Rating Action: Moody’s downgrades Bright Scholar’s CFR to B2; outlook remains negativeGlobal Credit Research – 28 Dec 2021Hong Kong, December 28, 2021 — Moody’s Investors Service has downgraded Bright Scholar Education Holdings Ltd’s corporate family rating (CFR) and senior unsecured rating to B2 from B1.The outlook remains negative.”The downgrade reflects the faster-than-expected discontinuation of Bright Scholar’s kindergartens and school operations, the high uncertainties over the company’s evolving business model and the resultant weaker business profile and smaller scale,” says Shawn Xiong, a Moody’s Assistant Vice President and Analyst.”The negative outlook reflects the execution risks involved in restructuring its business, and the time required for the recovery of revenues in its overseas schools,” adds Xiong.On 14 May 2021, China’s State Council announced “the Implementing Regulations of the Private Education Promotion Law”, which came into effect on 1 September 2021.On 15 November 2021, Bright Scholar announced that it would hold an extraordinary general meeting (EGM) of shareholders on 10 December 2021 to discuss and approve a business disposal plan in response to amendments to the regulation. On 13 December 2021, the company announced that it had adjourned the EGM of shareholders.On 21 December 2021, in its fiscal year 2021 results announcement, Bright Scholar announced that it will classify a list of schools and kindergartens, over which it had lost control on 31 August 2021, as discontinued operations.The announcement also stated that Bright Scholar was in negotiations with the affected entities for possible future cooperation in the provision of operation services as well as management services such as consultation for school operations, catering and accommodation, property management and maintenance, administrative management, student recruiting and school branding.RATINGS RATIONALEBright Scholar’s B2 CFR reflects the company’s asset-light business model of operating its overseas schools, complementary education services in China and net cash position.The rating also considers the risks stemming from Bright Scholar’s small scale, its evolving business model and the execution risks involved in restructuring its business.For fiscal year ended 31 August 2021, Bright Scholar’s continuing operations contributed around RMB1.4 billion in revenue, while its discontinued operations contributed around RMB2.3 billion. At the same time, the company’s continuing operations reported a company-adjusted EBITDA loss of around RMB30 million for FY2021.The discontinued operations will significantly reduce the company’s scale and shift its business model to providing management services to the affected schools and kindergartens. These include consultation for school operations, catering and accommodation, property management and maintenance, administrative management, student recruiting and school branding.Moody’s expects Bright Scholar to retain the affected schools and kindergartens for management services due to their long-standing relationships with them. However, its contracts with the schools will be more susceptible to competitive bidding and pricing pressure over the medium to long term compared with school fees.Additionally, management services fees, which are received after services have been rendered, are not as advantageous from a cash flow perspective compared with school fees, which are collected in advance.Bright Scholar has adequate liquidity. It had a cash balance of around RMB845 million and restricted cash of around 669 million as of 31 August 2021. Additionally, Bright Scholar had also received RMB2,029 million due to the company from the affected schools and kindergartens as of 21 December 2021, according to the company’s results announcement.As a result, Moody’s expects Bright Scholar will have adequate liquidity to cover its short-term debt of RMB754 million and its USD300 million bonds due in July 2022.Bright Scholar’s ratings also considers the following environmental, social and governance (ESG) factors.From a social perspective, China’s recent policy change highlighted the regulatory risks the company is exposed to, which drove the rating action.The company’s ownership is concentrated in its founder and chairman, who held a stake of 77.9% as of 31 August 2020. However, the company’s listed and regulated status tempers this risk.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody’s could return the outlook to stable if (1) Bright Scholar successfully executes on its business restructuring; (2) the trajectory of its revenue, earnings and cash flow profile becomes clearer; and (3) the company maintains a net cash position with continued funding access.Moody’s could downgrade the ratings if the company is unable to transition to providing management services to the affected schools and kindergartens following the disposal; if the company is unable to access funding; or if it loses its net cash position.Prolonged uncertainties around the company’s management service contracts will also be negative to the ratings.The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Bright Scholar Education Holdings Ltd listed on the New York Stock Exchange in May 2017. It operates several overseas schools, for-profit kindergartens in China and offers complementary education services. The family of Country Garden’s founder and chairman owned a 77.9% stake in Bright Scholar as of August 2020.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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