Incidents:

Fushouyuan announced its 2022 performance announcement: in 2022, the company achieved operating income of 2,672 million yuan/-6.63% year on year, and net profit of 659 million yuan/-8.53% year on year. 2022H2 achieved operating income of 1,265 million yuan/+6.84% year on year, and net profit of 397 million yuan/+12.71% year on year.

Investment highlights:

Cemetery service: The peak sales season for the winter solstice was affected by the 202Q4 epidemic, and expectations for performance recovery in the second half of the year were slightly lower. In 2022 as a whole, operating tombs earned 1,563 million yuan/-6.75% year on year, of which sales volume was -12.4% year on year, and the average sales price was +6.40% year on year. 2022H2, operating tomb revenue was 921 million yuan/+11.35% year on year, sales volume +2.79% year on year, and average sales price +8.30% year on year. Split by volume and price, the second half of the year was due to a recovery in Q3 and the low base of 2021H2, and revenue and sales both recovered year-on-year; Q4 travel restrictions became stricter, and traditional peak season sales during the winter solstice were greatly affected, and the recovery was slightly lower than previously anticipated. The annual average selling price increased significantly due to product structure upgrades.

The operation of mature cemeteries picked up, and profitability gradually recovered. In 2022 as a whole, the operating profit of cemetery services was 996 million yuan/-6.9% year on year; the operating profit margin was 56.40% /+0.90 pct year on year, mainly due to the rapid recovery of the business of weighted cemeteries in Shanghai after the pandemic, and their contribution to the cemetery division increased.

Mergers and acquisitions and additions to cemeteries have continued to advance, and the size of existing tombs has increased. In 2022, the company completed the acquisition of remaining shares in Guanlingshan, Liaoning, the second capital increase in Zhuolu Yuanbaoshan (holding 51% of shares), and achieved strategic cooperation with the Yunnan Wenshan Civil Affairs Bureau. By the end of 2022, the company's area available for tomb sales was 2.62 million square meters/+3.15% year on year.

The volume of funeral services continues to expand, and the average service unit price has declined due to a decrease in value-added services under the influence of the pandemic. In 2022, funeral service revenue was 359 million yuan/+8.27% year on year, number of customers +13.83% year on year, and average service unit price -4.89% year on year. 2022H2, funeral service revenue was 195 million yuan/+14.79% year on year, number of customers +11.98% year on year, and average service unit price +2.51% year on year. Under the control of the epidemic, the number of value-added services with high unit prices declined, while the volume of basic services with low unit prices increased with the expansion of funeral facilities. There was a decline in the average unit price of services and an increase in the number of customers.

Value-added services have been greatly affected by the pandemic. Profitability is expected to be restored as the haze of the epidemic dissipates. In 2022 as a whole, the operating profit of funeral services was 48 million yuan/-2.50% year on year; the operating profit margin was 13.55% /-1.4pct year on year. The decline in profit margins stemmed from the impact of varying degrees of epidemic rebound in various regions and the short-term impact of reduced agglomeration restrictions on the supply of high-value-added services. As the impact of the epidemic gradually recedes, it is expected that value-added services will return to normal supply, and profit margins for funeral services can be expected to increase.

Profit forecast and investment ratings: The backlog of demand during the pandemic is expected to be released rapidly in 2023. It is expected that 2023-2025 will achieve operating income of 28.67/32.74/3.693 billion yuan, an increase of 32.04%/14.19%/12.78% over the previous year; Guimu's net profit was 872/994/1,114 million yuan, up 32.10%/13.96%/12.13%; corresponding valuation of 13.55/11.89/10.61 xPE, lower than the historical valuation center of 29.01 xPE, The industry pattern is excellent. The company is a leading funeral company, holds a large number of cemetery assets, builds a stable first-mover advantage barrier, and maintains a “buy” rating.

Risk warning: Cemetery extension mergers and acquisitions have fallen short of expectations; changes in cemetery supervision policies are uncertain; industry competition intensifies; post-pandemic recovery falls short of expectations; and the decline in the macroeconomic cycle affects middle and high-end funeral expenses.