Santa Bella, a high-end confinement center brand, has taken a critical step in going public in Hong Kong. To be precise, Beckon International officially went public in Hong Kong under the name of the Santa Bella Group.

Zhitong Finance App learned that the Hong Kong Stock Exchange disclosed on June 25 that SAINT BELLA INC. (Santa Bella) submitted a listing application to the main board of the Hong Kong Stock Exchange. According to the prospectus, in 2023, Santa Bella is the largest comprehensive home care brand group in China based on revenue. Its business covers postpartum care centers (including postpartum care and postpartum repair services), home care services, and functional food for women's health. Among them, the confinement center business owns 59 high-end confinement centers under brands such as SAINT BELLA (SAINT BELLA), Bella ISLA (Bella ISLA), and Baby Bella (Baby Bella).

In terms of performance, sales in 2021, 2022 and 2023 were approximately 0.39 billion yuan (RMB, same below), 0.589 billion yuan, and 0.775 billion yuan, respectively, and achieved revenue of approximately 0.259 billion yuan, 0.472 billion yuan, and 0.56 billion yuan, respectively, with a compound annual growth rate of 47%. However, behind the rapid growth in business scale, the profitability of the Santa Bella Group continued to be under pressure, and the cumulative net profit loss for the above 3 years was 0.77 billion yuan.

After the Santa Bella Group submitted the report, the market was quite petty about its loss of performance, which also sparked many discussions. For example, whether a high-end confinement center is a good business, and whether it can create an investment target with good returns for investors in the secondary market after it is listed. To answer these questions, we first need to analyze why Santa Bella lost money.

0.28 billion High Labor Costs: Defining Industry Service Standards

According to the Zhitong Finance App, although confinement has been a Chinese custom since ancient times, the mainland confinement center industry has only been developing for more than 20 years, and the market is in the nurturing stage. According to Frost & Sullivan's report, in 2023, the penetration rate of postnatal care services in mainland China was 16.2%, of which the penetration rate of confinement centers was 5.5%. In contrast, the penetration rate of post-natal care services in South Korea and Taiwan is as high as 60%, respectively. Even so, before, an enterprise in the industry was listed behind the scenes in Hong Kong. Net profit from 2020 to 2023 was -0.383 billion HKD, 0.035 billion HKD, -0.178 billion HKD, and -177 million HKD, respectively. The cumulative loss over the past 4 years exceeded HK$0.7 billion.

It should be noted that these companies that are brave enough to “eat crabs” have used losses to open up a typical blue ocean market. The Santa Bella Group is also one of them, and is likely to be the ultimate winner. According to the Zhitong Finance App, the reason why the Santa Bella Group was able to take the lead in breaking through the home care segment is that the underlying logic is to redefine and transform modern home care through specialized, standardized, digital and customized services to build a unique competitive advantage.

Interpreting the development philosophy of the Santa Bella Group, professionalism is the first principle in building its brand power, and the first principle of professionalism is the professionalism of employees. Due to the labor-intensive operation of home care services, in 2023, the total number of employees in the Santa Bella Group reached 1,229, of which the number of nursing staff reached 696, accounting for 56.6%. It is currently the brand with the highest number of caregivers in the industry.

From 2021 to 2023, the Santa Bella Group invested a total of 0.28 billion yuan in labor costs. Among them, labor costs each accounted for 34.3% of total sales costs in 2023. Only such a high ratio of service personnel and investment regardless of cost has shaped the Santa Bella service system.

With the support of a professional team, the Santa Bella Group continues to innovate the model of maternal and child care at confinement centers. According to public information, at the Santa Bella Confinement Center, each mother and child are provided with 2 full-time caregivers in shifts to provide customers with 24-hour one-on-one personalized nursing services. The Little Bella Confinement Center also provides multiple nursing modes. Customers can choose the 24-hour mother and child caregiver model, or combine 12 hours of one-on-one care during the day and 12 hours of intensive baby care at night. Bella Isla, a full-cycle nursing brand for women, focuses on women's mental health after childbirth.

The Santa Bella Group is also pioneering collaboration with the American Accreditation Association (ACI) and doctoral experts to establish standards for maternal and child care services and conduct systematic training for nursing professionals. Currently, the Santa Bella Group sets service benchmarks and prepares standard operating procedures (SOPs) for mother and child care. All confinement centers under the Group follow the SOP, which fully covers the main business processes of the confinement center business, including detailed division of labor, mother and child care procedures, and sales and marketing. The promotion of SOP has improved the scalability of the business and strengthened quality control to ensure consistent service quality.

Seen in this way, nearly 0.3 billion in labor costs were spent on nursing staff training and system construction, which helped Santa Bella build a high level of service and established a moat for professional nursing capabilities, fundamentally widening the gap between Santa Bella and the industry.

30 million R&D expenditure: digitalization enables operational efficiency

In addition to having a dedicated team of nursing experts, the San Bella Group seems to have an obsessive investment in the digitalization and standardization of the home care industry. According to the prospectus, as of 2023, the R&D team staffed by the Santa Bella Group was staffed by 38 employees, most of whom were IT personnel. From 2021 to 2023, the company's cumulative R&D expenses exceeded 30 million yuan. Investment of this scale is indeed rare for service industry companies.

Where is all this money being spent?

According to the prospectus, the Santa Bella Group has independently developed a SAAS and nursing service platform for industry services. Although it costs quite a bit, it will benefit in the long run. According to reports, the Santa Bella nursing service platform is deployed to the confinement center network and will continue to update and improve service processes regularly. It can also be deployed via SaaS to quickly improve the service quality and efficiency of the new center.

With the assistance of the nursing service platform, nursing experts can monitor the vital signs of the mother and baby in real time and record data with the customer's consent. Using accumulated maternal and child care knowledge and collected data, the system can design personalized operating procedures for each customer.

In addition, the Santa Bella Group also signed a strategic cooperation agreement with an artificial intelligence company to explore the application of large-scale language models in operations. The Group's ultimate goal is to apply AIoT devices, big language models, and other artificial intelligence technologies to transform its IT infrastructure into an integrated integrated platform called Beckham Intelligence.

The Zhitong Finance App believes that Santa Bella is a technology-based group company that wears the coat of a confinement club. Supported by a professional team of carers and a digital business model, Santa Bella provides systematic, professional and personalized quality services, and the Santa Bella Group has created a high level of satisfaction among the customer base. In 2023, the average customer ratings for Santa Bella and Little Bella Confinement Centers (on a scale of 0 to 10) were 9.62 and 9.34, respectively, saving the Group a large amount of marketing expenses.

0.106 billion marketing expenses: diversification expands brand influence

According to the prospectus, the cumulative sales and distribution expenses of the confinement center business under Santa Bella reached 0.106 billion yuan in 2021, 2022 and 2023. What may seem like high marketing expenses are actually still low compared to peers. In 2023, Aidi Palace's sales and distribution expenses in a single year reached HK$0.116 billion, and the corresponding revenue was HK$0.555 billion, with a sales expense ratio of about 21%; Yonghe, a listed company in the medical services industry, had sales and marketing expenses of 1.044 billion yuan in 2023, corresponding revenue of 1.777 billion yuan, and a sales expense ratio of about 59%. However, Santa Bella's sales expenses of 0.106 billion yuan accounted for only 13.66% of sales of 7.0.76 billion yuan, which is clearly far lower than that of peers.

Why is Santa Bella able to grow its business rapidly when its share of sales is relatively low?

According to official information, in addition to word-of-mouth marketing, the Santa Bella Group also mainly uses online marketing services and products, including shopping information platforms, social media platforms and e-commerce platforms. The Santa Bella Group has successfully held the “Pregnancy Museum” exhibition in several cities in China; it has collaborated with Tesla to launch a short-term “Pregnant Mother Travel, Wave and Stop” project in several cities in China to provide free transportation services for pregnant women. Santa Bella has also collaborated with UCCA's Ullens Center for Contemporary Art to customize underarm swimming rings for newborns, with the aim of solving safety hazards that may be caused by traditional collar swimming and making swimming more comfortable and safe for newborns.

According to the Zhitong Finance App, the Santa Bella brand has enhanced brand awareness and brand image through research on user psychology, grasped user needs, and obtained corresponding brand value through diversified marketing and promotion methods. Although San Bella's profits are under pressure due to the increasing trend of expenses, the company's profit quality has also improved significantly due to the rapid expansion of the company's business scale and the improvement of the business structure and the company's control over cost efficiency. As a result, Santa Bella did not invest heavily in marketing expenses like its peers, but instead continued to optimize hardware, improve personnel training, and deepen standardization and technology research and development.

In 2023, the consolidated gross margin of the Santa Bella Group increased to 36.5%, up 6.6% year on year; in the same period, the net cash flow from the company's operating activities reached 56.703 million yuan, a record high of nearly three years. The gross margin of the Group's confinement center business reached 34.1% in 2023, an increase of 5.4 percentage points over the previous year, which is 12.3 percentage points higher than the gross profit margin of 21.8% in the same period. Obviously, Santa Bella's expensive investment in standardization in the early stages is gradually showing results, and the future may show marginal diminishing effects.

In 2021, Santa Bella Group acquired Guanghetang to strategically enter the women's health functional food business. In addition to selling its products in its own online stores on e-commerce platforms, it has also begun to explore cross-selling at confinement centers under the group and through its own online channels. In 2023, the Santa Bella Group's women's health functional food business achieved revenue of 70.954 million yuan, an increase of 68.1% over the previous year; gross margin reached 63.3%, an increase of 19.6 percentage points over the previous year. In the future, this business segment may have higher growth potential, which can bring higher gross profit and performance growth to the Santa Bella Group.

According to Frost & Sullivan's report, the health food market for women in mainland China has broad potential for growth. The market size increased from 40.4 billion yuan in 2018 to 70.8 billion yuan in 2023, with a CAGR of 11.9%. The market size is expected to grow to 177.1 billion yuan in 2030, with a compound annual growth rate of 13.5% from 2024 to 2030.

According to reports, the Santa Bella Group has also launched a home-to-home nursing business, invested in Hangzhou Meihua Hospital, lifestyle magazine Robb Report HongKong, etc., to empower its main business by building a home care ecosystem.

Is Santa Bella really losing money?

According to the prospectus, it is measured according to non-Hong Kong financial reporting standards (i.e. adjusted EBITDA and adjusted year (loss) /profit) as an additional financial measure. In 2023, the adjusted EBITDA of the Santa Bella Group was 0.061 billion yuan, an increase of more than 31 times over the previous year; the adjusted annual profit was 0.021 billion yuan, turning a year-on-year loss into a profit. As we all know, non-Hong Kong financial reporting standards can more truly reflect the company's operating cash flow situation and the profitability of its core business by excluding some non-recurring profit and loss items.

The reason why the San Bella Group lost money under the Hong Kong Financial Reporting Standards was mainly due to changes in the fair value of financial instruments issued to investors (common shares and warrants with priority issued by investors prior to listing). According to the prospectus, the Santa Bella Group recognized the increase in the fair value of the financial instrument mentioned above as a fair value loss. It is a non-cash item, and will not be generated again within the financial year after listing, because priority rights will be terminated immediately before listing.

According to the Zhitong Finance App, when expanding new businesses, many companies may incur large initial investment and operating costs, so they use the method of issuing preferred shares for financing to support their long-term strategic development. Issuing preferred shares may cause losses in the short term, but in the long run, it may help the company seize market opportunities and achieve greater growth.

In the Hong Kong stock market, Internet giants such as Tencent (00700) and Meituan-W (03690) have issued preferred shares based on their own financing needs. Among them, Meituan lost 10.5 billion yuan, 5.8 billion yuan, and 19 billion yuan respectively from 2015 to 2017 due to significant changes in the fair value of convertible and redeemable preferred shares. However, after adjusting the “fair value of preferred shares”, the losses for the three years were 5.9 billion yuan, 5.4 billion yuan, and 2.85 billion yuan, respectively. After listing, both Tencent and Meituan created rich return on investment for investors due to good business growth.

According to the Zhitong Finance App, losses on preferred stocks are not necessarily negative; the key is whether the company has clear strategic planning and execution capabilities, and whether it can achieve profits in the future. Judging from the steady growth in business scale and the performance of achieving profits under non-Hong Kong financial reporting standards, the Santa Bella Group is moving towards the vision of “reshaping the home care industry” and has good prospects for business and profit growth.

According to the Zhitong Finance App, Santa Bella spent 0.77 billion yuan in exchange for the “Unicorn” position at the confinement center circuit, and its profit pattern of turning a loss into profit after adjustment in 2023 gave the company a future-oriented family quality care circuit and the heritage of building a leading global home care brand group. This investment in long-term value and determination may eventually be expected to create an investment target with excellent returns for investors.