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Noah Education Holdings Ltd (NYSE:NED)

F4Q11 Earnings Call

August 31, 2011, 08:00 a.m. ET

Executives

Jerry He - CEO

Dora Li - CFO

Analysts

Ella Ji - Oppenheimer

Kun Tao - ROTH Capital Partners

Operator

Good morning and good evening ladies and gentlemen. Welcome to Noah Education Holdings Limited Fourth Quarter and Full Fiscal 2011 Financial Results Conference Call. At this time all participants are in a listen-only mode. Following managements prepared remarks there will be a Q&A session. As a reminder this conference is being recorded.

Joining the conference today are Mr. Jerry He, Chief Executive Officer; and Ms. Dora Li, Chief Financial Officer. As at a U.S. market closed yesterday afternoon, Noah issued a press release announcing its fourth quarter and full fiscal year 2011 financial result. The release is available on the company’s IR website at ir.noahedu.com.cn. Along with the presentation for today’s call. This call is also being broadcast live over the internet.

Before management’s presentation I’d like to refer to the Safe Harbor statement in connection with today’s conference call. This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including certain expectations and goals which are subject to numerous assumptions and risks. Forward-looking statements involve known and unknown risks and uncertainties many of which are beyond our control which may cause actual results to differ materially from any future results or achievements implied by such forward-looking statements. The company’s actual results could differ materially from those contained in the risks factor section of the company’s final prospectus or recent filings filed with the Securities and Exchange Commission unless required by law the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

I’d now like to turn the call over to Noah’s Chief Financial Officer, Ms. Dora Li. Ms. Li, you may proceed.

Dora Li

Thank you for joining us today on our fourth quarter and full fiscal 2011 earnings conference call. I hope you all have had to chance to read our earnings press release. This quarter represented a brand new chapter for Noah with the completion of the acquisition of Yuanbo Education and the divestment of ELP Business, which allowed more to firmly establish it's footprint in the education service segment. Further to the exciting given this progress we are very pleased to report that Noah was able to deliver another set of strong results as our education service business continued to flourish with revenue growing 186% year-over-year in the first quarter and 134% year-over-year in fiscal 2011, both exceeding our guidance.

The [lowest] result was delivered by our two education service arm, Little New Star and Wentai Education, which continued to demonstrate the anticipated profit for growth potential, draw margin and highly visible business mobile enabling us to conclude the fiscal year with a strong growth momentum.

Turning to the detailed financial results for the fourth quarter and full-year 2011 as they are available in our earnings release. I’d like to highlight a few key financial metrics with you, all numbers will be in RMB unless otherwise stated.

Net revenue for the quarter which purely came from education service business up 186.4% year-over-year to 29.6 million exceeding our guidance. The strong growth was mainly driven by the contribution of Wentai Education which we acquired in August 2010 and also by the stable growth of Little New Star which grew revenue by [12 to 10%]. Wentai accounted for 61.6% of net revenue in the fourth quarter of 2011.

Gross profit up 189.3% year-over-year to 15.7 million and a gross profit margin improved 0.6 percentage points to 53%. On a full-year basis gross profit margin maintained at 53.7% a high and a stable growth margin demonstrated its extinctive feature of education service business and we expect our gross margin to maintain at a high and at stable level going forward.

Looking into detailed operating expenses. General and administrative expenses up about 52.9% year-over-year to 15.6 million mainly due to the incremental expenses from Wentai and that the share option incurred. As a percentage of revenue G&A expenses were 52.8% compared to 98.9% with the same time in fiscal 2010. A percentage remained high as infrastructure is built to support a more stabilized operation. However, as they further expand our revenue size its organic growth of Little New Star and Wentai as well as the additional contribution from Yuanbo from the coming quarter, we expect that the percentage of G&A expense to revenue will be lower in fiscal 2012.

Net of one off expenses related to the total of ELP Business, our operation is close to break-even for fourth quarter and operating losses of less than RMB1 million. Other operating expenses in the first quarter amounted to 10.1 million which included 8.7 million legal and professional services fees in relating to the total of ELP Business. This led to an operating loss of 9.6 million in this quarter.

Net loss for the quarter was 38.7 million or a loss of RMB1.11 per basic and the diluted share compared to a net loss of 3 million or a loss of RMB0.08 per basic and diluted shares in the fourth quarter of fiscal 2010. Net of one-time expenses related to ELP disposal, net loss would have been around 4 million. The one-off items includes the recognition of accumulated exchange reserve related to the ELP Business amounting to RMB30.7 million and the 3.9 million legal and the professional fees charged in this quarter.

Our balance sheet is strong and solid with our operations generated 28.2 million and our cash and cash equivalent, short-term bank deposit and short-term investment totaled 487.9 million or US$75.5 million on June 30. We had received second installment of 17.5 million or US$2.7 million net of adjustment on July 12 and the third installment of 30 million of US$4.6 million were received in October for the disposal of ELP Business.

If we take a closer look at the per share value, our cash per share at end of June is $2.05, cash plus real asset value at book is $2.65 a share and a book value per share is $3.23. If we add remaining receivables for dispose of ELP to cash per share, cash per share value would be $2.25.

That completes our financial review. Now I will turn the call back to our CEO, Jerry. He will walk you through our operation updates, strategy, outlook and guidance.

Jerry He

Thank you, Dora. As said you all saw from our financial results our operations continue to show strong (inaudible) growth in the past quarter. Thanks to our certain execution of growth strategy that built strong organic and acquisitive growth. Then I will update you on the business progress and opportunities for the three education services namely one by one.

Please refer to Slide 9. First about Yuanbo Education, which has started making contribution from (inaudible). There are ample growth opportunities. Yuanbo is the third acquisition in two years as Noah transformed it into an education services company. It operates and it manages 15 kindergartens in the (inaudible) Yangtze Delta region under the brand Qingan. Yuanbo focus on children at the age of 2 to 6 and offers world class international courses, that meets the growing demand for high quality pre-school education in China. It has a total enrollment about 4300 with the net revenue of RMB32 million at end of calendar year 2010.

To drive future growth Yuanbo will continue to expand its network, progressing on eastern part of China and to improve utilization rate. As of now Yuanbo has already added a two more kindergarten which are scheduled to open in September bringing the total number of kindergartens to 17. Right now 8 out of 15 existing kindergartens have reached or close to full capacity with the remainder having a 70, 80% utilization rate. We expect to further ramp up the utilization rate representing additional revenue growth opportunity.

Please refer to Slide 10 for Wentai. In the fourth quarter it finished the conversion and added four kindergartens up then making the total number grow to 15 schools and a kindergarten. Total enrollment exceeded 3300 representing a 23% year-over-year increase. After during a nice contribution in the past year, Wentai will continue to grow driven by two catalyst; first, a continued expansion of the number of schools in the kindergartens. We will open one new school and one kindergarten in September F1. There is one school originally scheduled for September which were now opened in the third quarter of fiscal 2012 due to change in construction process. In addition, we have signed contract for two additional schools and 6 kindergartens which are scheduled to open over the next two years. We are on track to reach our target to have at least 20 schools and kindergartens and their management by the end of calendar 2011.

Currently the average utilization of the business is about 22%, we expect to further improve the utilization rate in the years to come. Internally we have gradually integrating starting internal functions of Little New Star and Wentai. That’s including management of financial reporting to stay in place and including R&D in the IT resources to realize synergy of the business.

Turning to Slide 11. Little New Star’s revenue mainly comes for in the sales of teaching material, tuition and franchisee. Going forward, Little New Star drives our R&D initiatives in developing teaching material and its growth were driven by two catalyst; first, revenue enhancement opportunity brought by Dudu Happy Reading program, DHR. And second, growth (inaudible) of kindergarten network. DHR is a premium English teaching program for kids which was introduced last year. The duty of DHR is that we helped increased revenue per enrollment in three ways; firs, it increased the tuition of our own kindergarten by about 15% to about 1550 a month per enrollment from 1350. Second, we were introduced premium program to our direct owned and franchisee school network. So, we bring this program to kindergartens via Little New Star network and I the past quarter we have already introduced DHR to 9 kindergartens beyond our own network.

On the other hand we will continue to expand a self owned kindergarten network the number of self owned kindergarten has increased to 3 kindergartens in fiscal 2011 from one kindergarten in fiscal 2010 increasing revenue to RMB7.5 million for RMB2.2 million. In the next quarter we will add one more kindergarten, in addition, the two new kindergarten adding in fiscal 2011 already broke even in the second half of fiscal 2011 and that we expect them to be profitable in fiscal 2012. In addition, we have (inaudible) at a Little New Star to enhance efficiency and to better realize the potential of the business.

In the high growth education service industry in China, we were focused on three areas mainly; pre-school education opportunities, primary and secondary education and fundamental education. We are further penetrating in pre-school area with continued expansion of kindergartens of our all three units to (inaudible) their potential. We were deepening penetration in primary and secondary space with emphasis on English and the international programs. In addition, we further explore opportunities in supplemental education as the momentum Little New Star English training program is world place to capture potential in this segment. We are also expanding into the summer camps and other offerings to increase (inaudible) to fully utilize our school facilities.

To drive organic growth, personally we will continue to build the network at the Yuanbo, Wentai and Little New Star to bigger scale. Definitely we will increase enrollment to maximize utilization. We will also broaden service offerings to increase revenue per students. And that US$75 million in liquid assets, we will certainly capitalize on our finance strength to further expand our presence in the pre-school education space to build nation-wide network to drive need to long-term growth.

Finally, looking into our financial outlook. For the first quarter of fiscal 2012 we expect net revenue to be in the range of RMB33 to RMB35 million representing 68 to 78 year-over-year growth. For the full fiscal 2012 we expect a net revenue to be in the range of RMB145 million to RMB155 million, representing a 55 to 66 year-over-year increase. This reflect the current business plan of Little New Star, Wentai and Yuanbo Education, result of factoring in any potential acquisitions for additional expansion plan of the three existing units.

In all our fiscal 2012 top line will be driven by organic growth of expansion of Little New Star and the Wentai network as well as by the acquisitive growth brought by Yuanbo. In terms of profitability, gross margin were to be maintained at a similarly high level with our transformation into pure education services business with G&A to revenue where the trending down of our revenue size continue to expand. We expect continued improvement in profitability and profitable fiscal year 2012 beginning next quarter. With the strong liquidity (inaudible) we will continue to expand our core network and to seek acquisitive growth to drive our mid to long-term growth.

That concludes our presentation. And that we would like to open the call for questions. Operator, please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from the line of Ella Ji from Oppenheimer. You may proceed.

Ella Ji - Oppenheimer

Jerry, did I get you right that you said that you expect to be profitable both in fiscal first quarter fiscal year ’12?

Jerry He

That’s correct.

Ella Ji - Oppenheimer

Great. Good to know. And for the full-year of FY ’12, could you share some colors in terms of what profitability or what margins are you expecting?

Jerry He

The moment I gave you the guidance as 145 million to RMB165 million, that’s our top line and I made it clear that without factoring any additional potential acquisitions or expansion plans otherwise. The growth margin for the business become the revenue stable maintaining in the 50s. However, because they revenue side is rather small so all they had to revenue as a ratio is relatively higher at this point. So, the net margin were affected by that, as the businesses continue to grow in the size, the net margin were continue to improve. At this point we are looking at I believe 10 to 20% net margin range.

Ella Ji - Oppenheimer

That’s GAAP or non-GAAP?

Jerry He

That’s GAAP.

Ella Ji - Oppenheimer

Okay. Thanks. And you within your total revenue guidance could you for instance break it down for us how much percentage from each of your business lines?

Jerry He

All right. For three components; Little New Star, Wentai and Yuanbo. Yuanbo is relatively new, we mentioned that a moment ago. The revenue for (inaudible) is 32 million. We do expect that to grow by about 20% on the top line. For Little New Star, top line expectation is about 30%, for Wentai should be over 40.

Ella Ji - Oppenheimer

And you mentioned a very aggressive expansion plan for all three of them. Could you also share with us how much cash investment to expect that you were needed for that?

Jerry He

Actually they can’t act revenue small, because almost all our business we do not own the facilities, so we rent the facilities. For a new kindergarten our average we spend a close to RMB2 million in starter fees, but in assuming RMB is actually advertised over 3 to 5 year’s depends on what kind of equipment that we have. So, if you are talking about in total, we two schools one kindergarten for Wentai opening in September, and one from Little New Star and two from Yuanbo, in total it's 5. In terms of CapEx it's a little over RMB10 million in total. But that’s amortized over 5 years. So, that’s all in RMB terms, (inaudible) our cash position which is very close to 500 million it's very small number.

Operator

(Operator Instructions) Our next question is from the line of Kun Tao from ROTH Capital Partners. You may proceed.

Kun Tao - ROTH Capital Partners

Just a follow-up with (inaudible) what’s the profitability of your LNS and Wentai for this quarter or maybe for fiscal 2011?

Jerry He

If you just look at business a spend along this business that we got to factor in the overhead for the holding company. For fiscal ’11 Wentai’s gross margin is about 50%, for Little New Star its 57%, for Yuanbo we don’t have the number yet, because we just closed over the transaction.

Kun Tao - ROTH Capital Partners

Do you have a net margin profitability?

Jerry He

Net margin typically be in 20 to 30% range.

Kun Tao - ROTH Capital Partners

Okay. So, standalone these two segments are basically profitable?

Jerry He

For all three business are profitable and standalone business.

Kun Tao - ROTH Capital Partners

And given you just mentioned you probably spend roughly RMB10 million for your current CapEx plan. What’s your plan for (inaudible) after the expansion after you acquired this business?

Jerry He

As we mentioned earlier we have two just opened in September, I guess coming very soon. The CapEx we measured on average is about RMB2 million which is not huge. And in this business we either open in September or in March, but most of it in September. For example we don’t have anything scheduled for March yet. We only have one kindergarten potentially open in March for Wentai, but it's also possible that we (inaudible) to September to deepen down the condition and progress of the construction. But September 2012 would be in fiscal 2013 so that would not be in the fiscal 2012.

Kun Tao - ROTH Capital Partners

Okay. Given the cash you have and comparatively small (inaudible) would you want to use with your cash?

Jerry He

Okay. That’s a good question. One thing that we mentioned earlier was that we are driving our growth in other three business we acquired that we are growing nicely organically, but at the same time with a huge cash position we have we continue to see operational opportunities in this space, especially in the per-school space. We have Wentai in the south part of China and we have Yuanbo in the east part of China. Our plans to expand the network nation-wide so we were going to the north and the west of China.

Kun Tao - ROTH Capital Partners

So, you are currently negotiating with some of your targets right?

Jerry He

We are very pleased to report that we have very strong pipeline, but as you know it's (inaudible) until we assign anything definitive, but for mid to long-term growth for Noah Education we definitely need to diverge our cash position to make acquisitions going forward.

Kun Tao - ROTH Capital Partners

When do you expect additional acquisition will happen. Is it happening in fiscal 2012 or maybe later?

Jerry He

We do hope that we have additional acquisition to happen in fiscal ’12, but until we assign anything definitive it's very hard to say when that will be realized. The guidance I gave so far is not factoring any acquisitions.

Kun Tao - ROTH Capital Partners

Okay, my last question is regarding your potential new acquisitions. When you make or talking to new acquisitions, are those target pipelines are the [products] they have to be profitable or what kinds of [products] you are looking for?

Jerry He

For pre-schools and the schools, one of the criteria would be at least let’s say organization would be profitable. As an example you can say, organization have 10 kindergartens, which do not enquire every single while it depends is profitable but we at least require the 10 as a total is profitable.

Kun Tao - ROTH Capital Partners

You mentioned probably it take one year for your new kindergarten to be break-even. Is that correct?

Jerry He

Typically, in business it takes about a 1.5 and 3 years to reach for capacity. So, the break-even point typically happens like 1.5 and 2 years, but for our kindergartens it's nice that we were able to do that very soon. For example, the two new kindergarten that we added into Little New Star we actually were starting to make a positive second half of this fiscal 2011 for the first full fiscal year is already broke even that means we were losing money in the first half but we actually made a money second half. We broke even for the full year. Going forward for next year of course, we are going to be profitable as we expect. That’s actually better than the average than the normal.

Operator

(Operator Instructions) At this time there are no further questions in queue. So, I’d like to hand the call back to Mr. He for closing remarks.

Jerry He

Thank you for joining us today and we look forward to updating you our progress at a next conference call. Have a nice day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference call. You may now disconnect, have a nice day.

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