The consumption spending of Chinese consumers and HK residents all missed expectations. We reckon sales growth will be good, but not as high as ECH's original expectation. In the meantime, the high US interest rate may stay longer than expected, leading to high interest costs for debts related to acquisitions, while the payrolls to doctors remain stable. Thus, earnings will be lower than expected despite the high topline growth. We cut our 2024-26 sales estimates by 12.7%, 10.9%, and 11.6%, and earnings estimates by 53.2%, 32.2%, and 33.3%, respectively. New TP of HK$3.17 is based on 25x FY24E P/E (from previous 35x FY24E P/E). Downgrade to HOLD.

Key Factors for Rating

EC Healthcare (ECH) has executed acquisitions aggressively over the past three years, expanding to medical services, pet hospitals, and some specialists. The acquisition strategy will go well if consumption is strong enough. However, both local residents and tourists from the Mainland delivered weaker-than-expected consumption trend. After the border reopens, Chinese tourists contributed only 15% of sales, half of the 30% pre-COVID level. The population in HK declines and some consumption goes to the Mainland or overseas. Overall, the consumption did not catch up with the original acquisition plans.

Expense and cost would continue to drag earnings. The payrolls of medical specialists are stable. The financial cost would likely rise significantly in FY24 due to the rise in debt and interest rate. The high US interest rate is set to remain longer than expected.

The outbound traveling volume of its traditionally targeted mainland client base is yet to return to pre-pandemic level, thus affecting tourist medical and aesthetical medical consumptions.

Key Risks for Rating

Upside risks: consumption recovers faster than our expectation; the equity market experiences a strong rebound. Downside risk: HK consumption goes weaker.

Valuation

We cut 2024-26 sales estimates by 12.7%, 10.9% and 11.6%, and earnings estimates by 53.2%, 32.2% and 33.3%, respectively. The slight sales adjustment but big earnings cut reflect the rigid payroll and the rise in financial cost. We also take into account the longer time for the synergy of acquisitions to deliver. We derive the new TP by applying a revised target multiple of 25x FY2024E P/E. The new target multiple is justified as historically, ECH trades at an average multiple of 18.8x while earnings would still have a chance to double in FY25. New TP implies 9% upside, downgrade to HOLD.