entry procedures.
The MOFCOM, and the National Development and Reform Commission, or NDRC, promulgated the Catalogue of Industries for Guiding Foreign
Investment, or the Catalogue, as amended on March 10, 2015, which came into effect on April 10, 2015, and as further amended on June 28, 2017 and
came into effect on July 28, 2017 (the “2017 Catalogue”). On June 28, 2018, the MOFCOM and NDRC promulgated the Special Measures for Foreign
Investment Access (2018 version), or the 2018 Negative List, terminating the 2017 Catalogue. On June 30, 2019, the MOFCOM and NDRC
promulgated the Special Measures for Foreign Investment Access (2019 version) and on June 23, 2020, the MOFCOM and NDRC promulgated the
Special Measures for Foreign Investment Access (2020 version). According to the 2019 version and 2020 version, preschool education, general senior
high schools and institutions of higher education can be set up through cooperation only and controlled by the Chinese party (with principals or principal
administrators with Chinese nationality, and the council, Chinese members in the board of directors or the joint management committee accounting for
not less than one half of the total members). Investment in institutions offering compulsory education and religious educational institutions is prohibited.
We conduct our private education business in China primarily through contractual arrangements among our operating subsidiary in China and Hailiang
Management and our affiliated schools owned and operated by Hailiang Management and the shareholder of Hailiang Management. We hold the
required licenses and permits necessary to conduct our private education business in China through the schools owned and operated by Hailiang
Management. As of the date of this annual report, the sponsor of our current 13 affiliated schools is in compliance with the requirements of the above
regulations, and we control and operate our affiliated schools through contractual arrangements that do not violate the above regulations.
On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law or the FIL, which took effect on January 1, 2020, and
replaced the existing laws regulating foreign investment in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative Joint Venture Law
and the Wholly Foreign-owned Enterprise Law, or Existing FIE Laws, together with their implementation rules and ancillary regulations. The FIL
embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the
legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. See “Item 4. Information on the Company—B.
Business Overview—Regulation— Provisions on Foreign Investment.”
21
However, uncertainties still exist in relation to interpretation and implementation of the FIL, especially in regard to, including, among other things, the
nature of variable interest entities contractual arrangements and specific rules regulating the organization form of foreign-invested enterprises within the
five-year transition period. While FIL does not define contractual arrangements as a form of foreign investment explicitly, we cannot assure you that
future laws and regulations will not provide for contractual arrangements as a form of foreign investment. Therefore, there can be no assurance that our
control over our VIEs through contractual arrangements will not be deemed as foreign investment in the future. In the event that any possible
implementing regulations of the FIL, any other future laws, administrative regulations or provisions deem contractual arrangements as a way of foreign
investment, or if any of our operations through contractual arrangements is classified in the “restricted” or “prohibited” industry in the future “negative
list” under the FIL, our contractual arrangements may be deemed as invalid and illegal, and we may be required to unwind the variable interest entity
contractual arrangements and/or dispose of any affected business. Also, if future laws, administrative regulations or provisions mandate further actions
to be taken with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a
timely manner, or at all. Furthermore, under the FIL, foreign investors or the foreign investment enterprises should be imposed legal liabilities for failing
to report investment information in accordance with the requirements. In addition, the FIL provides that foreign invested enterprises established
according to the existing laws regulating foreign investment may maintain their structure and corporate governance within a five-year transition period,
which means that we may be required to adjust the structure and corporate governance of certain of our PRC subsidiaries in such transition period.
Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely
affect our current corporate structure, corporate governance and business operations.
We rely on contractual arrangements with Hailiang Management and its shareholders for our operations in China, which may not be as effective in
providing control as direct ownership.
We have relied and expect to continue to rely on the contractual arrangements with Hailiang Management and its shareholders, Beize Group and
Mr. Feng, our founder and our ultimate controlling shareholder, to operate our private education business. For a description of these contractual
arrangements, see “Item 4. Information on the Company—A. History and Development of the Company” and “Item 4. Information on the Company —C.
Organizational Structure.” However, these contractual arrangements may not be as effective as direct equity ownership in providing us with control
over Hailiang Management and our affiliated schools. Any failure by our affiliated entities, including Hailiang Management and our affiliated schools
controlled and held by Hailiang Management, and the shareholders of Hailiang Management, to perform their obligations under the contractual
arrangements would have a material adverse effect on the consolidated financial position and consolidated financial performance of our company. For
example, the contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly,
these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The
legal system in the PRC is not as developed as some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system
could limit our ability to enforce these contractual arrangements. In addition, if the legal structure and the contractual arrangements were found to be in
violation of any existing or future PRC laws and regulations, we may be subject to fines or other legal or administrative sanctions.
If government actions cause us to lose our right to direct the activities of our affiliated entities or our right to receive substantially all the economic
benefits and residual returns from our affiliated entities and we are not able to restructure our ownership structure and operations in a satisfactory
manner, we would no longer be able to consolidate the financial results of our affiliated entities.
The majority shareholder of Hailiang Management, Mr. Feng, our founder and our ultimate controlling shareholder, may not act in the best
interests of our company.
Mr. Feng is the majority shareholder of Hailiang Management. He is also the founder and ultimate controlling shareholder of our company. We cannot
assure you that Mr. Feng will act in the best interests of our company. We rely on Mr. Feng to comply with the terms and conditions of the contractual
arrangements. Although Mr. Feng is obligated to honor his contractual obligations with respect to our affiliated entities, he may nonetheless breach or
cause Hailiang Management to breach or refuse to renew the existing contractual arrangements that allow us to effectively exercise control over our
affiliated entities and to receive economic benefits from them. If Mr. Feng does not honor his contractual obligations with respect to our affiliated
entities, we may exercise our exclusive option to purchase, or cause our designee to purchase, all or part of the equity interest in Hailiang Management
to the extent permitted by PRC law. If we cannot resolve any disputes between us and the shareholder of Hailiang Management, we would have to rely
on legal proceedings, which could result in disruption of our business and substantial uncertainty as to the outcome of any such legal proceedings.
22
Contractual arrangements between our affiliated entities and us may be subject to scrutiny by the PRC tax authorities and a finding that we or our
affiliated entities owe additional taxes could materially reduce our net income and the value of your investment.
Under PRC laws and regulations, transactions between related parties should be conducted on an arm’s-length basis and may be subject to audit or
challenge by the PRC tax authorities. We could face material adverse tax consequences if the PRC tax authorities determine that the contractual
arrangements among our subsidiary in the PRC, our affiliated entities and the shareholders of Hailiang Management are not conducted on an arm’s-
length basis and adjust the income of our affiliated entities through the transfer pricing adjustment. A transfer pricing adjustment could, among other
things, result in, for PRC tax purposes, increased tax liabilities of our affiliated entities. In addition, the PRC tax authorities may require us to disgorge
our prior tax benefits, and require us to pay additional taxes for prior tax years and impose late payment fees and other penalties on our affiliated entities
for underpayment of prior taxes. To date, similar contractual arrangements have been used by many public companies, including companies listed in the
United States, and, to our knowledge, the PRC tax authorities have not imposed any material penalties on those companies. However, we cannot assure
you that such penalties will not be imposed on any other companies or us in the future. Our net income may be harmed if the tax liabilities of our
affiliated entities materially increase or if they are found to be subject to additional tax obligations, late payment fees or other penalties.
If any of our affiliated entities becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy assets held by
such entity, which could materially and adversely affect our business, financial condition and results of operations.
We currently conduct our operations in China through contractual arrangements with our affiliated entities and the shareholders of Hailiang
Management. As part of these arrangements, most of our education-related assets that are important to the operation of our business are held by our
affiliated entities. If any of these entities goes bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we may be
unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of
operations. If any of our affiliated entities undergoes a voluntary or involuntary liquidation proceeding, its equity owner or unrelated third-party creditors
may claim rights relating to some or all of these assets, which would hinder our ability to operate our business and could materially and adversely affect
our business, our ability to generate revenue and the market price of our ADSs.
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using financing
activities to make loans or additional capital contributions to our PRC subsidiary and affiliated entities, which could harm our liquidity and our
ability to fund and expand our business.
As an offshore holding company of our PRC subsidiaries, we may (i) make loans to our PRC subsidiary and affiliated entities, (ii) make additional
capital contributions to our PRC subsidiaries, (iii) establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, and
(iv) acquire offshore entities with business operations in China in an offshore transaction. However, most of these uses are subject to PRC regulations
and approvals. For example:
·
·
loans by us to our wholly-owned subsidiary in China, which is a foreign-invested enterprise, cannot exceed statutory limits and must be
registered with the State Administration of Foreign Exchange of the PRC, or SAFE, or its local counterparts;
loans by us to our affiliated entities, which are domestic PRC entities, over a certain threshold must be approved by the relevant government
authorities and must also be registered with SAFE or its local counterparts.
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In addition, on August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested company of its capital
contribution in foreign currency into Renminbi. The notice requires that the capital of a foreign-invested company settled in Renminbi converted from
foreign currencies shall be used only for purposes within the business scope as approved by the applicable governmental authorities. Such loan may not
be used for equity investments within the PRC unless such activity is set forth in the business scope or is otherwise permissible under PRC laws or
regulations. In addition, SAFE strengthened its oversight of the flow and use of such capital of a foreign-invested company settled in Renminbi
converted from foreign currencies. The use of such Renminbi capital may not be changed without SAFE’s approval, and may not in any case be used to
repay Renminbi loans if the proceeds of such loans have not otherwise been used. Violations of Circular 142 will result in severe penalties including
heavy fines. In order to further reform the foreign exchange administration system, SAFE issued the Circular on Reform of Administration Model of the
Settlement of Foreign Currency Capital of Foreign-Invested Enterprises on March 30, 2015, or Circular 19, which took effect from June 1, 2015 and
replaced the SAFE Circular 142. Circular 19 allows foreign invested enterprises to settle their foreign exchange capital on a discretionary basis
according to the actual needs of their business operations and provides procedures by which a foreign-invested company may convert and use equity
investments made in foreign currencies. Circular 19 also reiterates, however, the principle that Renminbi converted from the foreign currency-
denominated capital of a foreign-invested company may not be used, either directly or indirectly, for purposes beyond its business scope. Furthermore,
SAFE has promulgated Notice of the State Administration of Foreign Exchange on Policies for Reforming and Regulating the Control over Foreign
Exchange Settlement under the Capital Account, on June 9, 2016, hereinafter referred to as Circular 16, which emphasizes the unified policies for
discretionary settlement of foreign exchange receipts under the capital account by domestic institutions. Circular 16 also reiterates the principle that
Renminbi converted from the foreign currency-denominated capital of a foreign-invested company may not be used, either directly or indirectly, for
purposes beyond the company’s business scope.
Furthermore, SAFE issued an internal guideline to its local counterparts, referred to as Circular 16, on June 9, 2016. Based on the version of Circular 16
made publicly available by certain local governmental authorities on their websites, we understand that Circular 16 requires SAFE’s local counterparts to
unify and regulate the control over discretionary settlement and payment of foreign exchange receipts under the capital account, with the purpose of
better serving and facilitating domestic enterprises’ needs in business and capital operations. Circular 16 stipulates that a domestic enterprise, when
using its capital account foreign exchange income and Renminbi funds obtained from foreign exchange settlements, shall abide by the principle of
truthfulness and only for use in its own operations, and comply with the following: (1) such receipts and funds shall not, directly or indirectly, be used
for the expenditures beyond the business scope of domestic institutions or the expenditures prohibited by laws and regulations of the State; (2) unless
otherwise provided, such receipts and funds shall not, directly or indirectly, be used for investment in securities or other investments than banks’
principal-secured products; (3) such receipts and funds shall not be used for the granting of loans to non-affiliated enterprises, with the exception that
such granting is expressly permitted in the business license; and (4) such receipts and funds shall not be used for construction or purchase of real estate
for purpose other than self-use (exception applies for real estate enterprises).
We expect that PRC laws and regulations may continue to limit our use of proceeds from financing sources. We cannot assure you that we will be able to
obtain these government registrations or approvals on a timely basis, if at all, with respect to future loans or capital contributions by us to our entities in
China. If we fail to receive such registrations or approvals, our ability to capitalize our PRC operations may be negatively affected, which could
adversely affect our liquidity and our ability to fund and expand our business.
Risks Relating to Doing Business in China
PRC economic, political and social conditions, as well as changes in any government policies, laws and regulations, could adversely affect the
overall economy in China or the educational services market, which could harm our business.
Substantially all of our operations are conducted in China, and most of our revenue is derived from China. Accordingly, our business, prospects,
financial condition and results of operations are subject, to a significant extent, to economic, political and legal developments in China.
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The PRC economy differs from the economies of most developed countries in many respects. Although the PRC economy has been transitioning from a
planned economy to a more market-oriented economy since the late 1970s, the PRC government continues to play a significant role in regulating the
industry. The PRC government continues to exercise significant control over China’s economic growth through allocating resources, controlling the
incurrence and payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular
industries or companies. Uncertainties or changes in any of these policies, laws and regulations, especially those affecting the education industry in
China, could adversely affect the economy in China or the market for education services, which could harm our business of providing education
programs and services. For example, under the Private Education Laws promulgated in 2004 and its implementing rules, a private school should elect to
be either a school that does not require “reasonable returns” or a school that requires “reasonable returns.” A private school must consider factors such as
the school’s tuition, ratio of the funds used for education-related activities to the course fees collected, admission standards and educational quality when
determining the percentage of the school’s net income that would be distributed to the investors as reasonable returns. However, pursuant to the 2016
Private Education Law, sponsors are not permitted to register for-profit schools that provide compulsory education services, which covers grades one to
nine which grades account for a significant portion of our for-profit K-12 education business. However, the 2016 Private Education Law does not
provide for a definitive time line for existing schools to re-register/change their for-profit or non-profit status. As of the date of this annual report on
Form 20-F, we have not received any notice from the regulatory bodies regarding re-registration. The State Council and certain provinces including the
Zhejiang province have promulgated supporting regulations of 2016 Private Education Law (in the form of Opinions). Zhejiang province has
promulgated implementing opinions that all schools located in Zhejiang province are required to re-register and/or change their for-profit or non-profit
statuses before 2022. Except for Zhuji Hailiang Foreign Language High and Zhenjiang Jianghe High School of Art registered as for-profit schools,
Lanzhou Hailiang Experimental School, Wuhu Hailiang Experimental School, Hailiang Overseas Chinese School and Jinhua Hailiang Foreign Language
School, which we started operating in September 2020 and Jinhua Hailiang Foreign Language School, which we acquired in September 2020, are
registered as non-profit schools, and are registered as non-profit schools, we intend to maintain the current statuses of our affiliated schools until we
have obtained better clarity on the application of the 2016 Private Education Law.
While the PRC economy has experienced significant growth in the past two to three decades, growth has been uneven, both geographically and among
various sectors of the economy. Demand for our educational services depends, in large part, on economic conditions in China. Any significant slowdown
in China’s economic growth may cause our potential students to delay or cancel their plans to enroll in our schools, which in turn could reduce our
revenue. In addition, any sudden changes to China’s political system or the occurrence of social unrest could have a material and adverse effect on our
business, prospects, financial condition and results of operations.
Uncertainties with respect to the PRC legal system could have a material adverse effect on us.
The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions in a civil law system may be
cited as reference but have limited precedential value. Since 1979, newly introduced PRC laws and regulations have significantly enhanced the
protections of interest relating to foreign investments in China. However, since these laws and regulations are relatively new and the PRC legal system
continues to evolve rapidly, the interpretations of such laws and regulations may not always be consistent, and enforcement of these laws and regulations
involves significant uncertainties, any of which could limit the available legal protections.
In addition, the PRC administrative and judicial authorities have significant discretion in interpreting, implementing or enforcing statutory rules and
contractual terms, and it may be more difficult to predict the outcome of administrative and judicial proceedings and the level of legal protection we may
enjoy in the PRC than under some more developed legal systems. These uncertainties may affect our decisions on the policies and actions to be taken to
comply with PRC laws and regulations, and may affect our ability to enforce our contractual or tort rights. In addition, the regulatory uncertainties may
be exploited through unmerited legal actions or threats in an attempt to extract payments or benefits from us. Such uncertainties may therefore increase
our operating expenses and costs, and materially and adversely affect our business and results of operations.
Any increase in applicable enterprise income tax rates or the discontinuation of any preferential tax treatments currently available to us may result
in a significantly higher tax burden or the disgorgement of any benefits we enjoyed in the past, which could in turn negatively affect our business,
financial condition and results of operations.
Under the 2016 Private Education Law, which became effective on September 1, 2017, private schools, whether non-profit or for-profit, may enjoy
preferential tax treatment. Zhenjiang Jianghe High School of Art and Zhuji Hailiang Foreign Language High School elected to register their statuses as
for-profit. As of the date of this annual report, Lanzhou Hailiang Experimental School, Wuhu Hailiang Experimental School, Hailiang Overseas Chinese
School and Jinhua Hailiang Foreign Language School, which are four new affiliated schools that we started operating or acquired in September 2020,
elected to register their status as non-profit. Except for the above schools, all other affiliated schools in operation currently have not elected to change or
re-register their statuses pending the effectiveness of the implementation rule. The 2016 Private Education Law provides that non-profit private schools
will be entitled to the same tax benefits as public schools. Taxation policies for for-profit private schools following the effectiveness of the 2016 Private
Education Law are still unclear as more specific provisions are not yet introduced. As private schools requiring reasonable return, seven of our nine
affiliated schools in operation by the end of 2020 fiscal year end have enjoyed preferential tax policies for enterprise income tax and value-added tax
(“VAT”) since their establishment. Two for-profit schools by the end of 2020 fiscal year end have enjoyed preferential tax policies for VAT as permitted
by the Notice of the Ministry of Finance and the State Administration of Taxation on Full Launch of the Pilot Scheme on Levying Value-added Tax in
Place of Business Tax. In July 2020, confirmed by the local tax authorities and our PRC counsel, (i) all of our affiliated private schools in operation have
enjoyed the preferential tax policies for VAT and (ii) our affiliated private schools in operation other than Zhenjiang Jianghe High School of Art and
Zhuji Hailiang Foreign Language High are exempt from income taxes since their establishment, and all of our affiliated private schools in operation did
not violate any tax laws or regulations since their establishment.
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Preferential tax treatments granted to us by local governmental authorities are subject to review and may be adjusted or revoked at any time in the future.
The discontinuation of any preferential tax treatments currently available to us will cause our effective tax rate to increase, which will increase our
income tax expenses and in turn decrease our net income. In addition, we may not be granted preferential tax treatment by the local governments of
additional regions into which we may expand. Any such negative development could have a material and adverse effect on our business, financial
condition and results of operations.
Under the New EIT Law, we may be classified as a “resident enterprise” of China. Such classification could result in unfavorable tax consequences
to us and our non-PRC shareholders.
The PRC Enterprise Income Tax Law (“New EIT Law”) and its implementing rules provide that enterprises established outside of China whose “de
facto management bodies” are located in China are considered “resident enterprises” under PRC tax laws. The implementing rules promulgated under
the New EIT Law define the term “de facto management bodies” as a management body which substantially manages, or has control over the business,
personnel, finance and assets of an enterprise. The State Administration of Taxation, or SAT, promulgated Notice of the State Administration of Taxation
on Issues Concerning the Determination of Chinese-Controlled Enterprises Registered Overseas as Resident Enterprises on the Basis of Their Bodies of
Actual Management on April 22, 2009, referred to as Circular 82; Circular 82 formulates specific criteria for determining “de facto management body:”
(1) its premises where its officers and management departments in charge of routine production and operation management perform their duties are
mainly located inside China; (2) its financial decisions (such as borrowing, loan, financing and financial risk management) and personnel decision (such
as appointment, dismissal and remuneration) are made by the organizations or persons located inside China, or need to be approved by them; (3) its
principal properties, accounting books, corporate seals, meeting minutes and files of the board meetings and the shareholders’ meetings are placed or
kept inside China; and (4) 1/2 or more than 1/2 of its directors or officers with voting rights customarily reside inside China. However, SAT
promulgated Announcement of the State Administration of Taxation on Issues Concerning the Determination of Resident Enterprises on the Basis of
Their Actual Management Bodies on January 29, 2014, referred to as Circular 9. Pursuant to these regulations, once we meet the above criteria, we shall
file an application for determination of resident enterprise with the competent tax authorities at the place where its main investor is located in China. The
competent local tax authorities will, upon preliminary judgment of the enterprise’s resident status, report the same from local, to municipal, to the
provincial tax authorities for confirmation. Therefore, until we make such filing application, it is still unclear if the PRC tax authorities would determine
that we should be classified as a PRC “resident enterprise.”
If we are deemed as a PRC “resident enterprise,” we will be subject to PRC enterprise income tax on our worldwide income at a uniform tax rate of
25%, although dividends distributed to us from our existing PRC subsidiary, Hailiang Consulting and any other PRC subsidiaries which we may
establish from time to time could be exempt from the PRC dividend withholding tax due to our PRC “resident recipient” status. This could have a
material and adverse effect on our overall effective tax rate, our income tax expenses and our net income. Furthermore, dividends, if any, paid to our
shareholders and ADS holders may be decreased as a result of the decrease in distributable profits. In addition, if we were to be considered a PRC
“resident enterprise,” dividends we pay with respect to our ADSs or ordinary shares and the gains realized from the transfer of our ADSs or ordinary
shares may be considered income derived from sources within the PRC and be subject to PRC withholding tax. This could have a material and adverse
effect on the value of your investment in us and the price of our ADSs.
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There are significant uncertainties under the New EIT Law relating to the withholding tax liabilities of our PRC subsidiaries, and dividends payable
by our PRC subsidiaries to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.
Under the New EIT Law and its implementation rules, the profits of a foreign invested enterprise generated through operations, which are distributed to
its immediate holding company outside the PRC, will be subject to a withholding tax rate of 10%. Pursuant to a special arrangement between Hong
Kong and the PRC, such rate may be reduced to 5% if a Hong Kong resident enterprise owns more than 25% of the equity interest in the PRC company.
Our current PRC subsidiary, Hailiang Consulting is wholly-owned by our Hong Kong subsidiary. Hailiang Consulting also wholly owns the remaining
of our PRC subsidiaries. Moreover, under the Notice of the State Administration of Taxation on Issues regarding the Administration of the Dividend
Provision in Tax Treaties promulgated on February 20, 2009, the tax payer needs to satisfy certain conditions to enjoy the benefits under a tax treaty.
These conditions include: (1) the taxpayer must be the beneficial owner of the relevant dividends, and (2) the corporate shareholder to receive dividends
from the PRC subsidiaries must have continuously met the direct ownership thresholds during the 12 consecutive months preceding the receipt of the
dividends. Further, the State Administration of Taxation promulgated the Notice on How to Understand and Recognize the “Beneficial Owner” in Tax
Treaties on October 27, 2009, which limits the “beneficial owner” to individuals, enterprises or other organizations normally engaged in substantive
operations, and sets forth certain detailed factors in determining the “beneficial owner” status. Furthermore, the State Administration of Taxation
promulgated Announcement of the State Administration of Taxation on Issues Relating to “Beneficial Owner” in Tax Treaties (“Circular 9”) in
February 2018, which took into effect on April 1, 2018 and provides guidance for determining whether a resident of a contracting state is the “beneficial
owner” of an item of income under China’s tax treaties and tax arrangements.
Under applicable tax laws and regulations, we are required to apply for approvals from local tax authorities before we can enjoy any benefits under such
taxation treaties relating to the 5% withholding tax rate which we have not undertaken. Hailiang Consulting will apply for such approvals when it
intends to declare and pay dividends, but there is no assurance that the PRC tax authorities will approve the 5% withholding tax rate on dividends
received from Hailiang Consulting.
Based on the recent development of PRC law, there is significant uncertainty relating to the application and interpretation of the 2016 Private
Education Law and Implementation Rules of 2016 Private Education Law. We may be subject to significant limitations on our ability to engage in
the private education business, acquire private schools, or receive payments from our affiliated entities and may otherwise be materially and
adversely affected by changes in PRC laws and regulations.
The Standing Committee of the National People’s Congress amended the Law on the Promotion of Private Education on November 7, 2016, which
became effective on September 1, 2017. Pursuant to the 2016 Private Education Law, sponsors of private schools may choose to establish schools as
either non-profit or for-profit schools. Sponsors are not permitted to establish for-profit schools that provide compulsory education services, which
covers grades one to nine which accounted for a significant portion of our students as well as revenue during the reporting period. Sponsors of for-profit
private schools are entitled to retain the profits from their schools and the operating surplus may be allocated to the sponsors pursuant to the PRC
company law and other relevant laws and regulations. Sponsors of non-profit private schools are not entitled to any distribution of profits from their
schools and all revenue must be used for the operation of the schools. For further details, refer to “Item 4. Information on the Company–B. Business–
Regulations on Private Education–2016 Private Education Law and The 2004 Implementation Rules for Private Education Laws.”
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On August 10, 2018, the Ministry of Justice, or the MOJ, released the Implementation Rules for 2016 Private Education Laws (the MOJ Draft) to seek
public comments. As of the date of this annual report, the Implementation Rules for 2016 Private Education Laws has not come into force, and their
content and retroactive effect is still uncertain. The MOJ Draft stipulates, among others, (1) that foreign-invested enterprises established in China and
social organizations whose actual controllers are foreign parties shall not sponsor, participate in or actually control private schools that provide
compulsory education, (2) that group-based education organizations shall not control non-profit private schools through mergers and acquisitions,
franchise agreements and contractual arrangements, and (3) that related party transactions entered into by private schools shall be open, fair and just and
shall not harm national interests, school interests, or student or teacher interests. However, there is uncertainty as to whether the MOJ Draft will be
legislated in the same form as published for consultation, how it will be interpreted and implemented, and when and if the MOJ Draft will be legislated
at all. In particular, if the Implementation Rules for 2016 Private Education Laws is promulgated and implemented in accordance with the MOJ Draft
with retroactive effect, the validity of our contractual arrangements may be challenged and our corporate structure may need to be restructured to comply
with the new regulations, which may be time-consuming and expensive and impose additional restrictions on our business expansion. Our schools in
China that are involved in related party transactions may also be subject to strict supervision by relevant government authorities, and we may need to
establish corresponding information disclosure systems and incur greater compliance costs, and our contractual arrangements, which may be deemed as
related-party transactions, may be subject to scrutiny against the stipulated benchmarks by relevant government authorities.
As of the date of this annual report on Form 20-F, the State Council and national ministries and certain provinces including Zhejiang province have
promulgated supporting rules for the 2016 Private Education Law (in the form of Opinions). The 2016 Private Education Law does not provide for a
definitive time line for existing schools to re-register/change their for-profit or non-profit status. Nevertheless, Zhejiang province has promulgated
implementing opinions that all schools located in Zhejiang province are required to re-register and/or change their for-profit or non-profit status before
2022. In addition, local government authorities, in implementing the amended law, may impose additional limits on the tuition and fees our schools
charge. Furthermore, as a holding company, our ability to generate profits, pay dividends and other cash distributions to our shareholders under the
existing and amended law are affected by many factors, including whether our schools are characterized as for-profit or non-profit schools, the
profitability of our schools, and our ability to receive dividends and other distributions from our PRC subsidiary, Hailiang Consulting, which in turn
depends on the service fees paid to Hailiang Consulting from our affiliated schools and other service and management fees paid to Hailiang Consulting
by our other PRC managed schools.
Hailiang Consulting has entered into an exclusive management services and business cooperation agreement with Hailiang Management, pursuant to
which we provide service to our schools in exchange for the payment of service fees. As advised by our PRC counsel, our right to receive the service
fees from our schools and other affiliated entities does not contravene any PRC laws and regulations and that payment of service fees under our
contractual arrangements should not be regarded as the distribution of returns, dividends or profits to the sponsors of our schools under the PRC laws
and regulations. However, if the relevant PRC government authorities take a different view, or if the 2016 Private Education Law were to be
implemented and interpreted in a manner that deems our current business practices to be in violation, our business, financial condition and results of
operations may be materially and adversely affected.
We face uncertainties with respect to indirect transfers of the equity interests in PRC resident enterprises by their non-PRC holding companies.
The State Administration of Taxation has promulgated the Announcement of the State Administration of Taxation on Several Issues Relating to
Enterprise Income Tax on Transfer of Assets between Non-resident Enterprises, on February 3, 2015, hereinafter referred to as Circular 7. Under the
Circular 7, where a non-resident enterprise makes indirect transfer of assets such as the equity of a Chinese resident enterprise through arrangements
which do not have a reasonable commercial objective to circumvent enterprise income tax payment obligation, the indirect transfer shall be redefined
pursuant to the provisions of Article 47 of the new EIT Law as direct transfer of assets such as equity of Chinese resident enterprises. The Circular 7
defined the term “Indirect Transfer” clearly in Article 1: Indirect transfer of taxable assets in China shall mean transfer by a non-resident enterprise of
equity and other similar interests (hereinafter referred to as the “equity”) of an overseas enterprise which holds taxable assets in China directly or
indirectly (excluding Chinese resident enterprises registered overseas, hereinafter referred to as the “overseas enterprise”), which gives rise to a
transaction that has identical or similar substantial results as direct transfer of taxable assets in China, including restructuring of a non-resident enterprise
which causes changes in shareholders of an overseas enterprise. The non-resident enterprise which makes the indirect transfer of taxable assets in China
shall be referred to as the “transferor of equity”. Moreover, Circular 7 has also stipulated how the effective tax rates in foreign tax jurisdictions are
calculated, and the process and format of the reporting of an Indirect Transfer to the competent tax authority of the relevant PRC resident enterprise.
Articles 3, 4, 5 and 6 of Circular 7 provide guidance on how to determine whether a foreign investor has adopted an abusive arrangement in order to
reduce, avoid or defer PRC tax. Under Circular 7, where the tax authorities in charge needs to set up a case for investigation into and making adjustment
to the transaction of indirect transfer of taxable assets in China, the matter shall be dealt with pursuant to the relevant provisions on general anti-
avoidance.
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On October 17, 2017, the State Administration of Taxation (“SAT”) promulgated the Announcement of the State Administration of Taxation on Issues
Relating to Withholding at Source of Income Tax of Non-resident Enterprises (“SAT No.37”), which took effect on December 1, 2017. The SAT No.37
shall apply to handling of matters relating to withholding at source of income tax of non-resident enterprises pursuant to the provisions of Article 37,
Article 39 and Article 40 of the New EIT Law. Specifically, the SAT No.37 cancels the requirement for contract filing, but the tax authorities in charge
still have the right to require the taxpayer, the withholding agent and other relevant parties who are informed, to provide contract(s) and other relevant
materials relating to the tax withholding. In addition, according to the SAT No.37, where the income subject to withholding at source derived by a non-
resident enterprise is equity investment income such as dividends, bonuses etc., the date of occurrence of withholding obligation for the relevant tax
payable amount shall be the date of actual payment of equity investment income such as dividends, bonuses etc.; where the same asset transfer income
subject to withholding at source is derived by a non-resident enterprise by way of instalments, the instalments may first be treated as recovery of costs of
previous investments; upon recovery of all costs, the tax amount to be withheld shall then be computed and withheld. If the non-resident enterprise does
not declare and pay tax pursuant to the provisions of Article 39 of the New EIT Law, the tax authorities may order the enterprise to make payment
within a stipulated period, and the non-resident enterprise shall declare and pay tax within the period determined by the tax authorities; if the non-
resident enterprise has declared and paid tax before the tax authorities order it to make payment within a stipulated period, the enterprise shall be deemed
to have paid tax on time.
According to the New EIT Law, where business dealings between an enterprise and its interested parties fail to comply with the independent transaction
principle, and reductions are made to the taxable income or the amount of income of the enterprise or its interested parties; Or where the taxable income
or amount of income of an enterprise is reduced as a result of arrangements with no reasonable commercial objectives implemented by the enterprise,
the tax authorities have a right to make adjustments according to a reasonable method. Where the tax authorities have made tax adjustments and the
taxpayer is required to make up outstanding tax payments, the additional tax amount shall be levied and collected with interest pursuant to the provisions
of the State Council.
As a result, we and our non-resident investors may have the risk of being taxed according to above regulations and may be required to spend valuable
resources to comply with above regulations or to establish that we or our non-resident investors should not be taxed according to above regulations,
which may have a material adverse effect on our financial condition and results of operations or such non-resident investors’ investments in us.
Restrictions on currency exchange may limit our ability to receive income and allocate or reinvest effectively.
Most of our income is denominated in Renminbi. As a result, restrictions on currency exchange may limit our ability to use income generated in
Renminbi to fund any business activities we may have outside China in the future or to make dividend payments to our shareholders and ADS holders in
U.S. dollars. Under current PRC laws and regulations, Renminbi is freely convertible for current account items, such as trade and service-related foreign
exchange transactions and dividend distributions. However, Renminbi is not freely convertible for direct investment or loans or investments in securities
outside China, unless such use is approved by SAFE. For example, foreign exchange transactions under our subsidiary’s capital account, including
principal payments in respect of foreign currency-denominated obligations, remain subject to significant foreign exchange controls and the approval
requirement of SAFE. These limitations could affect our ability to obtain foreign exchange for capital expenditures.
Hailiang Consulting is permitted to declare dividends to our offshore subsidiary holding its equity interest, convert the dividends into a foreign currency
and remit to its shareholder outside of the PRC. In addition, in the event that Hailiang Consulting liquidates, proceeds from the liquidation may be
converted into foreign currency and distributed outside of China to our overseas subsidiary holding its equity interest. Furthermore, in the event that
Hailiang Management liquidates, Hailiang Consulting may, pursuant to a power of attorney it has entered into with Mr. Feng and Beize Group, require
Hailiang Management to pay and remit the proceeds from such liquidation to Hailiang Consulting. Hailiang Consulting then may distribute such
proceeds to us after converting them into foreign currency and remit them outside of China in the form of dividends or other distributions. Once remitted
outside of the PRC, dividends, distributions or other proceeds from liquidation paid to us will not be subject to restrictions under PRC regulations on its
further transfer or use.
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Other than the above distributions by and through Hailiang Consulting which are permitted to be made without the necessity to obtain further approvals,
any conversion of the Renminbi-denominated income generated by our affiliated entities for direct investment, loan or investment in securities outside
China will be subject to the limitations discussed above. To the extent we need to convert and use any Renminbi-denominated income generated by our
affiliated entities not paid to Hailiang Consulting and income generated by Hailiang Consulting not declared and paid as dividends, the limitations
discussed above will restrict the convertibility of, and our ability to directly receive and allocate or reinvest such income. As a result, our business and
financial condition may be adversely affected. In addition, there is no assurance that the PRC regulatory authorities will not impose more stringent
restrictions on the convertibility of Renminbi in the future, especially with respect to foreign exchange transactions.
Our subsidiaries and affiliated entities in China are subject to restrictions on making dividends and other payments to us.
We are a holding company and rely principally on dividends paid by our subsidiary in China for our cash needs, including paying dividends and other
cash distributions to our shareholders to the extent we choose to do so, servicing any debt we may incur and paying our operating expenses. Hailiang
Consulting and its subsidiaries’ income in turn depends on the service fees paid by our affiliated entities and managed schools. Current PRC regulations
permit our subsidiary in China to pay dividends to us only out of its accumulated profits, if any, determined in accordance with Chinese accounting
standards and regulations. Under the applicable requirements of PRC law, Hailiang Consulting may distribute dividends only after it has made
allowances to fund certain statutory reserves. These reserves are not distributable as cash dividends. In addition, at the end of each fiscal year, pursuant
to The 2004 Implementation Rules for Private Education Laws, each of our schools that is a private school in China requiring reasonable return is
required to allocate a certain amount to its development fund for the construction or maintenance of the school properties or purchase or upgrade of
school facilities. However, following the effectiveness of the 2016 Private Education Law, which no longer uses the term “reasonable return” and
requires a private school to either register as for-profit or non-profit. Pursuant to the 2016 Private Education Law, sponsors are not permitted to establish
for-profit schools that provide compulsory education services, which covers grades one to nine which accounted for a significant portion of our students
as well as revenue during the reporting period. Sponsors of for-profit private schools are entitled to retain the profits from their schools and the operating
surplus may be allocated to the sponsors pursuant to the PRC company law and other relevant laws and regulations. Sponsors of non-profit private
schools are not entitled to any distribution of profits from their schools and all revenue must be used for the operation of the schools. In addition, prior to
the specific Implementation Rules of 2016 Private Education Law being promulgated by the State Council and other relevant regulations promulgated
by other local and regional governments, all of our affiliated schools that we control, each of which is a private school, are required to allocate not less
than 25% of their annual net income to its development fund for the construction or maintenance of the school properties or for the purchase or upgrade
of school facilities. We are uncertain how the Implementation Rules of 2016 Private Education Law will be promulgated, and how such rules will impact
our operation. For more detailed information, refer to “Item 4. Information on the Company–B. Business–Regulations on Private Education–2016
Private Education Law and The 2004 Implementation Rules for Private Education Laws.” Furthermore, if our subsidiaries or our affiliated entities in
China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments
to us. Any such restrictions may materially affect such entities’ ability to make dividends or make payments, in service fees or otherwise, to us, which
may materially and adversely affect our business, financial condition and results of operations.
Fluctuations in the value of the Renminbi may have a material adverse effect on your investment.
The change in value of the Renminbi against the U.S. dollar and other currencies is affected by, various factors, such as changes in China’s political and
economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar.
Under such policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Later on,
the People’s Bank of China has decided to further implement the reform of the RMB exchange regime and to enhance the flexibility of RMB exchange
rates. Such changes in policy have resulted in a significant appreciation of the Renminbi against the U.S. dollar since 2005 though there have been
periods when the U.S. dollar has appreciated against the Renminbi as well. There remains significant international pressure on the PRC government to
adopt a more flexible currency policy, which could result in a further and more significant adjustment of the Renminbi against the U.S. dollar.
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Any significant appreciation or revaluation of the Renminbi may have a material adverse effect on the value of, and any dividends payable on, our ADSs
in foreign currency terms. More specifically, if we decide to convert our Renminbi into U.S. dollars, appreciation of the U.S. dollar against the Renminbi
would have a negative effect on the U.S. dollar amount available to us. To the extent that we need to convert U.S. dollars we received from our initial
public offering or that we will receive from future offerings or financings into Renminbi for our operations, appreciation of the Renminbi against the
U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. In addition, appreciation or depreciation in the
exchange rate of the Renminbi to the U.S. dollar could materially and adversely affect the price of our ADSs in U.S. dollars without giving effect to any
underlying change in our business or results of operations.
We might have been required to obtain prior approval of the China Securities Regulatory Commission, or CSRC, of the listing and trading of our
ADSs on the Nasdaq Global Market.
On August 8, 2006, six PRC regulatory authorities, including the MOFCOM, the State Assets Supervision and Administration Commission, the State
Administration of Taxation, State Administration for Industry and Commerce of PRC, or SAIC, CSRC and SAFE, jointly issued the Regulations on
Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules. This regulation, among other things, requires that the listing
and trading on an overseas stock exchange of securities in an offshore special purpose vehicle formed for purposes of holding direct or indirect equity
interests in PRC companies and controlled directly or indirectly by PRC companies or individuals be approved by the CSRC. On September 21, 2006,
the CSRC published on its official website the procedures for such approval process. In particular, certain documents are required to be filed with the
CSRC as part of the approval procedures and it could take several months to complete the approval process.
While the implementation and interpretation of the M&A Rules remains unclear, we believe, based on the advice of our PRC counsel, that approval by
the CSRC was not required for our initial public offering because we are not a special purpose vehicle formed or controlled by PRC companies or PRC
individuals as defined under the M&A Rules. However, we cannot assure you that the relevant PRC regulatory authorities, including the CSRC, would
reach the same conclusion as our PRC counsel. If the CSRC or other PRC regulatory authority subsequently determines that we needed to obtain the
CSRC’s approval for our initial public offering, we may face sanctions by the CSRC or other PRC regulatory authorities. In such event, these regulatory
authorities may, among other things, impose fines and penalties on or otherwise restrict our operations in the PRC or delay or restrict any remittance of
the proceeds from our initial public offering into the PRC. Any such or other actions taken could have a material adverse effect on our business,
financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs.
Certain PRC regulations, including the M&A Rules and national security regulations, may require a complicated review and approval process
which could make it more difficult for us to pursue growth through acquisitions in China.
The M&A Rules established additional procedures and requirements that could make merger and acquisition activities in China by foreign investors
more time-consuming and complex. For example, the MOFCOM must be notified in the event a foreign investor takes control of a PRC domestic
enterprise. In addition, certain acquisitions of domestic companies by offshore companies that are related to or affiliated with the same entities or
individuals of the domestic companies, are subject to approval by the MOFCOM. In addition, the Implementing Rules Concerning Security Review on
Mergers and Acquisitions by Foreign Investors of Domestic Enterprises, issued by the MOFCOM in August 2011, require that mergers and acquisitions
by foreign investors in “any industry with national security concerns” be subject to national security review by the MOFCOM. In addition, any activities
attempting to circumvent such review process, including structuring the transaction through a proxy or contractual control arrangement, are strictly
prohibited.
There is significant uncertainty regarding the interpretation and implementation of these regulations relating to merger and acquisition activities in
China. In addition, complying with these requirements could be time-consuming, and the required notification, review or approval process may
materially delay or affect our ability to complete merger and acquisition transactions in China. As a result, our ability to seek growth through
acquisitions may be materially and adversely affected.
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In addition, if the MOFCOM determines that we should have obtained its approval for our entry into contractual arrangements with our affiliated entities
and the shareholder of Hailiang Management, we may be required to file for remedial approvals. There is no assurance that we would be able to obtain
such approval from the MOFCOM. We may also be subject to administrative fines or penalties by the MOFCOM that may require us to limit our
business operations in the PRC, delay or restrict the conversion and remittance of our funds in foreign currencies into the PRC or take other actions that
could have material and adverse effect on our business, financial condition and results of operations.
A failure by the beneficial owners of our shares who are PRC residents to comply with certain PRC foreign exchange regulations could restrict our
ability to distribute profits, restrict our overseas and cross-border investment activities and subject us to liability under PRC law.
SAFE has promulgated regulations, including the Notice on Relevant Issues Relating to Domestic Residents’ Investment and Financing and Round-Trip
Investment through Special Purpose Vehicles , or SAFE Circular No. 37, effective on July 4, 2014, and its appendices, that require PRC residents,
including PRC institutions and individuals, to register with local branches of SAFE in connection with their direct establishment or indirect control of an
offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic
enterprises or offshore assets or interests, referred to in SAFE Circular No. 37 as a “special purpose vehicle”. SAFE Circular No. 37 further requires
amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital
contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding
interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be
prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the
special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Further, failure to comply with the
various SAFE registration requirements described above could result in liability under PRC law for foreign exchange violation.
These regulations apply to our direct and indirect shareholders who are PRC residents and may apply to any offshore acquisitions or share transfers that
we make in the future if our shares are issued to PRC residents. However, in practice, different local SAFE branches may have different views and
procedures on the application and implementation of SAFE regulations, and since SAFE Circular No. 37 was recently issued, there remains uncertainty
with respect to its implementation. We have requested PRC residents who we know currently hold direct or indirect interests in our company to make the
necessary applications, filings and amendments as required under SAFE Circular No. 37 and other related rules. As advised by AllBright Law Offices,
our PRC legal counsel, as of the date of this annual report on Form 20-F, such PRC residents have duly made such applications, filings and amendments
as required by SAFE Circular No. 75, the predecessor regulation of SAFE Circular No. 37. Such applications, filings and amendments were made
pursuant to SAFE Circular No. 75 before SAFE Circular No. 37 went into effect. However, SAFE Circular No. 37 shall apply to any subsequent
amendments made by Mr. Feng after the effective date of SAFE Circular No. 37. As of the date of this annual report on Form 20-F, to the best of our
knowledge, Mr. Feng is not required to make any amendment under SAFE Circular No. 37. However, we cannot assure you that Mr. Feng or any other
direct or indirect shareholders or beneficial owners of our company who are PRC residents will be able to successfully complete the registration or
update the registration of their direct and indirect equity interest as required in the future. If they fail to make or update the registration, our PRC
subsidiaries could be subject to fines and legal penalties, and SAFE could restrict our cross-border investment activities and our foreign exchange
activities, including restricting our PRC subsidiaries’ ability to distribute dividends to, or obtain loans denominated in foreign currencies from, our
company, or prevent us from paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and
adversely affected.
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You may experience difficulties in effecting service of legal process, enforcing foreign judgments, or bringing actions in China against us or our
management named in the prospectus based on foreign laws. It may also be difficult for you or overseas regulators to conduct investigations or
collect evidence within China.
As a company incorporated under the laws of the Cayman Islands, we conduct a majority of our operations in China and a majority of our assets are
located in China. In addition, all of our senior executive officers reside within China for a significant portion of the time and are PRC nationals. As a
result, it may be difficult for you to effect service of process upon those persons inside mainland China. It may be difficult for you to enforce judgements
obtained in U.S. courts based on civil liability provisions of the U.S. federal securities laws against us and our officers and directors, as none of them
currently resides in the U.S. or has substantial assets in the U.S. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the
PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws
of the U.S. or any state.
The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce
foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where
the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of written arrangement with
the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures
Law, the PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic
principles of PRC laws or national sovereignty, security, or public interest. As a result, it is uncertain whether and on what basis a PRC court would
enforce a judgment rendered by a court in the United States.
It may also be difficult for you or overseas regulators to conduct investigations or collect evidence within China. For example, in China, there are
significant legal and other obstacles to obtaining information, documents, and materials needed for regulatory investigations or litigation outside China.
Although the authorities in China may establish a regulatory cooperation mechanism with its counterparts of another country or region to monitor and
oversee cross border securities activities, such regulatory cooperation with the securities regulatory authorities in the Unities States may not be efficient
in the absence of practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or “Article 177,” which became
effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory
of the PRC. Article 177 further provides that Chinese entities and individuals are not allowed to provide documents or materials related to securities
business activities to foreign agencies without prior consent from the securities regulatory authority of the PRC State Council and the competent
departments of the PRC State Council. While detailed interpretation of or implementing rules under Article 177 have yet to be promulgated, the inability
for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced
by you in protecting your interests.
Recent joint statement by the SEC and the Public Company Accounting Oversight Board (United States), or the “PCAOB,” proposed rule changes
submitted by Nasdaq, and an act passed by the U.S. Senate all call for additional and more stringent criteria to be applied to emerging market
companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These
developments could add uncertainties to us.
On April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint
statement highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including China.
The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher
risks of fraud in emerging markets.
On May 18, 2020, Nasdaq filed three proposals with the SEC to (i) apply minimum offering size requirement for companies primarily operating in
“Restrictive Market,” (ii) adopt a new requirement relating to the qualification of management or board of director for Restrictive Market companies,
and (iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s auditor.
On May 20, 2020, the U.S. Senate passed an act requiring a foreign company to certify it is not owned or manipulated by a foreign government if the
PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to
inspect the company’s auditor for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange.
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On June 4, 2020, the U.S. President issued a memorandum ordering the President’s working group on financial markets to submit a report to the
President within 60 days of the date of the memorandum that should include recommendations for actions that can be taken by the executive branch and
by the SEC or PCAOB to enforce U.S. regulatory requirements on Chinese companies listed on U.S. stock exchanges and their audit firms. On
August 6, 2020, the President’s working group released a report recommending that the SEC take steps to implement the five recommendations outlined
in the report. In particular, to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfill its statutory mandate,
the President’s working group recommended enhanced listing standards on U.S. stock exchanges. This would require, as a condition to initial and
continued exchange listing, PCAOB access to work papers of the principal audit firm for the audit of the listed company. Companies unable to satisfy
this standard as a result of governmental restrictions on access to audit work papers and practices in their jurisdiction may satisfy this standard by
providing a co-audit from an audit firm with comparable resources and experience where the PCAOB determines it has sufficient access to audit work
papers and practices to conduct an appropriate inspection of the co-audit firm. The report permits the new listing standards to provide for a transition
period until January 1, 2022 for listed companies. If we fail to meet the new listing standards before Janaury 1, 2022 due to factors beyond our control,
we could face possible de-listing from Nasdaq, deregistration from the SEC and/or other risks, which may materially and adversely affect, or effectively
terminate, our ADRs trading in the United States. On August 10, 2020, the SEC announced that the SEC chairman had directed the SEC staff to prepare
proposals in response to the report of the President’s working group, and that the SEC was soliciting public comments and information with respect to
the development of these proposals. It remains unclear what further actions, if any, the U.S. executive branch, the SEC, and PCAOB will take to address
the problem.
The lack of access to the PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors
based in China. As a result, investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of
auditors in China makes it more difficult to evaluate the effectiveness of these accounting firm’s audit procedures or quality control procedures as
compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our Ordinary
Shares to lose confidence in our auditor’s audit procedures and reported financial information and the quality of our financial statements.
Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report on Form 20-F, as an
auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant
to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is located in China, a
jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, and hence, our auditor is not currently
inspected by the PCAOB. However, the recent developments would add uncertainties to our listing on Nasdaq and we cannot assure you whether
Nasdaq or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit
procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach, or experience as it relates
to our audit.
Labor Contract Laws in China May Adversely Affect Our Results of Operations.
On June 29, 2007, the PRC government promulgated the Labor Contract Law of the PRC, or the Labor Contract Law, which became effective on
January 1, 2008. The Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision to reduce
its workforce. Further, it requires certain terminations be based on the mandatory requirement age. In the event we decide to significantly change or
decrease our workforce, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our
business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations.
Increases in labor costs in the PRC may adversely affect our business and our profitability.
The economy of China has been experiencing significant growth, leading to inflation and increased labor costs. According to the National Bureau of
Statistics of China, the consumer price index in China increased by 1.6%, 2.1% and 2.9% in 2017, 2018 and 2019, respectively. China’s overall economy
and the average wage in the PRC are expected to continue to grow. Future increases in China’s inflation and material increases in the cost of labor may
materially and adversely affect our profitability and results of operations unless we are able pass on these costs to our students by increasing tuition.
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Risks Relating to our Ordinary Shares and ADSs
The market price for the ADSs may be volatile.
The market price for our ADSs has fluctuated since we listed our ADSs. Since our ADSs became listed on the NASDAQ Global Market on July 7, 2015,
the trading price of our ADSs has ranged from US$7.02 to US$88.92 per ADS, and the last reported trading price on October 13, 2020 was US$57.11
per ADS. The market price of the ADSs may be highly volatile and subject to wide fluctuations in response to factors including the following:
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changes in the general environment and the outlook of the education industry;
regulatory developments in the education industry;
actual or anticipated fluctuations in our quarterly or annual results of operations;
changes in financial estimates by securities research analysts or the failure by securities research analysts to cover our ADSs after the listing;
negative market studies or reports;
changes in performance and valuation of our peer or comparable companies;
announcements by us or our competitors of new services, acquisitions, strategic relationships, joint ventures or capital commitments;
changes in our senior management;
sales or anticipated sales of additional ordinary shares or ADSs; and
fluctuations in the exchange rate between the Renminbi and the U.S. dollar.
In addition, the securities markets in the United States, China and elsewhere have from time to time experienced significant price and volume
fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect
the market price of the ADSs.
Substantial future sales of our ADSs or the anticipation of future sales of our ADSs in the public market could cause the price of our ADSs to
decline.
Sales of substantial amounts of our ADSs or ordinary shares in the public market, or the perception that these sales could occur, could cause the market
price of our ADSs to decline. All of our outstanding ADSs are freely transferable without restriction or additional registration under the Securities
Act and are available for sale, subject to certain restrictions. Sales of these shares into the market could cause the market price of our ADSs to decline.
We may need additional capital, and the sale of equity or debt securities would result in dilution to our shareholders and restrictions on our business
and operations.
We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for
more than the next twelve months. We may, however, require additional cash resources due to changed business conditions or other future developments.
If our resources are insufficient to satisfy our cash requirements, we may seek to sell equity or debt securities or obtain a credit facility. The sale of
equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could
result in operating and financing covenants that would restrict our operations or our ability to pay dividends. Our ability to raise additional funds in the
future is subject to a variety of uncertainties, including our future financial condition, results of operations and cash flows, general market conditions for
capital-raising activities, and economic, political and other conditions in China and elsewhere. We cannot assure you that if we need cash financing it
will be available in sufficient amounts or on terms acceptable to us, if at all.
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If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding
our ADSs, the price of our ADSs and trading volume could decline.
The trading market for our ADSs depends in part on the research and reports that industry or securities analysts publish about us or our business. We do
not have any control over these analysts. If one or more of the analysts who cover us downgrade us, the price of our ADSs would likely decline. If one
or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets,
which could cause the price of our ADSs or trading volume to decline.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it
deems necessary or advisable in connection with the performance of its duties, or at our reasonable written request. In addition, the depositary may
refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the
depositary deem it necessary or advisable to do so in good faith, because of any requirement of law or of any government or governmental body or
commission or securities exchange on which our ADSs are listed, or under any provision of the deposit agreement, or for any other reason.
We incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of
2002, as well as rules subsequently implemented by the SEC and the Nasdaq Global Market, imposes various requirements on the corporate governance
practices of public companies. As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth
company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are
otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of
the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting.
Compliance with these rules and regulations has increased and will continue to increase our legal and financial compliance costs and has made and will
continue to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur
significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley
Act of 2002 and the other rules and regulations of the SEC. We will cease to qualify as an “emerging growth company” on the earliest of (i) the last day
of the fiscal year in which we had US$1.07 billion or more in annual gross revenue, (ii) the last day of the fiscal year following the fifth anniversary of
our initial public offering, (iii) the date on which we have, during the previous three-year period, issued more than US$1.0 billion in non-convertible
debt or (iv) the date on which we are deemed a “large accelerated filer” under the Exchange Act.
In addition, we have incurred additional costs associated with our public company reporting requirements. It may also be more difficult for us to find
qualified persons to serve on our board of directors or as executive officers. We expect these rules and regulations to increase our legal and financial
compliance costs, but we cannot predict or estimate the additional costs or the timing of additional costs we may incur.
Shareholders of a public company often bring securities class action suits against the company following periods of instability in the market price of that
company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources
from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such
class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is
successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and
results of operations.
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If we cease to qualify as a foreign private issuer, we would be required to comply fully with the reporting requirements of the Exchange
Act applicable to U.S. domestic issuers, and we would incur significant legal, accounting and other expenses that we do not incur as a foreign
private issuer.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our
officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as
promptly as U.S. domestic issuers, and are not required to disclose in our periodic reports all of the information that U.S. domestic issuers are required to
disclose. If we do not qualify as a foreign private issuer in the future, we will be required to comply fully with the reporting requirements of
the Exchange Act applicable to US domestic issuers, and we will incur significant legal, accounting and other expenses that we would not incur as a
foreign private issuer.
Anti-takeover provisions in our amended and restated memorandum and articles of association may discourage, delay or prevent a change in
control.
Some provisions of our currently effective amended and restated memorandum and articles of association may discourage, delay or prevent a change in
control of our company or management that shareholders may consider favorable, including, among other things, the following:
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provisions that authorize our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences,
privileges and restrictions of such preferred shares without any further vote or action by our shareholders; and
provisions that restrict the ability of our shareholders to call meetings and to propose special matters for consideration at shareholder meetings.
The depositary may give us a discretionary proxy to vote the ordinary shares represented by the ADSs.
The depositary will try, as far as practical, subject to the laws of the Cayman Islands and the provisions of our amended and restated memorandum and
articles of association, to vote or to have its agents vote the ordinary shares or other deposited securities (in person or by proxy) as you instruct. If we
timely requested the depositary to solicit your instructions but no instructions are received by the depositary from an owner with respect to any of the
deposited securities represented by the ADSs of that owner on or before the date established by the depositary for such purpose or the instructions fail to
specify the manner in which the depositary is to vote, the depositary shall deem that owner to have instructed the depositary to give a discretionary
proxy to a person designated by us with respect to such deposited securities, and the depositary shall give a discretionary proxy to a person designated
by us to vote such deposited securities. However, no such instruction shall be deemed given and no such discretionary proxy shall be given with respect
to any matter if we inform the depositary, we do not wish such proxy given, substantial opposition exists or the matter materially and adversely affects
the rights of holders of the ordinary shares. The effect of this discretionary proxy is that if you do not give voting instructions, you cannot prevent the
ordinary shares underlying your ADSs from being voted, except in the circumstances described above. This may make it more difficult for shareholders
to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.
You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise
your right to vote.
As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying ordinary shares in accordance with the
provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. In order to give you a
reasonable opportunity to instruct the depositary as to the exercise of voting rights relating to deposited securities, if we request the depositary to act, we
will give the depositary notice of any such meeting and details concerning the matters to be voted at least 30 business days in advance of the meeting
date. However, there is no guarantee that you will receive voting materials in time to instruct the depositary to vote, and it is possible that you, or
persons who hold their ADSs through brokers, dealers or other third-parties, will not have the opportunity to exercise a right to vote.
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Upon receipt of notice of a shareholders meeting from us, the depositary will distribute to registered holders of ADSs a notice which contains, among
other things, a statement as to the manner in which your voting instructions may be given, including an express indication that, subject to limited
exceptions, such instructions may be given or deemed given to the depositary to give a discretionary proxy to a person designated by us if no
instructions are received by the depositary from you on or before the response date established by the depositary.
You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the
depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either
registered under the Securities Act, or exempt from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation
to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared
effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our
ADSs may be unable to participate in a right offering we make and may experience dilution in their holdings as a result.
You may not receive distributions on our ordinary shares or any value for them if such distribution is illegal or if any required government approval
cannot be obtained in order to make such distribution available to you.
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other
deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of
ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution
available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require
registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. In these cases,
the depositary may determine not to distribute such property. We also have no obligation to take any other action to permit the distribution of ADSs,
ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any
value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our
ADSs.
You will have limited ability to bring an action against us or against our directors and officers, or to enforce a judgment against us or them, because
we are incorporated in the Cayman Islands, we conduct a majority of our operations in China, and the majority of our directors and officers reside
outside the United States.
We are incorporated in the Cayman Islands and conduct our operations primarily in China. Substantially all of our assets are located outside the United
States and the majority of our directors and officers reside outside the United States. As a result, it may be difficult or impossible for you to bring an
action against us or against these individuals in the Cayman Islands or in China in the event that you believe your rights have been infringed under the
applicable securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may
render you unable to enforce a judgment against our assets or the assets of our directors and officers.
The laws of the Cayman Islands may not provide our shareholders with benefits comparable to those provided to shareholders of corporations
incorporated in the United States.
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Our corporate affairs are governed by our amended and restated memorandum and articles of association, by the Companies Law, Cap 22 (Law 3 of
1961, as consolidated and revised) of the Cayman Islands and by the common law of the Cayman Islands. The rights of shareholders to take action
against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large
extent governed by the common law of the Cayman Islands. The common law in the Cayman Islands is derived in part from comparatively limited
judicial precedent in the Cayman Islands and from English common law. Decisions of the Privy Council (which is the final Court of Appeal for British
Overseas Territories such as the Cayman Islands) are binding on a court in the Cayman Islands. Decisions of the English courts, and particularly the
House of Lords and the Court of Appeal are generally of persuasive authority but are not binding in the courts of the Cayman Islands. The rights of our
shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or
judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws relative to the United States.
Therefore, our public shareholders may have more difficulty protecting their interests in the face of actions by our management, directors or controlling
shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
Legislation enacted in the Cayman Islands as to Economic Substance may affect our operations.
Pursuant to the International Tax Cooperation (Economic Substance) Law, 2018 of the Cayman Islands (“Cayman ES Law”) that came into force on
January 1, 2019, a “relevant entity” is required to satisfy the economic substance test set out in the Cayman ES Law. A “relevant entity” includes an
exempted company incorporated in the Cayman Islands (such as the Company); however, it does not include an entity that is tax resident outside the
Cayman Islands. Accordingly, for so long as the Company is a tax resident outside the Cayman Islands, including in the U.S., it is not required to satisfy
the economic substance test set out in the ES Law. If we ceased to be a tax resident outside the Cayman Islands, and failed to satisfy the economic
substance test set out in the Cayman ES Law, we may initially be subject to penalty in accordance with the Cayman ES Law.
We may be classified as a passive foreign investment company, which could result in adverse United States federal income tax consequence to U.S.
holders of our ADSs or ordinary shares.
A non-United States corporation such as ourselves will be treated as a PFIC, as defined in Section 1297(a) of the Code, for United States federal income
tax purposes for any taxable year if, applying applicable look-through rules, either:
·
·
at least 75% of its gross income for such year is passive income; or
at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets
that produce or are held for the production of passive income.
For this purpose, passive income generally includes dividends, interest, royalties, and rents (other than certain royalties and rents derived in the active
conduct of a trade or business and not derived from a related person).
If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds our
ordinary shares, the U.S. taxpayer may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.
Depending on the assets held for the production of passive income, it is possible that, for our 2020 taxable year or for any subsequent year, more than
50% of our assets may be assets which produce passive income. We will make this determination following the end of any particular tax year. Although
the law in this regard is unclear, we are treating Hailiang Management and its subsidiaries as being owned by us for United States federal income tax
purposes, not only because we control their management decisions, but also because we are entitled to the economic benefits associated with Hailiang
Management and its subsidiaries, and as a result, we are treating Hailiang Management as our wholly-owned subsidiary for U.S. federal income tax
purposes. For purposes of the PFIC analysis, in general, according to Internal Revenue Code Section 1297(c), a non-U.S. corporation is deemed to own
its pro rata share of the gross income and assets of any entity in which it is considered to own at least 25% of the equity by value. Although we do not
technically own any stock in Hailiang Management, because of our control of management decisions of Hailiang Management, our entitlement to
economic benefits associated with Hailiang Management, and the inclusion of Hailiang Management as part of the consolidated group, there is a risk
that our interest in Hailiang Management might be considered a deemed stock interest. Therefore, the income and assets of Hailiang Management and its
subsidiaries should be included in the determination of whether or not we are a PFIC in any taxable year. It is important to emphasize that there is little
to no guidance other than the statute itself (Internal Revenue Code Section 1297(c)) and analogous portions of the code, treasury regulations and other
accepted authorities and as such it is possible for the IRS to challenge the argument that the look through rule would apply in this case, especially since
the statute explicitly says “stock.” Thus, if we are not treated as owning Hailiang Management and its subsidiaries for United States federal income tax
purposes, we would likely be treated as a PFIC.
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The determination of whether we are or will become a PFIC for any taxable year may depend in part upon the value of our goodwill and other unbooked
intangibles not reflected on our balance sheet (which may be determined based upon the market value of our ADSs or ordinary shares from time to
time). A material decline in the trading price of our ADSs relative to their current trading price may result in us becoming a PFIC. If we are a PFIC for
any taxable year for which a U.S. holder holds our ADSs or ordinary shares, certain adverse United States federal income tax consequences could apply
to such U.S. holders. See “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment
Company.”
Item 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We are an exempted company with limited liability incorporated in the Cayman Islands. We conduct our business through our subsidiaries and affiliated
entities in China. As of June 30, 2020, we owned and operated nine affiliated schools offering K-12 educational services in Zhuji, Zhejiang province and
Zhenjiang, Jiangsu province of China, and managed and operated, but did not own or sponsor, an additional 28 private and public schools that offer K-
12 educational services in the Jiangxi, Hubei, Shandong, Jiangsu and Zhejiang provinces of China. In September 2020, we started operating or acquired
four additional affiliated schools, namely, Lanzhou Hailiang Experimental School, Wuhu Hailiang Experimental School, Hailiang Overseas Chinese
School and Jinhua Hailiang Foreign Language School, which are located in Gansu, Anhui and Zhejiang Provinces of China, increasing our affiliated
schools from nine as of June 30, 2020 to 13 as of the date of this annual report. Moreover, there are two additional schools, tentatively named Ninghai
Public School and Xianghu Public School which are to be sponsored by us, are under construction. These two schools are located in Zhejiang Province
of China, and are expected to start operating in the fall of 2021.
We started our operations in 1995 when Zhuji Hailiang Foreign Language School, our first private school, was founded by Mr. Feng. Our second private
school, Hailiang Experimental High School, was founded by Mr. Feng and Mr. Zhanghuan Meng in 2001. At the time Hailiang Experimental High
School’s founding, Mr. Feng owned 60% of the equity interest in the school and Mr. Zhanghuan Meng held the remaining equity interest in the school.
In November 2011, Mr. Feng purchased the remaining 40% equity interest in Hailiang Experimental High School from Mr. Zhanghuan Meng and
became the sole sponsor of Hailiang Experimental High School. Our third private school, Tianma Experimental School, was jointly acquired by
Mr. Feng and Mr. Zhanghuan Meng in July 2009. At the time of the acquisition, Mr. Feng and Mr. Zhanghuan Meng beneficially owned 80% and 20%
of the equity interest in the school, respectively. In November 2011, Mr. Feng acquired the 20% equity interest in the school from Mr. Zhanghuan Meng
and became the sole sponsor of Tianma Experimental School.
Between 2011 and 2013, we underwent a corporate restructuring in contemplation of our initial public offering. In particular:
·
·
·
Incorporation of the listing entity and Hong Kong subsidiary. In April 2011, Mr. Feng incorporated Hailiang Inc. as our proposed listing entity
in the Cayman Islands and Hailiang HK in Hong Kong. In January 2012, he transferred all of his shares of Hailiang HK to Hailiang Inc.
Change in holding structure by Mr. Feng. In December 2011, Mr. Feng transferred all the shares in Hailiang Inc. to four BVI holding
companies.
Incorporation of PRC subsidiary. In December 2011, Hailiang HK incorporated Hailiang Consulting as our wholly-owned subsidiary in the
PRC.
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·
·
Equity investment in our company. In March 2012, Maxida International Company Limited, an independent third party, purchased 5,000,000
newly issued ordinary shares, or 1.4% of Hailiang Inc.’s total outstanding shares after the purchase, for US$3.0 million.
Consolidation of our affiliated schools under a single entity. In April 2012, Mr. Feng incorporated Hailiang Management which is wholly-
owned by Mr. Feng, as the holding company to hold equity interests in our affiliated schools in China and transferred his equity interests in our
three schools to Hailiang Management.
In October 2014, Mr. Feng transferred his 100% interest in Brilliant One Development Limited, one of the four BVI companies that Mr. Feng had
previously transferred his shares of Hailiang Inc. to in December 2011, to Hailiang International Investment (HK) Limited, a company wholly owned by
Hailiang Group. Hailiang Group is controlled by Mr. Feng.
Foreign ownership in educational services is subject to significant regulations in China. The PRC government regulates the provision of educational
services through strict licensing requirements. In particular, PRC laws and regulations currently prohibit foreign ownership of companies and institutions
providing compulsory educational services at primary and middle school levels, and restrict foreign investment in educational services businesses at the
high school level. We are a company incorporated in the Cayman Islands. Our PRC subsidiary, Hailiang Consulting, is a foreign-owned enterprise and is
currently ineligible to apply for and hold licenses to operate, or otherwise own equity interests in, our schools with K-12 educational programs, either
for-profit or not-for-profit. Due to these restrictions, we, through our PRC subsidiary, Hailiang Consulting, have initially entered into a series of
contractual arrangements prior to our initial public offering, with (i) our affiliated entities, consisting of Hailiang Management and the schools which
Hailiang Management controls and holds, and (ii) the shareholder of Hailiang Management, Mr. Feng, who is also our founder, which enable us to:
·
·
·
exercise the power over our affiliated entities;
have the exposure or rights to variable returns from our involvement with our affiliated entities; and
exercise the ability to affect those returns through use of its power over our affiliated entities.
We do not have any equity interest in our affiliated entities. However, as a result of these contractual arrangements, we control our affiliated entities
through our PRC subsidiary, Hailiang Consulting. We have consolidated the results of our affiliated entities in our consolidated financial statements
included elsewhere in this annual report on Form 20-F in accordance with IFRSs.
On June 30, 2017, Hailiang Consulting, Hailiang Management and Mr. Feng entered into a series of amended and restated contractual arrangements
(collectively, the “First Amended and Restated Contractual Arrangements”). The First Amended and Restated Contractual Arrangements added new
affiliated entities of Hailiang Management and allowed for potential contractual arrangements, if any and when applicable, to be entered into by
controlled affiliate(s) of Hailiang Consulting.
On February 23, 2018, Hailiang Management, Hailiang Consulting, Mr. Feng and Beize Group entered into a series of contractual arrangements (the
“Second Amended and Restated Contractual Arrangements”), including the Second Amended and Restated Call Option Agreement, Second Amended
and Restated Powers of Attorney, Second Amended and Restated Consulting Services Agreement and Second Amended and Restated Equity Pledge
Agreement.
We have been advised by AllBright Law Offices, our PRC legal counsel, that:
·
·
The ownership structures of Hailiang Consulting and our affiliated entities comply with all current PRC laws and regulations; however, the
current various interest entity structure or the VIE structure established by the Second Amended and Restated Contractual Arrangements may
not be as effective in providing control as direct ownership;
The Second Amended and Restated Contractual Arrangements are valid, binding and enforceable under PRC laws and regulations, and are not
in violation of PRC laws or regulations currently in effect; and
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·
The business licenses of Hailiang Consulting and our affiliated entities are in full force and effect. Each of Hailiang Consulting and our
affiliated entities have all necessary power to conduct its business as described in its business scope under its business license, and to enter into
the contractual arrangements described in this annual report on Form 20-F. To the best of our PRC legal counsel’s knowledge after due inquiry,
none of Hailiang Consulting, any affiliated entities, or their respective assets are entitled to any sovereign immunity from any action, suit or
other legal proceedings, or from enforcement, execution or attachment.
We have been advised by our PRC legal counsel, however, that there are substantial uncertainties regarding the interpretation and application of PRC
laws and regulations. Accordingly, PRC regulatory authorities may in the future take a view that is contrary to the opinion of our PRC legal counsel. We
have been further advised by our PRC legal counsel that if the PRC government finds that the contractual arrangements and agreements that establish the
structure for operating our educational services business in China do not comply with relevant PRC government restrictions on foreign investment in the
educational services industry, we could be subject to severe penalties, including being prohibited from continuing operations. For a detailed description
of the risks associated with our corporate structure, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Corporate Structure” and
“Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China.”
On July 6, 2015, we completed the initial public offering of 2,858,000 ADSs. On July 7, 2015, we listed our ADSs on the NASDAQ Global Market
under the symbol “HLG.”
On December 22, 2017, we filed with the SEC a registration statement on Form F-3 for a shelf registration offering of Ordinary Shares and warrants in
the aggregate amount of $100,000,000 (the “Shelf Offering”), which was declared effective on January 5, 2018. As of June 30, 2020, and the date of this
annual report on Form 20-F, we have not completed any draw down under the Shelf Offering.
In September 2015, Zhuji Hailiang Foreign Language School and selected programs from Tianma Experimental School and Hailiang Experimental High
School relocated to Hailiang Education Park. Tianma Experimental School’s and Hailiang Experimental High School’s remaining programs continue to
operate on their existing respective campuses. As of June 30, 2020, our affiliated schools and subsidiaries operating in Hailiang Education Park include
Hailiang Primary School, Hailiang Junior Middle School, Hailiang Senior Middle School, Hailiang Foreign Language School, Zhuji Hailiang Foreign
Language High, Hailiang After-school, Zhuji Hailiang Logistics, Hailiang Sports and Zhuji Nianxin Lake Hotel. See “Item 4. Information on the
Company—B. Business Overview—Hailiang Education Park.”
In November 2016 and February 2017, certain schools were separated from Zhuji Hailiang Foreign Language School and Zhuji Private High School
(currently named Hailiang Experimental High School) and established as separate legal entities, with all of their equity interests held by Hailiang
Management. Hailiang International Kindergarten, Hailiang Primary School, Hailiang Junior Middle School and Hailiang Senior Middle School became
independent from Zhuji Hailiang Foreign Language School, and Hailiang High School of Art became independent from Hailiang Experimental High
School. We remained owners of 100% of the equity interest in each of the aforementioned schools by the end of 2017 fiscal year end.
On February 28, 2018, we sold the sponsorship and 100% equity interest of Hailiang Kindergarten to Hangzhou Hailiang Preschool Education Group
Co., Ltd. (“Hailiang Preschool”), a related party ultimately controlled by Mr. Feng, for a consideration of RMB20.0 million pursuant to a purchase
agreement. An independent third-party appraisal entity provided an appraisal opinion valuing the Hailiang Kindergarten at RMB20.0 million. The
Hailiang Kindergarten was operating at a loss in recent years.
On February 28, 2018, we sold all the assets and liabilities related to the kindergarten business unit of Tianma Experimental School (“Tianma
Kindergarten”) to Zhuji Hailiang Preschool Education Investment Co., Ltd., a related party ultimately controlled by Mr. Feng, for a consideration of
RMB1.7 million pursuant to an asset restructuring agreement. An independent third-party appraisal entity provided an appraisal opinion valuing the
Tianma Kindergarten at RMB1.7 million.
As a result, Hailiang Kindergarten and Tianma Kindergarten are no longer part of our operation.
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We initially acquired right to operate Chuzhou Hailiang Foreign Language School on July 19, 2017. Pursuant to an amendment to the operator
agreement in June, 2018, we transferred our operating right to Chuzhou Zhengxu Education Information Consulting Co., Ltd., a subsidiary controlled by
Hailiang Group, for a consideration of RMB1.8 million (the “Chuzhou School Transfer Transaction”) based upon the appraised value determined by an
independent third-party evaluator. The Chuzhou School Transfer Transaction was conducted based on our business assessment in response to current
market conditions.
On August 28, 2018, Hailiang Management incorporated Zhuji Hailiang Foreign Language High as the first for-profit school of our Group. As of
June 30, 2020, 1,467 students are enrolled in Zhuji Hailiang Foreign Language High.
On September 28, 2018, we entered into an Investment Cooperation Agreement to acquire a 51% controlling interest in Zhenjiang Jianghe High School
of Art from three founders of the School. The transaction was completed on October 31, 2018. As of June 30, 2020, Zhenjiang Jianghe High School of
Art’s student body consists of 439 students. It offers various art education programs including but not limited to painting, music and media, with a
variety of specialized modules and seminars.
On July 16, 2019, we signed a cooperation agreement with the People's Government of Chengguan District, Lanzhou City, Gansu Province, pursuant to
which, it’s free for us to lease part of the existing land, facilities, equipment and other assets that were previously used by a public school to sponsor a
new school, which provides primary and middle school courses of basic education program. This new school has opened in September 2020.
On December 28, 2019, Hailiang Group signed a cooperative school operating agreement with the Wuhu Municipal People's Government of Anhui
Province to establish and operate a new affiliated school named Wuhu Hailiang Experimental School, which provides high school programs. The
affiliated school has commenced operation in September 2020.
On April 15, 2020, Hailiang management signed a cooperative school operating agreement with Zhejiang Juxian Education Technology Co., Ltd. to
establish and operate a new school named Hailiang Overseas Chinese School. Juxian Technology will lease the land, facilities, equipment and other
assets for free to sponsor the affiliated school by August 31, 2026. Hailiang Overseas Chinese School provides primary and middle school programs.
The school has commenced operation in September 2020. Additionally, the school plans to build a new site in the next few years, which will increase the
school’s capacity.
On April 29, 2020, we established a wholly owned subsidiary, Hailiang International Education Group Pte. Ltd. (“HIEG”), our international education
headquarter located in Singapore, to promote our K-12 educational services (including education training and online education, study trip, overseas
study consulting services), create a cooperative operations system between our domestic and international headquarters, and provide high quality and
diversified service offerings to improve the Company's strategic global education portfolio.
On July 15, 2020, we entered into a sponsorship transfer agreement with Hailiang Investment to acquire 100% sponsorship of Jinhua Hailiang Foreign
Language School, with a total consideration of RMB34.0 million (approximately US$4.8 million). The school is located in Jinhua City, Zhejiang
Province. As of June 30, 2020, the school has an aggregate of 598 enrolled students. On September 16, 2020, we obtained the relevant administrative
approval and completed all the required process to obtain the sponsorship of the school. The transaction will be accounted for as a business combination
between entities under common control.
Our principal executive offices are located at No. 1508 Binsheng Road, Binjiang District, Hangzhou City, Zhejiang Province, 310051, People’s Republic
of China. Our telephone number at this address is +86-571-5812-1974 and our fax number is +86-571-5812-1974. Our registered office in the Cayman
Islands is located at the offices of Conyers Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman, KY1-
1111, Cayman Islands. Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our website
is http://www.hailiangeducation.com. The information contained on our website is not a part of this annual report on Form 20-F. Our agent for service of
process in the United States is Corporation Service Company, 1180 Avenue of the Americas, Suite 210, New York, New York 10036-8401.
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For information regarding our principal capital expenditures, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital
Resources—Capital Expenditures.”
B. Business Overview
Overview
We are an education and management services provider of primary, middle, and high schools in the PRC, offering K-12 educational service, education
and management service, and ancillary education services, such as educational training service, study trip service, overseas consulting service. See “Item
4. Information on the Company—B. Business Overview—Ancillary Education Services.”
K-12 educational service consists of academic programs, after-school enrichment services, accommodations, meals, transportation services and study
materials, which are offered through our affiliated schools and wholly owned service companies, such as Zhuji Hailiang Logistics, Hailiang Mingxin and
Hailiang After-school. As of June 30, 2020, we operate and manage an aggregate of nine affiliated schools in the PRC that we own or sponsor through
our PRC affiliated entities. As of June 30, 2020, an aggregate of 23,716 students were enrolled in our affiliated schools. As of June 30, 2020, we employ
an aggregate of 2,153 teachers and educational staff. We are dedicated to hiring teachers and educational staff who hold the required academic
credentials, are dedicated and active professionals in their field, and are committed to improving their students’ academic performance. In
September 2020, we started operating four additional affiliated schools across Gansu, Anhui and Zhejiang Provinces of China, namely Lanzhou Hailiang
Experimental School, Wuhu Hailiang Experimental School, Hailiang Overseas Chinese School and Jinhua Hailiang Foreign Language School,
increasing our affiliated schools from nine as of June 30, 2020 to 13 as of the date of this annual report. Moreover, there are two additional schools,
tentatively named Ninghai Public School and Xianghu Public School which are to be sponsored by us, are under construction. These two schools are
located in Zhejiang Province of China, and are expected to start operating in the fall of 2021.
Our Cayman Islands holding company does not have any substantive operations other than indirectly controlling Hailiang Management, our affiliated
entity, which controls and holds our schools through certain contractual arrangements.
We offer our basic educational program and international program at the primary school, middle school and high school levels, which covers grades one
to nine, the compulsory education, and grades ten to twelve. Our basic educational program offers curricula with courses both mandated by the PRC
regulatory authorities and developed through internal research. Our international program offers curricula mandated by the PRC regulatory authorities
with a focus on preparing students to study abroad. As most of the students in our international program plan to study abroad after they graduate from
our middle school and high school programs, we have designed our international program to specifically address the linguistic and academic needs of
these students. In addition, we provide courses designed to help students become eligible to U.S., UK and Australian undergraduate programs, including
as A-levels courses for U.K. universities, SAT courses for U.S. universities, or VCE courses for Australian universities. We have steadily developed our
international program within our affiliated schools from 3,860 students as of June 30, 2018, 4,553 students as of June 30, 2019, to 4,859 students as of
June 30, 2020.
With respect to our international program, we have continued to develop new courses with our partners or collaborators to strengthen the
competitiveness of the programs offered by our affiliated schools. These programs are intended to provide an efficient international education pathway
to students who wish to study abroad for their undergraduate degrees. On February 25, 2017, Hailiang Foreign Language School, Hailiang Education
and Thomas Carr College in Australia entered into a collaboration agreement (“TCC Agreement”) to deliver the Victorian Certificate of Education
(“VCE”) program, as authorized by the Victorian Curriculum and Assessment Authority (“VCAA”), in addition to Chinese high school curriculums for
students aiming at studying in Australian higher education institutions. On September 8, 2017, Hailiang Foreign Language School and ELS American
Education Consulting (Shanghai) Co., Ltd. (“ELS”) entered into a cooperation agreement in order to supplement and incorporate the EAP program
(English for Academic Purpose) into Hailiang’s existing curricula. With certificates issued by ELS, students can apply for community colleges and
universities that recognize language certificates issued by ELS in the United States without completing IELTS/TOEFL examinations.
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On September 23, 2017, we entered into a cooperation agreement, as further supplemented on September 18, 2018, with Pate’s Grammar School, a
premier co-ed state schools in the UK, to develop new curriculum based on the same principles of educational philosophy that Pate’s Grammar School
and we shared. Accordingly, in September 2018, we commenced a new class in Hailiang Foreign Language School based on Pate’s curriculum to
provide our Zhuji students with a full British education. In June 2018, Hailiang Foreign Language School became a candidate school for the
International Baccalaureate Primary Years Programme, or IB PYP, an educational program for students aged three to twelve managed by the
International Baccalaureate Organization, or IBO, an international educational foundation headquartered in Geneva, Switzerland. Hailiang Foreign
Language School is preparing for the IB PYP Consultation Visit, the second phase of authorization, which will be held by the IBO in December 2020. In
May 2019, Hailiang Foreign Language School became a candidate school for the International Baccalaureate Diploma Programme, or IB DP, a two-year
educational program for students aged between sixteen to nineteen and managed by the IBO. As of June 2020, Hailiang Foreign Language School has
completed the IB DP Consultation Visit, the second phase of authorization, held by the IBO. Hailiang Foreign Language School is expected to complete
the final phase in 2021. In June 2019, Hailiang Foreign Language School entered into an Education Cooperation Agreement with Canada Kent School
located in Ontario, Canada to jointly offer Canadian high school courses. Accordingly, a “2+1” model is applied, in which students will be studying at
Hailiang Education campus for 2 years and at Canada Kent School for 1 year, the high school diploma issued by Canada Kent School will also be
granted to the students participating in this course. In May 2020, we started enrolling students’ enrollment activities after the cooperation. In June 2019,
Hailiang Foreign Language School also entered into an Education Cooperation Agreement with Australia Deakin University to open preparatory
programs in our school. In March 2020, Hailiang Foreign Language School was authorized by the American College Board to be an American
Advanced Placement Program (“AP”) accredited school (CEEB code 694166), and included in the list of high schools offering AP courses. Hailiang
Foreign Language School started to offer AP courses in September 2020.
We provide education and management services to schools that we do not own or sponsor (“managed schools”), including but not limited to branding,
academic management, basic and international education resources, school culture, admission, finance, human resources, procurement, IT, internal audit,
property and logistics management services. We may provide additional services in the future, as needed, to our managed schools. As of June 30, 2020,
we provided education and management services to 28 managed schools. For more detailed information on our managed schools, see “Item 4.
Information on the Company – B. Business Overview –Services Provided to Our Managed Schools”.
Our total revenue increased by 28.2% to RMB1,499.0 million in the 2019 fiscal year, primarily due to the growth in revenue from K-12 educational
services and the expansion of other ancillary services to our students such as educational training and study trips. Our total revenue slightly decreased by
1.1% to RMB1,482.6 million (approximately US$209.8 million) in the 2020 fiscal year. Since early 2020, the global outbreak of COVID-19 has
impacted our business. Revenue from study trips decreased due to restrictions on travel domestically and internationally. Revenue from accommodation
and transportation services decreased due to the suspension of physical classes from February to April 2020 during a nationwide lockdown in China.
Revenue from K-12 educational services for high school level of RMB32.3 million (approximately US$4.6 million) was deferred to the next fiscal year
because of the delay of school year end, and revenue from K-12 educational services for middle and primary school were not significantly impacted.
Revenue from educational training services decreased due to the liquidation of Haibo Education and the suspension of onsite training courses during the
pandemic period.
Our gross profit increased by 29.4% to RMB472.1 million in the 2019 fiscal year, and increased by 5.8% to RMB499.4 million (approximately US$70.7
million) in the 2020 fiscal year.
Our net profit attributable to our shareholders increased by 31.8% to RMB293.4 million in the 2019 fiscal year, and increased by 26.4% to RMB370.8
million (approximately US$52.5 million) in the 2020 fiscal year.
Asset-Light Model
Prior to fiscal year ended June 30, 2018, we have provided educational services in the PRC through the traditional model of owning and having legal
sponsorship in each of the schools we launched or acquired. Beginning in 2017 and predominantly in the fiscal year ended June 30, 2018, we made a
strategic shift to develop our asset-light expansion strategy, where we operate and manage K-12 schools pursuant to consulting and management
agreements, or act as these schools’ sponsor without acquiring ownership of land and facilities in such schools.
45
With this asset-light approach, we are able to sponsor additional schools without having to own or acquire the land and facilities of such schools. By
leasing land and facilities to sponsor additional schools, we can avoid significant capital expenditure. While considering the adoption of IFRS 16
commencing July 1, 2019, we are required to recognize a right-of-use asset representing the right to use the leased campuses and a lease liability
representing the obligation to make lease payments. See “Item 4. Information on the Company—D. Property, Plants and Equipment” for more
information.
By entering into consulting and management agreements with affiliated schools, we provide education and management services to these schools in
exchange for services fees. Services we provide include, but are not limited to branding, academic management, basic and international education
resources, school culture, admission, finance, human resources, procurement, IT, internal audit, property and logistics management services. To expedite
the asset-light model, we entered into a cooperation agreement, the 2017 Group Strategic Cooperation Agreement, with our related parties, Hailiang
Group and Hailiang Investment. Both Hailiang Group and Hailiang Investment plan to establish additional schools through construction, merger and
acquisition, and cooperation with third-parties. Pursuant to the 2017 Group Strategic Cooperation Agreement, all of these schools are expected to be
operated through entrusted management and we have a priority right to operate and manage such schools. In addition, we also cooperate with
governments and third parties to provide education and management services to both public and private schools. As of June 30, 2020, we operated and
managed 28 schools located in the Jiangxi, Hubei, Shandong, Jiangsu and Zhejiang provinces, with a total of 42,628 enrolled students. We may provide
additional services in the future, as needed, to our managed schools.
We have established several subsidiaries in the PRC to facilitate our strategic asset-light approach in acquiring rights to operate and manage new
schools, and providing education and management services. On June 20, 2017, Ningbo Haoliang was incorporated as Hailiang Consulting’s wholly-
owned subsidiary to provide consulting and management services. On September 26, 2018, Zhuji Hailiang Logistics and Zhuji Hailiang Supply were
incorporated as Ningbo Hailiang’s wholly-owned subsidiaries to provide logistic services and procurement services respectively.
Our Schools and Programs
We have experienced significant growth since 1995. Since the commencement of operation of our first Hailiang school in 1995, an aggregate number of
more than 40,000 students have graduated from our high school programs offered at our affiliated schools. As of June 30, 2020, we operated and
managed nine affiliated schools in the PRC that we own or sponsor through our PRC affiliated entities (the “affiliated schools”). As of September 2020,
we have four new affiliated schools started operating, and another two additional schools were in the construction. As of June 30, 2020, across our
affiliated schools, we had an aggregate number of 23,716 students, including for our basic educational program, 4,536 students in the primary school
program, 6,014 students in the middle school program, 8,307 students in the high school program, and 4,859 students in our international program. Our
schools employed an aggregate number of 2,153 teachers and educational staff as of June 30, 2020.
For our affiliated schools, we generally require our students to board at our schools, and substantially all of our students live in our boarding facilities.
We provide student dormitory and cafeteria services in our schools. Each student dormitory building houses 144 to 1,440 students. Students who want to
commute, rather than board at our schools, are reviewed and admitted on a case-by-case basis. Generally, we only accept non-boarding applications from
students that can demonstrate a feasible commuting arrangement that would not affect their ability to attend our school programs in any material way.
We charge students basic accommodation fees, and accommodation standard upgrade fees generally range from RMB3,000 to RMB4,000 per school
year, for students who wish to upgrade their dormitory accommodation. Cafeterias in our schools offer our student breakfast, lunch and dinner during the
time our students are boarding at schools. Apart from cafeteria staff, we also engaged dietitians to guarantee a balanced and nutritious diets to our
students. At each of our cafeterias we also adopt rigorous management and quality control beginning from raw materials procurement to dishes cooking
and offering. Our boarding facilities provide an attractive option to parents who want their children to experience living outside the home before
attending college in China or overseas.
We also aim to provide modern, comprehensive, and immersive learning and teaching facilities. As of June 30, 2020, our affiliated schools in aggregate
had over 916 multi-media classrooms, all with Wi-Fi coverage, over 2,347 computers and tablet computers, 11 sports fields and approximately 4,751
student dormitory rooms. On April 9, 2018, both the library and shooting range in Hailiang Education Park opened. The library covers a gross floor area
of approximately 2,000 square meters, which can accommodate a total number of approximately 300,000 books. The shooting range covers a gross floor
area of approximately 2,256 square meters with 3 stadiums of 10-meter, 25-meter and 50-meter respectively. In November 2018, we opened the fencing
hall located in Hailiang Education Park which covers a site area of approximately 1,200 square meters (13,000 square feet) with 9 fencing lines.
46
The following table sets forth the basic information of our affiliated schools currently in operation as of June 30, 2020:
School
Hailiang Foreign Language School
Year
Opened/Acquired
1995
Hailiang Primary School **
Hailiang Junior Middle School **
Hailiang Senior Middle School **
Hailiang Experimental High School
Hailiang High School of Art ***
2016
2016
2016
2001
2017
Tianma Experimental School
2009*
Zhuji Hailiang Foreign Language High
Zhenjiang Jianghe High School of Art
Lanzhou Hailiang Experimental
School****
2018
2018
2020
Hailiang Overseas Chinese School****
2020
Wuhu Hailiang Experimental School****
2020
Educational
Programs
Number
of
Students
Number
of
Classes
Number of
Teachers
and
Educational
Staff
Primary School
Middle School
High School
Sub-total
Primary School
Sub-total
Middle School
Sub-total
High School
Sub-total
High School
Sub-total
High School
Sub-total
Primary School
Middle School
Sub-total
High School
Sub-total
High School
Sub-total
Primary School
Middle School
Sub-total
Primary School
Middle School
Sub-total
High School
Sub-total
Total
47
1,599
1,484
309
3,392
2,805
2,805
3,238
3,238
2,026
2,026
4,270
4,270
1,572
1,572
1,731
2,776
4,507
1,467
1,467
439
439
—
—
—
—
—
—
—
—
—
76
64
16
156
84
84
69
69
49
49
91
91
37
37
48
61
109
68
68
14
14
—
—
—
—
—
—
—
—
—
225
200
51
476
224
224
196
196
193
193
279
279
143
143
163
169
329
232
232
57
57
3
11
14
—
2
2
—
5
5
23,716
677
2,153
(*) Tianma Experimental School commenced its operations in 1995, and we acquired Tianma in 2009.
(**) Hailiang Primary School, Hailiang Junior Middle School and Hailiang Senior Middle School became independent from Zhuji Hailiang Foreign
Language School.
(***) Hailiang High School of Art became independent from Hailiang Experimental High School.
(****)Lanzhou Hailiang Experimental School, Hailiang Overseas Chinese School and Wuhu Hailiang Experimental School started operating in
September 2020, and the students of these three schools were enrolled in September 2020.
The following table sets forth the numbers of students, classes and teachers and educational staff of our affiliated schools as of June 30, 2018, 2019 and
2020.
Number of Students
June 30,
2019
June 30,
2020
June 30,
2018
Number of Classes
June 30,
2019
June 30,
2020
June 30,
2018
Number of
Teachers and
Educational Staff
June 30,
2018
June 30,
2019
June 30,
2020
Primary School
Middle School
High School
International Program
Total
4,285
5,631
8,334
3,860
22,110
4,445
5,708
8,113
4,553
22,819
4,536
6,014
8,307
4,859
23,716
48
130
118
186
192
626
131
126
188
221
666
132
130
191
224
677
351
336
644
525
1,856
375
365
676
646
2,062
390
378
677
708
2,153
Our affiliated schools are managed by the senior management and principals of each school. They meet on a regular basis to discuss major policy
decisions, personnel changes, student recruitment, and operation adjustments; other meetings may be held from time to time to discuss safety, human
resource, IT, and student management. We believe effective and timely exchange of knowledge and expertise among them ensures consistent quality in
our educational services and efficient management of schools.
Additionally, as of June 30, 2020, we provided education and management services to 28 managed schools in the PRC that we did not own or sponsor
the managed schools either directly or through our affiliated entities in the PRC. For more detailed information on our managed schools, see “Item 4.
Information on the Company – B. Business Overview –Services Provided to Our Managed Schools.”
Academic Programs
Students enrolled in our affiliated schools can choose between enrolling in our basic educational program and international program. The key differences
between our basic educational programs and our international program are as follows:
Basic educational program
International program
Post-graduation plans
· Higher level education in the PRC
· Higher level education overseas
Coursework
· Government-mandated coursework
· Government-mandated coursework
· Elective courses developed by our school faculty
· Curricula with a focus on preparing students to study abroad,
such as mandatory language courses and subjects addressed in
A-levels courses, VCE courses and SAT courses
Student to teacher ratio
· 13 students to 1 teacher (in the 2019/2020 school
· 7 students to 1 teacher (in the 2019/2020 school year)
year)
Examinations taken
· Gaokao (China’s standardized college entrance
examination)
· In addition to Gaokao which is optional, examinations for
purposes of entering into overseas universities and colleges,
such as A-levels, VCE and related language tests
Tuition
· RMB45,567 (approximately US$6,450) (for the
· RMB92,398 (approximately US$13,078) (for the 2019/2020
2019/2020 school year)
school year)
The tuition fee depends among a number of factors, including the schools and educational programs that the students are enrolled in, the level of the
accommodation chosen by the students, and the students’ grade level.
As for managed schools, since we provide education and management services to these schools, such as educational, managerial, logistics, supporting
and operational services, and the academic programs offered at these schools are not part of our products and hence, not ultimately determined by us, we
have not included programs offered at our managed schools hereunder.
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Basic educational program
The basic educational program offered by our affiliated schools consists of primary school, middle school and high school programs. The curricula are
composed of compulsory courses required by the PRC regulatory authorities and a variety of elective courses to develop student interests, strength and
comprehensive ability.
Middle school students in our basic educational program generally prepare for and take Zhongkao, a standardized annual admission test administered by
local authorities at a prefectural level for admission into high schools in the same geographic region. High school students in our basic educational
program generally prepare for and take Gaokao, a standardized annual admission test administered by local authorities at a provincial level and the result
is critical in determining student admission into undergraduate programs in universities in China.
As of June 30, 2020, our affiliated schools offered approximately 600 courses. These courses include 34 compulsory courses, and a total of 566 elective
courses in our affiliated schools. The compulsory courses are guided by detailed and demanding government standards that specify what students should
know and be able to do at the end of each school year. As for the course materials for our basic educational program, we primarily use materials
designated by the governmental authorities while complementing materials designed by our teachers based on their research and experience. Our
elective courses are designed to develop the students' interests, strength and comprehensive ability. Students can choose courses freely, such as career
planning, baking, photography. We also offer characterized sports training services, including swimming, NBA Academy, fencing and shooting to
enhance students’ physical health, and after-school courses based on our students’ interest and demand, such as workshops for science competitions.
Among these elective courses, we have some school-based courses, which are based on the compulsory curriculum, and actively expands the courses
that combine Hailiang Education's characteristics, such as the Olympiad Competition courses, inventor courses, Chinese traditional culture courses.
In addition, we offer art educational program under our basic educational education. The curricula for art educational program are composed of
compulsory courses required by the PRC regulatory authorities and a variety of art courses. Students enrolled in art educational program generally
prepare for and take Gaokao, Art Joint Examination and/or Art school-level examination. Apart from being able to apply for art universities, students in
art education program can also apply for a comprehensive university majoring in art.
Our art educational program consists of art, music and media courses, with a variety of featured modules. For instance, art courses consist of sketch,
watercolor painting, and other elective courses, such as art appreciation, calligraphy, and sculpture; music courses consist of singing, listening, vocal
music, instrumental music, and other elective courses, such as music theory and music appreciation; media courses consist of lines, physique,
performance, and other elective courses, such as broadcasting and hosting. In addition, we offer a selection of specialized public courses to the entire
student body to fully satisfy the diversified talent development, such as social morality, art literacy, and elegant life courses. The art education program
offers students a turnkey development platform in art, music, media, dance, performance, and drama, which integrates art and culture education.
International program
In addition to the basic educational program offered by our affiliated schools, students enrolled in our affiliated schools can also elect to be placed into
our international program which is geared towards students who wish to study abroad. PRC students in our international program take courses required
by the PRC regulatory authority and earn a PRC school diploma. As most of the students in our international program plan to study abroad after they
graduate from our middle school or high school programs, we have designed our international program to specifically address the needs of these students
in terms of both language and academics. For instance, in our primary and middle schools, we offer bilingual international, immersive Cambridge
English classes, Montessori primary courses, and IB PYP courses. In our high schools, we offer A-level courses, VCE courses, American high school
courses, Canadian high school courses, and will be offering AP courses in the 2020/2021 school year. In addition, we became the candidate school for
IB DP in 2019. At the same time, we also provide programs that combine basic high school modules and intensive language courses. Students can
acquire the PRC graduation certificate after passing a graduation test upon completion of basic modules, and at the same time learn foreign languages to
be better prepared for education abroad. For example, we provide IELTS, TOEFL, ELS training courses, and other foreign language courses, including
Korean, Japanese, and Spanish. Students who want to study in Japan, Korea, and Spain can take other foreign language tests instead of English in
Gaokao and acquire an international certificate.
50
The number of students enrolled in our affiliated schools’ international program has increased rapidly in the last three school years, from 3,860 as of
June 30, 2018, to 4,553 as of June 30, 2019, to 4,859 as of June 30, 2020., including both PRC students and foreign students.
In addition to preparing Chinese students for studying abroad, we also offer the HSK (Hanyu Shuiping Kaoshi) program for our foreign students to learn
Chinese at our schools. In 1999, we were authorized by the Zhejiang provincial government to accept foreign students for Chinese language studying.
Foreign students may prepare and take the Chinese Proficiency Test administered by the Department of Education of the PRC and the Gaokao for
admission to PRC universities. Our HSK program offers a variety of academic and non-academic subjects featuring Chinese culture, such as Chinese
History, Chinese Geography, Martial Arts and Chinese Painting and Calligraphy, with varied optional modules including guitar, piano, dance, handwork,
ceramics, badminton, football and basketball. In addition, we provide students with activities to practice the Chinese language and short trips each
academic year. We have accumulated more than ten years of teaching experience in our HSK program. All of our teachers have acquired the
International Chinese Teacher Qualification Certificate issued by Education Commission of the PRC. In November 2019, Zhuji Hailiang Foreign
Language High became an HSK test center certified by Hanban (“汉办”) of China, also known as the Office of Chinese Language Council International,
originally called the China National Office for Teaching Chinese as a Foreign Language, established in 1987.
In January 2020, Zhuji Hailiang Foreign Language High started operating the International Student College, which was formally established and
developed from the original HSK program into a separate college for international students. For international students interested in applying for Chinese
domestic universities, the high school program offered at the International Student College offers them an academic track, preparing them for
examinations, such as the HSK level test, necessary for applying for China's top universities. For students interested in applying for international
universities, the high school program offers IGCSE and A-Level courses designed to increase students' competitiveness in applicant pools and prepare
them to enter top universities in the world. As of June 30, 2020, we have 124 foreign students in our affiliated schools, and 56 students were enrolled in
our International Student College. These students came from several countries, such as the United Kingdom, South Korea, Germany, Russia, Brazil, the
United States, Italy, Spain and the Netherlands. 100% of our HSK graduating students passed HSK Level IV test.
Our Students
Student recruitment and admission
It has been 25 years since our initial school was established. We have confidence in our brand and our ability to attract more students in the future to our
affiliated schools. Our target students are from families with medium to high levels of household income as well as students who want to study abroad
after graduating from our schools.
Due to the improvement of the academic results of our affiliated schools, our recognized brand and social influence, we no longer send out our recruiters
to most regions. Our schools and programs are publicized through social media, teachers and educational staff’s promotion and parents’
recommendations. We encourage our teachers and educational staff to actively participate in the recruitment process and offer incentive-based payments
to employees who make a significant contribution to student recruitment.
As of June 30, 2020, we had 12,484 students from Zhejiang province and 11,108 students from other regions in China, including 22 provinces, 4
municipalities, 4 autonomous regions and 2 special administrative regions. We also have 124 foreign students from 23 foreign countries.
We require applicants to our high schools to meet certain minimum scores on the Zhongkao to ensure they have the necessary academic ability to
succeed. In addition to academic requirements, the admission and entrance standards of our schools are designed to identify those students who have
strong desire to learn, passion for their areas of interest and ability to contribute to a positive classroom dynamic. In addition, we launched a ‘Creative
Talent’ project in December 2017 to recruit exceptional middle and high school students in China. In July 2018, we also launched "The Belt and Road
International Talents Program" to increase our efforts to recruit outstanding talents from disadvantage communities from countries along the Belt and
Road to study in China.
51
Academic performance
We routinely monitor students’ progress in our affiliated schools according to academic standards. We set our standards and instructional programs
based on international, national and local standards published by the regulatory authorities. We believe our students are well prepared for international
tests, such as A-level and VCE, and national and provincial tests, such as Gaokao and Zhongkao. We require our teachers to regularly evaluate their
students and set specific goals for them. Our students take all standardized tests required by international, provincial and local authorities, and we also
administrate/manage our own annual tests calibrated to our academic standards. Our students have achieved outstanding academic performance, as
measured by these external assessments. For example, over 98.37% of our students from our affiliated schools in the 2019 graduate classes passed the
Joint Graduation Exam, an annual provincial test administered to each graduating class.
For the 2019/2020 Gaokao, 2,743 students from our affiliated schools received admissions into universities and 399 students passed the admission cutoff
of “first tier universities”, among which, 51 passed the admission cutoff of “first tier universities” in university entrance examinations for athlete and art
students, and 113 students were admitted into dual first-class universities, and one student was admitted by Peking University. For the 2019/2020
Gaokao, three students from our affiliated schools were ranked 2nd, 3th and 4th in Zhuji City, Zhejiang Province.
In the 2020 graduating classes of our international program from our affiliated schools, 434 students applied for overseas universities, among which 325
students have received offers, 37.10% of these students received offers from global top 100 universities, such as Imperial College London and
University College London. For Hailiang Foreign Languages School, 87.37% of the graduates received offers from global top 100 universities, 36.84%
of these students were admitted to global top 30 universities, and 22.11% were admitted to global top 10 universities. It is worth mentioning that 100%
of students in the 2020 graduating class of our A-level courses in Hailiang Foreign Languages School have been admitted to global top 100 universities.
These universities include Imperial College London, University College London, Nanyang Technological University, The University of Edinburgh, or
The University of Manchester, among others. In addition, students in our HSK program achieved outstanding academic performance. They received
admission notices from top domestic universities, such as Peking University, Renmin University of China, Zhejiang University, Nanjing University,
Wuhan University, Tongji University. This is the first time our students were admitted to Peking University and Renmin University of China since this
program was founded. In addition, three of 15 HSK graduates were admitted to foreign universities, and one student received two offers from the well-
known University of Manchester and University of Warwick in the UK.
In the 2019/2020 Zhongkao, all the top 10 students of Zhuji City are students in our affiliated schools, while 19.43% of our students scored above 650
points out of 720 points, which denotes outstanding academic performance. In addition, one of our students received the highest score in the 2019/2020
Zhongkao in Zhuji City with 698 points.
Students from our affiliated schools have also achieved excellent results in various academic competitions at both the national and provincial levels,
including competitions in mathematics, physics, chemistry, biology and computer science. In the 2019/2020 school year, one student won the gold medal
and two students won the silver medal in the final of the National Mathematical Olympiad, and three students won the first prize in the National Youth
Informatics Olympiad. Tsinghua and Peking University, top two universities in China, signed eight students of our Hailiang Senior Middle School with
outstanding results in the competitions. We value our students' mental and physical health, demonstrated by multiple physicals activate offered by us and
our principle of encouraging students to participate in athletic contests. In the 2019/2020 school year, our students have won first prize in the 14th Asian
Shooting Championship, as well as five Gold Medals, five Silver Medals, and five Bronze Medals in the Zhejiang Youth Shooting Championship,
respectively. Our students also won the second prize in the 2nd National Youth Games and National 7-man Rugby Championships respectively, and the
first prize in the junior high school championship of the Zhejiang Middle School Basketball League.
52
Student retention
Upon graduating from primary or middle school, students enrolled in our affiliated schools can apply for admission to the next level of educational
programs in our school system. With the improving recognition of our educational quality and brand reputation, we selectively admit students from our
schools or other schools in consideration of a range of student characteristics. The student characteristics we review include academic performance,
background and potential. For our 2020 graduate classes, 79.3% of our primary school graduates were admitted into our middle schools and 76.3% of
our middle school graduates were admitted to our high schools.
From time to time, students may experience declining academic performance. Our teachers provide advice and assistance to students on academic and
personal matters in order to maintain student retention. Remedial courses are available for students with lower grades, and additional practice materials
and sessions are also available for students experiencing academic difficulties. Our average net annual student retention rate for all students, which
measures the percentage of students enrolled at the beginning of the year who move on to the next grade level, was approximately 90.0 % for the
2017/2018 school year, 92.1% for the 2018/2019 school year, and 91.7% for the 2019/2020 school year.
Our Teachers
Our affiliated schools seek to hire teachers and educational staff that hold the required academic credentials, are dedicated and active professionals in
their field, and are committed to improving their students’ academic performance. As of June 30, 2020, the number of our teachers and educational staff
in our affiliated schools reached 2,153, and approximately 12.3% of our teachers and educational staff hold a master’s degrees or above.
We have built a team of experienced teachers with an average of over five years of educational experience for our affiliated schools. We also require
teachers in our affiliated schools to possess the qualifications required by PRC regulatory authorities. As of June 30, 2020, nine of our teachers and
educational staff were recognized as “Exceptional Teachers” (特级教师), a national award given by the MOE to teachers who have made significant
contributions to their schools and profession. In addition, we have 16 golden Olympiad competition training coaches, and 264 teachers with masters or
doctoral degrees. We had 70 full-time foreign teachers, approximately 41.4% of whom hold master’s degrees or above, and they come from 22
countries, contributing to an international environment that inspires our students with multiple cultures. They are staffed interchangeably in respective
schools and mainly teach foreign languages including English, Japan, Korean, and French, A-level subjects including music, and art. Depending on the
service agreements, we provide teacher recruitment counseling services and/or hire teachers on behalf of our managed schools.
The following table lists information about our teachers and educational staff from our affiliated schools at each school and each educational program as
of June 30, 2020.
School
Hailiang Foreign Language School
Hailiang Primary School
Hailiang Junior Middle School
Hailiang Senior Middle School
Hailiang Experimental High School
Hailiang High School of Art
Tianma Experiment School
Zhuji Hailiang Foreign Language High
Zhenjiang Jianghe High School of Art
Lanzhou Hailiang Experimental School*
Hailiang Overseas Chinese School*
Wuhu Hailiang Experimental School*
Total
Number
of
Teachers
and
Educational
Staff
Number
of
Teachers
with
“Advanced
Teaching
Qualifications”
Number
with
Master’s
Degree
or
Above
476
224
196
193
279
143
332
232
57
14
2
5
2,153
6
8
21
44
24
5
20
8
1
—
1
1
139
76
3
16
23
41
20
17
53
9
5
—
1
264
53
(*) Lanzhou Hailiang Experimental School, Hailiang Overseas Chinese School and Wuhu Hailiang Experimental School are started operating in
September 2020.
Our schools are staffed with three levels of teachers and educational staff: senior teachers, mid-level teachers and junior teachers. Senior teachers are
outstanding teachers chosen by our schools, with the most advanced K-12 teacher’s qualification available in China. Mid-level teachers are teachers with
nationally-qualified first degree teaching qualifications. Junior teachers are teachers with nationally-qualified second- and third-degree teaching
qualifications. We believe this three-tier seniority system provides an attractive career path and allows new teachers to be mentored by more experienced
teachers. As of June 30, 2020, our team of teachers and educational staff in our affiliated schools consists of 139 senior teachers, 396 mid-level teachers
and 1,051 junior teachers.
It is crucial for us to maintain a robust group of distinguished teachers and managements for us to improve education quality and expand our scale. We
follow a specific process for faculty hiring which we have developed over the years. The recruitment of school principals and managements mainly
relies on headhunting, internal resource recommendation and campus recruitment. We will conduct multiple rounds of interviews for candidates through
professional interviewers and executives, and focus on investigating whether candidates have a broad international vision, outstanding educational
achievements, leadership skills, and management experience. The recruitment of teachers is conducted through professional teacher recruitment websites
and campus recruitment. Teachers are assessed through a series of hiring procedures, including, without limitation, written examination, interviews,
mock lectures, expertise in their specific subject areas, ability assessment (IBA), and psychological risk evaluation. We expect teachers to have or will
develop excellent communication and teaching skills, the ability to mentor other teachers and the ability to develop innovative curriculum. As of June
30, 2020, we had 450 teachers and managements graduated from dual first-class universities, 23 of which were from Tsinghua University and Peking
University.
We maintain strategic cooperation with many universities in China, allowing us to invite outstanding university graduates to intern at our schools, and
attempt to recruit those who show outstanding performance during the internship. We also have recommendation policy that encourages our educational
staff to recommend excellent teachers and offer reward accordingly. During the nationwide lockdown from February to April 2020 pandemic, we
promoted digital transformation, adopted scientific and technological means, and launched a “contactless” school recruitment solution through the
Internet. Moreover, we have achieved remarkable results in deepening the reward system of internal recommendation for outstanding employees. Our
faculty members are encouraged to utilize their own social resources to recommend principals and teachers to us, contributing to the rapid development
of Hailiang Education.
We have established a comprehensive training and management system for our staff. For new teachers, we will set training goals and arrange them to
undergo a training program consisting of teaching skills and techniques. For our current teachers, we offer continued professional knowledge and skills
training designed to improve teaching ability and educational creativity. In the 2019 school year, we established Hailiang Education's professional grade
system for teachers to accelerate the growth of young teachers and fully mobilize the enthusiasm of all teachers.
Hailiang Education Cadre Army Academy (“Cadre Army Academy”) was founded in April 2019 to strengthen the training and cultivation of our
management team. Our experienced tutors have implemented personalized and targeted trainings, developed tailor-made training projects, and launched
activities such as online work report, salons and management research. As of June 30, 2020, 79 employees were promoted, including five principals.
In August 2019, we further established the Hailiang Education Excellent Teacher Development Academy (“Excellent Teacher Development Academy”)
to improve our teachers’ teaching and researching capability through initiatives such as mentor-apprentice pairing model and trainees' three-year
planning. As of June 30, 2020, Excellent Teacher Development Academy has selected 87 trainees. There have 12 ongoing research topics, 6 completed
research topics, and 8 awarded research topics. Over 30 published papers were granted various awards.
We emphasize the professionalism of our teachers, thereby providing them with a wide platform and comfortable living environments. Teachers can be
promoted through improvement of management and professional skills. We encourage our newly hired teachers to split their time between work and
study, allowing them time for their development. Teachers that have taught in Hailiang for a certain time receive the opportunity to study abroad, work
on research materials and enhance their professional skills. We have a competitive compensation package. Our teachers’ salary increased by 7.7% in
2020. In addition, we offer a variety of bonuses, subsidies and welfare to increase our teachers’ enthusiasm and initiative. We conduct monthly
evaluations of our teachers’ performance, set workload management systems, clear targets, and form a transparent, well-organized, fair, and just system
to ensure the stability of our teaching team. We also pay for health insurance for our teachers, and provide for paid vacation, free accommodation and
other benefits. In the 2019 school year, we worked with Ping An Insurance of China to jointly create an "Excellent Teacher Welfare Guarantee Plan" for
benchmarking public schools, targeting outstanding teachers and other employees who have made special contributions to the company, so that they can
enjoy pensions and medical insurance equal to or better than that of public teachers.
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Each year, we have to terminate teachers and educational staff who do not meet our teaching standards. Our teacher retention rates, as of June 30, 2018,
2019 and 2020 were 91.5%, 93.3% and 88.8%, respectively.
Services Provided to Our Managed Schools
In the process of implementing our asset-light strategy, we may provide a wide range of services, as needed, to public and private schools, including but
not limited to, educational, managerial, logistics, supporting and operational services. We do not own or sponsor our managed schools; such schools are
owned or sponsored by our affiliated entities, Hailiang Group or Hailiang Investment, and local governments. Instead, we provide services to such
schools in exchange for a management fee or service fee. As of June 30, 2020, we provided various services to 28 managed schools, with an aggregate
of approximately 42,628 students. For the fiscal year ended June 30, 2020, education and management services we provided to our managed schools
including but not limited to branding, academic management, basic and international education resources, school culture, admission, finance, human
resources, procurement, IT, internal audit, property and logistics management services. We may provide additional services in the future, as needed, to
our managed schools.
On January 1, 2018, we entered into service agreements with the following schools Jiulixianghucheng Kindergarten, Nanchang Baishu Angel City &
Fenghuang Kindergarten, Nanchang Foreign Language Jiulixianghucheng School, Nanchang Foreign Language Gaoxin School, Nanchang Maqiu Senior
Middle School, Nanchang Baishu School, Yichun Baishu Foreign Language School, Yichun Baishu Foreign Language School Xuefulu Campus, Yichun
Baishu Angel City&Bilingual Kindergarten, Yichun Baishu Angel City&Bilingual Kindergarten Xuefulu Campus, Nanchang Baishu Xingfu Shiguang
Kindergarten. On May 1, 2018, we entered into service agreements with Nanchang Hualian Foreign Language Experimental School, Nanchang Xihu
District Baishu Education Group Teaching Staff Kindergarten and Jingdezhen Baishu School. On December 25, 2018, we entered into a service
agreement with Nanchang East Lake Sijihuacheng Kindergarten. On September 30, 2019, we entered into a master management service agreement for a
term of 5 years with these 15 Baishu Schools, which replaced and terminated the previous agreements we entered with them. Pursuant to the agreement,
we receive management fees based upon the provision of services related to education, management and logistics. As of June 30, 2020, 15 Baishu
Schools have approximately 22,110 students and 1,459 teachers in total, offering kindergarten, primary, middle and high school programs. In the
2019/2020 Gaokao, among 508 high school graduates from Nanchang Maqiu Senior High school, 13 students passed the first-tier university line. In the
2019/2020 Zhongkao, 594 students achieved the score of 600 or higher.
On April 1, 2018, we entered into a service agreement with Xiantao No.1 Middle School (the “Xiantao School”) in Hubei province, China. Pursuant to
such agreement, we receive management fees based upon the provision of education and management services, including, but not limited to services
related to human resources, financial management and information technology. This agreement is renewable annually and is currently in effect. Founded
in 1958, with an area of about 378,666 square meters, Xiantao School is a private school that provides middle and high school education required by the
PRC regulatory authority in Xiantao City, Hubei Province. In the 2019/2020 school year, the total number of students reached 7,560 and the number of
teachers was 457. The tuition fee is approximately 13,960 RMB per year. For the 2019/2020 Gaokao, 670 students passed the first-tier university
admission score, which accounted for about 44.4% of the total number of high school graduates of Xiantao School. 1,338 students of Xiantao School
were admitted into undergraduate programs, which account for 88.7% of its total graduate students. One student from Xiantao School ranked in the top
10 among all the students in the Gaokao of Hubei Province, and received the highest score in liberal arts in Xiantao City, and another student from
Xiantao School received the top ten science scores in the Gaokao in Xiantao City. In addition, two students graduated from the high school were directly
admitted without examination into the “Innovation Experimental Class” of the Junior Class of the University of Science and Technology of China
because of the excellent results in the competition and the Gaokao. In the 2019/2020 Zhongkao, 145 students scored 660 or above, which accounted for
approximately 15.2% of the total number of middle school graduates of Xiantao School.
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On April 1, 2018, we entered into a service agreement (the “NanRui Agreement”) with Nanrui Experimental School in Xinchang County (the “NanRui
School”). This agreement is renewable annually and is currently in effect. Pursuant to the NanRui Agreement, we receive management fees based upon
the provision of education and management services, including, but not limited to services related to human resources, financial management and
information technology. Founded in 2004, with an area of about 50,000 square meters, Nanrui School is a non-profit private school that provides
compulsory education required by the PRC regulatory authority in Xinchang County, Zhejiang Province. In the 2019/2020 school year, the total number
of students in such school is approximately 2,819, and the number of teachers is approximately 192. The tuition fee ranges from 18,000 RMB to 32,000
RMB annually. For the 2019/2020 Zhongkao, 371 or 85.3% of NanRui School students passed the admission score into high school. Among all the
students who had taken such examination in Xinchang County in 2020, two students from NanRui School ranked top 10.
On August 28, 2018, we entered into a cooperation agreement with the MOE of Binjiang district in Hangzhou for a term of six years. Pursuant to the
cooperation agreement, we provide education and management services to two existing public schools, Hangzhou Chunhui Primary School and
Hangzhou Xixing Middle School. As of June 30, 2020, these two schools had an aggregate of 882 enrolled students.
On October 10, 2018, we entered into a service agreement with Jinhua Hailiang Foreign Language School in Jinhua City. Pursuant to such agreement,
we received management fees based upon the provision of education and management services, including, but not limited to services related to human
resources, financial management and information technology. Jinhua Hailiang Foreign Language School is a non-profit private school that provides
compulsory education required by the PRC regulatory authority. The campus of Jinhua Hailiang Foreign Language School covers an area of
approximately 13 acres. On July 15, 2020, we entered into a sponsorship transfer agreement with Hailiang Investment to acquire 100% sponsorship of
Jinhua Hailiang Foreign Language School, terminating the service agreement. On September 16, 2020, we obtained the relevant administrative approval
and completed all the required process to obtain the sponsorship of the school.
On October 10, 2018, we entered into a cooperation agreement for a term of ten years with the Education Bureau of Xiaoshan District, City of
Hangzhou, National Tourism Resort Management Committee of Xianghu, Zhejiang Province, and Xianghu Travel Holding Company. Pursuant to the
partnership program, Hailiang Investment is to be the sponsor and legal operator of one new school located in Xianghu, and we started to provide
education and management services at the beginning of 2019 to three existing public schools located in Wenyan District, Hangzhou City, namely the
Wenyan Primary School, Wenyan No. 2 Primary School, and Wenyan Middle School. As of June 30, 2020, these three schools had an aggregate of 3,601
enrolled students.
On October 10, 2018, we entered into a service agreement with Feicheng Hailiang Foreign Language School in Feicheng City. Pursuant to such
agreement, we receive management fees based upon the provision of education and management services, including, but not limited to services related
to human resources, financial management and information technology. This agreement is renewable annually and is currently in effect. Feicheng
Hailiang Foreign Language School is a non-profit private school that provides compulsory education required by the PRC regulatory authority. As of
June 30, 2020, the school had an aggregate of 412 enrolled students.
On April 28, 2019, we entered into logistics service agreements with Hailiang Kindergarten, Zhuji Hailiang Jinshan Kindergarten and Tianma
Kindergarten, respectively. Zhuji Hailiang Preschool Education Investment Co., Ltd., a related party ultimately controlled by Mr. Feng, along with its
subsidiaries, are sponsors of these three kindergartens. These agreements are renewable annually and are currently in effect.
On July 9, 2019, we entered into a cooperation agreement for a term of ten years with the Education Bureau of Sihong County of Jiangsu Province to
manage and operate Sihong Second Experimental School. Sihong Second Experimental School is a public school and provides a basic education
program ranging from primary to middle school classes. As of June 30, 2020, there were 3,985 students enrolled and 236 teachers and educational staff
in Sihong Second Experimental School.
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On January 12, 2020, we entered into a cooperation agreement for a term of ten years with the Management Committee of Suqian Economic and
Technological Development District of Jiangsu Province National Development District, pursuant to which the Company acquired the right to manage
and operate two public schools named Xiamen Road School and Fumin Avenue School. These two schools have composed of primary and middle
school programs. We started to manage these two schools in July 2020.
For further details of the capacity of these managed schools, please refer to the “Item 4. Information on the Company—C. Organizational Structure.”
Ancillary Education Services
We also provide ancillary education services, including educational training, study trip and overseas study consulting services, with the objective of
improving the learning experience and advancing academic outcomes of the students enrolled in both our affiliated and managed schools.
Educational Training Services
We offer students a wide range of educational training products under the “Hailiang Mingyou” brand, which focuses on comprehensive discipline
training and quality-oriented education. In the future, we expect Hailiang Mingyou to establish a high-end K-12 educational training brand and to open
training centers in other cities, where our schools are already located. We expect to achieve plans through standardization of the teaching products,
teaching methods and operation. Hailiang Mingyou currently includes online training and three training centers: Zhuji Chengdong Center, Zhuji Tianma
Boya Center and Hangzhou Binjiang Center. For the 2019/2020 school year, Hailiang Mingyou has 31,959 student attendances.
On January 26, 2018, Ningbo Haoliang acquired a 56% equity interest in Jiangxi Haibo Education Management Co., Ltd. (“Haibo Education”). Haibo
Education was primarily engaged in providing educational training services, and was liquidated in the 2020 fiscal year.
On August 2, 2018, Zhuji Hailiang After-school Service Co., Ltd. (“Hailiang After-school”) was incorporated as Ningbo Haoliang’s wholly owned
subsidiary and is primarily engaged in providing academic tutoring and quality-oriented education.
On July 22, 2019, Tianma Boya Training Center Co., Ltd. (“Tianma Boya”) was acquired by Hailiang Management’s as its wholly owned subsidiary and
is primarily engaged in providing educational training services.
Overseas Study Consulting Services
Overseas study consulting services are aimed at helping our students with the preparation, application and continuous success for studying in colleges
and universities globally. We provide one-to-one personalized overseas study consulting services, including background evaluation, studying plan
customization, professional assessment, background improvement, application and course selection. For the 2019/2020 school year, we provided
overseas study consulting services to 1,161 students. In January 2020, we formed a dedicated overseas-studying service team covering Australia, the
UK, Canada, Japan, and South Korea. The members of the team have overseas study experience and can provide all-round customized services such as
coursework guidance, life assistance, safety, internship and employment guidance and further studies.
Recently, in order to achieve diversified choice for studying abroad, we have started to promote Sino-foreign cooperative education programs of higher
education approved by the Ministry of Education, such as Lambton College of Jilin University, and the Spanish “1+3” educational project. The Sino-
foreign cooperative education programs of higher education offer students who take the Gaokao with additional options to further their studies, and
make it possible for students with lower less satisfactory academic performance to be admitted to better universities. Moreover, it has also become an
alternative plan for studying abroad during the COVID-19 outbreak, and this program has received extensive attention and positive responses from both
students and parents.
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On August 9, 2017, Hailiang Mingxin was incorporated as Hailiang Management’s wholly owned subsidiary and is primarily engaged in the provision
of after-school enrichment services and overseas study consulting services.
On September 26, 2018, Hailiang International Studying was incorporated as Hailiang HK’s wholly owned subsidiary and is primarily engaged in
providing overseas study consulting services.
On October 22, 2018, Hangzhou Hailiang International Studying was incorporated as Hailiang Consulting’s wholly owned subsidiary and is mainly
engaged in providing overseas study consulting services.
Study Trip Services
Through cooperation with other education service providers and through development completed in-house, we offer more than 100 study trip and camp
programs to our students, operated domestically and globally for our students to choose from. We operate our study trip programs in more than 30
countries, such as UK, US, Australia, Japan, Korea, New Zealand, Thailand, Singapore, and several provinces in China, offering students the
opportunities to visit famous universities and experience local culture. Study trip services are available to the students both enrolled in our affiliated and
managed schools. For the 2019/2020 school year, more than 30,000 student attendances have participated in study trips. The operation of study trips was
negatively impacted since early 2020, and this was due to restrictions on travel domestically and internationally caused by the global outbreak of
COVID-19.
On August 2, 2018, Zhejiang Mingxin International Travel was incorporated as Hailiang Management’s wholly owned subsidiary and is mainly engaged
in the provision of international and domestic study trip services for students enrolled in both our affiliated and managed schools.
On December 3, 2018, Hangzhou Hailiang Study Trip was incorporated as Hailiang Consulting’s wholly owned subsidiary and is primarily engaged in
international and domestic study trip services.
On February 20, 2019, Shaoxing Sihai International Travel Co., Ltd. (“Sihai Travel”) was acquired by Hailiang Mingxin as its wholly owned subsidiary
and is primarily engaged in providing international and domestic study trip services.
Hailiang Education Park
Hailiang Investment, a company controlled by our ultimate controlling shareholder, Mr. Feng, has completed the construction of the Hailiang Education
Park, which has a total site area of approximately 850,000 square meters (9,149,323.85 square feet) and a floor area of approximately 550,000 square
meters (5,920,150.73 square feet). Hailiang Education Park commenced operation in September 2015, and over 11,000 students and 900 teachers began
classes on the new campus at the start of the school year on September 7, 2015. In September 2015, Zhuji Hailiang Foreign Language School and
selected programs from Tianma Experimental School and Hailiang Experimental High School relocated to the Hailiang Education Park. Tianma
Experimental School’s, and Hailiang Experimental High School’s, remaining programs continue to operate on their existing respective campuses. As of
June 30, 2020, our affiliated schools and subsidiaries operating in Hailiang Education Park were (i) Hailiang Primary School, (ii) Hailiang Junior Middle
School, (iii) Hailiang Senior Middle School, (iv) Hailiang Foreign Language School, (v) Zhuji Hailiang Foreign Language High, (vi) Hailiang After-
School, (vii) Zhuji Hailiang Logistics, (viii) Hailiang Sports, and (ix) Zhuji Nianxin Lake Hotel.
Hailiang Education Park has six educational buildings, one administrative building, six dining halls, six track fields, one landmark tower, one school
hospital, 20 student dormitory buildings and 10 dormitory buildings for teachers and staff, all of which have been completed and put into operation as of
the date of this annual report on Form 20-F. In addition, there is a multi-function sports center with basketball courts, an indoor swimming pool, a
student activity center, and a hotel that not only provides convenience for students and parents, but also operates publicly. Hailiang Education Park is
designed to accommodate a maximum of 12,000 students and 2,000 teachers. The school facility contains a number of modern and distinctive buildings
such as the main administration and educational building, the landmark tower, and the new kindergarten department building with a distinctive trumpet
shell-shaped architectural design. In September 2018, a license plate identification and facial recognition system was installed and activated on the three
main gates of Hailiang Education Park in order to improve security. In June 2020, we fully launched the safety management system to trace the results of
safety checking and follow-up solutions. In June 2020, the school-bus line system was launched to optimize the shuttle route and upgrade the shuttle
mode.
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On April 28, 2019, the Company entered into eight new lease agreements with Hailiang Investment regarding Hailiang Education Park, in order to
allocate lease fees to the respective schools and subsidiaries according to their used gross floor area. The term of the lease is for nineteen years from
July 1, 2018 and the rental fees in the first year was RMB22.3 million and is subject to a 5% annual increase from fiscal year 2020 to 2022. The rental
fees commencing from the fiscal year 2023 will be subject to further negotiation between the Company and Hailiang Investment. The leases cover the
properties and facilities of Hailiang Education Park with a total combined gross floor area and site area of approximately 489,225 square meters and
833,000 square meters, respectively.
On September 6, 2019, our affiliated schools and subsidiaries entered into eight Supplemental Agreements with Hailiang Investment respectively,
effective as of July 1, 2019, regarding Hailiang Education Park, pursuant to which our eight affiliated schools and subsidiaries prepaid the rental fee for
the remaining 18 years within 30 days from the date of agreements.
There are certain risks associated with utilization of the Hailiang Education Park. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our
Business and Industry—There are risks associated with our use of the Hailiang Education Park.”
Innovations and Education Technology
Continuous and high-quality research and development capabilities are the foundations and driving forces for us to provide high-quality educational
services. Therefore, we have invested a lot of resources to develop education technology, which is integrated into our campus and classes, to improve
education quality and management. We cooperate with Hailiang Education Research Institute, a related party controlled by Mr. Feng, to develop various
education technology products and courses to establish the “smart campus” and “smart classroom”.
The idea of establishing the smart campus is to make our schools smarter, safer, and more energy-efficient. We have integrated the smart campus project
into energy consumption management, security management, dormitory management, cafeteria management, fee management. For example, we utilize
the technology of IOT (“Internet of Things”) to integrate the operating and power consuming status of major energy-consuming equipment into an
online control center, such as cooling, heating and lighting equipment, so that logistic managers can easily monitor and control the operating status of
these energy-consuming equipment.
Establishing smart classroom will help young teachers quickly improve the quality of teaching and students improve learning efficiency. Smart
classroom will enable us to render high-quality educational resources to our students in different regions, and to protect the company's intellectual
property. In order to improve the efficiency of selecting test questions and automatically correct answering results, we have developed a cloud databased
application of test questions that can help teachers quickly select suitable test questions and distribute them to students. After completing the answers,
the students' answers are stored and used for future data analysis to provide a personalized teaching plan for each student. We have also invested a lot of
resources in education standardization to support teaching activities. We have cooperated with Hailiang Education Research Institute to develop the
“Star Classroom” platform, a proprietary platform owned by us, which can provide our teachers with one-stop lesson preparation and teaching. At the
same time, junior teachers can learn best teaching practices from experienced teachers on the platform, and use the courseware developed by
experienced teachers in teaching activities to ensure the teaching quality.
We believe that excellent education services are the basis for Hailiang Education to further develop while offering high-quality education services.
Therefore, we will continue to invest a substantial amount of resources in educational technology, to improve our educational services through
educational technology, and to build on such competitive advantage.
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Growth Strategies
Our goal is to strengthen our leadership position in China’s private K-12 educational services market and expand our asset-light approach by providing
education and ancillary educational services. We intend to leverage our strong market position and strong brand in pursuing the following strategies:
•
•
Attract and retain outstanding students, school management, and teachers to deliver quality education and high academic performance, as a result,
strengthening our market presence as a leading primary, middle and high school educational service provider in China;
Expedite the expansion of our affiliated and managed school network with asset-light model through strategic partnerships with various parties,
including but not limited to, Hailiang Group, local governments and third-parties, to establish a virtual platform to fuel our revenue growth;
• Further explore international expansion strategies, including increasing enrolment of our international program, recruiting international students,
and build/invest/acquire private schools in Belt and Road countries and developed countries with strategic synergies;
•
•
Diversify business model, and increase the proportion of ancillary education services, especially committed to establish Hailiang Mingyou's high-
end K-12 educational training brand, and expand through standardized and localized products and teaching methods, as well as strategies for
collaborative development with our schools, to realize the expansion of online education’ training users and onsite education training centers, and;
Continue to invest in the application and development of education technology to improve our education quality, maximize academic performance,
optimize management efficiency, support our school network expansion, and diversify our education service offerings.
Competition
The K-12 educational services market in China is rapidly evolving, highly fragmented and competitive. According to the Ministry of Education of the
PRC, the total number of student enrollments of private K-12 education in China has increased steadily, from 37.8 million in 2015 to 46.4 million in
2019. The proportion of students in private K-12 schools against the total number of students in K-12 schools also increased from 16.9% to
19.3% during the same period. However, in 2020, the top five listed K-12 education groups, namely Hailiang Education, Wisdom Education, China
Maple Leaf Education, Virscend Education, and Bright Scholar Education in China, only enrolled an aggregate of 0.55% of the total private school
students in China, according to the Ministry of Education of the PRC and public data. The top five listed education groups are based in different
provinces, recruiting students in different regions, therefore relatively mutually independent in their growth. Based on this low concentration rate and
scattered location of the leading private education groups, we believe that private education service providers have a significant growth potential.
Because the market share of private K-12 schools is relatively small, key market players are not only private K-12 schools of the same type in the same
region, but also public K-12 schools in areas where we recruit our students. With respect to our basic educational program, currently the key market
player in Zhuji is Zhuji High School. We also face competition from Zhuji Ronghuai School, which is the second-largest private school in Zhuji, where
eight of our affiliated schools are located. Zhenjiang Jianghe High School of Art is located in Zhenjiang city, Jiangsu province. There are another two
private international schools in the city, which are Maple Leaf Education in Zhenjiang New District and Bright Scholar Education in Jurong County.
These two schools mainly offer international program; however, our school mainly focuses on art programs. In September 2020, we opened or acquired
additional four affiliated schools, namely, Lanzhou Hailiang Experimental School, Hailiang Overseas Chinese School, Wuhu Hailiang Experimental
School and Jinhua Hailiang Foreign Language School. The key market players of the cities where these three schools are located include Bright Scholar
Education, Maple Leaf Education and local public schools. We believe that we can effectively compete with key market players in the region relying on
our brand, education services, and experience. As we continue to grow our business through expansion and acquisitions, we also expect to face
competition from K-12 schools, both private and public, located in other geographic regions where we expect to establish or acquire additional K-12
schools.
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We believe that the competition in the K-12 educational services market is based on school brand, student academic performance, parent satisfaction,
quality of teachers, campus size, and tuition fees. We expect competition to persist and intensify. We believe that we are able to compete effectively
because of our strong brand recognition and established international program. However, some of our existing and potential competitors, especially
public schools, may have access to resources that we do not have. Some of these competitors, particularly public schools, have governmental support in
forms of government subsidies and other payments or fee reductions.
In 2020, we faced the impact of the outbreak of COVID-19 like other market players. Relying on our abundant educational resources, outstanding
facility capabilities, and our technology across our affiliated and management schools, we launched “Hailiang VIP Cloud Virtual Classroom” in
February 2020. More than 2,000 teachers and nearly 38,000 students participated in the Hailiang VIP Cloud Virtual Classroom. We believe that online
education services are not just to be used in times of emergency, and we intend to make it a growing and long-lasting initiative to supplement the way
that we deliver quality innovative K-12 educational services. At the same time, Hailiang Education is committed to improving R&D capabilities and
talent strength in order to further consolidate Hailiang Education's market competitiveness. See “Item 3. Key Information—D. Risk Factors—Risks
Relating to Our Business and Industry—We face significant competition and we may fail to compete effectively.”
Marketing
We selectively and systematically employ a variety of marketing tools to enhance the brand recognition of the school programs offered by our affiliated
schools. We intend to establish a standard corporate identity across all our schools. We take measures to increase word-of-mouth referrals, which are
critical in attracting new students and building our brand. We advertise in media and organize various promotional events, recruitment fairs, workshops
to assist students and families to better understand our service and enhance our brand.
Referrals. Word-of-mouth referrals by former and current students and their families have historically been a significant source of student enrollment. In
particular, recommendations made by our middle and high school graduates who have been successful in the Zhongkao or Gaokao or were admitted into
overseas educational institutions are particularly persuasive for prospective students. We actively work with our alumni and current students to
encourage them to recommend our programs to potential students. We believe that our student enrollment will continue to benefit from referrals from
our extensive network of alumni and their families, many of whom have enjoyed pleasant and satisfactory learning experiences and achieved their study
goals at our schools.
Promotional events. From time to time, we organize promotional and recruiting events to provide real-time, on-site opportunities for our prospective
students to learn more about our services and programs and meet our teachers and staff. We also organize events specifically for our international
program so that prospective students interested in studying abroad can meet with teachers and recruiting personnel from overseas institutions and learn
more about our international program. Our promotional events include visits from Kawhi Leonard, NBA player, visit of The Yale Alley Cat, a world-
renowned all-men a cappella singing group from Yale University, an environment-protection speech by Nobel Peace Prize winner Mr. Rajendra Shende,
a visit and speech by Dr. Robert Easton, Executive Vice Principal of the University of Oxford, a visit and speech by an astronomy professor the
University of Oxford, and the host of China National Education Development Summit Forum. In the 2019/2020 school year, we received delegations
from the Indonesian Islamic University Student Union and French students visiting our schools, and organized campus experience days and other
activities.
Media advertising. We actively promote the Hailiang Education brand through media advertising. We place advertisements in national and global
newspapers and television, such as People’s Daily, PR Newswire, XinhuaNet, "Learning Power" learning platform and CCTV Chanel 5. Moreover, we
explore marketing via WeChat, television media, print media, and other off-line activities to promote our brand.
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Employees
We had 4,129, 4,183 and 4,164 employees as of June 30, 2018, 2019 and 2020, respectively. The majority of our employees is full-time and has signed
employment agreements for one to three years, which will be renewed with substantially the same terms upon the employee passing the end-of-contract
evaluation. In addition to teachers and educational staff for our affiliated schools, we also have employees in marketing, information technology and
general administration who provide services to both our affiliated schools and our managed schools. As of June 30, 2020, depending on the service
agreements with our managed schools, we also provide teacher recruitment counseling services and/or hire teachers on behalf of our managed schools.
The following table sets forth the numbers of our employees, categorized by function as of June 30, 2020.
Teachers and educational staff
Cafeteria and dining hall staff
Student living staff
Security and safety staff
Administrative staff
Other staff
Total
As of June 30,
2020
2,153
678
520
88
330
395
4,164
As required by PRC laws and regulations, we participate in various employee social security plans for our employees that are administered by local
governments, including housing pension, medical insurance and unemployment insurance. We compensate our employees with base salaries as well as
performance-based bonuses. None of our employees are represented by any collective bargaining arrangements, and we consider our relations with our
employees to be good.
Intellectual Property
To protect our intellectual properties, we rely on a combination of trademark, copyright and trade secret laws. Our schools hold copyrights to various
course materials that have been developed internally and provide a basis for improving the quality of our educational services. Generally, we require
most of our teachers to devote certain portion of their time into the development of course and teaching materials, essays, education research, and
publications. Our strategic plan calls for continued and extensive investment in maintaining and expanding these assets. From time to time, we are
required to obtain licenses with respect to course materials owned by third parties for our educational services, in particular for our international program
which requires foreign-language educational materials.
In addition, we have registered 11 domain names with the China Internet Network Information Center, such as www.hailiangedu.com,
or www.hailiangeducation.com. We have registered the Hailiang Education trademark in the PRC.
Insurance
We maintain various insurance policies designed to safeguard against risks and unexpected events. We maintain insurance to cover students’ and
teachers’ medical expenses for injuries they might sustain at our school. We also maintain insurance to cover our liability should any injuries occur at
our schools. In addition, we maintain property insurance for our school facilities and vehicles. We do not maintain business interruption insurance,
product liability insurance or key-man life insurance. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—We
have limited insurance coverage with respect to our business and operations.” We consider our insurance coverage to be in line with that of other
private K-12 education providers of a similar scale in China.
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Legal Proceedings
On May 21, 2019, we filed a lawsuit in the People’s Court of Zhuji City of China against Ronghuai Education Group and Zhuji Ronghuai School
(collectively, “Ronghuai”), asserting claims of infringement of registered trademarks and unfair competition under the Trademark Law and Anti-Unfair
Competition Law of the PRC. This case was transferred to the Intermediate People’s Court of Shaoxing City of China for acceptance. We alleged in our
claims that Ronghuai manipulated settings of certain popular search engines in China, such as www.360.cn, hao.360.com and www.so.com, which
caused confusion for our potential clients/students. Ronghuai’s alleged misconduct directed these students to Ronghuai’s website instead of our websites
when the students searched key terms such as “Hailiang”, “Hailiang education”, “Hailiang senior middle school”, and “Hailiang primary school”.
Therefore, we claimed damages of RMB 3.0 million against Ronghuai. Based on new evidence we collected through discovery, we subsequently
amended our claims and increased the amount of damages claimed to RMB 7.51 million. On April 8, 2020, the court entered into a judgement of first
instance, ordering Ronghuai to immediately stop manipulating settings of certain search engines, and to publish statements on its official platform to
eliminate the negative impact of the case within 10 days from the effective date of the judgement and compensate us for economic loss and reasonable
expenses amounting to RMB3.0 million (approximately US$0.4 million) within 30 days from the effective date of the judgement. Ronghuai did not
agree with the judgement and subsequently appealed to the Higher People’s Court of Zhejiang Province of China. This case is still in the process of
second instance as of the date of this annual report.
On July 8, 2019, Ronghuai filed a lawsuit in the People’s Court of Zhuji City of China against Hailiang Group, our related party, and Hailiang Senior
Middle School, one of our affiliated schools, asserting claims of infringement of registered trademarks and unfair competition under the Trademark Law
and Anti-Unfair Competition Law of the PRC. This case was transferred to the Intermediate People’s Court of Shaoxing City of China for acceptance.
Ronghuai alleged, in a way similar to our original claims as described above, that we employed manipulative measures to direct potential
clients/students to our websites instead of theirs and requested monetary damages in the amount of RMB 3.01 million. Based on new evidence Ronghuai
claimed to have collected through discovery, Ronghuai later amended their claims to increase the amount of damages to RMB 7.51 million. On May 19,
2020, the court rejected the request filed by Ronghuai. Ronghuai did not agree with the judgement and subsequently appealed to the Higher People’s
Court of Zhejiang Province of China. This case is still in the process of second instance as of the date of this annual report.
On July 18, 2019, Ronghuai filed a separate lawsuit in the People’s Court of Zhuji City of China against the Company’s seven affiliated entities and
three of the Company’s related parties, including Hailiang Group, Hailiang Investment and Zhejiang Hailiang Limited, alleging defamation. Ronghuai
alleged that our public announcement regarding our filing of claims against Ronghuai contained defamatory remarks against Ronghuai and affected its
reputation, and requested monetary damages in the amount of RMB10 million. This case was transferred to the Intermediate People’s Court of Ningbo
City of China for acceptance and is still in the process as of the date of this annual report.
After consultation with our external legal counsel, we assessed the probability of the potential liability to be more than remote but not probable and the
amount of loss not being able to be reasonably estimated at this time. As a result, we did not record any liabilities pertaining to the lawsuits filed by
Ronghuai.
Regulations
We operate our business in China under a legal regime consisting of the National People’s Congress, which is the country’s highest legislative body, the
State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries and agencies under its
authority, including the MOE, the Ministry of Information Industry, SAIC, the Ministry of Civil Affairs ("MCA”) and their respective local offices. This
section summarizes the principal PRC regulations related to our business.
Regulations on Private Education
The principal laws and regulations governing private education in China consist of the Education Law of the PRC, the Law for Promoting Private
Education (2018) (“2016 Private Education Law”), the Implementation Rules for the Law for Promoting Private Education (2004) (“2004
Implementation Rules for Private Education Laws”), and the Regulations on Chinese-Foreign Cooperation in Operating Schools. Below is a summary
of the relevant provisions of these regulations.
Education Law of the PRC
On March 18, 1995, the National People’s Congress enacted the Education Law of the PRC, which was amended on August 27, 2009 and further
amended on December 27, 2015. The Education Law sets forth provisions relating to the fundamental education system of the PRC, including a system
of preschool, primary, secondary (including middle and high schools) and higher education and a system of awarding certificates or diplomas.
The Education Law stipulates that the government formulates plans for the development of education, establishes and operates schools and other
institutions of education. Under the Education Law, enterprises, social organizations and individuals are encouraged to operate schools and other types
of educational organizations in accordance with PRC laws and regulations.
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2016 Private Education Law and the 2004 Implementation Rules for Private Education Laws
The Decision of the Standing Committee of the National People’s Congress on Amending the 2016 Private Education Law, or the Amendment, has been
promulgated by Order No. 55 of the President of the PRC on November 7, 2016 and became effective on September 1, 2017. On December 29, 2018,
the Decision of the Standing Committee of the National People’s Congress on Amending the Seven Laws of the Labor Law of the People’s Republic of
China was promulgated by Order No.24 of the President of the PRC and took into effect on the same date. The Amendment made two minor
adjustments to Article 26 and Article 64 of the 2016 Private Education Law. The 2004 Implementation Rules for Private Education Laws became
effective on April 1, 2004. Under these regulations, “private schools” are defined as schools established by non-governmental organizations or
individuals using non-government funds. Private schools providing academic qualifications education, kindergarten education, education for self-study
examination and other education shall be subject to approval by the education authorities at or above the county level, while private schools engaging in
occupational qualification training and occupational skill training shall be subject to approvals from the authorities in charge of labor and social welfare
at or above the county level. A duly approved private school will be granted a Permit for Operating a Private School, and shall be registered as either a
private non-enterprise institution with the MCA of the PRC or its local counterparts, or a company with the Administration for Industry & Commerce.
Each of our affiliated schools has obtained the Permit for Operating a Private School and has been registered with the relevant local counterpart of the
MCA or the Administration for Industry & Commerce. We have been informed by our managed schools that they have obtained necessary school
operating permits and have obtained the operating permit from the local bureau of MOE and MCA.
Under the above regulations, private schools have the same status as public schools, though private schools are prohibited from providing military,
police, political and other kinds of education that are of a special nature. However, the operations of a private school are highly regulated under the
above regulations. For example, pursuant to the 2016 Private Education Law, sponsors of private schools may choose to establish schools as either non-
profit or for-profit schools, but sponsors are not permitted to establish for-profit schools that provide compulsory education services. The types and
amounts of fees charged by a non-profit private school shall be decided by the provincial government or its counterpart authorities. Both non-profit and
for-profit private schools shall publicly disclose such information.
According to PRC laws and regulations, entities and individuals who establish non-profit private schools registered with MCA are commonly referred to
as “sponsors” rather than “owners” or “shareholders.” The economic substance of “sponsorship” with respect to private schools is substantially similar
to that of shareholder’s ownership with respect to companies in terms of legal, regulatory and tax matters. For example, the name of the sponsor shall be
entered into the private schools’ articles of association and Permit for Operating a Private School, similar to that of shareholders where their names shall
be entered into the company’s articles of associations and corporate records filed with relevant authority. From the perspective of control, the sponsor of
a private school also has the right to exercise ultimate control over the school by various means such as adopting the private school’s constitutional
documents, electing the school’s decision-making bodies, including the school’s board of directors and principals. The sponsor can also profit from the
private schools by disposing of its sponsorship interests in the schools for economic gains. However, the rights of sponsors vis-à-vis private schools also
differ from the rights of shareholders vis-à-vis companies. For example, under the PRC laws, a company’s ultimate decision-making body is its
shareholders meeting, while for private schools, it is the board of directors, though the members of which are substantially appointed by the sponsor. The
sponsorship interest also differs from the ownership interests with regard to the right to the distribution of residual properties upon liquidation of a
private school, mainly because non-profit private education is treated as a public welfare undertaking under the current regulations. Non-profit private
schools shall be entitled to the same preferential tax treatment as public schools.
In addition, the 2016 Private Education Law also provides that private schools providing certifications or diplomas, pre-school education, other culture
education (including K-12 education) and self-study aids are subject to approval by the education authorities, while private schools engaging in
occupational training are subject to approval by the administrative department(s) for human resources and social security.
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The key features of the differences between sponsorship and equity ownership, following the effectiveness of 2016 Private Education Law, include the
following:
·
·
Right to receive a return on investment. Pursuant to the the 2004 Implementation Rules for Private Education Laws, either sponsors or owners
shall have the right to receive a return on investment. However, the portion of after-tax profits that can be distributed by a company to its owner
is different from that distributed by a school to its sponsor. Under the PRC Company Law, a company is required to allocate 10% of its after-tax
profits to statutory reserve funds, while under the the 2004 Implementation Rules for Private Education Laws, a school that requires reasonable
returns is required to allocate no less than 25% of its annual net profit or annual increased net assets to its development fund as well as make
allocation for mandatory expenses as required by applicable laws and regulations. The 2016 Private Education Law no longer uses the term
“reasonable return” and now requires private schools to register as either for-profit or non-profit schools. However, the Implementation
Rules of 2016 Private Education Law have not been enacted, so it remains uncertain, how the Implementation Rules will apply to the right to
receive a return on investment for owners, and sponsors of schools that register as non-profit, specifically;
Right to the distribution of residual properties upon termination and liquidation. With respect to a school, the 2016 Private Education
Law provides that the property of a private school shall be liquidated in the following order: (1) tuition fees and extras and other expenses paid
by students that should be returned; (2) wages payable to the teachers and staff members and the social insurance premiums that should be paid;
and (3) other debts that should be cleared off. The remaining property of a non-profit private school after the debts mentioned above are settled
shall continue to be used for the running of other non-profit schools; the remaining property of a for-profit private school after the debts
mentioned above are settled shall be disposed of according to relevant provisions of the PRC Company Law. Under the PRC Company Law, the
remainder properties after payment of relevant fees and compensations upon termination and liquidation of a company, shall be distributed to
its owners.
Despite the above differences between sponsorship and ownership, the sponsor of a private school has effective control over such private school under
the 2016 Private Education Law through controlling the executive council or board of directors of such school, which is the decision-making body of the
school. Through the school’s decision-making body, the sponsor exercises a broad range of powers, including (i) the appointment and dismissal of the
school principal, (ii) the amendment of articles of association of the school and formulation of rules and regulations of the school, (iii) the adoption of
development plans and approval of annual work plans, (iv) raising funds for school operations and adoption of budgets and final accounts, (v) making
decisions on the size and compensation of the staff, (vi) making decisions on the division, merger or termination of the school, and (vii) making
decisions on other important matters of the school. In addition, through controlling the decision-making body, the sponsor also has the power to use and
manage the properties of the school in accordance with relevant laws and regulations.
A duly approved private school will be granted a private school operating permit, and the non-profit private school shall be registered with the MCA or
its local bureaus as a private non-enterprise institution, the for-profit private school shall be registered with the Administration for Industry &
Commerce. As of the date of this annual report, our 13 affiliated schools have obtained and maintained the private school operating permits.
Besides the 2016 Private Education Law and the above regulations, the following and other specific implementation rules of the 2016 Private Education
Law as applied to the operation requirement of non-profit schools and for-profit schools have not yet been introduced:
·
·
·
the amendment to the Implementation Rules for the Law for Promoting Private Education of the PRC;
the local regulations relating to legal person registration of for-profit and non-profit private schools;
the specific measures to be formulated and promulgated by the competent authorities responsible for the administration of private schools in the
province(s) in which our schools are located, including but not limited to the specific requirements for authenticating various parties’ property
rights and payment of taxes and fees of for-profit private schools, taxation policies for for-profit private schools, measures for the collection of
non-profit private schools’ fees.
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Prior to September 1, 2017, which is before the 2016 Private Education Law took effect, private schools were divided into three categories: private
schools established with donated funds; private schools that require reasonable returns and private schools that do not require reasonable returns. While
private education is treated as a public welfare undertaking under the regulations, in the case of private schools choosing to require “reasonable returns,”
sponsors of these schools may choose to require “reasonable returns” from the annual net balance of the school after deduction of costs, donations
received, government subsidies, if any, the reserved development fund and other expenses required by the regulations.
According to the 2016 Private Education Law, the key features of the aforesaid new classification system for private schools include the following:
·
·
·
·
sponsors of for-profit private schools are entitled to retain the profits and proceeds from the schools and the operation surplus may be allocated
to the sponsors pursuant to the PRC Company Law and other relevant laws and regulations;
sponsors of non-profit private schools are not entitled to the distribution of profits or proceed from the non-profit schools and all operation
surplus of non-profit schools shall be used for the operation of the schools;
for-profit private schools are entitled to set their own tuition and other miscellaneous fees without the need to seek prior approvals from or
report to the relevant government authorities. The collection of fees by non-profit private schools, on the other hand, shall be regulated by the
provincial, autonomous regional or municipal governments;
private schools (for-profit and non-profit) may enjoy preferential tax treatments. Non-profit private schools will be entitled to the same tax
benefits as public schools. Taxation policies for for-profit private schools after the 2016 Private Education Law taking effect are still unclear as
more specific provisions are not yet to be introduced;
· where there is construction or expansion of a non-profit private school, the school may acquire the required land use rights in the form of
allocation by the government as a preferential treatment. Where there is construction or expansion of a for-profit private school, the school may
acquire the required land use rights by purchasing them from the government;
·
·
the remaining assets of non-profit private schools after liquidation shall continue to be used for the operation of non-profit schools. The
remaining assets of for-profit private schools shall be distributed to the sponsors in accordance with the PRC Company Law; and
people’s governments at or above the county level may support private schools by subscribing to their services, provision of student loans and
scholarships, and leases or transfers of unused state assets. The governments may further take such measures as government subsidies, bonus
funds and incentives for donation in support of non-profit private schools.
On December 29, 2016, the State Council issued the Several Opinions of the State Council on Encouraging the Operation of Education by Social Forces
and Promoting the Healthy Development of Private Education, or the State Council Opinions, which requires to facilitate access to the operation of
private schools and encourages social forces to enter the education industry. The State Council Opinions also provide that each level of the People’s
governments shall increase their support to the private schools in terms of financial investment, financial support, autonomy policies, preferential tax
treatments, land policies, fee policies, autonomy operation, protecting the rights of teachers and students. Further, the State Council Opinions require
each level of the People’s governments to improve its local policies on government support to for-profit and non-profit private schools by ways of
preferential tax treatments. In addition, the State Council Opinions require the strengthening of the Chinese Communist Party, or the CCP. Under the
Opinions, local governments are required to consider the school CCO organization and the CCP’s leadership as important factors in the annual
inspections of private schools.
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On August 10, 2018, the Ministry of Justice, or the MOJ, released the Implementation Rules for 2016 Private Education Laws (the MOJ Draft) to seek
public comments. As of the date of this annual report, the Implementation Rules for 2016 Private Education Laws has not come into force, and their
contents and retroactive effect are still uncertain. The MOJ Draft stipulated, among other provisions, (1) that foreign-invested enterprises established in
China and social organizations whose actual controllers are foreign parties shall not sponsor, participate in or actually control private schools that
provide compulsory education, (2) that group-based education organizations shall not control non-profit private schools through mergers and
acquisitions, franchise agreements and contractual arrangements, and (3) that related party transactions entered into by private schools shall be open, fair
and just and shall not harm national interests, school interests, or student or teacher interests. However, there is uncertainty as to whether the MOJ Draft
will be legislated in the same form as published for consultation and how they will be interpreted and implemented when and if legislated at all.
Supporting regulations of 2016 Private Education Law
On December 30, 2016, the MOE, MCA, SAIC, the Ministry of Human Resources and Social Welfare and the State Commission Office of Public
Sectors Reform jointly issued the Implementation Rules on the Classification Registration of Private Schools to reflect the new classification system for
private schools as set out in the 2016 Private Education Law. Generally, if a private school established before promulgation of the 2016 Private
Education Law chooses to register as a non-profit school, it shall amend its articles of association, continue its operation and complete the new
registration process. If such private school chooses to register as a for-profit school, it shall conduct financial liquidation process, have the property
rights of its assets such as lands, school buildings and net balance being authenticated by relevant government authorities, pay up relevant taxes, apply
for a new Permit for Operating a Private School, re-register as for-profit schools and continue its operation. On April 4, 2018, Zhejiang province has
promulgated implementing rules on Classification Registration of Existing Private Schools, which took into effect on June 1, 2018. These supporting
rules provided the procedure regarding the new registration procedures of the Existing Private Schools. However, more specific provisions regarding the
above registrations are yet to be promulgated, such as the specific requirements for authenticating various parties’ property rights and payment of taxes
and fees of for-profit private schools, taxation policies for for-profit private schools and so on.
On December 30, 2016, the MOE, SAIC and the Ministry of Human Resources and Social Welfare jointly issued the Implementation Rules on the
Supervision and Administration of For-profit Private Schools, pursuant to which the establishment, division, merger and other material changes of a for-
profit private school shall first be approved by the education authorities or the authorities in charge of labor and social welfare, and then be registered
with the competent branch of SAIC.
As such, starting from September 1, 2017, when the 2016 Private Education Law took effect, compulsory education services from first grade to ninth
grade are required to register as non-profit schools, where revenues generated by school operation are required to remain within the school and used for
school operation, and cannot be disbursed to the sponsor or owner of the school. Additionally, private schools are required to register as either for-profit
or non-profit schools, and the sponsor of a private school should independently register the school as non-profit or for-profit. Under existing regulations,
schools providing compulsory education services could not be registered as for-profit schools. The supporting regulations of 2016 Private Education
Law (in the form of Opinions) promulgated by the State Council and the provincial governments have not provided details regarding the new
registration procedures of schools. In addition, the amendment to the Implementation Rules for 2016 Private Education Law has not been promulgated,
and therefore, the specific effects of the rules on our company and operations are uncertain at the date of this annual report. For example, we are
uncertain about the tax regulations for for-profit private schools under the 2016 Private Education Law since specific provisions have not been
introduced. Additionally, the 2016 Private Education Law does not provide for a definitive timeline for existing schools to re-register/change their for-
profit or non-profit status. Moreover, Zhejiang province has promulgated implementing opinions that all schools located in Zhejiang province are
required to re-register and/or change their for-profit or non-profit statuses before 2022. As of June 30, 2020, our affiliated schools have not changed their
current registration statuses as private schools with reasonable return and we intend to maintain the current statuses until we have obtained better clarity
on the application of the 2016 Private Education Law. As of the date of this annual report on Form 20-F, we have not received any notice from the
regulatory bodies regarding such re-registration. In addition, as of June 30, 2020, we registered two for-profit schools newly established after the
effectiveness of the 2016 Private Education Law, i.e., Zhuji Hailiang Foreign Language High and Zhenjiang Jianghe High School of Art and three non-
profit schools, i.e. Lanzhou Hailiang Experimental School, Wuhu Hailiang Experimental School and Hailiang Overseas Chinese School. In the future,
we may redefine and evolve our business model in response to the changes in law, which may include, without limitation, an increased emphasis on
leveraging our knowledge and expertise in school operations by providing managerial and consulting services to various schools we operate or partner
with.
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As of the date of this annual report on Form 20-F, none of our managed schools have elected to register as for-profit or non-profit private schools and
since we are not sponsoring to any of our managed schools, we do not expect to determine when the registration change or re-registration shall take
place.
For a detailed discussion on how the 2016 Private Education Law and the above regulations will affect our schools, see “Risk Factors—Risks Related to
Business and Industry—We may be subject to significant limitations on our ability to engage in the private education business or make payments to our
subsidiaries and may otherwise be materially and adversely affected by changes in PRC laws and regulations”.
Regulations on Education-related Fees
The 2016 Private Education Law stipulates that for-profit private schools are entitled to set their own tuition and other miscellaneous fees without the
need to seek prior approvals from or report to the relevant government authorities. The collection of fees by non-profit private schools, on the other
hand, shall be regulated by the provincial, autonomous regional or municipal governments.
As such, if our private schools choose to register as for-profit private schools for our noncompulsory education services, we will be able to set our own
tuitions and other miscellaneous fees according to the market conditions. However, pursuant to the 2016 Private Education Law, for our compulsory
education services, our private schools are required to register as non-profit private schools, and will be subject to regulations of non-profit private
schools, and as such, shall be regulated by the provincial, autonomous regional or municipal governments.
On July 8, 2011, the Zhuji Municipal Development and Reform Bureau, the Zhuji Finance Bureau, the Zhuji Education Department and the Zhuji
Human Resources and Social Security Bureau jointly promulgated the Notice of Regulating the Fees Management of Private Primary and
Secondary Schools (ZFGJ [2011] No. 96), or the Notice. Under the Notice, private primary schools and secondary schools of Zhuji city are approved to
charge tuition, accommodation fees and the registration fees from their students. In addition, when setting tuition and accommodation fee standards,
schools should properly contemplate reasonable returns for the private schools. The registration fees standard should be in accordance with the principle
of “voluntary payment, accurate calculation of expenses, timely settlement and regular disclosure.” Specifically, textbook fees cannot exceed RMB365
for grade 10 and grade 11 and cannot exceed RMB265 for grade 12.
On January 21, 2020, the Zhejiang Provincial Development and Reform Commission, Zhejiang Provincial Department of Education, Zhejiang
Provincial Department of Human Resources and Social Security and Zhejiang Provincial Market Supervision Administration promulgated the
Administrative Measures for Private Education Fees, which applies to non-profit private schools for academic education in Zhejiang province. The
Administrative Measures for Private Education Fees stipulate, among other provisions, that: (1) the fee policy for private primary and secondary schools
is determined by governments in accordance with the direction of marketization; (2) for the convenience of students’ study and life and under the
precondition of students’ willingness, private schools can provide services and charge service fees, or collect and pay related services fees for the third
service provider, who provide services. In addition, the service fee must be charged according to the fact, be settled timely and be published regularly.
On August 17, 2020, the MOE and other four ministries and commissions promulgated the Opinions on Further Standardization of Education Fee, which
stipulate, among other provisions, that:
(1) The measures for the collection of fees by non-profit private schools shall be formulated by the people's governments of various provinces,
autonomous regions and centrally-administered municipalities; the charging criteria of for-profit private schools are subject to market regulation and
shall be determined by the schools themselves. The private schools established before November 7, 2016 which have not complete their registration
procedures of their for-profit or non-profit statuses must be managed according to the non-profit private schools’ charging policy;
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(2) In addition to completing education and teaching tasks, private schools can provide related convenient services for students, and organize research
trips, after-school services, social practice and other activities, but the parts of service fees borne by the students or parents must be charged based on
voluntary and non-profit principles. If related services are provided by the third party outside the school, the school may collect and pay related services
fees for the third service provider;
(3) Private schools must publicize the charging items and standards in a prominent location in the school and indicate the charging items and standards
in the admissions brochure and admission notice. If fees that should be publicized were actually not publicized, or the contents of the publicity are not in
compliance with the related policies, students are entitled to refuse the payment of the fees;
(4) Strengthen the audit for non-profit private schools, and strictly prohibit the sponsor of a non-profit private school from gaining proceeds from school
running in any way.
Although the State Council and some provincial governments have promulgated some supporting rules of 2016 Private Education Law, the
Implementation Rules for 2016 Private Education Law has not been promulgated. So, we are uncertain how these rules and regulations will impact our
operation and business model from the perspective of tuition and other education-related fees. For example, the ceiling on tuition and accommodation
expenses we can charge for our basic educational program was set out by the Zhuji branch of the MOE in August 2019, which are RMB62,000 per
student, RMB66,000 per student and RMB74,000 per student for primary school, middle school and high schools respectively. In the 2019/2020 school
year, we charged an average tuition per student for the primary school, middle school and high school education under our basic educational program of
RMB44,301, RMB45,232 and RMB46,501. Pursuant to the registration documents filed with local authorities for the 2019/2020 school year and
2020/2021 school year, we are approved to charge RMB86,000 to RMB200,000 and RMB102,000 to RMB220,000 respectively for our international
program. For the 2019/2020 school year, we charged an average tuition per student for international program of RMB92,398. See “Item 3. Key
Information—D. Risk Factors—The tuition charged by our affiliated schools and student enrollment at these affiliated schools are subject to regulation
by the Chinese government, and our revenue is highly dependent on the level of these fees and the number of students enrolled.”
Regulations on Chinese-foreign cooperation in operating schools
Chinese-foreign cooperation in operating schools or training programs is specifically governed by the Regulations on Operating Chinese-foreign
Schools, promulgated by the State Council in 2003 and amended in 2013 and 2019, and the Implementing Rules for the Regulations on Operating
Chinese-foreign Schools, or the Implementing Rules were issued by the MOE in 2004.
The regulations on Operating Chinese-foreign Schools and its Implementing Rules encourage substantive cooperation between overseas educational
organizations with relevant qualifications and experience in providing high-quality education and Chinese educational organizations to jointly operate
various types of schools in the PRC, with such cooperation in the areas of higher education and occupational education being encouraged. Chinese-
foreign cooperative schools are not permitted, however, to engage in compulsory education and military, police, political and other kinds of education
that are of a special nature in the PRC.
Permits for Chinese-foreign Cooperation in Operating Schools can be obtained from education authorities or from the authorities that regulate labor and
social welfare in the PRC.
To date, none of our schools is being operated under a Chinese-foreign cooperation project, and therefore we are not governed by the Regulations on
Operating Chinese-foreign Schools.
Foreign investment in educational service industry
On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law or the FIL, which took effect on January 1, 2020, and
replaced the existing laws regulating foreign investment in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative Joint Venture Law
and the Wholly Foreign-owned Enterprise Law, or Existing FIE Laws, together with their implementation rules and ancillary regulations. The FIL
embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the
legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The Foreign Investment Law defines foreign
investment as the investment activities conducted by foreign investors directly or indirectly in the PRC and sets forth the situations that should be
regarded as foreign investment. Meanwhile, it introduces pre-establishment national treatment with a negative list for foreign investment. Foreign
investors shall not invest in any field prohibited by the negative list for foreign investment, while for any field with investment restricted by the negative
list, foreign investors shall meet the investment conditions stipulated under the negative list. Any field that does not fall within the negative list shall be
administered under the principle of equal treatment to domestic and foreign investment.
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However, uncertainties still exist in relation to interpretation and implementation of the FIL, including, among other things, the nature of variable
interest entities contractual arrangements and specific rules regulating the organization form of foreign-invested enterprises within the five-year
transition period (as discussed below). While the FIL does not define contractual arrangements as a form of foreign investment explicitly, we cannot
assure you that future laws and regulations will not provide for contractual arrangements as a form of foreign investment. Therefore, there can be no
assurance that our control over our VIEs through contractual arrangements will not be deemed as foreign investment in the future. In the event that any
possible implementing regulations of the FIL, any other future laws, administrative regulations or provisions deem contractual arrangements as a way of
foreign investment, or if any of our operations through contractual arrangements is classified in the “restricted” or “prohibited” industry in the future
“negative list” under the FIL, our contractual arrangements may be deemed as invalid and illegal, and we may be required to unwind the variable interest
entity contractual arrangements and/or dispose of any affected business. Also, if future laws, administrative regulations or provisions mandate further
actions to be taken with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions
in a timely manner, or at all. Furthermore, under the FIL, foreign investors or the foreign investment enterprises should be imposed legal liabilities for
failing to report investment information in accordance with the requirements. In addition, the FIL provides that foreign invested enterprises established
according to the existing laws regulating foreign investment may maintain their structure and corporate governance within a five-year transition period,
which means that we may be required to adjust the structure and corporate governance of certain of our PRC subsidiaries in such transition period.
Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely
affect our current corporate structure, corporate governance and business operations.
On June 30, 2019, the National Development and Reform Commission and the Ministry of Commerce promulgated the Special Administrative
Measures (Negative List) for Foreign Investment Access (2019 version), which took effect on July 30, 2019, and on June 23, 2020, the National
Development and Reform Commission and the Ministry of Commerce promulgated the Special Administrative Measures (Negative List) for Foreign
Investment Access (2020 version),which took effect on July 23 2020. Under the Negative List, preschool education, general senior high schools and
institutions of higher education can be set up through cooperation only and controlled by the Chinese party (with principals or principal administrators
having Chinese nationality, and the council, Chinese members in the board of directors or the joint management committee accounting for not less than a
half of the total members). Investment in institutions offering compulsory education and religious educational institutions is prohibited.
On June 30, 2019, the National Development and Reform Commission and the Ministry of Commerce promulgated the Catalogue of industries in which
foreign investment is encouraged, which took effect on July 30, 2019. Under the Catalogue, foreign investment is encouraged in non-academic
vocational training institutions.
We conduct our private education business in China primarily through contractual arrangements among our operating subsidiary in China and Hailiang
Management and our affiliated schools owned and operated by Hailiang Management and the shareholder of Hailiang Management. We hold the
required licenses and permits necessary to conduct our private education business in China through the schools owned and operated by Hailiang
Management. As of the date of this annual report, the sponsor of our current 13 affiliated schools is in compliance with the requirements of the above
regulations, and we control and operate our affiliated schools through contractual arrangements that do not violate the above regulations.
Regulation of Domain Names and Website Names
PRC law requires owners of Internet domain names to register their domain names with qualified domain name registration agencies approved by The
Ministry of Industry and Information Technology and obtain registration certificates from such registration agencies. A registered domain name owner
has an exclusive use right over its domain name. Unregistered domain names may not receive proper legal protections and may be misappropriated by
unauthorized third parties.
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As of June 30, 2020, we registered 11 domain names relating to our websites, with the Internet Corporation for Assigned Names and Numbers and the
China Internet Network Information Center.
Regulation of Copyright and Trademark Protection
China has adopted legislation governing intellectual property rights, including copyrights and trademarks. China is a signatory to the main international
conventions on intellectual property rights and became a member of the Agreement on Trade Related Aspects of Intellectual Property Rights upon its
accession to the World Trade Organization in December 2001.
Copyright
The National People’s Congress amended the Copyright Law in 2001 and in 2010 to widen the scope of works and rights that are eligible for copyright
protection. The amended Copyright Law extends copyright protection to Internet activities, products disseminated over the Internet and software
products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center. To address the problem of
copyright infringement related to the content posted or transmitted over the Internet, the National Copyright Administration and the Ministry of
Information Industry jointly promulgated the Administrative Measures for Copyright Protection Related to the Internet on April 29, 2005. These
measures became effective on May 30, 2005. In addition, to protect the information network transmission right of copyright holders, performers,
producers of audio and video recordings in the internet space, Regulations on Protection of Information Network Transmission Right was promulgated in
2006 and amended in 2013 by State Council.
Trademark
The PRC Trademark Law, adopted in 1982, revised in 2001 and further revised in 2013 and 2019, protects the proprietary rights to registered
trademarks. The Trademark Office under the SAIC handles trademark registrations and grants a term of ten years to registered trademarks and another
ten years to trademarks as requested upon expiry of the prior term. Trademark license agreements must be filed with the Trademark Office for record.
We had five registered trademarks in the PRC.
Regulations on Foreign Exchange
The PRC government imposes restrictions on the convertibility of the RMB and on the collection and use of foreign currency by PRC entities. Under
current regulations, the RMB is convertible for current account transactions, which include dividend distributions, and the import and export of goods
and services. Conversion of RMB into foreign currency and foreign currency into RMB for capital account transactions, such as direct investment,
portfolio investment and loans, however, is still generally subject to the prior approval of or registration with SAFE.
Under current PRC regulations, foreign-invested enterprises such as our PRC subsidiary are required to apply to the Banks that meet the requirements of
SAFE, for a Foreign Exchange Registration of Foreign-Invested Enterprise. With such Registration, a foreign-invested enterprise may open foreign
exchange bank accounts at banks authorized to conduct foreign exchange business by SAFE and may buy, sell and remit foreign exchange through such
banks, subject to documentation and approval requirements. Foreign-invested enterprises are required to open and maintain separate foreign exchange
accounts for capital account transactions and current account transactions. In addition, there are restrictions on the amount of foreign currency that
foreign-invested enterprises may retain in such accounts.
71
Regulations on Foreign Exchange in Certain Onshore and Offshore Transactions
The Circular on Relevant Issues concerning Foreign Exchange Administration of Overseas Investment and Financing and Return Investments
Conducted by Domestic Residents through offshore Special Purpose Company (the “Notice” or “Circular No. 37”), which was promulgated by SAFE
and became effective on July 14, 2014, requires a PRC individual resident to file a “Registration Form of Offshore Investments Contributed by Domestic
Individual Residents” and register with the local SAFE branch before he or she contributes assets or equity interests in an offshore special purpose
company, that is directly established or controlled by the PRC resident for the purpose of conducting investment or financing. Following the initial
registration, the PRC resident is also required to register with the local SAFE branch for any major change includes, among other things, any major
change of the offshore special purpose company’s PRC resident shareholder, name of the offshore special purpose company, term of operation, or any
increase or reduction of the offshore special purpose company’s registered capital, share transfer or swap, and merger or division. Failure to comply with
the registration procedures of Circular No. 37 may result in penalties, including the imposition of restrictions on the ability of the offshore special
purpose company’s PRC subsidiary to distribute dividends to the offshore entity.
As of the date of this annual report on Form 20-F, to the best of our knowledge, our PRC resident shareholder with offshore investments in our Company
had registered with SAFE as to his offshore investments in accordance with the predecessor regulation of SAFE Circular No. 37, namely the Notice of
the State Administration of Foreign Exchange on the Administration of Foreign Exchange Involved in Financing and Return Investments Conducted by
Domestic Residents via Special Purpose Vehicles (“Circular No. 75”), which was replaced by SAFE Circular No. 37 on July 14, 2014 but still effective
when the relevant PRC resident shareholder made his investments. Therefore, as of the date of this annual report on Form 20-F, to the best of our
knowledge, our PRC resident shareholder has duly made such applications, filings and amendments as required.
Regulations on Dividend Distribution
Under applicable PRC laws and regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any,
determined in accordance with PRC accounting standards and regulations. In addition, foreign-invested enterprises in China are required to allocate at
least 10% of their accumulated profits each year, if any, to fund statutory reserves of up to 50% of the registered capital of the enterprise. Statutory
reserves are not distributable as cash dividends except in the event of liquidation. Each wholly-owned subsidiary in China must comply with the
foregoing regulations.
At the end of each fiscal year, each of our schools is required to allocate a certain amount to its development fund for the construction or maintenance of
the school properties or for the purchase or upgrade of school facilities. Such fund is also a statutory reserve that cannot be distributed as cash dividends.
In particular, as of June 30, 2020, our 9 affiliated schools are required to allocate no less than 25% of their annual net income for such purposes. In
addition, pursuant to the 2016 Private Education Law, sponsors of non-profit private schools are not entitled to any distribution of profits from their
schools and all revenue must be used for the development of the schools.
As of June 30, 2020, Hailiang Consulting had not paid any dividends to our offshore entities from its accumulated profits. No dividends were declared
and paid during the 2018, 2019 and 2020 fiscal years.
M&A Rules and Overseas Listings
On August 8, 2006, six PRC regulatory agencies, namely, the MOFCOM, the State Assets Supervision and Administration Commission, the State
Administration of Taxation, SAIC, CSRC and SAFE, jointly adopted the M&A Rules which became effective on September 8, 2006. This M&A
Rules purport to require, among other things, offshore special purpose vehicles, or SPVs, formed for the purpose of acquiring PRC domestic companies
and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock
exchange. While the application of the M&A Rules remains unclear, we believe, based on the advice of our PRC counsel, that CSRC approval was not
required in the context of our initial public offering as we are not a special purpose vehicle formed for the purpose of acquiring domestic companies that
are controlled by our PRC individual shareholders, as we acquired contractual control rather than equity interests in our domestic affiliated entities.
However, we cannot assure you that the relevant PRC government agency, including the CSRC, would reach the same conclusion as our PRC counsel. If
the CSRC or other PRC regulatory agency subsequently determines that we needed to obtain the CSRC’s approval for our initial public offering or if
CSRC, we may face sanctions by the CSRC or other PRC regulatory agencies. In such event, these regulatory agencies may impose fines and penalties
on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from our initial public offering
into the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, and prospects, as
well as the trading price of our ADSs.
72
Regulations on Loans to and Direct Investment in the PRC Entities by Offshore Holding Companies
According to the Provisional Regulations on Statistics and Supervision of Foreign Debt promulgated by SAFE on September 24, 1997 and the Interim
Provisions on the Management of Foreign Debts promulgated by SAFE, the National Development and Reform Commission and the Ministry of
Finance and effective from March 1, 2003, loans by foreign companies to their subsidiaries in China, which accordingly are foreign-invested enterprises,
or FIEs, are considered foreign debt, and such loans must be registered with the local branches of SAFE. Under the provisions, these FIEs must register
with the local branches of SAFE within 15 days from the date on which the loan agreements for the foreign debt are executed. In addition, the total
amount of accumulated foreign debt borrowed by an FIE is limited to the difference between the total investment and the registered capital of the FIE.
Total investment of an FIE is the total amount of capital that can be used for the operation of the FIE, as approved by the MOFCOM or its local
counterpart, and may be increased or decreased upon approval by the MOFCOM or its local counterpart. Registered capital of an FIE is the total amount
of capital contributions made to the FIE by its foreign holding company or owners, as approved by the MOFCOM or its local counterpart and registered
at the SAIC or its local counterpart.
According to the FIL and its Implementation Regulations, which took effect on January 1, 2020, Foreign investors shall not invest in any field with
investment prohibited by the negative list for foreign investment access. Foreign investors shall meet the investment conditions stipulated under the
negative list for any field with investment restricted by the negative list for foreign investment access. For the fields not included in the negative list for
foreign investment access, management shall be conducted under the principle of consistency for domestic and foreign investment. Registration of
foreign investment enterprises shall be handled pursuant to the law by the market regulatory authority of the State Council or the market regulatory
authorities of local People's Governments empowered thereby. When performing their duties pursuant to the law, the relevant administrative authorities
shall not process licensing, enterprise registration etc. for proposed investments by foreign investors in the fields set out in the Negative List if the
investment does not comply with the provisions of the Negative List; where approval for fixed asset investment projects is involved, the relevant
approval shall not be processed.
Our PRC subsidiaries, Hailiang Consulting, Ningbo Hailiang, Zhuji Nianxin Lake Hotel, Hailiang Sports, Ningbo Haoliang, Hangzhou Hailiang
International Studying, Hangzhou Hailiang Study Trip, Zhuji Hailiang Logistics, Zhuji Hailiang Supply, Haibo Education, Jiangxi Haibo Logistics
Management Co., Ltd. (“Haibo Logistics”) and Hailiang After-school are FIEs subject to the regulations discussed above but are not engaged in any
businesses listed in the Negative List.
73
C. Organizational Structure
The following diagram illustrates our corporate structure as of the date of this annual report on Form 20-F:
Note:
(1)According to PRC laws and regulations, entities and individuals who establish private schools are commonly referred to as “sponsors” instead of
“owners” or “shareholders.” The economic substance of “sponsorship” with respect of private schools is substantially similar to that of ownership
with regard to legal, regulatory and tax matters. However, the differences between sponsorship and equity ownership can be found in the specific
provisions of the laws and regulations applicable to sponsors and owners, such as provisions regarding the right to receive returns on investment
and the right to the distribution of residual properties upon termination and liquidation. Except for Zhuji Hailiang Foreign Language High and
Zhenjiang Jianghe High School of Art registered as for-profit schools, Lanzhou Hailiang Experimental School, Wuhu Hailiang Experimental
School and Hailiang Overseas Chinese School registered as non-profit schools, the rest of our affiliated schools have been registered as private
schools that requires “reasonable returns”. Under the 2004 Implementation Rules for Private Education Laws and other PRC laws and regulations,
although private education is mainly treated as a public welfare undertaking, sponsors of schools may choose to require reasonable returns from
the annual earnings of the school after deduction of certain costs, expenses, donations, subsidies and required contributions to development funds.
As of the date of this annual report, Hailiang Management or its subsidiaries is the sponsor of each of the 13 affiliated schools we currently
operate as registered pursuant to applicable PRC laws and regulations. However, following September 1, 2017 when the 2016 Private Education
Laws came into effect, and subject to the promulgation of the Implementing Rules of the 2016 Private Education Laws, our affiliated schools will
be required to register as private non-profit schools that are permitted to provide compulsory education services, and we will register our affiliated
schools accordingly. The State Council and certain provinces including the Zhejiang province have promulgated some supporting regulations of
2016 Private Education Law (in the form of Opinions). Zhejiang province has promulgated implementing opinions that all schools located in
Zhejiang province are required to re-register and/or change their for-profit or non-profit statuses before 2022. Except for Zhuji Hailiang Foreign
Language High and Zhenjiang Jianghe High School of Art registered as for-profit schools, Lanzhou Hailiang Experimental School, Wuhu
Hailiang Experimental School and Hailiang Overseas Chinese School registered as non-profit schools, we intend to maintain the current statuses
of our affiliated schools until we have obtained better clarity on the application of the 2016 Private Education Law. For more information
regarding the nature of schools requiring reasonable returns under relevant laws and regulations, school sponsorship and difference between
sponsorship and ownership under relevant laws and regulations, see “—B. Business Overview—Regulations—Regulations on Private Education—
2016 Private Education Law and The 2004 Implementation Rules for Private Education Laws.”
74
The following table sets out the details of our subsidiaries and affiliated entities that are significant to us:
Subsidiaries
Hailiang International Education Group Pte. Ltd.
Hailiang Education (HK) Limited
Hailiang Education International Studying Service Limited
Pate's - Hailiang International College Company Limited
Zhejiang Hailiang Education Consulting and Services Co., Ltd.
Ningbo Hailiang Education Logistics Management Co., Ltd.
Ningbo Haoliang Information Consulting Co., Ltd.
Zhuji Nianxin Lake Hotel Co., Ltd.
Ningbo Hailiang Sports Development Co., Ltd.
Hangzhou Hailiang International Studying Service Co., Ltd.
Hangzhou Hailiang Study Trip Co., Ltd.
*Xiantao Hailiang Education Logistics Management Co., Ltd.
Zhuji Hailiang After-school Service Co., Ltd.
Zhuji Hailiang Logistics Service Co., Ltd.
Zhuji Hailiang Supply Chain Management Co., Ltd.
Consolidated Affiliated Entities
Hailiang Education Management Group Co., Ltd.
Hailiang Experimental High School
Hailiang Foreign Language School
Hailiang High School of Art
Hailiang Junior Middle School
*Hailiang Overseas Chinese School
Hailiang Primary School
Hailiang Senior Middle School
Hangzhou Hailiang Education Management Co., Ltd.
Hangzhou Mingyou Training School Co., Ltd.
Jinhua Hailiang Education Technology Co., Ltd
*Jinhua Hailiang Foreign Language School
Lanzhou Hailiang Education Consulting Co., Ltd.
*Lanzhou Hailiang Experimental School
*Shanghai Yunhan Education Technology Co., Ltd.
Shaoxing Sihai International Travel Co., Ltd.
Tianma Experimental School
Wenzhou Hailiang Juxian Education Technology Co., Ltd
Wuhu Hailiang Education Management Co., Ltd
*Wuhu Hailiang Experimental School
Zhejiang Hailiang Mingxin Education Technology Co., Ltd
Zhejiang Mingxin International Travel Co., Ltd.
*Zhuji Mingyou Training Center Co., Ltd.
Zhenjiang Jianghe High School of Art Co., Ltd.
Zhuji Hailiang Foreign Language High School Co., Ltd.
Zhuji Tianma Boya Training Center Co., Ltd.
Zhuji Yuesheng Enterprise Management Consulting Co., Ltd.
Singapore
Hong Kong, PRC
Hong Kong, PRC
United Kingdom
China
China
China
China
China
China
China
China
China
China
China
Place
of
Incorporation
Ownership
Interest
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
90%
100%
100%
100%
Place of
Incorporation
China
China
China
China
China
China
China
China
China
China
China
China
China
China
China
China
China
China
China
China
China
China
China
China
China
China
China
* Entities acquired/incorporated or schools started operating/acquired between June 30, 2020 and the date of this annual report.
75
The following table sets out the details of our affiliated and managed schools as of the date of this annual report on Form 20-F:
Number of
Students
As of June 30,
2020
Location
Fiscal Year of
Commencement of
Operating or
Managing
Schools
Hailiang Foreign Language School
Hailiang Experimental High School
Tianma Experimental School
Hailiang Primary School
Hailiang Junior Middle School
Hailiang Senior Middle School
Hailiang High School of Art
Zhuji Hailiang Foreign Language High
Zhenjiang Jianghe High School of Art
Lanzhou Hailiang Experimental School
Hailiang Overseas Chinese School
Wuhu Hailiang Experimental School
Jinhua Hailiang Foreign Language School
Ninghai Public School
Xianghu Public School
Zhuji, Zhejiang Province
Zhuji, Zhejiang Province
Zhuji, Zhejiang Province
Zhuji, Zhejiang Province
Zhuji, Zhejiang Province
Zhuji, Zhejiang Province
Zhuji, Zhejiang Province
Zhuji, Zhejiang Province
Zhenjiang, Jiangsu Province
Lanzhou, Gansu Province
Wenzhou, Zhejiang Province
Wuhu, Anhui Province
Jinhua, Zhejiang Province
Ningbo, Zhejiang Province
Hangzhou, Zhejiang Province
Capacity
3,374**
4,450
4,599
2,856**
3,350**
1,642**
1,700
2,139**
920
2,200
1,705
1,680
900
4,500
1,152
3,392
4,270
4,507
2,805
3,238
2,026
1,572
1,467
439
—
—
—
598
—
—
Xiantao No.1 Middle School
Xiantao, Hubei Province
7,560
8,000
Xinchang Nanrui Experimental School
Shaoxing, Zhejiang Province
2,819
2,900
Feicheng Hailiang Foreign Language School
15 Baishu Schools
Feicheng, Shandong Province
Jiangxi Province
412
22,110
800
29,341
Hangzhou Chunhui Primary School
Hangzhou, Zhejiang Province
491
1,600
Hangzhou Xixing Middle School
Hangzhou, Zhejiang Province
391
960
Xiaoshan District Wenyan Primary School
Hangzhou, Zhejiang Province
2,287
3,000
Xiaoshan District Wenyan No. 2 Primary School Hangzhou, Zhejiang Province
400
400
Xiaoshan District Wenyan Middle School
Hangzhou, Zhejiang Province
914
1,920
Hailiang Kindergarten
Zhuji, Zhejiang Province
Zhuji Hailiang Jinshan Kindergarten
Zhuji, Zhejiang Province
Tianma Kindergarten
Zhuji, Zhejiang Province
261
154
246
400
249
350
Sihong Second Experimental School
Suqian, Jiangsu Province
3,985
5,500
Xiamen Road School
Suqian, Jiangsu Province
—
4,600
Fumin Avenue School
Suqian, Jiangsu Province
—
3,200
2018
2018
2019
2018
Sponsorship
Hailiang Inc.
1996
Hailiang Inc.
2002
Hailiang Inc.
2010
Hailiang Inc.
2017
Hailiang Inc.
2017
Hailiang Inc.
2017
Hailiang Inc.
2018
Hailiang Inc.
2019
Hailiang Inc.
2019
Hailiang Inc.
2021
Hailiang Inc.
2021
2021
Hailiang Inc.
2021*** Hailiang Inc.
Hailiang Inc.
2022*
Hailiang Inc.
2022*
Hailiang
Investment
Hailiang
Investment
Hailiang
Investment
Private
Company(s)
Third-
by
in
party(s)
2020
Local
Government
Local
Government
Local
Government
Local
Government
Local
Government
Hailiang
Investment
Hailiang
Investment
Hailiang
Investment
Local
Government
Local
Government
Local
Government
2021
2019
2021
2020
2019
2019
2019
2019
2019
2019
2019
(*) Refers to the school(s) that is(are) under construction, and will obtain the sponsorship of the school(s) after the construction is completed.
(**) The capacity of each school in Hailiang Education Park may be adjusted according to the students enrollment every school year.
(***) We obtained the sponsorship of Jinhua Hailiang Foreign Language School in fiscal year 2021.
Contractual Arrangements with our affiliated entities and their shareholders
Hailiang Inc. is a holding company with no substantive operations. We had previously, on December 31, 2013, through our PRC subsidiary, Hailiang
Consulting, entered into a series of contractual arrangements with Hailiang Management which enabled us to:
·
·
·
exercise the power over our affiliated entities;
have the exposure or rights to variable returns from our involvement with our affiliated entities; and
exercise the ability to affect those returns through use of its power over our affiliated entities.
On June 30, 2017, we, through our PRC subsidiary, Hailiang Consulting, entered into a series of revised and amended contractual arrangements (the
“First Amended and Restated Contractual Arrangements”) with Hailiang Management. On February 8, 2018, Beize Group, controlled by Mr. Feng,
became a 0.1% record shareholder of Hailiang Management by contributing additional capital to Hailiang Management. As of the date of this annual
report on Form 20-F, Mr. Feng and Beize Group hold a 99.9% and 0.1% equity interest in in Hailiang Management, respectively. On February 23, 2018,
each of the First Amended and Restated Contractual Arrangements were further amended and restated, whereby Hailiang Management, Hailiang
Consulting, Mr. Feng and Beize Group entered into a series of contractual arrangement (the “Second Amended and Restated Contractual
Arrangements”), including the Second Amended and Restated Call Option Agreement, Second Amended and Restated Powers of Attorney, Second
Amended and Restated Consulting Services Agreement and Second Amended and Restated Equity Pledge Agreement. The recording process for the
Second Amended and Restated Contractual Arrangements with the local government was completed on March 15, 2018.
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The following is a summary of the material provisions of the Second Amended and Restated Contractual Arrangements with our affiliated entities and
the shareholders of Hailiang Management:
Second Amended and Restated Call Option Agreement
Pursuant to the Second Amended and Restated Call Option Agreement among Hailiang Consulting, Hailiang Management, Mr. Feng and Beize Group
entered into on February 23, 2018, Mr. Feng and Beize Group unconditionally and irrevocably granted Hailiang Consulting or its designee an exclusive
option to purchase, to the extent permitted under PRC laws and regulations, in certain cases, including but not limited to the cancellation of any of the
Second Amended and Restatement Contractual Arrangements or liquidation or dissolution of Hailiang Management, all or part of the equity interest in
Hailiang Management at the lowest consideration permitted by PRC laws and regulations unless a valuation of the equity is required by the PRC laws.
Hailiang Consulting has the sole discretion to decide when to exercise the option, and whether to exercise the option in part or in full. Without Hailiang
Consulting’s written consent, Hailiang Management, Beize Group or Mr. Feng may not sell, transfer, pledge or otherwise dispose of or create any
encumbrance on any of Hailiang Management’s assets, businesses or equity interests or merge with or acquire other businesses. Without Hailiang
Consulting’s written consent, Hailiang Management may not enter into any material contracts, incur any indebtedness or provide any loan or guarantee
to a third party, or alter the nature or scope of its business. The Second Amended and Restated Call Option Agreement may not be terminated by
Hailiang Management, Beize Group or Mr. Feng, nor can it be terminated by Hailiang Consulting without cause. Unless terminated, the Second
Amended and Restated Call Option Agreement shall remain in full force and effect until Hailiang Management’s term of operations expires in
April 2042.
Second Amended and Restated Power of Attorney
On February 23, 2018, Mr. Feng and Beize Group executed an irrevocable Second Amended and Restated Power of Attorney appointing Hailiang
Consulting, or any person designated by Hailiang Consulting, as their attorney-in-fact to (i) exercise on their behalf all their rights as shareholders of
Hailiang Management, including those rights under PRC laws and regulations and the articles of association of Hailiang Management, such as
appointing, replacing or removing directors, declaring dividends and making decisions on operational and financial matters, (ii) act as the representative
of Hailiang Management in its business operations, and (iii) unconditionally assign the shareholder rights of each of Mr. Feng and Beize Group to
Hailiang Consulting, including dividends or other benefits associated with being a shareholder that Mr. Feng and Beize Group each receives from
Hailiang Management.
77
Second Amended and Restated Consulting Services Agreement
Pursuant to the Second Amended and Restated Consulting Services Agreement among Hailiang Consulting, Hailiang Management, Beize Group and
Mr. Feng, entered into on February 23, 2018, Hailiang Consulting (or its controlled affiliate) has the exclusive right to provide comprehensive technical
and business support services to Hailiang Management’s affiliated entities. In particular, such services include developing curriculum, conducting
market research and offering strategic business advice, providing information technology services, providing public relations services, providing support
for teacher hiring and training and providing other services that the affiliated entities may need from time to time. Without the prior written consent of
Hailiang Consulting, none of Hailiang Management’s affiliated entities may receive such services from any third party. Hailiang Consulting owns the
exclusive intellectual property rights created despite the changes of the performance of services under this Second Amended and Restated Consulting
Services Agreement. Hailiang Management’s affiliated entities agree to pay annual service fees, calculated as a percentage of their total revenue, to
Hailiang Consulting (or its controlled affiliate). At the sole discretion of Hailiang Consulting, the service fees may be adjusted from time to time based
on the complexity of the services provided, the time and resources committed by Hailiang Consulting (or its controlled affiliate) and the commercial
value of the services. The Second Amended and Restated Consulting Agreement enables Hailiang Consulting (or its controlled affiliate) to charge an
annual service fee, the maximum of which equals the net income of Hailiang Management’s affiliated entities after deducting the mandatory
development reserve fund and other necessary costs prior to the payment of such service fees. As part of the Second Amended and Restated Consulting
Agreement, Hailiang Management, Beize Group and Mr. Feng agree that each of them will not take any actions, such as incurring indebtedness,
disposing of material assets, materially changing the scope or nature of the business of Hailiang Management’s affiliated entities, disposing of their
equity interests in Management’s affiliated entities, or paying dividends to Mr. Feng or Beize Group without the written consent of Hailiang Consulting.
The Second Amended and Restated Consulting Agreement may not be terminated by Hailiang Management, Beize Group, or Mr. Feng, nor can it be
terminated by Hailiang Consulting without cause. Unless terminated, the Second Amended and Restated Consulting Agreement shall remain in full force
and effect during the term of operations of Hailiang Management’s affiliated entities.
Second Amended and Restated Equity Pledge Agreement
Pursuant to the Second Amended and Restated Equity Pledge Agreement among Hailiang Consulting, Beize Group, Mr. Feng and Hailiang Management
entered into on February 23, 2018, each of Mr. Feng and Beize Group unconditionally and irrevocably pledged all of their respective equity interests in
Hailiang Management to Hailiang Consulting to guarantee performance of the obligations of Hailiang Management’s affiliated entities under the Second
Amended and Restated Call Option Agreement, the Second Amended and Restated Power of Attorney, and the Second Amended and Restated
Consulting Agreement, each as described above. Beize Group and Mr. Feng each agreed that without prior written consent of Hailiang Consulting, they
shall not transfer or dispose of the pledged equity interests, commence any bankruptcy or liquidation process of Hailiang Management or create or allow
any encumbrance on the pledged equity interests. The Second Amended and Restated Equity Pledge Agreement may not be terminated by Hailiang
Management, Beize Group or Mr. Feng, nor can it be terminated by Hailiang Consulting without cause. Unless terminated, the Second Amended and
Restated Equity Pledge Agreement remains in full force and effect until all of the obligations of Hailiang Management’s affiliated entities under the
consulting services agreement have been duly performed and related payments are duly paid. The pledge of equity interests in Hailiang Management by
Mr. Feng and Beize Group has been duly registered with the local branch of SAIC and becomes effective upon such registration.
D. Property, Plants and Equipment
Lease Agreements
Our principal executive offices are located at 1508 Binsheng RD, Binjiang District, Hangzhou City, Zhejiang Province, 310051, People’s Republic of
China. We lease real properties used by our affiliated schools and companies with a total site area of approximately 1.52 million square meters
(approximately 16,361,144 square feet) as of the date of this annual report, among which, approximately 1.1 million square meters (approximately
11,840,301 square feet) are rented from Hailiang Investment, which is controlled by Mr. Feng, our ultimate controlling shareholder, approximately
31,661 square meters (approximately 340,796 square feet) from Education Bureau of Dantu District, Zhenjiang City of land and resources for Zhenjiang
Jianghe High School of Art, approximately 77,256 square meters (approximately 831,577 square feet) from the People's Government of Chengguan
District, Lanzhou City of land and resources for Lanzhou Hailiang Experimental School, approximately 18,648 square meters (approximately 200,725
square feet) from the People's Government of Wencheng County, Wenzhou City of temporary land and resources for Hailiang Overseas Chinese School,
approximately 231,624 square meters (approximately 2,493,180 square feet) from Wuhu Shenxiang Middle School of land and resources for Wuhu
Hailiang Experimental School, and approximately 53,280 square meters (approximately 573,501 square feet) from the People's Government of Jindong
District, Jinhua City of land and resources for Jinhua Hailiang Foreign Language School. We will lease the land of Lanzhou Hailiang Experimental
School and Hailiang Overseas Chinese School for free. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions
—Transactions with Certain Related Parties.”
78
The terms of each of our current leases for campuses in Zhuji city for approximately 1.1 million square meters rented from Hailiang Investment is for
nineteen years from July 1, 2018. These leases contain priority renewal provisions which provide that we have the right of first refusal to renew the lease
upon the expiration of the lease, provided, that we notify the lessor six months in advance. Under each of these lease agreements, we can terminate the
lease at any time without cause, provided, that we notify the lessor in writing three months in advance. The lessor may only terminate the agreements
upon a written notice to us one year in advance for any unapproved sublease by the lessee, unapproved modification to the premises, failure to pay rent
for more than 60 days, or use of the properties for illegal activities. To terminate these leases for other causes, the lessor is required to give us written
notice one year in advance and obtain our consent to such termination.
On April 28, 2019, the Company entered into eight new lease agreements with Hailiang Investment regarding Hailiang Education Park, in order to
allocate lease fees to the respective schools and subsidiaries according to their used gross floor area. The term of each of these leases is for nineteen
years from July 1, 2018 and the rental fees in the first year was RMB22.3 million in the aggregate and is subject to a 5% annual increase from fiscal year
2020 to 2022. The rental fees commencing from the fiscal year 2023 will be subject to further negotiation between the Company and Hailiang
Investment. The leases cover the properties and facilities of Hailiang Education Park with a total combined gross floor area and site area of
approximately 489,225 square meters (approximately 581,252 square feet) and 833,000 square meters (approximately 8,966,338 square feet),
respectively.
We have not entered into any leases with respect to our managed schools since we do not own or sponsor any of our managed schools.
Leasehold improvement
On November 13, 2014, Hailiang Experimental High School entered into three leasehold improvement contracts with Heng Zhong Da, a company over
which Mr. Feng has significant influence, for outfitting services and related improvements for student dormitories, educational buildings, dining halls,
administrative building, sports stadiums, welcoming center and the school hospital of Hailiang Education Park. Under the contracts, Hailiang
Experimental High School will pay a total contract consideration of approximately RMB291.7 million (or RMB223.7 million, RMB12.2 million and
RMB55.8 million under each of the contracts, respectively) to Heng Zhong Da. The outfitting and improvements began on November 13, 2014 and were
completed as of June 30, 2016. After a final inspection by Hailiang Experimental High School, the parties of the contracts fixed the final contract
payment based on the actual costs incurred which were approximately RMB291.7 million (or RMB223.7 million, RMB12.2 million and RMB55.8
million under each of the contracts, respectively).
Additionally, we also entered into a series of leasehold improvement contracts with Heng Zhong Da for the leasehold improvement of educational
buildings, dining halls, student dormitories of our affiliated schools, and the amount of the contracts was RMB31.7 million and RMB136.8 million
(approximately US$19.4 million) during the years ended June 30, 2019 and 2020, respectively. As of June 30, 2020, and as of the date of this annual
report on Form 20-F, work related to a certain number of the leasehold improvement contracts have completed and payments remitted, while other
contracts are open and payments are expected to be remitted upon work completion.
79
We have purchased leasehold improvement service in the amount of RMB29.1 million, RMB29.7 million, and RMB106.8 million, (approximately
US$15.1 million) from Heng Zhong Da during the years ended June 30, 2018, 2019 and 2020, respectively.
We have paid RMB24.3 million, RMB37.9 million, and RMB76.1 million (approximately US$10.8 million) to Heng Zhong Da during the years ended
June 30, 2018, 2019 and 2020, respectively.
Item 4A. UNRESOLVED STAFF COMMENTS
None.
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated
financial statements and their related notes included in this annual report on Form 20-F. This annual report on Form 20-F contains forward-looking
statements. See “—G. Safe Harbor” in this Item. In evaluating our business, you should carefully consider the information provided under the caption
“Item 3. Key Information—D. Risk Factors” in this annual report on Form 20-F. We caution you that our businesses and financial performance are
subject to substantial risks and uncertainties.
A. Operating Results
Review of operating segments
We are an educational service provider of private primary, middle and high schools in China. We determined our operating segments based on financial
information utilized by our chief operating decision maker to allocate resources and assess performance.
For the year ended June 30, 2018, we identified seven segments, including K-12 educational services, after-school enrichment services, management
consulting services, logistic services, educational training services, overseas study consulting services and hotel management services.
For the year ended June 30, 2019 and 2020, we optimized our management structure for efficient resource allocation and high-quality management for
both our affiliated and managed schools. Thus, K-12 educational services, after-school enrichment services, management consulting services and logistic
services were merged into an operating segment “K-12 educational and management services” considering the integration of operation and the financial
result of the above business was reviewed as a whole. As a result, four operating segments were identified for the year ended June 30, 2019 and 2020,
including K-12 educational and management services, educational training services, study trip and overseas study consulting services and hotel
management services.
Segment information for the year ended June 30, 2018 has been restated to conform to the presentation for the years ended June 30, 2019 and 2020.
The following discussion summarizes the four operating segments:
K-12 educational and management services
As of June 30, 2020, we owned and sponsored 9 affiliated schools and managed and operated 28 managed schools that were not owned or sponsored by
us, with an aggregate 66,344 students across China. Our affiliated schools, with the goal of providing distinguished, specialized, and internationalized
education, offer a broad range of basic and international education programs designed to facilitate students’ different characters, improve their academic
performance, and prepare them for higher education domestically and globally. As of June 30, 2020, 23,716 students were enrolled in our affiliated
schools. We also provided various services including but not limited to branding, academic management, basic and international education resources,
school culture, admission, finance, human resources, procurement, IT, internal audit, property and logistics management services to our managed
schools, with an aggregate 42,628 students enrolled as of June 30, 2020.
80
Educational training services
We offer students a wide range of educational training products under the “Hailiang Mingyou” brand. Our educational training service portfolio mainly
consists of comprehensive discipline training, quality-oriented education and online education services. For the 2019/2020 school year, Hailiang
Mingyou has 31,959 student attendances.
Study trip and overseas study consulting services
Through cooperation with other education service providers and self-developed study trip and camp courses, we offer students in our affiliated and
managed schools a variety of study trip programs operated domestically and globally. For the 2019/2020 school year, we have attracted more than
30,000 student attendances in these programs.
We also provide one-to-one personalized overseas study consulting services, including background evaluation, studying plan customization, professional
assessment, background improvement, application and course selection. For 2019/2020 school year, we provided overseas consulting services to 1,161
students.
Hotel management services
We provide lodging, meals and other guest services at the Zhuji Nianxin Lake Hotel, located in Hailiang Education Park.
Review of operations
The outbreak and spread of COVID-19 domestically and globally have impacted our business lines. To ease and prevent the potential adverse impact of
COVID-19 on our operating results, we have taken a number of measures, including launching an online education and tutoring platform to continue
providing original curriculum while our students staying at home, having our teachers and students take nucleic acid tests before returning to in-person
teaching classes, impose more rigorous visiting rules for parents and other visitors, etc. For our K-12 educational services, we launched an online
education and tutoring platform, which enabled our teachers and educational staff to provide original curriculums to their students online while our
schools were not allowed to operate in-person teaching classes. As a result, only accommodation and transportation services were suspended between
February 2020 and April 2020 and related service fees with immaterial amount was expected to be refunded, which had limited impact on revenue from
K-12 educational services. Besides, revenue from K-12 educational services for high school level of RMB32.3 million (approximately US$4.6 million)
was deferred to the next fiscal year due to the delay of school year end, while revenue from K-12 educational services for middle and primary school
were not significantly impacted. For our ancillary education business, revenue from study trip services decreased by 30.8% or RMB25.1 million
(approximately US$3.6 million) year-over-year, due to certain regulations and travel restrictions imposed by PRC governments and authorities. Revenue
from educational training services decreased due to the liquidation of Haibo Education and the suspension of onsite training courses during the pandemic
period.
We have shown steady performance in our business in recent years despite the outbreak of COVID-19 in 2020. Our total revenue increased by 28.2% to
RMB 1,499.0 million, gross profits increased by 29.4% to RMB472.1 million and net profit attributable to our shareholders increased by 31.8% to
RMB293.4 million in the 2019 fiscal year. Our total revenue decreased by 1.1% to RMB 1,482.6 million (approximately US$209.8 million), gross
profits increased by 5.8% to RMB499.4 million (approximately US$70.7 million) and net profit attributable to our shareholders increased by 26.4% to
RMB370.8 million (approximately US$52.5 million) in the 2020 fiscal year.
Factors Affecting Our Results of Operations
We believe that our results of operations are affected by general factors affecting China’s private K-12 education industry and company-specific factors,
including the following:
· Demand for private K-12 education in China. We have benefited from an increasing demand for private K-12 education in China in the last
decade. This increase was driven by the overall economic growth, the rise in household disposable income and household spending on
education, as well as an improvement in the education system and policies relating to K-12 education in China. According to Ministry of
Education of the PRC, the total number of student enrollments of private K-12 education in China has increased steadily, from 37.8 million in
2015 to 46.4 million in 2019, and the proportion of student in private K-12 schools against the total number of students in K-12 schools also
increased from 16.9% to 19.3% during the same period. We anticipate that the demand for quality private K-12 education in China will
continue to grow which we expect will provide us with significant opportunity to expand our business.
81
· Demand for international education in the PRC market. The demand for international and bilingual private K-12 education in China is
increasing at a fast pace. According to a report prepared at our request by Sansheng Consulting, an independent market research firm, or the
Sansheng Report, the total number of students enrolled in international and bilingual private schools in China has increased from 171.8
thousand in 2015 to 427.8 thousand in 2019, realizing a fast increase with a CAGR of 25.6%. This quick growth can mainly be attributed to the
strong demand of Chinese students wanting to study abroad, the rising income and wealth of Chinese households and the rising recognition of
the quality of higher education overseas. As a result of the huge demand and increasing student enrollments, the total revenue of international
and bilingual private schools in China increased from RMB15.8 billion in 2015 to RMB45.4 billion in 2019 at an increase CAGR of 30.2%
(according to the Sansheng Report). With high-quality teachers, well-known brand, and strong management team, we are determined to deliver
well-designed curriculums and facilitate comprehensive development of our students.
· Ability to successfully expand our school network through an asset-light approach efficiently. We facilitate the development of our school
network by employing an asset-light approach, which allows us to manage and operate additional schools, or act as these schools’ sponsor
without acquiring ownership of land and facilities in such schools. For schools we sponsor but for which we do not own the land and facilities,
we can avoid significant capital expenditure by leasing land and facilities. For schools we manage and operate but do not act as sponsor, we aim
to provide education and management services to both public and private schools. As of June 30, 2020, we entered into service agreements with
28 private and public schools to provide education and management services. For these services, we earn fees based on the types, scale and
costs of the services we rendered. We expect to provide education and management services to additional public and private schools in the
future to reach students across China and promote the Hailiang Education brand both domestically and internationally, which we expect would
then lead to an increase in our profitability and market penetration.
·
·
Level of student enrollment. As of June 30, 2018, 2019 and 2020, we had a total of 22,110, 22,819, and 23,716 students, respectively.
Additional four affiliated schools have started operating in September 2020, with a capacity of about 6,485 students in the aggregate. We expect
the number of students enrolled in our affiliated schools to grow further in the next few years.
Pricing of educational programs. Our results of operations are affected by the pricing of our educational programs. We generally charge
tuition based on a student’s education phase (primary, middle, high school) and whether the student attends our basic educational program or
international program. Tuition includes charges for academic programs, after-school enrichment services, accommodations, meals,
transportation services and study materials. The tuition we charge for some of our education programs is subject to regulatory restrictions. The
most recent ceiling on tuition and accommodation expenses we can charge for our basic educational program was set out by the Zhuji branch
of the MOE in August 2019, which are RMB62,000 per student, RMB66,000 per student and RMB74,000 per student for primary school,
middle school and high schools respectively. There is currently no maximum amount set for our international program. Pursuant to the
registration documents filed with local authorities for the 2019/2020 school year and 2020/2021 school year, we can charge RMB86,000 to
RMB200,000 and RMB102,000 to RMB220,000 respectively for our international program. The tuition limitation is reviewed by the
regulatory authority on a periodic basis. See “Item 4. Information on the Company–B. Business–Regulations on Private Education–2016
Private Education Law and The 2004 Implementation Rules for Private Education Laws.” Subject to applicable regulatory requirements, we
generally determine tuition based on the demand for our educational programs, the cost of our educational services and the tuition and the fees
charged by our competitors, and seek to increase tuition by approximately 5% to 15% each year. For example, in the 2018, 2019 and 2020
fiscal years, the average tuition for primary, middle and high schools, including both our basic educational program and our international
program, was RMB48,280, RMB53,333, and RMB55,162 (approximately US$7,808), respectively. The increase was also due to a greater
proportion of students enrolled in the international program which charges higher tuition. In the 2018, 2019 and 2020 fiscal years, average
tuition charged for students in our international program was approximately twice as high as tuition charged for students in our basic
educational program. The increase of average tuition fee was also driven by the raise in pricing for both basic and international programs.
82
· Ability to control costs and expenses. Our ability to maintain and increase profitability also depends on our ability to effectively control our
costs and expenses.
Cost of revenue. Our cost of revenue mainly consists of labor cost, student-related costs, depreciation expenses and to a lesser extent,
transportation costs, utility costs and leasing fees. Our cost of revenue as a percentage of our total revenue was 68.8%, 68.5%, and 66.3% for
fiscal years 2018, 2019 and 2020, respectively. In the near future, we expect our cost of revenue to increase as we will continue to hire
additional teachers to support our growing K-12 educational program and expand our school network.
Selling expenses and administrative expenses. For the 2018, 2019 and 2020 fiscal years, our total selling expenses and administrative expenses
as a percentage of our total revenue were 7.5%, 6.5%, and 7.0%, respectively. We expect our expenses will also increase as we incur additional
expenses associated with our overall growth. We expect, however, that we will benefit from economies of scale as we continue to grow our
business and increase our student base, so we expect our total selling expenses and administrative expenses as a percentage of our total revenue
to decrease.
Overview of Financial Results
We evaluate our business using a variety of key financial measures.
Revenue
During the fiscal years ended June 30, 2018, 2019 and 2020, we generated revenue of RMB1,169.3 million, RMB1,499.0 million and RMB 1,482.6
million (approximately US$ 209.8 million), respectively. Revenue was derived from the following sources:
K-12 educational services, which accounted for 93.6%, 81.2% and 88.2% of total revenue in the fiscal years 2018, 2019 and 2020, respectively;
Educational training services, which accounted for 3.1%, 9.6% and 3.6% of total revenue in the fiscal years 2018, 2019 and 2020, respectively;
Study trip services, which accounted for 1.2%, 5.4% and 3.8% of total revenue in the fiscal years 2018, 2019 and 2020, respectively;
Education and management services, which accounted for 1.6%, 2.7% and 3.3% of total revenue in the fiscal years 2018, 2019 and 2020, respectively;
and
Others, which accounted for 0.5%, 1.1% and 1.1% of total revenue in the fiscal years 2018, 2019 and 2020, respectively. Other services mainly include
overseas study consulting services and hotel management services.
83
The following table sets forth the sources of our revenue by amount and as a percentage of total revenue for the periods indicated:
2018
RMB (in
thousands)
1,093,933
36,395
13,791
19,021
6,208
1,169,348
Year Ended June 30,
2019
% of
revenue
RMB (in
thousands)
% of
revenue
RMB (in
thousands)
2020
US$ (in
thousands)
% of
revenue
93.6
3.1
1.2
1.6
0.5
100.0
1,217,007
144,188
81,495
40,942
15,393
1,499,025
81.2
9.6
5.4
2.7
1.1
100.0
1,308,211
53,700
56,408
48,317
15,963
1,482,599
185,165
7,601
7,984
6,839
2,259
209,848
88.2
3.6
3.8
3.3
1.1
100.0
K-12 educational services
Educational training services
Study trip services
Education and management services
Others
Total revenue
K-12 educational services
Revenue from K-12 educational services represents tuition charged to our students. Tuition includes charges for enrollment in our academic programs,
which vary based on grade levels and whether the student attends our basic educational program or our international program, as well as charges in
relation to after-school enrichment services, accommodations, meals, transportation services and study materials.
Tuition increased during the fiscal years 2018, 2019 and 2020 primarily due to increases in pricing of our educational programs and the level of student
enrollment. We expect our revenue to continue to increase going forward, reflecting our plan to continue to increase tuition at an annual rate of 5% to
15% and our efforts to increase our student enrollment by establishing and/or acquiring more affiliated schools.
Tuition fees are paid in two installments for newly enrolled students. When new students sign up for enrollment in the following academic year, we
generally require a tuition deposit of approximately RMB5,000 for our basic education program and RMB10,000 for our international education
program, with the remainder of the tuition fee to be remitted before the commencement of the academic year. We generally do not refund the tuition
deposit unless a student cannot enroll due to restrictions imposed by the regulatory authority pursuant to applicable laws and regulations.
The following tables compare revenue generated from our basic educational program and international program and as a percentage of total revenue
generated from K-12 educational services for the periods indicated, as well as the number of students and average tuition. Average tuition is calculated
by the total revenue derived from a particular program or grade level divided by the total number of students enrolled in that program for a particular
academic year. Our basic educational program offers curricula and coursework mandated by the PRC regulatory authorities. Our international program
also offers curricula mandated by the PRC regulatory authorities and in addition provides curricula with a focus on preparing students to study abroad.
Tuition for our international program covers tuition for basic education classes, language classes and special international classes. The higher tuition
charged for our international program reflects the higher cost of certain course materials, the need to hire foreign teachers with higher salaries and a
higher teacher to student ratio in our international program.
84
The following table sets forth revenue generated from each program, both in absolute amount and as a percentage of total revenue from K-12
educational services for the years indicated:
2018
Year Ended June 30,
2019
2020
Revenue*
(in
RMB
thousands)
% of
revenue Students
Average
Tuition
(in
RMB)
Revenue
(in
RMB
thousands)
% of
revenue Students
Average
Tuition
(in
RMB)
Revenue
(in
RMB
thousands)
Revenue
(in
USD
thousands)
% of
revenue Students
Average
Tuition
(in
RMB)
764,165
69.9 18,693 40,880
805,693
66.2 18,266 44,109
859,250
121,619
65.7 18,857 45,567
329,768
448,961
1,093,933 100.0 22,658 48,280 1,217,007 100.0 22,819 53,333 1,308,211
3,965 83,170
4,553 90,339
411,314
30.1
33.8
63,546
4,859 92,398
185,165 100.0 23,716 55,162
34.3
Basic educational
program
International
program
Total
* Hailiang International kindergarten and Tianma Kindergarten were carved out from our Group in February 2018. To keep the consistency of
presentation, 548 students at the kindergarten level, 443 students enrolled in basic program and 105 students enrolled in international program are
included in the number of students respectively. The related revenue derived from basic program and international program at the kindergarten level as
of February 2018 was included as well, representing RMB9.1 million and RMB3.7 million, respectively.
Revenue from our basic educational program increased by RMB41.5 million, or 5.4% from the 2018 fiscal year to the 2019 fiscal year, and further
increased by RMB53.6 million (approximately US$7.6 million), or 6.6% from the 2019 fiscal year to the 2020 fiscal year. In addition, revenue derived
from tuition of students enrolled in our international program increased by RMB81.5 million or 24.7% from the 2018 fiscal year to the 2019 fiscal year,
and further increased by RMB37.6 million (approximately US$5.3 million), or 9.2% from the 2019 fiscal year to the 2020 fiscal year. The increase was
mainly due to the increase in the number of students enrolled as well as the increase in the average tuition charged in both programs.
The following table sets forth revenue generated at the kindergarten, primary, middle and high school levels as well as the number of students and
average tuition. The table includes both our basic educational program and our international program:
2018
Year Ended June 30,
2019
2020
% of
revenue Students
Revenue
(in
RMB
thousands)
12,761
252,688
334,841
493,643
Revenue
(in
RMB
thousands)
-
330,741
407,311
570,159
1,093,933 100.0 22,658 48,280 1,217,007 100.0 22,819 53,333 1,308,211
Average
Tuition
(in
RMB)
548 23,286
5,320 47,498
6,905 48,493
9,885 49,939
Average
Tuition
(in
RMB)
-
5,887 52,943
7,149 52,927
9,783 53,864
Revenue
(in
RMB
thousands)
-
311,678
378,376
526,953
revenue Students
-
-
25.6
31.1
43.3
1.2
23.1
30.6
45.1
Average
Revenue*
Tuition
(in
(in
USD
RMB)
revenue Students
thousands)
-
-
-
-
6,135 53,911
25.3
46,813
31.1
7,498 54,323
57,651
80,701
43.6 10,083 56,547
185,165 100.0 23,716 55,162
% of
% of
Kindergarten*
Primary school
Middle school
High school
Total
*The number of students and related revenue at the kindergarten level is as of February 28, 2018. Since then, we does not offer kindergarten programs.
Educational training services
Educational training services mainly represent various extracurricular courses to arouse students’ interest and broaden both academic and nonacademic
outlook of students. Revenue from educational training services amounted to RMB36.4 million, RMB144.2 million and RMB53.7 million
(approximately US$7.6 million) for the years ended June 30, 2018, 2019 and 2020, respectively. The decrease in the 2020 fiscal year was mainly due to
the liquidation of Haibo Education and the suspension of onsite training courses during the pandemic period.
Study trip services
Study trip services mainly represent services for the provision of study tours, summer and winter camps, amounting to RMB13.8 million, RMB81.5
million and RMB56.4 million (approximately US$8.0 million) for the years ended June 30, 2018, 2019 and 2020, respectively. The decrease in the 2020
fiscal year was mainly due to the restriction on travels during the pandemic period which affected the second half of our fiscal year.
Education and management services
Education and management services mainly represent the provision of services including but not limited to branding, academic management, basic and
international education resources, school culture, admission, finance, human resources, procurement, IT, internal audit, property and logistics
management services. Pursuant to the 2017 Group Strategic Cooperation Agreement, we have a right of first refusal to provide education and
management services for schools constructed, merged and acquired by Hailiang Group or Hailiang Investment. We also entered into services agreements
where we will provide education and management services to private and public schools and cooperate with local governments, in line with our asset-
light strategy. Our revenue from education and management services increased from RMB19.0 million in the 2018 fiscal year to RMB40.9 million in the
2019 fiscal year, further to RMB48.3 million (approximately US$6.8 million) in the 2020 fiscal year, the increase in the fiscal year 2020 was mainly
derived from the increase in number of managed schools and management fees of 15 Baishu Schools in the 2020 fiscal year.
Others
Other revenue mainly represents revenue derived from the provision of overseas study consulting services and hotel management services, amounting to
RMB6.2 million, RMB15.4 million and RMB16.0 million (approximately US$2.3 million) in total during the years ended June 30, 2018, 2019 and
2020, respectively.
85
Cost of Revenue
Our cost of revenue primarily consists of labor costs, which are compensation for our teachers and educational staff, student-related costs (such as cost
of books, uniforms, and cafeteria food), depreciation of owned property and equipment and amortization expenses, depreciation of right-of-use assets
and, to a lesser extent, transportation, utility and short-term lease payments for our schools and companies. For the year ended June 30, 2018, RMB14.3
million of cost related to study trip services and overseas study consulting services was presented in student related costs rather than other costs to
conform presentation of the years ended June 30, 2019 and 2020. Our cost of revenue slightly decreased from the 2019 fiscal year to the 2020 fiscal
year; this was primarily due to the decrease in transportation cost resulting from the decrease in shuttle trips of students during the outbreak of COVID-
19 and the slight decrease in labor costs of our teachers and teaching staff. We expect our cost of revenue to increase to support the operation of newly
launched schools.
The following table sets forth the components of our cost of revenue by amount and as a percentage of total revenue for the periods indicated:
2018
Year Ended June 30,
2019
RMB (in
thousands)
% of
revenue
RMB (in
thousands)
% of
revenue
RMB (in
thousands)
2020
US$ (in
thousands)
% of
revenue
407,053
147,571
35,447
112,039
-
25,783
31,041
45,740
804,674
34.8
12.6
3.0
9.6
-
2.2
2.7
3.9
68.8
552,324
199,478
49,137
126,621
-
25,925
33,392
40,026
1,026,903
36.8
13.3
3.3
8.4
-
1.7
2.2
2.8
68.5
532,797
204,217
28,933
128,338
29,627
21,736
-
37,527
983,175
75,413
28,905
4,095
18,165
4,193
3,077
-
5,311
139,159
35.9
13.8
2.0
8.7
2.0
1.5
-
2.4
66.3
Cost of Revenue:
Labor costs
Student-related costs
Transportation
Depreciation of owned property and equipment
and amortization
Depreciation of right-of-use assets
Utilities
Operating lease charges
Other costs
Total cost of revenue
Operating Expenses
Our operating expenses consist of selling expenses and administrative expenses.
The following table sets forth the components of our operating expenses in absolute amount and as a percentage of revenue for the periods indicated.
Operating Expenses
Selling expenses
Administrative expenses
Total operating expenses
2018
Year Ended June 30,
2019
RMB (in
thousands)
% of
revenue
RMB (in
thousands)
% of
revenue
RMB (in
thousands)
2020
US$ (in
thousands)
% of
revenue
24,539
63,374
87,913
2.1
5.4
7.5
25,003
72,661
97,664
1.7
4.8
6.5
26,899
77,536
104,435
3,807
10,975
14,782
1.8
5.2
7.0
86
Selling expenses
Our selling expenses consist of advertisement expenses, recruiting expenses and amortization related to student relationship. Our overall selling
expenses increased from the 2018 fiscal year to the 2019 fiscal year and further to the 2020 fiscal year. Our overall selling expenses in the 2020 fiscal
year increased by 7.6% primarily due to the increase in recruiting expenses as we have increased student enrollment rewards on recruitment to attract
outstanding students. We anticipate that our overall selling expenses may increase steadily in the near future to support recruitment affairs of newly
owned and sponsored schools, build our brand name and keep our outstanding academic performance, and therefore, attract growing student enrollment.
Administrative expenses
Our administrative expenses consist primarily of salary for our office and administrative staff and consulting fee, and also, to a lesser extent, office
expenses and other miscellaneous fees. Our overall administrative expenses in the 2020 fiscal year increased by 6.7% primarily due to the increase in
labor cost resulting from an increase in the compensation level of our office and administrative staff. We expect our overall administrative expenses to
increase steadily in the near future.
Other Income, Net
Other income consists of government grants and other miscellaneous income (expense). Government grants are subsidies we received from local
government authorities. Other miscellaneous income (expense) primarily consists of non-operating expense and income from disposal of property and
equipment. Other income in the 2020 fiscal year increased by 189.9% primarily due to the increase of government grants. Other income increased by
RMB21.4 million compared with the fiscal year 2018 primarily due to the increase of government grants in the 2019 fiscal year.
The following table sets forth the components of income derived from the aforementioned sources in absolute amount and as a percentage of revenue for
the periods indicated.
2018
Year Ended June 30,
2019
RMB (in
thousands)
% of
revenue
RMB (in
thousands)
% of
revenue
RMB (in
thousands)
2020
US$ (in
thousands)
% of
revenue
5,832
(2,143)
3,689
0.5
(0.2)
0.3
25,437
(337)
25,100
1.7
0.0
1.7
73,604
(828)
72,776
10,418
(117)
10,301
5.0
(0.1)
4.9
Other income, net
Government grants
Other
Total other income, net
Gain on Disposal of Affiliated Entities
In February 2018, we transferred all the sponsorship and 100% of the equity interests in our kindergartens to Hangzhou Hailiang Preschool Education
Group Co., Ltd. and its wholly controlled subsidiary, which entities are controlled by Hailiang Group, and recognized RMB3.2 million and RMB1.7
million from a gain on the disposal of Hailiang Kindergarten and the kindergarten business of Tianma Experimental, respectively.
In June 2018, we entered into a Change of Operator Agreement with Chuzhou Zhengxu Education Information Consulting Co., Ltd. and transferred the
sponsorship and 100% of the equity interests in Chuzhou School to Chuzhou Zhengxu Education Information Consulting Co., Ltd., a wholly owned
subsidiary of Hailiang Group, and recognized a RMB0.4 million gain on the disposal of Chuzhou School.
87
Finance Income
Our finance income mainly derived from deposits placed with a related party finance entity. See “Item 7. Major Shareholders and Related Party
Transactions—B. Related Party Transactions—Transactions with Certain Related Parties”. Finance income slightly increased in the 2020 fiscal year
and increased by 118.9% in the 2019 fiscal year primarily due to the increase in the amount of fund we deposited with the related party. Finance income
was 1.0%, 1.7%, and 1.7% of our total revenue in the 2018, 2019 and 2020 fiscal years, respectively.
Finance Cost
Our finance cost mainly derived from interest expenses for lease liabilities, amounting to RMB4.4 million (approximately US$0.6 million) in the 2020
fiscal year. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures—Recent
Accounting Pronouncements—IFRS 16 Leases” for more information.
Taxation
Cayman Islands
We are an exempted company incorporated in the Cayman Islands and conduct our primary business operations through our subsidiaries and affiliated
entities in the PRC. We also have two wholly-owned subsidiaries in Hong Kong. Under the current laws of the Cayman Islands, upon payments of
dividends to our shareholders, no Cayman Islands withholding tax will be imposed.
The Cayman Islands currently has no exchange control restrictions. The Cayman Islands currently levies no taxes on individuals or corporations based
upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be
material to us levied by the government of the Cayman Islands, save certain stamp duties which may be applicable, from time to time, on certain
instruments executed in or brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not a party to any double tax treaties.
Pursuant to section 6 of the Tax Concessions Law (2011 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor in
Cabinet:
(a) that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply to us or
our operations; and
(b) in addition, that no tax levied on profits, income, gains or appreciation or no tax which is in the nature of estate duty or inheritance tax shall be
payable by us:
(i) on or in respect of the shares, debentures or our other obligations; or
(ii) by way of withholding in whole or in part of any relevant payment as defined in section 6(3) of the Tax Concession Law (2011 Revision).
The undertaking is for a period of 20 years from January 27, 2015.
Hong Kong
Under the Hong Kong tax laws, subsidiaries in Hong Kong are subject to the Hong Kong profits tax rate at 16.5% and they are exempted from income
tax on their foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends. A two-tiered profits tax rates regime
was introduced in 2018 where the first HK$2 million of assessable profits earned by a company will be taxed at half of the current tax rate (8.25%)
while the remaining profits will continue to be taxed at 16.5%. There is an anti-fragmentation measure where each group will have to nominate only one
company in the group to benefit from the progressive rates.
88
China
Under the New EIT Law, domestic enterprises and foreign investment enterprises, or FIEs, are subject to a unified 25% enterprise income tax rate,
except for certain entities that are entitled to tax holidays or exemptions.
According to the Implementation Rules for the Law for Promoting Private Education in 2004, or the 2004 Implementation Rules, private schools,
whether requiring reasonable returns or not, may enjoy preferential tax treatment. The 2004 Implementing Rules provide that the relevant authorities
under the State Council may introduce preferential tax treatments and related policies applicable to private schools requiring reasonable returns.
According to the current laws and regulations, preferential tax treatments and related policies applicable to private schools requiring reasonable returns
have not been introduced.
According to the 2016 Private Education Law effective as of September 1, 2017, private schools, whether non-profit or for-profit, may enjoy preferential
tax treatment, and non-profit private schools will be entitled to similar tax benefits as public schools. In addition, taxation policies for for-profit private
schools are still unclear as more specific provisions are not yet introduced. For Zhenjiang Jianghe High School of Art and Zhuji Hailiang Foreign
Language High, two private schools incorporated in 2018, we elected to register their statuses as for-profit. Accordingly, these two schools are subject to
unified 25% enterprise income tax rate. For Lanzhou Hailiang Experimental School, Wuhu Hailiang Experimental School and Hailiang Overseas
Chinese School, three private schools incorporated during the year ended June 30, 2020, we elected to register their status as non-profit. Accordingly,
these three schools are exempt from income taxes for the year ended June 30, 2020.
As of the date of this annual report, except for Zhenjiang Jianghe High School of Art, Zhuji Hailiang Foreign Language High School, Lanzhou Hailiang
Experimental School, Wuhu Hailiang Experimental School, Hailiang Overseas Chinese School and Jinhua Hailiang Foreign Language School, other
affiliated schools sponsored by us are registered as private schools requiring reasonable return under the 2004 Implementing Rules, and we had not
elected to change or re-register their statuses as of June 30, 2020. Confirmed by the local tax authorities and our PRC counsel, our affiliated private
schools in operation other than Zhenjiang Jianghe High School of Art and Zhuji Hailiang Foreign Language High are exempt from income taxes for the
years ended June 30, 2018, 2019 and 2020.
We recognized income tax expenses of RMB66.3 million for the year ended June 30, 2018, RMB108.7 million for the year ended June 30, 2019 and
RMB121.9 million (approximately US$17.3 million) for the year ended June 30, 2020.
Pursuant to the 2016 Private Education Law, sponsors of private schools may choose to register their schools as either non-profit or for-profit schools but
sponsors are not permitted to register for-profit schools that provide compulsory education services. Non-profit private schools will be entitled to the
same tax benefits as public schools, while for-profit private schools may be subject to 25% enterprise income tax rate. Up to June 30, 2020, no separate
policies, regulations or rules have been introduced by the authorities in this regard.
We evaluate whether it is probable that tax authority will accept the tax treatment for each uncertain tax position (including the potential application of
interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. As of June 30, 2019, and
2020, we did not have any significant unrecognized uncertain tax positions, as we consider it is probable that taxation authorities will accept the private
schools requiring reasonable return being entitled to income tax exemption as non-profit private schools.
As of June 30, 2020, we had unused tax loss of RMB20.5 million (approximately US$2.9 million) available for offset against future taxable profits, of
which RMB3.5 million (approximately US$0.5 million) will expire as of June 30, 2023, RMB7.0 million (approximately US$1.0 million) will expire as
of June 30, 2024, RMB9.9 million (approximately US$1.4 million) will expire as of June 30, 2024 As of June 30, 2019, we had unused tax loss of
RMB14.4 million available for offset against future taxable profits, of which RMB0.3 million will expire as of June 30, 2021, RMB4.9 million will
expire as of June 30, 2023, RMB9.2 million will expire as of June 30, 2024. No deferred tax assets have been recognized in respect of such tax losses,
because it is not probable that future taxable profit against which the losses can be utilized will be available in the relevant tax jurisdiction.
89
Under the New EIT Law, dividends paid by an FIE to any of its foreign non-resident enterprise investors are subject to a 10% withholding tax. Thus, the
dividends, if and when payable by our PRC subsidiaries to its offshore parent entities, would be subject to a 10% withholding tax. A lower tax rate will
be applied if such foreign non-resident enterprise investor’s jurisdiction of incorporation has signed a tax treaty or arrangement for the avoidance of
double taxation and the prevention of fiscal evasion with respect to taxes on income with China. Furthermore, pursuant to the applicable circular and
interpretations of the New EIT Law, dividends from earnings created prior to 2008 but distributed after 2008 are not subject to withholding income tax.
We have not provided for deferred income tax liabilities on the PRC entities’ undistributed earnings of RMB1,149.0 million (approximately US$162.6
million) as of June 30, 2020, because we control the timing of the undistributed earnings and it is probable that the earnings will not be distributed. We
plan to reinvest those earnings in the PRC in the foreseeable future.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with IFRSs as issued by the IASB, which requires us to make judgments, estimates and
assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenue and expenses during the period.
We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our
expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about
matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual
results could differ from those estimates and assumptions.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly
uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting
estimates that are reasonably likely to occur periodically could materially impact the consolidated financial statements. We believe the following critical
accounting policies reflect the more significant estimates and assumptions used in the preparation of our consolidated financial statements. The
following descriptions of critical accounting policies should be read in conjunction with our consolidated financial statements and other disclosures
included elsewhere in this annual report.
Consolidation
The Contractual Agreements provide us, through Hailiang HK and Hailiang Consulting, the following, (i) the power to control the Affiliate Entities;
(ii) the exposure or rights to variable returns from our involvement with the Affiliated Entities; and (iii) the ability to affect those returns through our
control over the Affiliated Entities.
We have control over the Affiliated Entities by virtue of the Power of Attorney, pursuant to which Hailiang Consulting has rights that give it the current
ability to direct the activities that significantly affect the returns of the Affiliated Entities. Hailiang Consulting has the rights to appoint, replace or
remove directors of Hailiang Management, as well as to make decisions on all operational and financial matters of the Affiliated Entities.
We have the exposure or rights to variable returns from our involvement with the Affiliated Entities by virtue of the Power of Attorney and Consulting
Services Agreement. Hailiang Consulting’s returns from its involvement with the Affiliated Entities have the potential to vary as a result of the
performance of the Affiliated Entities. Pursuant to the Power of Attorney, Hailiang Consulting is the only party that can share in the distributed and
undistributed earnings of the Affiliated Entities. Pursuant to the Consulting Services Agreement, Hailiang Consulting has the exclusive right to provide
consulting, support and services to the Affiliated Entities in return for a fee that could be up to 100% of the profits of the Affiliated Entities.
We have all decision-making rights over the Affiliated Entities to affect the amounts of our returns. By virtue of the Power of Attorney, Hailiang
Consulting is the principal and is the only party that has the decision-making authority on all relevant activities of the Affiliated Entities. There are no
substantive rights held by other parties that may affect or restrict Hailiang Consulting’s ability to direct the relevant activities of the Affiliated Entities.
The Power of Attorney is irrevocable and no party can remove Hailiang Consulting without cause. Hailiang Consulting also has exposure to variability
of returns of the Affiliated Entities from the Call Option Agreement.
90
Leases
Policy applicable from July 1, 2019
We have adopted IFRS 16 in the financial reporting period commencing July 1, 2019 and elected to use the modified retrospective approach. Therefore,
comparative information has not been restated.
Prior to the adoption of IFRS 16, we determined at contract inception whether an arrangement was or contained a lease under IFRIC 4 Determining
whether an Arrangement contains a Lease. On transition to IFRS 16, we elected to apply the practical expedient to grandfather the assessment of which
transactions are, or contain leases. Therefore, the definition of a lease under IFRS 16 is applied only to contracts entered into or changed on or after
July 1, 2019. In addition, we elected not to recognize right-of-use assets and lease liabilities for leases of low-value assets and short-term leases.
The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or
before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore
the underlying asset or the site on which it is located, less any lease incentives received.
The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term, unless the
lease transfers ownership of the underlying asset to us by the end of the lease term or the cost of the right-of-use asset reflects that we will exercise a
purchase option. In that case the right-of-use asset will be depreciated over the useful life of the underlying asset, which is determined on the same basis
as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain
remeasurements of the lease liability.
In determining the lease term, we consider all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise
a termination option. Extension options and periods after termination options are only included in the lease term if the lease is reasonably certain to be
extended or not terminated.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the
incremental borrowing rate. We determine the incremental borrowing rate by obtaining interest rates from various external financing sources and makes
certain adjustments to reflect the terms of the lease and type of the asset leased.
Lease payments included in the measurement of the lease liability comprise the following:
– – fixed payments, including in-substance fixed payments;
– – variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;
– – amounts expected to be payable under a residual value guarantee; and
– – the exercise price under a purchase option that we are reasonably certain to exercise, lease payments in an optional renewal period if we are
reasonably certain to exercise an extension option, and penalties for early termination of a lease unless we are reasonably certain not to terminate
early.
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The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments
arising from a change in an index or rate, if there is a change in our estimate of the amount expected to be payable under a residual value guarantee, if
we change our assessment of whether it will exercise a purchase, extension or termination option or if there is a revised in-substance fixed lease
payment.
When the lease liability is remeasured by discounting the revised lease payments using a revised discount rate to reflect changes to the lease payments, a
corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-
use asset has been reduced to zero.
Our lease contracts are mainly for campuses and office spaces. Under IFRS 16, we recognize right-of-use assets and lease liabilities for most of these
leases – i.e. these leases are on-balance sheet. On transition, for these leases, lease liabilities are measured at the present value of the remaining lease
payments, discounted at our incremental borrowing rate. And right-of-use assets are measured at an amount equal to the lease liability, adjusted by the
amount of any prepaid or accrued lease payments. As of July 1, 2019, lease liabilities and the corresponding right-of-use assets of RMB411.1 million
(approximately US$58.2 million) were recognized upon the initial adoption of IFRS 16. On September 6, 2019, we signed a series of supplementary
contracts with Hailiang Investment regarding the lease of campuses in Zhuji city. Accordingly, lease liabilities and the corresponding right-of-use assets
increased by RMB131.6 million (approximately US$18.6 million) due to the lease modification, and we fully prepaid rental leases of RMB525.0 million
(VAT exclusive, approximately US$74.3 million) for the remaining 18 years’ rental period.
Policy applicable before July 1, 2019
We classified leases as operating leases under IAS 17, which are recognized in profit or loss on a straight-line basis over the term of leases.
Credit losses from financial instruments
Policy applicable from July 1, 2018
Loss allowances for trade receivables are always measured at an amount equal to lifetime expected credit losses (ECLs). ECLs on trade receivables are
estimated using a provision matrix based on our historical credit loss experience, adjusted for factors that are specific to the debtors and an assessment of
both the current and forecast general economic conditions at the reporting date.
For all other financial instruments, we recognize a loss allowance equal to 12-month ECLs unless there has been a significant increase in credit risk of
the financial instrument since initial recognition, in which case the loss allowance is measured at an amount equal to lifetime ECLs.
In assessing whether the credit risk of a financial instrument has increased significantly since initial recognition, we compare the risk of default
occurring on the financial instrument assessed at the reporting date with that assessed at the date of initial recognition. In making this reassessment, we
consider that a default event occurs when (i) the borrower is unlikely to pay its credit obligations to us in full, without recourse by us to actions such as
realizing security (if any is held); or (ii) the financial asset is 90 days past due. We consider both quantitative and qualitative information that is
reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort.
In particular, the following information is taken into account when assessing whether credit risk has increased significantly since initial recognition:
- failure to make payments of principal or interest on their contractually due dates;
- an actual or expected significant deterioration in a financial instrument’s external or internal credit rating (if available);
- an actual or expected significant deterioration in the operating results of the debtor; and
- existing or forecast changes in the technological, market, economic or legal environment that have a significant adverse effect on the debtor’s ability to
meet its obligation to us.
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Policy applicable before July 1, 2018
An “incurred loss” model was used to measure impairment losses on financial assets not classified as at fair value through profit or loss. Under the
“incurred loss” model, an impairment loss was recognized only when there was objective evidence of impairment. Objective evidence of impairment
included:
• default or delinquency by a debtor;
• restructuring of an amount due to us on terms that we would not consider otherwise;
• indications that a debtor or issuer will enter bankruptcy;
• adverse changes in the payment status of borrowers or issuers;
• the disappearance of an active market for a security because of financial difficulties; or
• observable data indicating that there is a measurable decrease in the expected cash flows from a group of financial assets.
We consider evidence of impairment for financial assets measured at amortized cost (other receivables) at both a specific asset and collective level. All
individually significant receivables are assessed for specific impairment. All individually significant receivables found not to be specifically impaired
are then collectively assessed for any impairment that has been incurred but not yet identified. Receivables that are not individually significant are
collectively assessed for impairment by grouping together receivables with similar risk characteristics.
In assessing collective impairment, we use historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted
for management’s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than
suggested by historical trends.
Revenue Recognition
Policy applicable from July 1, 2018
We adopted IFRS 15 using the cumulative effect method, with the effect of initially applying this standard recognized at the date of initial application
(i.e. July 1, 2018). Accordingly, the information presented for the year ended June 30, 2018 has not been restated – i.e. it is presented, as previously
reported, under IAS 18, IAS 11 and related interpretations.
Prior to the adoption of IFRS 15, sales commissions related to the acquisitions of new service contracts relating to the provision of K-12 educational
services were expensed when incurred. Upon the adoption of IFRS 15 on July 1, 2018, we capitalized sales commissions related to the acquisitions of
new K-12 educational service contracts as contract costs, which would be amortized over the expected student relationship period. At the same time, we
increased retained earnings by the same amount. We applied the practical expedient IFRS 15 and recognized the incremental costs of obtaining contracts
as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less from the initial
recognition of the asset.
Prior to the adoption of IFRS 15, up-front payments not yet earned, inclusive of value-added tax (“VAT”), are recorded as deferred revenue and
recognized as revenue as related services are rendered or goods are delivered. Upon the adoption of IFRS 15 on July 1, 2018, up-front payments not yet
earned, net of VAT, are recorded as contract liabilities. Using the practical expedient in IFRS 15, we do not adjust the promised amount of consideration
for the effects of a significant financing component if it expects, at contract inception, that the period between the transfer of the promised services or
goods to the customer and when the customer pays for that services or goods will be one year or less.
93
Since the adoption of IFRS 15 starting from July 1, 2018, we recognize revenues upon the satisfaction of its performance obligation in an amount that
reflects the consideration to which we expect to be entitled to in exchange for those goods or services, excluding amounts collected on behalf of third
parties, such as value-added taxes. For each performance obligation satisfied over time, we recognize revenue over time by measuring the progress
toward complete satisfaction of that performance obligation. If we do not satisfy a performance obligation over time, the performance obligation is
satisfied at a point in time.
Our contracts with customers often include promises to transfer multiple products and services. For these contracts, we account for individual
performance obligations separately if they are capable of being distinct and distinct within the context of the contract. Determining whether products and
services are considered distinct performance obligations may require significant judgment. Judgment is also required to determine the stand-alone selling
price, for each distinct performance obligation.
During the year ended June 30, 2019, revenue attributable to the provision of the curriculum education services, accommodations, transportation
services and other ancillary school activities is recognized over time, based on a straight-line basis over the school year, as customers simultaneously
receive and consume the benefits of these services throughout the service period, and the control of curriculum education services, accommodations,
transportation services and other ancillary school activities is transferred evenly over the school year and all related performance obligations could be
fulfilled before each fiscal year end. During the year ended June 30, 2020, in response to the COVID-19 pandemic, between February 2020 and
April 2020, we temporarily stopped providing offline curriculum education services, accommodations and transportation services to students, instead it
offered online curriculum education services to students during the period. Revenue attributable to the curriculum education services is recognized over
the service period based on the estimated progress of courses delivery, and revenue attributable to the accommodations and transportation services is
recognized over time evenly over the period with service provided. The amount of considerations relating to accommodations and transportation service
to students between February and April, which were not provided, has been recorded as refund liability in trade and other payables to third parties.
Revenue attributable to the delivery of educational books and related materials, and meal catering services is recognized at point in time, respectively,
when the control of the educational books and related materials or underlying goods is transferred to customers. We consider that we are acting as the
principal in the transaction and recognizes revenue from sales of the educational materials on a gross basis.
We consider contract modifications to exist when the parties to a contract approve a modification that either creates new or changes the existing
enforceable rights and obligations of the parties to the contract. The effect of a contract modification on a change in the transaction price is accounted for
as if it was a termination of existing contract and the creation of a new contract when the remaining goods or services are distinct from those transferred
on or before the date of the contract modification, and on a cumulative catch-up basis when the remaining goods or services are not distinct.
Policy applicable before July 1, 2018
Revenue is measured at the fair value of the consideration received or receivable under the contract or agreement. Where the outcome of a transaction
involving the rendering of services can be estimated reliably at the balance sheet date, revenue is recognized by reference to the stage of completion
based on the progress of work performed. Where the outcome cannot be estimated reliably, revenues are recognized to the extent of the costs incurred
that are expected to be recoverable, and an equivalent amount is charged to profit or loss as service cost; otherwise, the costs incurred are recognized in
profit or loss and no service revenue is recognized.
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Impairment of non-financial assets, including goodwill and trademark with indefinite useful lives
The carrying amounts of our non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any
such indication exists, then the asset’s recoverable amount is estimated. Goodwill and indefinite-lived intangible assets are tested annually for
impairment.
For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely
independent of the cash inflows of other assets or cash-generating units, or CGUs. Goodwill arising from a business combination is allocated to CGUs
(cash-generating units) or groups of CGUs that are expected to benefit from the synergies of the combination.
The recoverable amount of an asset or a CGU is the greater of its value in use and fair value less costs to sell. In assessing value in use, the estimated
future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money
and the risks specific to the asset or CGU. For impairment testing, assets are grouped together into the smallest group of assets that generates cash
inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. Goodwill acquired in a business combination is
allocated to groups of CGUs that are expected to benefit from the synergies of the combination. An impairment loss is recognized if the carrying amount
of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss.
An impairment loss in respect of goodwill is not reversed. In respect of other non-financial assets, impairment losses recognized in prior periods are
assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a
change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount
does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
Our trademark and goodwill arose from the acquisition of Tianma Experimental School on July 1, 2009. Mr. Feng and Mr. Zhanghuan Meng acquired
80% and 20% of the registered capital equity interest in Tianma Experimental School for a total cash consideration of RMB114.0 million. The goodwill
recognized on the acquisition is mainly attributable to the synergies expected to be achieved from integrating Tianma Experimental School into our
existing business.
For the purpose of impairment testing, goodwill and trademark are allocated to the CGU which represents the lowest level within our group at which the
goodwill and trademark are monitored for internal management purpose. The recoverable amount of goodwill is estimated based on discounted cash
flows forecast, which is based upon a combination of long-term trends, industry forecasts and in-house estimates.
For the purpose of impairment testing, the carrying amounts of goodwill and trademark are allocated to business related to Tianma Experimental School,
which is the lowest level for which the assets are monitored for internal management purpose. The aggregated carrying amounts of goodwill and
trademark are as follows:
Goodwill
Trademark with indefinite useful lives
Total
2018
RMB
61,640
16,540
78,180
Year Ended June 30,
2019
RMB
RMB
2020
61,640
16,540
78,180
61,640
16,540
78,180
US$
8,725
2,341
11,066
The recoverable amount of this CGU was based on value in use, which was estimated using discounted cash flow projections.
The key assumptions used in the estimation of the recoverable amount are set out below. The values assigned to the key assumptions represented
management’s assessment of future trend in the relevant industry and were based on historical data from both external and internal sources.
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Discount rate
Revenue growth rates over the next five fiscal years
Terminal value growth rate
2018
Year Ended June 30,
2019
2020
15%
3%
3%
15.5%
3~5%
3%
15.5%
5%
3%
The discount rate was a pre-tax measure estimated based on the historical industry average weighted-average cost of capital, with a possible debt
leveraging of 0%.
The cash flow projections included the following specific estimates for five years and a terminal growth rate thereafter. The terminal growth rate was
determined based on management’s estimate, consistent with the assumption that a market participant would make.
·
Revenue growth was projected considering the average growth levels experienced over the past five years and the estimated student headcount
and tuition growth for the next five years. It was assumed that tuition would increase in line with forecast inflation over the next five years.
· Growth of cost of sales, selling expenses and administrative expenses were projected considering inflation and estimated student headcount for
the next five years.
The estimated recoverable amount of the CGU exceeded its carrying amount as of June 30, 2018, 2019 and 2020 respectively.
The recoverable amount of trademark is determined using the relief from royalty method, which was based on pre-tax cash flow projections for five
years based on financial budgets approved by management, including royalty rate of 3% (2019 and 2018: 3%), terminal growth rate of 3% (2019 and
2018: 3%) and the applicable discount rate of 15.5% (2019:15.5% and 2018: 15%). Management determined expected growth rates and operating results
based on past performance and its expectations in relation to market developments. The discount rate used is pre-tax and reflects specific risks relating to
us.
Based on management’s assessment results, there was no impairment of goodwill and trademark as of June 30, 2018, 2019 and 2020.
Results of Operations
Revenue
Cost of revenue
Gross profit
Other income, net
Selling expenses
Administrative expenses
Operating profit
Gain on disposal of affiliated entities
Finance income
Finance costs
Profit before tax
Income tax expenses
Net profit
Net profit attributable to the Company’s
shareholders
Total comprehensive income
2018
RMB (in
thousands)
1,169,348
(804,674)
364,674
3,689
(24,539)
(63,374)
280,450
5,349
11,391
—
297,190
(66,288)
230,902
Year Ended June 30,
2019
% of
revenue
RMB (in
thousands)
% of
revenue
RMB (in
thousands)
2020
US$ (in
thousands)
% of
revenue
100.0
(68.8)
31.2
0.3
(2.1)
(5.4)
24.0
0.4
1.0
—
25.4
(5.7)
19.7
1,499,025
(1,026,903)
472,122
25,100
(25,003)
(72,661)
399,558
—
24,935
—
424,493
(108,713)
315,780
100.0
(68.5)
31.5
1.7
(1.7)
(4.8)
26.7
—
1.7
—
28.4
(7.3)
21.1
1,482,599
(983,175)
499,424
72,776
(26,899)
(77,536)
467,765
—
25,120
(4,363)
488,522
(121,924)
366,598
209,848
(139,159)
70,689
10,301
(3,807)
(10,975)
66,208
—
3,556
(618)
69,146
(17,258)
51,889
222,588
228,360
19.0
19.5
293,421
319,090
19.6
21.3
370,832
368,924
52,488
52,218
96
100.0
(66.3)
33.7
4.9
(1.8)
(5.2)
31.6
—
1.7
(0.3)
33.0
(8.3)
24.7
25.0
24.9
Year Ended June 30, 2019 Compared to Year Ended June 30, 2020
Revenue
Our revenue slightly decreased by 1.1% from RMB1,499.0 million in the 2019 fiscal year to RMB1,482.6 million (approximately US$209.8 million) in
fiscal year 2020, primarily due to the following:
K-12 educational services. Our revenue from K-12 educational services increased by 7.5% from RMB1,217.0 million in the 2019 fiscal year to
RMB1,308.2 million (approximately US$185.2 million) in the 2020 fiscal year. The increase was mainly due to a 3.4% increase of the average tuition
fees from RMB53,333 to RMB55,162 (approximately US$7,808) despite the outbreak of COVID-19 and the increase in the total number of enrolled
students from 22,819 as of June 30, 2019 to 23,716 as of June 30, 2020.
Educational training services. Our revenue from educational training services decreased by 62.8% from RMB144.2 million in the 2019 fiscal year to
RMB53.7 million (approximately US$7.6 million) in the 2020 fiscal year. The decrease was mainly resulting from the liquidation of Haibo Education.
Study trip services. Our revenue from study trip services decreased by 30.8% from RMB81.5 million in the 2019 fiscal year to RMB56.4 million
(approximately US$8.0 million) in the 2020 fiscal year. The decrease in the 2020 fiscal year was due to the restriction on travels during the pandemic
period which affected study trip services in second half of 2020 fiscal year.
Education and management services. Our revenue from education and management services increased by 18.1% from RMB40.9 million in the 2019
fiscal year to RMB48.3 million (approximately US$6.8 million) in the 2020 fiscal year, mainly due to the increase in number of managed schools and
management fees of 15 Baishu Schools in the 2020 fiscal year.
Others. Other revenue slightly increased by 3.9% from RMB15.4 million in the 2019 fiscal year to RMB16.0 million (approximately US$2.3 million) in
the 2020 fiscal year, resulted from the increase in revenue of overseas consulting services.
Cost of revenue
Our cost of revenue decreased by 4.3% from RMB1,026.9 million in the 2019 fiscal year to RMB983.2 million (approximately US$139.2 million) in the
2020 fiscal year. The decrease in cost of revenue was primarily due to a steep decrease in transportation costs related to K-12 educational services and
study trip services resulting from the outbreak of COVID-19; and to a slight decrease in labor costs of our teachers and teaching staff.
Gross profit
As a result of the foregoing, our gross profit increased by 5.8% from RMB472.1 million in the 2019 fiscal year to RMB499.4 million (approximately
US$70.7 million) in the 2020 fiscal year.
Other income, net
Other income increased by 189.9% from RMB25.1 million in the 2019 fiscal year to RMB72.8 million (approximately US$10.3 million) in the 2020
fiscal year. The increase in other income was mainly due to an increase in government grants of subsidies we received from the local government.
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Operating expenses
Our operating expenses increased by 6.9% from RMB97.7 million in the 2019 fiscal year to RMB104.4 million (approximately US$14.8 million) in the
2020 fiscal year. The increase was primarily due to the following reasons:
·
·
Selling expenses. Our selling expenses increased by 7.6% from RMB25.0 million in the 2019 fiscal year to RMB26.9 million (approximately
US$3.8 million) in the 2020 fiscal year. The increase was primarily due to increased student enrollment rewards on recruitment.
Administrative expenses. Our administrative expenses increased by 6.7% from RMB72.7 million in the 2019 fiscal year to RMB77.5 million
(approximately US$11.0 million) in the 2020 fiscal year. The increase was primary due to the increase in legal fees related to lawsuit against
Ronghuai and increase in labor cost of our office and administrative staff.
Finance income and finance costs
Our finance income increased by 0.8% from RMB24.9 million in the 2019 fiscal year to RMB25.1 million (approximately US$3.6 million) in the 2020
fiscal year. Our finance costs increased from nil in the 2019 fiscal year to RMB4.4 million (approximately US$0.6 million) in the 2020 fiscal year.
Income tax expenses
We had RMB108.7 million and RMB121.9 million income tax expenses (approximately US$17.3 million) for the 2019 and 2020 fiscal years,
respectively. The increase was mainly driven by the growth of taxable profits. See “Item 10. Additional Information— E. Taxation—People’s Republic of
China Taxation.”
Net profit
As a result of the foregoing, our net profit increased by 16.1% from RMB315.8 million in the 2019 fiscal year to RMB366.6 million (approximately
US$51.9 million) in the 2020 fiscal year.
Net profit attributable to the Company’s shareholders
As a result of the foregoing, net profit attributable to our shareholders increased by 26.4% from RMB293.4 million in the 2019 fiscal year to RMB370.8
million (approximately US$52.5 million) in the 2020 fiscal year.
Year Ended June 30, 2018 Compared to Year Ended June 30, 2019
Revenue
Our revenue increased by 28.2% from RMB1,169.3 million in the 2018 fiscal year to RMB1,499.0 million in fiscal year 2019, primarily due to the
following aspects:
K-12 educational services. Our revenue from K-12 educational services increased by 11.3% from RMB1,093.9 million in the 2018 fiscal year to
RMB1,217.0 million in the 2019 fiscal year. The increase was mainly due to a 10.5% increase of the average tuition fees from RMB48,280 to
RMB53,333 and a slight increase in the total number of enrolled students from 22,110 as of June 30, 2018 to 22,819 as of June 30, 2020. Our revenue
increase was also attributable to having a greater proportion of our students enrolled in our international program which charges higher tuition than our
basic educational program. Between the 2018 and 2019 fiscal years, the percentage of students enrolled in international program increased from 17.5%
to 20.0%.
Educational training services. Our revenue from educational training services increased by 296.2% from RMB36.4 million in the 2018 fiscal year to
RMB144.2 million in the 2019 fiscal year. The increase was mainly derived from the increase in students’ attendances in educational training programs
resulting from the expansion of our affiliated and managed schools.
Study trip services. Our revenue from study trip services increased by 490.6% from RMB13.8 million in the 2018 fiscal year to RMB81.5 million in the
2019 fiscal year. The increase was mainly derived from the increase in the number of students participating in study trips.
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Education and management services. Our revenue from education and management services increased by 115.3% from RMB19.0 million in the 2018
fiscal year to RMB40.9 million in the 2019 fiscal year, mainly due to the increase of number of our managed schools in the 2019 fiscal year.
Others. Other revenue increased by 148.4% from RMB6.2 million in the 2018 fiscal year to RMB15.4 million in the 2019 fiscal year. The increase was
mainly due to the increase in overseas study consulting services and hotel management services.
Cost of revenue
Our cost of revenue increased by 27.6% from RMB804.7 million in the 2018 fiscal year to RMB1,026.9 million in the 2019 fiscal year. The increase in
cost of revenue was primarily due to a) a 35.7% increase in labor costs due to (i) an increase in the total number of our teachers and educational staff,
and (ii) a general increase in our employees’ compensation levels; b) a great increase in student related cost and transportation cost mainly derived from
the increase in cost related to study trips and overseas study consulting services resulting from the increase in number of students participated in
aforementioned programs.
Gross profit
As a result of the foregoing, our gross profit increased by 29.4% from RMB364.7 million in the 2018 fiscal year to RMB472.1 million in the 2019 fiscal
year. Our gross margin was 31.5% in the 2019 fiscal year, compared to 31.2% in the 2018 fiscal year.
Other income, net
Other income increased by 578.4% from RMB3.7 million in the 2018 fiscal year to RMB25.1 million in the 2019 fiscal year. The increase in other
income was mainly due to an increase in government grants of subsidies we received from the local government.
Operating expenses
Our operating expenses increased by 11.1% from RMB87.9 million in the 2018 fiscal year to RMB97.7 million in 2019 fiscal year. The increase was
primarily due to the following reasons:
·
Selling expenses. Our selling expenses slightly increased by 2.0% from RMB24.5 million in the 2018 fiscal year to RMB25.0 million in the
2019 fiscal year. The increase was primarily due to increased student enrollment rewards on recruitment.
We have adopted IFRS 15 on July 1, 2018, which establishes a comprehensive framework for determining whether, how much and when
revenue is recognized. It replaced IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations.
Upon the adoption of IFRS 15, we capitalized sales commissions related to the acquisitions of new K-12 educational service contracts as
contract costs, which would be amortized over the expected student relationship period. We applied the practical expedient IFRS 15 and
recognized the incremental costs of obtaining contracts as selling expense when incurred if the amortization period of the assets that we
otherwise would have recognized is one year or less from the initial recognition of the asset.
As a result of the adoption of IFRS 15 on July 1, 2018, our selling expense decreased by RMB1.0 million compared with estimates of the
hypothetical amounts of selling expense that would have been recognized under IAS 18 and IAS 11 if those superseded standards had
continued to apply to the year ended June 30, 2020 instead of IFRS 15.
·
Administrative expenses. Our administrative expenses increased by 14.7% from RMB63.4 million in the 2018 fiscal year to RMB72.7 million
in the 2019 fiscal year. The increase was primary due to the increase in labor cost resulting from the increase in the compensation level of our
office and administrative staff.
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Finance income and finance costs
Our finance income increased by 118.4% from RMB11.4 million in the 2018 fiscal year to RMB24.9 million in the 2019 fiscal year. This increase was
primarily due to an increase in interest income caused by more funds deposited with the related party in the 2019 fiscal year compared to the 2018 fiscal
year.
Income tax expenses
We had RMB66.3 million and RMB108.7 million income tax expenses for the 2018 and 2019 fiscal years, respectively. The increase was mainly driven
by the growth of taxable profits. See “Item 10. Additional Information— E. Taxation—People’s Republic of China Taxation”.
Net profit
As a result of the foregoing, our net profit increased by 36.8% from RMB230.9 million in the 2018 fiscal year to RMB315.8 million in the 2019 fiscal
year.
Net profit attributable to the Company’s shareholders
As a result of the foregoing, net profit attributable to our shareholders increased by 31.8% from RMB222.6 million in the 2018 fiscal year to RMB293.4
million in the 2019 fiscal year.
B. Liquidity and Capital Resources
Historically, we have financed our operations through our own capital. As of June 30, 2019 and 2020, we had approximately RMB260.7 million and
RMB503.0 million (approximately US$71.2 million), respectively, in cash and cash equivalents. Our cash primarily consists of cash on hand, bank
deposits and deposit in related party finance entity with an original maturity less than three months and are held for the purpose of short-term cash
commitments. We intend to finance our future working capital requirements and capital expenditures from our cash and cash equivalents and cash
generated from operating activities.
Although we consolidate the results of our affiliated entities and their respective subsidiaries, we do not have direct access to the cash and cash
equivalents or future earnings of our affiliated entities or their respective subsidiaries. However, a portion of the cash balances of our affiliated entities
and their respective subsidiaries will be paid to us pursuant to our contractual arrangements with our affiliated entities and their respective subsidiaries.
See “Item 7. Major Shareholders and Related Party Transactions—B. Related Parties Transactions—Contractual Arrangements with our Affiliated
Entities and their Shareholder.”
We historically had recorded significant related party transactions involving loans made to, and repayments received from, such related parties as well as
term deposits placed with Hailiang Finance, a finance company owned by Hailiang Group. As part of our cash management policy, we expect to
continue to deposit a certain amount of cash generated from our private education business with a related party finance company owned by Hailiang
Group. To reduce our credit exposure with Hailiang Finance, based upon our current policy effective September 2, 2019, we have set an upper deposit
budget maintained by Hailiang Finance at any given time in fiscal year 2020 to be approximately RMB2.1 billion, and any amount above the upper
deposit budget must be transferred to a commercial bank within seven business days. Effective from September 28, 2020, the upper deposit budget in
2021 fiscal year changed to RMB2.5 billion (approximately US$353.9 million). As of June 30, 2020, we had demand deposits and term deposits of
RMB1,405.6 million (approximately US$198.9 million) at Hailiang Finance. Hailiang Finance is a non-bank financial institution licensed by the China
Bank Regulatory Commission. It was incorporated in February 2013. It currently has a registered capital of RMB1.9 billion and has been approved by
the relevant authorities to conduct business with other entities within the Hailiang Group, including, among other things, receiving deposits, borrowing,
lending and providing guarantees, providing accounting and financing consultancy, and providing trade settlement and insurance brokerage services. We
believe that Hailiang Finance provides interest at market rates with flexible withdrawal terms on our deposits. Based on our review of relevant
documents provided by Hailiang Finance, we believe that Hailiang Finance has satisfactory asset quality, liquidity position and internal control
environment. In addition, since September 2014, Hailiang Group and Mr. Feng have entered into an annual guarantee agreement with us to irrevocably
and jointly guarantee the timely return of such deposits on behalf of the finance company in the event that the finance company defaults on the return of
such deposits or payment of the interest, and the guarantee was renewed annually. After considering the terms provided by Hailiang Finance, coupled
with its financial condition as well as the guarantee provided by Hailiang Group and Mr. Feng, our board approved the arrangement in September 2020
and our audit committee reviews our related party transactions, including the deposit arrangement from time to time. We, however, recognize that there
are risks involved in the cash deposit arrangement. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—We
deposit a certain amount of cash with a related party and are subject to credit risks of such related party.”
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We have not encountered any difficulties in meeting our cash obligations to date. When considering our liquidity position and our future capital
resources and needs, we take into account price controls set by local governments that may affect the tuition fees we are able to charge to students in our
K-12 schools, annual enrollment numbers approved for our schools, the economic benefits we have received from our affiliated entities attributable to
the provision of services to these entities and the economic benefits we may receive from our affiliated entities directly through payments under our
consulting services agreement. We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet
our anticipated cash needs for the next 12 months.
The following table sets forth a summary of our cash flows for the periods indicated:
Net cash from operating activities
Net cash from/(used in) investing activities
Net cash from/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Effect of movements in exchange rates on cash held
Cash and cash equivalents at the end of the year
Operating Activities
For the year ended June 30,
2018
RMB
2019
RMB
2020
RMB
US$
(In thousands)
587,931
131,145
18,609
737,685
77,801
(2,866)
812,620
690,317
(1,234,206)
(7,343)
(551,232)
812,620
(704)
260,684
431,042
(127,760)
(61,382)
241,900
260,684
437
503,021
61,010
(18,083)
(8,688)
34,239
36,897
62
71,198
Net cash provided by operating activities amounted to RMB431.0 million (approximately US$61.0 million) in the 2020 fiscal year. The net cash
provided by operating activities in the 2020 fiscal year was primarily attributable to net profit of RMB366.6 million (approximately US$51.9 million),
adjusted for depreciation of RMB163.1 million (approximately US$23.1 million), primarily relating to our furniture, equipment, leasehold
improvements and right-of-use assets and income tax expenses of RMB121.9 million (approximately US$17.3 million), mainly derived from the
subsidiaries, affiliated for-profit schools and consolidated affiliated companies in the PRC, which are subject to a unified 25% enterprise income tax rate,
and offset against interest income of RMB24.8 million (approximately US$3.5 million), primarily from a related party finance entity. Adjustments for
changes in working capital primarily included (i) an increase in trade and other payables due to third parties of RMB46.8 million (approximately US$6.6
million), primarily reflecting an increase in accrued fee refund and other expenses, while partially offset by the decrease of business tax and other tax
payable; (ii) an decrease in contract liabilities of RMB123.5 million (approximately US$17.5 million) caused by later collection of tuition fee for the
next school year; and offset against income tax paid of RMB135.6 million (approximately US$19.2 million).
Net cash provided by operating activities amounted to RMB690.3 million in the 2019 fiscal year. The net cash provided by operating activities in the
2019 fiscal year was primarily attributable to net profit of RMB315.8 million, adjusted for depreciation of RMB132.0 million, primarily relating to our
furniture, equipment and leasehold improvements and income tax expenses of RMB108.7 million, mainly derived from the subsidiaries, affiliated for-
profit schools and consolidated affiliated companies in the PRC, which are subject to a unified 25% enterprise income tax rate, and offset against interest
income of RMB24.5 million, primarily from a related party. Adjustments for changes in working capital primarily included (i) an increase in trade and
other payables due to third parties of RMB94.9 million, primarily reflecting an increase in accrued labor costs; (ii) an increase in deferred revenue and
contract liabilities of RMB186.7 million caused by earlier collection of tuition fee for the next school year and offset against income tax paid of
RMB111.3 million.
101
Net cash provided by operating activities amounted to RMB587.9 million in the 2018 fiscal year. The net cash provided by operating activities in the
2018 fiscal year was primarily attributable to net profit of RMB230.9 million, adjusted for depreciation of RMB113.1 million, primarily relating to our
furniture, equipment and leasehold improvements and income tax expenses of RMB66.3 million, mainly derived from the subsidiaries, affiliated for-
profit schools and consolidated affiliated companies in the PRC, which are subject to a unified 25% enterprise income tax rate, and offset
against (ii) gain on disposal of affiliated entities of RMB5.3 million and (iii) interest income of RMB11.7 million, primarily from a related party.
Adjustments for changes in working capital primarily included (i) an increase in trade and other payables due to third parties of RMB30.4 million,
primarily reflecting an increase in accrued labor costs and business tax and other tax payable; (ii) an increase in other payables due to related parties of
RMB18.0 million, primarily reflecting decreases in payables for the purchase of healthy food products due to a related party and in rental payables due
to a related party, respectively; (iii) an increase in deferred revenue of RMB165.6 million caused by the increase of student enrollment, (iv) an increase
in other current asset of RMB13.7 million, primarily reflecting increase in expense prepaid for overseas study consulting services and advances to
employees, (v) an increase in prepayment to third parties of RMB2.2 million, and offset against income tax paid of RMB8.9 million.
Investing Activities
Net cash used in investing activities amounted to RMB127.8 million (approximately US$18.1 million) in the 2020 fiscal year. The net cash used in
investing activities in the 2020 fiscal year was primarily attributable to (i) term deposits of RMB3,808.8 million (approximately US$539.1 million)
placed with Hailiang Finance; (ii) cash used in purchase of property and equipment of RMB111.5 million (approximately US$15.8 million) relating to
the renovation of school buildings and purchase of furniture and equipment; and (iii) prepayment of right-of-use assets amounting to RMB525.0 million
(approximately US$74.3 million), partially offset by (i) cash withdrawn upon the maturity of term deposits placed with Hailiang Finance of
RMB4,279.3 million (approximately US$605.7 million); (ii) repayment of loans from Hong Kong Leonit Limited (“Leonit”) of RMB11.9 million
(approximately US$1.7 million); and (iii) interest income of RMB25.3 million (approximately US$3.6 million) mainly received from Hailiang Finance.
Net cash used in investing activities amounted to RMB1,234.2 million in the 2019 fiscal year. The net cash used in investing activities in the 2019 fiscal
year was primarily attributable to (i) term deposits of RMB4,709.7 million placed with Hailiang Finance; (ii) cash used in purchase of property and
equipment of RMB80.1 million relating to the renovation of school buildings and purchase of furniture and equipment; partially offset by (i) cash
withdrawn upon the maturity of term deposits placed with Hailiang Finance of RMB3,526.6 million; (ii) repayment of loans from Hong Kong Leonit
Limited (“Leonit”) of RMB12.4 million; and (iii) interest income of RMB20.6 million received from Hailiang Finance.
Net cash provided by investing activities amounted to RMB131.1 million in the 2018 fiscal year. The net cash provided by investing activities in the
2018 fiscal year was primarily attributable to (i) cash withdrawn upon the maturity of term deposits placed with Hailiang Finance of RMB401.0 million;
(ii) interest income of RMB10.7 million mainly received from Hailiang Finance; (iii) proceeds of RMB18.0 million received from the disposal of
kindergartens and Chuzhou School and (iv) proceeds of RMB1.0 million from sales of property and equipment; partially offset by (i) term deposits of
RMB204.0 million placed with Hailiang Finance; (ii) cash used in purchase of property and equipment of RMB89.4 million relating to the renovation of
school buildings and purchase of furniture and equipment and (iii) cash payment in acquisition of Haibo Logistics and Haibo Education amounting to
RMB6.2 million.
Financing Activities
Net cash used in financing activities amounted to RMB61.4 million (approximately US$8.7 million) in the 2020 fiscal year, which was mainly
attributable to (i)dividends paid to non-controlling shareholders of our subsidiaries amounting to RMB21.1 million (approximately US$3.0 million) and
(ii)repayment a loan to Hailiang Group of RMB32.1 million (approximately US$ 4.5 million).
102
Net cash used in financing activities amounted to RMB7.3 million in the 2019 fiscal year, which was attributable to dividends paid to non-controlling
shareholders of our subsidiaries amounting to RMB7.5 million.
Net cash provided by financing activities amounted to RMB18.6 million in the 2018 fiscal year, which was attributable to the receipt of loan from a
related party of RMB7.6 million and capital contribution from former shareholder of RMB11.0 million.
Capital Expenditures
We incurred capital expenditures of RMB89.4 million, RMB80.1 million and RMB111.5 million (approximately US$15.8 million) in the 2018, 2019 and
2020 fiscal years, respectively. The capital expenditure in 2018, 2019 fiscal year primarily related to the renovation of school buildings and classrooms
in Hailiang Experimental High School and Tianma Experimental School and the purchase of furniture and equipment for Hailiang Education Park. The
capital expenditure in 2020 fiscal year primarily related to the renovation of school buildings and classrooms and the purchase of furniture and
equipment for Lanzhou Hailiang Experimental School, Hailiang Experimental High School and Zhenjiang Jianghe High School of Art.
Recent Accounting Pronouncements
Up to the date of issue of our consolidated financial statements, the IASB has issued a number of amendments, new standards and interpretations, which
are not yet effective for the year ended June 30, 2020 and which have not been adopted in our consolidated financial statements. These include the
following which may be relevant to us.
Amendments to IFRS 3, Definition of a Business
Amendments to IAS 1 and IAS 8, Definition of Material
Amendments to IFRS 3, Definition of a Business
Effective for
accounting periods
beginning on or after
January 1, 2020
January 1, 2020
Amendments to IFRS 3 provide additional guidance on the definition of a business. The amendments clarify that to be considered a business, an
acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to
create output. A business can exist without including all of the inputs and processes needed to create outputs. The amendments remove the assessment of
whether market participants are capable of replacing any missing inputs or processes and continuing to produce outputs. Instead, the focus is on whether
acquired inputs and acquired substantive processes together significantly contribute to the ability to create outputs. The amendments have also narrowed
the definition of outputs to focus on goods or services provided to customers, investment income or other income from ordinary activities. Furthermore,
the amendments provide guidance to assess whether an acquired process is substantive and introduce an optional fair value concentration test to permit a
simplified assessment of whether an acquired set of activities and assets is not a business.
We expect to adopt the amendments prospectively from July 1, 2020. Since the amendments apply prospectively to transactions or other events that
occur on or after the date of first application, we will not be affected by these amendments on the date of transition.
Amendments to IAS 1 and IAS 8, Definition of Material
Amendments to IAS 1 and IAS 8 provide a new definition of material. The new definition states that information is material if omitting, misstating or
obscuring it could reasonably be expected to influence decisions that the primary users of general-purpose financial statements make on the basis of
those financial statements. The amendments clarify that materiality will depend on the nature or magnitude of information. A misstatement of
information is material if it could reasonably be expected to influence decisions made by the primary users.
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We expect to adopt the amendments prospectively from July 1, 2020. The amendments are not expected to have any significant impact on our financial
statements.
C. Research and Development, Patents and Licenses, etc.
Research and Development
We have strong research and development capabilities and have devoted significant resources to develop our academic courses and innovative teaching
methods and materials. We have taken the following measures to continuously improve the quality of our K-12 educational services: (i) Establish the
Cadre Army Academy, so as to further our training of school management talents, and conduct research on methods, management standards and models;
(ii) Establish the Excellent Teacher Development Academy, so as to steadily promote the mentor-apprentice pairing model, and implement the lifelong
mentoring system to help young teachers grow rapidly;; (iii) We encourage our teachers to develop, update and improve our curricula and course
materials based upon the latest official government curricula for each of our subjects as well as on students’ needs and preferences. The development
process for our curricula and course materials typically starts with a review of the latest examination requirements to analyze new educational needs and
trends. As our students’ academic ability levels vary widely, our curricula are designed with the flexibility to address a specific class or a specific
student’s strengths and weaknesses. Our senior teachers in charge of the curriculum for a specific subject also work with other teachers to prepare or
update course curricula. At the end of each semester, we evaluate, update and improve course materials based upon student performance and feedback
from teachers, students and parents. We believe our strong research and development capabilities differentiate us from our competitors in the private K-
12 education industry.
Leveraging our research and development capabilities, we have developed teaching methods and courses for certain subjects that are not generally
offered by other similar private education providers. We have supplemented various government-mandated coursework with our self-developed courses.
For example, we offered an interdisciplinary course called “STEAM”, which teaches Science, Technology, Engineering, Arts and Mathematics, with the
aim of developing our students the ability to deal with complicated situations. We also offer a local geography course called “Local history——
Hangzhou” for purposes of getting students to apply the geographical approaches and principles they learn to local city.
In addition, Hailiang Mingyou provides high-quality educational training and significantly improves students' academic performance, which is the
foundation for Hailiang Mingyou to be recognized by students and their parents. Therefore, Hailiang Mingyou attaches great importance to the research
and development of educational training courses and the establishment of services standards. Hailiang Mingyou established the Product R&D
Department, which is responsible for the establishment of the teaching framework, the development of curriculum and courses materials, and the
localization of training content. In the teaching process, the training teachers needs to allocate a fixed time every day to devote into the R&D and
localization of the curriculum and courses materials, to ensure that the content taught is as close as possible to the trend of the local official examination.
In addition, Hailiang Mingyou has developed an online education business, and our online education services have thrived during the outbreak of
COVID-19. Relying on our abundant educational resources, outstanding facility capabilities, and technical advantages across our affiliated and
management schools, we launched 'Hailiang VIP Cloud Virtual Classroom' in February 2020. There were more than 2,000 teachers and nearly 38,000
students were participating in the Hailiang VIP Cloud Virtual Classroom. Online education services are not just a countermeasure for this emergency,
but we intend that it will be a growing and long-lasting creative initiative to supplement the way that we deliver quality innovative K-12 educational
services.
We are also in the process of developing new courses to strengthen our international program. We have entered into a cooperation agreement with Pate’s
Grammar School, a K-12 co-educational institution in London, UK, where we will focus on the mutual learning of teaching materials and mutual
communication of teachers, in collaboration with Pate’s Grammar School.
We recorded research and development expenditure of RMB3.2 million (approximately US$0.5 million) for the fiscal year ended June 30, 2020, which
amounted to approximately 0.2% of our total revenue, and was included in “cost of sales” and “administrative expenses”.
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D. Trend Information
Other than as disclosed elsewhere in this annual report on Form 20-F, we are not aware of any trends, uncertainties, demands, commitments or events for
the period from July 1, 2018 to June 30, 2020 that are reasonably likely to have a material adverse effect on our revenue, income, profitability, liquidity
or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial condition.
E. Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have
not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as
credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
F. Contractual Obligations
The following table sets forth our contractual obligations as of June 30, 2020:
Capital Commitments (1)
Leasehold improvement
Furniture, fixtures and other equipment
Lease Obligations (2)
Total
Less than 1
Year
Payment Due by Period
1-3 Years
3-5 Years
More than 5
Years
47,813
2,826
27,356
47,813
2,826
2,687
-
-
6,284
-
-
5,157
-
-
13,228
(1) Includes payments to be made to Heng Zhong Da, a company over which Mr. Feng has significant influence, relating to the renovation of school
buildings in Wuhu Hailiang Experimental School, Zhenjiang Jianghe High School of Art and Tianma Experimental School, and payments to be made
to certain third-party vendors for the purchase of furniture, equipment and leasehold improvements.
(2) Mainly represent lease obligations for the lease of Zhenjiang Jianghe High School of Art, the land use right of Tianma Experimental School and the
lease of Mingyou educational training schools located in Hangzhou and Zhuji City.
G. Safe Harbor
This annual report on Form 20-F contains forward-looking statements that are based on our management’s beliefs and assumptions and on information
currently available to us. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
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You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,”
“plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. We have based these forward-looking statements largely on our
current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations,
business strategy and financial needs. These forward-looking statements include, among other things, statements relating to:
·
·
·
·
·
·
our business strategies and initiatives as well as our business plans;
our future business development, results of operations and financial condition;
the development of the outbreak of COVID-19 in China and elsewhere;
growth of and trends and competition in the education industry in China;
PRC governmental policies and regulations relating to the education industry in China; and
general economic and business conditions in China.
You should thoroughly read this annual report on Form 20-F and the documents that we refer to in this annual report on Form 20-F with the
understanding that our actual results in the future may be materially different from or worse than, what we expect. We qualify all of our forward-looking
statements by these cautionary statements. Other sections of this annual report on Form 20-F include additional factors which could adversely affect our
business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and
it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent
to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Item 3. Key
Information—D. Risk Factors” and elsewhere in this annual report on Form 20-F.
This annual report on Form 20-F also contains third-party data related to macroeconomic data and the education industry as well as related projections
and analyses based on a number of assumptions. These market data, including statistical data extracted from Ministry of Education of the PRC and the
Sansheng Report, include projections that are based on a number of assumptions. The projected growth may not materialize at the rates suggested by the
market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse effect on our business and the market price
of our ADSs. In addition, the changing nature of the education industry subjects any projections or estimates relating to the growth prospects or future
condition of our market to significant uncertainties. If any one or more of the assumptions underlying the market data turns out to be incorrect, our actual
results may differ from the projections based on these assumptions. Although we believe that the publications, reports and surveys are reliable, we have
not independently verified the data. You should not place undue reliance on these forward-looking statements.
The forward-looking statements made in this annual report on Form 20-F relate only to events or information as of the date on which these statements
are made in this annual report on Form 20-F. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, after the date of this annual report on Form 20-F. You should not rely upon forward-looking statements as
predictions of future events.
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth information regarding our directors and executive officers as of the date of this annual report. The business address of all
of our directors and executive officers is 1508 Binsheng road, Binjiang District, Hangzhou City, Zhejiang province, 310051, People’s Republic of China:
Name
Junwei Chen*
Cuiwei Ye
Ken He
Xiaohua Gu
Xiaofeng Cheng
Peng Fan
Ping Huang
Lei Peng
Zhougang Zhu
Jian Guo Yu
Litao Qiu
Age
Position/title
29 Chairman and chief executive officer
61 Director and principal general
40 Independent director
48 Independent director
45 Independent director
38 Vice President
49 Vice President
49 Vice President
41 Vice President
47 Chief financial officer
54 Board secretary
* Mr. Junwei Chen took office in his capacity as chairman and member of the board and as the chief executive officer of the Company on June 23, 2020,
after Mr. Ming Wang retired and resigned as chairman and member of the board and as the chief executive officer of the Company on the same date.
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Mr. Junwei Chen has served as the chairman of the board of directors and chief executive officer of Hailiang Inc. since June 2020, as the president of
Hailiang Education Management Group Co., Ltd. since March 2019 and as the vice president of Hailiang Group Co., Ltd. since January 2019. Mr. Chen
received a doctorate degree in Energy and Resource Engineering from Peking University in 2019. While pursuing his doctorate degree, he served as the
38th president of the postgraduate student union, and organized many social undertakings, including the Peking University Doctoral Services Group. He
was invited to the Great Hall of the People to receive commendation for his active participation in poverty alleviation. Mr. Chen holds multiple patents
and has published several influential academic papers in international journals.
Mr. Cuiwei Ye has served as a director and principal general of Hailiang Inc. since November 3, 2017. With the accumulation of 17 years of experience
being the principal of Hangzhou No.2 High School, Mr. Ye is a seasoned school principal with high reputation and rich experience in education. Mr. Ye
received a Bachelor of Science Degree in Biology from Hubei University, a Master’s Degree in Education Leadership from the University of Canberra
in Australia, and is currently a PhD candidate from East China Normal University. As a nationally renowned principal, Mr. Ye has been awarded with
several honorary titles by education organizations and media, such as Person of the Year of Chinese Brands in 2017, Contemporary Education Master,
one of China’s Top 10 Popular Principals selected by China Education Newspaper, China’s Good Principal selected by China Education Website,
initiator of high school principal’s real-name recommendation system of Peking University, Adjunct professor of high school principal training center of
Ministry of Education, Adjunct professor of Southwest University, Adjunct professor of Zhejiang Normal University, National Education Advanced
Worker, Zhejiang Merit Teacher. In addition, Mr. Ye was appointed by the Zhejiang Provincial People's Government as a special researcher of the
Provincial Government in August 2020.
Mr. Ken He has served as our independent director since June 2015. Mr. He is currently serving as the vice president of Racing Capital Management
(HK) Limited, an asset management company, where he oversees its asset management and financial activities. Mr. He has also served as independent
director of Ebang International Holdings Inc. since June 2020. From August 2011 to September 2015, Mr. He served as the chief financial officer of
China Shengda Packaging Group Inc., or China Shengda, where he oversaw China Shengda’s financing and investment activities, accounting practices
and investor relations. Before joining China Shengda, Mr. He served as an investment director of Wealthcharm Investments Limited, a private
investment company, from September 2009. Prior to that, Mr. He spent five years at PricewaterhouseCoopers Australia and China. Having several years
of experience in the financial and accounting field, Mr. He is experienced and familiar with Chinese accounting standards, Hong Kong accounting
standards, Australian accounting standards, international accounting standards and U.S. GAAP, as well as the differences among them. Mr. He holds a
master’s degree in applied finance from Macquarie University, Australia. Mr. He is a U.S. Certified Public Accountant, and he also holds a Certified
Public Accountant designation from the Chinese Institute of CPA, a Certified Public Accountant designation from the Hong Kong Institute of CPA, a
Certified Practicing Accountant designation from the CPA Australia and a Chartered Financial Analyst designation from the CFA Institute.
Mr. Xiaohua Gu has served as our independent director since June 2015. Since August 1, 2016, Mr. Gu has served as the Chief Financial Officer for
Dragon Victory International Limited (Nasdaq: LYL). From July 2006 to February 2010, Mr. Gu was the Hangzhou branch manager of the KPMG
Consulting (China) CO., Ltd. From March 2010 to February 2012, Mr. Gu Xiaohua was the partner of RichLink International Investment Co., Ltd. From
March 2012 to present, Mr. Gu has been a Director of China Education Group, Associate Director of HEP CPA Shanghai Branch. Mr. Gu holds a
Master’s Degree in Newcastle University and a Master’s Degree in Finance in Leeds Metropolitan University.
Mr. Xiaofeng Cheng has served as our independent director since October 2016. Since July 2012, Mr. Cheng has served as a partner at Jingtian &
Gongcheng law firm in Beijing. Previously, Mr. Cheng served in various positions at several international law firms. In addition, Mr. Cheng has served
as adjunct professor at Peking University Law School since September 2011. Mr. Cheng received his master’s degree in Law from Columbia University
in 2003, master’s degree in Criminology from the University of South Florida in 2002 and bachelor degrees in both Law and Economics from Peking
University in 1999.
107
Mr. Peng Fan has served as our vice president since August 2020 and is responsible for investor relations, mergers and acquisitions, and capital
markets. Prior to joining us, Mr. Fan served as the chief strategy officer of Aesthetic Medical International Holdings Group Limited from August 2018
to August 2020, where he oversaw securities affairs, investor relations, board office, mergers and acquisitions. Before August 2018, Mr. Fan Peng served
as the chief financial officer of Cashbus (Cayman) Limited from October 2017 to July 2018. From May 2016 to October 2017, Mr. Fan was the Head of
Investor Relations and Capital Markets of Dali Foods Group Company Limited, a company listed on the main board of The Stock Exchange of Hong
Kong Limited (stock code: 3799), and was primarily responsible for investor relations, corporate development, and mergers and acquisitions. From
December 2007 to May 2016, Mr. Fan Peng served at Hong Kong Branch of Deutsche Bank AG where his position was vice president in the corporate
finance division. From May 2007 to December 2007, Mr. Fan Peng served as an analyst in the investment banking department of HSBC Markets (Asia)
Limited. From July 2006 to May 2007, Mr. Fan served as a business analyst in the investment banking group of Macquarie Investment Advisory
(Beijing) Co, Ltd. Mr. Fan Peng currently also serves as an independent non-executive director of Jiangsu Innovative Ecological New Materials Limited,
a company listed on the main board of The Stock Exchange of Hong Kong Limited (stock code: 2116). Mr. Fan Peng received his bachelor's degree in
accounting and master's degree in business administration from Tsinghua University in July 2004 and July 2006, respectively.
Mr. Ping Huang has served as the Vice President of Hailiang Management since August 2018 and vice principal general since March 2019, and as the
chairman of the board of Hailiang Preschool education group since November 2019 and the president of Hailiang Preschool education group since
March 2020. Before these current positions, Mr. Huang has served as the executive vice principal of Hailiang Inc. from 2017 to 2018 and vice principal
of Hailiang Inc. from March 2016 to May 2017. Mr. Huang has also served as the principal of Hailiang Elementary School from August 2015 to present.
From August 2011 to March 2016, Mr. Huang served as the principal of the Elementary School of Tianma Experimental School. Mr. Huang has worked
in Hailiang Inc. since 1995 in various functions. Mr. Huang received a bachelor’s degree from Central Broadcast and Television University in 2006.
Mr. Huang has won various honor awards in the PRC education section including Outstanding Teacher of Zhejiang’s Private Education Elementary and
Secondary School Chapter and Chunchan Award of Zhejiang Province.
Ms. Lei Peng has served as the vice president of Hailiang Management since May 2019. Ms. Peng joined the company since August 2000, and has been
awarded with several honorary titles, such as National Outstanding Private teacher, Shaoxing City’s Famous Principle, First Prize of Zhejiang High
School Geography Course. Ms. Peng received a bachelor degree in geography education from Xinjiang Normal University in 1992. From 1993 to 2000,
Ms. Peng worked with Grain Corporation Futures Trading Department in Zhuji.
Mr. Zhougang Zhu has served as the vice president of Hailiang Management since May 2019 and the principle of Xinchang Nanrui Experimental
School and Hailiang Overseas Chinese School. Mr. Zhu joined Hailiang Group since 1998, but he left to work in other companies for a few years and
returned to Hailiang Group in August 2016. During this period, Mr. Zhu has served as the vice principle of Huangshan Middle School and the principle
of Donghe Middle School. Mr. Zhu received a bachelor degree in music education from Zhejiang Normal University, and is currently pursuing a master
degree in mathematics at East China Jiao Tong University. Mr. Zhu has won honor awards in the PRC education including the National First Prize of
Mathematics Course and Famous Principle of Zhejiang Province.
Mr. Jian Guo Yu has served as our chief financial officer since November 3, 2017. Before 2006, Mr. Yu worked with PricewaterhouseCoopers LLP.
From 2006 to 2017, Mr. Yu was a Senior Internal Auditor Manager with Sunrider International. Mr. Yu received a Bachelor of Science degree in
Accounting and Finance Emphasis (dual degrees) from California State University, Long Beach and is a member of AICPA, a licensed Certified Public
Accountant, in the State of California as well as a Certified Internal Auditor with Institute of Internal Auditors.
Mr. Litao Qiu has served as our Board Secretary since August 2017 and as a director of Hailiang Consulting since September 2018. Mr. Qiu has a
bachelor’s degree in applied computer science and graduate diploma in computer education from Edith Cowan University, a master’s degree in system
management from Sunderland University, and an EMBA degree from Fudan University. Mr. Qiu has served as Vice chairman and director of the board
of Hailiang Management Financial Leasing Co. Ltd. since June 2016; as Assistant to CEO of Hong Kong Leonit Ltd., a related party of the Company,
since March 2016; as a director of the board of Hailiang Australian Agriculture Development Pty Ltd. since December 2014; as a director of the board
of Hailiang Australian Agriculture Land Trust since December 2014; as a director of the board of Hailiang Australian Land Investment Company Pty
Ltd. since December 2014; and as Associate Vice President of Hailiang Group Co. Ltd. since July, 2012.
108
Departure of Chairman, Director and Chief Executive Officer
On May 18, 2020, Mr. Ming Wang notified the Company of his desire to retire and resign as chairman and member of the board and as the chief
executive officer of the Company. Mr. Wang continued in his role through June 23, 2020 after the adjournment of the Company’s annual general meeting
of shareholders. Mr. Wang’s departure did not result from any disagreement with the Company or its auditors regarding any matter related to the
Company’s operations, policies or practices.
B. Compensation of Directors and Executive Officers
Compensation of Directors and Executive Officers
For the year ended June 30, 2020, we paid an aggregate amount of RMB5.5 million (approximately US$0.8 million) in cash compensation to our
directors and executive officers, that were disclosed in “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management”.
Since some directors and executive officers also held multiple management positions in our related parties, we recognized and paid part of the
compensations within the scope of their job functions in our group.
Our PRC subsidiaries are required by PRC laws and regulations to make contributions equal to certain percentages of each employee’s salary for his or
her retirement benefit, medical insurance benefits, housing funds, unemployment and other statutory benefits. Our PRC subsidiaries paid retirement and
similar benefits for our officers and directors in the year ended June 30, 2020.
C. Board Practices
Board of Directors
Our board of directors consists of five directors. A director is not required to hold any shares in our company to qualify to serve as a director. Subject to
any separate requirement for Audit Committee’s (as defined in our articles of association) approval under applicable law or the listing rules of our
Designated Stock Exchange (as defined in our articles of association), a director may vote with respect to any contract, transaction or arrangement in
which he or she is materially interested provided the nature of the interest is disclosed prior to its consideration and as long as he has not been
disqualified by the chairman of the relevant board meeting. Our board of directors may exercise all of the powers of our company to borrow money, to
mortgage or charge its undertaking, property and uncalled capital, or any part thereof, and to issue debentures, debenture stock or other securities
whether outright or as security for any debt, liability or obligation of our company or of any third-party. None of our directors has a service contract with
us that provides for benefits upon termination of service.
Committees of the Board of Directors
We have established three committees under the board of directors, namely the audit committee, the compensation committee and the corporate
governance and nominating committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are
described below.
109
Audit Committee
Our audit committee consists of Mr. Ken He, Mr. Xiaofeng Cheng, and Mr. Xiaohua Gu and is chaired by Mr. He. Mr. He, Mr. Cheng, and Mr. Gu
satisfy the “independence” requirements of Section 5605(a)(2) of the NASDAQ Listing Rules as well as the independence requirements of Rule 10A-
3 under the Exchange Act. Our board also has determined that Mr. He qualifies as an audit committee financial expert within the meaning of the SEC
rules and possesses financial sophistication within the meaning of the NASDAQ Listing Rules. The audit committee oversees our accounting and
financial reporting processes and the audits of the financial statements of our group. The audit committee is responsible for, among other things:
·
·
·
·
·
selecting our independent registered public accounting firm and pre-approving all auditing and non-auditing services permitted to be performed
by our independent registered public accounting firm;
reviewing with our independent registered public accounting firm any audit problems or difficulties and management’s response;
reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K. In particular, our audit committee
will review and approve our cash management policy in regard to depositing cash generated from our school operations with related parties,
including the maximum amount of such deposits based on our financial condition from time to time;
discussing the annual audited financial statements with management and our independent registered public accounting firm;
annually reviewing and reassessing the adequacy of our audit committee charter;
· meeting separately and periodically with the management and our independent registered public accounting firm;
·
·
reporting regularly to the full board of directors; and
such other matters that are specifically delegated to our audit committee by our board of directors from time to time.
Compensation Committee
Our compensation committee consists of Mr. Ken He, Mr. Xiaofeng Cheng, and Mr. Xiaohua Gu, and is chaired by Mr. Cheng. Mr. He, Mr. Cheng, and
Mr. Gu satisfy the “independence” requirements of Section 5605(a)(2) of the NASDAQ Listing Rules. Our compensation committee assists the board in
reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our
directors and executive officers. Members of the compensation committee are not prohibited from direct involvement in determining their own
compensation. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The
compensation committee is responsible for, among other things:
·
·
·
·
·
·
reviewing and approving to the board with respect to the total compensation package for our most senior executive officers;
approving and overseeing the total compensation package for our executives other than the most senior executive officers;
reviewing and recommending to the board with respect to the compensation of our directors;
reviewing periodically and approving any long-term incentive compensation or equity plans;
selecting compensation consultants, legal counsel or other advisors after taking into consideration all factors relevant to that person’s
independence from management; and
programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
110
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee consists of Mr. Ken He, Mr. Xiaofeng Cheng, and Mr. Xiaohua Gu and is chaired by Mr. Gu.
Mr. He, Mr. Cheng and Mr. Gu satisfy the “independence” requirements of Section 5605(a)(2) of the NASDAQ Listing Rules. The corporate governance
and nominating committee assists our board of directors in identifying individuals qualified to become our directors and in determining the composition
of the board and its committees. The corporate governance and nominating committee is responsible for, among other things:
·
·
·
·
identifying and recommending nominees for election or re-election to our board of directors or for appointment to fill any vacancy;
reviewing annually with our board of directors its current composition in light of the characteristics of independence, age, skills, experience and
availability of service to us;
identifying and recommending to our board the directors to serve as members of committees;
advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as our
compliance with applicable laws and regulations, and making recommendations to our board of directors on all matters of corporate governance
and on any corrective action to be taken; and
· monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to
ensure proper compliance.
Duties of Directors
Under Cayman Islands law, our directors have a duty of loyalty to act honestly, in good faith and with a view to our best interests. Our directors also
have a duty to exercise skills they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable
circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended
and re-stated from time to time. Our company has the right to seek damages if a duty owed by our directors is breached.
Terms of Directors and Officers
Our directors hold office until such time as they are removed from office by ordinary resolution or the unanimous written resolution of all shareholders.
A director will be removed from office automatically if, among other things, the director (i) becomes bankrupt or makes any arrangement or
composition with his creditors; or (ii) dies or is found by our company to be or becomes of unsound mind. Officers are selected by and serve at the
discretion of the board of directors. The compensation of our directors is determined by the board of directors. There is no mandatory retirement age for
directors. Our officers are elected by and serve at the discretion of the board of directors.
Employment Agreements
We have entered into employment agreements with our executive officers. Each of our executive officers is employed for a specified time period, which
will be renewed upon both parties’ agreement thirty days before the end of the current employment term. We may terminate the employment for cause,
at any time, without notice or remuneration, for certain acts of the executive officer, including but not limited to the commitments of any serious or
persistent breach or non-observance of the terms and conditions of the employment, conviction of a criminal offense, willful disobedience of a lawful
and reasonable order, fraud or dishonesty, receipt of bribery, or severe neglect of his or her duties. An executive officer may terminate his or her
employment at any time with a one-month prior written notice.
Each executive officer has agreed to hold, both during and after the employment agreement expires, in strict confidence and not to use or disclose to any
person, corporation or other entity without written consent, any confidential information. Each executive officer has also agreed to assign to our group
all his or her all inventions, improvements, designs, original works of authorship, formulas, processes, compositions of matter, computer software
programs, databases, mask works, concepts and trade secrets.
D. Employees
We had 4,129, 4,183 and 4,164 employees as of June 30, 2018, 2019 and 2020, respectively. The majority of our employees are full-time and have
signed employment agreements for one to three years, which will be renewed with substantially the same terms upon the employee passing the end-of-
contract evaluation. In addition to teachers and educational staff, we also have employees in marketing, information technology and general
administration. The following table sets forth the numbers of our employees, categorized by function as of June 30, 2020.
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Function
Teachers and educational staff
Cafeteria and dining hall staff
Student living staff
Security and safety staff
Administrative staff
Other staff
Total
Number of
Employees
2,153
678
520
88
330
395
4,164
As required by PRC laws and regulations, we participate in various employee social security plans for our employees that are administered by local
governments, including housing, pension, medical insurance and unemployment insurance. We compensate our employees with base salaries as well as
performance-based bonuses. None of our employees are represented by any collective bargaining arrangements, and we consider our relations with our
employees to be good.
E. Share Ownership
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of October 14, 2020 by:
·
·
·
each of our directors and executive officers;
each person known to us to beneficially own more than 5% of our ordinary shares; and,
officers and directors as a group.
The calculations in the table below are based on there being 412,450,256 ordinary shares outstanding as of October 14, 2020.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through
the exercise of any option, warrant or other right or the conversion of any other security. These shares, however, are not included in the computation of
the percentage ownership of any other person.
Name
Directors and Executive Officers:
Junwei Chen
Cuiwei Ye
Ken He
Xiaohua Gu
Xiaofeng Cheng
Peng Fan
Ping Huang
Lei Peng
Zhougang Zhu
Jian Guo Yu
Litao Qiu
Directors and Officers as a group (11 persons)
Principal Shareholder:
Hailiang Feng(1)
Ordinary
Shares beneficially
owned
Number
%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
360,000,000
87.28
(1)Includes 223,200,000 shares held by Jet Victory International Limited, 100,800,000 shares held by Brilliant One Development Limited, 18,000,000
shares held by Fame Best International Limited and 18,000,000 shares held by Gain Success Group Limited. Jet Victory International Limited is a
British Virgin Islands, or BVI company wholly-owned by Jet Victory Group Limited, a BVI company wholly owned by Jet Victory Holdings
Limited, a BVI company that is wholly owned by an irrevocable trust controlled by Mr. Feng, the settlor of the trust. Gain Success Group Limited is a
BVI company wholly-owned by Candid Group Limited, a BVI company wholly owned by Candid Holdings Limited, a BVI company that is wholly
owned by an irrevocable trust controlled by Mr. Feng, the settlor of the trust. Fame Best International Limited is a BVI company wholly owned by
Mr. Feng. Brilliant One Development Limited is a BVI company wholly owned by Hailiang Group. As of the date of this annual report on Form 20-F,
Hailiang Group is controlled by Mr. Feng and is held 43.6% by Mr. Feng, 40.3% by Ningbo Zhetao Investment Holdings Co., Ltd. and 9.3% by
Ningbo Dunshi Investment Co., Ltd. Ningbo Zhetao Investment Holdings Co., Ltd. is controlled by Mr. Feng and is held 58.8% by Mr. Feng and
31.6% by Beize Group. Beize Group is controlled by Mr. Feng and is held 99.8% by Mr. Feng and 0.2% by his brother in law. Ningbo Dunshi
Investment Co., Ltd. is controlled by Mr. Feng and is held 96.6% by Mr. Feng. All the remaining minority equity interests in such shareholding
entities are held by Mr. Feng’s relatives and/or independent third parties.
112
As of the date of this annual report on Form 20-F, none of our outstanding ordinary shares are held by holders of record in the United States. None of our
existing shareholders have different voting rights from other shareholders as of the date of this annual report on Form 20-F. We are currently not aware
of any arrangement that may, at a subsequent date, result in a change of control of our company.
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
B. Related Party Transactions
Contractual Arrangements with our Affiliated Entities and their Shareholder
We have entered into a series of contractual arrangements with Hailiang Management which controls and holds our affiliated schools, and the
shareholders of Hailiang Management, Mr. Feng and Beize Group. Such contractual arrangements provide us with: (i) the power over Hailiang
Management, (ii) the exposure or rights to variable returns from our involvement with Hailiang Management, and (iii) the ability to affect those returns
through use of our power over Hailiang Management to affect the amount of our returns. Therefore, we control Hailiang Management and its
subsidiaries. For a description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure.”
Transactions with Certain Related Parties
Loans to/from related parties
Our ultimate controlling shareholder, Mr. Feng, owns or controls other non-educational service businesses that from time to time require short-term
financing to support their business operations and working capital needs. After considering our cash on hand and forecasted cash flows to fund our
operations, we provided financing to certain companies owned or controlled by Mr. Feng, during the periods presented.
On October 31, 2016, we provided a one-year-period interest-free loan in the amount of US$14.5 million (the “Leonit Loan”) to Leonit, a related party
of the Company. On the same date, Hailiang Group, controlled by Mr. Feng and a related party of the Company, provided an interest-free loan in the
amount of US$14.5 million (the “2016 Hailiang Loan”) to Hailiang Consulting, our PRC WOFE, due when the Leonit Loan is paid off.
On October 9, 2017, we and Leonit agreed to extend the due date of the Leonit Loan to October 30, 2018 with renewal option of both parties agree.
Similarly, on October 9, 2017, Hailiang Group and Hailiang Consulting agreed to extend the due date of the 2016 Hailiang Loan to October 30, 2018
with renewal option if both parties agree.
Separately, on December 5, 2017, Leonit provided an interest-free loan in the amount of US$1.15 million (the “2018 Leonit Loan”) to us, due on
December 4, 2018 with renewal option if both parties agree. The loan of US$1.15 million was offset against the Leonit loan per the agreement between
the Company and Leonit.
During the year ended June 30, 2019, Leonit repaid part of the Leonit Loan, amounting to US$1.82 million.
During the year ended June 30, 2020, Leonit repaid part of the Leonit Loan, amounting to US$1.70 million, while Hailiang Consulting repaid part of the
2016 Hailiang Loan, amounting to RMB32.1 million (approximately US$4.5 million) to Hailiang Group. We received and will continue to receive an
annual guarantee from a related party, incorporated in British Virgin Island and controlled by Hailiang Group, on the Leonit Loan. Therefore, we
consider that the credit risk arising from the loan is significantly mitigated by the guarantee.
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Deposits
Starting from the 2014 fiscal year, we deposited a certain amount of cash with Hailiang Finance, a related party finance company owned by Hailiang
Group. Hailiang Finance may provide funds and financing to entities within the Hailiang Group.
As of June 30, 2019 and 2020, we had held cash at a related party finance entity of RMB223.5 million and RMB489.0 million (approximately US$69.2
million), respectively. During the year ended June 30, 2019, net amount of RMB517.2 million were withdrawn from Hailiang Finance. During the years
ended June 30, 2018 and 2020, net amount of RMB679.0 million and RMB265.5 million (approximately US$37.6 million) were placed with Hailiang
Finance, respectively.
As of June 30, 2019 and 2020, we had term deposits with maturities not less than three months and not greater than twelve months which are held for the
purpose of investment amounting to RMB1,387.1 million and RMB916.6 million (approximately US$129.7 million) placed at Hailiang Finance,
respectively. During the year ended June 30, 2018, term deposits of RMB204.0 million were placed with Hailiang Finance, and RMB401.0 million
matured. During the year ended June 30, 2019, term deposits of RMB4.7 billion were placed with Hailiang Finance, and RMB3.5 billion matured.
During the year ended June 30, 2020, term deposits of RMB3.8 billion (approximately US$539.1 million) were placed with Hailiang Finance, and
RMB4.3 billion (approximately US$605.7 million) matured.
The interest income from the deposits during the years ended June 30, 2018, 2019 and 2020 amounted to RMB11.5 million, RMB24.3 million and
RMB24.8 million (approximately US$3.5 million), respectively. As part of our cash management policy, we expect to continue to deposit a certain
amount of cash generated from our private education business with Hailiang Finance. To reduce our credit exposure with Hailiang Finance, based upon
our current policy effective September 2019, we have set an upper deposit budget maintained by Hailiang Finance at any given time in fiscal 2020 to be
approximately RMB2.1 billion, and any amount above the upper deposit budget must be transferred to a commercial bank within 7 business days.
Effective from September 28, 2020, the upper deposit budget in 2021 fiscal year changed to RMB2.5 billion (approximately US$353.9 million). In
July 2020, Hailiang Group and Mr. Feng entered into a guarantee agreement with us to irrevocably and jointly guarantee timely return of such deposits
on behalf of the finance company in the event that the finance company defaults on the return of such deposits or payment of the interest. As of June 30,
2020, the balance of cash and deposits we had with Hailiang Finance amounted to RMB489.0 million (approximately US$69.2 million) in cash and
RMB916.6 million (approximately US$129.7 million) in term deposits, respectively. During the year ended June 30, 2020, our deposits with the finance
company are generally made in the form of demand deposits or term deposits with terms ranging from three months to twelve months. The demand
deposits are held for the purpose of meeting short-term cash commitments, such as to pay for our operating expenses at any time. The term deposits are
held for investment purposes and can be withdrawn prior to their maturity without incurring significant penalties. We are subject to credit risks
associated with the term deposit arrangement. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—We
deposit a certain amount of cash with related parties and are subject to credit risks of such related parties.”
Lease agreements with related parties
We lease school buildings and related facilities for campuses in Zhuji city from Hailiang Investment, a company controlled by our ultimate controlling
shareholder, Mr. Feng.
On December 29, 2017, we and Hailiang Investment mutually terminated the lease agreements and entered into new lease agreements in order to
allocate lease fees to respective schools according to gross floor area. For the 2018 fiscal year, the rental expenses amounted to RMB31.0 million.
On April 28, 2019, we and Hailiang Investment mutually terminated the above-mentioned lease agreements and entered into new lease agreements, in
order to allocate lease fees to respective schools and subsidiaries according to gross floor area. The term of the lease is for nineteen years since July 1,
2018 and the rental fee is subject to a 5% annual increase from fiscal year 2020 to 2022. The rental fee commencing from the fifth year is subject to
further negotiation between the Company and Hailiang Investment. For the 2019 fiscal year, we recognized rental expenses amounted to RMB31.5
million.
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On September 6, 2019, we entered into a series of supplementary contracts with Hailiang Investment regarding the school buildings and the related
facilities in three campuses in Zhuji, China from Hailiang Investment, pursuant to which, on September 12, 2019, we made lease prepayments of
RMB525.0 million (approximately US$74.3 million, VAT exclusive) regarding the school buildings and the related facilities in three campuses in Zhuji,
China from Hailiang Investment for the remaining lease period until June 30, 2037. Regarding other lease contracts with Hailiang Investment and
Hailiang Real Estate, we initially recognized right-of-use assets of RMB4.4 million (approximately US$0.6 million) as at July 1, 2019 or the
commencement date of the lease. During the year ended June 30, 2020, we recognized interest expense of RMB3.6 million (approximately US$0.5
million) on lease liabilities and settled lease liabilities of RMB529.4 million (approximately US$74.9 million) relating to the above lease contracts with
Hailiang Investment and Hailiang Real Estate.
On September 6, 2019,we terminated the lease contract with Nanchang Hongtou due to the liquidation of Haibo Education and Haibo Logistics.
Leasehold improvement contracts
On November 13, 2014, Hailiang Experimental High School entered into three leasehold improvement contracts with Heng Zhong Da Construction
Co., Ltd.(“Heng Zhong Da”), a company over which Mr. Feng has significant influence, for outfitting services and related improvements for student
dormitories, educational buildings, dining halls, administrative building, sports stadiums, welcoming center and the school hospital of Hailiang
Education Park. Pursuant to the three leasehold improvement contracts, Hailiang Experimental High School agreed to pay a total consideration of
approximately RMB291.7 million (or RMB223.7 million, RMB12.2 million and RMB55.8 million under each of the contracts) to Heng Zhong Da.
Heng Zhong Da commenced outfitting and improvements on November 13, 2014 and completed the relevant work prior to June 30, 2016. After a final
inspection by Hailiang Experimental High School, the parties of the contracts agreed on the final payment amount to be based on the actual costs
incurred which were approximately RMB291.7 million (or RMB223.7 million, RMB12.2 million and RMB55.8 million under each of the three
leasehold improvement contracts).
Additionally, we also entered into a series of leasehold improvement contracts with Heng Zhong Da for the leasehold improvement of educational
buildings, dining halls, student dormitories of our affiliated schools and the amount of the contracts was RMB23.2 million, RMB31.7 million and
RMB136.8 million (approximately US$19.4 million) during the years ended June 30, 2018, 2019 and 2020, respectively. As of June 30, 2020, and as of
the date of this annual report on Form 20-F, work related to a certain number of the leasehold improvement contracts have completed and payments
remitted, while other contracts are open and payments are expected to be remitted upon work completion.
We purchased leasehold improvement service of RMB29.1 million, RMB29.7 million and RMB106.8 million (approximately US$15.1 million) from
Heng Zhong Da during the years ended June 30, 2018, 2019 and 2020, respectively.
We have paid RMB24.3 million, RMB37.9 million and RMB76.1 million (approximately US$10.8 million) to Heng Zhong Da during the years ended
June 30, 2018, 2019 and 2020, respectively.
Purchase of healthy food products and information service
We purchased healthy food products from Ming Kang Hui Ecological Agriculture Group Co., Ltd., and Ming Kang Hui E-Commerce Co., Ltd., two
companies controlled by Mr. Feng, amounting to, RMB38.3 million, RMB69.0 million during the years ended June 30, 2018 and 2019, respectively. We
purchased healthy food products from Ming Kang Hui Ecological Agriculture Group Co., Ltd. and Zhuji Hailiang Food Co., Ltd., a related party
controlled by Mr. Feng, totally amounting to RMB74.1 million (approximately US$10.5 million) during the year ended June 30, 2020.
We received IT services, student’s physical examination services, travel services and other services from related parties controlled by Hailiang Group,
amounting to RMB6.9 million, RMB23.3 million and RMB20.0 million (approximately US$2.8 million) during the year ended June 30, 2018, 2019 and
2020, respectively.
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Sales of products and services
For the years ended June 30, 2018 and 2019, we provided education and management services to Hailiang Kindergarten, Zhuji Hailiang Jinshan
Kindergarten and Tianma Kindergarten, which were controlled by Hailiang Group, and other 19 schools controlled by Hailiang Investment, including
Xiantao No.1 Middle School, Xinchang Nanrui Experimental School, Feicheng Hailiang Foreign Language school, Jinhua Hailiang Foreign Language
School and 15 Baishu Schools. Education and management service fees of RMB12.3 million, and RMB28.3 million were charged to the above-
mentioned schools for the fiscal year 2018 and 2019, respectively.
For the year ended June 30, 2020, we provided education and management services to Hailiang Kindergarten, Zhuji Hailiang Jinshan Kindergarten and
Tianma Kindergarten, which were controlled by Hailiang Group, and other 4 schools controlled by Hailiang Investment, including Xiantao No.1 Middle
School, Xinchang Nanrui Experimental School, Feicheng Hailiang Foreign Language school and Jinhua Hailiang Foreign Language School. Education
and management service fees of RMB8.9 million (approximately US$1.3 million) were charged to the abovementioned schools for the 2020 fiscal year.
On October 30, 2019, Hailiang Investment disposed all of the equity interest in Xinyu Baishu Technology Service Co., Ltd. (“Xinyu Baishu”) and hence
Xinyu Baishu is not considered as a related party since then.
We provided property and logistics management services to Ming Kang Hui supermarkets located on our campuses. These supermarkets are operated by
Zhejiang Ming Kang Hui Food Co., Ltd., controlled by Mr. Feng, The services we provided amounted to RMB4.6 million, RMB4.9 million and
RMB3.4 million (approximately US$0.5 million) during the years ended June 30, 2018, 2019 and 2020.
We sold products and other services to our related parties, amounting to RMB0.4 million, RMB3.3 million and RMB3.5 million (approximately US$0.5
million) during the years ended June 30, 2018, 2019 and 2020.
Disposal of affiliated entities to related parties
We transferred our 100% equity interest in Tianma Kindergarten and 100% equity interest in Hailiang Kindergarten to Zhuji Hailiang Preschool
Education Group Co., Ltd., a related party of the Company controlled by Hailiang Group, and transferred the sponsorship and 100% equity interest in
Chuzhou School to Chuzhou Zhengxu Education Information Consulting Co., Ltd., a related party of the Company controlled by Hailiang Group, and
recognized an aggregate gain on disposal of RMB5.3 million during the year ended June 30, 2018. See “Item 5. Operating and Financial Review and
Prospects—A. Operating Results—Gain on disposal of affiliated entities.”
Acquisition of subsidiaries or affiliated entities from related parties
In August 2017, Haibo Education and Haibo Logistics were incorporated by Xinyu Baishu, an entity ultimately controlled by Mr. Feng. The contributed
capitals from Xinyu Baishu in Haibo Education and Haibo Logistics were RMB6.0 million and RMB5.0 million, respectively. In January 2018, Xinyu
Baishu transferred 56% equity interests in each of Haibo Education and Haibo Logistics to Ningbo Haoliang with considerations of RMB3.4 million and
RMB2.8 million, respectively. The considerations were equivalent to the cost of 56% of the contributed capital since Haibo Education and Haibo
Logistics had no substantive operation as of the acquisition date. Haibo Education and Haibo Logistics were under common control with us both
immediately before and after the acquisition, and we recognized the assets and liabilities of Haibo Education and Haibo Logistics at historical cost.
In January 2018, Xinyu Baishu also transferred the remaining 44% equity interest in Haibo Education and Haibo Logistics to Nanchang Baishu
Education Group (“Nanchang Baishu Education”). The 44% equity interests owned by Nanchang Baishu Education were recorded as non-controlling
interests.
In November 2018, Haibo Education and Haibo Logistics declared and fully paid dividends amounting to RMB6.1 million and RMB1.4 million to
Nanchang Baishu Education, respectively.
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In September 2019, Haibo Education and Haibo Logistics declared and fully paid dividends amounting to RMB17.7 million (approximately US$2.5
million) and RMB3.5 million (approximately US$0.5 million) to Nanchang Baishu Education, respectively.
In December 2019, net assets attributable to Nanchang Baishu Education was paid upon the liquidation of Haibo Education and Haibo Logistics, totally
amounting to RMB3.7 million (approximately US$0.5 million).
In July 2019, we acquired 100% shares of Zhuji Tianma Boya Training Center Co., Ltd. with the consideration of RMB0.1 million (approximately
US$0.01 million) from Hailiang Investment.
In May 2020, the Company acquired 100% shares of Zhuji Yuesheng Management Consulting Co., Ltd. with the consideration of RMB0.1 million
(approximately US$0.01 million) from Hailiang Investment.
Capital contribution
Mr. Feng made capital contribution of RMB 15 million to us through payment of awards to outstanding teachers of our schools to recognize their
outstanding performance and contributions during fiscal year 2019.
Employment Agreements
See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Employment Agreements.”
C. Interests of Experts and Counsel
Not applicable.
Item 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
We have included consolidated financial statements filed as part of this annual report on Form 20-F. Please see “Item 18. Financial Statements.”
B. Significant Changes
Except as disclosed elsewhere in this annual report on Form 20-F, we have not experienced any significant changes since the date of our audited
consolidated financial statements included in this annual report on Form 20-F.
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial
statements included in this annual report.
Item 9. THE OFFER AND LISTING
A. Offering and Listing Details.
Our ADSs are listed on the NASDAQ Global Market under the symbol “HLG.” Each ADS represents 16 of our ordinary shares. For the period from
June 30, 2019 to June 30, 2020, the trading price of our ADSs on the NASDAQ Global Market has ranged from US$31.85 to US$75.43 per ADS.
B. Plan of Distribution
Not applicable.
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C. Markets
Our ADSs, each representing 16 of our ordinary shares, have been listed on the NASDAQ Global Market since July 7, 2015 under the symbol “HLG.”
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We are a Cayman Islands exempted company with limited liability and our affairs are governed by our memorandum and articles of association, as
amended and restated from time to time the Companies Law of the Cayman Islands (2018 Revision), which is referred to as the Companies Law below,
and the common law of the Cayman Islands.
The following are summaries of the material provisions of our amended and restated memorandum and articles of association and the Companies Law
insofar as they relate to the material terms of our ordinary shares. This summary is not complete, and you should read our amended and restated
memorandum and articles of association, which has been filed as Exhibit 3.1 to our Form F-1 (File No. 201263), as amended, filed with the SEC on
December 24, 2014.
Registered Office and Objects
Our registered office in the Cayman Islands is located at the offices of Conyers Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive,
P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands. As set forth in article 3 of our amended and restated memorandum of association, the
objects for which our company is established are unrestricted.
Board of Directors
See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Committees of the Board of Directors” and “Item 6. Directors, Senior
Management and Employees—C. Board Practices—Terms of Directors and Officers.”
Ordinary Shares
General Our authorized share capital is US$100,000 consisting of 1,000,000,000 ordinary shares with par value US$0.0001 each. All of our issued and
outstanding ordinary shares are fully paid and non-assessable. Our ordinary shares are issued in registered form, and are issued when registered in our
register of members. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their ordinary shares. Under our amended
and restated memorandum and articles of association, our company may issue only non-negotiable shares and may not issue bearer shares.
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Dividends The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors. In addition, our shareholders
may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, our
company may declare and pay a dividend only out of funds legally available therefor, namely out of either profit or our share premium account, provided
that in no circumstances may we pay a dividend if this would result in our company being unable to pay its debts as they fall due in the ordinary course
of business.
Voting Rights Holders of our ordinary shares vote as a single class on all matters submitted to a vote of our shareholders, except as may otherwise be
required by law. In respect of matters requiring shareholders’ vote, on a poll each ordinary share is entitled to one vote. At any general meeting a
resolution put to the vote of the meeting shall be decided by a show of hands unless a poll is demanded. A poll may be demanded by the chairman of
such meeting or any one or more shareholders who together hold not less than 10% of the votes attaching to all issued and outstanding shares of our
company entitled to vote at general meetings.
An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes attached to the ordinary shares
cast by those shareholders entitled to vote who are present in person or by proxy at a general meeting, while a special resolution requires the affirmative
vote of no less than two-thirds of the votes attached to the ordinary shares cast by those shareholders entitled to vote who are present in person or by
proxy at a general meeting. A special resolution is required for important matters such as a change of name or any amendment to our memorandum and
articles of association. Holders of our ordinary shares may effect certain changes by ordinary resolution, including increasing the amount of our
authorized share capital, consolidating all or any of our share capital into shares of larger amount than our existing shares, sub-dividing our shares or any
of them into shares of an amount smaller than that fixed by our memorandum, and cancelling any unissued shares. Both ordinary resolution and special
resolution may also be passed by a unanimous written resolution signed by all the shareholders of our company, as permitted by the Companies Law and
our amended and restated memorandum and articles of association.
Appointment and Removal of Directors Our board of directors may, by the affirmative vote of a simple majority of the directors present and voting at a
board meeting, appoint any person as a director, to fill a casual vacancy on the board or as an addition to the existing board. Directors may be removed
by ordinary resolution of our shareholders.
General Meetings of Shareholders and Shareholder Proposals As a Cayman Islands exempted company, we are not obliged by the Companies Law to
call shareholders’ annual general meetings. Our amended and restated memorandum and articles of association provide that we may, but are not obliged
to, in each year hold a general meeting as our annual general meeting in which case we shall specify the meeting as such in the notices calling it, and the
annual general meeting shall be held at such time and place as may be determined by our directors.
Shareholders’ annual general meetings and any other general meetings of our shareholders may be convened by a majority of our board of directors or
the chairman of the board. Advance notice of at least ten clear days is required for the convening of our annual general shareholders’ meeting and any
other general meeting of our shareholders. A quorum required for a general meeting of shareholders consists of one or more shareholders present in
person or by proxy or, if a corporation or other non-natural person, by its duly authorized representative, who hold in aggregate not less than one-third of
the votes attaching to all issued and outstanding shares of our company entitled to vote at general meetings.
Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to
put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our amended and restated
memorandum and articles of association allow any two or more of our shareholders holding in the aggregate not less than one-third of the votes
attaching to the issued and outstanding shares of our company entitled to vote at general meetings, to requisition an extraordinary general meeting of the
shareholders, in which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting; however,
our amended and restated memorandum and articles of association do not provide our shareholders with any right to put any proposals before annual
general meetings or extraordinary general meetings not called by such shareholders.
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Transfer of Shares Subject to the restrictions of our amended and restated memorandum and articles of association set out below, as applicable, any of
our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or ordinary form or any other form
approved by our board of directors.
Our board of directors may, in its sole discretion, decline to register any transfer of any ordinary share which is not fully paid up. Our directors may also
decline to register any transfer of any ordinary share unless (a) the instrument of transfer is lodged with us, accompanied by the certificate for the
ordinary shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make
the transfer; (b) the instrument of transfer is properly stamped, if required; (c) in the case of a transfer to joint holders, the number of joint holders to
whom the ordinary share is to be transferred does not exceed four; (d) the share to be transferred is free of any lien in favor of us; (e) a fee of such
maximum sum as NASDAQ may determine to be payable, or such lesser sum as our board of directors may from time to time require, is paid to us in
respect thereof; and (f) the instrument of transfer is in respect of only one class of shares.
If our directors refuse to register a transfer they shall, within three months after the date on which the instrument of transfer was lodged, send to each of
the transferor and the transferee notice of such refusal. The registration of transfers may, after compliance with any notice required of NASDAQ, be
suspended and our register of members closed at such times and for such periods as our board of directors may from time to time determine, provided,
however, that the registration of transfers shall not be suspended nor the register of members closed for more than 30 days in any year as our board of
directors may determine.
Liquidation On a winding up of our company, if the assets available for distribution among our shareholders shall be more than sufficient to repay the
whole of the share capital at the commencement of the winding up, the surplus shall be distributed among our shareholders on a pro rata basis in
proportion to the par value of the shares held by them at the commencement of the winding up, subject to a deduction from those shares in respect of
which there are monies due, of all monies payable to our company for unpaid calls or otherwise. If our assets available for distribution are insufficient to
repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders in proportion to the par value of the shares
held by them.
The liquidator may, with the sanction of a special resolution of our shareholders, divide amongst the shareholders in species or in kind the whole or any
part of the assets of our company and may for that purpose value any assets and determine how the division shall be carried out as between our
shareholders or different classes of shareholders.
We are an exempted company with limited liability incorporated under the Companies Law, and under the Companies Law, the liability of our members
is limited to the amount, if any, unpaid on the shares respectively held by them. Our memorandum of association contains a declaration that the liability
of our members is so limited.
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Calls on Shares and Forfeiture of Shares Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their
ordinary shares in a notice served to such shareholders at least 14 calendar days prior to the specified time and place of payment. The ordinary shares
that have been called upon and remain unpaid on the specified time are subject to forfeiture.
Redemption, Repurchase and Surrender of Shares We may issue shares on terms that such shares are subject to redemption, at our option or at the option
of the holders, on such terms and in such manner as may be determined by our board of directors, before the issue of such shares, or by a special
resolution of our shareholders. Our company may also repurchase any of our shares provided that the manner and terms of such purchase have been
approved by our board of directors or by ordinary resolution of our shareholders, or are otherwise authorized by our memorandum and articles of
association. Under the Companies Law, the redemption or repurchase of any share may be paid out of our company’s profits or out of the proceeds of a
fresh issue of shares made for the purpose of such redemption or repurchase, or out of capital (including share premium account and capital redemption
reserve) if the company can, immediately following such payment, pay its debts as they fall due in the ordinary course of business. In addition, under the
Companies Law no such share may be redeemed or repurchased (a) unless it is fully paid up, (b) if such redemption or repurchase would result in there
being no shares outstanding, or (c) if the company has commenced liquidation. In addition, our company may accept the surrender of any fully paid
share for no consideration.
Variations of Rights of Shares If at any time, our share capital is divided into different classes of shares, all or any of the special rights attached to any
class of shares may be varied either with the written consent of the holders of two-thirds in nominal value of the issued shares of that class, or with the
sanction of a special resolution passed at a separate general meeting of the holders of shares of that class. The rights conferred upon the holders of the
shares of any class issued with preferred or other rights will not, unless otherwise expressly provided by the terms of issue of the shares of that class, be
deemed to be varied by the creation or issue of further shares ranking pari passu with such existing class of shares.
Inspection of Books and Records Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our
list of shareholders or our corporate records. However, at the discretion of our board of directors, we intend to provide our shareholders with annual
audited financial statements.
Changes in Capital Our shareholders may from time to time by ordinary resolution:
·
·
·
·
increase our share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe;
consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares;
sub-divide our existing shares, or any of them into shares of a smaller amount, provided that in the subdivision the proportion between the
amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in case of the share from which the reduced share
is derived; or
cancel any shares that, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the
amount of our share capital by the amount of the shares so cancelled.
Our shareholders may, by special resolution and subject to confirmation by the Grand Court of the Cayman Islands on an application by our company for
an order confirming such reduction, reduce our share capital and any capital redemption reserve in any manner authorized by law.
Issuance of Additional Shares Our amended and restated memorandum and articles of association authorizes our board of directors to issue additional
ordinary shares from time to time as our board of directors shall determine, to the extent there are available authorized but unissued shares.
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Our amended and restated memorandum and articles of association authorizes our board of directors to establish from time to time one or more series of
convertible redeemable preferred shares and to determine, with respect to any series of convertible redeemable preferred shares, the terms and rights of
that series, including:
·
·
·
·
designation of the series;
the number of shares of the series;
the dividend rights, conversion rights and voting rights; and
the rights and terms of redemption and liquidation preferences.
The issuance of convertible redeemable preferred shares may be used as an anti-takeover device without further action on the part of the shareholders.
Issuance of these shares may dilute the voting power of holders of ordinary shares.
Anti-Takeover Provisions Some provisions of our memorandum and articles of association may discourage, delay or prevent a change of control of our
company or management that shareholders may consider favorable, including provisions that:
·
·
authorize our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and
restrictions of such preferred shares without any further vote or action by our shareholders; and
limit the ability of shareholders to requisition and convene general meetings of shareholders.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our amended and restated
memorandum and articles of association for a proper purpose and for what they believe in good faith to be in the best interests of our company.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on
the Company” or elsewhere in this annual report on Form 20-F.
D. Exchange Controls
See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations on Foreign Exchange” and “Item 4. Information on the
Company—B. Business Overview—Regulations—Regulations on Dividend Distribution.”
E. Taxation
Cayman Islands Taxation
The Cayman Islands currently has no exchange control restrictions. The Cayman Islands currently levies no taxes on individuals or corporations based
upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be
material to us levied by the government of the Cayman Islands, save certain stamp duties which may be applicable, from time to time, on certain
instruments executed in or brought within the jurisdiction of the Cayman Islands.
Pursuant to section 6 of the Tax Concessions Law (2011 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor in
Cabinet:
(a)that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply to us or
our operations; and
(b)in addition, that no tax levied on profits, income, gains or appreciation or no tax which is in the nature of estate duty or inheritance tax shall be
payable by us:
(i) on or in respect of the shares, debentures or our other obligations; or
(ii) by way of withholding in whole or in part of any relevant payment as defined in section 6(3) of the Tax Concession Law (2011 Revision).
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The undertaking is for a period of 20 years from January 27, 2015.
People’s Republic of China Taxation
Hailiang Inc. is a holding company incorporated in the Cayman Islands and its income depends primarily on dividends from our PRC subsidiaries.
The New EIT Law and its implementation rules provide that an income tax rate of 10% will be applicable to dividends payable by Chinese companies to
non-PRC-resident enterprise shareholders unless otherwise exempted or reduced according to treaties or arrangements between the PRC central
government and governments of other countries or regions. Under the Double Tax Avoidance Arrangement, dividends paid by a foreign-invested
enterprise in the PRC to its direct holding company, which is considered a Hong Kong tax resident and is determined by the PRC tax authority to have
satisfied relevant requirements under the Double Tax Avoidance Arrangement between China and Hong Kong and other applicable PRC laws, will be
subject to withholding tax at the rate of 5%. Pursuant to the Administrative Measures on Entitlement of Non-residents to Treatment under Tax Treaties,
non-resident taxpayers which satisfy the criteria for entitlement to tax treaty benefits may, at the time of tax declaration or withholding declaration
through a withholding agent, enjoy the tax treaty benefits, and be subject to continuous administration by the tax authorities. On October 14, 2019, the
State Administration of Taxation promulgated Announcement of State Taxation Administration on Promulgation of the Administrative Measures on
Non-resident Taxpayers Enjoying Treaty Benefits, which took effect on January 1, 2020 and replaced the Administrative Measures on Entitlement of
Non-residents to Treatment under Tax Treaties. According to the Announcement of State Taxation Administration on Promulgation of the
Administrative Measures on Non-resident Taxpayers Enjoying Treaty Benefits, non-resident taxpayers claiming treaty benefits shall be handled in
accordance with the principles of "self-assessment, claiming benefits, retention of the relevant materials for future inspection". Where a non-resident
taxpayer self-assesses and concludes that it satisfies the criteria for claiming treaty benefits, it may enjoy treaty benefits at the time of tax declaration or
at the time of withholding through the withholding agent, simultaneously gather and retain the relevant materials for future inspection, and accept
follow-up administration by the tax authorities.
Furthermore, the State Administration of Taxation promulgated Announcement of the State Administration of Taxation on Issues Relating to “Beneficial
Owner” in Tax Treaties (“Circular 9”) in February 2018, which took into effect on April 1, 2018 and provides guidance for determining whether a
resident of a contracting state is the “beneficial owner” of an item of income under China’s tax treaties and tax arrangements. Under Circular 9, to
determine the "beneficial owner" status of a resident of the treaty counterparty who needs to enjoy the tax treaty benefits, a comprehensive analysis shall
be carried out in accordance with the factors set out in Article 2 and actual conditions of the specific case shall be taken into account. According to the
Article 2 of Circular 9, generally speaking, if the business activities undertaken by the applicant do not constitute substantive business activities, it will
be unfavorable for determination of the applicant’s “beneficial owner” status. Substantive business activities shall include manufacturing, sales and
marketing and management activities of a substantive nature. Determination of whether the business activities undertaken by the applicant are of a
substantive nature shall be based on the functions actually performed and the risks borne. Investment holding management activities of a substantive
nature undertaken by the applicant may constitute substantive business activities; where the applicant undertakes investment holding management
activities which do not constitute substantive business activities and simultaneously undertakes other business activities, if such other business activities
are not significant enough, the applicant's business activities shall not constitute substantive business activities. Therefore, an agent or conduit company
will normally not be regarded as a beneficial owner and not qualify for tax benefits under the treaties or arrangements. The conduit company normally
refers to a company that is set up for the purpose of avoiding or reducing taxes or transferring or accumulating profits. See “Item 3. Key Information—
D. Risk Factors—Risks Relating to Doing Business in China—Our subsidiaries and affiliated entities in China are subject to restrictions on making
dividends and other payments to us.”
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Under the New EIT Law, enterprises established under the laws of jurisdictions outside China with their “de facto management body” located within
China may be considered to be PRC tax resident enterprises for tax purposes and therefore subject to PRC enterprise income tax at the rate of 25% on
their worldwide income. The New EIT Law Implementation Regulations define the term “de facto management body” as a management body that
exercises full or substantial control and management authority over the production, operation, personnel, accounts and properties of an enterprise. The
State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax
Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for
determining whether the “de facto management body” of a Chinese-controlled offshore incorporated enterprise is located in China, which include all of
the following conditions: (i) the senior management and core management departments in charge of daily operations are located mainly within the PRC,
(ii) financial and human resources decision are subject to determination or approval by persons or bodies in the PRC, (iii) major assets, accounting
books, company seals and minutes and files of board and shareholders’ meeting are located or kept within the PRC, and (iv) at least half of the
enterprise’s directors with voting rights or senior management reside within the PRC. Although Circular 82 explicitly provides that the above standards
apply to enterprises which are registered outside the PRC and funded by PRC enterprises or PRC enterprise groups as controlling investors, the
determining criteria set forth in Circular 82 may reflect the general position of the State Administration of Taxation on how the “de facto management
body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises
or PRC enterprise groups or by PRC or foreign individuals. We currently do not believe that we or our Hong Kong subsidiary meet all of the conditions
above and thus we do not believe that we are, or our Hong Kong subsidiary is, a PRC resident enterprise but there can be no assurance in this regard. If
we and/or our Hong Kong subsidiary were considered to be a PRC tax resident enterprise, we and/or our Hong Kong subsidiary would be subject to a
PRC enterprise income tax on our and/or its worldwide income at a tax rate of 25% and to certain reporting obligations. See “Item 3. Key Information—
D. Risk Factors—Risks Relating to Doing Business in China—Under the New EIT Law, we may be classified as a “resident enterprise” of China. Such
classification could result in unfavorable tax consequences to us and our non-PRC shareholders.
The implementation rules of the New EIT Law provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC, or (ii) if gains are
realized from transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital gains are treated as China-sourced income.
It is not clear how “domicile” may be interpreted under the New EIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax
resident. Any dividends we pay to our overseas shareholders or ADS holders as well as gains realized by such shareholders or ADS holders from the
transfer of our shares or ADSs may be regarded as China-sourced income, if we are considered a PRC tax resident enterprise for tax purposes, and as a
result, such dividends and capital gains paid to overseas shareholders or ADS holders that are non-PRC resident enterprises may become subject to PRC
income tax at a rate of up to 10.0%, unless otherwise exempted or reduced under relevant tax treaties or arrangements between the PRC and relevant
foreign jurisdictions.
Under the PRC Individual Income Tax Law promulgated on September 10, 1980, as amended in 1993, 1999, 2005, 2007, 2011 and 2018 and its
implementation rules, dividends from sources within the PRC paid to foreign individual investors who are not residents of the PRC are ordinarily subject
to a PRC withholding tax at a rate of 20% and PRC source gains realized by such investors on the transfer of ADSs or shares would be subject to 20%
PRC income tax, in each case, subject to any reduction or exemption set forth in applicable tax treaties and PRC laws. See “Item 3. Key Information—
D. Risk Factors—Risks Relating to Doing Business in China—Under the New EIT Law, we may be classified as a “resident enterprise” of China. Such
classification could result in unfavorable tax consequences to us and our non-PRC shareholders.”
Under PRC laws, payers of the PRC sourced income to non-PRC-resident enterprises are generally obligated to withhold PRC income taxes from the
payment. In the event of failure to withhold, the non-PRC-resident enterprises are required to pay such taxes on their own. Failure to comply with the tax
payment obligations by the non-PRC-resident enterprises will result in penalties, including full payment of taxes owed, fines, and default interest on
those taxes.
United States Federal Income Taxation
The following discussion describes the material United States federal income tax consequences to a United States Holder (as defined below), under
current law, of an investment in our ADSs or ordinary shares. This discussion is based on the federal income tax laws of the United States as of the date
of this annual report, including the United States Internal Revenue Code, as amended, or the Code, existing and proposed Treasury regulations
promulgated thereunder, judicial authority, published administrative positions of the IRS and other applicable authorities, all as of the date of this annual
report. All of the foregoing authorities are subject to change, which change could apply retroactively and could significantly affect the tax consequences
described below. We have not sought any ruling from the IRS with respect to the statements made and the conclusions reached in the following
discussion and there can be no assurance that the IRS or a court will agree with our statements and conclusions. This summary does not discuss the so-
called Medicare tax on net investment income, any federal non-income tax laws, including the federal estate or gift tax laws, or the laws of any state,
local or non-United States taxing jurisdiction.
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This discussion applies only to a United States Holder (as defined below) that holds ADSs or ordinary shares as capital assets for United States federal
income tax purposes (generally, property held for investment). The discussion neither addresses the tax consequences to any particular investor nor
describes all of the tax consequences applicable to persons in special tax situations, such as:
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banks;
certain financial institutions;
insurance companies;
regulated investment companies;
real estate investment trusts;
brokers or dealers in stocks and securities, or currencies;
persons who are required to use a mark-to-market method of accounting;
certain former citizens or residents of the United States subject to Section 877 of the Code;
entities subject to the United States anti-inversion rules;
tax-exempt organizations and entities;
persons subject to the alternative minimum tax provisions of the Code;
persons whose functional currency is other than the United States dollar;
persons holding ADSs or ordinary shares as part of a straddle, hedging, conversion or integrated transaction;
persons holding ADSs or ordinary shares through a bank, financial institution or other entity, or a branch thereof, located, organized or resident
outside the United States;
persons that actually or constructively own 10% or more of the total combined voting power of all classes of our voting stock;
persons who acquired ADSs or ordinary shares pursuant to the exercise of an employee stock option or otherwise as compensation; or
partnerships or other pass-through entities, or persons holding ADSs or ordinary shares through such entities; or
beneficiaries of a trust holding ADSs or ordinary shares.
If a partnership (including an entity or arrangement treated as a partnership for United States federal income tax purposes) holds our ADSs or ordinary
shares, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. A partner
in a partnership holding our ADSs or ordinary shares should consult its own tax advisors regarding the tax consequences of holding our ADSs or
ordinary shares.
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The following discussion is for informational purposes only and is not a substitute for careful tax planning and advice. Investors considering the
purchase of ADSs or ordinary shares should consult their own tax advisors with respect to the application of the United States federal income
tax laws to their particular situations, as well as any tax consequences arising under the Medicare tax on net investment income, any federal
non-income tax laws, including the federal estate or gift tax laws, or the laws of any state, local or non-United States taxing jurisdiction and
under any applicable tax treaty.
For purposes of the discussion below, a “United States Holder” is a beneficial owner of our ADSs or ordinary shares that is, for United States federal
income tax purposes:
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an individual who is a citizen or resident of the United States;
a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of
the United States, any state thereof or the District of Columbia;
an estate, the income of which is subject to United States federal income taxation regardless of its source; or
a trust, if (i) a court within the United States is able to exercise primary jurisdiction over its administration and one or more United States
persons have the authority to control all of its substantial decisions or (ii) in the case of a trust that was treated as a domestic trust under the law
in effect before 1997, a valid election is in place under applicable Treasury Regulations to treat such trust as a domestic trust.
The discussion below assumes that the representations contained in the deposit agreement and any related agreements are true and that the obligations in
such agreements will be complied with in accordance with their terms.
ADSs
If you own our ADSs, then you should be treated as the owner of the underlying ordinary shares represented by those ADSs for United States federal
income tax purposes. Accordingly, deposits or withdrawals of ordinary shares for ADSs should not be subject to United States federal income tax.
The United States Treasury Department and the IRS have expressed concerns that intermediaries in the chain of ownership between the holder of an
ADS and the issuer of the security underlying the ADS may be taking actions that are inconsistent with the beneficial ownership of the underlying
security (for example, a pre-release of ADSs to persons that do not have beneficial ownership of the securities underlying the ADSs). Such actions may
be inconsistent with the claiming of the reduced rate of tax applicable to certain dividends received by non-corporate United States Holders of ADSs,
including individual United States Holders, and the claiming of foreign tax credits by United States Holders of ADSs. Accordingly, among other things,
the availability of foreign tax credits or the reduced tax rate for dividends received by non-corporate United States Holders, each discussed below, could
be affected by actions taken by intermediaries in the chain of ownership between the holder of an ADS and our company, if as a result of such actions,
the holders of ADSs are not properly treated as beneficial owners of ordinary shares.
Passive Foreign Investment Company
We are unable to determine whether we were a passive foreign investment company for U.S. federal income tax purposes, or a PFIC, for our taxable
year ended on June 30, 2020. For U.S. federal income tax purposes, an entity is a PFIC for any taxable year if applying applicable look-through rules,
either (i) at least 75% of its gross income for such year is passive income, or (ii) at least 50% of the value of its assets (determined based on a quarterly
average) during such year is attributable to assets that produce or are held for the production of passive income. The determination of PFIC status is
based on an annual determination that cannot be made until the close of a taxable year, involves extensive factual investigation, including ascertaining
the fair market value of all of our assets on a quarterly basis and the character of each item of income that we earn, and is subject to uncertainty in
several respects. We have not been able to determine the fair market value of all of our assets on a quarterly basis with sufficient certainty to determine
whether we were a PFIC for our taxable year ended on June 30, 2020. Additionally, we have a significant amount of cash, which is a passive asset, and
consequently the determination of our PFIC status for our current taxable year ended on June 30, 2020 will depend primarily on the trading price of our
ADSs and the rate at which we use our cash (including cash raised in our initial public offering) and other liquid assets to acquire non-passive assets
during the remainder of the current taxable year. Accordingly, we cannot confirm that we will be treated as a PFIC for our current taxable year or for any
future taxable year or that the United States Internal Revenue Service, or IRS, will not take a contrary position.
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A non-United States corporation such as ourselves will be treated as a PFIC, as defined in Section 1297(a) of the Code, for United States federal income
tax purposes for any taxable year if, applying applicable look-through rules, either:
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at least 75% of its gross income for such year is passive income; or
at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets
that produce or are held for the production of passive income.
For this purpose, passive income generally includes dividends, interest, royalties, and rents (other than certain royalties and rents derived in the active
conduct of a trade or business and not derived from a related person).
We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other corporation in which we
own, directly or indirectly, more than 25% by value of the stock. The determination of whether we are or will become a PFIC for any taxable year may
depend in part upon the value of our goodwill and other unbooked intangibles not reflected on our balance sheet (which may be determined based upon
the market value of our ADSs or ordinary shares from time to time). A material decline in the trading price of our ADSs relative to their current trading
price may result in us becoming a PFIC.
Based on our operations and the composition of our assets we do not expect to be treated as a PFIC under the current PFIC rules. We however, must
make a separate determination each year as to whether we are a PFIC, and there can be no assurance with respect to our status as a PFIC for our current
taxable year or any future taxable year. Depending on the assets held for the production of passive income, it is possible that, for our 2020 taxable year
or for any subsequent year, more than 50% of our assets may be assets which produce passive income. We will make this determination following the
end of any particular tax year. Although the law in this regard is unclear, we are treating Hailiang Management and its subsidiaries as being owned by us
for United States federal income tax purposes, not only because we control their management decisions, but also because we are entitled to the economic
benefits associated with Hailiang Management and its subsidiaries, and as a result, we are treating Hailiang Management as our wholly-owned
subsidiary for U.S. federal income tax purposes. For purposes of the PFIC analysis, in general, according to Internal Revenue Code Section 1297(c), a
non-U.S. corporation is deemed to own its pro rata share of the gross income and assets of any entity in which it is considered to own at least 25% of the
equity by value. Although we do not technically own any stock in Hailiang Management, because of our control of management decisions of Hailiang
Management, our entitlement to economic benefits associated with Hailiang Management, and the inclusion of Hailiang Management as part of the
consolidated group, there is a risk that our interest in Hailiang Management might be considered a deemed stock interest. Therefore, the income and
assets of Hailiang Management and its subsidiaries should be included in the determination of whether or not we are a PFIC in any taxable year. It is
important to emphasize that there is little to no guidance other than the statute itself (Internal Revenue Code Section 1297(c)) and analogous portions of
the code, treasury regulations and other accepted authorities and as such it is possible for the IRS to challenge the argument that the look through
rule would apply in this case, especially since the statute explicitly says “stock.” Thus, if we are not treated as owning Hailiang Management and its
subsidiaries for United States federal income tax purposes, we would likely be treated as a PFIC. In addition, the application of the PFIC rules is subject
to uncertainty in several respects and the composition of our income and assets will be affected by how, and how quickly, we spend our cash and other
liquidity assets. We are under no obligation to take steps to reduce the risk of our being classified as a PFIC, and as stated above, the determination of
the value of our assets will depend upon material facts (including the market price of our ADSs or ordinary shares from time to time) that may not be
within our control. If we are a PFIC for any year during which you hold our ADSs or ordinary shares, we will continue to be treated as a PFIC for all
succeeding years during which you hold our ADSs or ordinary shares. However, if we cease to be a PFIC and you did not previously make a timely
“mark-to-market” election as described below, you may avoid some of the adverse effects of the PFIC regime by making a “purging election” (as
described below) with respect to our ADSs or ordinary shares.
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If we are a PFIC for any taxable year (which we are currently unable to determine) during which you hold ADSs or ordinary shares, then, unless you
make a “mark-to-market” election (as discussed below), you generally will be subject to special and adverse tax rules with respect to any “excess
distribution” that you receive from us and any gain that you recognize from a sale or other disposition, including a pledge, of the ADSs or ordinary
shares. For this purpose, distributions that you receive in a taxable year that are greater than 125% of the average annual distributions that you received
during the shorter of the three preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as an excess distribution.
Under these rules:
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the excess distribution or recognized gain will be allocated ratably over your holding period for the ADSs or ordinary shares, as applicable;
the amount of the excess distribution or recognized gain allocated to the current taxable year, and to any taxable years in your holding period
prior to the first taxable year in which we were treated as a PFIC, will be treated as ordinary income; and
the amount of the excess distribution or recognized gain allocated to each other taxable year will be subject to the highest tax rate in effect for
individuals or corporations, as applicable, for each such year and the resulting tax will be subject to the interest charge generally applicable to
underpayments of tax.
The tax liability for amounts allocated to years prior to the year of disposition or excess distribution cannot be offset by any net operating losses for such
years, and gains (but not losses) from a sale or other disposition of the ADSs or ordinary shares cannot be treated as capital, even if you hold the ADSs
or ordinary shares as capital assets.
A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election under Section 1296 of the Code for such stock
to elect out of the tax treatment discussed above. If you make a mark-to-market election for first taxable year which you hold (or are deemed to hold) our
ADSs or ordinary shares and for which we are determined to be a PFIC, you will include in your income each year an amount equal to the excess, if any,
of the fair market value of our ADSs or ordinary shares as of the close of such taxable year over your adjusted basis in such ADSs or ordinary shares,
which excess will be treated as ordinary income and not capital gain. You are allowed an ordinary loss for the excess, if any, of the adjusted basis of our
ADSs or ordinary shares over their fair market value as of the close of the taxable year. However, such ordinary loss is allowable only to the extent of
any net mark-to-market gains on our ADSs or ordinary shares included in your income for prior taxable years. Amounts included in your income under a
mark-to-market election, as well as gain on the actual sale or other disposition of our ADSs or ordinary shares, are treated as ordinary income. Ordinary
loss treatment also applies to any loss realized on the actual sale or disposition of our ADSs or ordinary shares, to the extent that the amount of such loss
does not exceed the net mark-to-market gains previously included for such ADSs or ordinary shares. Your basis in our ADSs or ordinary shares will be
adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by corporations
which are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for qualified dividend income discussed above
under “— Dividends and Other Distributions on the ADSs or Ordinary Shares if we are not a PFIC” generally would not apply.
The mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least 15 days
during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations), including
the Nasdaq Capital Market. If our ADSs or ordinary shares are regularly traded on the Nasdaq Capital Market and if you are a holder of our ADSs or
ordinary shares, the mark-to-market election would be available to you were we to be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election under Section 1295(b) of the Code with respect to such
PFIC to elect out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will
generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. However,
the qualified electing fund election is available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits
as required under applicable U.S. Treasury regulations. We do not currently intend to prepare or provide the information that would enable you to make
a qualified electing fund election. If you hold our ADSs or ordinary shares in any taxable year in which we are a PFIC, you will be required to file U.S.
Internal Revenue Service Form 8621 in each such year and provide certain annual information regarding such ADSs or ordinary shares, including
regarding distributions received on our ADSs or ordinary shares and any gain realized on the disposition of our ADSs or ordinary shares.
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If you do not make a timely “mark-to-market” election (as described above), and if we were a PFIC at any time during the period you hold our ADSs or
ordinary shares, then such ADSs or ordinary shares will continue to be treated as stock of a PFIC with respect to you even if we cease to be a PFIC in a
future year, unless you make a “purging election” for the year we cease to be a PFIC. A “purging election” creates a deemed sale of such ADSs or
ordinary shares at their fair market value on the last day of the last year in which we are treated as a PFIC. The gain recognized by the purging election
will be subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above. As a result of the purging
election, you will have a new basis (equal to the fair market value of our ADSs or ordinary shares on the last day of the last year in which we are treated
as a PFIC) and holding period (which new holding period will begin the day after such last day) in our ADSs or ordinary shares for tax purposes.
A United States Holder that holds our ADSs or ordinary shares in any year in which we are classified as a PFIC (which we are currently unable to
determine) will be required to file an annual report containing such information as the United States Treasury Department may require.
You should consult your own tax advisor regarding the application of the PFIC rules to your investment in our ADSs or ordinary shares and
the availability, application and consequences of the elections discussed above.
Dividends and Other Distributions on the ADSs or Ordinary Shares if we are not a PFIC
Subject to the passive foreign investment company rules discussed above, the gross amount of any distribution that we make to you with respect to our
ADSs or ordinary shares (including any amounts withheld to reflect PRC or other foreign withholding taxes, if any) will be taxable as a dividend, to the
extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles.
Such income (including any withheld taxes) will be includable in your gross income on the day actually or constructively received by you, if you own
the ordinary shares, or by the depositary, if you own ADSs. Because we do not intend to determine our earnings and profits on the basis of United States
federal income tax principles, any distribution paid will generally be reported as a “dividend” for United States federal income tax purposes. Such
dividends will not be eligible for the dividends-received deduction allowed to qualifying corporations under the Code.
If we are not a PFIC, dividends we distribute to a non-corporate United States Holder may qualify for the lower rates of tax applicable to “qualified
dividend income,” if we are paid by a “qualified foreign corporation” and other conditions discussed below are met. A non-United States corporation is
treated as a qualified foreign corporation (i) with respect to dividends paid by that corporation on shares (or American depositary shares backed by such
shares) that are readily tradable on an established securities market in the United States or (ii) if such non-United States corporation is eligible for the
benefits of a qualifying income tax treaty with the United States that includes an exchange of information program. However, a non-United States
corporation will not be treated as a qualified foreign corporation if it is a PFIC for the taxable year in which the dividend is paid or the preceding taxable
year.
Under a published IRS Notice, common or ordinary shares, or ADSs representing such shares, are considered to be readily tradable on an established
securities market in the United States if they are listed on the Nasdaq Global Market, as are our ADSs (but not our ordinary shares). Based on existing
guidance, it is unclear whether the ordinary shares are considered to be readily tradable on an established securities market in the United States, because
only the ADSs, and not the underlying ordinary shares, are listed on a securities market in the United States. We believe, but we cannot assure you, that
dividends we pay on the ordinary shares that are represented by ADSs, but not on the ordinary shares that are not so represented, are, subject to
applicable limitations, eligible for the reduced rates of taxation if we are not a PFIC. In addition, if we are treated as a PRC resident enterprise under the
PRC tax law (see “—People’s Republic of China Taxation”), then we may be eligible for the benefits of the income tax treaty between the United States
and the PRC. If we are eligible for such benefits, then dividends that we pay on our ordinary shares, regardless of whether such shares are represented by
ADSs, would, subject to applicable limitations, be eligible for the reduced rates of taxation, if we are not a PFIC.
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Even if dividends would be treated as paid by a qualified foreign corporation and we are not a PFIC, non-corporate United States Holders will not be
eligible for reduced rates of taxation if they do not hold our ADSs or ordinary shares for more than 60 days during the 121-day period beginning 60 days
before the ex-dividend date or if such United States Holders elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of
the Code. In addition, the rate reduction will not apply to dividends of a qualified foreign corporation if the non-corporate United States Holder receiving
the dividend is obligated to make related payments with respect to positions in substantially similar or related property.
You should consult your own tax advisors regarding the availability of the lower tax rates applicable to qualified dividend income for any dividends that
we pay with respect to the ADSs or ordinary shares, as well as the effect of any change in applicable law after the date of this annual report.
PRC or other foreign withholding taxes, if any, imposed on dividends paid to you with respect to ADSs or ordinary shares generally will be treated as
foreign taxes eligible for credit against your United States federal income tax liability, subject to the various limitations and disallowance rules that apply
to foreign tax credits generally. For purposes of calculating the foreign tax credit, dividends paid to you with respect to the ADSs or ordinary shares will
be treated as income from sources outside the United States and generally will constitute passive category income. The rules relating to the
determination of the foreign tax credit are complex, and you should consult your tax advisors regarding the availability of a foreign tax credit in your
particular circumstances.
Disposition of the ADSs or Ordinary Shares if we are not a PFIC
You will recognize gain or loss on a sale or exchange of ADSs or ordinary shares in an amount equal to the difference between the amount realized on
the sale or exchange and your tax basis in the ADSs or ordinary shares. Subject to the discussion under “—Passive Foreign Investment Company”
above, such gain or loss generally will be capital gain or loss if we are not a PFIC. Capital gains of a non-corporate United States Holder, including an
individual, that has held the ADS or ordinary share for more than one year currently are eligible for the reduced tax rates. The deductibility of capital
losses is subject to limitations.
Any gain or loss that you recognize on a disposition of our ADSs or ordinary shares generally will be treated as United States-source income or loss for
foreign tax credit limitation purposes. However, if we are treated as a PRC resident enterprise for PRC tax purposes subject to PRC taxation as a resident
for treaty purposes and PRC tax is imposed on gain from the disposition of ADSs or ordinary shares (see “—People’s Republic of China Taxation”),
then a United States Holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may elect to treat the gain as
PRC-source income for foreign tax credit purposes.
If such an election is made, the gain so treated will be treated as a separate class or “basket” of income for purposes of the foreign tax credit under
Section 865(h) of the Code. You should consult your tax advisors regarding the proper treatment of gain or loss, as well as the availability of a foreign
tax credit, in your particular circumstances.
Information Reporting and Backup Withholding
Dividend payments with respect to our ADSs or ordinary shares and proceeds from the sale, exchange or redemption of our ADSs or ordinary shares
may be subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding under Section 3406 of the Code with
at a current flat rate of 24%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and
makes any other required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders
who are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are
urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
130
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability,
and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S.
Internal Revenue Service and furnishing any required information. We do not intend to withhold taxes for individual shareholders. Transactions effected
through certain brokers or other intermediaries, however, may be subject to withholding taxes (including backup withholding), and such brokers or
intermediaries may be required by law to withhold such taxes.
Under the Hiring Incentives to Restore Employment Act of 2010, certain U.S. Holders are required to report information relating to our ADSs or
ordinary shares, subject to certain exceptions (including an exception for ADSs or ordinary shares held in accounts maintained by certain financial
institutions), by attaching a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for
each year in which they hold our ADSs or ordinary shares.
Information on Foreign Financial Assets
Under legislation enacted in 2010, United States Holders who are individuals generally will be required to report our name, address and such
information relating to an interest in the ADSs or ordinary shares as is necessary to identify the class or issue of which your ADSs or ordinary shares are
a part. These requirements are subject to exceptions, including an exception for ADSs or ordinary shares held in accounts maintained by certain financial
institutions and an exception applicable if the aggregate value of all “specified foreign financial assets” (as defined in the Code) does not exceed certain
specified thresholds. United States Holders should consult their tax advisors regarding the application of these information reporting rules.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We have previously filed with the SEC our registration statements on Form F-1 (File Number 333-201263), as amended.
We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file
reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal
year. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public
reference facilities maintained by the SEC at Judiciary Plaza, 100 F Street, N.E., Washington, D.C. 20549, and at the regional office of the SEC located
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The public may obtain information regarding the Washington, D.C.
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that contains reports, proxy
and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign
private issuer, we are exempt from the rules of the Exchange Act prescribing, among other things, the furnishing and content of proxy statements to
shareholders, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act.
In accordance with Rule 5250(d) of the NASDAQ Listing Rules, we will post this annual report on Form 20-F on our website http://ir.hailiangedu.com.
In addition, we will provide hardcopies of our annual report free of charge to shareholders and ADS holders upon request.
I. Subsidiary Information
For a listing of our subsidiaries, see “Item 4. Information on the Company—C. Organizational Structure.”
131
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
Our financial statements are expressed in Renminbi, and most of our revenue, costs and expenses are denominated in Renminbi. Additionally, our cash
and cash equivalents are held in both Renminbi and U.S. dollars. As a result, fluctuations in the exchange rates between the U.S. dollar and Renminbi
may affect our results of operations and financial condition.
To the extent that we need to convert U.S. dollars we receive from financing activities into the Renminbi for our operations or other uses within the
PRC, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion.
On the other hand, a decline in the value of the Renminbi against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results,
the value of your investment in our company and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the
prices of ADSs.
In addition, very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into
any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions
in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In
addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign
currency.
Credit Risk
Our credit risk is primarily attributable to cash in banks, cash and term deposits held at a related party finance entity, loans receivable due from a related
party.
We had cash held by third-party financial institutions located in the PRC, Hong Kong SAR. The bank deposits with financial institutions in the PRC are
insured by the government authority for up to RMB500. The bank deposits with financial institutions in the Hong Kong SAR are insured by the
government authority for up to HK$500. We have not experienced any losses in uninsured bank deposits and do not believe that it is exposed to any
significant risks on cash held in bank accounts. To limit exposure to credit risk, we primarily place bank deposits with large financial institutions in the
PRC, Hong Kong SAR with acceptable credit rating. We have historically made deposits with Hailiang Finance. See “Item 7. Major Shareholders and
Related Party Transactions—B. Related Party Transactions—Transactions with Certain Related Parties—Deposits.” Hailiang Finance, a subsidiary of
Hailiang Group, is a finance company that is licensed to provide intra-group financing arrangements within Hailiang Group subsidiaries and other
related party companies. The establishment of Hailiang Finance was approved by the China Banking Regulatory Commission, or CBRC, as a non-
banking financial institution to solely facilitate Hailiang Group’s internal financing transactions including issuing loans to and accepting cash deposits
from its subsidiaries and other related party entities. Pursuant to the license issued by CBRC, Hailiang Finance is not permitted to make any loans or
accept any deposits from any parties that are unrelated to Hailiang Group, except for inter-bank transactions with other unrelated commercial banks.
Hailiang Group and Mr. Feng have provided a guarantee on our deposits with Hailiang Finance. Based on one recent PRC credit rating organization,
Hailiang Group has been rated AA+ which indicates strong ability to make payments on debts as they become due. Management believes that the credit
risk on our deposit is low considering Hailiang Group’s guarantee and credit rating. To reduce our credit exposure with Hailiang Finance, based upon
our current policy effective from September 28, 2020, we have set an upper deposit budget maintained by Hailiang Finance at any given time in fiscal
2021 to be approximately RMB2.5 billion (approximately US$353.9 million), and any amount above the upper deposit budget must be transferred to a
commercial bank within 7 business days. As of June 30, 2020, we had cash and term deposits of RMB1,405.6 million (approximately US$198.9 million)
at Hailiang Finance which represented 50.4% of our consolidated total assets as of June 30, 2020.
We received an annual guarantee from a related party, incorporated in British Virgin Island and controlled by Hailiang Group, on the loan due from
Hong Kong Leonit Limited (“Leonit”), a related party controlled by Hailiang Group. We consider that the credit risk arising from the loan is
significantly mitigated by the guarantee.
132
Liquidity Risk
Liquidity risk is the risk that we will encounter difficulty in meeting the obligations associated with our financial liabilities that are settled by delivering
cash or other financial assets. Our approach to managing liquidity is to ensure, as far as possible, that we will always have sufficient liquidity to meet our
liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to our reputation.
The following are the contractual maturities of financial liabilities, which are based on contractual undiscounted cash flows and the earliest date we can
be required to pay:
Carrying
amount
Contractual
cash flow
1 year or less
1-2 years
2-5 years
more than 5 years
June 30, 2020
RMB
US$
264,870 RMB
(37,490) US$
264,870 RMB
(37,490) US$
264,870
(37,490)
—
—
—
—
RMB
US$
RMB
US$
136,045 RMB
(19,256) US$
20,502 RMB
(2,902) US$
136,045 RMB
(19,256) US$
27,356 RMB
(3,872) US$
136,045
(19,256)
2,687 RMB
(380) US$
—
—
3,442 RMB
(487) US$
—
—
7,999 RMB
(1,132) US$
—
—
—
—
13,228
(1,872)
Non-derivative financial instruments
Trade and other payables
due to third parties
Other payables due to
related parties
Lease liabilities
Interest Rate Risk
The interest rates of cash held in bank and cash and term deposits placed with Hailiang Finance ranged from 0.30% to 2.1% per annum for the years
ended June 30, 2019 and 2020, respectively. We do not have any financial assets that were designated at fair value through profit or loss. We have not
used derivative financial instruments to hedge interest risk. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed,
nor do we anticipate being exposed to material risks due to changes in market interest rates. However, our future interest income may fall short of
expectations due to changes in market interest rates.
Inflation Risk
In recent years, inflation has not had a material impact on our results of operations. According to the National Bureau of Statistics of China, the
consumer price index in China increased by 1.6%, 2.1% and 2.9% in 2018, 2019 and 2020, respectively. Although we have not in the past been
materially affected by inflation since our inception, we can provide no assurance that we will not be affected in the future by higher rates of inflation in
China. If inflation rises, it may materially and adversely affect our business.
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
133
D. American Depositary Shares
Fees Paid by Our ADS Holders
Our ADS holders will be required to pay the following service fees to the depositary bank, Deutsche Bank Trust Company Americas, and certain taxes
and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities
represented by any of your ADSs):
Service Fees
· To any person to which ADSs are issued or to any person to which a distribution is made in respect of ADS distributions pursuant to stock dividends
or other free distributions of stock, bonus distributions, stock splits or other distributions (expect where converted to cash)
Up to US$0.05 per ADS issued
· Cancellation of ADSs, including the case of termination of the deposit agreement
Up to US$0.05 per ADS cancelled
· Distribution of cash dividends
Up to US$0.05 per ADS held
· Distribution of cash entitlements (other than cash dividends) and/or cash proceeds from the sale of rights, securities and other entitlements
Up to US$0.05 per ADS held
· Distribution of ADSs pursuant to exercise of rights
Up to US$0.05 per ADS held
· Depositary services
Up to US$0.05 per ADS held on the applicable record date(s) established by the depositary bank
The fees described above may be amended from time to time.
Our ADS holder will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges
(in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your
ADSs) such as:
·
·
·
·
·
·
Fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for the ordinary shares in the Cayman Islands
(i.e., upon deposit and withdrawal of ordinary shares).
Expenses incurred for converting foreign currency into U.S. dollars.
Expenses for cable, telex and fax transmissions and for delivery of securities.
Taxes and duties upon the transfer of securities, including any applicable stamp duties, any stock transfer charges or withholding taxes (i.e.,
when ordinary shares are deposited or withdrawn from deposit).
Fees and expenses incurred in connection with the delivery or servicing of ordinary shares on deposit.
Fees and expenses incurred in connection with complying with exchange control regulations and other regulatory requirements applicable to
ordinary shares, deposited securities, ADSs and ADRs.
· Any applicable fees and penalties thereon.
134
The depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their
clients) receiving the newly issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary
bank for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities
to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS record
date.
The depositary fees payable for cash distributions are generally deducted from the cash being distributed or by selling a portion of distributable property
to pay the fees. In the case of distributions other than cash (i.e., share dividends, rights), the depositary bank charges the applicable fee to the ADS
record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in
direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian
accounts (via the Depository Trust Company, or the DTC), the depositary bank generally collects its fees through the systems provided by DTC (whose
nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and
custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary banks.
In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until
payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.
Fees and Payments from the Depositary to Us
Our depositary has agreed to reimburse us for a portion of certain expenses we incur that are related to establishment and maintenance of the ADR
program, including investor relations expenses. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of
reimbursement available to us is not related to the amounts of fees the depositary collects from investors. Further, the depositary has agreed to reimburse
us certain fees payable to the depositary by holders of ADSs. For the year ended June 30, 2020, we did not receive any payment from the depositary in
reimbursements relating to the establishment and maintenance of the ADS program.
135
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Part II
None.
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
See “Item 10. Additional Information” for a description of the rights of securities holders, which remain unchanged.
Use of Proceeds
The following “Use of Proceeds” information relates to the registration statement on Form F-3 (the “Shelf Registration Statement”), filed on
December 22, 2017 and declared effective on January 5, 2018 (File Number 333-222271) for our shelf offering of $10,000,000 of our ordinary shares,
including ordinary shares represented by ADSs, or warrants to purchase ordinary shares or ADSs in any combination from time to time in one or more
offerings, at prices and on terms described in one or more supplements to prospectus as part of the Shelf Registration Statement. As of the date of this
annual report on Form 20-F, we have not received any proceeds from our shelf offering as we have not made any takedown in connection with the shelf
offering.
Item 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out
an evaluation of the effectiveness of our disclosure controls and procedures, which is defined in Rules 13a-15(e) of the Exchange Act, as of June 30,
2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of
June 30, 2020 were effective.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with international financial reporting standards
(“IFRSs”), as issued by the International Accounting Standards Board. Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions or because the degree of compliance with policies or procedures may deteriorate. Under the
supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an
assessment of the effectiveness of our internal control over financial reporting as of June 30, 2020. The assessment was based on criteria established in
the framework Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management concluded that our internal control over financial reporting was effective as of June 30, 2020.
Attestation Report of the Registered Public Accounting Firm
This annual report on Form 20-F does not include an attestation report of our registered public accounting firm due to rules of the SEC where domestic
and foreign registrants that are “emerging growth companies” which we are, are not required to provide the auditor attestation report.
136
Changes in Internal Control Over Financial Reporting
There are no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act ) that occurred during the year
ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
It should be noted that while our management believes that our disclosure controls and procedures provide a reasonable level of assurance, our
management does not expect that our disclosure controls and procedures or internal financial controls will prevent all errors or fraud. A control system,
no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Mr. Ken He qualifies as an “audit committee financial expert” as defined in Item 16A of Form 20-F. Mr. He, Mr. Xiaofeng Cheng, and Mr. Xiaohua Gu
satisfy the “independence” requirements of Section 5605(a)(2) of the NASDAQ Listing Rules as well as the independence requirements of Rule 10A-
3 under the Exchange Act.
Item 16B. CODE OF ETHICS
Our board of directors has adopted a code of ethics that applies to our directors, officers and employees, including certain provisions that specifically
apply to our chief executive officer and chief financial officer. We have filed our code of business conduct and ethics as Exhibit 99.1 to our registration
statement on Form F-1 (file No. 333-201263) filed with the SEC on December 24, 2014 and posted the code on our website http://ir.hailiangedu.com.
We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten working days after we
receive such person’s written request.
Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by our principal
external auditors, for the periods indicated.
Audit fees(1)
Audit-related fees(2)
Tax fees(3)
All other fees(4)
TOTAL
For the year ended June 30,
2020
2019
(In thousand)
RMB
RMB
RMB
RMB
RMB
3,913 RMB
— RMB
— RMB
— RMB
3,913 RMB
4,239 US$
1,100 US$
— US$
— US$
5,339 US$
600
156
—
—
756
(1) “Audit fees” are defined as the audit that needs to be performed each year in order to issue opinions on our consolidated financial statements and
limited procedures performed in relation to interim financial information. We paid or accrued expenses of RMB3,913 and RMB4,239 to KPMG
Huazhen LLP related to its audit of our annual financial statements for the years ended June 30, 2019 and 2020, respectively, and limited procedures
performed in relation to interim financial information.
(2) “Audit-related fees” means the aggregate fees billed for each of the fiscal years for assurance and related services and due diligence services relating
to acquisitions by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements and are
not reported under paragraph (1).
(3) "Tax Fees" represents the aggregate fees billed in each of the fiscal years listed for the professional tax services rendered by our principal auditors.
(4) "All Other Fees" represents the aggregate fees billed in each of the fiscal years listed for services rendered by our principal auditors other than
services reported under "Audit fees," "Audit-related fees" and "Tax fees.".
The policy of our audit committee is to pre-approve all audit and non-audit services provided by our independent auditor including audit services, audit-
related services, tax services and other services.
137
Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
Item 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
Item 16G. CORPORATE GOVERNANCE
As a Cayman Islands company listed on the NASDAQ Global Market, we are subject to the NASDAQ Global Market corporate governance listing
standards. However, NASDAQ Global Market rules permit a foreign private issuer like us to follow the corporate governance practices of its home
country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the NASDAQ Global
Market corporate governance listing standards. To date, we have followed and intend to continue to follow the applicable corporate governance
standards under the Nasdaq Listing Rules, including having a majority of our board members be independent.
Item 16H. MINE SAFETY DISCLOSURE
Not applicable.
138
Item 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
Item 18. FINANCIAL STATEMENTS
Part III
The consolidated financial statements of Hailiang Education Group Inc. and its subsidiaries are included at the end of this annual report on Form 20-F.
Item 19. EXHIBITS
1.1
1.2
2.1
2.2
2.3
4.1
4.2
4.3
4.4
4.5
Exhibit
number
Description of document
Amended and Restated Memorandum of Association of the Registrant (incorporated by reference to Exhibit 3.1 of our Registration
Statement on Form F-1 (file No. 333-201263) filed with the Securities and Exchange Commission on December 24, 2014)
Amended and Restated Articles of Association of the Registrant (incorporated by reference to Exhibit 3.3 of our Registration Statement
on Form F-1 (file No. 333-201263) filed with the Securities and Exchange Commission on December 24, 2014)
Form of the Registrant’s American depositary receipt (included in Exhibit 2.3)
Registrant’s Specimen Certificate for Ordinary Shares (incorporated by reference to Exhibit 4.2 of our Registration Statement on
Form F-1 (file No. 333-201263) filed with the Securities and Exchange Commission on December 24, 2014)
Form of Deposit Agreement between the Registrant, the depositary and holders and beneficial owners of the American depositary
shares (incorporated by reference to Exhibit 4.3 of our Registration Statement on Form F-1 (file No. 333-201263), as amended, filed
with the Securities and Exchange Commission on March 20, 2015)
Form of Employment Agreement between the Registrant and the executive officers of the Registrant (incorporated by reference to
Exhibit 10.1 of our Registration Statement on Form F-1 (file No. 333-201263) filed with the Securities and Exchange Commission on
December 24, 2014)
Form of Indemnification Agreement between the Registrant and each of its directors and executive officers (incorporated by reference
to Exhibit 10.2 of our Registration Statement on Form F-1 (file No. 333-201263) filed with the Securities and Exchange Commission
on December 24, 2014)
English translation of Equity Pledge Agreement among Hailiang Consulting, Mr. Feng and Hailiang Management, dated December 31,
2013 (incorporated by reference to Exhibit 10.3 of our Registration Statement on Form F-1 (file No. 333-201263) filed with the
Securities and Exchange Commission on December 24, 2014)
English translation of Call Option Agreement among Hailiang Consulting, Hailiang Management and Mr. Feng, dated December 31,
2013 (incorporated by reference to Exhibit 10.4 of our Registration Statement on Form F-1 (file No. 333-201263) filed with the
Securities and Exchange Commission on December 24, 2014)
English translation of Power of Attorney from Mr. Feng, dated December 31, 2013 (incorporated by reference to Exhibit 10.5 of our
Registration Statement on Form F-1 (file No. 333-201263) filed with the Securities and Exchange Commission on December 24, 2014)
139
4.6
4.7
4.8
4.9
4.10
4.11
4.24
4.25
4.26
4.27
4.28
English translation of Consulting Services Agreement among Hailiang Consulting, Hailiang Management, Hailiang Management’s
affiliates and Mr. Feng, dated December 31, 2013 (incorporated by reference to Exhibit 10.6 of our Registration Statement on Form F-1
(file No. 333-201263) filed with the Securities and Exchange Commission on December 24, 2014)
English translation of Property Lease Agreement between Hailiang Management Group Co., Ltd. and Zhuji Hailiang Foreign Language
School, dated June 30, 2009 (incorporated by reference to Exhibit 10.7 of our Registration Statement on Form F-1 (file No. 333-
201263) filed with the Securities and Exchange Commission on December 24, 2014)
English translation of Property Lease Agreement between Hailiang Management Group Co., Ltd. and Hailiang Experimental High
School, dated June 30, 2005 (incorporated by reference to Exhibit 10.8 of our Registration Statement on Form F-1 (file No. 333-
201263) filed with the Securities and Exchange Commission on December 24, 2014)
English translation of Supplemental Agreement to Property Lease Agreement between Hailiang Management Group Co., Ltd. and
Hailiang Experimental High School, dated June 30, 2012 (incorporated by reference to Exhibit 10.9 of our Registration Statement on
Form F-1 (file No. 333-201263) filed with the Securities and Exchange Commission on December 24, 2014)
English translation of Property Lease Agreement between Hailiang Management Group Co., Ltd. and Tianma Experimental School,
dated June 30, 2009 (incorporated by reference to Exhibit 10.10 of our Registration Statement on Form F-1 (file No. 333-201263) filed
with the Securities and Exchange Commission on December 24, 2014)
English translation of Property Lease Cooperation Agreement among Hailiang Management Group Co., Ltd., Hailiang Experimental
High School. Hailiang Group and Mr. Feng, dated November 13, 2014 (incorporated by reference to Exhibit 10.11 of our Registration
Statement on Form F-1 (file No. 333-201263) filed with the Securities and Exchange Commission on December 24, 2014)
English translation of Decoration and Renovation Project Execution Contract between Hailiang Experimental High School and Heng
Zhong Da Construction Limited Company, dated November 13, 2014 (incorporated by reference to Exhibit 10.12 of our Registration
Statement on Form F-1 (file No. 333-201263) filed with the Securities and Exchange Commission on December 24, 2014)
English translation of Guarantee Letter made by Hailiang Group, dated September 29, 2014 (incorporated by reference to Exhibit 10.13
of our Registration Statement on Form F-1 (file No. 333-201263) filed with the Securities and Exchange Commission on December 24,
2014)
English translation of Guarantee Letter made by Mr. Feng dated September 29, 2014 (incorporated by reference to Exhibit 10.14 of our
Registration Statement on Form F-1 (file No. 333-201263) filed with the Securities and Exchange Commission on December 24, 2014)
Amended and Restated Escrow Agreement among the Registrant, Network 1 Financial Securities, Inc. and Continental Stock
Transfer & Trust Company, dated June 2, 2015 (incorporated by reference to Exhibit 10.15 of our Registration Statement on Form F-1
(file No. 333-201263), as amended, filed with the Securities and Exchange Commission on June 2, 2015)
English translation of Amended and Restated Call Option Agreement among Hailiang Consulting, Hailiang Management and Mr. Feng,
dated June 30, 2017 (incorporated by reference to Exhibit 10.2 of our Form 6-K filed with the Securities and Exchange Commission on
June 30, 2017)
4.29
English translation of Amended and Restated Power of Attorney from Mr. Feng, dated June 30, 2017 (incorporated by reference to
Exhibit 10.3 of our Form 6-K filed with the Securities and Exchange Commission on June 30, 2017)
140
4.30
4.31
4.32
4.33
4.34
4.35
8.1*
11.1
12.1*
12.2*
13.1**
13.2**
15.1*
15.2*
English translation of Amended and Restated Consulting Services Agreement among Hailiang Consulting, Hailiang Management,
Hailiang Management’s affiliates and Mr. Feng, dated June 30, 2017 (incorporated by reference to Exhibit 10.4 of our Form 6-K filed
with the Securities and Exchange Commission on June 30, 2017)
English translation of Amended and Restated Equity Pledge Agreement among Hailiang Consulting, Mr. Feng and Hailiang
Management, dated June 30, 2017 (incorporated by reference to Exhibit 10.1 of our Form 6-K filed with the Securities and Exchange
Commission on June 30, 2017)
English Translation of Second Amended and Restated Call Option Agreement among Hailiang Consulting, Hailiang Investment,
Mr. Feng and Zhejiang Zhongyida Investment Co., Ltd., dated February 23, 2018 (incorporated by reference to Exhibit 10.1 of our
Form 6-K filed with the Securities and Exchange Commission on March 30, 2018)
English Translation of Second Amended and Restated Powers of Attorney among Mr. Feng, Zhejiang Zhongyida Investment Co., Ltd.
and Hailiang Consulting, dated February 23, 2018 (incorporated by reference to Exhibit 10.2 of our Form 6-K filed with the Securities
and Exchange Commission on March 30, 2018)
English Translation of Second Amended and Restated Consulting Services Agreement among Hailiang Consulting, Hailiang
Investment, Mr. Feng and Zhejiang Zhongyida Investment Co., Ltd., dated February 23, 2018 (incorporated by reference to
Exhibit 10.3 of our Form 6-K filed with the Securities and Exchange Commission on March 30, 2018)
English Translation of Second Amended and Restated Equity Pledge Agreement among Hailiang Consulting, Hailiang Investment,
Mr. Feng and Zhejiang Zhongyida Investment Co., Ltd., dated February 23, 2018 (incorporated by reference to Exhibit 10.4 of our
Form 6-K filed with the Securities and Exchange Commission on March 30, 2018)
Subsidiaries and Affiliated Entities of the Registrant.
Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 99.1 of our Registration Statement on
Form F-1 (file No. 333-201263) filed with the Securities and Exchange Commission on December 24, 2014)
Certification of Chief Executive Officer Pursuant to Rule 13a-14/15d-14
Certification of Chief Financial Officer Pursuant to Rule 13a-14/15d-14
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Consent of KPMG Huazhen LLP
Consent of Marcum Bernstein & Pinchuk LLP
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed with this annual report on Form 20-F.
**In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 13.1 and
Exhibit 13.2 herewith are deemed to accompany this Form 20-F and will not be deemed filed for purposes of Section 18 of the Exchange Act. Such
certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act.
141
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to
sign this annual report on its behalf.
SIGNATURES
Hailiang Education Group Inc.
By:
/s/ Junwei Chen
Name: Junwei Chen
Title: Chairman and Chief Executive Officer
Date: October 14, 2020
Index to Consolidated Financial Statements
HAILIANG EDUCATION GROUP INC.
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Profit or Loss and Other Comprehensive Income
Consolidated Statements of Financial Position
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
F-1
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Hailiang Education Group Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of Hailiang Education Group Inc. and subsidiaries (the “Company”) as
of June 30, 2020 and 2019, the related consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for
the years then ended, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash
flows for the years then ended, in conformity with International Financial Reporting Standards (“IFRSs”) as issued by the International Accounting
Standards Board.
Changes in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for leases due to the adoption of
IFRS 16, Leases as of July 1, 2019. In addition, as discussed in Note 4 to the consolidated financial statements, as of July 1, 2018, the Company has
changed its method of accounting for revenue recognition due to the adoption of IFRS 15, Revenue from Contracts with Customers and has changed its
method of accounting for financial instruments due to the adoption of IFRS 9, Financial instruments.
Related Party Transactions
As discussed in Note 20 to the consolidated financial statements, the Company entered into significant transactions with related parties for the years
ended June 30, 2020 and 2019.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to
obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
/s/ KPMG Huazhen LLP
We have served as the Company’s auditor since 2018.
Hangzhou, China
October 14, 2020
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Hailiang Education Group Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of profit or loss and other comprehensive income, shareholders’ equity and cash flows of
Hailiang Education Group Inc. (the “Company”) for the year ended June 30, 2018, and the related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year
ended June 30, 2018, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain
an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Marcum Bernstein & Pinchuk LLP
Marcum Bernstein & Pinchuk LLP
We have served as the Company’s auditor from 2016 to 2018.
New York, New York
October 18, 2018, except for Note 5(ii) Segment reporting to the financial statements, as to which the date is September 23, 2019.
F-3
HAILIANG EDUCATION GROUP INC.
CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED JUNE 30, 2018, 2019 AND 2020
(Amounts in thousands except per share data)
Revenue
Cost of revenue
Gross profit
Other income, net
Selling expenses
Administrative expenses
Operating profit
Gain on disposal of affiliated entities
Finance income
Finance costs
Net finance income
Profit before tax
Income tax expenses
Net Profit
Profit attributable to:
Net profit/(loss) attributable to non-controlling interests
Net profit attributable to Hailiang Education Group Inc. (the
“Company”)’s shareholders
Earnings per share
Basic and diluted earnings per share
Net Profit
Other comprehensive (loss)/income
Items that will not be reclassified to profit or loss
Exchange differences on translation of financial statements of the
Company
Items that are or may be reclassified subsequently to profit or
loss
Exchange differences on translation of financial statements of
foreign operations other than the Company
Other comprehensive (loss)/income, net of nil income tax
Note
5
8(ii)
6
8(ii)
8(ii)
8(iii)
8(i)
8(i)/12(b)
9
17
10
2018
RMB
2019
RMB
1,169,348
(804,674)
1,499,025
(1,026,903)
2020
RMB
1,482,599
(983,175)
364,674
3,689
(24,539)
(63,374)
280,450
5,349
11,391
—
11,391
297,190
(66,288)
472,122
25,100
(25,003)
(72,661)
399,558
—
24,935
—
24,935
499,424
72,776
(26,899)
(77,536)
467,765
—
25,120
(4,363)
20,757
424,493
(108,713)
488,522
(121,924)
230,902
315,780
366,598
8,314
22,359
(4,234)
222,588
230,902
293,421
315,780
370,832
366,598
0.54
0.71
0.90
230,902
315,780
366,598
(3,016)
4,086
2,966
474
(2,542)
(776)
3,310
(640)
2,326
Total comprehensive income
228,360
319,090
368,924
Total comprehensive income attributable to:
Total comprehensive income/(loss) attributable to non-
controlling interests
Total comprehensive income attributable to the Company’s
shareholders
Note:
17
8,314
22,359
(4,234)
220,046
228,360
296,731
319,090
373,158
368,924
The Group has initially applied IFRS 15 and IFRS 9 as of July 1, 2018. Under the cumulative effect method, comparative information is not restated.
See note 4(m) and 4(c), respectively.
The Group has initially applied IFRS 16 as of July 1, 2019 using the modified retrospective approach. Under this approach, comparative information is
not restated. See note 3.
The accompanying notes are an integral part of these consolidated financial statements.
F-4
HAILIANG EDUCATION GROUP INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF JUNE 30, 2019 AND 2020
(Amounts in thousands)
Assets
Property and equipment, net
Intangible assets and goodwill, net
Right-of-use assets
Contract costs
Prepayments to third party suppliers
Deferred tax assets
Non-current assets
Other receivables due from related parties
Other current assets
Term deposits held at a related party finance entity
Restricted bank deposits
Cash and cash equivalents
Current assets
Total assets
Equity
Share capital
Share premium
Contributed capital
Reserves
Retained earnings
Total Hailiang Education Group Inc. shareholders' equity
Non-controlling interests
Total equity
Liabilities
Contract liabilities
Deferred tax liabilities
Lease liabilities
Non-current liabilities
Trade and other payables due to third parties
Other payables due to related parties
Contract liabilities
Income tax payable
Lease liabilities
Current liabilities
Total liabilities
Commitments and contingencies
Total equity and liabilities
Note:
Note
11
13
12(a)
9
20(b)
14
20(b)
15/20(b)
16
16
16
16
17
5(c)
9
12(d)
18
18/20(b)
5(c)
12(d)
21
2019
RMB
2020
RMB
620,623
99,525
—
9,899
94
—
628,538
97,806
517,609
10,766
75
568
730,141
1,255,362
91,674
31,706
1,387,094
1,613
260,684
76,646
36,723
916,601
324
503,021
1,772,771
1,533,315
2,502,912
2,788,677
268
134,583
251,034
360,914
905,009
1,651,808
37,439
268
134,583
251,034
394,865
1,244,216
2,024,966
10,797
1,689,247
2,035,763
2,579
4,691
—
7,270
218,122
134,745
398,951
54,577
—
3,159
4,607
18,749
26,515
264,870
136,045
274,874
48,857
1,753
806,395
726,399
813,665
—
2,502,912
752,914
—
2,788,677
The Group has initially applied IFRS 15 and IFRS 9 as of July 1, 2018. Under the cumulative effect method, comparative information is not restated.
See note 4(m) and 4(c), respectively.
The Group has initially applied IFRS 16 as of July 1, 2019 using the modified retrospective approach. Under this approach, comparative information is
not restated. See note 3.
The accompanying notes are an integral part of these consolidated financial statements.
F-5
HAILIANG EDUCATION GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED JUNE 30, 2018, 2019 AND 2020
(Amounts in thousands)
Share
capital
Share
premium
RMB RMB
Note 16 Note 16
134,584
267
Contributed Translation Statutory Retained
earnings
RMB
capital
RMB
Note 16
reserve
RMB
Note 16
reserve
RMB
Note 16
267,358
235,895
10,686
Total
Hailiang
Education
Group Inc.
shareholders’
equity
RMB
Non-
controlling Total
equity
RMB
interests
RMB
Note 17
452,823
1,101,613
— 1,101,613
—
—
—
—
—
—
—
—
—
—
—
(2,542)
—
—
222,588
—
222,588
(2,542)
8,314
—
230,902
(2,542)
—
—
(2,542)
—
—
37,165
222,588
(37,165)
220,046
—
8,314
—
228,360
—
—
—
11,000
—
—
—
11,000
—
11,000
—
—
(11,000)
—
—
—
(11,000)
4,840
(6,160)
Balance at June 30, 2017
Total comprehensive income
Profit for the year
Other comprehensive loss
Total comprehensive
(loss)/income
Transfer to statutory reserve
Establishment of subsidiaries
under common controlled by
ultimate shareholder (Note
20(a)(xi))
Transfer of equity interests in
subsidiaries under common
controlled by ultimate
shareholder to the Company
and non- controlling
interests (Note 20(a) (xi))
Exercise of warrants
1
(1)
—
—
—
—
—
—
—
Balance at June 30, 2018
Adjustment on initial
application of
IFRS 15, net of income tax
Restated balance at July 1,
268
134,583
235,895
8,144
304,523
638,246
1,321,659
13,154 1,334,813
—
—
—
—
—
18,279
18,279
—
18,279
2018
268
134,583
235,895
8,144
304,523
656,525
1,339,938
13,154 1,353,092
Total comprehensive income
Profit for the year
Other comprehensive income
Total comprehensive income
Transfer to statutory reserve
Acquisition of business with
non-controlling interests
Contributed capital (Note 16(a)
(iii))
Dividends
Balance at June 30, 2019
Total comprehensive income
Profit for the year
Other comprehensive income
Total comprehensive income
Liquidation of subsidiaries
(note 17)
Transfer to statutory reserve
Contribution from a non-
controlling shareholder
(note 17)
Dividends paid to a non-
controlling shareholder of
subsidiaries (note 17)
Balance at June 30, 2020
Note:
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,310
3,310
—
—
—
—
44,937
293,421
—
293,421
(44,937)
293,421
3,310
296,731
—
22,359
—
22,359
—
315,780
3,310
319,090
—
—
—
—
—
9,408
9,408
—
—
268
—
—
134,583
15,139
—
251,034
—
—
11,454
—
—
349,460
—
—
905,009
15,139
—
1,651,808
15,139
—
(7,482)
(7,482)
37,439 1,689,247
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,326
2,326
—
—
—
370,832
—
370,832
370,832
2,326
373,158
(4,234)
—
(4,234)
366,598
2,326
368,924
—
—
(2,364)
33,989
2,364
(33,989)
—
—
(3,713)
—
(3,713)
—
—
—
—
—
—
—
—
2,450
2,450
—
268
—
134,583
—
251,034
—
13,780
—
—
381,085 1,244,216
—
2,024,966
(21,145)
(21,145)
10,797 2,035,763
The Group has initially applied IFRS 15 and IFRS 9 as of July 1, 2018. Under the cumulative effect method, comparative information is not restated.
See note 4(m) and 4(c), respectively.
The Group has initially applied IFRS 16 as of July 1, 2019 using the modified retrospective approach. Under this approach, comparative information is
not restated. See note 3.
The accompanying notes are an integral part of these consolidated financial statements.
F-6
HAILIANG EDUCATION GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2018, 2019 AND 2020
(Amounts in thousands)
Note
2018
RMB
2019
RMB
2020
RMB
Cash flows from operating activities
Net profit for the year
Adjustments for:
Depreciation of owned property and equipment
Depreciation of right-of-use assets
Gain on disposal of affiliated entities
Gain on derecognition of a lease contract
Loss on the disposal of property and equipment
Amortization of intangible assets
Net foreign exchange loss/(gain)
Interest income
Interest on lease liabilities
Income tax expenses
Changes in operating assets and liabilities and other, net of effect of
acquisitions and disposals:
Other current assets and contract costs
Prepayment to third party suppliers
Trade and other payables due to third parties
Other payables due to related parties
Deferred revenue and contract liabilities
Cash generated from operating activities
Income tax paid
8(ii)
8(ii)/12(a)
8(iii)
12(b)
8(ii)
8(i)
8(i)/12(b)
9
230,902
315,780
366,598
113,128
—
(5,349)
—
371
446
324
(11,715)
—
66,288
132,026
—
—
—
342
1,494
(465)
(24,470)
—
108,713
132,654
30,485
—
(39)
691
2,694
(287)
(24,833)
4,363
121,924
394,395
533,420
634,250
(13,681)
2,157
30,416
18,000
165,583
(8,127)
—
94,885
(5,275)
186,731
596,870
(8,939)
801,634
(111,317)
1,415
—
46,771
7,699
(123,497)
566,638
(135,596)
Net cash generated from operating activities
587,931
690,317
431,042
Cash flows from investing activities
Interest received
Proceeds from sale of property and equipment
Purchase of property and equipment
Purchase of intangible assets
Purchase of right-of-use assets
Payments of restricted bank deposits
Collection of restricted bank deposits
Term deposits placed with a related party finance entity
Maturity of term deposits placed with a related party finance entity
Repayment of loans from a related party
Acquisition of subsidiaries or an affiliated entity, net of cash acquired
Net proceeds from disposal of affiliated entities, net of cash disposed
12(c)
20(a)(ii)
20(a)(ii)
20(a)(i)
10,677
1,015
(89,369)
—
—
—
—
(204,000)
401,000
—
(6,160)
17,982
20,592
—
(80,133)
(1,743)
—
(1,613)
—
(4,709,697)
3,526,603
12,412
(627)
—
25,271
737
(111,469)
(935)
(524,996)
—
1,289
(3,808,762)
4,279,255
11,850
—
—
Net cash generated from/(used in) investing activities
131,145
(1,234,206)
(127,760)
Cash flows from financing activities
Loans borrowed from a related party
Repayment of loans to a related party
Capital contributions
Payments to a non-controlling shareholder upon the liquidation of
subsidiaries
Capital element of lease rentals paid
Interest element of lease rentals paid
Dividends paid to a non-controlling shareholder of subsidiaries
20(a)(i)
20(a)(i)
17
17
12(c)
12(c)
17
7,609
—
11,000
—
—
—
—
—
—
139
—
—
—
(7,482)
—
(32,079)
2,450
(3,713)
(2,721)
(4,174)
(21,145)
Net cash generated from/(used in) financing activities
18,609
(7,343)
(61,382)
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Effect of movements in exchange rates on cash and cash equivalents
737,685
77,801
(2,866)
(551,232)
812,620
(704)
241,900
260,684
437
Cash and cash equivalents at the end of the year
812,620
260,684
503,021
Non-cash transaction:
Deemed capital contribution for awards paid to the Group’s teachers by
the controlling shareholder
16(a)(iii)
—
15,000
—
Net settlement of a loan made to a related party with a loan borrowed
from a related party
Payables for purchase of property and equipment
Note:
7,609
31,728
—
20,501
—
52,662
The Group has initially applied IFRS 15 and IFRS 9 as of July 1, 2018. Under the cumulative effect method, comparative information is not restated.
See note 4(m) and 4(c), respectively.
The Group has initially applied IFRS 16 as of July 1, 2019 using the modified retrospective approach. Under this approach, comparative information is
not restated. See note 3.
The accompanying notes are an integral part of these consolidated financial statements.
F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
1 Reporting entity and organization
Hailiang Education Group Inc. (the “Company”) is a holding company and is ultimately controlled by Mr. Hailiang Feng (“Mr. Feng”). The Company,
its subsidiaries and consolidated affiliated entities are collectively referred to as the “Group”.
The Group is principally engaged in the provision of education and management services in the People’s Republic of China (“PRC”). The Group mainly
offers private K-12 educational services in schools located in Zhuji, Zhejiang Province, Zhenjiang, Jiangsu Province and Lanzhou, Gansu Province,
China, after-school enrichment services, education and management services, educational training services and study trip services.
In February 2018, the Group disposed the ownership and controlling interest in Hailiang International Kindergarten and the kindergarten business unit of
Tianma Experimental School (“Tianma Kindergarten”) since the kindergartens had been at a loss and the Group decided to focus on providing
educational services for primary, middle and high school students. In June 2018, the Group disposed the ownership in Chuzhou Hailiang Foreign
Language School (“Chuzhou School”), which was mainly based on the Group’s business assessment in response to current market conditions.
In October 2018, the Group’s consolidated affiliated entity, Hailiang Education Management Group Co., Ltd. (“Hailiang Management”), acquired 51%
controlling interest in Zhenjiang Jianghe High School of Art Co., Ltd. (“Zhenjiang Jianghe High School of Art”) located in Jiangsu Province, which is a
for- profit high school specializing in the arts education.
The Group liquidated Jiangxi Haibo Education Management Co., Ltd. (“Haibo Education”) and Jiangxi Haibo Logistics Management Co., Ltd. (“Haibo
Logistics”) in March 2020 and April 2020, respectively.
As of June 30, 2020, the Company’s subsidiaries and consolidated affiliated entities are as follows:
Subsidiaries
Hailiang Education (HK) Limited (“Hailiang HK”)
Zhejiang Hailiang Education Consulting and
Services Co., Ltd. (“Hailiang Consulting”or
“WOFE”)
Ningbo Hailiang Education Logistics Management
Place and year of
establishment
Hong Kong, China, 2011
Legal
ownership
Principal activities
100% Investment holding
Zhejiang, China, 2011
100% Investment holding
Co., Ltd.
Zhejiang, China, 2017
100% Education and management service
Ningbo Haoliang Information Consulting Co., Ltd.
(“Ningbo Haoliang”)
Zhuji Nianxin Lake Hotel Co., Ltd.
Ningbo Hailiang Sports Development Co., Ltd.
Zhejiang, China, 2017
Zhejiang, China, 2017
Zhejiang, China, 2018
Zhuji Hailiang Supply Chain Management Co., Ltd. Zhejiang, China, 2018
Zhejiang, China, 2018
Zhuji Hailiang Logistics Service Co., Ltd.
Zhuji Hailiang After-school Service Co., Ltd.
Zhejiang, China, 2018
Hailiang Education International Studying Service
100% Education and management service
100% Hotel management service
100% Educational training service
Procurement and transportation
services
100%
100% Accommodation service
100% After-school enrichment service
Limited
Hongkong, China, 2018
100% Overseas study consulting service
Hangzhou Hailiang International Studying Service
Co., Ltd.
Hangzhou Hailiang Study Trip Co., Ltd
Pate’s-Hailiang International College Company
Limited
Hailiang International Education Group Pte. Ltd.
Zhejiang, China, 2018
Zhejiang, China, 2018
United Kingdom,2018
Singapore, 2020
100% Overseas study consulting service
100% Study trip service
100% Overseas study consulting service
100% Investment holding
Consolidated affiliated
entities
Hailiang Management (previously named “Zhejiang
Hailiang Education Investment Group Co., Ltd.”)
Zhejiang Hailiang Mingxin Education Technology
Co., Ltd.
Zhejiang, China, 2017
Hangzhou Hailiang Education Management Co., Ltd. Zhejiang, China, 2018
Hailiang Foreign Language School (“Foreign
Place and year of
establishment
Legal
ownership
Principal activities
Zhejiang, China, 2012
N/A*
Investment holding
After-school enrichment service and
overseas study consulting service
N/A*
N/A* Education and management service
Language”)
Zhejiang, China, 1995
N/A* K-12 educational services
Hailiang Experimental High School (“Experimental
High”)
Zhejiang, China, 2002
N/A* K-12 educational services
Tianma Experimental School (“Tianma
Experimental”)
Hailiang Primary School
Hailiang Junior Middle School
Hailiang Senior Middle School
Hailiang High School of Art (previously named
Zhejiang, China, 1995
Zhejiang, China, 2016
Zhejiang, China, 2016
Zhejiang, China, 2016
N/A* K-12 educational services
N/A* K-12 educational services
N/A* K-12 educational services
N/A* K-12 educational services
“Hailiang Art Middle School”)
Zhejiang, China, 2017
N/A* K-12 educational services
Zhuji Hailiang Foreign Language High School Co.,
Ltd. (“Zhuji Hailiang Foreign Language High
School”)
Zhejiang, China, 2018
N/A* K-12 educational services
Zhenjiang Jianghe High School of Art
Zhejiang Mingxin International Travel Co., Ltd.
Shaoxing Sihai International Travel Co., Ltd. (“Sihai
Jiangsu, China, 2018
Zhejiang, China, 2018
N/A* K-12 educational services
N/A* Study trip service
International Travel”)
Zhejiang, China, 2010
N/A* Study trip service
Zhuji Tianma Boya Educational Training Center
Co., Ltd.
Zhejiang, China, 2019
N/A* Educational training service
Hangzhou Mingyou Educational Training School
Co., Ltd.
Zhejiang, China, 2019
Lanzhou Hailiang Education Consulting Co., Ltd.
Lanzhou Hailiang Experimental School
Gansu, China, 2019
Gansu, China, 2020
Wuhu Hailiang Education Management Co., Ltd.
Wuhu Hailiang Experimental School
Anhui, China, 2020
Anhui, China, 2020
Jinhua Hailiang Education Technology Co., Ltd.
Wenzhou Hailiang Juxian Education Technology
Zhejiang, China, 2020
Co., Ltd. (“Juxian Technology”)
Hailiang Overseas Chinese School
Zhuji Yuesheng Management Consulting Co., Ltd.
Zhejiang, China, 2020
Zhejiang, China, 2020
Zhejiang, China, 2018
N/A* Educational training service
Accommodation and after-school
enrichment service
N/A*
N/A* K-12 educational services
Accommodation and after-school
N/A*
enrichment service
N/A* K-12 educational services
N/A*
Accommodation and after-school
enrichment service
Accommodation and after-school
N/A*
enrichment service
N/A* K-12 educational services
Investment holding
N/A*
* These entities are controlled by the Company pursuant to the contractual arrangements disclosed below in note 2(b).
F-8
2 Basis of preparation
(a) Statement of compliance
The consolidated financial statements of the Group as of June 30, 2019 and 2020 and for each of the years in the three-year period ended June 30,
2020 comprise the accounts of the Company, its subsidiaries and consolidated affiliated entities, in which all intercompany balances and
transactions have been eliminated. The consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRSs”) as issued by International Accounting Standards Board (“IASB”).
The consolidated financial statements were authorized for issue by the Company’s board of directors on October 14, 2020.
(b) Basis of presentation
Since laws of PRC prohibit foreign ownership of companies and institutions in compulsory educational services at primary and middle school
levels, and restrict foreign investment in educational services businesses at the high school level, the Group’s offshore holding companies are not
allowed to directly own and operate schools in China. Thus, Hailiang Consulting, the Company’s wholly owned PRC subsidiary, entered into a
series of contractual arrangements with Hailiang Management and the shareholder of Hailiang Management, Mr. Feng, on December 31, 2013.
These contractual agreements were subsequently amended on June 30, 2017, to revise the original contractual arrangements among the said parties
entered into in December 2013 in order to (i) reflect and accommodate additions of new affiliated entities of Hailiang Management since
December 2013 as well as any future changes thereto, and (ii) to allow for potential arrangements, if any and when applicable, to be entered into by
controlled affiliate(s) of Hailiang Consulting.
On February 8, 2018, Zhejiang Beize Group Co., Ltd. (“Beize Group”), a PRC company controlled by Mr. Feng, subscribed 0.1% registered capital
of Hailiang Management. Accordingly, on February 23, 2018, Hailiang Consulting, Hailiang Management, Mr. Feng and Beize Group entered into a
series of contractual arrangement (“Contractual Agreements”) to reflect the abovementioned increase of shareholders while the terms of these
agreements remained unchanged. The Contractual Arrangements include Call Option Agreement, Power of Attorney, Consulting Services
Agreement, and Equity Pledge Agreement.
The key terms of the Contractual Agreements are as follows:
Call Option Agreement: Pursuant to the Call Option Agreement, Mr. Feng and Beize Group unconditionally and irrevocably granted Hailiang
Consulting or its designee an exclusive option to purchase, to the extent permitted under PRC laws and regulations, in certain cases, including but
not limited to the cancellation of any of the other agreements under the contractual arrangements or liquidation or dissolution of Hailiang
Management, all or part of the equity interest in Hailiang Management at the lowest consideration permitted by PRC laws and regulations unless a
valuation of the equity is required by the PRC laws. Hailiang Consulting has the sole discretion to decide when to exercise the option, and whether
to exercise the option in part or in full. Without Hailiang Consulting’s written consent, Hailiang Management and Mr. Feng and Beize Group may
not sell, transfer, pledge or otherwise dispose of or create any encumbrance on any of Hailiang Management’s assets, businesses or equity interests
or merge with or acquire other businesses. Without obtaining Hailiang Consulting’s written consent, Hailiang Management may not enter into any
material contracts, incur any indebtedness or provide any loan or guarantee to a third party, or alter the nature or scope of its business. This
agreement may not be terminated by Hailiang Management or Mr. Feng or Beize Group, nor can it be terminated by Hailiang Consulting without
cause. Unless terminated, this agreement shall remain in full force and effect until Hailiang Management’s term of operations expires in April 2042.
Power of Attorney: Mr. Feng and Beize Group each executed an irrevocable Power of Attorney appointing Hailiang Consulting, or any person
designated by Hailiang Consulting, as their attorney-in-fact to (i) exercise on their respective behalf all their respective rights as shareholders of
Hailiang Management, including those rights under PRC laws and regulations and the articles of association of Hailiang Management, such as
appointing, replacing or removing directors, declaring dividends and making decisions on operational and financial matters, (ii) act as the
representative of Hailiang Management in its business operations, and (iii) unconditionally assign Mr. Feng and Beize’s shareholding rights to
Hailiang Consulting, including dividends or other benefits that Mr. Feng and Beize Group receive from Hailiang Management as shareholders.
F-9
Consulting Services Agreement. Pursuant to the Consulting Services Agreement between Hailiang Consulting, Hailiang Management and
Mr. Feng and Beize Group, as the shareholders of Hailiang Management, Hailiang Consulting (or its controlled affiliate) has the exclusive right to
provide comprehensive technical and business support services to Hailiang Management’s affiliated entities. In particular, such services include
developing curriculum, conducting market research and offering strategic business advice, providing information technology services, providing
public relations services, providing support for teacher hiring and training and providing other services that the affiliated entities may need from
time to time. Without the prior consent of Hailiang Consulting, none of Hailiang Management’s affiliated entities may accept such services provided
by any third party. Hailiang Consulting owns the exclusive intellectual property rights created as a result of the performance of this agreement.
Hailiang Management’s affiliated entities agree to pay annual service fees, calculated as a percentage of their total revenue, to Hailiang Consulting
(or its controlled affiliate). At the sole discretion of Hailiang Consulting, the percentage ratio for calculating the service fees may be adjusted from
time to time based on the complexity of the services provided, the time and resources committed by Hailiang Consulting (or its controlled affiliate)
and the commercial value of the services. The Consulting Services Agreement enables Hailiang Consulting (or its controlled affiliate) to charge an
annual service fee, the maximum of which equals the net income of Hailiang Management’s affiliated entities after deducting the mandatory
development reserve fund and other necessary costs prior to the payment of such service fees. As part of the Consulting Services Agreement,
Hailiang Management and Mr. Feng and Beize Group agree that they will not take any actions, such as incurring indebtedness, disposing of material
assets, materially changing the scope or nature of the business of Hailiang Management’s affiliated entities, disposing of their equity interests in
Hailiang Management’s affiliated entities, or paying dividends to Mr. Feng or Beize Group without the written consent of Hailiang Consulting. This
agreement may not be terminated by Hailiang Management or Mr. Feng or Beize Group, nor can it be terminated by Hailiang Consulting without
cause. Unless terminated, the agreement shall remain in full force and effect during the term of operations of Hailiang Management’s affiliated
entities.
Equity Pledge Agreement. Pursuant to the Equity Pledge Agreement between Hailiang Consulting, Mr. Feng and Beize Group, and Hailiang
Management, Mr. Feng and Beize Group unconditionally and irrevocably pledged all of their equity interests in Hailiang Management to Hailiang
Consulting to guarantee performance of the obligations of Hailiang Management’s affiliated entities under the Call Option Agreement, Power of
Attorney and Consulting Services Agreement , each as described above. Mr. Feng and Beize Group agreed that without prior written consent of
Hailiang Consulting, they shall not transfer or dispose of the pledged equity interests, commence any bankruptcy or liquidation process of Hailiang
Management or create or allow any encumbrance on the pledged equity interests. This agreement may not be terminated by Hailiang Management
or Mr. Feng or Beize Group, nor can it be terminated by Hailiang Consulting without cause. Unless terminated, the Equity Pledge Agreement
remains in full force and effect until all of the obligations of Hailiang Management’s affiliated entities under the Consulting Services Agreement
have been duly performed and related payments are duly paid. The pledge of equity interests in Hailiang Management has been duly registered with
the local branch of State Administration for Industry and Commerce of PRC (“SAIC”) and is effective upon such registration.
The Contractual Agreements provide the Company, through Hailiang HK and Hailiang Consulting, the following, (i) the power over the Affiliated
Entities; (ii) the exposure or rights to variable returns from its involvement with the Affiliated Entities; and (iii) the ability to affect those returns
through its power over the Affiliated Entities.
The Company has the power over the Affiliated Entities by virtue of the Power of Attorney, pursuant to which Hailiang Consulting has rights that
give it the current ability to direct the activities that significantly affect the returns of the Affiliated Entities. Hailiang Consulting has the rights to
appoint, replace or remove directors of Hailiang Management, as well as to make decisions on all operational and financial matters of the Affiliated
Entities.
F-10
The Company has the exposure or rights to variable returns from its involvement with the Affiliated Entities by virtue of the Power of Attorney and
Consulting Services Agreement. Hailiang Consulting’s returns from its involvement with the Affiliated Entities have the potential to vary as a result
of the performance of the Affiliated Entities. Pursuant to the Power of Attorney, Hailiang Consulting is the only party that can share in the
distributed and undistributed earnings of the Affiliated Entities. Pursuant to the Consulting Services Agreement, Hailiang Consulting has the
exclusive right to provide consulting, support and services to the Affiliated Entities in return for a fee that could be up to 100% of the profits of the
Affiliated Entities.
The Company has all decision-making rights over the Affiliated Entities to affect the amounts of its returns. By virtue of the Power of Attorney,
Hailiang Consulting is the principal and is the only party that has the decision-making authority on all relevant activities of the Affiliated Entities.
There are no substantive rights held by other parties that may affect or restrict Hailiang Consulting’s ability to direct the relevant activities of the
Affiliated Entities. The Power of Attorney is irrevocable and no party can remove Hailiang Consulting without cause. Hailiang Consulting also has
exposure to variability of returns of the Affiliated Entities from the Call Option Agreement.
The following financial statement balances and amounts of the affiliated entities were included in the Group’s consolidated financial statements
after the elimination of intercompany balances and transactions.
Total non-current assets
Total current assets*
Total assets
Total non-current liabilities
Total current liabilities
Total liabilities
2019
RMB
687,407
1,313,326
2,000,733
7,270
635,670
642,940
2020
RMB
957,020
1,153,200
2,110,220
23,064
554,943
578,007
* Intercompany receivables due from the WOFE and its subsidiaries have been eliminated upon consolidation.
Revenue
Profit before tax
Net profit
2018
RMB
2019
RMB
2020
RMB
1,110,470
221,057
177,088
1,087,054
202,157
152,713
1,049,023
224,618
171,970
The affiliated entities contributed an aggregate of 95.0%, 72.5% and 70.8% of the Group’s consolidated revenue for the years ended June 30, 2018,
2019 and 2020, respectively. As of June 30, 2019 and 2020, the affiliated entities accounted for an aggregate of 79.9% and 75.7%, respectively, of
the consolidated total assets, and 79.0% and 76.8%, respectively, of the consolidated total liabilities.
Creditors do not have recourse to the general credit of the Company for the liabilities of the respective consolidated affiliated entities. There is
currently no contractual arrangement that would require the Company to provide additional financial support to the consolidated affiliated entities.
As the Group is conducting certain businesses in the PRC through the consolidated affiliated entities, the Group may provide additional financial
support on a discretionary basis in the future, which could expose the Group to a loss.
(c) Risks and uncertainties
Risks and uncertainties of the Contractual Arrangements: The Company relies on the Contractual Agreements to control the Affiliated Entities.
However, these Contractual Arrangements may not be as effective as direct equity ownership in providing the Company with control over the
Affiliated Entities. Any failure by Hailiang Management, Mr. Feng or Beize Group, the nominee shareholders of Hailiang Management to perform
the obligations under the Contractual Agreements would have a material adverse effect on the financial position and financial performance of the
Company. Therefore, the enforceability of the Contractual Agreements represents a significant judgment and assumption. All the Contractual
Agreements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these agreements
would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in
the PRC is not as developed as some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit the
Company’s ability to enforce these Contractual Arrangements. In addition, if the legal structure and the Contractual Agreements were found to be in
violation of any existing or future PRC laws and regulations, the Company may be subject to fines or other legal or administrative sanctions.
F-11
In the opinion of management, based on the legal opinion obtained from the Company’s PRC legal counsel, the above Contractual Arrangements
are legally binding and enforceable and do not violate current PRC laws and regulations. However, there are uncertainties regarding the
interpretation and application of existing and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory
authorities will not ultimately take a contrary view to its opinion. If the current ownership structure of the Company and the Contractual
Arrangements are found to be in violation of any existing or future PRC laws and regulations, the PRC government could:
•
•
•
•
•
•
require the Company to restructure its ownership structure and operations in the PRC to comply with the existing or future PRC
laws and regulations;
revoke the Affiliated Entities’ business and operating licenses;
require the Affiliated Entities to discontinue or restrict operations;
block the Affiliated Entities’ websites;
impose additional conditions or requirements with which the Affiliated Entities may not be able to comply; or
take other regulatory or enforcement actions against the Affiliated Entities that could be harmful to the Affiliated Entities’ business.
If the imposition of any of these government actions causes the Company to lose its right to direct the activities of the Affiliated Entities or to lose
its right to the variable returns from its involvement with the Affiliated Entities and the Company is not able to restructure its ownership structure of
the Affiliated Entities (such as acquiring controlling equity interests), the Company would not be able to consolidate the financial results of the
Affiliated Entities in the Company’s consolidated financial statements. A substantial part of the assets, liabilities and results of operations reported
in the accompanying consolidated financial statements comprise the assets, liabilities and results of operations of the Affiliated Entities. In the
opinion of management, the likelihood of loss in respect of the Company’s current ownership structure or Contractual Arrangements is remote
based on current facts and circumstances.
The equity interests of Hailiang Management are legally held by Mr. Feng and Beize Group on behalf of the Company. Mr. Feng is also the ultimate
controlling shareholder of the Company. The Company cannot assure that Mr. Feng and Beize Group will act in the best interests of the Company.
The Company relies on Mr. Feng and Beize Group to comply with the terms and conditions of the Contractual Agreements. If Mr. Feng and Beize
Group are in breach of their contractual obligations under the Contractual Agreements and the Company cannot resolve any dispute between the
Company, Mr. Feng and Beize Group, the Company would have to rely on legal proceedings, which could result in disruption of the Company’s
business and subject the Company to substantial uncertainty as to the outcome of any such legal proceedings.
(d) Functional and presentation currency
The functional currency of each of the Group’s entities is the currency of the primary economic environment in which the entity operates (the
“functional currency”). The Company’s functional currency is the United States dollar (“USD”), whereas the functional currency of the PRC entities
of the Group is the Renminbi (“RMB”), respectively.
The Group’s presentation currency is RMB. All financial information presented has been rounded to the nearest thousands, except when otherwise
indicated.
F-12
(e) Use of estimates
The preparation of the consolidated financial statements in conformity with IFRSs requires management to make a number of estimates and
assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenue and expenses during the period. Significant items subject to such estimates
and assumptions include the consolidation of the Affiliated Entities, assumptions used to determine the fair value of the favorable lease acquired, the
useful lives and the recoverability of the carrying amounts of property and equipment and intangible assets (including goodwill), the collectability
of a loan made to a related party and cash and term deposits placed with a related party finance entity, income tax, the assessment of contingent
liabilities, and incremental borrowing rate to measure lease liabilities. These estimates are often based on complex judgments and assumptions that
management believes to be reasonable but are inherently uncertain and unpredictable. Actual results may differ from those estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which
the estimates are revised and in any future periods affected.
Assumptions and estimation uncertainties
Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial
year are included in the following notes:
•
•
•
•
•
•
Note 2 (c), risks and uncertainties (the enforceability of the Contractual Agreements)
Note 9, income tax expenses
Note 11, property and equipment
Note 12, Leases
Note 13, intangible assets and goodwill
Note 19(a), credit risk
Measurement of fair values
A number of the Group’s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and
liabilities.
Management regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or
pricing services, is used to measure fair values, then management assesses the evidence obtained from the third parties to support the conclusion that
such valuations meet the requirements of IFRSs, including the level in the fair value hierarchy in which such valuations should be classified.
When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair values are categorized into
different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows.
Level 1: inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level 2: inputs are inputs, other than quoted prices included within Level 1, those are observable for the asset or liability, either directly or
indirectly; and
Level 3: inputs are unobservable inputs for asset or liability.
If the inputs used to measure the fair value of an asset or a liability might be categorized in different levels of the fair value hierarchy, then the fair
value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire
measurement.
The Group recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.
Further information about assumptions made in measuring fair values is included in the following notes:
•
Note 19(d), fair value
F-13
3 Changes in accounting policies
The IASB has issued IFRS 16, Lease, and amendments to IFRSs that are first effective for the current accounting period of the Group. Of these, the
following developments are relevant to the Group’s financial statements:
(a)
IFRS 16, Leases
(b) IFRIC 23, Uncertainty over Tax Treatments
The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period.
The adoption of IFRIC 23 does not have any material impact on the Group’s financial statements.
(a) IFRS 16, Leases
IFRS 16 replaces IAS 17 Leases, IFRIC 4, Determining whether an Arrangement contains a Lease, SIC 15, Operating Leases - Incentives and SIC 27,
Evaluating the Substance of Transactions Involving the Legal Form of a Lease. It sets out the principles for the recognition, measurement, presentation
and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model to recognize and measure right-of-use assets
and lease liabilities, except for exemptions for short-term leases and leases of low-value items.
The Group applied IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognized as an
adjustment to the opening equity at July 1, 2019. Therefore, comparative information continues to be reported under IAS 17 and related interpretations.
Additionally, the disclosure requirements in IFRS 16 have not been applied to comparative information.
Further details of the nature and effect of the changes to previous accounting policies and the transition approach are set out below:
(i) Definition of lease
Previously, the Group determined at contract inception whether an arrangement was or contained a lease under IFRIC 4 Determining whether an
Arrangement contains a Lease. On transition to IFRS 16, the Group elected to apply the practical expedient to grandfather the assessment of which
transactions are leases. The Group applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases
under IAS 17 and IFRIC 4 were not reassessed for whether there is a lease under IFRS 16. Therefore, the definition of a lease under IFRS 16 was
applied only to contracts entered into or changed on or after July 1, 2019.
(ii) As a lessee - Leases classified as operating leases under IAS 17
The Group’ lease contracts are mainly for campuses and office space, which were previously classified as operating leases under IAS 17. Under IFRS
16, the Group recognizes right-of-use assets and lease liabilities for most of these leases – i.e. these leases are on-balance sheet. On transition, for these
leases, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group’s incremental borrowing rate as at
July 1, 2019 (see Note 3(a)(iii)). Right-of-use assets are measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or
accrued lease payments.
The Group used a number of practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17. In particular,
the Group:
–– did not recognize right-of-use assets and liabilities for leases for which the lease term ends within 12 months of the date of initial application;
–– did not recognize right-of-use assets and liabilities for leases of low value assets;
–– excluded initial direct costs from the measurement of the right-of-use asset at the date of initial application; and
–– used hindsight when determining the lease term.
(iii) Impact on financial statements
On transition to IFRS 16, the impact on transition is summarized below.
Right-of-use assets
Lease liabilities
- current
- non-current
July 1, 2019
RMB’000
411,115
411,090
16,754
394,336
For the impact of IFRS 16 on profit or loss for the fiscal year, see note 12(b). For the impact of IFRS 16 on the statement of cash flows, see notes 12(c).
For the details of accounting policies under IFRS 16 and IAS 17, see Note 4(o).
F-14
When measuring lease liabilities for leases that were classified as operating leases, the Group discounted lease payments using its incremental borrowing
rate at July 1, 2019. The incremental borrowing rate applied is 4.9%.
The lease liabilities at July 1, 2019 reconciled to the operating lease commitments at June 30, 2019 are as follows:
Operating lease commitments at June 30, 2019 as disclosed under IAS 17 in the Group’s consolidated financial statements
Less: lease payments in contracts under which the forecast of changes in an index or a rate is not needed
Less: discounted using the incremental borrowing rate at 4.9%
Present value of remaining lease payments, discounted using the incremental borrowing rate as at July 1, 2019
Lease liabilities recognized as at July 1, 2019
RMB’000
688,424
(87,393)
601,031
(189,941)
411,090
411,090
F-15
4
Significant accounting policies
The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial statements, and have been
applied by each of the entities comprising the Group.
(a) Basis of consolidation
(i) Business combinations
The Group accounts for business combinations (except entities acquired under common control) using the acquisition method when control is
transferred to the Group. The consideration transferred in the acquisition is generally measured at fair value, as well as the identifiable net assets
acquired. Any goodwill that arises is tested annually for impairment (see note 4(f)(ii)). Any gain on a bargain purchase is recognized in profit or loss
immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities.
Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the
definition of a financial instrument is classified as equity, then it is not re-measured and settlement is accounted for within equity. Otherwise, other
contingent consideration is re-measured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration
are recognized in profit or loss.
(ii) Subsidiaries and consolidated affiliated entities
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its
involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are
included in the consolidated financial statements from the date on which control commences until the date on which control ceases.
(iii)Entities acquired under common control
Entities acquired under common control or transactions accounted for in a manner similar to a pooling-of-interests (for example, a reorganization of
entities under common control) are accounted under the “book value” accounting, where the Company recognizes the assets acquired and liabilities
assumed using the book values of the transferor. When the consolidated financial statements are issued for a period that includes the date the
common control transaction occurred, the Company’s consolidated financial statements of all prior periods are retrospectively revised to the earliest
date presented.
(iv)Non-controlling interests
Non-controlling interests (“NCI”) are measured initially at the proportionate share of the acquiree’s identifiable net assets at the date of acquisition,
or at the fair value at the date of acquisition, on a transaction by transaction basis. Profit or loss and each component of other comprehensive income
(“OCI”) are attributed to the owners of the parent and to non-controlling interests in proportion to their ownership interests in the subsidiary. Losses
applicable to the non-controlling interests in a subsidiary (including components of OCI) are allocated to the non-controlling interests even if this
causes the non- controlling interests to have a deficit balance.
Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.
F-16
(b) Foreign currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates ruling at the dates of the
transactions.
Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rate at the reporting date.
Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated to the functional currency at the exchange rate
when the fair value was determined. Foreign currency differences are generally recognized in profit or loss. Non-monetary items that are measured
based on historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into RMB at the
exchange rates at the reporting date. The income and expenses of foreign operations are translated into RMB at the exchange rates at the dates of the
transactions. Foreign currency differences are recognized in other comprehensive income and accumulated in the translation reserve.
(c) Financial instruments
Policy applicable from July 1, 2018
The Group initially applied IFRS 9 at July 1, 2018. Under the transition methods chosen, the information presented for the year ended June 30, 2018
has not been restated.
(i) Recognition and initial measurement
Trade receivables and debt securities issued are initially recognized when they are originated. All other financial assets and financial liabilities are
initially recognized when the Group becomes a party to the contractual provisions of the instrument.
A financial asset (unless it is a trade receivable without a significant financing component) or financial liability is initially measured at fair value
plus, for an item not at fair value through profit or loss (“FVTPL”), transaction costs that are directly attributable to its acquisition or issue. A trade
receivable without a significant financing component is initially measured at the transaction price.
(ii) Classification and subsequent measurement Non-derivative financial assets
On initial recognition, a financial asset is classified as measured at: amortized cost; Fair value through other comprehensive income (“FVOCI”) –
debt investment; FVOCI – equity investment; or FVTPL.
Financial assets are not reclassified subsequent to their initial recognition unless the Group changes its business model for managing financial
assets, in which case all affected financial assets are reclassified on the first day of the first reporting period following the change in the business
model.
A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL:
- It is held within a business model whose objective is to hold assets to collect contractual cash flows; and
- Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interests on the principal amount
outstanding.
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On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in the
investment’s fair value on OCI. This election is made on an investment-by-investment basis.
All financial assets not classified as measured at amortized cost or FVOCI as described above are measured at FVTPL. This includes all derivative
financial assets. On initial recognition, the Group may irrevocably designate a financial asset that, otherwise meets the requirements to be measured
at amortized cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.
Non-derivative financial assets - Business model assessment
The Group makes an assessment of the objective of the business model in which a financial asset is held at a portfolio level because this best reflects
the way the business is managed and information is provided to management. The information considered includes:
- The stated policies and objectives for the portfolio and the operation of those policies in practice. These include whether management’s strategy
focused on earning contractual interest income, maintaining a particular interest rate profile, matching the duration of the financial assets to the
duration of any related liabilities or expected cash outflows or realizing cash flows through the sale of the assets;
- how the performance of the portfolio is evaluated and reported to the Group’s management;
-
the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are
managed;
- how managers of the business are compensated – e.g. whether compensation is based on the fair value of the assets managed or the contractual
cash flows collected; and
- The frequency, volume and timing of sales of financial assets in prior periods, the reasons for such sales and expectations about future sales
activity.
Transfers of financial assets to third parties in transactions that do not qualify for derecognition are not considered sales for this purpose, consistent
with the Group’s continuing recognition of the assets.
Financial assets that are held for trading or are managed and whose performance is evaluated on a fair value basis are measured at FVTPL.
Non-derivative financial assets - Assessment whether contractual cash flows are solely payments of principal and interest
For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as
consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time
and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin.
In assessing whether the contractual cash flows are solely payments of principal and interest, the Group considers the contractual terms of the
instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual
cash flows such that it would not meet this condition. In making this assessment, the Group considers:
-
-
contingent events that would change the amount or timing of cash flows;
terms that may adjust the contractual coupon rate, including variable-rate features;
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-
-
prepayment and extension features; and
terms that limit the Group’s claim to cash flows from specified assets (e.g. non-recourse features).
A prepayment feature is consistent with the solely payments of principal and interest criterion if the prepayment amount substantially represents
unpaid amounts of principal and interest on the principal amount outstanding, which may include reasonable additional compensation for early
termination of the contract.
Additionally, for a financial asset acquired at a discount or premium to its contractual par amount, a feature that permits or requires prepayment at
an amount that substantially represents the contractual par amount plus accrued (but unpaid) contractual interest (which may also include reasonable
additional compensation for early termination) is treated as consistent with this criterion if the fair value of the prepayment feature is insignificant at
initial recognition.
Non-derivative financial assets - Subsequent measurement and gains and losses
Financial assets at amortized cost are subsequently measured at amortized cost using the effective interest method. The amortized cost is reduced by
impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized in profit or loss. Any gain or loss on
derecognition is recognized in profit or loss.
Non-derivative financial liabilities – Classification, subsequent measurement and gains and losses
Financial liabilities are classified as measured at amortized cost or FVTPL. A financial liability is classified as at FVTPL if it is classified as held-
for- trading, it is a derivative or it is designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value and net gains
and losses, including any interest expense, are recognized in profit or loss. Other financial liabilities are subsequently measured at amortized cost
using the effective interest method. Interest expense and foreign exchange gains and losses are recognized in profit or loss. Any gain or loss on
derecognition is also recognized in profit or loss.
(iii) Derecognition
Non-derivative financial assets
The Group derecognizes a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to
receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are
transferred or in which the Group neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of
the financial asset.
The Group enters into transactions whereby it transfers assets recognized in its statement of financial position, but retains either all or substantially
all of the risks and rewards of the transferred assets. In these cases, the transferred assets are not derecognized.
Non-derivative financial liabilities
The Group derecognizes a financial liability when its contractual obligations are discharged or cancelled, or expire. The Group also derecognizes a
financial liability when its terms are modified and the cash flows of the modified liability are substantially different, in which case a new financial
liability based on the modified terms is recognized at fair value.
On derecognition of a financial liability, the difference between the carrying amount extinguished and the consideration paid (including any non-
cash assets transferred or liabilities assumed) is recognized in profit or loss.
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(iv) Offsetting
Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the
Group currently has a legally enforceable right to set off the amounts and it intends either to settle them on a net basis or to realize the asset and
settle the liability simultaneously.
Policy applicable before July 1, 2018
The Group classifies non-derivative financial assets into the following categories: financial assets at fair value through profit or loss, held-to-
maturity financial assets, loans and receivables and available-for-sale financial assets.
The Group classifies non-derivative financial liabilities into the following categories: financial liabilities at fair value through profit or loss and
other financial liabilities.
(v) Non-derivative financial assets and financial liabilities – Recognition and de-recognition
The Group initially recognizes loans and receivables and debt securities issued on the date when they are originated. All other financial assets and
financial liabilities are initially recognized on the trade date when the entity becomes a party to the contractual provisions of the instrument.
The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the
contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred, or it
neither transfers nor retains substantially all of the risks and rewards of ownership and does not retain control over the transferred asset. Any interest
in such derecognized financial assets that is created or retained by the Group is recognized as a separate asset or liability.
The Group derecognizes a financial liability when its contractual obligations are discharged or cancelled, or expire.
Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the
Group currently has a legally enforceable right to offset the amounts and intends either to settle them on a net basis or to realize the asset and settle
the liability simultaneously.
(vi) Non-derivative financial assets – Measurement
A financial asset is classified as at fair value through profit or loss if it is classified as held-for-trading or is designated as such on initial recognition.
Directly attributable transaction costs are recognized in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at
fair value and changes therein, including any interest or dividend income, are recognized in profit or loss.
Held-to-maturity financial assets are initially measured at fair value plus any directly attributable transaction costs. Subsequent to initial recognition,
they are measured at amortized cost using the effective interest method.
Loans and receivables are initially measured at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are
measured at amortized cost using the effective interest method.
Available-for-sale financial assets are initially measured at fair value plus any directly attributable transaction costs. Subsequent to initial
recognition, they are measured at fair value and changes therein, other than impairment losses and foreign currency differences on debt instruments,
are recognized in other comprehensive income and accumulated in the fair value reserve. When these assets are derecognized, the gain or loss
accumulated in equity is reclassified to profit or loss.
(vii) Non-derivative financial liabilities – Measurement
A financial liability is classified as at fair value through profit or loss if it is classified as held-for-trading or is designated as such on initial
recognition. Directly attributable transaction costs are recognized in profit or loss as incurred. Financial liabilities at fair value through profit or loss
are measured at fair value and changes therein, including any interest expense, are recognized in profit or loss.
Other non-derivative financial liabilities are initially measured at fair value less any directly attributable transaction costs. Subsequent to initial
recognition, these liabilities are measured at amortized cost using the effective interest method.
(d) Property and equipment
(i) Recognition and measurement
Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses (Note 4(f)).
Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of
materials and any other costs directly attributable to bringing the asset to a working condition for its intended use.
Construction in progress represents property under construction and equipment pending installation, and is stated at cost less impairment losses
(Note 4(f)). Capitalization of these costs ceases and the construction in progress is transferred to property and equipment when the asset is
substantially ready for its intended use. No depreciation is provided in respect of construction in progress.
Gains or losses arising from the retirement or disposal of an item of property and equipment are determined as the difference between the net
disposal proceeds and the carrying amount of the item and are recognized in profit or loss on the date of retirement or disposal.
(ii) Subsequent costs
The cost of replacing a component of an item of property and equipment is recognized in the carrying amount of the item if it is probable that the
future economic benefits embodied within the component will flow to the Group, and its cost can be measured reliably. The carrying amount of the
replaced component is derecognized. The costs of the day-to-day servicing of property, and equipment are recognized in profit or loss as incurred.
F-20
(iii) Depreciation
Items of property and equipment are depreciated from the date that they are available for use or, in respect of self-constructed assets, from the date
that the asset is completed and ready for use. Depreciation is calculated to write off the cost of items of property and equipment less their estimated
residual values using the straight-line basis over their estimated useful lives. Leasehold improvements are depreciated over the shorter of the lease
term or their useful lives. The estimated useful lives for the current and comparative years of significant property and equipment are as follows:
Motor vehicles
Furniture, fixtures and other equipment
Leasehold improvements
5 years
3~5 years
Shorter of the remaining lease terms or estimated useful
lives
Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
F-21
(e) Intangible assets and goodwill
(i) Goodwill
Goodwill is presented with intangible assets and represent the excess of:
(i)
the aggregate of the fair value of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of
the Group’s previously held equity interests in the acquiree; over
(ii) the net fair value of the acquiree’s identifiable assets and liabilities measured as at the acquisition date.
When (ii) is greater than (i), then this excess is recognized immediately in profit or loss as a gain on a bargain purchase.
Goodwill is stated at cost less accumulated impairment losses. Goodwill arising on a business combination is allocated to each cash-generating unit,
or groups of cash generating units, that is expected to benefit from the synergies of the combination and is tested annually for impairment (see note
4(f)).
On disposal of a cash generating unit during the year, any attributable amount of purchased goodwill is included in the calculation of profit or loss
on disposal.
(ii) Trademark
Trademark is not amortized when their useful life is assessed to be indefinite, which is reviewed annually to determine whether events and
circumstances continue to support the indefinite useful life assessment. The change in the useful life assessment from indefinite to finite is
accounted for prospectively from the date of change and in accordance with the policy for amortization of intangible assets with finite lives.
(iii)Other intangible assets
Other intangible assets that have finite useful lives are measured at cost less accumulated amortization and any accumulated impairment losses
(Note 4(f)). Other intangible assets include software, student relationships that arose from the acquisition of Tianma Experimental, favorable lease
that arose from the acquisition of Zhenjiang Jianghe High School of Art.
(iv) Amortization
Amortization of intangible assets with finite useful lives is charged to profit or loss on a straight-line basis over the assets’ estimated useful lives.
The following intangible assets with finite useful lives are amortized from the date they are available for use and their estimated useful lives are as
follows:
Student relationships
Favorable lease
Others
1~15 years
20 years
3 years
Amortization methods and useful lives are reviewed at each reporting date and adjusted if appropriate.
F-22
(f) Impairment
(i) Non-derivative financial assets
Policy applicable from July 1, 2018
The Group recognizes loss allowances for ECLs on financial assets measured at amortized cost.
The Group measures loss allowances at an amount equal to lifetime ECLs, except for the following, which are measured at 12-month ECLs:
- debt securities that are determined to have low credit risk at the reporting date; and
- other debt securities and bank balances for which credit risk (i.e. the risk of default occurring over the expected life of the financial instrument)
has not increased significantly since initial recognition.
Loss allowances for trade receivables are always measured at an amount equal to lifetime ECLs.
When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, the
Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative
and qualitative information and analysis, based on the Group’s historical experience and informed credit assessment and including forward-looking
information.
The Group assumes that the credit risk on a financial asset has increased significantly if it is more than 30 days past due.
The Group considers a financial asset to be in default when:
- the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realizing security (if
any is held); or
- the financial asset is more than 90 days past due.
Lifetime ECLs are the ECLs that result from all possible default events over the expected life of a financial instrument.
12- month ECLs are the portion of ECLs that result from default events that are possible within the 12 months after the reporting date (or a shorter
period if the expected life of the instrument is less than 12 months).
The maximum period considered when estimating ECLs is the maximum contractual period over which the Group is exposed to credit risk.
Measurement of ECLs
ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference
between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive).
ECLs are discounted at the effective interest rate of the financial asset.
F-23
Credit-impaired financial assets
At each reporting date, the Group assesses whether financial assets carried at amortized cost are credit-impaired. A financial asset is ‘credit-
impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.
Evidence that a financial asset is credit-impaired includes the following observable data:
–significant financial difficulty of the borrower or issuer;
–a breach of contract such as a default or being more than 90 days past due;
–the restructuring of a loan or advance by the Group on terms that the Group would not consider otherwise;
–it is probable that the borrower will enter bankruptcy or other financial reorganization; or
–the disappearance of an active market for a security because of financial difficulties.
Presentation of allowance for ECL in the statement of financial position
Loss allowances for financial assets measured at amortized cost are deducted from the gross carrying amount of the assets. For debt securities at
FVOCI, the loss allowance is charged to profit or loss and is recognized in OCI.
Policy applicable before July 1, 2018
A financial asset not classified as at fair value through profit or loss, including an interest in an equity-accounted investee, is assessed at each
reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if there is objective evidence of
impairment as a result of one or more events that occurred after the initial recognition of the asset, and that loss event had an impact on the
estimated future cash flows of that asset that can be estimated reliably.
Objective evidence that financial assets are impaired includes:
• default or delinquency by a debtor;
• restructuring of an amount due to the Group on terms that the Group would not consider otherwise;
• indications that a debtor or issuer will enter bankruptcy;
• adverse changes in the payment status of borrowers or issuers;
• the disappearance of an active market for a security because of financial difficulties; or
• observable data indicating that there is a measurable decrease in the expected cash flows from a group of financial assets.
The Group considers evidence of impairment for financial assets measured at amortized cost (other receivables) at both a specific asset and
collective level. All individually significant receivables are assessed for specific impairment. All individually significant receivables found not to be
specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Receivables that are not
individually significant are collectively assessed for impairment by grouping together receivables with similar risk characteristics.
In assessing collective impairment the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss
incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be
greater or less than suggested by historical trends.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the
present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in profit or loss and
reflected in an allowance account against receivables. When a subsequent event causes the amount of impairment loss to decrease, the decrease in
impairment loss is reversed through profit or loss.
F-24
(ii) Non-financial assets
The carrying amounts of the Group’s non-financial assets are reviewed at each reporting date to determine whether there is any indication of
impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and indefinite-lived intangible assets are tested
annually for impairment.
For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely
independent of the cash inflows of other assets or cash-generating units (“CGU”s). Goodwill arising from a business combination is allocated to
CGUs or groups of CGUs that are expected to benefit from the synergies of the combination.
The recoverable amount of an asset or CGU is the greater of its value in use and fair value less costs to sell. In assessing value in use, the estimated
future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of
money and the risks specific to the asset or CGU. An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its
estimated recoverable amount. Impairment losses are recognized in profit or loss.
An impairment loss in respect of goodwill is not reversed. In respect of other non-financial assets, impairment losses recognized in prior periods are
assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a
change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount
does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been
recognized.
(g) Contract costs
Contract costs are either the incremental costs of obtaining a contract with a customer or the costs to fulfil a contract with a customer which are not
capitalized as inventory, property and equipment or intangible assets.
Incremental costs of obtaining a contract are those costs that the Group incurs to obtain a contract with a customer that it would not have incurred if
the contract had not been obtained (e.g. an incremental sales commission). Incremental costs of obtaining a contract are capitalized when incurred if
the costs relate to revenue which will be recognized in a future reporting period and the costs are expected to be recovered. Contract costs are
amortized over the expected customer relationship period, generally from one to six years. Other costs of obtaining a contract are expensed when
incurred.
The Group applies the practical expedient in paragraph 94 of IFRS 15 and recognizes the incremental costs of obtaining contracts as an expense
when incurred if the amortization period of the assets that the Group otherwise would have recognized is one year or less from the initial recognition
of the asset.
Capitalized contract costs are stated at cost less accumulated amortization and impairment losses. Impairment losses are recognized to the extent
that the carrying amount of the contract cost asset exceeds the net of (i) remaining amount of consideration that the Group expects to receive in
exchange for the goods or services to which the asset relates, less (ii) any costs that relate directly to providing those goods or services that have not
yet been recognized as expenses. Amortization of capitalized contract costs is charged to “selling expenses” in the consolidated statements of profit
or loss and other comprehensive income when the revenue to which the asset relates is recognized.
F-25
(h) Contract liability
A contract liability is the obligation to provide services or goods to a customer for which the Group has received consideration from the customer. If
a customer pays the consideration before the Group provides services or goods to the customer, a contract liability is recognized when the payment
is made or the payment is due.
(i) Cash and cash equivalents
Cash and cash equivalents in the consolidated statements of financial position comprise cash at banks and on hand and cash equivalents with an
original maturity of three months or less that are readily convertible into known amounts of cash and which are subject to an insignificant risk of
changes in value and are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.
(j) Term deposits
Term deposits comprise highly liquid investments with original maturities of three months or greater than three months, but within twelve months,
which are held for the purpose of investment.
(k) Employee benefits
(i) Defined contribution plan
Obligations for contributions to defined contribution plans, pursuant to which certain pension benefits, medical care, employee housing fund are
provided to employees, are recognized as an employee benefit expense in profit or loss in the period during which services are rendered by
employees. Pursuant to the relevant labor rules and regulations in the PRC, the Group participates in defined contribution plans (the “Plans”)
organized by the relevant local government authorities for its eligible employees whereby the Group is required to make contributions to the Plans
at 25.3% to 38.64% of the deemed salary rate announced annually by the local government authorities.
The Group has no other material obligation associated with those Plans beyond the annual contributions described above.
(ii) Short-term employee benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.
A provision is recognized for the amount expected to be paid under short-term cash bonus or other short-term benefits if the Group has a present
legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.
F-26
(l) Provisions and contingent liabilities
A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it
is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected
future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The
unwinding of the discount is recognized as finance cost.
Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is
disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only
be confirmed by the occurrence or non-occurrence of one or more future events, are also disclosed as contingent liabilities unless the probability of
outflow of economic benefits is remote.
(m) Revenue recognition
Policy applicable from July 1, 2018
The Group adopted IFRS 15 using the cumulative effect method, with the effect of initially applying this standard recognised at the date of initial
application (i.e. July 1, 2018). Accordingly, the information presented for the year ended June 30, 2018 has not been restated.
Revenue is recognized when control of promised goods or services is transferred to the Group’s customers in an amount of consideration to which
the Group expects to be entitled to in exchange for those goods or services. The Group follows the five steps approach for revenue recognition
under IFRS 15: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction
price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the Group satisfies a
performance obligation. The primary sources of the Group’s revenues are as follows:
K-12 educational services
The Group’s revenue is principally derived from the provision of boarding school educational services to students. The Group offers basic
educational and international programs at the primary school, middle school and high school. The basic educational program provides curricula and
coursework mandated by the PRC government. The international program provides students the opportunity to earn both their PRC school diplomas
and to prepare for admissions to overseas educational institutions.
Tuition fees are generally collected before the beginning of each school year. Each school year is comprised of two semesters. Generally, the first
semester starts in September and ends in January next year. The second semester starts the following month in February and ends in June. Due to
the impact of COVID-19, the second semester of 2019/2020 school year was extended to July.
Each contract with a student in respect of the educational programs contains multiple performance obligations consisting of the provision of the
curriculum education services, accommodations, transportation services, other ancillary school activities, delivery of educational books and related
materials, and meal catering services. These performance obligations are distinct in the context of the contract. The consideration expected to be
received is allocated at contract inception among the performance obligations based on their stand-alone selling prices.
The Group generally utilizes the portfolio approach to estimate the amount of revenue to recognize for its contracts and groups contracts together
that have similar characteristics. Significant judgment is used to determine which contracts are grouped together to form a portfolio. The portfolio
approach is utilized only when the result of the accounting is not expected to be materially different than if applied to individual contracts.
During the year ended June 30, 2019, revenue attributable to the provision of the curriculum education services, accommodations, transportation
services and other ancillary school activities is recognized over time, based on a straight-line basis over the school year, as customers
simultaneously receive and consume the benefits of these services throughout the service period, and the control of curriculum education services,
accommodations, transportation services and other ancillary school activities is transferred evenly over the school year and all related performance
obligations could be fulfilled before each fiscal year end. During the year ended June 30, 2020, in response to the COVID-19 pandemic, between
February 2020 and April 2020, the Group temporarily stopped providing offline curriculum education services, accommodations and transportation
services to students, instead it offered online curriculum education services to students during the period. Revenue attributable to the curriculum
education services is recognized over the service period based on the estimated progress of courses delivery, and revenue attributable to the
accommodations and transportation services is recognized over time evenly over the period with service provided. The amount of considerations
relating to accommodations and transportation service to students between February and April, which were not provided, has been recorded as
refund liability in trade and other payables to third parties. Revenue attributable to the delivery of educational books and related materials, and meal
catering services is recognized at point in time, respectively, when the control of the educational books and related materials or underlying goods is
transferred to customers. The Group considers that it is acting as the principal in the transaction and recognizes revenue from sales of the
educational materials on a gross basis.
The Group considers contract modifications to exist when the parties to a contract approve a modification that either creates new or changes the
existing enforceable rights and obligations of the parties to the contract. The effect of a contract modification on a change in the transaction price is
accounted for as if it was a termination of existing contract and the creation of a new contract when the remaining goods or services are distinct
from those transferred on or before the date of the contract modification, and on a cumulative catch-up basis when the remaining goods or services
are not distinct.
F-27
Education and management services
The Group also provides education and management services to schools, including but not limited to branding, academic management, basic and
international education resources, school culture, admission, finance, human resources, procurement, IT, internal audit, property and logistics
management services.
The promised services in each education and management service contract are combined and accounted as a single performance obligation, as the
promised services in a contract are not distinct and are considered as a significant integrated service. The revenue is recognized on a straight-line
basis over the period of the education and management service, as customers simultaneously receive and consume the benefits of these services
throughout the service period. Invoices are usually settled within 30 days from billing date.
Educational training services
The Group provides various extracurricular courses to arouse students’ interest and broaden their both academic and nonacademic outlook.
Each contract of educational training service contains a single performance obligation. Educational training tuition fee is generally collected in
advance and is initially recorded as contract liability. Educational training tuition revenue is recognized over time, proportionately as the tutoring
sessions are delivered, as customers simultaneously receive and consume the benefits of these services throughout the service period. The Group is
the principal in providing educational training services as it controls such services before the services are transferred to the customer.
Study trip services
The Group provides overseas study tours and summer and winter camps to students.
Each contract of study strip service contains a single performance obligation. Study trip service fee is generally collected in advance and is initially
recorded as contract liability. Study trip service revenue is recognized on a straight-line basis over the period of the study trip services, as customers
simultaneously receive and consume the benefits of these services throughout the service period.
Others
Others mainly include revenue derived from overseas study consulting services and hotel management services. Revenue is recognized when
control of promised services is transferred to the customers in an amount of consideration to which the Group expects to be entitled to in exchange
for those services.
VAT collected from customers is excluded from revenue. The Company’s PRC subsidiaries and affiliated companies are subject to VAT. The
deductible input VAT balance is reflected in the other current assets, and VAT payable balance is recorded in the trade and other payables due to
third parties.
Policy applicable before July 1, 2018
Revenue is measured at the fair value of the consideration received or receivable under the contract or agreement. Where the outcome of a
transaction involving the rendering of services can be estimated reliably at the balance sheet date, revenue is recognized by reference to the stage of
completion based on the progress of work performed. Where the outcome cannot be estimated reliably, revenues are recognized to the extent of the
costs incurred that are expected to be recoverable, and an equivalent amount is charged to profit or loss as service cost; otherwise, the costs incurred
are recognized in profit or loss and no service revenue is recognized.
K-12 educational services
Tuition fees are allocated to multiple components based on their relative fair value. Revenue attributable to educational services is recognized on a
straight-line basis over the school year. Revenue attributable to educational materials and meal catering services are recognized upon the delivery of
the products and services to the students, which is when the risks and rewards have been transferred to the students. Tuition fees not yet earned are
recorded as deferred revenue.
Educational training services
Tuition is generally collected in advance and is initially recorded as deferred revenue. Revenue derived from providing educational training services
is recognized over the period of the courses delivered.
Education and management services, study trip services and others
Revenue is recognized upon the delivery progress of services.
F-28
(n) Government grants
Government grants are recognized in the statements of profit or loss and other comprehensive income when the grants are unconditional and
become receivable. Grants that compensate the Group for expenses incurred are recognized as income in profit or loss on a systematic basis in the
same periods in which the expenses are incurred. For government grant in the form of non-monetary assets, the Group records those assets and grant
at a nominal amount.
(o) Leases
Policy applicable from July 1, 2019
At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the
right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to
control the use of an identified asset, the Group uses the definition of a lease in IFRS 16.
(i) As a lessee
Right-of-use assets and lease liabilities
The Group recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost,
which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial
direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is
located, less any lease incentives received.
The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term, unless
the lease transfers ownership of the underlying asset to the Group by the end of the lease term or the cost of the right-of-use asset reflects that the
Group will exercise a purchase option. In that case the right-of-use asset will be depreciated over the useful life of the underlying asset, which is
determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if
any, and adjusted for certain remeasurements of the lease liability.
In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option,
or not exercise a termination option. Extension options and periods after termination options are only included in the lease term if the lease is
reasonably certain to be extended or not terminated.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the
Group’s incremental borrowing rate. The Group determines its incremental borrowing rate by obtaining interest rates from various external
financing sources and makes certain adjustments to reflect the terms of the lease and type of the asset leased.
Lease payments included in the measurement of the lease liability comprise the following:
–– fixed payments, including in-substance fixed payments;
–– variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;
–– amounts expected to be payable under a residual value guarantee; and
–– the exercise price under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the
Group is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Group is reasonably certain not
to terminate early.
The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease
payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a
residual value guarantee, if the Group changes its assessment of whether it will exercise a purchase, extension or termination option or if there is a
revised in-substance fixed lease payment.
When the lease liability is remeasured by discounting the revised lease payments using a revised discount rate to reflect changes to the lease
payments, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount
of the right-of-use asset has been reduced to zero.
Short-term leases and leases of low-value assets
The Group has elected not to recognize right-of-use assets and lease liabilities for leases of low-value assets and short-term leases. The Group
recognizes the lease payments associated with these leases in profit or loss on a straight-line basis over the lease term.
Policy applicable before July 1, 2019
(i) Leased assets
Leases of property and equipment that transfer to the Group substantially all of the risks and rewards of ownership are classified as finance leases.
The leased assets are measured initially at an amount equal to the lower of their fair value and the present value of the minimum lease payments.
Subsequent to initial recognition, the assets are accounted for in accordance with the accounting policy applicable to that asset.
Assets held under other leases are classified as operating leases and are not recognized in the Group’s statement of financial position.
(ii) Lease payments
Payments made under operating lease are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received
are recognized as an integral part of the total lease expenses over the term of the lease.
F-29
(p) Finance income
Finance income comprises interest income.
Foreign currency gains and losses are reported on a net basis as either finance income or finance expense depending on whether foreign currency
changes are in a net gain or net loss position.
Interest income is recognized using the effective interest method. The ‘effective interest rate’ is the rate that exactly discounts estimated future cash
payments or receipts through the expected life of the financial instrument to the gross carrying amount of the financial asset.
In calculating interest income, the effective interest rate is applied to the gross carrying amount of the asset (when the asset is not credit-impaired).
However, for financial assets that have become credit-impaired subsequent to initial recognition, interest income is calculated by applying the
effective interest rate to the amortized cost of the financial asset. If the asset is no longer credit-impaired, then the calculation of interest income
reverts to the gross basis.
F-30
(q) Income tax expense
Income tax expense comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets
and liabilities are recognized in profit or loss except to the extent that they relate to a business combination, or items recognized directly in equity or
in other comprehensive income.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and
any adjustment to tax payable in respect of previous years.
Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying
amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and
unused tax credits.
Deferred tax is not recognized for the following temporary differences: taxable temporary differences arising on the initial recognition of goodwill;
the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit,
and differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the
reversal and it is probable they will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will
reverse in the future.
The amount of deferred tax recognized is measured based on the expected manner of realization or settlement of the carrying amount of the assets
and liabilities, using tax rates enacted or substantively enacted at the reporting date.
Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax
assets are offset against current tax liabilities, and deferred tax assets are offset against deferred tax liabilities, if there is a legal enforceable right to
offset current tax assets and current tax liabilities, and in the case of current tax assets and liabilities, the Group intends either to settle on a net basis,
or to realize the asset and settle the liability simultaneously, or in the case of deferred tax assets and liabilities, if they relate to income taxes levied
by the same tax authority on the same taxable entity.
Deferred tax assets are recognized for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that
future taxable profits will be available against which they can be utilized. The carrying amount of a deferred tax asset is reviewed at each reporting
date and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be
utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.
In determining the amount of current and deferred tax, the Group takes into account the impact of uncertain tax positions and whether additional
taxes and interest may be due. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New
information may become available that causes the Group to change its judgment regarding the adequacy of existing tax liabilities; such changes to
tax liabilities will impact tax expense in the period that such determination is made.
(r) Earnings per share
Basic earnings per share (“basic EPS”) is calculated by dividing the profit by the weighted-average number of ordinary shares outstanding during
the period. Diluted earnings per share (“diluted EPS”) is similar to basic earnings per share but presents the dilutive effect on a per share basis of
potential ordinary shares (e.g. warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later.
F-31
(s) Related parties
For the purposes of these consolidated financial statements, a person or entity is considered to be related to the Group if:
(a) A person, or a close member of that person’s family, is related to the Group if that person:
(i) has control or joint control over the Group.
(ii)has significant influence over the Group; or of a parent of the Group.
(iii)is a member of the key management personnel of the Group or of a parent of the Group.
(b) An entity is related to the Group if any of the following conditions applies:
(i) the entity and the Group are members of the same Group (which means that each parent, subsidiary and fellow subsidiary is related to
the other).
(ii)one entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of the Group of which the
other entity is a member).
(iii)both entities are joint ventures of the same third party.
(iv)one entity is a joint venture of a third entity and the other entity is an associate of the third entity.
(v) the entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group.
(vi)the entity is controlled or jointly controlled by a person identified in (a).
(vii)a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or
of a parent of the entity).
(viii)the entity, or any member of a group of which it is a part, provides key management personnel services to the Group or to the Group’s
parent.
Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their
dealings with the entity.
F-32
(t) Possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended June 30, 2020
Up to the date of issue of these consolidated financial statements, the IASB has issued a number of amendments, new standards and interpretations
which are not yet effective for the year ended June 30, 2020 and which have not been adopted in these consolidated financial statements. These
include the following which may be relevant to the Group.
Amendments to IFRS 3, Definition of a Business
Amendments to IAS 1 and IAS 8, Definition of Material
Effective for
accounting periods
beginning on or after
January 1, 2020
January 1, 2020
For those other new standards with effective date beginning on January 1, 2020, the Group is in the process of making an assessment of what the
impact of these amendments is expected to be in the period of initial application.
Amendments to IFRS 3 provide additional guidance on the definition of a business. The amendments clarify that to be considered a business, an
acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the
ability to create output. A business can exist without including all of the inputs and processes needed to create outputs. The amendments remove the
assessment of whether market participants are capable of replacing any missing inputs or processes and continuing to produce outputs. Instead, the
focus is on whether acquired inputs and acquired substantive processes together significantly contribute to the ability to create outputs. The
amendments have also narrowed the definition of outputs to focus on goods or services provided to customers, investment income or other income
from ordinary activities. Furthermore, the amendments provide guidance to assess whether an acquired process is substantive and introduce an
optional fair value concentration test to permit a simplified assessment of whether an acquired set of activities and assets is not a business. The
Group expects to adopt the amendments prospectively from July 1, 2020. Since the amendments apply prospectively to transactions or other events
that occur on or after the date of first application, the Group will not be affected by these amendments on the date of transition.
Amendments to IAS 1 and IAS 8 provide a new definition of material. The new definition states that information is material if omitting, misstating
or obscuring it could reasonably be expected to influence decisions that the primary users of general-purpose financial statements make on the basis
of those financial statements. The amendments clarify that materiality will depend on the nature or magnitude of information. A misstatement of
information is material if it could reasonably be expected to influence decisions made by the primary users. The Group expects to adopt the
amendments prospectively from July 1, 2020. The amendments are not expected to have any significant impact on the Group’s financial statements.
F-33
5 Revenue and segment reporting
(i) Revenue
(a) Disaggregation of revenue from contracts with customers by major revenue stream is as follows:
K-12 educational services
Educational training services
Study trip services
Education and management services
Others
2018
RMB
1,093,933
36,395
13,791
19,021
6,208
1,169,348
2019
RMB
1,217,007
144,188
81,495
40,942
15,393
1,499,025
2020
RMB
1,308,211
53,700
56,408
48,317
15,963
1,482,599
(b) Disaggregation of revenue from contracts with customers by timing of revenue recognition is as follows:
Timing of revenue recognition
Revenue recognized over time
Revenue recognized point in time
(c) Contract liabilities
The following table provides information about contract liabilities from contracts with customers.
Current liabilities
Contract liabilities
Non-current liabilities
Contract liabilities
2019
RMB
2020
RMB
1,304,361
194,664
1,499,025
1,289,758
192,841
1,482,599
June 30, 2019 June 30, 2020
RMB’000 RMB’000
398,951
274,874
2,579
3,159
The contract liabilities primarily relate to payments received related to unsatisfied performance obligations for the K-12 educational services,
educational training services, study trip services and overseas study consulting services as of June 30, 2019 and 2020, included in current and
non-current contract liabilities in the Group’s consolidated statements of financial position.
The amount of RMB379,626 recognized in contract liabilities as of July 1, 2019 has been recognized as revenue for the year ended June 30,
2020.
F-34
(d) Transaction price allocated to the remaining performance obligation
The Group has applied the practical expedient in IFRS 15 such that the Group does not disclose the information about revenue that the Group
will be entitled to when it satisfies the remaining performance obligations under all sales contracts that had an original expected duration of one
year or less.
(ii) Segment reporting
The Group’s chief operating decision maker (“CODM”) has been identified as the chief executive officer of the Group, who reviews the financial
information of operating segments when making decisions to allocate resources and assess performance of the Group.
For the year ended June 30, 2018, the Group identified seven segments, including K-12 educational services, after-school enrichment services,
management consulting services, logistic services, educational training services, overseas study consulting services and hotel management services.
For the year ended June 30, 2019, the Group optimized its management structure for efficient resource allocation and high-quality management for
affiliated and managed schools. Thus, K-12 educational services, after-school enrichment services, management consulting services and logistic services
were merged into an operating segment “K-12 educational and management services” considering the integration of operation and the financial result of
the above business was reviewed as a whole. As a result, four operating segments were identified for the years ended June 30, 2019 and 2020, including
K-12 educational and management services, educational training services, study trip and overseas study consulting services and hotel management
services.
K-12 educational and management services and educational training services were identified as reportable segments, respectively. Study trip and
overseas study consulting services and hotel management services were aggregated as “others” since individually they do not exceed 10% quantitative
threshold of combined revenue. Segment information for the year ended June 30, 2018 has been restated to conform to the presentation for the years
ended June 30, 2019 and 2020.
(a) Segment results
The revenue and operating results by segments were as follows:
For the year ended June 30, 2018
K-12
educational
and
management
services
RMB
Educational
training
services
RMB
Others
RMB
Revenues from external customers
Inter-segment revenues
Total segment revenues
Segment income/ (loss) before income tax
Interest income
Depreciation and amortization
1,112,954
—
1,112,954
276,587
7,083
104,254
36,395
14,678
51,073
28,820
151
1
19,999
260
20,259
1,157
119
9,319
Unallocated* Consolidated
RMB
—
—
—
RMB
1,169,348
14,938
1,184,286
(9,374)
4,362
—
297,190
11,715
113,574
*Unallocated income (expenses) are primarily related to corporate administrative costs, interest income and other miscellaneous items that are not
allocated to individual segment.
For the year ended June 30, 2019
K-12
educational
and
management
services
RMB
Educational
training
services
RMB
Others
RMB
Unallocated*
RMB
Consolidated
RMB
Revenues from external customers
Inter-segment revenues
Total segment revenues
Segment income/ (loss) before income tax
Interest income
Depreciation and amortization
1,257,949
422
1,258,371
320,639
21,244
125,676
144,188
2,767
146,955
91,720
519
526
96,888
6,135
103,023
18,773
1,110
7,318
—
—
—
1,499,025
9,324
1,508,349
(6,639)
1,597
—
424,493
24,470
133,520
*Unallocated income (expenses) are primarily related to corporate administrative costs and other miscellaneous items that are not allocated to individual
segment.
F-35
For the year ended June 30, 2020
K-12
educational
and
management
services
RMB
Educational
training
services
RMB
Others
RMB
Unallocated*
RMB
Consolidated
RMB
Revenues from external customers
Inter-segment revenues
Total segment revenues
Segment income/ (loss) before income tax
Interest income
Interest on lease liabilities
Depreciation and amortization
1,356,528
1,129
1,357,657
480,095
23,142
3,968
157,612
53,700
6,360
60,060
17,122
154
326
1,947
72,371
11,818
84,189
405
322
69
6,274
—
—
—
1,482,599
19,307
1,501,906
(9,100)
1,215
—
—
488,522
24,833
4,363
165,833
*Unallocated income (expenses) are primarily related to corporate administrative costs and other miscellaneous items that are not allocated to individual
segment.
Note:
The Group has initially applied IFRS 15 and IFRS 9 as of July 1, 2018. Under the cumulative effect method, comparative information is not restated.
See note 4(m) and 4(c), respectively.
The Group has initially applied IFRS 16 as of July 1, 2019 using the modified retrospective approach. Under this approach, comparative information is
not restated. See note 3.
The Group’s CODM does not review the financial position by operating segments, thus no total assets or liabilities of each operating segment are
presented. All of the Group’s operations and customers are located in the PRC.
The Group’s customer base is diversified and no customer with whom transactions have exceeded 10% of the Group’s revenues.
The Group’s non-current assets are all located in mainland China. The geographical location of the Group’s non-current assets is based on the physical
location of the asset, in the case of property and equipment, the location of the operation to which they are allocated, in the case of intangible assets and
goodwill.
F-36
6 Other income, net
Government grants
Others
7
Employee benefit expenses
Wages and salaries
Contributions to defined contribution plans
8
Profit before tax
(i) Net finance income
Interest income
Others
Finance income
Interest on lease liabilities (Note 12(b))
Finance costs
Net finance income
2018
RMB
2019
RMB
2020
RMB
5,832
(2,143)
3,689
25,437
(337)
25,100
73,604
(828)
72,776
2018
RMB
2019
RMB
2020
RMB
388,238
52,898
441,136
533,505
64,118
597,623
514,267
67,239
581,506
2018
RMB
2019
RMB
2020
RMB
11,715
(324)
11,391
-
-
11,391
24,470
465
24,935
-
-
24,935
24,833
287
25,120
(4,363)
(4,363)
20,757
Interest income was mainly generated from deposits placed with a related party finance entity (Note 20(a)(ii)).
F-37
(ii) Expenses by nature
Employee benefit expenses (Note 7)
Students related cost
Transportation
Marketing and promotion
Depreciation of owned property and equipment (Note 11)
Depreciation of right-of-use assets (Note 12(a))
Utilities
Amortization of intangible assets (Note 13)
Operating lease charges
Others
Total cost of revenue, selling expenses and administrative expenses
2018
RMB
2019
RMB
441,136
147,571
36,110
24,019
113,128
-
26,100
446
33,290
70,787
892,587
597,623
199,478
49,137
24,490
132,026
-
26,162
1,494
35,639
58,518
1,124,567
2020
RMB
581,506
204,217
28,933
26,395
132,654
30,485
21,797
2,694
-
58,929
1,087,610
Students related costs are mainly comprised of costs for textbooks, uniforms, dining services, living accommodations and costs relating to
educational training services, study trip services and overseas study consulting services. For the year ended June 30, 2018, RMB14,263 of costs
relating to study trip services and overseas study consulting services have been combined with students related cost to conform the presentation of
the years ended June 30, 2019 and 2020.
The Group has initially applied IFRS 16 using the modified retrospective approach to recognize right-of-use assets relating to leases which were
previously classified as operating leases under IAS 17. After initial recognition of right-of-use assets at July 1, 2019, the Group as a lessee is
required to recognize the depreciation of right-of-use assets, instead of the previous policy of recognizing rental expenses incurred under operating
leases on a straight-line basis over the lease term. Under this approach, the comparative information is not restated. See note 3(a).
(iii) Gain on disposal of affiliated entities
On February 28, 2018, the Group entered into agreements with Hailiang Preschool Education Group Co., Ltd. (“Hailiang Preschool”),
controlled by Mr. Feng transferred the Tianma Kindergarten and the sponsorship and 100% equity interest in Hailiang Kindergarten. The
consideration of disposing Tianma Kindergarten and Hailiang Kindergarten was RMB1,666 and RMB20,049, respectively. On the disposal
date, the carrying amount of the net liabilities of Tianma Kindergarten was RMB17, and the carrying amount of the net assets of Hailiang
Kindergarten was RMB16,764. The Group recognized a gain of RMB1,683 and RMB3,285 on the disposal of Tianma Kindergarten and
Hailiang Kindergarten, respectively.
In addition, in June 2018, Hailiang Management entered into a Change of Operator Agreement and transferred the sponsorship and 100%
equity interest in Chuzhou School to Chuzhou Zhengxu Education Information Consulting Co., Ltd., a wholly owned subsidiary of Hailiang
Group Co., Ltd. (“Hailiang Group”). The consideration was RMB1,793, and the carrying amount of its net assets was RMB1,412 on disposal
date. The Group recognized a gain of RMB381 on the disposal.
The deals were not strategic shifts of the business and these transactions will not have major impact on the Group’s business, therefore the
transactions were not qualified as discontinued operation.
F-38
9
Income taxes
The Company is incorporated in the Cayman Islands and conducts its primary business operations through its subsidiaries and consolidated affiliated
entities in the PRC. It also has a wholly-owned subsidiary in Hong Kong. Under the current laws of the Cayman Islands, the Company is not subject to
tax on income or capital gains. Additionally, upon payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax will
be imposed.
Hong Kong
Under the Hong Kong tax laws, subsidiaries in Hong Kong are subject to the Hong Kong profits tax rate at 16.5% and they are exempted from income
tax on their foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends. A two-tiered profits tax rates regime
was introduced in 2018 where the first HK$2 million of assessable profits earned by a company will be taxed at half of the current tax rate (8.25%)
while the remaining profits will continue to be taxed at 16.5%. There is an anti-fragmentation measure where each group will have to nominate only one
company in the group to benefit from the progressive rates.
China
Under the Enterprise Income Tax (“EIT”) Law, domestic enterprises and Foreign Investment Enterprises (the “FIE”) are subject to a unified 25%
enterprise income tax rate, except for certain entities that are entitled to tax holidays or exemptions.
According to the Implementation Rules for the Law for Promoting Private Education (2004), or the 2004 Implementing Rules, private schools, whether
requiring reasonable returns or not, may enjoy preferential tax treatment. The 2004 Implementing Rules provide that the relevant authorities under the
State Council may introduce preferential tax treatments and related policies applicable to private schools requiring reasonable returns. According to the
current laws and regulations, preferential tax treatments and related policies applicable to private schools requiring reasonable returns have not been
introduced.
According to the Law on the Promotion of Private Education (“2016 Private Education Law”) effective as of September 1, 2017, private schools,
whether non-profit or for-profit, may enjoy preferential tax treatment, and non-profit private schools will be entitled to similar tax benefits as public
schools. In addition, taxation policies for for-profit private schools are still unclear as more specific provisions are not yet introduced. For Zhenjiang
Jianghe High School of Art and Zhuji Hailiang Foreign Language High School, two private schools incorporated in 2018, the Group elected to register
their statuses as for- profit. Accordingly, these two schools are subject to unified 25% enterprise income tax rate. For Lanzhou Hailiang Experimental
School, Wuhu Hailiang Experimental School and Hailiang Overseas Chinese School, three private schools incorporated during the year ended June 30,
2020, the Group elected to register their statuses as non- profit. Accordingly, these three schools are exempt from income taxes for the year ended
June 30, 2020.
Except for Zhenjiang Jianghe High School of Art, Zhuji Hailiang Foreign Language High School, Lanzhou Hailiang Experimental School, Wuhu
Hailiang Experimental School and Hailiang Overseas Chinese School, other affiliated schools within the Group are registered as private schools
requiring reasonable return under the 2004 Implementing Rules, the Group had not elected to change or re-register their statuses as of June 30, 2020.
Confirmed by the local tax authorities and the Company’s PRC counsel, the Company’s affiliated private schools other than Zhenjiang Jianghe High
School of Art and Zhuji Hailiang Foreign Language High School are exempt from income taxes for the years ended June 30, 2018, 2019 and 2020, and
all the Company’s affiliated private schools did not violate any tax laws or regulations and are exempt from income taxes for the years ended June 30,
2018, 2019 and 2020.
The PRC tax system is subject to substantial uncertainties. There can be no assurance that changes in PRC tax laws or their interpretation or their
application will not subject the Company’s PRC entities to substantial PRC taxes in the future.
Pursuant to the 2016 Private Education Law, sponsors of private schools may choose to register their schools as either non-profit or for-profit schools but
sponsors are not permitted to register for-profit schools that provide compulsory education services. Non-profit private schools will be entitled to the
same tax benefits as public schools, while for-profit private schools may be subject to 25% enterprise income tax rate. Up to June 30, 2020, no separate
policies, regulations or rules have been introduced by the authorities in this regard.
The Group evaluates whether it is probable that tax authority will accept the tax treatment for each uncertain tax position (including the potential
application of interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. As of
June 30, 2019, and 2020, the Group did not have any significant unrecognized uncertain tax positions, as the Group considers it is probable that taxation
authorities will accept the private schools requiring reasonable return being entitled to income tax exemption as non-profit private schools.
F-39
As of June 30, 2020, the Group had unused tax loss of RMB20,496 available for offset against future taxable profits, of which RMB3,501 will expire as
of June 30, 2023, RMB6,994 will expire as of June 30, 2024, RMB9,924 will expire as of June 30, 2025 (As of June 30, 2019, the Group had unused tax
loss of RMB14,417 available for offset against future taxable profits, of which RMB230 will expire as of June 30, 2021, RMB4,879 will expire as of
June 30, 2023, RMB9,241 will expire as of June 30, 2024 ). No deferred tax assets have been recognized in respect of such tax losses, because it is not
probable that future taxable profit against which the losses can be utilized will be available in the relevant tax jurisdiction.
Under the current EIT Law, dividends paid by an FIE to any of its foreign non-resident enterprise investors are subject to a 10% withholding tax. Thus,
the dividends, if and when payable by the Company’s PRC subsidiaries to their offshore parent entities, would be subject to 10% withholding tax. A
lower tax rate will be applied if such foreign non-resident enterprise investor’s jurisdiction of incorporation has signed a tax treaty or arrangement for the
avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income with China. Furthermore, pursuant to the applicable
circular and interpretations of the current EIT Law, dividends from earnings created prior to 2008 but distributed after 2008 are not subject to
withholding income tax. The Company has not provided for deferred income tax liabilities on the PRC entities’ undistributed earnings of RMB820,456
and RMB1,148,960 as of June 30, 2019 and 2020, respectively, because the Company controls the timing of the undistributed earnings and it is probable
that such earnings will not be distributed. The Company plans to reinvest those earnings in the PRC indefinitely in the foreseeable future.
(i)
Income tax expenses in the consolidated statements of profit or loss and other comprehensive income represents:
Current
—PRC income tax expenses
Deferred
—PRC income tax expenses
Income tax expenses for the year
2018
RMB
2019
RMB
2020
RMB
66,288
108,545
122,576
—
66,288
168
108,713
(652)
121,924
F-40
(ii) Reconciliation between the provision for income tax computed by applying applicable tax rates:
Reconciliation between the provision for income tax computed by applying applicable tax rates in fiscal year 2018, 2019 and 2020 to income
before income taxes and the actual provision for income tax was as follow:
Profit before tax
Notional tax on profit before taxation, calculated at the applicable rates in the tax
jurisdictions concerned
Effect of expenses that are not deductible in determining taxable profit
Effect of incomes that are not taxable in determining taxable profit
Unrecognized tax losses
Utilization of tax losses previously not recognized
Effect of income tax exemptions
Income tax expense recognized in profit or loss
(iii) Deferred tax assets and liabilities recognized:
2018
RMB
2019
RMB
2020
RMB
297,190
424,493
488,522
74,298
373
(956)
70
(46)
(7,451)
66,288
108,122
524
—
2,054
(486)
(1,501)
108,713
124,421
592
—
2,482
(964)
(4,607)
121,924
Deferred tax liabilities
At June 30, 2019
(Charged)/credited to profit or loss
At June 30, 2020
Deferred tax assets
At June 30, 2019
Credited to profit or loss
At June 30, 2020
Capitalized
contract
costs
Favorable
lease
Right-of-use
assets and
Lease liabilities
Total
(328)
(156)
(484)
—
—
—
(4,363)
240
(4,123)
—
—
—
—
—
—
—
568
568
(4,691)
84
(4,607)
—
568
568
F-41
10 Earnings per share
The calculation of basic EPS has been based on the following net profit attributable to the Company’s shareholders and weighted-average number of
ordinary shares outstanding.
The calculation of diluted EPS has been based on the following net profit attributable to the Company’s shareholders and weighted-average number of
ordinary shares outstanding after adjustment for the effects of all dilutive potential ordinary shares.
(i) Net profit attributable to the Company’s shareholders
Net profit attributable to the Company’s shareholders (basic and diluted)
(ii) Weighted-average number of ordinary shares
2018
RMB
2019
RMB
2020
RMB
222,588
293,421
370,832
Weighted average number of ordinary shares for basic EPS
Effects of dilution from warrants
Weighted average number of ordinary shares adjusted for the effect of dilution
2018
2019
2020
411,878,478
638,292
412,516,770
412,450,256 412,450,256
—
412,450,256 412,450,256
—
(iii) Earnings per share
Basic and diluted earnings per share
2018
2019
2020
0.54
0.71
0.90
F-42
11 Property and equipment
Cost
Balance at June 30, 2018
Additions
Acquisition through a business combination
Transferred from construction in progress
Transferred to intangible assets
Disposals
Balance at June 30, 2019
Additions
Transferred from construction in progress
Transferred to intangible assets (Note 13)
Disposals
Balance at June 30, 2020
Accumulated depreciation
Balance at June 30, 2018
Depreciation for the year
Disposals
Balance at June 30, 2019
Depreciation for the year
Disposals
Balance at June 30, 2020
Net book value
At June 30, 2019
At June 30, 2020
12 Lease
(a) Right-of-use assets
Motor
vehicles
RMB
Furniture,
fixtures and
other
equipment
RMB
Leasehold
improvement
RMB
Construction
in progress
RMB
Total
RMB
21,403
190
—
—
—
—
21,593
1,134
—
—
(68)
22,659
(14,017)
(3,669)
—
(17,686)
(1,354)
40
(19,000)
263,034
21,970
3,954
22,962
—
(5,236)
306,684
19,174
386
—
(3,943)
322,301
(111,198)
(62,121)
4,894
(168,425)
(59,229)
3,615
(224,039)
747,541
12,137
8,772
1,051
—
—
769,501
9,366
102,100
—
(2,011)
878,956
(233,212)
(66,236)
—
(299,448)
(72,071)
939
(370,580)
5,530
29,325
—
(24,013)
(2,438)
—
8,404
112,546
(102,486)
(223)
—
18,241
—
—
—
—
—
—
—
1,037,508
63,622
12,726
—
(2,438)
(5,236)
1,106,182
142,220
—
(223)
(6,022)
1,242,157
(358,427)
(132,026)
4,894
(485,559)
(132,654)
4,594
(613,619)
3,907
3,659
138,259
98,262
470,053
508,376
8,404
18,241
620,623
628,538
As of June 30, 2020, the Group leases office spaces and several campuses. The Group generally enters into lease agreements with initial terms of 3
to 20 years. Most of the lease agreements contain termination options that permit the Group to terminate the lease agreement early at any time
without cause, provided the Group notifies the lessor in writing within certain period in advance. The Group generally has extension options for the
leases. Such extension options are accounted for only when it is reasonably certain that the Group will exercise the options. The rent under lease
agreements is payable with fixed payments including a fixed escalation.
During the year ended June 30, 2020, the Group entered into certain long-term cooperative arrangements with local governments in areas where
some of the schools are located. Pursuant to such arrangements, the government agreed to provide the existing land, buildings and equipment free of
charge for the Group to carry out the cooperative education throughout the whole period of cooperative arrangements. The Group recognizes the
asset and the relevant grants at their nominal amounts, which is zero.
The movements in right-of-use asset are as follows:
Leasehold buildings held for own use, carried at depreciated cost:
As at July 1, 2019
Additions – new leases
Lease modification*
Depreciation charge for the year
Derecognition of a lease contract due to termination
As at June 30, 2020
2020
RMB
411,115
9,571
131,634
(30,485)
(4,226)
517,609
*Lease modification was related to the supplementary contracts with the lessor, Hailiang Education Investment Group Ltd. (“Hailiang Investment”)
regarding the lease of campuses in Zhuji, China signed on September 6, 2019.
F-43
(b) Amounts recognized in profit or loss
The analysis of expense items in relation to leases recognized in profit or loss is as follows:
2020 - Leases under IFRS 16
Depreciation charge of right-of-use assets
Interest on lease liabilities
Expense relating to short-term leases
Expense relating to leases of low-value assets, excluding short-term leases of low-value assets
Gain on derecognition of a lease contract due to termination
2019 – Operating leases under IAS 17
Lease expenses
2020
RMB
30,485
4,363
147
679
39
2019
RMB
35,639
Note: The Group has initially applied IFRS 16 using the modified retrospective approach and adjusted the opening balances at July 1,2019 to recognize
right-of-use assets relating to leases which were previously classified as operating leases under IAS 17. After initial recognition of right-of-use
assets at July 1, 2019, the Group as a lessee is required to recognize the depreciation of right-of-use assets, instead of the previous policy of
recognizing rental expenses incurred under operating leases on a straight-line basis over the lease term. Under this approach, the comparative
information is not restated. See note 3.
(c) Amounts recognized in statement of cash flows
Amounts included in the statement of cash flow for leases comprise the following:
Within operating cash flows
Within investing cash flows
Within financing cash flows
2020
RMB
826
524,996
6,895
532,717
In the statement of cash flow, the Group as a lessee is required to split rentals paid under capitalized leases into their capital element and interest
element. These elements are classified as financing cash outflows, similar to how leases previously classified as finance leases under IAS 17 were
treated, rather than as operating cash outflows, as was the case for operating leases under IAS 17. Although total cash flows are unaffected, the adoption
of IFRS 16 therefore results in a change in presentation of cash flows within the statement of cash flow.
On September 6, 2019, the Group entered into a series of supplementary contracts with Hailiang Investment regarding the school buildings and the
related facilities in three campuses in Zhuji, China from Hailiang Investment, pursuant to which, on September 12, 2019, the Group made lease
prepayments of RMB524,996 regarding the school buildings and the related facilities in three campuses in Zhuji, China from Hailiang Investment for
the remaining lease period until June 30, 2037. The Group classified the lease prepayments within investing cashflows.
(d) Lease liability
The carrying amount of lease liabilities and the movements during the year are as follows:
As at July 1, 2019
New leases
Lease modification
Accretion of interest recognized during the year
Payments
Derecognition of a lease contract due to termination
As at June 30, 2020
Analyzed into:
Current portion
Non-current portion
2020
RMB
411,090
9,571
131,634
4,363
(531,891)
(4,265)
20,502
1,753
18,749
The following table shows the remaining contractual maturities of the Group’s lease liabilities at the end of the current year and at the date of transition
to IFRS 16:
June 30, 2020
July 1, 2019
(Note)
Present
Total
Present
Total
Within 1 year
After 1 year but within 2 years
After 2 years but within 5 years
After 5 years
Less: total future interest expenses
Present value of lease liabilities
value of the
minimum
lease
payments
RMB
minimum
lease
payments
RMB
value of the
minimum
lease
payments
RMB
minimum
lease
payments
RMB
1,753
2,687
16,754
35,662
2,623
6,222
9,904
20,502
3,442
7,999
13,228
27,356
6,854
20,502
19,945
55,753
318,638
411,090
37,928
104,081
423,360
601,031
189,941
411,090
Note: The Group has initially applied IFRS 16 using the modified retrospective approach and adjusted the opening balances at July 1, 2019 to recognize
lease liabilities relating to leases which were previously classified as operating leases under IAS 17. Comparative information as at June 30, 2019
has not been restated. Further details on the impact of the transition to IFRS 16 are set out in note 3.
F-44
13 Intangible assets and goodwill
Cost
Balance at June 30, 2018
Addition
Acquisitions through a business combination
Transferred from construction in progress
Balance at June 30, 2019
Addition
Transferred from construction in progress
Balance at June 30, 2020
Accumulated Amortization
Balance at June 30, 2018
Amortization for the year
Balance at June 30, 2019
Amortization for the year
Balance at June 30, 2020
Net book value
At June 30, 2019
At June 30, 2020
Goodwill
Trademark relationship
RMB
RMB
RMB
lease
RMB
Others
RMB
Total
RMB
Student
Favorable
61,640
—
—
—
61,640
—
—
61,640
—
—
—
—
—
16,540
—
—
—
16,540
23
—
16,563
45,037
—
—
—
45,037
—
—
45,037
—
—
—
(4)
(4)
(44,470)
(260)
(44,730)
(162)
(44,892)
—
—
18,091
—
18,091
—
—
18,091
—
(640)
(640)
(961)
(1,601)
—
1,743
—
2,438
4,181
729
223
5,133
—
(594)
(594)
(1,567)
(2,161)
123,217
1,743
18,091
2,438
145,489
752
223
146,464
(44,470)
(1,494)
(45,964)
(2,694)
(48,658)
61,640
61,640
16,540
16,559
307
145
17,451
16,490
3,587
2,972
99,525
97,806
Student relationship, goodwill and trademark with indefinite useful lives arose from the acquisition of Tianma Experimental on July 1, 2009.
F-45
Goodwill and trademark with indefinite useful lives
For the purpose of impairment testing, goodwill and trademark are allocated to a group of CGUs which represents the lowest level within the Group at
which the goodwill and trademark are monitored for internal management purpose. The recoverable amount of goodwill is estimated based on
discounted cash flows forecast, which is based upon a combination of long term trends, industry forecasts and in house estimates.
For the purpose of impairment testing, the carrying amounts of goodwill and trademark are allocated to the business relating to Tianma Experimental,
which is the lowest level for which the assets are monitored for internal management purpose. The aggregated carrying amounts of goodwill and
trademark with indefinite useful lives are as follows:
Goodwill
Trademark with indefinite useful lives
Total
F-46
2019
RMB
2020
RMB
61,640
16,540
78,180
61,640
16,540
78,180
The recoverable amount of this CGU was based on value in use, which was estimated using discounted cash flow projections.
The key assumptions used in the estimation of the recoverable amount are set out below. The values assigned to the key assumptions represented
management’s assessment of future trends in the relevant industry and were based on historical data from both external and internal sources.
In percent
Discount rate
Revenue growth rates over the next five fiscal years
Terminal value growth rate
2018
2019
2020
15%
3%
3%
15.5%
3%~5%
3%
15.5%
5%
3%
The discount rate was a pre-tax measure estimated based on the historical industry average weighted-average cost of capital, with a possible debt
leveraging of 0%.
The cash flow projections included the following specific estimates for five years and a terminal growth rate thereafter. The terminal growth rate was
determined based on management’s estimate, consistent with the assumption that a market participant would make.
•
•
Revenue growth was projected considering the average growth levels experienced over the past five years and the estimated student
headcount and tuition growth for the next five years. It was assumed that tuition would increase in line with forecast inflation over the next
five years.
Growth of cost of sales, selling expenses and administrative expenses were projected considering inflation and estimated student headcount
for the next five years.
The estimated recoverable amount of the CGU exceeded its carrying amount as of June 30, 2018, 2019 and 2020, respectively.
The recoverable amount of trademark is determined using the relief from royalty method, which was based on pre-tax cash flow projections for 5 years
based on financial budgets approved by management, including royalty rate of 3% (2019 and 2018: 3%), terminal growth rate of 3% (2019 and 2018:
3%) and the applicable discount rate of 15.5% (2019:15.5% and 2018: 15%). Management determined the expected growth rates and the operating
results based on the past performance and its expectations in relation to market developments. The discount rate used is pre-tax and reflects specific risks
relating to the Company.
Based on management’s assessment results, there was no impairment of goodwill and trademark as of and for the years ended June 30, 2018, 2019 and
2020.
Student relationship
The amortization of student relationship is included in “selling expenses”. No impairment loss of the student relationship intangible asset was recognized
in the statements of profit or loss and other comprehensive income for the years ended June 30, 2018, 2019 and 2020.
Favorable lease
Favorable lease arose from the acquisition of Zhenjiang Jianghe High School of Art in October 2018. The amortization was recognized in “cost of
revenue” over the period of leasing.
F-47
14 Other current assets
Prepayments
Trade receivables
Contract costs
Advances to employees
Deductible VAT and prepaid income tax
Other receivables due from third parties
Total
2019
RMB
2020
RMB
15,476
—
9,360
3,687
1,091
2,092
31,706
3,560
4,475
8,742
1,952
14,988
3,006
36,723
Contract costs represented the capitalized sales commissions relate to the acquisitions of new K-12 educational service contracts, which would be
amortized over the expected student relationship period. The amount of capitalized costs recognized in profit or loss during the years ended June 30,
2019 and 2020 was RMB13,052 and RMB12,980, respectively.
The current portion of capitalized sales commissions that is expected to be amortized within one year is included in “other current assets” and the non-
current portion is included in “contract costs”.
15 Cash and cash equivalents
(i) Cash and cash equivalents comprise:
Cash on hand
Cash at bank
Cash held at a related party finance entity
Cash held at other financial institutions
Total
Note
20(b)
RMB
2019
RMB
2020
309
36,827
223,548
—
260,684
—
8,546
489,027
5,448
503,021
As of June 30, 2019 and 2020, the cash and cash equivalents of the Group denominated in RMB amount to RMB248,438 and RMB498,144,
respectively.
F-48
(ii) Reconciliation of liabilities and equity arising from financing activities
Liabilities
Equity
Loans due to
related parties
RMB
Lease liability
RMB
(Note 18)
(Note 12(d))
Contributed
capital
RMB
(Note 16(a)
(iii))
Non-controlling
interests
RMB
(Note 17)
Total
RMB
At July 1, 2017
99,603
—
235,895
—
335,498
Changes from financing cash flows:
Proceeds from a loan from a related party
Capital contribution
Total changes from financing cash flows
Other change:
Net settlement of a loan made to a related party with
a loan borrowed from a related party
Transfer of equity interests in subsidiaries under
common controlled by ultimate shareholder to the
Company and NCI
Net profit and total comprehensive income
attributable to NCI
Total other changes
7,609
—
7,609
—
—
—
—
11,000
11,000
—
—
—
7,609
11,000
18,609
(7,609)
—
—
—
(7,609)
—
—
(11,000)
4,840
(6,160)
—
(7,609)
—
—
—
(11,000)
8,314
13,154
8,314
(5,455)
At June 30, 2018 and July 1, 2018
99,603
—
235,895
13,154
348,652
Changes from financing cash flows:
Capital contribution
Dividends paid to NCI
Total changes from financing cash flows
Other changes:
Deemed capital contribution for awards paid to the
Group’s teachers by the controlling shareholder
Acquisition of business with NCI
Net profit and total comprehensive income
attributable to NCI
Total other changes
—
—
—
—
—
—
—
—
—
—
—
—
—
—
At June 30, 2019
Impact on initial application of IFRS 16 (Note 3)
At July 1, 2019
99,603
—
99,603
—
411,090
411,090
Changes from financing cash flows:
Repayment of a loan to a related party
Capital contribution
Payments to NCI upon liquidation of subsidiaries
Capital element of lease rentals paid
Interest element of lease rentals paid
Dividends paid to NCI
Total changes from financing cash flows
Other changes:
New leases
Interest on lease liabilities
Termination of a lease contract
Lease modification
Leases prepayments
Net loss and total comprehensive loss attributable to
NCI
Total other changes
At June 30, 2020
(32,079)
—
—
—
—
—
(32,079)
—
—
—
—
—
—
—
—
—
—
(2,721)
(4,174)
—
(6,895)
9,571
4,363
(4,265)
131,634
(524,996)
—
(383,693)
139
—
139
—
(7,482)
(7,482)
139
(7,482)
(7,343)
15,000
—
—
15,000
251,034
—
251,034
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9,408
22,359
31,767
37,439
—
37,439
—
2,450
(3,713)
—
—
(21,145)
(22,408)
—
—
—
—
—
(4,234)
(4,234)
15,000
9,408
22,359
46,767
388,076
411,090
799,166
(32,079)
2,450
(3,713)
(2,721)
(4,174)
(21,145)
(61,382)
9,571
4,363
(4,265)
131,634
(524,996)
(4,234)
(387,927)
67,524
20,502
251,034
10,797
349,857
Note: The Group has initially applied IFRS 16 using the modified retrospective method and adjusted the opening balances at July 1, 2019 to recognize
lease liabilities relating to leases which were previously classified as operating leases under IAS 17. See notes 3 and 12(d).
F-49
16 Capital and reserve
(a) Share capital and share premium
At June 30 par value USD0.0001-authorized
-issued and outstanding
All ordinary shares rank equally.
(i) Ordinary shares
2019
1,000,000,000 1,000,000,000 1,000,000,000
2020
2018
412,450,256
412,450,256
412,450,256
Holders of these shares are entitled to dividends as declared from time to time and are entitled to one vote per share at general meetings of the Company.
In March 2012, in connection with a private placement by a third-party investor, the Board resolved to increase the authorized ordinary shares from
360,000,000 shares to 365,000,000 shares. Concurrently, 5,000,000 newly authorized ordinary shares were issued to Maxida International Company
Limited (“Maxida”). The Company received cash proceeds of USD3,000 (equivalent to RMB18,867) from Maxida in exchange for 1.4% equity interest
in the Company.
In December 2014, the Board resolved to increase the authorized ordinary shares from 365,000,000 shares to 1,000,000,000 shares.
In July 2015, the Company completed an IPO in the US market, in which the Company issued 2,858,000 American depositary shares, or ADSs (equal to
45,728,000 ordinary shares), at a public offering price of US$7 per ADS. Each ADS represents 16 ordinary shares, par value USD0.0001 per share.
In September 2015, the Company granted 480,000 restricted shares to a consultant as a consideration for its service rendered. Per valuation of the
restricted shares, the fair value of 480,000 shares is USD229 (equivalent to RMB1,459).
On December 15, 2017, all the warrants issued to the underwriter were exercised into 77,641 ADSs (equal to 1,242,256 ordinary shares).
(ii) Share premium
Share premium relates to the following issuances of the Company’s ordinary shares:
(1) Share deficit of RMB236 for ordinary shares issued by the Company to Mr. Feng for nil consideration upon the Company’s
incorporation in 2011.
(2) The capital contributed by Maxida in excess of the par value of the ordinary shares issued in the private placement of RMB18,864 in
2012.
(3) The gross proceeds of RMB122,369 received from IPO deducting the issuance cost of RMB9,551 and par value of ordinary shares
issued to public of RMB28, with net proceed of RMB112,790 in July, 2015.
(4) The fair value of warrants issued to the underwriter of RMB1,707 upon completion of IPO. On December 15, 2017, all the warrants
issued to the underwriter were exercised into 77,641 ADSs (equal to 1,242,256 ordinary shares).
(5) The fair value of restricted shares issued to consultant in September, 2015, in excess of par value of ordinary shares issued of
RMB1,459.
F-50
(iii) Contributed capital
Contributed capital represented the following capital transactions with the Company’s shareholders:
(1) Upon completion of the IPO restructure in October 2014, contributed capital arose from below transactions:
- The contributions of the registered capital of 100% of Foreign Language and 60% of Experimental High made by Mr. Feng totaling
RMB82,800.
- The consideration of RMB110,000 made by Mr. Feng for the acquisition of 80% equity interest in Tianma Experimental.
- The share capital of HKD10 (equivalent to RMB9) contributed by Mr. Feng upon incorporation of Hailiang HK.
- RMB32,906 arising from acquisition of non-controlling interests. In November 2011, Mr. Feng acquired 40% registered capital equity
interest in Experimental High and 20% registered capital equity interest in Tianma Experimental from Mr. Meng, the non-controlling
shareholder of both schools for cash considerations of RMB35,000 and RMB6,000, respectively. Upon the acquisitions, Mr. Feng
became the sole sponsor of Experimental High and Tianma Experimental and owned 100% registered capital equity interest in each of
the two schools. The non-controlling interests’ proportionate shares of the net identifiable assets of Experimental High and Tianma
Experimental on the date of the acquisitions were RMB28,790 and RMB4,116, respectively. The aggregate cash consideration of
RMB41,000 paid by Mr. Feng for the acquisitions was recorded in contributed capital. The difference between the cash consideration
paid of RMB41,000 and the total carrying amount of the non-controlling interests of RMB32,906, which amounted to RMB8,094, was
charge to deduct contributed capital within equity.
- The capital contributions of RMB139,980 paid by Mr. Feng upon incorporation of Hailiang Management.
- Cash consideration of RMB139,800 paid to Mr. Feng for the transfer of 100% registered capital equity interest in each of the Foreign
Language, Experimental High and Tianma Experimental.
(2) Capital contribution of RMB10,000 from Hailiang Investment, a related party controlled by Mr. Feng, through waiving liability during the year
ended June 30, 2017.
(3) Capital contribution of RMB139 from Beize Group through subscribing 0.1% registered capital of Hailiang Management during the year ended
June 30, 2019.
(4) Deemed capital contribution of RMB15,000 from Mr. Feng, through payment of awards to the Group’s outstanding teachers to recognize their
outstanding performance and contributions during the year ended June 30, 2019.
F-51
(b) Reserves
(i) Statutory reserve
As stipulated by relevant PRC laws and regulations, the Company’s subsidiaries and affiliated entities in the PRC must take appropriations
from after-tax profit to non-distributive funds. These reserves include general reserve and the development reserve.
The general reserve requires annual appropriation 10% of after-tax profits at each year-end until the balance reaches 50% of the PRC
company’s registered capital. Other reserve is set aside at the Company’s discretion. These reserves can only be used for general enterprise
expansion and are not distributable as cash dividends. The general reserve as of June 30, 2019 and 2020 was RMB43,024 and RMB63,239,
respectively.
Each of the schools is required to appropriate 25% of its after-tax profits to a non-distributable education development reserve, which could
only be used for school construction, maintenance and upgrade of educational equipment in accordance with the Law of Promoting Private
Education. The development reserve is restricted net assets of the schools which are un-distributable to the Company in the form of
dividends or loans. The education development reserve as of June 30, 2019 and 2020 was RMB306,436 and RMB317,846, respectively.
(ii) Translation reserve
The translation reserve comprises foreign currency differences arising from the translation of the financial statements of the Company and
its subsidiaries into the presentation currency.
(c) Dividends
No dividends were declared and paid by the Company during the years ended June 30, 2018, 2019 and 2020.
17 Non-controlling interests
Non-controlling interests (“NCI”) represent 44% non-controlling interests in Haibo Education and Haibo Logistics, which are held by Nanchang
Baishu Education Group (“Nanchang Baishu”), a related party of the Group before October 30, 2019, 49% non-controlling interests in Zhenjiang
Jianghe High School of Art and 49% non-controlling interests in Juxian Technology, which are held by third parties. In the fiscal year of 2020, the
Group ceased the operation of Haibo Education and Haibo Logistics. The following table summarizes the changes in non-controlling interests
from June 30, 2019 through June 30, 2020.
Balance at June 30, 2019
Capital contribution from NCI
Net loss and total comprehensive loss attributable to
NCI
Dividends paid to NCI
Payments to NCI upon liquidation of Haibo
Education and Haibo Logistics
Balance at June 30, 2020
Haibo
Education
RMB
Haibo
Logistics
RMB
Zhenjiang
Jianghe High
School of Art
RMB
Juxian
Technology
RMB
Total
RMB
6,165
—
(679)
(3,475)
(2,011)
—
8,424
—
(27)
—
—
8,397
—
2,450
(50)
—
—
2,400
37,439
2,450
(4,234)
(21,145)
(3,713)
10,797
22,850
—
(3,478)
(17,670)
(1,702)
—
F-52
18 Trade and other payables
Trade payables
Accrued payroll
Other taxes payable
Advances from students
Deposits
Others
Trade and other payables due to third parties
Loans due to related parties
Amounts due to related parties
Other payables due to related parties
Total
The Group’s exposure to liquidity risk related to trade and other payables is disclosed in Note 19.
F-53
2019
RMB
2020
RMB
20,556
130,744
21,167
14,529
8,314
22,812
218,122
99,603
35,142
134,745
18,350
137,445
5,585
61,358
9,585
32,547
264,870
67,524
68,521
136,045
352,867
400,915
19 Financial risk management and fair values
The Group has exposure to the following risks from financial instruments:
•
•
•
credit risk
liquidity risk
market rate risk
This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and
managing risk, and the Group’s management of capital.
The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework.
(a) Credit risk
The Group’s credit risk is primarily attributable to cash at bank, cash and term deposits held at a related party finance entity, loans receivable due from a
related party. The carrying amount of financial assets represents the maximum credit exposure. The Group does not provide any other guarantees which
would expose the Group to credit risk.
Cash at bank
All of the Group’s cash at bank is held by third-party financial institutions located in the PRC and Hong Kong SAR. The bank deposits with financial
institutions in the PRC are insured by the government authority for up to RMB500. The bank deposits with financial institutions in the Hong Kong SAR
are insured by the government authority for up to HK$500. The Company has not experienced any losses in uninsured bank deposits and does not
believe that it is exposed to any significant risks on cash held in bank accounts. To limit exposure to credit risk, the Company primarily places bank
deposits with large financial institutions in the PRC and Hong Kong SAR with acceptable credit rating.
Cash and term deposits placed with a related party finance entity
As of June 30, 2020, the Group had cash of RMB489,027 and term deposits of RMB916,601 at Hailiang Group Finance Co., Ltd. (“Hailiang Finance”),
which represented 92% of the Group’s consolidated current assets as of June 30, 2020.
Hailiang Group, an entity controlled by Mr. Feng, established a finance group, namely, Hailiang Finance, which is licensed to provide intra-group
financing arrangements within Hailiang Group’s subsidiaries and other related party companies. The establishment of Hailiang Finance was approved by
the China Banking Regulatory Commission (“CBRC”) as a non-banking financial institution to solely facilitate Hailiang Group’s internal financing
transactions including issuing loans to and accepting cash deposits from its subsidiaries and other related party entities. Pursuant to the license issued by
CBRC, Hailiang Finance is not permitted to make any loans or accept any deposits from any parties that are unrelated to Hailiang Group, except for
inter-bank transactions with other unrelated commercial banks.
Since September 2014, Hailiang Group and Mr. Feng provided an annual guarantee on the Group’s deposits with Hailiang Finance, and the guarantee
was renewed annually. Based on one most recent PRC credit rating organizations, Hailiang Group has been rated AA+ which indicates strong ability to
make payments on debts as they become due.
Management believes that the credit risk on the Group’s cash of RMB489,027 and term deposits of RMB916,601 is low considering Hailiang Group’s
guarantee and credit rating.
To reduce its credit exposure with Hailiang Finance, the Group provided an annual budget for the aggregate amount deposits with Hailiang Finance as
RMB 2,500,000 based on current policy effective since September 2019.
F-54
Loans receivable due from a related party
The Company received an annual guarantee from a related party, incorporated in British Virgin Island and controlled by Hailiang Group, on the
Company’s loan due from Hong Kong Leonit Limited (“Leonit”), a related party controlled by Hailiang Group. The Group considers that the credit risk
arising from the loan is significantly mitigated by the guarantee.
(b) Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by
delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient
liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the
Group’s reputation.
The following are the contractual maturities of financial liabilities, which are based on contractual undiscounted cash flows and the earliest date the
Group can be required to pay:
Non-derivative financial instruments
Trade and other payables due to third parties
Other payables due to related parties
Non-derivative financial instruments
Trade and other payables due to third parties
Other payables due to related parties
Lease liabilities (Note 12(d))
Carrying
amount
RMB
Contractual
cash flow
RMB
264,870
136,045
20,502
264,870
136,045
27,356
Carrying
amount
RMB
218,122
134,745
June 30, 2019
Contractual
cash flows 1 year or less
RMB
RMB
218,122
134,745
218,122
134,745
June 30, 2020
1-2 years 2-5 years
RMB
RMB
more than
5 years
RMB
—
—
3,442
—
—
7,999
—
—
13,228
1 year or
less
RMB
264,870
136,045
2,687
Note: The Group has initially applied IFRS 16 using the modified retrospective approach and adjusted the opening balances at July 1, 2019
to recognize lease liabilities relating to leases which were previously classified as operating leases under IAS 17. Lease liabilities include
amounts recognized at the date of transition to IFRS 16 in respect of leases previously classified as operating leases under IAS 17 and
amounts relating to new leases entered into during the year. Under this approach, the comparative information is not restated. See note 3.
(c) Market rate risk
Interest rate risk
The interest rates of cash held in bank and cash and term deposits placed with Hailiang Finance ranged from 0.30% to 2.1% per annum for the years
ended June 30, 2019 and 2020, respectively. The Group does not have any fixed-rate or variable-rate interest bearing financial instrument other than cash
and cash equivalent, and term deposits placed with a related party finance entity.
A change of 10 basis point in interest rate would not be expected to have a significant impact on the Group’s financial condition or results of operations.
(d) Fair value
The carrying amounts of financial assets and liabilities approximate their respective fair values as of June 30, 2019 and 2020, respectively, due to their
short- term maturities.
As of June 30, 2019 and 2020, the Group did not have financial instruments carried at fair value.
During the years ended June 30, 2019 and 2020, there were no transfers between Level 1 and Level 2, or transfers into or out of Level 3. The Group’s
policy is to recognize transfers between levels of fair value hierarchy as at the end of the reporting period in which they occur.
Further, the fair value disclosure of lease liabilities is not required for the year ended June 30, 2020.
F-55
(e) Capital management
The Group actively and regularly reviews and manages its capital structure to maintain a balance between higher shareholders’ return that might be
possible with higher levels of borrowings, and makes adjustments to the capital structure in light of changes in economic conditions.
The Group is not subject to externally imposed capital requirements.
F-56
20 Related parties transactions
Except for related party transactions disclosed in other notes of the financial statements, the Group entered into the following significant transactions
with related parties during the years ended June 30, 2018, 2019 and 2020.
(a) The significant related party transactions are summarized as follows:
Loans borrowed from a related party
Repayment of loans to a related party
Repayment of loans from a related party
Interest income from deposits placed with a related party finance entity
Net deposits/(withdrawals) of cash at a related party finance entity
Term deposits placed with a related party finance entity
Maturity of term deposits placed with a related party finance entity
Rental expenses
Purchase of Right-of-use assets
Interest on lease liabilities
Payments of lease liabilities
Payments of expenses by the Group on behalf of related parties
Payments of expenses by related parties on behalf of the Group
Collection of fees by the Group on behalf of related parties
Purchase of leasehold improvement from a related party
Purchase of food products from related parties
Education and management service provided to related parties
Other service and product provided to related parties
Service provided by related parties
Gains from disposal of affiliated entities to a related party
Acquisition of subsidiaries
Dividends paid to a non-controlling shareholder of subsidiaries
Payments to a non-controlling shareholder upon the liquidation of subsidiaries
Capital contribution
(b) The significant related party balances are summarized as follows:
Note
(i)
(i)
(i)
(ii)
(ii)
(ii)
(ii)
(iii)
(iii)
(iii)
(iii)
(iv)
(iv)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xi)
(xi)
(xii)
2018
RMB
2019
RMB
7,609
—
—
11,464
679,018
204,000
401,000
32,486
—
—
—
9,401
4,612
47,070
29,098
38,323
16,831
416
6,884
5,349
6,160
—
—
—
2020
RMB
—
(32,079)
11,850
24,798
265,479
3,808,762
4,279,255
—
529,406
3,624
529,377
11,465
3,458
34,649
106,835
74,116
12,241
3,464
19,957
—
200
21,145
3,713
—
2020
RMB
76,646
489,027
916,601
136,045
3,628
1,338
2,290
—
—
12,412
24,313
(517,185)
4,709,697
3,526,603
33,814
—
—
—
10,312
2,731
46,453
29,669
68,963
33,222
3,254
23,263
—
—
7,482
—
15,000
2019
RMB
91,674
223,548
1,387,094
134,745
—
—
—
Other receivables due from related parties
Cash held at a related party finance entity
Term deposits placed with a related party finance entity
Other payables due to related parties
Lease liabilities
- Current portion
- Non-current portion
Note
(i)(ii)(iii)(iv)(vii) (viii)
(ii)
(ii)
(i)(iii)(iv)(v)(vi)(ix)
(iii)
The Company’s majority shareholder, Mr.Feng owns or controls other non-educational services businesses (“Related Party Companies”) that from
time to time require short-term financing to support their business operations and working capital needs. After considering the cash on hand and
forecasted cash flows to fund its operations, the Group issued financing to Related Party Companies during the periods presented.
F-57
(i) On October 31, 2016, the Company provided a one-year-period interest-free loan to Leonit, which is controlled by Hailiang Group,
amounting to USD14,500 (equivalent to RMB98,229) (“USD Loan”). On the same date, Hailiang Consulting borrowed a one-year-
period interest-free loan from Hailiang Group amounting to RMB99,603 (“RMB Loan”). On October 9, 2017, the Company agreed to
extend the loan with Leonit, pursuant to which the USD Loan’s due date was extended to due on October 30, 2018 with renewal
option if both parties agree. Similarly, Hailiang Group and Hailiang Consulting agreed to a loan extension pursuant to which the RMB
Loan was due on October 30, 2018 with renewal option if both parties agree. Per the agreement among the four parties mentioned
above, when the USD Loan is repaid, the RMB Loan will similarly be repaid.
On December 5, 2017, the Company borrowed a one-year-period interest-free loan from Leonit amounting to USD1,150 (equivalent
to RMB7,609). The loan of USD1,150 was offset against the USD loan per the agreement between the Company and Leonit.
During the year ended June 30, 2019, Leonit settled part of the USD loan in cash, amounting to USD 1,820 (equivalent to
RMB12,412) to the Company.
During the year ended June 30, 2020, Leonit settled part of the USD loan in cash, amounting to USD1,700 (equivalent to
RMB11,850) to the Company, while Hailiang Consulting repaid part of the RMB loan, amounting to RMB 32,079 thousand to
Hailiang Group.
As of June 30, 2019 and 2020, the USD loan made to Leonit of USD11,530 (equivalent to RMB79,265) and USD9,830 (equivalent to
RMB69,591) was included in “Other receivables due from related parties”, respectively, and the RMB loan borrowed from Hailiang
Group of RMB99,603 and RMB67,524 was included in “Other payables due to related parties”, respectively.
(ii) As of June 30, 2019 and 2020, the Group has cash held at a related party finance entity of RMB223,548 and RMB489,027,
respectively. During the year ended June 30, 2019, net amount of RMB517,185 were withdrawn from Hailiang Finance. During the
years ended June 30, 2018 and 2020, net amount of RMB679,018 and RMB265,479 were placed with Hailiang Finance, respectively.
The cash held at a related party finance entity is held for the purpose of meeting short-term cash commitments, such as to pay for the
Group’s operating expenses at any time.
During the years ended June 30, 2018, 2019 and 2020, term deposits of RMB204,000, RMB4,709,697 and RMB3,808,762 were
placed with Hailiang Finance, and RMB401,000, RMB3,526,603 and RMB4,279,255 were matured, respectively. The term deposits
are held for investment purpose and can be withdrawn prior to their maturity without incurring significant penalties. Such amounts
have been presented as investing activities in the statements of cash flows.
As of June 30,2019 and 2020, the Group has term deposits with maturities ranging from three months to one year amounting to
RMB1,387,094 and RMB916,601 that are placed at Hailiang Finance, respectively.
The interest income from the deposits during the years ended June 30, 2018, 2019 and 2020 amounted to RMB11,464, RMB24,313
and RMB24,798, respectively. Interest receivable as of June 30, 2019 and 2020 amounted to RMB4,916 and RMB4,478, respectively,
which was included in “Other receivables due from related parties”.
(iii) The Group leases the school buildings and the related facilities in three campuses in Zhuji, China from Hailiang Investment, a related
party controlled by Mr.Feng. In addition, Haibo Education and Haibo Logistics lease the office space and warehouse from Nanchang
Hongtou Property Management Co., Ltd, (“Nanchang Hongtou”), a related party before October 30, 2019 and owned by Mr.Honggen
Min, who is the controlling shareholder of Nanchang Baishu. The Group also leases some office spaces from Hangzhou Hailiang Real
Estate Co., Ltd, (“Hailiang Real Estate”), a related party controlled by Mr.Feng. The leasing terms and rental amounts are as follows:
Rental from Hailiang Investment
Rental from Nanchang Hongtou
Rental from Hailiang Real Estate
Total
Leasing Period
October 11, 2017 ~ June 30,
2037
July 1, 2017 ~ June 30, 2022
June 11, 2018 ~ September 30,
2025
2018
RMB
2019
RMB
30,965
1,521
—
32,486
31,504
1,580
730
33,814
The Group has initially applied IFRS 16 using the modified retrospective approach and adjusted the opening balances at July 1,2019
to recognize right-of-use assets relating to leases which were previously classified as operating leases under IAS 17. After initial
recognition of right-of-use assets at July 1, 2019, the Group as a lessee is required to recognize the depreciation of right-of-use assets,
instead of the previous policy of recognizing rental expenses incurred under operating leases on a straight-line basis over the lease
term. Under this approach, the comparative information is not restated. See note 3.
On September 6, 2019, the Group entered into a series of supplementary contracts with Hailiang Investment regarding the school
buildings and the related facilities in three campuses in Zhuji, China from Hailiang Investment, pursuant to which, on September 12,
2019, the Group purchased right-of-use assets of RMB524,996 regarding the school buildings and the related facilities in three
campuses in Zhuji, China from Hailiang Investment for the remaining lease period until June 30, 2037. Regarding other lease
contracts with Hailiang Investment and Hailiang Real Estate, the Group initially recognized right-of-use assets of RMB4,410 as at
July 1, 2019 or the commencement date of the lease. During the year ended June 30, 2020, the Group recognized interest expense of
RMB3,624 on lease liabilities and settled lease liabilities of RMB529,377 relating to the above lease contracts with Hailiang
Investment and Hailiang Real Estate.
On September 6, 2019, the Group terminated the lease contract with Nanchang Hongtou due to the liquidation of Haibo Education
and Haibo Logistics.
As of June 30, 2020, the above unsettled balances of RMB3,628 were recognized in “Lease liabilities”.
F-58
(iv) During the years ended June 30, 2018, 2019 and 2020, the Group paid expenses, which mainly include staff related expenses and
other miscellaneous expenses, of RMB 9,401, RMB10,312 and RMB11,465 respectively on behalf of the related parties. Such amount
is receivable on demand, and the related parties repaid RMB8,794, RMB10,007 and RMB10,083 to the Group during the years ended
June 30, 2018, 2019 and 2020, respectively.
During the years ended June 30, 2018, 2019 and 2020, the related parties paid expenses, which mainly include staff related expenses
and other miscellaneous expenses, of RMB4,612, RMB2,731 and RMB3,458 respectively on behalf of the Group. Such amount is
due and payable on demand, and the Group repaid RMB4,124, RMB4,663 and RMB2,759 to the related parties during the years
ended June 30, 2018, 2019 and 2020, respectively.
During the years ended June 30, 2018, 2019 and 2020, the Group collected amounts of RMB47,070, RMB46,453 and RMB34,649,
mainly on behalf of Ming Kang Hui supermarkets, which are operated by Zhejiang Ming Kang Hui Food Co.,Ltd., a related party
controlled by Mr.Feng. Such amount is due and payable on demand, and the Group repaid RMB48,428, RMB47,429 and RMB32,502
to related parties during the years ended June 30, 2018, 2019 and 2020, respectively.
The above unsettled balances were included in “Other payables due to related parties” and “Other receivables due from related
parties” as of June 30, 2019 and 2020, respectively.
(v) The Group entered into a series of leasehold improvement contracts with Heng Zhong Da Construction Limited Company (“Heng
Zhong Da”), a company over which Mr.Feng has significant influence, for the leasehold improvement of classroom buildings, dining
halls, student dormitories.
During the years ended June 30, 2018, 2019 and 2020, the Group purchased leasehold improvement service from Heng Zhong Da of
RMB29,098, RMB29,669 and RMB106,835 respectively.
As of June 30, 2019 and 2020, the above unsettled balances of RMB11,260 and RMB42,033 were recognized in “Other payables due
to related parties”.
(vi) The Group purchased food products from Zhejiang Ming Kang Hui E-Commerce Co.,Ltd. and Ming Kang Hui Ecological
Agriculture Group Co.,Ltd. (collectively referred as “Ming Kang Hui”), two companies controlled by Mr.Feng, amounting to
RMB38,323 and RMB68,963 during the years ended June 30, 2018 and 2019, respectively. The Group purchased food products from
Ming Kang Hui Ecological Agriculture Group Co.,Ltd. and Zhuji Hailiang Food Co.,Ltd., a related party controlled by Mr.Feng,
totally amounting to RMB74,116 during the year ended June 30, 2020.
As of June 30, 2019 and 2020, the above unsettled balances of RMB18,516 and RMB11,387 were recognized in “Other payables due
to related parties”.
(vii) Education and management service provided to related parties are as follow:
Education and management service provided to managed schools
Service provided to Ming Kang Hui
Total
F-59
2018
RMB
2019
RMB
2020
RMB
12,275
4,556
16,831
28,344
4,878
33,222
8,818
3,423
12,241
Pursuant to the strategic cooperation agreement signed with Hailiang Group and Hailiang investment, the Group provided education
and management services to Hailiang Kindgarten, Zhuji Hailiang Jinshan Kindgarten and Tianma Kindgarten, which were controlled
by Hailiang Group, and other 19 schools controlled by Hailiang Investment, including Xiantao No.1 Middle School, Xinchang Nanrui
Experimental School, Feicheng Hailiang Foreign Language school, Jinhua Hailiang Foreign Language School and 15 schools
controlled by Xinyu Baishu Technology Service Co.,Ltd. (“Xinyu Baishu”). Education and management service fees of RMB12,275,
RMB28,344 and RMB8,818 were charged to the abovementioned schools during the years ended June 30, 2018, 2019 and 2020,
respectively.
On October 30, 2019, Hailiang Investment disposed all of the equity interest in Xinyu Baishu and hence Xinyu Baishu is not
considered as a related party to the Group since then.
The Group provided service to Ming Kang Hui supermarkets, which are operated by Zhejiang Ming Kang Hui Food Co.,Ltd.,
controlled by Mr.Feng, in the Group’s campuses, amounting to RMB4,556, RMB4,878 and RMB3,423 during the years ended June
30, 2018, 2019 and 2020, respectively.
(viii) Other service and product provided to related parties mainly include daily consumables sold to related parties, hotel services and etc.
(ix) The Group received IT services, physical examination services, travel services and other services from related parties controlled by
Hailiang Group, amounting to RMB6,884, RMB23,263 and RMB19,957 during the years ended June 30, 2018, 2019 and 2020.
As of June 30, 2019 and 2020, the above unsettled balances of RMB420 and RMB9,160 were recognized in “Other payables due to
related parties”.
(x) The gains were recognized from disposal of Hailiang Kindergarten, Tianma Kindergarten and Chuzhou School (see Note 8 (iii)for
additional details), amounting to RMB3,285, RMB1,683 and RMB381 during the year ended June 30, 2018, respectively.
(xi) In August 2017, Haibo Education and Haibo Logistics were incorporated by Xinyu Baishu, an entity ultimately controlled by
Mr.Feng. The contributed capitals from Xinyu Baishu in Haibo Education and Haibo Logistics were RMB6,000 and RMB5,000,
respectively. In January 2018, Xinyu Baishu transferred 56% equity interests in each of Haibo Education and Haibo Logistics to
Ningbo Haoliang with considerations of RMB3,360 and RMB2,800, respectively. The considerations were equivalent to the cost of
56% of the contributed capital.
In January 2018, Xinyu Baishu also transferred the remaining 44% equity interest in Haibo Education and Haibo Logistics to
Nanchang Baishu, a related party of the Company. The 44% equity interests owned by Nanchang Baishu were recorded as non-
controlling interests.
In November 2018, Haibo Education and Haibo Logistics declared and fully paid dividends amounting to RMB6,075 and RMB1,407
to Nanchang Baishu, respectively.
In September 2019, Haibo Education and Haibo Logistics declared and fully paid dividends amounting to RMB17,670 and
RMB3,475 to Nanchang Baishu, respectively.
In December 2019, net assets attributable to Nanchang Baishu was paid upon the liquidation of Haibo Education and Haibo Logistics,
totally amounting to RMB3,713.
In July 2019, the Company acquired 100% shares of Zhuji Tianma Boya Training Center Co.,Ltd. with the consideration of RMB100
from Hailiang Investment.
In May 2020, the Company acquired 100% shares of Zhuji Yuesheng Management Consulting Co.,Ltd. with the consideration of
RMB100 from Hailiang Investment.
(xii) Mr.Feng, paid awards of RMB15,000 to the Group’s outstanding teachers to recognize their outstanding performance and
contributions during the year ended June 30, 2019. The transaction is accounted for as a deemed contribution from a controlling
shareholder.
F-60
(c) Transactions with key management personnel
Remuneration of the directors and key management personnel of the Group for the years ended June 30, 2018, 2019 and 2020 are as follows:
Short-term benefits
Total remuneration is included in “employee benefit expenses” (Note 7).
21 Commitments and contingencies
(a) Capital commitments
Capital commitments, which are primarily related to the campus decoration are as follows:
Contracted, but not provided for:
Leasehold improvement
Furniture, fixtures and other equipment
F-61
2018
RMB
2019
RMB
2020
RMB
8,162
5,713
5,549
2019
RMB
2020
RMB
12,525
—
47,813
2,826
(b) Lawsuit
On May 21, 2019, the Group filed a lawsuit in the People’s Court of Zhuji City of China against Ronghuai Education Group and Zhuji Ronghuai
School (collectively, “Ronghuai”), asserting claims of infringement of registered trademarks and unfair competition under the Trademark Law and
Anti-Unfair Competition Law of the PRC. This case was transferred to the Intermediate People’s Court of Shaoxing City of China for acceptance.
The Group alleged in the claims that Ronghuai manipulated settings of certain popular search engines in China, such as www.360.cn, hao.360.com
and www.so.com, which caused confusion for the Group’s potential clients/students. Ronghuai’s alleged misconduct directed these students to
Ronghuai’s website instead of the Group’s websites when the students searched key terms such as “Hailiang”, “Hailiang education”, “Hailiang
senior middle school”, and “Hailiang primary school”. Therefore, the Group claimed damages of RMB3,000 against Ronghuai. Based on new
evidence collected through discovery, the Group subsequently amended the claims and increased the amount of damages claimed to RMB7,508.
On April 8, 2020, the court entered into a judgement of first instance, ordering Ronghuai to immediately stop manipulating settings of certain
search engines, and to publish statements on its official platform to eliminate the negative impact of the case within 10 days from the effective date
of the judgement and compensate the Group for economic loss and reasonable expenses amounting to RMB3,000 within 30 days from the effective
date of the judgement. Ronghuai did not agree with the judgement and subsequently appealed to the Higher People’s Court of Zhejiang Province of
China. This case was still in the process of second instance.
On July 8, 2019, Ronghuai filed a lawsuit in the People’s Court of Zhuji City of China against Hailiang Group, the Company’s related party, and
Hailiang Senior Middle School, one of the Company’s affiliated schools, asserting claims of infringement of registered trademarks and unfair
competition under the Trademark Law and Anti-Unfair Competition Law of the PRC. This case was transferred to the Intermediate People’s Court
of Shaoxing City of China for acceptance. Ronghuai alleged, in a way similar to the Group’s original claims as described above, that Hailiang
Group and Hailiang Senior Middle School employed manipulative measures to direct potential clients/students to the websites instead of theirs and
requested monetary damages in the amount of RMB3,010. Based on new evidence Ronghuai claimed to have collected through discovery,
Ronghuai later amended their claims to increase the amount of damages to RMB7,510. On May 19, 2020, the court rejected the request filed by
Ronghuai. Ronghuai did not agree with the judgement and subsequently appealed to the Higher People’s Court of Zhejiang Province of China. This
case was still in the process of second instance.
On July 18, 2019, Ronghuai filed a separate lawsuit in the People’s Court of Zhuji City of China against the Company’s seven affiliated entities and
three of the Company’s related parties, including Hailiang Group, Hailiang Investment and Zhejiang Hailiang Limited, alleging defamation.
Ronghuai alleged that the Group’s public announcement regarding the filing of claims against Ronghuai contained defamatory remarks against
Ronghuai and affected its reputation and requested monetary damages in the amount of RMB10,000. This case was transferred to the Intermediate
People’s Court of Ningbo City of China for acceptance and was still in the process.
After consultation with the Group’s external legal counsel, the Group assessed the probability of the potential liability to be more than remote but
not probable and the amount of loss not being able to be reasonably estimated at this time. As a result, the Group did not record any liabilities
pertaining to the lawsuits filed by Ronghuai.
F-62
22 Subsequent events
Acquisition of a school
On July 15, 2020, the Group entered into a sponsorship transfer agreement with Hailiang Investment to acquire 100% sponsorship of Jinhua
Hailiang Foreign Language School, with a total consideration of RMB34,000. The school is located in Jinhua City, Zhejiang Province, which can
accommodate up to 900 students. On September 16, 2020, the Group obtained the relevant administrative approval and completed all the required
process to obtain the sponsorship of the school. The transaction will be accounted for as a business combination between entities under common
control.
23 Comparative figures
The Group has initially applied IFRS 16 at July 1, 2019. Under the cumulative effect method, comparative information is not restated. Further
details of the changes in accounting policies are disclosed in note 3.
24 Immediate and ultimate controlling party
At June 30, 2020, the Directors consider the immediate parent of the Group to be Jet Victory International Limited, which is incorporated in British
Virgin Island, and the ultimate controlling party to be Mr.Feng. Neither of the parties produce financial statements available for public use.
25 Parent company financial statement
The following condensed parent company financial information of Hailiang Education Group Inc. has been prepared using the same accounting
policies as set out in the accompanying consolidated financial statements.
F-63
HAILIANG EDUCATION GROUP INC.
CONDENSED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
FOR THE YEARS ENDED JUNE 30, 2018, 2019 AND 2020
(Amounts in thousands)
Cost of revenue
Gross loss
Administrative expenses
Operating loss
Net finance expenses
Loss before tax
Loss
Other comprehensive (loss)/income-foreign currency translation differences
Total comprehensive loss
F-64
2018
RMB
(2,299)
(2,299)
(9,124)
2019
RMB
2020
RMB
—
—
—
(8,176)
—
(10,060)
(11,423)
(8,176)
(10,060)
(17)
—
—
(11,440)
(8,176)
(10,060)
(11,440)
(3,016)
(8,176)
4,086
(10,060)
2,966
(14,456)
(4,090)
(7,094)
HAILIANG EDUCATION GROUP INC.
CONDENSED STATEMENTS OF FINANCIAL POSITION
AS OF JUNE 30, 2019 AND 2020
(Amounts in thousands)
Assets
Other receivables due from subsidiaries
Non-current assets
Other receivables due from related parties
Other current assets
Cash
Current assets
Total assets
Shareholders’ equity
Share capital
Share premium
Translation reserve
Accumulated losses
Total shareholders’ equity
Liabilities
Other payables due to third parties
Other payables due to related parties
Current liabilities
Total liabilities
Total shareholders’ equity and liabilities
F-65
2019
RMB
2020
RMB
24,994
27,237
24,994
27,237
79,265
—
390
69,591
225
891
79,655
70,707
104,649
97,944
268
134,583
13,195
(45,679)
268
134,583
16,161
(55,739)
102,367
95,273
2,280
2
2,282
2,282
2,669
2
2,671
2,671
104,649
97,944
HAILIANG EDUCATION GROUP INC.
CONDENSED STATEMENTS OF CASH FLOWS FOR
THE YEARS ENDED JUNE 30, 2018, 2019 AND 2020
(Amounts in thousands)
Cash flows from operating activities
Loss for the year
Adjustments for:
Change in other payables due to third parties
Change in other payables due to a related party
Changes in other current assets
Change in other receivable due from subsidiaries
Change in other receivable due from related parties
Net cash used in operating activities
Cash flows from investing activities
Repayment of loans from a related party
Net cash generated from investing activities
Cash flows from financing activities
Loans made from a related party
Net cash from financing activities
Effect of movements in exchange rates on cash
Net (decrease) / increase in cash
Cash at the beginning of the year
Cash at end of the year
Non-cash transaction:
Net settlement of a loan made to a related party with a loan borrowed from a related party
F-66
2018
RMB
2019
RMB
2020
RMB
(11,440)
(8,176)
(10,060)
1,393
1
—
(152)
3,623
887
—
—
(4,664)
(201)
389
—
(225)
(1,528)
—
(6,575)
(12,154)
(11,424)
—
—
12,412
11,850
12,412
11,850
7,609
7,609
(3,016)
(1,982)
2,508
526
(7,609)
—
—
(394)
(136)
526
390
—
—
—
75
501
390
891
—