The Covid-19 pandemic will not “significantly depress” most Chinese private schools’ revenues this year, a leading ratings agency has said, because the chance of them granting refunds is low.

Fitch Ratings, one of the US’s largest corporate credit scorers, said private schools in China “with strong financial flexibility may seek overseas expansion as more opportunities arise” amid widespread distress in K12 markets across the world.

Fitch said there is low risk of tuition fee refunds for “most” Chinese private schools, as they have offered online classes and plan to offer weekend and summer catch-up classes to compensate students following months of government-enforced closures.

“Cash-flow challenges are also low for private schools, which generally have strong financial profiles, supported by robust profitability and positive FFO [funds from operations] generation resulting from stable, recurring, upfront-paid tuition fee revenue, and modest leverage,” Fitch said in a statement. “Free cash flow is particularly strong for those with a high proportion of rental properties, like Bright Scholar Education.” In 2019, New York-listed Bright Scholar acquired two UK private schools in a £38 million deal and bought CATS Colleges, an international school network based in England, for £150 million.

Schools across China began to re-open in mid-March in tranches, starting with grades 9 and 12, with stringent social distancing and sterilisation measures designed to curb the spread of Covid-19 in place.

Though Fitch’s outlook on the mainland’s private school sector was relatively rosy, it acknowledged that “revenue growth is likely to slow moderately in 2020, caused by weaker enrolment growth, reduced ability to raise tuition fees during the economic downturn, and reduced fees from ancillary services, such as food and study tour fees”.

Evidencing this, the firm flagged Maple Leaf Educational Systems, which is publicly listed and operates dozens of schools in China and a handful in Canada, whose revenue from camps and overseas consulting services dropped 40% in its second fiscal quarter of this year, compared to a 17.2% increase a year prior. Maple Leaf acquired a private school operator in Malaysia earlier this year. (You can read more about its strategy here.)

Chinese kindergartens, meanwhile, will face a “significant revenue drop”, said Fitch, as they cannot offer online education as a substitution for undelivered services, and will likely be the last educational centre to re-open in mid-May, at the earliest.

“Although local governments have announced various measures to support kindergartens, such as direct subsidies, rental deductions and preferential tax treatments, those policies mainly benefit inclusive kindergartens,” said Fitch. “Some kindergartens might not be able to cope with the prolonged cash-flow strains, especially those that collect tuition fees month by month.”

Date published: 15 May 2020

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