Key points of investment:
Dental chain leader whose profitability continues to improve
The company is a leading national chain of dental services. It has opened dental hospitals and clinics in 15 cities across the country under the two brands Rhyl Dental and Ruitai Dental, with a revenue CAGR of 14.7% for the fiscal year 2019-2022. The company's gross margin increased from 15.2% in FY2019 to 20.7% in FY2022, thanks to continued cost reductions and increased efficiency. Due to large fluctuations in administrative expenses after listing, the company appeared to have lost profits. Excluding the impact of administrative expenses, the sum of the company's sales expenses and management expenses ratio fell from 21.2% in fiscal year 2019 to 14.9% in fiscal year 2023, and profitability continued to increase.
The private market for dental services is growing faster, and the market share is expected to increase. According to statistics from Frost & Sullivan, the overall market size of dental services in China reached 141.8 billion in 2019. The market size is expected to reach 299.8 billion yuan in 2025, and the CAGR for 2019-2025 is 13.3%. Among them, the public dental market had a CAGR of 9.7% in 2020-2025, and the CAGR of the private dental market in 2020-2025 was 23.8%, and the growth rate was even faster. In 2020, the dental chain CR5 was 8.5%, and the market pattern was scattered. Driven by factors such as aging, increasing residents' awareness of oral health, and consumption upgrades, high-quality leaders are expected to continue to increase their market share through expansion.
More than half of the number of mature stores, profitability continues to improve
The company lays out stores in a hierarchy, which is expected to improve the company's overall profitability as the stores mature. The net interest rates of mature stores in FY2022 (more than 7 years), rapid growth period (3-6 years or more), and expansion period (within 3 years) were 29%, 12%, and -12% respectively. The number of new clinics and dental chairs in 2016-2020 accounted for more than 60%. As the company's scale continues to expand and the proportion of mature stores continues to increase, the company's profitability is expected to continue to improve.
Profit Forecasts, Valuations, and Ratings
We expect the company's revenue from fiscal year 2023 to fiscal year 2025 to fiscal year 17.2/20.7/2.43 billion, respectively. The corresponding growth rate is 6.1%/20.3%/17.1%, respectively, and the three-year CAGR is 18.6%. Guimu's net profit was 0.04/184/270 million yuan respectively, and the growth rate was 106%/316%/47% respectively. In view of the large fluctuations in the company's net profit, we used the PS valuation method. Referring to the average PS of a comparable company in 22-24, 8/6/5, we gave the company 6 times PS. The target price was HK$21.397, covering it for the first time, and giving it a “buy” rating.
Risk warning: risk of uncertain policies, risk of medical disputes, risk of expansion falling short of expectations