Key points of investment

Performance Overview: Annual results were high and low, and dividend payments exceeded expectations for the full year of '23 billion yuan, +21.0% year-on-year, and net profit of 790 million yuan, +20.1% year-on-year.

Among them, H2 had revenue of 1.10 billion yuan and profit of 330 million yuan, -13%/-18% year-on-year, mainly due to a clear recovery trend in the same period last year and a high overall base.

Furthermore, the company announced the payment of a special dividend, with a total dividend payout rate of about 99% for the whole year. If the special dividend is excluded, the basic dividend payout rate reached 43%, which is a slight increase from the 41% dividend rate last year.

Revenue split: The cemetery/funeral business was mainly driven by volume/price, and affected by the pace of reimbursement, Shanghai was under pressure in the second half of the year. According to business: 1) Cemetery revenue was 2.17 billion yuan (+24% year over year), accounting for 82%. There were 16,385 commercial graveyards sold throughout the year, with an average price of 120,000 yuan; sales volume/average price ratio was +23%/+2% under comparable caliber, mainly due to delayed demand recovery in core regions such as Shanghai, which led to a sharp rise in overall volume and price.

2) Funeral revenue of 400 million yuan (+11%), accounting for 15%. 72,668 households were served throughout the year, with an average price of 5,475 yuan; service volume/average price ratio under comparable caliber -2%/+13% year over year. The increase in average price was mainly due to the launch of related value-added services after restrictions on gathering were lifted, and the decline in service volume was mainly due to the company's withdrawal from some low-profit projects.

By region (listed only): Shanghai 1.26 billion yuan (+31%), accounting for 49%; Liaoning 190 million yuan (+24%), accounting for 7%; Anhui 170 million yuan (-14%), accounting for 7%; Henan 160 million yuan (+78%), accounting for 6%. Among them, Shanghai's deferred demand was concentrated on 22H2 and 23H1 releases. Revenue was -17% year-on-year in the context of a high 23H2 base, putting pressure on apparent revenue in the second half of the year.

Profitability: Overall business is steady, dividend income tax drags down apparent profit margin of 60.2% (+3.8pp) for the whole year, funeral service operating profit margin 16.2% (+2.7pp), and the main business operation side continues to improve. The net interest rate for the year was 37.1% (-0.2pp), mainly due to additional withholding dividend income tax of about $87.4 million.

Outlook: Operations will enter a stable period. It is important to note that the progress of regional expansion outside of Shanghai is affected by the 22-year base and recovery pace. The company's 23-year performance showed a “high and back” state. It is expected that the overall operation will return to a steady pace in 24, and the country's expansion is expected to accelerate in the future. The company acquired Yan'an Hongfu Cemetery and cooperated with the Shenyang Funeral Home Project in '23. In addition, it also established new project companies in Tianjin and Zhaoqing, Guangdong, and participated in the Guizhou Qiandongnan Project Company. The new project is expected to gradually be implemented, further contributing to the increase.

Furthermore, in terms of policy, the Ministry of Civil Affairs has incorporated the “Funeral Administration Regulations” into the legislative plan, and the revision process is underway. Recently, some local regulations were introduced first, generally stipulating that operating cemeteries implement market price adjustments, and once again emphasized strict approval. Against the backdrop of moderate regional policies, the company's operating policy risks are also expected to be mitigated.

Profit forecasting and valuation

The company has abundant resources and strong refined operation capabilities, and its business competitiveness is expected to continue to be consolidated. The net profit for 24-26 is estimated to be 9.1/10.8/1.27 billion yuan, +15%/18%/17% year-on-year. The corresponding PE under current market value is 11/9/8X, respectively, maintaining a “buy” rating.

Risk warning

Risk of changes in industry policies; risk of management iteration; integration of mergers and acquisitions projects falling short of expectations; increased industry competition.