Matters:
In 2023, the company achieved revenue of 2.145 billion yuan, a year-on-year increase of 31.2%, net profit of 230 million yuan, a year-on-year increase of 108.2%, and adjusted net profit of 241 million yuan, an increase of 53.2% over the previous year. Gross profit margin 45.6%, +1.7 pct year on year, net profit margin 10.7%, +4.0 pct year on year, adjusted net profit margin 11.2%, +1.6 pct year on year. The company plans to pay a dividend of HK$0.47 per share, for a total of HK$110 million, with a dividend payout ratio of approximately 45.3%.
23H2 achieved revenue of 1.11 billion yuan, up 23.0% year on year, net profit of 110 million yuan, gross profit margin of 45.0%, +0.2pct year on year, net profit margin 9.8% year on year, and -0.2 pct year on year.
Commentary:
Health and beauty are steady, and medical, aesthetic and sub-health care are growing at a high rate. The company's three businesses, Aesthetics, and Asia Healthcare, achieved revenue of 11.9 billion yuan, 8.5 billion yuan, and 100 million yuan respectively, with year-on-year ratios of +26.1%, +37.1%, and +47.6%, accounting for 55.6%, 39.7%, and 4.7% of revenue respectively. The company's revenue was mainly driven by customer flow. The customer flow of the company's directly-managed stores increased by 33.1%, and the average single purchase amount decreased slightly by 1.4%. Under high frequency stickiness, the average annual frequency of the company's active members visiting the store increased (9.5 → 10.6 times), driving the average annual consumption of direct store members to increase by 11.3% to 21,000 yuan. In addition, the company's penetration rate of beauty → medical aesthetics or sub-health care increased by 1.3 pct to 25.0%? The company's profitability is relatively stable. The gross margins of Shengmei, Medical Aesthetics, and Asia Healthcare directly-managed stores were 37.6%, 53.8%, and 46.7%, respectively, +4.1, -1.4, and +8.2 pct, respectively. Structural differences due to a decline in medical and aesthetic gross margins or an increase in the share of major injectable categories. Cost control on the cost ratio side was effective. The sales, management, and R&D cost rates were 17.6%, 14.8%, and 1.6%, which was the same as the previous year, -3.2 pct and -0.3 pct, respectively.
Continue to expand the store network. In 23, the company opened 19/31 new direct-managed/franchised stores. The newly opened and acquired direct-run stores included 15 Shengmei, 3 medical and aesthetic stores, 1 Asia Health and Medical. By the end of the year, the company had opened 201 direct-run stores (171+ Medical Beauty 23+ 7 Asia Healthcare) and 199 franchise stores.
Strong forces joined forces to acquire the Nerill brand. The company plans to acquire 70% of the shares in Nariel stores at a consideration price of 350 million yuan, corresponding to 80 Shengmei, 6 medical and aesthetic clinics, and 2 traditional Chinese medicine clinics. In 2023, the total revenue of this portion of Nerill's assets was 51 million yuan and net profit of 33.4 million yuan, with a net interest rate of about 6.5%, 1 times PS, and 15 times PE. The merger and acquisition will complement existing brands: 1) The acquired Nariel stores in the region mainly cover the Guangshen region, which is the region where the company is relatively weak; 2) in terms of projects and models, Nariel positions Oriental Beauty and has an advantage in health care projects, and may form strong collaborations with the company's sub-health care sector in the future.
Investment suggestions: The company opens new stores every year, and product development can continue to attract high-frequency customer traffic and maintain customer unit prices in line with demand, and continuously invest in R&D to build a strong center. We are optimistic about the stability of the company's endogenous business. In the future, as the company increases its mergers and acquisitions strategy, outreach will contribute additional volume. Since the acquisition of Nariel has not yet been completed, we are only giving net profit to the endogenous business. Affected by the general environment, we lowered our expectations for opening new stores. As a result, we lowered the company's net profit forecast for 24-26 to 2.7, 3.1, and 360 million yuan (previously estimated at about 330 to 430 million yuan for 24-25), and PE about 12/11/9x. Assuming that Nariel 24H2 is combined, we expect net profit to be 2.8, 350, and 420 million yuan respectively for 24-26. Referring to the company's growth rate over the next three years and comparable company valuations, we gave the company 17 times PE in 24 years, with a target price of HK$21.5, maintaining a “strong” rating.
Risk warning: store development falls short of expectations, decline in customer flow or customer unit prices due to declining consumption power, consumer safety incidents, slow increase in penetration rate of beauty to medical beauty, increased marketing expenses due to increased competition in the industry, etc.