Living with dignity is important for all, but at the end of life's journey, how to leave with dignity is just as important.

However, due to the special nature of this culture, there are not many companies that actually “leave the business” in the capital market. Supported by scarcity, Fu Shou Yuan (01448), a leader in the funeral service industry, has attracted attention since its launch.

On August 21, the company announced its 2020 interim results, achieving revenue of 734 million yuan (same unit), a year-on-year decrease of 19.5%, and net profit to mother of 248 million yuan, a decrease of 16.6% year-on-year. At a time when net profit growth is declining, the company's dividends are still relatively steady — basic profit per share is around RMB 10.9 points, and an interim dividend of HK3.28 cents per share is declared, with a dividend rate of close to 30%.

Rationally speaking, the decline in net profit growth is not a good performance, but after careful consideration, the decline in Fukushouyuan's revenue and net profit growth rate also seems reasonable. In the first half of this year, under the impact of public health events, most industry performance declined to a certain extent, and Fushouyuan also pointed out in its financial report that due to the public health incident, demand for tomb purchases was delayed, and sales declined.

In fact, judging from Fushouyuan's stock price performance after the announcement of the interim results, it seems that investors can also understand the decline in its performance — from August 21 to 28, its stock price maintained steady development, rising 0.25%. It is worth mentioning that since the beginning of this year, its stock price has risen more than 23%.

(Market source: Zhitong Finance)

The reason behind the steady rise in Fushouyuan's stock price is mainly based on the market's optimism about the future development of this leading funeral service company.

But after delving into Fukujuen's financial reports, what long-term value hasn't been discovered?

Cost reduction and efficiency have been very effective, and lifetime contracts are still growing rapidly

Speaking of which, judging from the overall performance, Fukujuyuan's “report card” is in line with market expectations.

On the one hand, the reason for the decline in Fushouyuan's revenue and net profit growth is understandable. In the first half of the year, revenue fell 19.5% year on year to 734 million yuan, and net profit to mother fell 16.6% year on year to 248 million yuan. The reason for the decline was mentioned earlier, that is, due to the impact of public health events, demand for tomb purchases was delayed.

The company's tomb purchase requirements are divided into two types. One is to pre-purchase a graveyard, and the other is to buy a graveyard. Both types of demand have one thing in common — there is little sense of urgency, and they can be postponed. Due to the impact of public health issues, this group of people couldn't stay closed for a while, so naturally sales declined. It should be pointed out that this part of the demand was only delayed rather than disappeared. This also means that demand deferred in the first half of the year will be released centrally in the second half of the year. In response, it stated in its financial report: “There was a rapid and continuous reversal in operating indicators and financial results for May and June.”

On the other hand, through the strategy of reducing costs and increasing efficiency, Fushouyuan's profitability also increased steadily in the first half of the year. During the period, its net sales margin was about 41.9%, which is basically the same as the same period last year. The stabilization of profitability was mainly due to the outstanding results of the management strategy — thanks to the company's efforts to control costs and reduce fees, employee costs, engineering costs, materials and materials, and marketing costs were reduced by 19.5%, 20.8%, 26.8%, and 32.1%, respectively.

Furthermore, Fukujuyuan's balance sheet data also showed its ability to withstand risks in disguise. As of June 30, 2020, it had total current assets of $2,877 billion, cash and equivalent holdings of $2.31 billion, and current liabilities of $795 million. At the same time, the balance to liability ratio for the latest period was only 2.0%, and it also has a comprehensive bank credit line of about $20.35 billion. Based on the data, it can be seen that the company has no financial constraints and is fully resilient to risks.

Of course, if you break it down to specific businesses, you may be able to see more things at Fukujuen. Divided according to revenue, it mainly includes three business segments, namely cemetery services, funeral services, and other services.

According to financial data, Fukushouyuan's main business, cemetery services and funeral services, have all experienced a certain decline. Among them, revenue from cemetery services was 619 million yuan, a year-on-year decrease of 19.9%; of funeral services, revenue from funeral services was 102 million yuan, a decrease of 20.4% year-on-year.

(Data source: Fu Shou Yuan semi-annual report)

It is an established fact that revenue is reduced due to reduced customer demand and declining sales. However, in the segmented financial data, we can actually see some highlights.

First, contracts during life have continued to grow rapidly. In the first half of this year, Fushouyuan sold pre-life contract services in 21 cities in 12 provincial regions. A total of 2,579 contracts were signed, an increase of 78% over the same period last year. Against the backdrop of an increasingly serious aging trend, the business is currently attracting more customers who want to arrange their own affairs early, and has great potential for development.

Second, the unit price level for cemeteries continues to rise. In the first half of this year, the average price of Fushouyuan's operating tombs was 103,000 yuan, an increase of 1.1% over the previous year. The operating profit margin of the cemetery was about 58%, which also increased year-on-year. The increase in the unit price level for cemeteries means that their profit margins have not declined, and their profitability is still strong.

Third, regional distribution is more balanced, and revenue sources are further diversified. By city, Shanghai's share fell further to 48.2%, with revenue from cities outside Shanghai (provinces/regions) exceeding 51%. As the company gains more and more projects in more cities, the company's revenue distribution will be more balanced, revenue sources will be further consolidated, and resilience to risks will be further strengthened.

Based on the above financial data, Fushouyuan can still maintain investors' confidence even after the decline in performance, which does not seem unreasonable.

“Endogenous growth+epitaxial mergers and acquisitions” two-wheel drive, more than funeral services

Although death is a heavy topic, the funeral industry is actually an unknown “blue ocean industry.”

As the aging trend of China's society continues to intensify, the demand for funeral services has also increased — relevant research reports indicate that in 2018, the average funeral cost (including cemeteries) in China was about 20,000 yuan per deceased, and the funeral industry market size was about 200 billion yuan. Experts predict that by 2024, the per capita funeral price will be 31,700 yuan, and the funeral industry market will reach 317 billion yuan.

Catalyzed by huge spatial effects, Fushouyuan has begun to adopt a “endogenous growth+epitaxial merger and acquisition” two-wheel drive strategy in order to further expand its scale and market share.

If the highlights hidden in the interim report are the main reasons investors have confidence in Fushouyuan, then its adoption of a “endogenous growth+epitaxial merger and acquisition” two-wheel drive strategy makes the outside world optimistic about the growth momentum of its future development.

In terms of endogenous growth, Fushouyuan has begun to further improve the layout of the industrial chain and enhance its overall competitiveness:

While improving cemetery services and funeral services, Fushouyuan's pre-life contract service continues to advance. Currently, it has entered 21 cities in 12 provincial regions; the environmentally friendly crematory machine business is also gradually maturing. Orders for 10 sets of environmentally friendly cremation machines were signed in the first half of 2020. Currently, 22 sets of orders have been signed and have not been delivered. In addition, it also used the company's deep experience in the industry to provide professional design services to other cemeteries and funeral parlors, and launched a series of innovative products and services such as “Fushou Cloud · Cloud Sacrifice” during the pandemic, leading a new transformation of the funeral industry's service model.

(Photo source: Fu Shou Yuan semi-annual report)

Meanwhile, Fukujuyuan's outward mergers and acquisitions are still progressing steadily, actively expanding its market share.

For example, the company completed the acquisition of 80% of the shares in the Guizhou Bijie Jinsha Funeral Integration Project in June, signed a contract to acquire 100% of the shares in the Mingxiyuan Project in Harbin, Heilongjiang in July, and is expected to launch several mergers and acquisitions within three years. In addition, the company is also further expanding its business layout in terms of promoting the implementation of contracted projects and paid management services for bidding government projects, etc., to achieve continuous growth.

In addition, financial data shows that as of the first half of 2020, Fushouyuan's business services have reached more than 30 cities in 16 provinces and cities, operating 25 cemeteries and 27 funeral service facilities. Currently, the total saleable area of the company's cemeteries is about 2.29 million square meters, and the total land reserves are sufficient.

In addition to increasing “endogenous growth+epitaxial mergers and acquisitions,” the positive values embodied in Fukushuyuan itself are also very worthy of study and appreciation.

Since its inception, the company has launched many public welfare projects, including providing public welfare pre-life contracts to assist low-income government groups, providing free burials for lonely elderly people, building memorial facilities for human organ donors, setting up scholarships and bursaries at funeral vocational education schools, funding public welfare institutions for cancer survivors, setting up museums to promote outstanding traditional culture, and supporting various patriotic education activities. Beyond business, Fukujuyuan has always been an excellent social responsibility bearer.

Looking at all of the above, the short-term decline in performance does not explain any problems. Against the backdrop of an aging population, promotion of cremation, and rising consumption levels, Fushouyuan's room for growth is definitely not limited to this.