On September 13, AVF Hospital Management Group Co., Ltd. (hereinafter: AVF) updated its prospectus with CITIC Securities as the sole sponsor. It is worth mentioning that at the end of 2021, AVF submitted an application for listing guidance and filing for A-shares and was accepted. Considering the timing and uncertainty of A-share listing, AVF withdrew the A-share advisory filing at the end of 2023 and turned its investment into Hong Kong stocks.

Now that more than half a year has passed, how has AVF's business progressed over the past six months?

The ART market space is growing rapidly, and the market is fragmented, and AVF's market share is only 1%

According to the Zhitong Finance App, established in 2006, IVF is a one-stop assisted reproductive technology (ART) and ancillary service provider. Through 4 authorized hospitals, namely Guangdong Zhanjiang Jiuhe Hospital, Tianjin Tianjin Aiwei Hospital, Guangdong Jieyang Aiwei Hospital, and Yunnan Kunming IVF Hospital, it focuses on providing ART and ancillary services for infertility patients, attracting patients from 15 provinces and municipalities in China. As of June 30, 2024, AVF has treated more than 0.1 million patients, performed more than 65,000 IVF cycles, completed more than 78,000 embryo transfers (including fresh embryo transfer and frozen embryo transfer), and gave birth to more than 36,000 IVF babies. According to Frost & Sullivan, in 2023, Avive's hospital ranked fourth among private ART service providers in China, accounting for about 1.0% of the total number of IVF cycles performed in China in the same year.

ART is one of the three main methods for treating infertility, including artificial insemination and in vitro fertilization and embryo transfer (IVF-ET). This technology directly bypasses the causes of infertility and performs ART surgery, and achieves fertilization and early embryo development under optimal conditions through a highly controlled laboratory environment, thereby assisting the natural production process.

The infertility rate in China is calculated by dividing the number of infertile couples by the number of couples of childbearing age (of which women are between 15 and 49 years old). The infertility rate in China has risen from about 9% in 1990 to 12% in 2007. Due to changes in the natural environment such as environmental pollution and changes in the social environment, such as delayed childbearing age, poor lifestyle habits such as smoking, alcohol abuse, staying up late, and prolonged sitting, and increased mental stress, the infertility rate further increased to about 15% in 2010 and 17% in 2020.

As the prevalence of infertile couples increases, the number of infertile couples in China will increase from 55.4 million pairs in 2018 to 58 million pairs in 2023, and Sullivan expects to increase to 67.4 million pairs in 2030.

Infertility can be treated with medication, surgery, and ART. Since ART bypasses natural reproduction processes and performs ART procedures under optimal conditions for fertilization and embryo development through a highly controlled laboratory environment, ART can effectively improve the success rate compared to other methods.

In recent years, the penetration rate of ART services has continued to grow. The total number of IVF cycles performed in China has increased from 0.684 million in 2018 to 0.8157 million in 2023, with a CAGR of 3.6%. Due to growing demand for ART services and increasing affordability, the total number of IVF cycles is expected to reach 1.2099 million and 1.5924 million in 2027 and 2030, with compound annual growth rates of 10.4% and 9.6%, respectively.

The size of China's ART service market is also growing year by year, from 25.2 billion yuan (unit, same) in 2018 to 30.8 billion yuan in 2023, with a compound annual growth rate of 4.1%. As demand for ART services continues to grow, China's ART service market will continue to grow rapidly, and is expected to reach 47.4 billion yuan and 63 billion yuan in 2027 and 2030, with CAGR of 11.4% and 9.9% respectively.

Currently, ART services are mainly in public hospitals, but private hospitals are growing faster.

The number of IVF cycles performed in public medical institutions increased from 0.6239 million in 2018 to 0.7232 million in 2023, with a compound annual growth rate of 3.0%, and is expected to further increase to 1.0436 million cases and 1.3454 million cases in 2027 and 2030, with compound annual growth rates of 9.6% and 8.8%, respectively. The number of IVF cycles performed by private medical institutions increased from 0.0601 million in 2018 to 0.0925 million in 2023, with a compound annual growth rate of 9.0%, and is expected to further increase to 0.1664 million cases and 0.2469 million cases in 2027 and 2030, with compound annual growth rates of 15.8% and 14.1%, respectively.

In terms of market size, the market size of ART services provided by public medical institutions increased from 22 billion yuan in 2018 to 26.5 billion yuan in 2023, with a compound annual growth rate of 3.8%, and is expected to further increase to 38.4 billion yuan and 48.1 billion yuan in 2027 and 2030, with compound annual growth rates of 9.7% and 7.9%, respectively. The market size of ART services provided by private medical institutions increased from 3.2 billion yuan in 2018 to 4.4 billion yuan in 2023, with a compound annual growth rate of 6.5%. It is expected to further increase to 9.1 billion yuan and 14.9 billion yuan in 2027 and 2030, with compound annual growth rates of 20.2% and 17.9%, respectively.

The market is big enough, and the market competition is also quite adequate. Judging from the competitive pattern, competition among private hospitals is quite scattered. According to IVF cycle statistics, as of the end of 2023, the first place market share was only 3.7%, and IVF's IVF cycle market share was 1.0%, ranking fourth, and there is still plenty of room for improvement.

Performance growth was slow, but gross margin declined against the backdrop of rising customer unit prices

Although there is enough space in the assisted reproduction industry and market competition is very scattered, IVF's performance in recent years has been very average.

According to the prospectus, in 2021, 2022 and 2023, AVF's operating income was 0.42 billion yuan, 0.407 billion yuan, and 0.494 billion yuan, respectively; the corresponding net profit for the period was 94.562 million yuan, 64.517 million yuan, and 64.749 million yuan, respectively. Regarding the decline in revenue in 2022, IVF stated in its prospectus that since it stopped operating Shenzhen Gynecological Hospital at the end of June 2021, it received revenue of 9.2 million yuan from it in 2021, and there was no such portion of revenue in 2022; in addition, patients were affected by the COVID-19 pandemic, especially Tianjin Aiwei Hospital and Kunming Aviv Hospital. The increase in revenue in 2023 is mainly due to the increase in the number of IVF cycles at Zhanjiang Jiuhe Hospital and Tianjin Aiwei Hospital. This is due to the adjustment of epidemic prevention measures in 2023 and the relocation of Tianjin Aiwei Hospital to a new hospital area with a more convenient transportation network and a larger area.

Therefore, the results for the first half of 2024 are an indication of AVF's performance under normal operation. According to the prospectus, AVF achieved operating income of 0.251 billion yuan and net profit of 37.648 million yuan in the first half of 2024, up 8.7% and 11.11% respectively from the same period in 2023. It is easy to see that endogenous growth is average.

By business revenue, ART services are the company's main source of revenue, accounting for about 90% of the company's revenue. It should be noted that the success rate of AVF hospitals has declined markedly in recent years. According to the data, the success rate of routine IVF fell from 58.4% in 2021 to 51.4% in the first half of 2024; the success rate of ICSI also dropped from 51.8% in 2021 to 45.5% in the first half of 2024.

Regarding the continued decline in the success rate, AVF stated in its prospectus that it was mainly due to the average age of patients accepted by the company in 2023 compared to 2022, and receiving more patients with serious gynecological diseases such as uterine diseases, which led to more cases of clinical pregnancy failure.

Although AVF's success rate is declining, in 2022, the company's success rate is 57.2%, which is higher than the industry average of 51.6%. However, compared to other hospitals, AVF lacks a PGT license. Although PGT technology is not widely used in ART services in China, PGT technology can improve the success rate, so the lack of this license may still affect patients' visits.

Moreover, in recent years, IVF's per capita expenditure for IVF patients has increased year by year, from 0.052 million yuan in 2021 to 0.06 million yuan in the first half of 2024.

However, IVF's gross and net profit margins are declining. The company's gross sales margin fell from 45.9% in 2021 to 44.3% in the first half of 2024; net profit margin fell from 22.5% in 2021 to 15% in the first half of 2024.

In addition to this, AVF has not expanded for more than 10 years, and all relied on the 4 hospitals it has built before. This is probably one of the main reasons why AVF's performance is growing slowly.

However, AVF has no expansion plans in raising capital in Hong Kong. The main purpose of fund-raising is to purchase equipment, refurbish and upgrade the hospital, and use part of the funds to obtain a tertiary specialist hospital qualification for its Zhanjiang Jiuhe Hospital in order to obtain a PGT license.

Overall, although assisted reproduction is a big business, IVF's performance is mediocre. The main reason is, on the one hand, that the company has not expanded for more than 10 years and still relies on 4 hospitals; on the other hand, the market is fully competitive. Although the industry concentration is very low, compared with the previous companies in the industry, AVF's market share is not high, and there are no plans to raise capital in Hong Kong, so it is foreseeable that IVF's performance growth rate will also be limited in the future.