China Maple Leaf: FY2021 H2 Earnings – Key Points to Know!
- Rupam Deb
- Dec 22, 2021
- 4 min read
China Maple Leaf – FY 2021 H2 Earnings Results
China Maple Leaf (“CML”) released its financials for the financial year 2021 (ended 31 August 2021) in mid December 2021.
Despite adding 2 newly acquired overseas schools (CIS in Singapore and KIS in Malaysia) during the year, CML’s revenue dropped significantly from the reported RMB 1.5 billion in FY2020 to RMB 941 million in FY2021, because the company has decided to deconsolidate the financials of many schools (preschools, elementary, middle and some affected high schools) from its financials (for now) due to the impact of the recent regulations.
Accounting profit also crashed from the reported profit of RMB 509 million in FY2020 to a loss of RMB 672 million in FY2021.
So what exactly happened in these uncertain times for CML? Here are our key points from the earnings results!
First of all, there have been some major changes in CML’s financials (which entails changes in its accounting) and operations, due to the Implementation Regulations relating to the Private Education Promotion Law in China which was announced in May 2021 and became effective on 1 September 2021.In short, CML considers it no longer having control (through contractual arrangements) over the private schools offering compulsory education (elementary & middle schools) and not-for-profit preschools (together, “the Affected Schools”), and therefore deconsolidate them from its financial accounts. This significantly reduces its reported revenues and profits, as those figures now only capture the operations & financials of the non-affected high schools and foreign national schools.
On the details:
Under the Implementation Regulations, there are restrictions prohibiting foreign participation in private schools that provide compulsory education and not-for-profit preschools by means of mergers and acquisitions, contractual agreements and related party transactions. The restrictions are intended to ensure the legitimate rights and interests of not-for-profit schools, especially to protect the property rights and interests of not-for-profit schools and to avoid the improper transfer of proceeds from the operation of not-for-profit schools.
The Implementation Regulations impose significant uncertainties and restrictions on CML’s control over the affiliated entities operating private schools offering compulsory education and not-for-profit preschools (“the Affected Schools”). As a result, the contractual arrangements with the Affected Schools were considered not enforceable when the Implementation Regulations became effective on 1 September 2021, and CML considered its ability to use its power from the contractual arrangements to direct the relevant activities of and its ability to affect its variable returns from the Affected Schools had ceased by 31 August 2021 immediately before the Implementation Regulations becoming effective.
Consequently, CML lost control over the Affected Schools on 31 August 2021 and the Affected Schools were deconsolidated from CML’s consolidated financial statements for FY2021 (ended 31 August 2021) and the operations of the Affected Schools were classified as discontinued operations as of 31 August 2021.
The Affected Schools in China not only include middle schools, elementary schools and not-for-profit preschools, but also include 8 high schools that are currently under the same operating licenses with private schools providing compulsory education and/or not-for-profit preschools (the “Mixed High Schools”).For context on the impact of the deconsolidation of the Affected Schools, as of 31 August 2021, CML had 117 schools in total. Only 18 schools (or 15% of total) were high schools (of which some are affected) and 3 were foreign national schools. The remaining 96 schools (or 82% of total ) were preschools (34), elementary schools (33) and middle schools (29).
In terms of the 46k students enrolled for FY 2021, 17% (7.6k students) were in high schools and 1% in foreign national schools. The remaining 83% (or 38.0k students) were in preschools (12%), elementary schools (49%) and middle schools (22%).
Although CML has deconsolidated the Affected Schools from its financials for now, it is still unclear (even to the company itself) how things would actually pan out in the end, including what they do with the Affected Schools and whether they still have any value (where currently they are not reflected in CML’s financials due to the deconsolidation).According to the company, “up to the date of this announcement, the Implementation Regulations have been in effect for a relatively short period of time, and local governments have not yet issued corresponding classification management regulations and rules for the Implementation Regulations, and as there are different policies and requirements for the implementation of the Implementation Regulations in various regions, it will be implemented when local governments issue relevant documents based on the actual situation.”
For the Mixed High Schools, CML has determined to take measures to optimise its operating structure to mitigate the impact of the Implementation Regulations, including transferring the current students from the Mixed High Schools to high schools that have their own operating licenses in China.The management is also in the process of proactively making registration and filings with the relevant local government departments in Hainan, Henan and other provinces in China for individual operating licenses for the 8 Mixed High Schools. Upon completion of the restructuring, it is expected that the operations of these high schools which will obtain individual operating licenses will be (re-)consolidated into the consolidated financial statements of the company. If and when that happens, then the financials like revenues and profits of CML would likely increase again, purely just due to the inclusion of more schools in the income statement.
On the financials, they are quite messy now, as many Affected Schools have been deconsolidated from the financials, resulting in a decrease in many items (like revenue, profits, assets, etc). In addition, if in the future the 8 Mixed High Schools get re-consolidated back after the relevant licenses are obtained (or the Affected Schools continue to have some value, instead of zero), then the financials would be revised again. Investors should therefore interpret CML’s financials for this FY2021 (explained below) in this context.For now, the revenue …
For the remaining points of this earnings summary, check them out at our Multibagger Research Series (linked below).
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