Q2 local epidemic repeatedly hit the key markets, the company's 1H22 income of 910 million yuan /-20.6%, belonging to the net profit of 260 million yuan /-28.9%. The revenue of cemetery / funeral / other services is 7.3 million yuan (- 24.9%) (- 24.9%) and 1.4% (29.7%) respectively. The overall operating profit margin is from-4.4pcts to 45.1%. Since June, the company has shown a rapid recovery; in the long run, as an industry leader, the company still has a leading professional management capacity and strong expansion advantages, maintaining the "buy" rating.

The impact of Q2 local epidemic situation, the reported performance also decreased by 28.9%. 1H22's operating income is 910 million yuan (- 20.6%), and the owner's profit is 260 million yuan (- 28.9%). From a business-by-business point of view, the decline in 1H22 revenue is mainly a drag on cemetery services. The revenue from cemetery services / funeral services / other services is RMB 7.3 million, which is-24.9%, 1.4%, 29.7%, and accounts for 80.3%, 18.1%, 2.5%, respectively, compared with the same period last year. From a regional point of view, FY21 Shanghai contributed nearly half of its revenue, while the local epidemic was serious during Ching Ming Festival in 2022, and the impact of the local epidemic in March-May was obvious. The revenue of 1H22 in Shanghai fell by 33.6% to 330 million yuan compared with the same period last year. Shanghai is a market with high profit margins, and the double-digit decline in revenue has a greater impact on the company's profits in the first half of the year. On the cost side, 1H22's relatively rigid employee costs (23.2%) and depreciation and amortization (8.6%) expense rates increased 2.8pcts and 2.2pcts, respectively, compared with the same period last year. The operating profit margin of 1H22 decreased by 4.4pcts to 45.1%, while the company's net profit margin decreased by 3.8pcts to 36.1%, which was basically the same as that of 2H21 (36.7%).

The business demand of the cemetery is expected to be deferred, and the demand for the simplification of funeral parlors is stable. By June 30, 2022, the company has entered 46 cities in 19 provinces and autonomous regions, and currently operates 31 cemeteries / year-on-year + 3, 30 funeral service facilities / year-on-year + 1. ① Cemetery Service: the revenue of 1H22 operating cemetery is 640 million yuan (- 24.4%). Structurally, the unit price is + 1.3% and the number of graves is-25.3%. Under the local epidemic, the operation of some cemeteries has been suspended, affecting sales, but with reference to the trend in 2020, the demand for tombs is expected to be replenished in the second half of the year. In the first half of the year, the income from comparable cemeteries was 640 million yuan (- 24.9%), the unit price was + 2.5%, and the number of graves was-26.8%. The income from newly acquired or newly built cemeteries was 4.989 million yuan, mainly from Longmen, Anhui Province, which was acquired in August 2021. ② funeral service: the income of 1H22 funeral service is 160 million yuan (+ 1.4%). Under the repeated influence of the epidemic, the ceremony is simplified, and the average price dropped 12.5% to 4700 yuan compared with the same period last year, while the service volume was not significantly disturbed (+ 16.0% compared with the same period last year). Among them, the comparable facility income is 160 million yuan (- 4.1%), the unit price is-8.1%, and the service volume is + 4.4%. The new facility income is 8.939 million yuan, mainly from the Linquan Jiahe Garden Funeral Parlour Company, which was built in 2021. ③ other business: 1H22 income is 22 million yuan (+ 29.7%), of which the revenue from funeral parlour construction services / professional design services / cremator business under the franchise agreement is 0.03 pound 0.04 million respectively.

Under the influence of business structure, operating profit margin decreased slightly compared with the same period last year. The overall operating profit margin of 1H22 is 45.1% (- 4.4pcts), compared with 2H21+0.4pct, in which the operating profit margins of cemetery service / funeral service / other services are 53.9%, 13.3% and 19.7%, respectively, compared with the same period last year. In the first half of the year, the local epidemic repeatedly affected the relatively mature cemetery enterprises, such as Shanghai, Heilongjiang and Liaoning, resulting in a decline in the operating profit margin of cemetery services; during the epidemic period, the development of high value-added funeral services was limited, affecting the operating profit margins of funeral services. The loss of other services was mainly due to the company's investment in the development of the two strategic sectors of environmental cremators and Fushouyun services, and the loss narrowed during the period.

We will expand and innovate the overlay model and continue to lay out key areas. In terms of equity acquisition in the first half of the year, the company completed the acquisition of the remaining 10% stake in Liaoning Guanlingshan Art Garden Cemetery Co., Ltd., becoming a wholly-owned shareholder, which is an important strategic stronghold of the group in the northeast region; completed the second capital increase in Zhuolu Yuanbaoshan, with a shareholding ratio of 51%. The project is located at the junction of Beijing and Zhangjiakou City, Hebei Province, which is an important step in promoting the Group's strategic planning in the Beijing-Tianjin-Hebei region. The company also continues to explore B2B business cooperation model, successfully signed contracts with several partners to provide service outsourcing or managed operations, and signed six cooperation projects in Jiangsu and Zhejiang provinces in the first half of the year.

Risk factors: local epidemic repeatedly affect the risk of cemetery operation and the provision of services; "Funeral Management regulations" and other policy restrictions exceed the expected risk; the risk of intensified competition in the industry; company management risk.

Earnings forecast, valuation and rating: the revision of the Funeral Management regulations is still in progress, and the market is worried about policy risks. at this stage, the low market risk appetite may still suppress the company's share price in the short term. But the regulations

It is expected to raise the threshold for industry entry, which is good for the leader in terms of pattern; and in the long run, the trend of urbanization, population aging, advocating cremation and rising consumption level is clear, and the company is expected to rely on outstanding management capacity and brand strength. Endogenous extension continues to expand and continues to increase market share. Since June, the company has shown a rapid recovery, with monthly revenue up 12.6% over the same period last year, and deferred demand is expected to be released in the second half of the year. Taking into account the repeated impact of Q2 local epidemic situation, we adjust the EPS forecast to 0.33 yuan in 2022 (the original forecast is 0.35 yuan), and maintain the 2023 EPS forecast of 0.42 yuan in 2024, and the current price corresponds to the PE of 13, 10 and 9X in 2022-24 respectively. Comparable company SCI (SCI.N) PE is 20x (2022E Bloomberg consensus), corresponding to medium-and long-term profit growth forecast for single digits. We give the company a "buy" rating of 20 times PE in 2022 and a target price of HK $7.60 at the current exchange rate.