Matters:

The company announced the 2024 semi-annual results announcement. In the first half of 2024, the company achieved main business revenue of 1.444 billion yuan (+8.2%), net profit of 0.19 billion yuan (-15.0%), adjusted net profit of 0.26 billion yuan (+1.8%), and operating cash flow of 0.384 billion yuan (+13.9%).

Commentary:

International business has gradually resumed, and the popularity of the Greater Bay Area continues to rise. The company achieved revenue of 1.444 billion yuan (+8.2%) in the first half of 2024 and maintained steady growth. By region:

1) In the first half of 2024, the company achieved operating income of 0.883 billion yuan (+8.6%) in the Chengdu region. Among them, the ARS business grew 4.0% mainly due to the increase in the share of VIP business (higher unit price) in Bisheng Hospital from 16.3% in 2023H1 to 19.5% in 2024H1, as well as a 14.9% year-on-year increase in obstetrics, gynecology and pediatric revenue.

In addition, the number of 2024H1 egg retrieval cycles in Chengdu reached 7,571, a year-on-year decrease of 4.7%. This is mainly due to the lengthening of the waiting period for local assisted reproduction to be included in medical insurance reimbursement coverage.

2) The Greater Bay Area's revenue was 0.242 billion yuan (+10.5%). The number of egg retrieval cycles and revenue of the Greater Bay Area business increased. Mainly due to the increase in popularity, reputation and market share of Shenzhen Zhongshan Hospital in the Greater Bay Area, the VIP business share increased from 7.2% to 7.7% in 2023H1.

3) 2024H1 Business revenue in Kunming and Wuhan was 0.13 billion yuan, down 6.6% year on year. We expect the revenue of urology and gynecology to drop 62.8% and 27.5% respectively, mainly due to department and business adjustments at Jiuzhou Hospital. In addition, the revenue of Wuhan Jinxin Hospital increased steadily by 43.1% year on year.

4) The company's overseas business achieved revenue of 0.391 billion yuan (+11.5%) in the first half of 2024. We expect this is mainly due to HRC Medical's vigorous promotion of egg freezing business in overseas business and the resumption of international business.

The business continued to expand, putting pressure on gross margins in the short term. The company's gross margin for the first half of 2024 was 40.4% (-1.9pct). We expect the main reason for the decline in gross margin is the increase in labor costs due to the expansion of the US business and recruitment of new doctors.

Investment advice: Since the inclusion of assisted reproduction in health insurance is expected to accelerate the increase in industry penetration rate in the future, the company's market share (number of egg retrieval cycles) is expected to increase steadily with strong operational integration capabilities and excellent brands and platforms. We expect the company's revenue for 24-26 to be 31.80, 35.95, and 4,023 billion yuan, with year-on-year growth rates of 13.0%, 13.1%, and 11.9%, respectively; the company's adjusted net profit forecasts to mother are 504, 5.71, and 639 million yuan, with year-on-year growth rates of 7.0%, 13.2%, and 12.0%, respectively. Referring to comparable Hong Kong stock companies, we gave the company a target PE of 20x in 2024, corresponding to a target market value of HK$9.1 billion and a target share price of HK$3.3. Maintain a “Recommended” rating.

Risk warning: The increase in the penetration rate of the assisted reproduction industry falls short of expectations, impairment of goodwill and intangible assets