2023 results are in line with our expectations
The company announced 2023 results: revenue of 2.145 billion yuan, +31.2% year over year; net profit to mother of 216 million yuan, +109.2% year over year; adjusted net profit of 241 million yuan, +53.3% year over year, in line with our expectations.
At the same time, the company announced that it would invest 70% of China's second-largest traditional beauty service provider, with a consideration strategy of 350 million yuan, and proposed a final dividend of 0.43 yuan/share for 2023, with a dividend rate of 47%.
Development trends
1. The number of members and per capita consumption increased year-on-year, and the revenue of the three major businesses grew rapidly. By business, ① beauty and health services: revenue of 1.19 billion yuan in 23 years, with the same increase of 26.1%, of which the number of active members in direct-run stores increased 19.4% to 90,000, and the average member spending increased 8.7% to 11,000 yuan; ② Medical and aesthetic services: 23 years of revenue of 850 million yuan, an increase of 37.1%, and the share of medical and aesthetic revenue increased by 2ppt to 40%. Among them, the number of active members also increased by 30.6% to 24,000 yuan; ③ Asia Health Services: Revenue in 23 100 million yuan, an increase of 47.6%, of which the number of active members also increased 36.5% to 4,191, and the average spending amount of members also increased 5.4% to 17,000 yuan. The company continued to expand its store layout, with a net increase of 8/10 direct-managed/franchise stores for beauty and health services, 3 Xiuker stores, and 1 Yanyuan store; by the end of 23, it had a total of 201/199 direct/franchise stores.
2. The combination of business structure optimization and scale effects showed, and profitability increased year-on-year. The company's gross margin was +1.7ppt to 45.6% year-on-year in '23, mainly due to the increase in passenger traffic, which diluted fixed costs due to the increase in passenger flow, and the share of medical, aesthetic and sub-health care revenue with high gross margins increased. On the cost side, the 23 sales rate was +0.1ppt to 17.6% year over year, which was basically stable; the management fee rate was -3.2ppt to 14.8% year over year, still -1.2ppt year after excluding the impact of listing expenses in the same period of the year, showing operating efficiency as revenue scale increased; R&D rate was -0.3ppt to 1.6% year over year. Under the combined influence, net profit margin was +3.7ppt to 10.1% year on year, adjusted net interest rate was +1.6ppt to 11.2% year on year, and profitability continued to be optimized.
3. Announcing a strategic investment of 70% of Nerrell's shares, optimistic about the broad growth space of beauty and health leaders.
The company announced that it will invest 70% of Narrell's shares with a consideration strategy of 350 million yuan. Ariel is the second-largest traditional beauty service provider in China. Based on the target group's 23-year valuation of 517 million yuan, the deal corresponds to Narrell's 1.0x P/S and 15x P/E in '23. After the transaction is completed, the company will have 88 direct-run stores and 47,000 active direct members in Guangzhou and Shenzhen. The transaction was paid in three instalments, with the second and third payment terms including Nerrell's net profit of 1H24/24 not less than 0.2 billion yuan, respectively. We believe this transaction is expected to enrich the company's member assets and expand the company's regional influence in the Greater Bay Area, thereby consolidating and increasing the market share and revenue and profit scale of the beauty and health care business. We are optimistic about the company's broad growth space as a leader in beauty and health.
Profit forecasting and valuation
Maintaining the 2024/25 profit forecast, the current stock price corresponds to 2024/25 11x/8x P/E. Maintaining an outperforming industry rating, the target price was raised by 27% to HK$19, corresponding to the 2024/25 15x/11x P/E, with 23% upside, taking into account the valuation premium brought about by the company's further strengthening in the market position.
risks
Increased industry competition; risk of medical malpractice; risk of impairment of goodwill; risk of policy regulation.