1H24 results fall short of our expectations

The company announced 1H24 results: operating income of 1.1 billion yuan, -27.8%; net profit to mother of 0.299 billion yuan, or -35.7% year-on-year, continuing demand pressure since 2H23 (2H23 revenue/net profit to mother -13%/-18% YoY to 1.1 billion yuan/0.327 billion yuan). The year-on-year decline in performance was significant and lower than our expectations, mainly due to the high base for the same period last year (1H23 revenue +68% year-on-year with post-pandemic demand recovery), customer prudence under macroeconomic pressure, lengthening consumption decision cycle, and the effects of the company's measures to optimize the product structure since 2H23 were released. 1H24 dividend of 6.38 HK cents/share, with a dividend rate of about 45%.

Cemetery services: 1H24 revenue was -29.6%, of which comparable cemeteries operated tomb sales service revenue was -31.7% YoY (sales volume -31.7% /average price remained flat, mainly due to the high base and demand pressure brought about by the release of deferred demand during the same period last year). Revenue from newly acquired or newly built cemeteries from operating tombs increased by 0.624 million yuan year-on-year, mainly contributed by cemetery projects in Yan'an, Shaanxi, and Heze, Shandong.

Funeral services: 1H24 revenue was -17.8%, of which comparable funeral facility service revenue was -19.1% (service volume -19.9% /average price +0.9%, mainly due to the high base brought about by demand recovery in the same period last year and the company's termination of cooperation on some underprofitable projects from 2H23). Revenue from newly acquired or newly built facility services increased by 2.963 million yuan year-on-year, mainly contributed by companies in Yan'an, Shaanxi and Shenyang, Liaoning, which were acquired and established in June and September 23 to provide funeral ceremonial services.

Under the operating deleveraging effect, 1H24 operating margin was -8.9ppt to 46.6% year-on-year. By cost, the employee cost rate was +5.2ppt to 23.2%. By business, the operating profit margin for cemetery services was -7.9ppt to 54.4% year on year, and the profit margin for funeral service operations was -6.8ppt to 14.0% year on year, mainly due to the operating deleveraging effect due to declining revenue. The operating loss of 6.66 million yuan in the other service segment was mainly due to investment in technology and product development for crematology and Fushouyun, which was partially offset by revenue related to design and construction.

Development trends

Demand pressure has not abated; pay attention to the boosting effect of the company's new products with multiple price bands on sales and progress in the digital technology business. 1) We have observed that the consumer decision-making cycle is lengthening and consumption is cautious. Since 23 years, the company has launched some low-priced high-end customized tombs and increased the supply of mid-range finished art tombs on the premise of controlling income/gross profit per unit area. We have observed that it will still take time for these products to boost sales, and focus on subsequent results. 2) Focus on the progress of the digital technology business: Under the “3JI” concept, the company launched a new emotion integration product for tomb+technology services, which has already been launched in 17 cemeteries; in 2014, Qingming released Huixin series products integrating intelligent cleaning facilities, Henan Fushouyuan's “Digital Intelligence Diantang”, and digital family temple, etc., transforming into a life science service provider.

Profit forecasting and valuation

Carefully considering demand pressure, we lowered our 24/25 net profit to mother by 27%/26% to 0.662 billion yuan/0.753 billion yuan. The current stock price corresponds to 24/25 15/13 times P/E. Maintaining an outperforming industry rating, the target price was lowered by 22% to HK$5, corresponding to 16/14 times P/E in 24/25, with an upward margin of 6%.

risks

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