Gratefulness Openness Preciseness Responsibility ANNUAL REPORT 2018 Contents Page Corporate Information 2 Our Schools 4 Chairman’s Statement 5 Financial and Business Summary 8 Management Discussion and Analysis 11 Directors and Senior Management 22 Report of Directors 32 Corporate Governance Report 70 ESG Report 86 Independent Auditor’s Report 121 Notes to Financial Statements 134 Definitions 216 CORPORATE INFORMATION BOARD OF DIRECTORS AUTHORIZED REPRESENTATIVES Mr. Li Tao Executive Directors Ms. Leung Wing Han Sharon Mr. Xu Changjun (Chairman) Mr. Wang Huiwu (Chief Executive Office) JOINT COMPANY SECRETARIES Mr. Li Tao Mr. Huang Zhongcai Non-executive Directors Ms. Leung Wing Han Sharon Mr. Wang Degen REGISTERED OFFICE Mr. Lu Zhichao Mr. Tang Jianyuan PO Box 309, Ugland House Grand Cayman, KY1-1104 Independent Non-executive Directors Cayman Islands Mr. Zhang Jin HEADQUARTERS AND PRINCIPAL PLACE Mr. Chen Yunhua OF BUSINESS IN CHINA Dr. Gao Hao 5/F, Administrative Building Audit Committee Sichuan TOP IT Vocational Institute Mr. Zhang Jin (Chairman) 2000 Xi Qu Avenue, Pidu District Mr. Lu Zhichao Chengdu Mr. Tang Jianyuan PRC Mr. Chen Yunhua Dr. Gao Hao PRINCIPAL PLACE OF BUSINESS IN HONG KONG Nomination and Remuneration Committee 40th Floor, Sunlight Tower Mr. Chen Yunhua (Chairman) No. 248 Queen’s Road East Mr. Wang Huiwu Wanchai, Hong Kong Dr. Gao Hao LEGAL ADVISOR AS TO HONG KONG LAW Strategy and Development Committee Davis Polk & Wardwell Mr. Wang Huiwu (Chairman) 18th Floor Mr. Xu Changjun The Hong Kong Club Building Mr. Wang Degen 3A Chater Road Mr. Lu Zhichao Hong Kong Mr. Li Tao 2 HOPE EDUCATION GROUP CO., LTD. • 2018 ANNUAL REPORT CORPORATE INFORMATION AUDITOR PRINCIPAL BANKERS Ernst & Young Bank of China Certified Public Accountants China Minsheng Bank 22/F, CITIC Tower Chengdu Rural Commercial Bank 1 Tim Mei Avenue Central, Hong Kong COMPANY’S WEBSITE COMPLIANCE ADVISOR www.hopeedu.com Guotai Junan Capital Limited STOCK CODE 27/F, Low Block Grand Millennium Plaza 1765 181 Queen’s Road Central Hong Kong PRINCIPAL SHARE REGISTRAR Maples Fund Services (Cayman) Limited PO Box 1093, Boundary Hall Cricket Square Grand Cayman, KY1-1102 Cayman Islands HONG KONG SHARE REGISTRAR Computershare Hong Kong Investor Services Limited Shops 1712-1716, 17th Floor, Hopewell Centre 183 Queen’s Road East Wanchai, Hong Kong HOPE EDUCATION GROUP CO., LTD. • 2018 ANNUAL REPORT 3 OUR SCHOOLS Sichuan Tianyi College Jinci College of Shanxi Southwest Jiaotong Medical University University Hope College Sichuan TOP IT Vocational Institute Shanxi Sichuan Guizhou Sichuan Vocational College of Culture & Communication Guizhou Vocational Institute of Technology Sichuan Hope Automotive Technical College Business College of Guizhou University of Sichuan Hope Automotive Finance and Economics Vocational College Provincial Capital School 4 HOPE EDUCATION GROUP CO., LTD. • 2018 ANNUAL REPORT CHAIRMAN’S STATEMENT I hereby represent the Board of Directors to present to you the annual report of the Company as of 31 December 2018. OVERVIEW OF THE GROUP 2018 is a very important year for the development of the Group. The Group successfully listed on the Main Board of the Hong Kong Stock Exchange on 3 August 2018. On behalf of the Board, I would like to thank the professionals and employees who have worked hard for the successful listing of the Group. The Listing, which opened up a new journey of capitalization and internationalization, has enhanced our financial position, raised sufficient funds for our future development, and provided us with good development opportunities and platforms. As of 31 December 2018, the Group had a total of nine schools, including three independent colleges, five higher vocational colleges and one technical college. The Group is one of the largest private education groups in China with 86,033 students. After Listing, the Group was selected as a constituent stock of MSCI China Small Cap Index on 30 November 2018, and selected as a constituent stock of the index series such as Hang Seng Composite Index by the Hang Seng Indexes Company Limited on 11 March 2019, and was included in the Hong Kong Stock Connect list under the Shenzhen-Hong Kong Stock Connect on the same day. The inclusion demonstrates the recognition of the Company’s business and results by the capital markets, which is expected to extend the shareholder base and increase the liquidity of the shares of the Company, so as to facilitate the enhancement of investment value of the Company and the Company’s reputation in the capital market. HOPE EDUCATION GROUP CO., LTD. • 2018 ANNUAL REPORT 5 CHAIRMAN’S STATEMENT RESULTS AND DIVIDEND We delivered a good performance in 2018. Our revenue increased by 37% from RMB752.43 million in 2017 to RMB1,029.52 million. Gross profit increased by 30% from RMB360.03 million in 2017 to RMB467.24 million. Core net profit increased by 43% from RMB219.50 million in 2017 to RMB314.80 million. As of 31 December 2018, our bank balances and cash amounted to RMB3,038.91 million. The Board has recommended the payment of a final dividend of RMB0.015 (equivalent to HK$0.018) per share for the year ended 31 December 2018, subject to the approval of the Shareholders at the 2018 AGM. OPERATING HIGHLIGHT The Group and the management team are always committed in expanding the scale of existing schools and continuously creating value for shareholders. Within the first month after listing, the number of freshmen registered in the Group’s colleges exceeded 30,000, reaching 31,025, representing a year-on-year increase of 42.99%. In the 2018/2019 school year, the student enrollment in our schools was 86,033, representing an increase of 13.65% as compared with the 2017/2018 school year. Among them, Business College of Guizhou University of Finance and Economics and Sichuan Vocational College of Cuture & Communication expanded their student base to 15,549 and 8,912 as of 31 December 2018, representing an increase of 347% and 191% respectively as compared to 2014 when we made aquisition. All these results demonstrate the Group’s excellent institutional post-M&A governance enhancement capabilities. After the Listing of the Group, in accordance with the corporate governance requirements of Hong Kong Stock Exchange, we continuously optimized the management model of the Group, enabled the sharing of teaching resources, employment resources, procurement resources and student recruitment experience among schools, and effectively controlled operating costs. In 2018, each college of the Group worked closely to actively apply for majors with high social needs and promising job prospects. National and provincial approved majors such as the undergraduate major of stomatology at Jinci College of Shanxi Medical University, majors of rehabilitative technology and Chinese pharmacy at Sichuan Tianyi College, majors of nursing and preschool education at Sichuan Hope Automotive Vocational College, and major of music and arts at Sichuan Vocational College of Culture & Communication have been successively approved. At the same time, the Group focused on cultivating applied and skilled talents, increasing the proportion of training during teaching in correspondingly equipped training rooms, thereby improving the competitiveness of graduates in seeking employment. In 2018, the number of graduates from colleges of the Group amounted to 19,488, with the average employment rate of the colleges of the Group reaching employment rate of 92.19%, representing an increase of over 2% as compared to the previous year. The Company continued to promote its external expansion work. While investigating the new acquisition targets, the Group also attached great importance towards the institution of new colleges. In 2018, the management of the Group carefully analyzed policies and the market and strategically commenced the construction of new colleges. The Group successively signed project investment agreements with the government of Xinfeng County in Guangdong Province, the government of Zhong County in Chongqing and the government of Baiyin District in Gansu province to establish one new vocational college in each local area. 6 HOPE EDUCATION GROUP CO., LTD. • 2018 ANNUAL REPORT CHAIRMAN’S STATEMENT DEVELOPMENT STRATEGY At present, China has entered a period of economic transformation with industry transforming from low-end manufacturing to medium-to-high-end development, resulting a gap in industrial demand and talent supply. The Group aspires to provide more Chinese students with access to quality higher education and to provide more specialized skill talents for the national industrial transformation. To achieve this goal, we will focus on the higher education industry and adhere to two major development principles: first, improve the quality of education in existing schools, expand enrollment, optimize professional settings, promote the integration of production and education, enhance students’vocational skills and increase quality of talent cultivation; second, make full use of the Company’s more than 10 years of schooling and M&A experience, seek more opportunities for industry integration, enlarge and strengthen the business scope of Hope Education, and cultivate more high-quality technical personnel required in the economic innovation transformation and upgrading process for the society. “It takes ten years to grow trees but a hundred years to rear people”. Looking to the future, we are deeply aware of the great historical responsibility we have shouldered! We will always adhere to the