1H23 performance is in line with market expectations

Chaoju Ophthalmology announced 1H23 results: revenue of 693 million yuan, up 30.0% year on year; net profit of 51 million yuan, up 45.4% year on year; adjusted net profit of 137 million yuan, up 32.1% year on year; performance was in line with market expectations.

Development trends

The scale of diagnosis and treatment increased significantly, and the main business recovered rapidly after the epidemic. The scale of services provided by 1H23 has expanded markedly, with 532,000 outpatient visits (up 20.9% year on year), 33,000 hospitalizations (46.3% year on year), and 58,000 optometry center customers (up 5.4% year on year); among them, the unit price for optometry center customers increased 16.0% year on year to 803 yuan. 1H23's consumer ophthalmology service revenue was 361 million yuan, up 24.1% year on year; basic ophthalmology service revenue was 332 million yuan, 37.2%, accounting for 47.9% of total revenue, an increase of 2.5ppt over the previous year. We believe that with the gradual increase in the company's medical treatment volume and customer unit prices and the balanced development of basic ophthalmology and consumer ophthalmology businesses, considering the impact of the low base of 4Q22, the company's revenue is expected to maintain a high year-on-year growth rate throughout the year.

The expansion of the layout is progressing steadily, and improvements in subject competencies and service levels have enabled long-term growth. 1) The “hospital cluster” strategy is progressing gradually: As of the end of June 2023, the company operated a total of 26 ophthalmology hospitals and 27 optometry centers, an increase of 2 and 1 over the beginning of the year, all of which were expanded outside the province, helping to further open up market space. 2) Overall improvement in the level of ophthalmology services: On the one hand, the company is expanding the consumer ophthalmology market through online marketing, public welfare activities, membership management, etc., and on the other hand, improving the level of basic ophthalmology service diagnosis and treatment by introducing advanced treatment plans and high-end medical devices. We believe that the company is expected to achieve long-term healthy development of performance by continuously improving the level of service diagnosis and treatment and the layout and expansion of the hospital network.

Operating indicators are stable, and profit margins have gradually increased. The company's 1H23 gross profit margin was 46.64%, an increase of 0.76ppt over the previous year, and a year-on-year net profit margin of 21.74%, an increase of 2.30ppt over the previous year. The 1H23 management expenses rate was 15.96%, a year-on-year decrease of 1.44ppt, a year-on-year decrease of 1.44ppt, and a year-on-year increase of 2.11ppt, mainly due to an increase in marketing expenses for newly built and acquired hospitals. We expect that with the economies of scale brought about by the company's business expansion and the maturity and improvement of hospital operations, there is room for further improvement in the company's profitability.

Profit forecasting and valuation

Due to rapid business recovery and increased profitability, the 2023-24 EPS was raised by 28.4% and 29.9% to 0.37 yuan and 0.46 yuan respectively. The current price corresponds to 10.7 times and 8.3 times P/E in 2023-24. Maintaining the “outperforming industry” rating, due to a downward shift in the sector's systematic valuation center, the target price of HK$7.68 was maintained, corresponding to 18.5 times and 14.3 times P/E in 2023-24, which is 72.6% upward from the latest closing price.

risks

Hospitals have climbed or expanded less than expected; policy changes; medical emergencies; repeated outbreaks.