Company Quick10K Filing
Hailiang Education Group
20-F 2019-06-30 Filed 2019-09-23
20-F 2018-06-30 Filed 2018-10-18
20-F 2017-06-30 Filed 2017-10-25
20-F 2016-06-30 Filed 2016-10-26

HLG 20F Annual Report

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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Hailiang Education Group Earnings 2019-06-30

Balance SheetIncome StatementCash Flow

20-F 1 tv527788_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

 

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended June 30, 2019

 

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)

 

Ming Wang, 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   Trading Symbol(s)   Name of Each Exchange on Which
Registered
American Depositary Shares, each representing 16
ordinary shares, par value US$0.0001 per share
  HLG   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, 2019.

 

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 ¨ Accelerated filer x
       
Non-accelerated filer ¨ 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 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 1
   
PART I 4
     
ITEM 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 4
     
ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE 4
     
ITEM 3.   KEY INFORMATION 4
     
ITEM 4.   INFORMATION ON THE COMPANY 39
     
ITEM 4A.   UNRESOLVED STAFF COMMENTS 73
     
ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS 73
     
ITEM 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 101
     
ITEM 7.   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 107
     
ITEM 8.   FINANCIAL INFORMATION 111
     
ITEM 9.   THE OFFER AND LISTING 111
     
ITEM 10.   ADDITIONAL INFORMATION 112
       
ITEM 11.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 125
     
ITEM 12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 126
   
PART II 128
     
ITEM 13.   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 128
     
ITEM 14.   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 128
     
ITEM 15.   CONTROLS AND PROCEDURES 128
     
ITEM 16A.   AUDIT COMMITTEE FINANCIAL EXPERT 130
     
ITEM 16B.   CODE OF ETHICS 130
     
ITEM 16C.   PRINCIPAL ACCOUNTANT FEES AND SERVICES 130
     
ITEM 16D.   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 130
     
ITEM 16E.   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 130
     
ITEM 16F.   CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 131
       
ITEM 16G.   CORPORATE GOVERNANCE 131
     
ITEM 16H.   MINE SAFETY DISCLOSURE 131
   
PART III 132
     
ITEM 17.   FINANCIAL STATEMENTS 132
     
ITEM 18.   FINANCIAL STATEMENTS 132
     
ITEM 19.   EXHIBITS 132

 

 

 

 

INTRODUCTION

 

Unless the context otherwise requires, in this annual report on Form 20-F references to:

 

  · “15 Baishu schools” are to 15 managed schools sponsored or operated by “Nanchang Baishu Technology”, in Jiangxi province, namely, Nanchang East Lake Sijihuacheng Kindergarten, 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, Nanchang Hualian Foreign Language Experimental School, Nanchang Xihu District Baishu Education Group Teaching Staff Kindergarten, 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 Hailiang Management, four companies controlled by Hailiang Management 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.; and nine affiliated schools owned and operated by Hailiang Management, 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, through Hailiang Management, control and act as sponsor to, as of June 30, 2019, 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.;

 

  · “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.

 

  · “fiscal year” are to the period from July 1 of each calendar year to June 30 of the following calendar year;

 

  · “Zhongkao” are to high school entrance examinations administered in China;

 

  · “Gaokao” are to university entrance examinations administered in China;

 

  · “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;

 

  · “graduate class” are to the class of students graduated or graduating at the end of a school year;  

 

  ·“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;

 

  · “Haibo Logistics” are to Jiangxi Haibo Logistics Management Co., Ltd., a subsidiary of the Company, where Mr. Honggen Min holds 44% of the equity through his wholly owned company, Nanchang Baishu Education Group (“Nanchang Baishu Education”), and Ningbo Haoliang holds 56%;

 

  · “Hailiang After-school” are to Zhuji Hailiang After-school Service Co., Ltd., incorporated on August 2, 2018 as a wholly owned subsidiary of Ningbo Haoliang;

 

  · “Hailiang Consulting” are to Zhejiang Hailiang Education Consulting and Services Co., Ltd., our wholly owned PRC subsidiary;

 

  ·“Haibo Education” are to Jiangxi Haibo Education Management Co., Ltd., a subsidiary of the Company, where Mr. Honggen Min holds 44% of the equity through his wholly owned company, Nanchang Baishu Education Group (“Nanchang Baishu Education”), and Ningbo Haoliang holds 56% of the equity;

 

·“Hailiang Finance” are to Hailiang Group Finance Co., Ltd., a related party;

 

1

 

  · “Hailiang Group” are to Hailiang Group Co., Ltd., a related party;

 

  · “Hailiang HK” are to “Hailiang Education (HK) Limited,” our wholly owned subsidiary incorporated in Hong Kong which holds 100% of the equity interest in Hailiang Consulting;

 

  · “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 company controlled by our ultimate controlling shareholder, Mr. Feng. Hailiang Investment previously was named “Hailiang Education Management Group Co., Ltd.”;

 

  · “Hailiang Management” are to Hailiang Education Management Group Co., Ltd., 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 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;
     
  · “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;

 

  · “Hangzhou Hailiang” are to “Hangzhou Hailiang Education Management Co., Ltd.” incorporated on June 19, 2018, as a wholly owned subsidiary of Hailiang Management;

 

  · “managed schools” are to schools we operate by providing education and management service, but do not own or sponsor, as of June 30, 2019, including 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, Nanchang Hualian Foreign Language Experimental School, Nanchang Xihu District Baishu Education Group Teaching Staff Kindergarten, Jingdezhen Baishu School, Xinchang Nanrui Experimental School, Xiantao No.1 Middle School, Xiaoshan District Wenyan Primary School, Xiaoshan District Wenyan No. 2 Primary School, Xiaoshan District Wenyan Middle School, Feicheng Hailiang Foreign Language School, Hangzhou Chunhui Primary School, Hangzhou Xixing Middle School, Jinhua Hailiang Foreign Language School, Nanchang East Lake Sijihuacheng Kindergarten, Hailiang Kindergarten, Zhuji Hailiang Jinshan Kindergarten, and Tianma Kindergarten.

 

  · “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 and chairman of the board of directors of Hailiang Group;

 

  · “Nanchang Baishu Technology” are to Nanchang Baishu Technology Co., Ltd., a related party of the Company as controlled by Hailiang Investment;

 

  · “Ningbo Hailiang” are to Ningbo Hailiang Education Logistics Management Co. Ltd., incorporated on June 22, 2017 as a wholly owned subsidiary of Hailiang Consulting;

 

2

 

  · “Ningbo Haoliang” are to Ningbo Haoliang Information Consulting Co., Ltd., incorporated on June 20, 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 as of June 30, 2019, including Hailiang Primary School, Hailiang Junior Middle School, Hailiang Senior Middle School, Hailiang High School of Art, Zhenjiang Jianghe High School of Art, Zhuji Hailiang Foreign Language High, Tianma Experimental School, Hailiang Experimental High School, Hailiang Foreign Language School, 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, Nanchang Hualian Foreign Language Experimental School, Nanchang Xihu District Baishu Education Group Teaching Staff Kindergarten, Jingdezhen Baishu School, Xinchang Nanrui Experimental School, Xiantao No.1 Middle School, Xiaoshan District Wenyan Primary School, Xiaoshan District Wenyan No. 2 Primary School, Xiaoshan District Wenyan Middle School, Feicheng Hailiang Foreign Language School, Hangzhou Chunhui Primary School, Hangzhou Xixing Middle School, and Jinhua Hailiang Foreign Language School , Nanchang East Lake Sijihuacheng Kindergarten, Hailiang Kindergarten, Zhuji Hailiang Jinshan Kindergarten, and Tianma Kindergarten.

 

  · “PHIC company” are to “Pate's - Hailiang International College Company Limited”, Hailiang International Studying’s wholly owned subsidiary incorporated on October 9, 2018 in United Kingdom;

 

  · the “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 to the period from September 1 of each calendar year to June 30 of the following calendar year;

 

  · “shares” or “ordinary shares” are to our ordinary shares, par value US$0.0001 per share;

 

  · “US$,” “U.S. dollars,” or “dollars” are to the legal currency of the United States;
     
  · “Zhejiang Mingxin International Travel” are to “Zhejiang Mingxin International Travel Co., Ltd.” incorporated on August 2, 2018, as a wholly owned subsidiary of Hailiang Management;
     
  · “Zhenjiang Jianghe High School of Art” are to Zhenjiang Jianghe High School of Art Co., Ltd., acquired on October 31, 2018, which is 51% owned by Hailiang Management.

 

  · “Zhuji Hailiang Foreign Language High” are to “Zhuji Hailiang Foreign Language High School Co., Ltd.” 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;

 

  · “Hangzhou Hailiang International Studying” are to “Hangzhou Hailiang International Studying Service Co., Ltd.”, incorporated on October 22, 2018, as a wholly owned subsidiary of Hailiang Consulting;

 

  · “Hangzhou Hailiang Study Trip” are to “Hangzhou Hailiang Study Trip Co., Ltd.”, Hailiang Consulting’s wholly owned subsidiary was incorporated on December 3, 2018 as a PRC corporation;

 

3

 

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, 2018 and 2019 and each of the three years ended June 30, 2019.

 

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 RMB6.8650 to US$1.00, the noon buying rate in effect on June 28, 2019 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 September 13, 2019, the noon buying rate was RMB7.0754 to US$1.00.

 

We completed an initial public offering of 2,858,000 ADSs on July 6, 2015. On July 7, 2015, we listed our ADSs on the NASDAQ Global Market under the symbol “HLG.”

 

Part I

 

Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not Applicable.

 

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

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, 2017, 2018 and 2019, and the selected consolidated statements of financial position data as of June 30, 2018 and 2019, 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, 2015 and 2016 and the selected consolidated statements of financial position data as of June 30, 2015, 2016 and 2017 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.

 

4

 

   Years Ended June 30, 
   2015
RMB
   2016
RMB
   2017
RMB
   2018
RMB
   2019
RMB
   2019
USD
 
   (In thousands, except per share data) 

Selected consolidated statements of profit or loss and other comprehensive income Data:

                              
Revenue   514,787    654,060    853,295    1,169,348    1,499,025    218,358 
Cost of revenue   (334,528)   (498,944)   (648,482)   (804,674)   (1,026,903)   (149,585)
Gross profit   180,259    155,116    204,813    364,674    472,122    68,773 
Other income, net   2,460    1,756    6,325    3,689    25,100    3,656 
Selling expenses   (15,540)   (16,753)   (21,902)   (24,539)   (25,003)   (3,642)
Administrative expenses   (33,334)   (36,153)   (28,385)   (63,374)   (72,661)   (10,584)
Disposal loss of leasehold improvement       (10,286)                
Operating profit   133,845    93,680    160,851    280,450    399,558    58,203 
Gain on disposal of affiliated entities               5,349         
Net finance income   7,149    5,752    6,892    11,391    24,935    3,632 
Profit before tax   140,994    99,432    167,743    297,190    424,493    61,835 
Income tax expenses               (66,288)   (108,713)   (15,836)
Net profit   140,994    99,432    167,743    230,902    315,780    45,999 
                               
Net profit attributable to non-controlling interests               8,314    22,359    3,257 
Net profit attributable to the Company’s shareholders   140,994    99,432    167,743    222,588    293,421    42,742 
                               
Basic and diluted earnings per share (1)   0.39    0.24    0.41    0.54    0.71    0.10 
Net profit   140,994    99,432    167,743    230,902    315,780    45,999 
Other comprehensive income/(loss), net of nil income tax   29    8,437    2,202    (2,542)   3,310    482 
Total comprehensive income   141,023    107,869    169,945    228,360    319,090    46,481 
                               
Total comprehensive income attributable to non-controlling interests               8,314    22,359    3,257 
Total comprehensive income attributable to the Company’s shareholders   141,023    107,869    169,945    220,046    296,731    43,224 

 

(1) After giving effect to a share split effected on December 23, 2014, following which each of our previously issued ordinary shares was subdivided into ten ordinary shares.

 

   2015   2016   2017   2018   2019   2019 
   RMB   RMB   RMB   RMB   RMB   USD 
Selected consolidated Statements of Financial Position Data:                              
Cash and cash equivalents   233,379    291,011    77,801    812,620    260,684    37,973 
Total assets   857,516    1,132,962    1,399,010    1,884,850    2,502,912    364,590 
Total equity   697,815    921,668    1,101,613    1,334,813    1,689,247    246,066 
Current liabilities   159,701    211,294    297,397    550,037    806,395    117,465 
Total liabilities   159,701    211,294    297,397    550,037    813,665    118,524 

 

5

 

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 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.

 

In addition, the tuition we charge for some of our educational programs is subject to regulatory restrictions. See “–—The tuition, accommodation and other fees charged by our K-12 schools and student enrollment at these 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.” 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, 2019, 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.

 

6

 

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:

 

  · 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;

 

  · 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 areas 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.

 

Our teacher retention rates as of June 30, 2017, 2018 and 2019 were 95.1%, 91.5%, and 93.3%, 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 teachers from overseas. 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.

 

7

 

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.

 

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.

 

8

 

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 2018/2019 school year was set out by the Zhuji branch of the MOE in August 2016, which are RMB60,000 per student, RMB65,000 per student and RMB70,000 per student for primary school, middle school and high schools respectively. 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. The international program of our affiliated schools are not currently subject to ceiling limitation on the amount of tuition we can charge as long as the tuitions we charge for our international programs are record-filed with local authorities and approved. Pursuant to the registration documents filed with local authorities for the 2018/2019 and 2019/2020 school year, we are approved to charge RMB 78,000 to RMB 176,000 and RMB86,000 to RMB200,000 respectively for our international program. In the 2018/2019 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 RMB43,510, RMB43,483 and RMB44,877, and an average tuition per student for international program of RMB90,339. 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—The Law for Promoting Private Education (2016) and the Implementation Rules for the Law for Promoting Private Education (2004).” 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 2018/2019 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.

 

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.

 

9

 

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.

 

Nevertheless, 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.

 

Based on the recent development of PRC law, there is significant uncertainty relating to the application and interpretation of PRC law as it relates to the promotion of the private for-profit education industry. The 2016 Private Education Law (as defined below) and its implementing rules might limit our ability to receive profit distributions from our affiliated schools in the future.

 

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. 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, which made two minor adjustments to Article 26 and Article 64 of the 2016 Private Education Law. These minor adjustments do not affect the Company’s business and operations. 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. Sponsors of for-profit private schools are entitled to receive the profits or proceeding distributed 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.

 

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 implementing rules (in the form of Opinions) for the 2016 Private Education Law. Zhejiang province has promulgated implementing rules 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, we intend to maintain the current statuses of our affiliated schools (as re-registration is not required at this time under the 2004 Implementation Rules for Private Education Laws currently effective) until we have obtained better clarity on the application of the 2016 Private Education Law. In the future, we might 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 education and management services to various schools we operate or partner with. As advised by our PRC counsel, our right to receive the service fees from our affiliated and managed schools does not contravene any PRC laws and regulations. However, if local governments deem that our new business plan fails to meet the revised local regulations, or if our new business plan fails to generate sufficient revenue, we may be unable to grow our business and the market price of our ADSs could be materially and adversely affected.

 

10

 

Hailiang Consulting has entered into contractual arrangements with Hailiang Management, the entity that owns and sponsors each of our affiliated schools, pursuant to which Hailiang Consulting provides service to our affiliated schools in exchange for the payment of service fees. As advised by our PRC counsel, our right to receive the service fees from our affiliated and managed schools 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 affiliated schools under the PRC laws and regulations. However, if the relevant PRC government authorities take a different view, or if 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 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. 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 test 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 are also changing, especially in Zhejiang province, one of the pioneers in educational reform and innovation. In particular, in 2009, Zhejiang Province implemented its new Gaokao regime, where two new types of evaluations, namely the High School Graduation Exam and the Comprehensive Quality Evaluation, were incorporated into the undergraduate admission process. The new regime also allowed universities to use their self-designed tests, as opposed to the standard tests designed by the government, in their admission process. 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.

 

11

 

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.

 

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, value-added services to our affiliated school. 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.

 

12

 

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 acquired 51% controlling interest in Zhenjiang Jianghe High School of Art (from its founders), a for-profit high school specializing in the arts education pursuant to an Investment Cooperation Agreement dated September 28, 2018. We also plan to selectively acquire schools to expand our network coverage and/or businesses that are complementary to our core expertise in K-12 education. 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. In addition, the businesses and schools we acquire may be 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 we acquire them, 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 benefits 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, 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, 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:

 

  · 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;

 

  · 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.

 

13

 

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.

 

We may not be able to successfully integrate businesses that we acquire, which may cause us to lose anticipated benefits from such acquisitions and to incur significant additional expenses.

 

One of our growth strategies is to grow by acquisitions of additional schools. It is challenging to integrate business operations and management philosophies of acquired schools. The benefits of our future acquisitions depend in significant part on our ability to integrate management, operations, technology and personnel. The integration of acquired schools is a complex, time-consuming and expensive process that, without proper planning and implementation, could significantly disrupt our business and operations. The main challenges involved in integrating acquired entities include the following:

 

  · consolidating service and product offerings;

 

  · retaining qualified education professionals of any acquired entity;

 

  · consolidating and integrating corporate information technology and administrative infrastructure;

 

  · ensuring and demonstrating to our students and their parents that the acquisitions will not result in any adverse changes to our brand image, reputation, service quality or standards;

 

  · preserving strategic, marketing or other important relationships of any acquired entity and resolving potential conflicts that may arise with our key relationships; and

 

  · minimizing the diversion of our management’s attention from ongoing business concerns.

 

We may not successfully integrate our operations and the operations of schools we acquire in a timely manner, or at all, and we may not realize the anticipated benefits or synergies of the acquisitions to the extent, or in the timeframe, we anticipated, which 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 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.

 

14

 

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 educational services on a straight-line basis over the school year. However, our costs and expenses vary significantly and do not necessarily correspond with our recognition of revenue. 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.

 

We may not be able to renew leases or obtain leases for our affiliated schools and companies at reasonable terms.

 

We lease real properties used by our affiliated schools and companies with a total site area of approximately 1.13 million square meters as of June 30, 2019, among which, approximately 1.1 million square meters are rented from Hailiang Investment which is controlled by Mr. Feng, our ultimate controlling shareholder and approximately 30,000 square meters from Zhenjiang Municipal Bureau of Land and Resources for Zhenjiang Jianghe High School of Art. Historically, we recorded rental expenses paid to Hailiang Investment of RMB30.0 million, RMB31.0 million, and RMB31.5 million (approximately US$4.6 million) for these properties which amounted to 3.5%, 2.7%, and 2.1% of our revenue in the 2017, 2018 and 2019 fiscal years, respectively.

 

The terms of our current leases for campuses in Zhuji city, approximately 1.1 million square meters rented from Hailiang Investment which is controlled by Mr. Feng, our ultimate controlling shareholder, are for nineteen years since 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 we agreed to prepay rental fees of RMB540.5 million (approximately US$78.7 million) for the entire remaining lease period from July 1, 2019 to June 30, 2037. On September 12, 2019, the rental fees of RMB540.5 million (approximately US$78.7 million) were fully paid. 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.

 

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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, as of June 30, 2019, the lessor, Hailiang Investment which is controlled by Mr. Feng, our ultimate controlling shareholder, 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 48.02% of all of our leased properties as of June 30, 2019. 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 airguns and the shooting range is staffed with professional coaches and restricted by tight security, accidents or intentional misuse of these airguns 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.

 

There are risks associated with our use of the Hailiang Education Park.

 

In September 2016, Hailiang Investment, a company controlled by our ultimate controlling shareholder, Mr. Feng, completed the construction of the 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 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.

 

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 agreements. See “Item 4. Information on the Company—B. Business Overview—Hailiang Education Park.”

 

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There are certain other risks associated with the utilization of the Hailiang Education Park, including:

 

  · construction quality issues;

 

  · greater time and resources may be required to utilize the Hailiang Education Park than we currently estimate;

 

  · any dissatisfaction with the 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

 

  · the possibility that the Hailiang Education Park will be inadequate.

 

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.

 

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, 2019, 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.

 

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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, 2019, 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, chairman 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.

 

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, 2019, the balance of cash and term deposits we had with Hailiang Finance amounted to RMB1,610.6 million (approximately US$234.6 million). To control our credit exposure with Hailiang Finance, based upon our current policy effective since September 2, 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 (approximately US$305.9 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.

 

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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 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.

 

We face risks related to natural disasters, health epidemics or terrorist attacks in China.

 

Our business could be materially and adversely affected by natural disasters, such as earthquakes, floods, landslides, tornados and tsunamis, 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 are an “emerging growth company” and may not be subject to requirements that other public companies are subject to, which could harm investor confidence in us and our ADSs.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and we may take advantage of certain exemptions from various requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.

 

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.

 

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Our management has concluded that our internal control over financial reporting was effective as of June 30, 2019. 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 arrangement that establishes 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.

 

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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 who 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 managed schools that we manage and operate but do not own or sponsor, 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, 2019 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.

 

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.

 

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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. According to the 2018 Negative List, the education services sector in which the Company is currently engaged in business operations, is not deemed to be either “restricted” or “prohibited” in the “negative list.”

 

On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law or the FIL, which will take effect on January 1, 2020, and replace 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.”

 

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 enterprise 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.

 

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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.

 

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.

 

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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; and

 

  · capital contributions to our wholly-owned subsidiary must be approved by the MOFCOM or its local counterparts

 

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.

 

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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.

 

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 implementing rules (in the form of Opinions) for the 2016 Private Education Law. Zhejiang province has promulgated implementing rules 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, we intend to maintain the current statuses of our affiliated schools (as re-registration is not required at this time under the 2004 Implementation Rules for Private Education Laws currently effective) until we have obtained better clarity on the application of the 2016 Private Education Law.

 

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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. Except for two for-profit schools, which are Zhenjiang Jianghe High School of Art and Zhuji Hailiang Foreign Language High, seven of our nine affiliated schools 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 by the end of 2019 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 2019 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 2019, confirmed by the local tax authorities and our PRC counsel, (i) all of our affiliated private schools have enjoyed the preferential tax policies for VAT and (ii) our affiliated private schools 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 did not violate any tax laws or regulations since their establishment,.

 

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.  

 

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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 regulationsonce 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.

 

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, except for Haibo Education and Haibo Logistics. 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.

 

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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.

 

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.

 

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–The Law for Promoting Private Education (2016) and the Implementation Rules for the Law for Promoting Private Education (2004).”

 

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 implementing rules (in the form of Opinions) for the 2016 Private Education Law. Under the 2016 Private Education Law and its implementing rules, schools that offer compulsory education services must register as non-profit schools. 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 rules 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 subsidiaries and 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.

 

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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.

 

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 and use our revenue effectively.

 

Most of our revenue is denominated in Renminbi. As a result, restrictions on currency exchange may limit our ability to use revenue 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.

 

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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.

 

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 revenue 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 revenue generated by our affiliated entities not paid to Hailiang Consulting and revenue 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 use such revenue. 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 Implementation Rules for the Law for Promoting Private Education (2004), 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 implementing 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 implementing 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–The Law for Promoting Private Education (2016) and the Implementation Rules for the Law for Promoting Private Education (2004).” 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.

 

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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.

 

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.

 

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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.

 

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 evasion.

 

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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Our independent registered public accounting firm is located in China, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, and as such, investors may be deprived of the benefits of such inspection.

 

Our independent registered public accounting firm, which issues the audit report included in our annual report filed with the SEC, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and 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, our auditor is not currently inspected by the PCAOB. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. The joint statement reflects a heightened interest in an issue that has vexed U.S. regulators in recent years. However, it remains unclear what further actions the SEC and the PCAOB will take to address this issue. Inspections of other firms that PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

 

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 2.0%, 1.6%, and 2.1% in 2016, 2017 and 2018, 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 September 20, 2019 was US$63.74 per ADS. The market price of the ADSs may be highly volatile and subject to wide fluctuations in response to factors including the following:

 

  · 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.

 

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.

 

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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.

 

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.

 

35

 

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:

 

  · 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 rights offerings 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.

 

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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.

 

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 2019 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.

 

38

 

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, 2019, we owned and operated 9 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 27 private and public schools that offer K-12 educational services in Jiangxi, Hubei, Shandong and Zhejiang provinces of China.

 

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 of its founding, Mr. Feng owned 60% of the equity interest in the school and Mr. 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. 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. Meng in July 2009. At the time of the acquisition, Mr. Feng and Mr. 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. 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.

 

  · 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.

 

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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

 

  · 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.

 

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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, 2019, and the date of this annual report on Form 20-F, we have not completed any draw down of 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 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, 2019, our affiliated schools and subsidiaries operated 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., 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.

 

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.

 

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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, 2019, 1,409 students are enrolled in Zhuji Hailiang Foreign Language High.

 

On September 28, 2018, we entered into an Investment Cooperation Agreement to acquire 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, 2019, Zhenjiang Jianghe High School of Art’s student body consists of 127 students and 30 faculty members. 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. We will lease part of the existing land, facilities, equipment and other assets of an existing school to sponsor a new school, which will provide primary and middle school courses of basic education program. This new school is expected to open in September, 2020 with an enrollment capacity up to approximately 2,400 students.

 

In the fiscal year ended June 30, 2019, we continued to vigorously implement our asset-light model where instead of acquiring ownership in and sponsoring schools, we would be providing education and management services as well as other related services to schools sponsored by affiliated third parties. Additionally, we have established several new subsidiaries in the PRC to facilitate the provisions of various types of services to carry out our asset-light strategic approach. Through 2017 Group Strategic Cooperation Agreement and collaboration with governments, as of the end of fiscal year 2019, we have managed and operated an aggregate of 27 private and public schools, where we receive education and management service fees for providing a mixed array 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. We may provide additional services in the future, as needed, to our managed schools.

 

Pursuant to our collaboration with Hailiang Group and Hailiang Investment, we are now able to accelerate the expansion of our Company across China and improve the business prospects of the Company, without the need for a large amount of capital.

 

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.

 

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

 

As of June 30, 2019, we operate and manage an aggregate of nine affiliated schools in the PRC that we own or sponsor through our PRC affiliated entities (the “affiliated schools”), and we provide operational, supporting, or management services to, but do not own or sponsor an additional 27 schools (the “managed schools”). 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.

 

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We generate revenue from operating and sponsoring our affiliated schools. As of June 30, 2019, an aggregate of 22,819 students were enrolled in our nine affiliated schools, including an aggregate of 2,062 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.

 

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 and development. 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, U.K. and Australian undergraduate programs, including as A-levels courses for U.K. universities, SAT courses for U.S. universities, or VCE courses for Australia universities. We have steadily developed our international program within our affiliated schools system from 2,825 students as of June 30, 2017, 3,860 students as of June 30, 2018, and 4,553 students as of June 30, 2019.

 

To diversify our operation and business model, we have adopted the asset-light model 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. This approach has allowed us to operate a highly scalable business model and launch schools with significantly lower upfront capital expenditures. As such, we now also generate revenues from management fees and operation service fees pursuant to stand-alone agreements entered into by and among us, any relevant wholly owned subsidiaries in the PRC, and the specific school. We operated and managed an aggregate of 16 schools and 27 schools as of June 30, 2018 and 2019 respectively. We expect to continue to increase the number of schools that we operate, manage but not own or sponsor. As of June 30, 2019, across our 27 managed schools, we had an aggregate number of approximately 38,290 students. For more detailed information on both our managed schools and our asset-light model, refer to “Item 4. Information on the Company – B. Business Overview –Our Schools and Programs,” and “Item 4. Information on the Company – B. Business Overview – Asset- Light Model.”

 

We are an educational service provider of private primary, middle and high schools in China. Hailiang Senior Middle School was recognized as Tier 2 Special Model School in Zhejiang province for the 2016/2017 school year. Both Hailiang Senior Middle School and Hailiang Experimental High School were recognized as “Key Schools” (重点学校) and both of Hailiang Junior Middle School and Tianma Experimental School were recognized as “Model Schools” (示范学校) by Zhejiang’s Department of Education in recognition of a number of factors, including the quality of education, course design, teacher qualifications and feedback from parents. In 2017/2018 school year, Hailiang Experimental High School was recognized as “Digital Campus Model School” (浙江省数学校园示范学校) by Zhejiang’s Department of Education in recognition of convergence of information technology and education. In school year 2017/2018, Hailiang Education received multiple awards including "2017 Education Group Influencer" (2017年度影响力教育集团) by Tencent Education Annual Billboard, "2017 Top Brand of China's Education Group Award" (2017中国品牌实力教育集团) by Sina Education, "Annual Most Value Investment Award" by the China Financial Summit Winter Forum, and "Top 10 Innovative Brand in China" (中国十大创新品牌) awarded jointly by China International Business magazine and other authorized institutions. In the 2018/2019 school year, we received multiple awards including, among others, “2018 Top 100 Influential Brand in China” (2018中国品牌影响力100强) by China Enterprise News, “2018 Annual Brand of China’s Education Group Award” (2018年度中国教育品牌) by the Xinhua Education Forum, "2018 Annual Brand Award" (2018年度品牌奖) by the China Financial Summit Winter Forum, “Best Education Investment Performance of China: Most Influential Education Institute Award” (中国最佳教育投资表现: 2018年度最具影响力教育机构) by the First Education Industry Investor’s Day held by i-EDU, and “Top 100 China’s International Digital Schools Award” (中国国际数码学校100强) by Tencent Education.

 

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With respect to our international academic programs, 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 Australia 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.

 

On September 23, 2017, and further supplemented on September 18, 2018, we entered into a cooperation agreement 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, an international educational foundation headquartered in Geneva, Switzerland. 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 International Baccalaureate. In June 2019, Hailiang Foreign Language School entered into an Education Cooperation Agreement with Canada Kent School 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 June 2019, Hailiang Foreign Language School also entered into an Education Cooperation Agreement with Australia Deakin University to open preparatory programs in our school.

 

For more detailed information on both our affiliated schools and our managed schools, refer to “Item 4. Information on the Company – B. Business Overview –Our Schools and Programs.”

 

We have experienced significant growth in our business. Our revenue increased by 37.0% to RMB1,169.3 million in the 2018 fiscal year, and by 28.2% to RMB1,499.0 million (approximately US$218.4 million) in the 2019 fiscal year. These increases were 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. The increase of revenue from K-12 educational services was driven by an increase in the average tuition charged per student and the number of students enrolled in our international program. In particular, in line with our strategy to increase enrollment in our international program, we have increased the proportion of revenue derived from students enrolled in our international program from 22.9% of revenue from K-12 educational services in the 2017 fiscal year, 30.1% of revenue from K-12 educational services in the 2018 fiscal year, and to 33.8% of revenue from K-12 educational services in the 2019 fiscal year. Our gross profit increased by 78.1% to RMB364.7 million in the 2018 fiscal year, and increased by 29.4% to RMB472.1 million (approximately US$68.8 million) in the 2019 fiscal year. Our net profit increased by 37.7% to RMB230.9 million in the 2018 fiscal year, and increased by 36.8% to RMB315.8 million (approximately US$46.0 million) in the 2019 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 have also 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. To expedite the asset-light model, we entered into 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. This cooperation affords us an opportunity to operate schools acquired or owned by Hailiang Group or Hailiang Investment. Pursuant to 2017 Group Strategic Cooperation and cooperation with local governments, we operated and managed 27 schools, which are currently in operation and have students actively enrolled as of the date of this annual report. We provided education and management services to schools in exchange for services fees 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, 2019, our managed schools were located in Jiangxi, Hubei, Shandong, and Zhejiang Province, and consisted of 38,290 students enrolled in our managed schools. Such cooperation provides us with a brand-new business expansion model, which will enhance the asset-light approach, to accelerate the expansion of our operations across China, and greatly improve our business outreach. With the asset-light approach, we can also sponsor additional schools without having to own or acquire the land and facilities of such schools. For Zhenjiang Jianghe High School of Art, we leased approximately 30,000 square meters from Zhenjiang Municipal Bureau of Land and Resources instead of acquiring the underlying land and facilities. 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 expected 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 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures—Recent Accounting Pronouncements—IFRS 16 Leases” for more information.

 

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We have established several subsidiaries in the PRC to facilitate our strategic asset-light strategic 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 subsidiaries to provide consulting and management services. In January 2018, Ningbo Haoliang acquired a 56% equity interests in Haibo Logistics, a logistic services company. 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 for affiliated and managed schools.

  

Our Schools and Programs

 

As of June 30, 2019, we operate and manage 9 affiliated schools in the PRC that we own or sponsor through our PRC affiliated entities (the “affiliated schools”). Currently, we also provide education and management services to an additional 27 managed schools in the PRC that we do not own or sponsor (the “managed schools”) either directly or through our affiliated entities in the PRC.

 

Eight of our nine affiliated schools are located in Zhuji City, Zhejiang Province, with one affiliated school in Zhenjiang City, Jiangsu Province. 27 managed schools are located in Nanchang City, Yichun City, Jingdezhen City, Xinchang City, Xiantao City, Feicheng City, Hangzhou City, Jinhua City and Zhuji City. Nanchang Baishu Technology, our related party controlled by Hailiang Investment, is the sponsor or operator of “15 Baishu Schools” in Jiangxi Province; Hailiang Investment, our related party, is the sponsor of Xinchang Nanrui Experimental School and Jinhua Hailiang Foreign Language School; Xiantao Tiancheng Education Investment Co, Ltd. our related party controlled by Hailiang Investment, is the sponsor of Xiantao No.1 Middle School; Feicheng Hailiang Education Investment Co., Ltd. our related party, is the sponsor of Feicheng Hailiang Foreign Language School; Hangzhou Hailiang Preschool Education Group Co., Ltd. and its subsidiaries, related party controlled by Hailiang Group, is the sponsor of Hailiang Kindergarten, Zhuji Hailiang Jinshan Kindergarten and Tianma Kindergarten; Hangzhou Chunhui Primary School, Hangzhou Xixing Middle School, Xiaoshan District Wenyan Primary School, Xiaoshan District Wenyan No. 2 Primary School and Xiaoshan District Wenyan Middle School are the public schools in Hangzhou, which are located in Binjiang District or Xiaoshan District;.

 

As of June 30, 2019, across our affiliated schools, we had an aggregate number of 22,819 students, including 4,445 students in primary school, 5,708 students in middle school, 8,113 students in high school of our basic educational program and 4,553 students in our international program. Our schools employed an aggregate number of 2,062 teachers and educational staff. We have experienced significant growth since 1995, as the national and local governments in the PRC have adopted various policies to encourage and support the growth of private K-12 education in China. Since the commencement of operation of our first Hailiang school in 1995, an aggregate number of more than 30,000 students have graduated from high schools in our affiliated schools.

 

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The following table sets forth the basic information of our nine currently in operation affiliated schools as of June 30, 2019:

 

School  Year
Opened/Acquired
  Educational
Programs
  Number
of
Students
   Number
of
Classes
   Number of
Teachers
and
Educational
Staff
 
Hailiang Foreign Language School  1995  International Primary School   1,442    74    200 
      International Middle School   1,441    64    192 
      International High School   261    14    51 
      Sub-total   3,144    152    443 
                      
Hailiang Primary School **  2016  Primary School   2,770    84    228 
      Sub-total   2,770    84    228 
                      
Hailiang Junior Middle School **  2016  Middle School   2,951    64    183 
      Sub-total   2,951    64    183 
                      
Hailiang Senior Middle School **  2016  High School   2,669    62    245 
      Sub-total   2,669    62    245 
                      
Hailiang Experimental High School  2001  High School   3,877    85    261 
      Sub-total   3,877    85    261 
                      
Hailiang High School of Art ***  2017  High School   1,440    34    140 
      Sub-total   1,440    34    140 
                      
Tianma Experimental School  2009*  Primary School   1,675    47    147 
      Middle School   2,757    62    182 
      Sub-total   4,432    109    329 
                      
Zhuji Hailiang Foreign Language High  2018  High School   1,409    69    203 
      Sub-total   1,409    69    203 
                      
Zhenjiang Jianghe High School of Art  2018  High School   127    7    30 
      Sub-total   127    7    30 
                      
      Total   22,819    666    2,062 

 

(*)  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.  

 

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The following table sets forth the numbers of students, classes and teachers and educational staff of our affiliated schools as of June 30, 2017, 2018 and 2019.

 

   Number of Students   Number of Classes   Number of Teachers and
Educational Staff
 
   June 30,
2017
   June 30,
2018
   June 30,
2019
   June 30,
2017
   June 30,
2018
   June 30,
2019
   June 30,
2017
   June 30,
2018
   June 30,
2019
 
Kindergarten   421            16            33         
Primary School   4,018    4,285    4,445    123    130    131    340    351    375 
Middle School   5,348    5,631    5,708    104    118    126    283    336    365 
High School   8,338    8,334    8,113    181    186    188    659    644    676 
International Program   2,825    3,860    4,553    141    192    221    319    525    646 
Total   20,950    22,110    22,819    565    626    666    1,634    1,856    2,062 

 

Each of our current affiliated schools is located within Zhuji City, Zhejiang Province or Zhenjiang City, Jiangsu Province. As of June 30, 2019, our affiliated schools in aggregate had over 878 multi-media classrooms, all with Wi-Fi-coverage, over 2,459 computers and tablet computers, 11 sports fields and approximately 4,672 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, the fencing hall was put into use, which is located in Hailiang Education Park covers a site area of approximately 1,200 square meters (13,000 square feet) with 9 fencing lines.

 

For our affiliated schools, we generally require all of our students to board at our schools, and substantially all of our students are housed in our boarding facilities. Each student dormitory building houses 144 to 1,032 students. Students that 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. The basic boarding fees are included in the tuition fees, and additional boarding fees generally range from RMB3,000 to RMB4,000 per school year. The final tuition fee depends among other factors, including the schools and educational programs that the students are enrolled in, the level of the accommodation chosen by the students, and students’ grade. A majority of our boarding students are from areas outside of Zhuji. 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.

 

Our affiliated schools’ system are managed by a five-member committee, under the supervision of our board of directors. The committee consists of a principal in charge of the overall school operation and management, a president responsible for business management, and three vice presidents responsible for daily management of teaching. The committee meets on a monthly basis. The meeting agenda consists of 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 the committee members ensures consistent quality in our educational services and efficient management of schools.

 

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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 and SAT courses
       
Student to teacher ratio  ·  13 students to 1 teacher (in the 2018/2019 school year)  ·  7 students to 1 teacher (in the 2018/2019 school 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  ·  RMB44,109 (approximately US$6,425) (for the 2018/2019 school year)  ·  RMB90,339 (approximately US$13,159) (for the 2018/2019 school year)

 

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 selective courses to develop student interests, strength and comprehensive ability. The basic compulsory curriculum is 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.

 

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, 2019, our affiliated schools offered approximately 295 courses. These courses include approximately 53 courses mandated by the PRC central government and the local governments and approximately 242 elective courses including Applied Physics, Economics, English Literature, Computer Programming, Digital Media Design, Photography and Etiquette. Our selective courses include supplemental courses developed from compulsory curriculum, and other courses such as STEM, extracurricular clubs, mentorship for start-ups, tips for daily life, and etiquette education. Our STEM courses are designed through integrating different disciplines, such as math, art, psychology, sociology, in the aim of developing our students the ability to deal with complicated situations. We categorize our STEM courses under five groups, including housework, architecture, transportation, energy and ecology, and provide our students with various workshops, including 3D printing, robot design projects to facilitate innovation and compatibility. 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. 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.

 

In addition, we offer art educational program under our basic 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 drama, stage play, and screenwriter. 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.

 

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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, and Montessori primary courses, and we will be offering IB PYP in the 2019/2020 school year; in our high schools, we offer A-level classes, VCE classes, American high school courses, Canadian high school courses and we have become the candidate school for IB DP. In addition, we provide programs that combine basic high school modules and intensive language courses. Students can acquire PRC graduation certificate after passing graduation test with the completion of basic modules and at the same time learn foreign languages to be better prepared for university 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 test instead of English in Gaokao and acquire an international certificate.

 

The number of students enrolled in our affiliated schools’ international program has increased rapidly in the last three school years, from 2,825 as of June 30, 2017 to 3,860 as of June 30, 2018, including both PRC students and foreign students, to 4,553 as of June 30, 2019.

 

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 HSK program. All of our teachers have acquired the International Chinese Teacher Qualification Certificate issued by Education Commission of the PRC. 100% of our students passed HSK Level IV test. As of June 30, 2019, 61 foreign students were enrolled in our international program, from foreign countries including but not limited to, the United Kingdom, South Korea, Germany, Russia, Brazil, the United States, Italy, Spain and the Netherlands.

 

Our Students

 

Student recruitment and admission

 

It has been 24 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 staffs’ promotion and parents’ recommendations. We encourage our teachers and educational staffs to actively participate in the recruitment process and offer incentive-based payments to employees who make a significant contribution to student recruitment. We also rely on a combination of advertisements on local television channels and newspaper to recruit students.

 

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As of June 30, 2019, we had 12,558 students from Zhejiang province and 10,137 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 22 foreign countries.

 

Students are required to take an entry examination before being admitted into our schools. 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. The characteristics are generally identified through personal interviews by representatives in admission office. We launched a ‘Creative Talent’ project in December 2017 to recruit exceptional middle and high school students in China.

 

Academic performance

 

We routinely monitor students’ progress in our affiliated schools according to academic standards. We set our standards and instructional programs based on national and local standards published by the regulatory authorities. We believe our students are well prepared for Zhongkao and Gaokao. We require our teachers to regularly evaluate their students and set specific goals for them. Our students take all standardized tests required by 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 96.68% of our students from our affiliated schools in the 2018 graduate classes passed the Joint Graduation Exam, an annual provincial test administered to each graduating class.

 

In the 2018/2019 Gaokao, 1,657 students in our affiliated schools received admissions into universities. 410 students passed the admission cutoff of “first tier universities”, of which, 184 passed the admission cutoff of “first tier universities” in university entrance examination for athlete and art students. In Gaokao, one of our students in affiliated schools scored 702 out of 750, the highest score in Zhuji City, and was admitted to Tsinghua University, a well-recognized and high-ranking university in the PRC. Another student in our affiliated schools was awarded the Gold Medal of 35th National Physics Competition and was admitted into Peking University, another well-recognized and high-ranking university in the PRC. 18 students passed the high-level universities’ independent admission examination, including Tsinghua University, Peking University, Fudan University, and Zhejiang University. In university entrance examination for athlete and art students, one student was admitted to Beijing Sport University, and two students were admitted to China Academy of Art. In addition, our students have achieved the highest score in the Art Joint Examination of Zhejiang Province for color and fashion performance, and the highest score in Art School-level Examination for music and music performance in Zhejiang Province. 

 

In the 2019 graduate classes of our affiliated schools, 284 students in our international programs applied for overseas universities, among which 283 students have received offers, 41% of these students received offers from global top 100 universities, such as Cambridge University, Imperial College London, University College London. All of the 39 graduates of Hailiang Foreign Languages School received the offers from global top 100 universities. 72% of these offers were from global top 30 universities, and 26% were from global top 10 universities. These universities include Imperial College London, University College London, The University of Edinburgh, The University of Manchester, King's College London, The University of New South Wales, The University of Queensland, University of Bristol, and The University of Warwick. In addition, students in HSK program achieved outstanding academic performance and received admissions from top universities including Tsinghua University, Fudan University, Zhejiang University, Nanjing University, Southwest University, China Academy of Art, and Shanghai International Studies University.

 

In the 2018/2019 Zhongkao, 18 of our students ranked in the top 20 students of Zhuji City, while 275 of our students scored above 685 points out of 770 points, which is outstanding academic performance. In addition, one of our students received the highest score in the 2018/2019 Zhongkao in the Zhuji City with 731 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 35th National Physics Olympiad, a Hailiiang student won a gold medal. In the 32th Zhejiang Chemistry Olympiad, Hailiang students won the first prize and second prize. In the 2018 National Middle School Students Biology Competition, a Hailiang students won the first and second prize. In the 15th National Mathematics Olympiad (Southeast region), Hailiang students won 2 first prizes and 9 second prizes. In the 2018 Chen Xingshen National High School Mathematic Olympiad, a Hailiang student won the second prize. In the 34th National Mathematic Olympiad, Hailiang students won 10 second prizes. In the 24th National Teenagers Informology Olympiad, Hailiang students won 8 first prizes and 11 second prizes. In addition, Hailiang Education has won the Group Award in the National Mathematic Competition (Zhejiang District), National Physics Competition (Zhejiang District) and National Informology Competition (Zhejiang District).

 

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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 2019 graduate classes, 81.2% of our primary school graduates were admitted into our middle schools and 79.8% 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 2016/2017 school year, and 90.0 % for the 2017/2018 school year, and 92.1% for the 2018/2019 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, 2019, from our affiliated schools, the number of our teachers and educational staff reached 2,062, and approximately 11.4% of our teachers and educational staff hold a master’s degrees or above.

 

We have built a team of sophisticated 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. Eight 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 15 golden Olympiad competition training coaches, and 235 teachers with masters or doctoral degrees. We had 67 full-time foreign teachers, approximately 34.3% of whom hold master’s degrees or above. We have foreign teachers are 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, 2019.

 

School  Number
of
Teachers
and
Educational
Staff
   Number
of
Teachers
with
“Advanced
Teaching
Qualifications”
   Number
with
Master’s
Degree
or
Above
 
Hailiang Foreign Language School   443    4    74 
Hailiang Primary School   228    9    1 
Hailiang Junior Middle School   183    20    13 
Hailiang Senior Middle School   245    48    25 
Hailiang Experimental High School   261    18    32 
Hailiang High School of Art   140    1    17 
Tianma Experiment School   329    21    22 
Zhuji Hailiang Foreign Language High   203    6    46 
Zhenjiang Jianghe High School of Art   30    7    5 
Total   2,062    134    235 

 

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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 highest 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, 2019, our team of teachers and educational staff in our affiliated schools consists of 134 senior teachers, 389 mid-level teachers and 1,024 junior teachers.

 

It is crucial for us to maintain a robust group of distinguished teachers and principals for us to expand our scale. We follow a specific process for faculty hiring which we have developed over the years. Teachers are assessed through a series of hiring procedures, including, without limitation, written examination, interviews, mock lectures, expertise in their specific subject areas, the item bank for 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. In 2019, we put more efforts into campus recruitment to attract high-quality staff members. On May 11, 2019, we held a school open day event, and invited 350 candidates from various normal universities to visit Hailiang Education Park to gain a better understanding of Hailiang Education. In addition, we launched the “Golden Olympiad Competition Training Coaches Camp” and “Boya Education Elite” programs to recruit outstanding candidates from top universities in China, such as Peking University and Tsinghua University. Target candidates are those who have potential to become golden Olympiad competition training coaches or famous teachers. Moreover, in cooperation with many normal universities in China, we invite excellent university graduates to intern at our schools, and attempt to recruit those who show outstanding performance during the internship. We have recommendation policy that encourages our educational staff to recommend excellent teachers and offer reward accordingly.

 

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.

 

Hailiang Education Cadre Army Institute was founded in April 2019 to strengthen the training and cultivation of our management team. 45 tutors with high morality, advanced philosophy and excellent management skills have implemented personalized and targeted trainings, developed tailor-made training projects, and launched activities such as online work report, salons and management research.

 

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 2019. In addition, we offer a variety of bonuses and subsidies 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.

 

Each year, we remove up to 6% of teachers and educational staff that do not meet our teaching standards. Our teacher retention rates, as of June 30, 2017, 2018 and 2019 were 95.1%, 91.5%, and 93.26%, respectively.

 

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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, 2019, we provided various services to 27 managed schools, with an aggregate enrollment of approximately 38,290 students. For the fiscal year ended June 30, 2019, education and management services we provided to our 27 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 April 1, 2018, we entered into a service agreement with the 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. 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 2018/2019 school year, the total number of students reached 7,585 and the number of teachers was 456. The tuition fee ranges from approximately 11,960 RMB per year to approximately 76,780 RMB per year. In the 2019 Gaokao, the liberal arts scores of six students from Xiantao School ranked top 10 among all the students in Xiantao City and the science scores of three students from Xiantao School ranked top 10 among all the students in Xiantao City. 567 students passed the first-tier university admission score, which accounted for about 33.2% of the total number of high school graduates of Xiantao School. 1,702 students of Xiaotao School were admitted into undergraduate programs, which account for 99.8% of its total graduate students. In the 2019 Zhongkao, among the top 10 students with highest scores in Xiantao City, seven students were from Xiantao School. 71 students scored 660 or above, which accounted for 41.5% of all the students who scored 660 or above in Xiaotao City.

 

On April 1, 2018, we entered into a service agreement (the “NanRui Agreement”) with the Nanrui Experimental School in Xinchang County (the “NanRui School”). 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 2018/2019 school year, the total number of students in such school is approximately 2,693, and the number of teachers is approximately 177. The tuition fee ranges from 4,000 RMB to 30,000 RMB annually. In the 2019 Zhongkao, 296 or 83.2% of NanRui School students passed the admission score into high school. Among all the students who had taken such examination in Xinchang County in 2019, five students from NanRui School ranked top 10.

 

On January 1, 2018, we entered into service agreements with the 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 (the “Baishu Schools”). 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. Pursuant to the agreements with the Baishu Schools, we receive management fees based upon the provision of services related to property management, landscaping, catering, maintenance, and logistics. With approximately 23,417 students and 1,290 teachers in total, Jiangxi Baishu Education Group offers kindergarten, primary, middle and high school programs. In the 2019 Gaokao, among 441 high school graduates from Nanchang Maqiu Senior High school, 15 students passed the first-tier university line. In the 2019 Zhongkao, 380 students achieved the score of 600 or higher.

 

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. The two schools can accommodate up to 2,560 students.

 

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On October 10, 2018, we entered into a cooperation agreement with the local government of Jindong District, Jinhua City, Zhejiang Province (the “Jindong Government”) pursuant to which Hailiang Investment will be the legal operator of Jinhua Hailiang Foreign Language School. We will operate and manage the school, and the Jindong Government will provide campuses, and building facilities as needed. The campus of Jinhua Hailiang Foreign Language School covers an area of around 13 acres and is expected to accommodate up to approximately 1,000 students.

 

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, after the end of fiscal year 2018, 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. The three schools can accommodate up to a total number of more than 3,000 students.

 

On October 10, 2018, we entered into a cooperation agreement with the government of Feicheng City, Shandong Province, pursuant to which Feicheng Hailiang Education Investment Co., Ltd., a wholly-owned subsidiary of Hailiang Investment, will be the sponsor of Feicheng Hailiang Foreign Language School. The Feicheng Government is expected to provide campuses, building facilities, including a newly constructed campus. The current campus of Feicheng Hailiang Foreign Language School is located in the campus of “Feicheng West District Experiment School” and is able to accommodate up to 750 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. and its subsidiaries, a related party ultimately controlled by Mr. Feng, are sponsors of three kindergartens.

 

On July 9, 2019, we entered into a cooperation agreement with 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, 2019, there were 3,407 students enrolled and 182 teachers and educational staff in Sihong Experimental School.

 

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 Service

 

We offer students enrolled in both our affiliated and managed schools to participate in educational training. Currently, our educational training service portfolio consists of courses training, academic tutoring, quality-oriented education and online education services. For the 2018/2019 school year, we have 167,985 student attendances in these services.

 

On January 26, 2018, Ningbo Haoliang acquired 56% equity interests in Haibo Education. Haibo Education is primarily engaged to provide educational training services. 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 of educational training services.

 

Overseas Study Consulting Service

 

Overseas study consulting service is 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, course selection, and accommodation. For 2018/2019 school year, we served 762 student attendances in our overseas study consulting services.

 

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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 Service

 

Through cooperation with other education service providers and self-developed study trip and camp courses, we offer a variety of programs operated domestically and globally. The locations include UK, US, Australia, Japan, Korea, New Zealand, Thailand, Singapore, and several European countries, 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 2018/2019 school year, we had 43,520 student attendances in our study trip programs. Study trips organized by us also attracted overseas students to visit Hailiang Education. For the 2018/2019 school year, there are hundreds of students visited Hailiang Education, who were from America, Britain, Australia, Singapore, South Korea, Malaysia, Indonesia.

 

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 Education 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, 2019, our affiliated schools and subsidiaries operated in Hailiang Education Park were (i) Hailiang Primary School, (ii) Hailiang Junior Middle School, (iii) Hailiang Senior Middle School, (iv) Hailiang Foreign Language School and (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, an administrative building, six dining halls, six track fields, a landmark tower, a school hospital, 20 student dormitory buildings and ten 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 and an indoor swimming pool, and a student activity center. There is also a hotel now in operation after having obtained all required permits and licenses. In September 2018, the license plate identification system and facial recognition system were installed and activated on the three main gates of Hailiang Education Park in order to improve the security management. 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.

 

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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 since July 1, 2018 and the rental fee in the first year is RMB22.3 million (approximately US$3.2 million) and is subject to a 5% annual increase from fiscal year 2020 to 2022. The rental fee commencing from the fiscal year 2023 is subject to further negotiation between the Company and Hailiang Investment. The lease covers 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.

 

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.

 

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 value-added services. We intend to leverage our strong market position and strong brand in pursuing the following strategies:

 

Continue to build our brand and reputation as a leading primary, middle and high school educational service provider in China;

 

Hire, train and retain outperforming school management, teachers and staff to continuously delivery high quality education services and support school network expansion;

 

Attract and retain outstanding students for our existing and new schools to strengthen our market leadership by focusing on education quality and academic performance;

 

Pursue opportunities of growing demand in high-quality international education to increase enrollment in our international program and broaden our diversified program offerings;

 

Establish strategic partnerships with various parties, including but not limited to, Hailiang Group, local governments and third-parties to further expedite asset-light approach, either by providing education and management services to non-profit and profit schools or sponsoring additional schools without acquiring ownership of land and facilities in such schools;

 

Implement hybrid development strategy, which combines asset-light mode and strategic acquisitions, to promote company strategies, improve brand recognition and explore market opportunities, and to expand our affiliated school network across 1st tier and capital cities in PRC and;

 

Further develop education and management service offerings to create additional value for our affiliated and managed schools and to establish a virtual platform to fuel our revenue growth.

 

Competition 

 

The K-12 educational services market in China is rapidly evolving, highly fragmented and competitive. 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 35.3 million in 2014 to 44.9 million in 2018. The proportion of students in private K-12 schools against the total number of students in K-12 schools also increased from 15.98% to 19.03% during the same period. However, in 2019, the top five listed K-12 education groups, including our Company, namely Hailiang Education, Wisdom Education, China Maple Leaf Education, Virscend Education, and Bright Scholar Education in China, only enrolled 0.55% of the total private school students in China, according to 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.

 

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Because the market share of private K-12 schools is relatively small compared to that of public schools, our primary competitors are public K-12 schools in areas where we recruit our students. With respect to our basic educational program, currently our major competitor 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, Zhejiang province, and the major competitor in this area is Zhengxing School, which targets similar students. 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 will establish or acquire additional K-12 schools.

 

Hailiang Education is an educational service provider of private primary, middle and high schools in China. As of June 30, 2019, we provide education and management service to 36 schools, among which, we own and sponsor nine affiliated schools, with an aggregate number of 22,819 students. In addition, as of June 30, 2019, we provide various services to 27 schools not owned or sponsored by us, with a total number of 38,290 students. 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. 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. 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 generator 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, the visit and speech by Dr. Robert Easton, Executive Vice Principal of the University of Oxford, the visit and speech by astronomy professor of University of Oxford, and the host of China National Education Development Summit Forum.

 

Media advertising. We stay active in media advertising to promote the brand of Hailiang Education. We place advertisements in national and global newspapers and television, such as People’s Daily, PR Newswire, 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 3,240, 4,129, and 4,183 employees as of June 30, 2017, 2018 and 2019, 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 sales and marketing, information technology and general administration who provide services to both our affiliated schools and our managed schools. As of June 30, 2019, depending on the service agreements we 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, 2019.

 

   As of June 30, 2019 
Teachers and educational staff   2,062 
Cafeteria and dining hall staff   639 
Student living staff   501 
Security and safety staff   96 
Administrative staff   

325

 
Other staff   

560

 
Total   4,183 

 

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

 

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. Our strategic plan calls for continued and extensive investment in maintaining and expanding these assets. We have also registered nine domain names with the China Internet Network Information Center, www.hailiangedu.com, www.hailiangeducation.com, www.hlcis.com, www.hlschool.com.cnwww.hlcjzx.comwww.zjhlgz.comwww.hailiangschool.comwww.hailiangart.com and www.tmschooledu.com. We have one registered trademark in the PRC. To protect our intellectual properties, we rely on a combination of trademark, copyright and trade secret laws. 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.

 

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. We alleged in our complaint 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 (approximately US$0.4 million) against Ronghuai. Based on new evidence we collected through discovery, we subsequently amended our complaint and increase the amount of damages to RMB 7.5 million (approximately US$1.09 million).

 

On July 8, 2019, Ronghuai filed a lawsuit in the People’s Court of Zhuji City of China against Hailiang Group, our affiliate, 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 the PRC. Ronghuai alleged, in a way similar to our original complaint 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 3.0 million (approximately US$0.4 million). Based on new evidence Ronghuai claimed to have collected through discovery, Ronghuai later amended their complaint to increase the amount of damages to RMB 7.51 million (approximately US$1.09 million).

 

On July 17, 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, on the ground of defamation. Ronghuai alleged that our public announcement regarding our filing of a complaint against Ronghuai contained defamatory remarks against Ronghuai and affected its reputation, and requested monetary damages in the amount of RMB10 million (approximately US$1.46 million).

 

As the above cases remain in their preliminary stages, after consultation with our external legal counsel, we assessed the probability of the potential liability to be not probable and the amount of loss cannot be reasonably estimated at current stage. As a result, we did not record any liabilities pertaining to this. We are purposing and defending these cases vigorously.

 

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), the Implementation Rules for the Law for Promoting Private Education (2004), 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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The Law for Promoting Private Education and the Implementation Rules for the Law for Promoting Private Education (2004)

 

The Decision of the Standing Committee of the National People’s Congress on Amending the Law for Promoting Private Education of the PRC (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 (the “2018 Private Education Law”) was promulgated by Order No.24 of the President of the PRC and took into effect on the same date. The 2018 Private Education Law made two minor adjustments to Article 26 and Article 64 of the 2016 Private Education Law(the “2018 Private Education Law”). The Implementation Rules for the Law for Promoting Private Education of the PRC (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 a company with either the MCA of the PRC, or its local counterparts, as a privately run non-enterprise institution or 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.  

 

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, 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 discloses 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 2004 Private Education Law, 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 2004 Private Education Law, 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 educatees 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 non-profit private school will be granted a private school operating permit, and shall be registered with the MCA or its local bureaus as a privately run non-enterprise institution. In addition, schools and their learning centers must make filings with the MOE and the MCA, or their local bureaus. Our 9 schools have obtained and maintained the private school operating permits.  

 

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.

 

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 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.

 

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.

 

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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 ease the 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.

 

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 implementing rules provided the procedure regarding the new registration procedures of the Existing Private Schools. However, specific provisions regarding the above registrations are yet to be promulgated by some provincial, autonomous regional or municipal governments.

 

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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.

 

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”

 

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 Implementing Rules 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. However, 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. As of June 30, 2019, our affiliated schools have not changed their current registration statuses as private schools with reasonable return. The State Council and certain provinces including the Zhejiang province have promulgated implementing rules (in the form of Opinions) for the 2016 Private Education Law. Zhejiang province has promulgated implementing rules that all schools located in Zhejiang province are required to re-register and/or change their for-profit or non-profit statuses before 2022. 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. For other schools, we intend to maintain the current statuses (as re-registration is not required at this time under the 2004 Implementation Rules for Private Education Laws currently effective) 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 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. For more detailed information on the regulations, refer to “Item 4. Information on the Company–B. Business–Regulations on Private Education–The Law for Promoting Private Education (2016) and the Implementation Rules for the Law for Promoting Private Education (2004).

 

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 sponsors to any of our managed schools, we do not expect to determine when the registration change or re-registration shall take place.

 

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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.

 

However, notwithstanding the fact that the Opinions have already been promulgated by the State Council and some provincial governments, implementing rules for the 2016 Private Education Law are still being promulgated by provincial, autonomous regional or municipal governments and the amendment to the Implementation Rules for 2016 Private Education Law has not been promulgated , so we are uncertain how these implementing rules 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 in 2018/2019 school year was set out by the Zhuji branch of the MOE in August 2016, which are RMB60,000 per student, RMB65,000 per student and RMB70,000 per student for primary school, middle school and high schools respectively. In the 2018/2019 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 RMB43,510, RMB43,483 and RMB44,877. 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. Pursuant to the registration documents filed with local authorities for the 2018/2019 school year, we can charge RMB78,000 to RMB176,000 for our international program. For the 2018/2019 school year, we charged an average tuition per student for international program of RMB90,339, tuition for some of our international programs has reached the maximum limits of tuition, such as the A-Level program. Pursuant to the registration documents filed with local authorities for the 2019/2020 school year, we can charge RMB86,000 to RMB200,000 for our international program. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Factors Affecting Our Results of Operations—Pricing of Educational Programs.” 

 

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 the Implementing Rules for the Regulations on Operating Chinese-foreign Schools, or the Implementing Rules, which were issued by the MOE in 2004 and amended in 2013 and 2019.

 

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.

 

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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 will take effect on January 1, 2020, and replace 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.

 

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 enterprise 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, which will take effect on July 1, 2019. 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, 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 will take effect on July 30, 2019. Under the Catalogue, foreign investment is encouraged in non-academic vocational training institutions.

 

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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. The sponsor of our current nine 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.

 

As of June 30, 2019, we registered nine 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 30, 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 one registered trademark 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 SAFE for a Foreign Exchange Registration Certificate for Foreign-Invested Enterprise. With such a certificate (which is subject to review and renewal by SAFE on an annual basis), 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.

 

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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 group 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, 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. Each wholly-owned subsidiary in China must comply with the foregoing regulations.

 

Under PRC law, our subsidiary, Hailiang Consulting, is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation.

 

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, 2019, 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, 2019, Hailiang Consulting had not paid any dividends to our offshore entities from its accumulated profits. No dividends were declared and paid during the 2017, 2018 and 2019 fiscal years.

 

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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 Rule purports 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 Rule 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.

 

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 the accumulated foreign debt borrowed by an FIE is not allowed to exceed the difference between the total investment and the registered capital of the FIE. 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 applicable PRC regulations on FIEs, capital contributions from a foreign holding company to its PRC subsidiaries, which are considered FIEs, may only be made when the approval by the MOFCOM or its local counterpart is obtained. In approving such capital contributions, the MOFCOM or its local counterpart examines the business scope of each FIE under review to ensure it complies with the Catalogue (as amended by the Negative List) lists the industries and economic activities in which foreign investment in the PRC is encouraged, restricted or prohibited. Any industry not listed in the Catalogue is a permitted industry. Pursuant to the Catalogue (as amended by the Negative List), real estate service section falls within the permitted catalogue. None of our PRC subsidiaries is engaged in any businesses related to the industries listed in the Catalogue (as amended by the Negative List).

 

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, 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.

 

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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. Each of our affiliated schools has been registered as a private school that requires “reasonable returns.” Under the 2004 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. Hailiang Management is the sponsor of each of the 9 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 implementing rules (in the form of Opinions) for the 2016 Private Education Law. Zhejiang province has promulgated implementing rules 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, we intend to maintain the current statuses of our affiliated schools (as re-registration is not required at this time under the 2004 Implementation Rules for Private Education Laws currently effective) 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—The Law for Promoting Private Education (2016) and the Implementation Rules for the Law for Promoting Private Education (2004).”  

 

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The following table sets out the details of our subsidiaries and affiliated entities that are significant to us:

 

Subsidiaries  Place
of
Incorporation
  Ownership
Interest
 
Hailiang Education (HK) Limited  Hong Kong, PRC   100%
Hailiang Education International Studying Service Limited  Hong Kong, PRC   100%
Pate's - Hailiang International College Company Limited  United Kingdom   100%
Zhejiang Hailiang Education Consulting and Services Co., Ltd.  China   100%
Ningbo Hailiang Education Logistics Management Co., Ltd  China   100%
Ningbo Haoliang Information Consulting Co., Ltd  China   100%
Zhuji Nianxin Lake Hotel Co., Ltd.  China   100%
Ningbo Hailiang Sports Development Co., Ltd.  China   100%
Hangzhou Hailiang International Studying Service Co., Ltd.  China   100%
Hangzhou Hailiang Study Trip Co., Ltd.  China   100%
Jiangxi Haibo Logistics Management Co., Ltd.  China   56%
Jiangxi Haibo Education Management Co., Ltd.  China   56%
Zhuji Hailiang After-school Service Co., Ltd.  China   100%
Zhuji Hailiang Logistics Service Co., Ltd.  China   100%
Zhuji Hailiang Supply Chain Management Co., Ltd.  China   100%

 

Affiliated Entities  Place of
Incorporation
Hailiang Education Management Group Co., Ltd.  China
Hailiang Foreign Language School  China
Hailiang Experimental High School  China
Tianma Experimental School  China
Hailiang Primary School  China
Hailiang Junior Middle School  China
Hailiang Senior Middle School  China
Hailiang High School of Art  China
Zhuji Hailiang Foreign Language High School Co., Ltd.  China
Zhenjiang Jianghe High School of Art Co., Ltd.  China
Zhejiang Hailiang Mingxin Education Technology Co., Ltd  China
Hangzhou Hailiang Education Management Co., Ltd.  China
Zhejiang Mingxin International Travel Co., Ltd.  China
Shaoxing Sihai International Travel Co., Ltd.  China
Lanzhou Hailiang Education Consulting Co., Ltd.*  China
Zhuji Tianma Boya Training Center Co., Ltd.*  China

 

* Entities acquired or incorporated between June 30, 2019 and the date of this annual report.

 

Contractual Arrangements with our affiliated entities and their Shareholder

 

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.

 

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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.

 

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.

 

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.

 

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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 1.13 million square meters (approximately 12,163,219 square feet) as of June 30, 2019, 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, and approximately 30,000 square meters (approximately 322917 square feet) from Zhenjiang Municipal Bureau of Land and Resources for Zhenjiang Jianghe High School of Art. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Transactions with Certain Related Parties.”

 

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 since 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. 

 

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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 each of these leases is for nineteen years since July 1, 2018 and the rental fees in the first year is RMB22.3 million (approximately US$3.2 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 is 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 Hailiang Education Park, Hailiang Experimental High School and Tianma Experimental School, and the amount of the contracts was RMB23.2 million and RMB31.7 million (approximately US$4.6 million) during the years ended June 30, 2018 and 2019, respectively. As of June 30, 2019 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 have purchased leasehold improvement service RMB37.2 million, RMB29.1 million, and RMB29.7 million (approximately US$4.3 million) to Heng Zhong Da during the years ended June 30, 2017, 2018 and 2019, respectively.

 

We have paid RMB 29.4 million, RMB24.3 million, and RMB37.9 million (approximately US$5.5 million) to Heng Zhong Da during the years ended June 30, 2017, 2018 and 2019, 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.

 

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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 years 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, 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, including K-12 educational and management services, educational training services, study trip and overseas study consulting services and hotel management services. The following discussion summarizes the four operating segments:

 

K-12 educational and management services

 

As of June 30, 2019, we owned and sponsored 9 affiliated schools and managed and operated 27 managed schools that were not owned or sponsored by us, with an aggregate number of 36 schools and 61,109 students across China. In our affiliated schools, with the goal of providing distinguished, specialized, and internationalized education, we 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, 2019, 22,819 students were enrolled in our affiliated schools. And also, we 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 enrollment of approximately 38,290 students as of June 30, 2019.

 

Educational training services

 

Our educational training service portfolio consists of courses training, academic tutoring, quality-oriented education and online education services. For the 2018/2019 school year, we have 167,985 student attendances in these services. We provided educational training services both to our affiliated schools and managed schools.

 

Study trip and overseas study consulting services

 

Through cooperation with other education service providers and self-development study trip programs, we offer a variety of study trips operated domestically and globally, including UK, US, Australia, Japan, Korea, New Zealand, Thailand, Singapore, and several European countries to offer students the opportunities to visit famous universities and experience local culture. Study trip services are both available to the students enrolled in our affiliated and managed schools.

 

Hotel management services

 

We provide lodging, meals and other guest services by Zhuji Nianxin Lake Hotel, locating in Hailiang Education Park.

 

Review of operations

 

We have experienced significant growth in our business in recent years. Our total revenue increased by 37.0% to RMB1,169.3 million in the 2018 fiscal year and further increased by 28.2% to RMB 1,499.0 million (approximately US$218.4 million) in the 2019 fiscal year. Our gross profits increased by 78.1% to RMB364.7 million in the 2018 fiscal year and further increased by 29.4% to RMB472.1 million (approximately US$68.8 million) in the 2019 fiscal year. Our net profit increased by 37.7 % to RMB230.9 million in the 2018 fiscal year and further increased by 36.8% to RMB315.8 million (approximately US$46.0 million) in the 2019 fiscal year.

 

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Our revenue from K-12 educational services increased by 11.3% to RMB 1,217.0 million (approximately US$177.3 million) in the 2019 fiscal year, representing 81.2% of total revenue. This increase in revenue from K-12 educational services was driven by a combination of the increase in the average tuition charged per student and the student enrollments in our international education programs. In particular, in line with our strategy to develop international education, we increased enrollment in our international program and raised the tuition fee accordingly. Our total student enrollment in international program of our affiliated schools increased from an aggregate of 2,825 students for the 2017 fiscal year to an aggregate of 3,860 students for the 2018 fiscal year, and further to an aggregate of 4,553 students for the 2019 fiscal year. The tuition fee of our international program of our affiliated schools rose from an average of RMB69,161 for the 2017 fiscal year to an average of RMB83,170 for the 2018 fiscal year, and further to an average of RMB90,339 (approximately US$13,159) for the 2019 fiscal year.

 

In the process of implementing our asset-light strategy, we expanded our school network by providing education and management services to both private and public schools across China. For the 2019 fiscal year, we provided education and management services to 27 private and public schools located in Zhejiang, Hubei, Shandong and Jiangxi provinces. Our revenue from education and management services increased from RMB19.0 million in the 2018 fiscal year to RMB40.9 million (approximately US$6.0 million) in the 2019 fiscal year, mainly due to the increase of number of our managed schools in the 2019 fiscal year. We believe that our successful expansion demonstrated our well-known brand reputation, outstanding educational management ability, strong potential to increase profitability and increase market penetration.

 

Our revenue from educational training services increased by 296.2% from RMB36.4 million in the 2018 fiscal year to RMB144.2 million (approximately US$21.0 million) in the 2019 fiscal year.

 

Our revenue from study trip services increased by 490.6% from RMB13.8 million in the 2018 fiscal year to RMB81.5 million (approximately US$11.9 million) in the 2019 fiscal year.

 

In addition, between June 30, 2019 and the date of the annual report, we entered into a cooperation agreement with the People's Government of Chengguan District, Lanzhou City, Gansu Province. Pursuant to the arrangement, we will lease part of properties of an existing school to provide compulsory educational services. Besides, we operated and managed an additional public school, Sihong Second Experimental School located in Jiangsu province, which is not owned or sponsored by us. 

 

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 35.3 million in 2014 to 44.9 million in 2018, and the proportion of student in K-12 schools against the total number of students in K-12 schools also increased from 15.98% to 19.03% 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.

 

  · 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 student enrollments of international and bilingual private schools in China has increased from 133.7 thousand in 2014 to 329.4 thousand in 2018, realizing a fast increase with a CAGR of 25.3%. 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 increased from RMB11.4 billion in 2014 to RMB37.2 billion in 2018 at an increase CAGR of 34.4% (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.

 

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  · Ability to successfully expand our school network through asset-light approach efficiently. We facilitate the development of our school network by employing the 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 addition schools. 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, 2019, we entered into service agreements with 27 private and public schools, including Xiantao No. 1 Middle School, XinChang NanRui Experimental School, Xiaoshan District Wenyan Primary School, Xiaoshan District Wenyan No. 2 Primary School, Xiaoshan District Wenyan Middle School, Feicheng Hailiang Foreign Language School, Hangzhou Chunhui Primary School, Hangzhou Xixing Middle School, Jinhua Hailiang Foreign Language School, Hailiang Kindergarten, Zhuji Hailiang Jinshan Kindergarten, Tianma Kindergarten and other 15 Baishu 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, 2017, 2018 and 2019, we had a total of 20,950, 22,110, and 22,819 students, respectively. While we expect the number of students enrolled in our affiliated schools to be relatively stable in the next two fiscal years, we plan to increase the proportion of students enrolled in our international program because our international program charges a tuition fee that is significantly higher than that of our basic educational program. We have already begun making this transition. For example, the number of students enrolled in the international program increased from 2,825 students as of June 30, 2017 to 3,860 students as of June 30, 2018, and 4,553 students as of June 30, 2019, with the proportion of our students enrolled in the international program increasing from 13.5% to 17.5%, and 20.0% during the same period, respectively. We intend to continue to grow our international program to take advantage of the growing demand for international education.

 

  · 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 may 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 2018/2019 school year, we are approved to charge RMB78,000 to RMB176,000 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–The Law for Promoting Private Education (2016) and the Implementation Rules for the Law for Promoting Private Education (2004).” 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 2017, 2018 and 2019 fiscal years, the average tuition for primary, middle and high schools, including both our basic educational program and our international program, was RMB40,730, RMB48,280, and RMB53,333 (approximately US$7,769), respectively. The increase was also due to a greater proportion of students enrolled in the international program which charges higher tuition. In the 2017, 2018 and 2019 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.  

 

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  · 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 76.0%, 68.8%, and 68.5% for fiscal years 2017, 2018 and 2019, 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 international program and expand our school network. 

 

Selling expenses and administrative expenses. For the 2017, 2018 and 2019 fiscal years, our total selling expenses and administrative expenses as a percentage of our total revenue were 5.9%, 7.5%, and 6.5%, 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, 2017, 2018 and 2019, we generated net revenue of RMB853.3 million, RMB1,169.3 million and RMB1,499.0 million (approximately US$218.4 million), respectively. Net revenue was derived from the following sources:

 

K-12 educational services, which accounted for 100%, 93.6% and 81.2% of total net revenue in the fiscal years 2017, 2018 and 2019;

 

Educational training services, which accounted for nil, 3.1% and 9.6% of total net revenue in the fiscal years 2017, 2018 and 2019;

 

Study trip services, which accounted for nil, 1.2% and 5.4% of total net revenue in the fiscal years 2017, 2018 and 2019;

 

Education and management services, which accounted for nil, 1.6% and 2.7% of total net revenue in the fiscal years 2017, 2018 and 2019;

 

Others, which accounted for nil, 0.5% and 1.1% of total net revenue in the fiscal years 2017, 2018 and 2019. Other services mainly include overseas study consulting services and hotel management services.

 

The following table sets forth the sources of our revenue by amount and as a percentage of total revenue for the periods indicated:

 

   Year Ended June 30, 
   2017   2018   2019 
   RMB (in
thousands)
   % of
revenue
   RMB (in
thousands)
   % of
revenue
   RMB (in
thousands)
   US$ (in
thousands)
   % of
revenue
 
K-12 educational services   853,295    100.0    1,093,933    93.6    1,217,007    177,277    81.2 
Educational training services           36,395    3.1    144,188    21,003    9.6 
Study trip services           13,791    1.2    81,495    11,871    5.4 
Education and management services           19,021    1.6    40,942    5,964    2.7 
Others           6,208    0.5    15,393    2,243    1.1 
Total revenue   853,295    100.0    1,169,348    100.0    1,499,025    218,358    100.0 

 

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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 2017, 2018 and 2019 primarily due to increases in pricing of our educational programs, especially the international program, and, to a lesser extent, 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%, our efforts to increase our student enrollment especially for international program and our efforts to establish and/or acquire additional schools. Our international program includes a variety of different program, including A-level courses, preparation courses designed for the U.S. SAT examinations, Australia’s dual-diploma VCE programs, and Chinese language and cultural programs for non-Chinese students.

 

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 RMB2,000 for our basic education program and RMB5,000 for 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.

 

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:

 

   Year Ended June 30, 
   2017   2018   2019 
   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)
 
Basic educational program   657,915    77.1    18,125    36,299    764,165    69.9    18,693    40,880    805,693    117,362    66.2    18,266    44,109 
International program   195,380    22.9    2,825    69,161    329,768    30.1    3,965    83,170    411,314    59,915    33.8    4,553    90,339 
Total   853,295    100.0    20,950    40,730    1,093,933    100.0    22,658    48,280    1,217,007    177,277    100    22,819    53,333 

 

* 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.

 

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Revenue from our basic educational program increased by RMB106.3 million, or 16.1% from the 2017 fiscal year to 2018 fiscal year, and further increased by RMB41.5 million (approximately US$6.0 million), or 5.4% from the 2018 fiscal year to 2019 fiscal year. This was driven primarily by an increase in the average tuition charged per student during the same periods. In addition, revenue derived from tuition of students enrolled in our international program increased by RMB134.4 million or 68.8% from the 2017 fiscal year to 2018 fiscal year, and further increased by RMB81.5 million (approximately US$11.9 million), or 24.7% from 2018 fiscal year to 2019 fiscal year. This was mainly due to the increase in the number of students enrolled in our international program as well as the increase in the average tuition charged in our international program.

 

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.

 

   Year Ended June 30, 
   2017   2018   2019 
   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)
 
Kindergarten*   14,689    1.7    510    28,802    12,761    1.2    548    23,286    -    -    -    -    - 
Primary school   194,154    22.8    4,798    40,466    252,688    23.1    5,320    47,498    311,678    45,401    25.6    5,887    52,943 
Middle school   242,176    28.4    6,200    39,061    334,841    30.6    6,905    48,493    378,376    55,117    31.1    7,149    52,927 
High school   402,276    47.1    9,442    42,605    493,643    45.1    9,885    49,939    526,953    76,759    43.3    9,783    53,864 
Total   853,295    100.0    20,950    40,730    1,093,933    100.0    22,658    48,280    1,217,007    177,277    100.0    22,819    53,333 

 

*The number of students and related revenue at the kindergarten level is as of February 28, 2018. Since then, the Company 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. We provided educational training services both to our affiliated schools and managed schools, amounting to nil, RMB36.4 million and RMB144.2 million (approximately US$21.0 million) for the years ended June 30, 2017, 2018 and 2019, respectively.

 

Study trip services

 

Study trip services mainly represent provision of study tours, summer and winter camps, amounting to nil, RMB13.8 million and RMB81.5 million (approximately US$11.9 million) for the years ended June 30, 2017, 2018 and 2019, respectively.

 

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 expect to enter into more services agreements where we will provide education and management services to various 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 (approximately US$6.0 million) in the 2019 fiscal year, mainly due to the increase of number of our managed schools in the 2019 fiscal year.

 

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Others

 

Other revenue mainly represents revenue derived from the provision of overseas study consulting services and hotel management services, amounting to nil, RMB6.2 million and RMB15.4 million (approximately US$2.2 million) in total during the years ended June 30, 2017, 2018 and 2019, respectively.

 

Cost of Revenue

 

Our cost of revenue primarily consists of labor costs, which are compensation for our teachers and educational staff, student-related costs, depreciation expenses and, to a lesser extent, transportation, utility and lease payment for our schools and companies. For the year ended June 30, 2017, RMB3.4 million of depreciation cost, lease fee and information service fee have been reclassified from cost to administrative expenses, and RMB6.1 million of maintenance fees have been reclassified from administrative expenses to cost to conform presentation of the year ended June 30, 2018 and 2019. 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 co