Introduction to this report:

Due to changes in consumer demand and the impact of a high base, the first half of the year's performance was under pressure. The company actively adjusted its sales strategy and expected results.

Key points of investment:

Maintain an increase in holdings rating. 2024H1's performance fell short of expectations, and the company's 2024-2026 net profit was reduced to 0.714, 0.806, and 0.903 billion yuan, respectively, up -9.8%/12.9%/12.1% year-on-year, corresponding EPS in 2024-2026 to 0.31 (-0.06), 0.35 (-0.06), and 0.39 (-0.07) yuan, respectively. The corresponding PE was 12x/11x/10x, respectively.

Performance summary: 2024H1's revenue was 1.1 billion yuan, -27.8%; operating profit was 0.512 billion yuan, -39.4%; operating profit margin was 46.6%, -8.9pct; net profit to mother was 0.299 billion yuan, -35.7% year over year; net profit to mother was 27.2%, -3.3 pct year on year. The Board of Directors intends to pay an interim dividend of HK6.38 cents per share.

Consumer behavior tends to be cautious and compounded by the high base for the same period last year, putting pressure on 2024H1 performance. The first half of the year was affected by the economic environment. In the funeral scenario, customer consumption behavior was cautious, the customer's consumption cycle was lengthening, and the application of local support policies for funeral companies also tended to decrease. Furthermore, the high base formed by the rapid release of accumulated and delayed market consumer demand during the same period last year after the pandemic put pressure on the company's revenue in the first half of the year, and operating profit margins declined year-on-year due to fixed costs. 2024H1 cemetery service revenue was 0.906 billion yuan/-29.6% year on year, operating profit 0.493 billion yuan/year on year -38.5%, operating profit margin 54.4% /year on year -7.9pct. Among them, sales volume of operational tomb services was -31.5% YoY, and the average unit price was -0.2% YoY. 2024H1 funeral service revenue 0.184 billion yuan/year over year -17.8%, service volume -16.3%, average sales price -1.8%, operating profit margin 14% /year over year -6.9pct.

Focus on product optimization and sales strategy adjustments, and maintain high growth in lifetime contract services. In order to cope with the changing trends in the economic environment and customer consumption behavior, the company continues to pay attention from the dual dimensions of the market and products, and is making more efforts in the fields of service extension, technological leadership, and cultural innovation to meet the diverse and differentiated consumer needs of cemetery customers, especially at the spiritual level. In the context of an aging population, pre-life contract services are attracting more customers who want to arrange their future affairs as soon as possible. A total of 11,923 pre-life contracts were signed in the first half of 2024, an increase of 28.6% over the same period last year. The main increase in sales came from the procurement of institutional and government solutions and the formulation of products at different target levels.

Risk warning: Funeral industry policy risks; weak consumer demand; M&A progress falls short of expectations.