2023 results are largely in line with our expectations

The company announced 23 annual results: revenue +21.0% YoY to 2.63 billion yuan, net profit to mother +20.1% YoY to 790 million yuan, corresponding 2H23 revenue -12.8% YoY to 1.10 billion yuan, and net profit to mother -17.9% YoY to 330 million yuan. The performance was basically in line with our expectations and fell short of market expectations, mainly because 2H22 benefited from demand recovery to form a high base, and parks such as Anhui/Chongqing were under pressure in the short term due to product strategy adjustments. Comprehensive dividend rate of 98.5% for 23 years (including interim and final dividends of HK15.92 cents per share, corresponding 42% dividend, and special dividend of 21.39 HK cents per share).

Cemetery service: Revenue for 23 years was +23.8% to 2.165 billion yuan, corresponding to -14.0% to 800 million yuan compared to 2H23. This is mainly due to the high base of 2H22 consumption rebates in Shanghai, and more deferred demand was released in 1H23. Comparable cemeteries operating tomb sales service revenue +25.2% year-on-year (sales +23.3%; average price +1.5%).

Funeral services: 23-year revenue +10.7% to 400 million yuan, corresponding to 2H23 -10.8% to 170 million yuan, of which comparable funeral facility service revenue was +10.1% YoY (service volume -2.3%, mainly termination of cooperation on projects with expired contracts and low profit; average price +12.8%, mainly due to the increase in the number of value-added services with higher unit prices and the number of ceremonies in Shanghai).

Operating margin was +4.8ppt to 52.2% year over year. Cemetery services were +3.8ppt to 60.2% year over year (mainly due to increased sales and unit prices of cemeteries in various regions, and increased revenue share of two powerful cemeteries in Shanghai); funeral services +2.7ppt to 16.2% year over year (mainly due to the resumption of value-added funeral services, promotion of innovative services and increase in funeral service volume); other services were +2.3ppt to 2.4% year over year, mainly due to revenue related to the Group's design and construction, partially offset by investment in crematory machines and Fushouyun.

Development trends

1H24 faced a high base year over year; determined to transform life science service providers. 1) Considering the large demand recovery in early '23, 1H23/2H23 companies' revenue was +68%/-13%, respectively. We expect the year-on-year growth rate of our 24-year results to be affected by the high base of 1H23, or higher than before. 2) The company is determined to transform life science service providers and continue to promote the implementation of digital technology applications in various parks, from resource-dependent to technology-driven development: built and completed the VR environment system of Shanghai Fushouyuan in 23 years, promoted the implementation of digital human technology (such as used in scenes such as graveyard farewell), released version 5.0 of cloud commemorative products, and released digital family temple products1 during the winter solstice; in March '24, the company integrated ecological burial with innovative elements such as AI, metaverse, and digital people to host public festivals and collective ecological burial ceremonies.

Profit forecasting and valuation

Maintain profit forecasts for 2024 and 25. The current stock price corresponds to 2024/25 11/10 times P/E. Maintaining an outperforming industry rating and target price of HK$6.4, corresponding to 15/12 times P/E in 2024/25, with 30% upside.

risks

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