What's new
EC Healthcare announced 1QFY23 (April-June 2022) sales data: The firm expects sales to grow over 17% YoY. We estimate that it may rise around 20% YoY to more than HK$850mn, showing solid signs of recovery. We expect growth of the firm’s businesses to accelerate in the next two quarters, as COVID-19 conditions ease in Hong Kong SAR and the Chinese mainland.
Comments
Revenue recovers as COVID-19 conditions ease; medical care business grows robustly. EC Healthcare expects 1QFY23 sales to increase over 17% YoY, which we estimate will equal more than HK$850mn. By business: The firm’s medical care business maintains rapid development thanks to organic growth and external expansion. EC Healthcare expects 1QFY23 sales of medical care services to grow over 29% YoY. We expect its combined sales of medical aesthetic services and other businesses to stay flat or slightly fall YoY, reflecting the short-term impact of COVID-19 resurgence (medical aesthetic services in Hong Kong SAR were suspended for 20 days in April due to COVID-19 conditions). By region: EC Healthcare estimates that 1QFY23 sales on the Chinese mainland may fall 6% YoY, at most, due to COVID-19 resurgence in Shenzhen and Shanghai, in our view. In Hong Kong SAR and Macao SAR, we expect 1QFY23 sales to grow about 18-19% YoY, maintaining strong growth momentum.
Business growth in Hong Kong SAR to accelerate; business on Chinese mainland to maintain steady expansion. Business in Hong Kong SAR: We note that COVID-19 conditions have improved significantly since 1QFY23. The relaxation of containment measures and stimulative actions of the Hong Kong SAR government have further boosted consumer sentiment. We believe customer traffic recovered to the 5M21 level in Hong Kong SAR in May, and revenue growth should further accelerate in 2-3QFY23. Business on the Chinese mainland: We note that offline customer traffic gradually increased with improving COVID-19 conditions in first-tier cities such as Shanghai and Shenzhen. However, we believe the tightening requirement for valid proof of negative COVID-19 test results still impacts consumption at EC Healthcare’s service centers. Regarding the firm’s expansion plans for these service centers, it opened two new centers in Shenzhen in July with the average floor area of about 576 sqm, as the disruptions to refurbishment of new service centers eased due to improving COVID-19 conditions. Currently, EC Healthcare has 18 service centers on the Chinese mainland, where the firm is steadily expanding its channels under the asset-light model. We expect this to bolster its full-year revenue growth on the Chinese mainland.
Multi-business ecosystem continues to improve; upbeat on the firm’s initiatives to build a leading platform to offer one-stop medical aesthetic and health care services in the Greater Bay Area. EC Healthcare continues to enrich its diversified brands. As of FY22, the firm has built seven brands in the medical aesthetics segment, offering services to different consumer groups. The firm also has 27 brands in the medical services segment, covering preventive medicine, testing and laboratory, general and specialized medical services. In FY22, the proportion of customers purchasing from two different brands reached 27.5%, and revenue contribution from existing customers increased 5.4ppt to 64.3%. We think this reflects the improved customer loyalty and repurchase rate, with clear advantages in the closed-loop ecosystem. We expect EC Healthcare to build a leading platform offering one-stop medical aesthetic and health care services in the Greater Bay Area through steady organic growth and external expansion.
Financials and valuation
Given the slower-than-expected recovery of the firm’s medical aesthetic services, as well as impact on the profit from revenue structural changes, we lower our FY23 and FY24 EPS forecasts 12% to HK$0.29 and 12% to HK$0.42. The stock is trading at 24x FY23e and 17x FY24e P/E. Considering the firm’s growth potential in the medium and long term, we maintain an OUTPERFORM rating and TP of HK$9, implying 31x FY23e and 22x FY24e P/E with 28% upside.
Risks
COVID-19 resurgence; intensified competition; medical care issues; regulatory headwinds; goodwill impairment.