1H23 results are in line with our expectations

The company announced 1H23 results: revenue of HK$307 million, -6.6% year on year; net profit to parent - HK$24 million. Loss for the same period last year was HK$62 million, narrowing 61.5% year on year. At this stage, the extremely asset-light model of the company's confinement business has been successfully operated, and profitability has been clearly restored; the store expansion plan is accelerating, and we are optimistic about the company's medium- to long-term growth prospects.

Development trends

1. The extremely lightweight asset model has been successfully operated, and the number of new cities has been accelerated. The monthly service business revenue for 1H23 was $307 million, or -6.0% year-on-year, mainly due to a decline in remittance of RMB to HKD. The company's store expansion strategy is progressing steadily. As of the announcement date, the company has a total of 14 stores. Among them, the Classic Aidi Palace team operates 10 Aidi Palace brand stores (6 in Shenzhen, 2 in Beijing, 2 in Chengdu), the Innovative Aidi Palace team operates 2 Aidi Palace brand stores (1 in Xiamen and 1 in Dongguan), and the Yuegge team operates 2 Yuegge brand stores (all in Zhuhai). Looking forward to the future, the company's “50 Cities in 5 Years” store expansion plan is accelerating, and we expect it to continue to seize market share.

2. The confinement service business has returned to a profitable state, and the Group's financial expenses have dragged down the overall profit margin. The company's 1H23 gross margin was +13.5ppt to 30.3% year-on-year, and gross margin increased significantly. On the cost side, the sales expense ratio was -0.27ppt to 19.1% year-on-year, mainly due to the increase in marketing efficiency brought about by innovative marketing methods in the confinement service business; the management/R&D expense ratio was -1.6ppt/-0.2ppt to 10.0%/10.4%, respectively. The confinement service achieved a net profit of HK$14.48 million and returned to a profitable state, mainly benefiting from reduced capital expenses and optimized store financial models brought about by the weakening impact of the epidemic and the extremely lightweight operation of stores. Dragged down by financial expenses of HK$31.94 million, the final net profit margin was -7.7%, but +11ppt compared to the previous year, showing the company's successful store transformation and improved operating capabilities.

3. Focus on post-epidemic restoration progress in the short term and be optimistic about the company's medium- to long-term growth prospects. Looking at it in the short term, we believe that the delayed impact of the epidemic will gradually be eliminated, which is expected to bring about business repair. Looking at the medium to long term, as a confinement center leader, the company has core advantages in terms of standardized care systems, talent training systems, and brand reputation. At this stage, the extremely asset-light model is working, three teams plus two major brands have been formed, and the 50-city plan is to accelerate the expansion of the market in 5 years. Furthermore, since mid-'21, the company has successively promoted real estate divestment, debt optimization, and equity structure improvements, etc., which we believe is expected to help the company develop healthily and in the long term.

Profit forecasting and valuation

Considering that the opening of the store fell short of expectations, the 2023 profit forecast was lowered by 40% to HK$73 million, and the 2024 profit forecast was lowered by HK$121 million. The current stock price corresponds to the 2023/2024 profit forecast of 19/11 times P/E, maintaining outperforming industry ratings. Based on the reduction in profit forecasts, combined with the trend of company valuation restoration, the target price was lowered by 27% to HK$0.44, corresponding to 26/16 times P/E in 2023/2024, with 38% upside.

risks

Non-main business is hampered, the speed of opening stores is lower than expected, and the shareholding ratio of the core management team is low.