Incidents:
The company announced its 2023 annual report. During the reporting period, it achieved operating income of 2,789 million yuan (+18%); net profit to mother of 345 million yuan (+185%), net interest rate of 12.4% (+7.2pcts); adjusted net profit of 471 million yuan (+72%), and adjusted net interest rate of 16.9% (+5.3pcts) during the reporting period, in line with the performance report. 2023H2 achieved operating income of 1,455 million yuan (+18.7%); net profit to mother of 121 million yuan, net interest rate of 8.3% (+14pcts); adjusted net profit of 216 million yuan, adjusted net interest rate of 14.9% (+13.6pcts).
Comment:
Revenue growth has been steady in all regions. In 2023, ARS and related businesses in Chengdu achieved revenue of 893 million yuan (+11.1%), accounting for 32%; the women and children business achieved revenue of 577 million yuan (-0.6%), accounting for 20.7%. Shenzhen Zhongshan Hospital achieved revenue of 407 million yuan (+16.9%), accounting for 14.6%. US HRC achieved revenue of 568 million yuan (+22.7%), accounting for 20.3%. The two hospitals in Yunnan achieved revenue of 236 million yuan (H2 increased 22.1% year over year), accounting for 8.4%. Hong Kong, Wuhan, and Laos achieved revenue of 67 million yuan (+12.3%), 38 million yuan, and 03 billion yuan respectively.
Profit margin recovery is obvious. Focus on the restoration of profit margins in the US business. The company's gross margin in 2023 was 42.1% (+5.2pcts), returning to 2021 levels. The management expense ratio was 17.3% (-2.1pcts), the sales expense ratio was 6.9% (+0.5pct, affected by the merger of the two hospitals in Kunming, which had a high sales expense ratio), and the financial expense ratio was 2.9% (-0.2pct), and various expense ratios declined. The profit margin for the China segment was 28.7% (+6.1pcts), and the profit margin for the US division was 1.7% (+18.9pcts). There has been a marked recovery. It is expected that the US HRC profit margin will return to normal levels.
The company is expected to benefit from the popularization of health insurance policies. Since Beijing and Guangxi included assisted reproduction technology in medical insurance in June 2023 and in October, Gansu and Inner Mongolia included assisted reproduction in health insurance in January 2024. Five months after Guangxi included assisted reproduction in medical insurance, the number of outpatients at assisted reproductive institutions increased by about 36% over the same period last year. We expect assisted reproduction to be gradually included in medical insurance throughout the country, and that health insurance policies in Sichuan, Guangdong, and Yunnan will greatly benefit the company.
Profit forecast: In view of the company's leading position in the assisted reproduction circuit, we expect the company's revenue in 2024-2026 to be 31.4/35.2/3.93 billion yuan, corresponding net profit to mother of 4.20/5.14/628 million yuan, respectively, and corresponding PE of 15X/12X/10X, respectively, maintaining a “buy” rating.
Risk warning: Assisted reproduction policy risk, risk of impairment of goodwill, risk of continued decline in fertility intentions, failure to control US business costs as expected, performance forecasts and valuation judgments falling short of expectations, etc.