Bright Scholar Education Could Decline Substantially When Lockup Expires

November 14, 2017 concludes the 180-day lockup period on Bright Scholar Education Holdings (NYSE: BEDU).

When the lockup period ends for BEDU, its pre-IPO shareholders, directors, and executives will have the chance to sell their restricted stock, which comprises 87% of total shares outstanding.

(Source: S-1/A)

The potential for a sudden increase in stock available in the open market may cause a significant decrease in the price of Bright Scholar Education Finance shares.

We believe that previously-restricted shareholders - nine individuals and numerous corporate entities - will be particularly eager to take their money off the table - BEDU has a return from IPO of 126%.

Currently, BEDU trades in the $23 to $23.90 range, above its IPO price of $10.50 and higher than its first day closing price of $13.40 on May 18, 2017.

Business Overview: Largest Operator Of International And Bilingual Schools In China

Bright Scholar Education Holdings operates international and bilingual K-12 schools in China. The company notes that it is the largest such operator based upon student enrollment in that country. Bright Scholar Education established its first private schools in 1994. Since then, the company has grown its network to 51 schools across seven provinces. In the first half of 2017, the company enrolled close to 30,000 students, which represents an increase of 54.5 percent from the 18,913 students enrolled only three years earlier in 2014.

The company operates international schools, bilingual schools, and kindergartens. Bright Scholar Education considers its curricula to be highly effective, and it notes that 68 percent of graduating students go on to higher education, including many top-ranked overseas universities such as the University of Oxford, University of Cambridge, Cornell, University of Virginia, University of California, Los Angeles, and the University of Cambridge.

(Source: S-1/A)

Financial Highlights

Bright Scholar Education reported the following financial highlights for the third quarter ended May 31:

• Revenue was RMB406.7 million, up 28.1%; gross profit was RMB183.8 million, up 51.5%; gross margin was 45.2%, up from 38.2%.

• Operating income was RMB121.8 million, up 66.5%; operating margin was 30.0%, up from 23.1%.

• Net income was RMB107.5 million, up 85.7%; adjusted net income was RMB107.5 million, up 85.7%; net margin was 26.4%%, up from 18.2%%; adjusted net margin was 26.4%, up from 18.2%.

• EPS was RMB1.05, up 150.0%; adjusted EPS was RMB1.05, up 150.0%.

• Adjusted EBITDA was RMB145.2 million, up 59.3%; adjusted EBITDA margin was 35.7%, up from 28.7%.

Management Team

Co-founder Huiyan Yang also serves as director and chairperson of Bright Scholar Holdings. Ms. Yang joined Country Garden Holdings Company Limited, a related party, which is a HKSE-listed Chinese residential property developer, in 2005, as the manager of its procurement department. Ms. Yang has served as a director of Country Garden since December 2006 and its vice chairperson since March 2012. Ms. Yang graduated from Ohio State University with a bachelor degree in marketing and logistics.

CEO Junli He has served in his position since October 2015. His previous experience comes from positions at Time Education China Holdings, Noah Education Holdings, Morgan Stanley Global Wealth Management, and Bear Stearns. Mr. He earned his bachelor degree in science from Peking University and an MBA from the University of Chicago, Booth School of Business. He is a CFA charter holder.

Competition: Tal Education Group, New Oriental Education & Technology, And Kroton

According to Morningstar, Bright Scholar Education faces competition from Tal Education (TAL), New Oriental Education & Technology (EDU), Kroton, Grand Canyon Education (LOPE), and others. In its SEC filing, the company also listed Nord Anglia and Maple Leaf schools and direct competition.

Early Market Performance

Bright Scholar Education’s IPO priced at $10.50 per share, above its expected price range of $8 to $10. The stock closed on the first day of trading at $13.40. Since then, the stock reached a high of $28.02 on October 1. The stock currently trades in the $23 to $23.50 range.

Conclusion: Short Shares Of BEDU Before November 14th

When the 180-day lockup period for BEDU expires on November 14th, the company's numerous pre-IPO insiders and shareholders will finally be able to cash in on their gains. And why wouldn't they? BEDU has a phenomenal return from IPO of 126%.

If even just a portion of the previously-restricted shareholders cash in on their gains once BEDU's lockup expires, the flood of shares in the market could cause a sudden, sharp, short-term downturn.

To take advantage of this anticipated dip, risk-tolerant investors should short shares before November 14th, 2017. Investors should cover positions late in the trading day on November 14th and during the trading session on November 15. To read more about our lockup trading strategy and recent results, click here.