1H23 performance is basically in line with our expectations

The company announced 1H23 results: operating income of 1,525 million yuan, +68.2% year on year; net profit of 465 million yuan, +78.0% year on year; significant year-on-year increase in performance, mainly due to the rapid release of 2H22's accumulated and deferred funeral consumer demand, and new projects entering a period of rapid development. The performance was basically in line with our expectations. 1H23 pays a dividend of 9.06 HK cents/share, with a dividend rate of about 40%.

Cemetery services: 1H23 revenue was +76.9%, of which the operating tomb sales service revenue of comparable cemeteries was +84.3% (sales volume +60.4% /average price +14.9%, mainly due to significant sales recovery from two cemeteries in Shanghai, etc., while benefiting from improved product structure and value). Revenue from new acquisitions or newly built operating tombs increased by 187,000 yuan over the same period last year, mainly contributed by Fuluyuan in Heze.

Funeral services: 1H23 revenue was +36.2%, of which service revenue for comparable funeral facilities was +36.2% (service volume +20.2% /average price +13.3%, mainly due to the resumption of normal operation of funeral facilities, the development of value-added funeral services such as spiritual services and etiquette farewell services, and the rapid development of newly established funeral facilities). Revenue from newly acquired or newly built facilities was 32,000 yuan, mainly contributed by funeral etiquette services provided by Yan'an Hongfu, which was acquired in 2023/6.

1H23 operating profit margin +10.3ppt to 55.4% year-on-year. Among them, the profit margin of cemetery service operations was +8.4 ppt to 62.3% year on year, mainly because mature cemeteries with high operating profit margins were affected by the epidemic in the same period last year and increased sales revenue contribution this year; funeral service operating profit margin was +7.6ppt to 20.9% year on year, mainly due to the development of value-added and innovative funeral services. Other service divisions lost 4.53 million yuan, mainly due to investment in technology and product development of cremators and Fushouyun.

Development trends

It settled in Shaanxi for the first time, focusing on the further layout of key provincial capitals; focusing on the progress of the transformation of life science and technology services. 1) The company's 1H23 performance announcement shows that it acquired 100% of the shares in the Yan'an Hongfu Funeral Integrated Funeral Project in the first half of the year and has already obtained 428 acres of funeral construction land. This is the first time the company has settled in Shaanxi Province, focusing on the further layout of key provincial capitals in the future. Furthermore, the company signed a cooperation agreement with Shenyang Fuyuan to jointly establish a joint venture to carry out funeral service-related business in Shenyang. 2) The company is committed to transforming funeral and life technology service providers. In June, the company held a digital transformation and “3JI” product launch conference to integrate “marking, commemoration, and recording” through digital technology. In other businesses, the pre-life contract business strengthened public acceptance, expanded cooperation channels, and innovated product content through publicity. The cumulative number of contracts signed on 1H23 increased by 18.4% over the same period last year.

Profit forecasting and valuation

Taking into account continued demand and new project contributions, the profit forecast for 2023 was raised by 3% to 800 million yuan, and the profit forecast for 2024 was raised by 3% to 986 million yuan. The current stock price corresponds to 13 times/12 times the 2023/2024 price-earnings ratio. Maintaining an outperforming industry rating and target price of HK$7, corresponding to 16 times/13 times the 2023/2024 price-earnings ratio, there is room for an increase of 17%.

risks

Endogenous growth of stock projects falls short of expectations; epitaxial expansion falls short of expectations; policy risks.