Projected 22% year-over-year increase in earnings in 2023
We expect net profit to grow 22% year-on-year in 2023, mainly considering that the first half of the year benefited from deferred demand recovery at the end of '22, but the recovery of Northern Cemeteries and the progress of deferred acquisitions fell short of our expectations in mid-'23. It is recommended to focus on the development of new digital businesses and industry standardization.
Key points of interest
The restoration and takeover of Northern Cemeteries in '23 fell short of our previous expectations. Considering the impact of the 23 lunar calendar “Leap February” (that is, 2023/3/22-2023/4/19) on burial demand in the northern region (influenced by traditional ideas, some consumers in the northern region think “leap February” is inappropriate for activities such as sweeping and burial) and extreme weather such as cold tides and blizzards in the north at the end of the year, we expect the Northern Cemeteries business to resume or be under pressure in 23. Furthermore, we expect the epitaxial acquisition project to progress or fall short of our previous expectations: the Yan'an and Dalian Cemetery project is still under construction, production capacity has not been fully released, and 2H23 has yet to announce the launch of new projects related to the epitaxial merger and acquisition. Looking ahead to '24, we expect demand for Northern Cemeteries affected by “Leap February” and extreme weather in '23 may be reimbursed to a certain extent. At the same time, some deferred acquisition projects, if implemented one after another, will contribute to incremental performance.
Follow the progress of new digital businesses and transformational life technology service providers. In recent years, the company has been committed to transforming a funeral and life technology service provider. In June 2023, it released an innovative “3JI” product integrating “marking, commemoration, and recording”, and continued to enrich the product content: 1) Starting 2023/12/22, the company launched AI ceremonial services in six provinces and cities to create a free “digital person” for the deceased, and plans to officially launch affordable AI gift products in 24. 2) Immersive digital funeral halls have been launched in Shanghai and Nanchang cemeteries. 3) Various digital products such as Cloud Sacrifice, Cloud Album, and Cloud Obituary have been deployed. We recommend focusing on the progress of the company's new digital business. Compared with peers, it has more forward-looking ideas and richer products, which is expected to further expand value-added services and increase customer stickiness.
Committed to promoting talent cultivation and standardized development in the industry. 2023/12/2-12/3 Under the guidance of the Ministry of Civil Affairs and other departments, Fushouyuan, Shanghai University, and Beijing Vocational College of Social Management (Ministry of Civil Affairs Training Center) took the lead in establishing a national community for the integration of maternity and education in the funeral industry; 2023/12/22 and Shanghai University issued the country's first “General Service Rules for Funeral Social Workers” group standards applicable to multiple sites. We believe that Fushouyuan, as a leader in the domestic funeral industry, works with all sectors of society to promote the cultivation of talents and the healthy development of standards in the industry.
Profit forecasting and valuation
Considering that the restoration of Northern Cemetery and the extended acquisition fell short of our previous expectations, the 23/24 profit forecast was lowered by 9%/8% to 804 million yuan/910 million yuan, and a 25-year profit forecast of 1,016 million yuan was introduced. Current stock prices correspond to 12 and 10 times 24 and 25 years' P/E. Maintaining an outperforming industry rating, the target price was lowered by 9% to HK$6.4, corresponding to 14-year 24-year and 12-year P/E, with 21% upside.
risks
Endogenous growth of stock projects falls short of expectations; epitaxial expansion falls short of expectations; policy risks.