Experiencing strong business rebound. EC Healthcare (ECH) reported FY1H23 revenue of HK$1,893mn, up by 31% YoY, and attributable net profit of HK$80mn, down by 50% YoY, accounting for 50%/ 19% of our full-year estimates, respectively. Sales volume (generated from contracted sales) showed continuous recovery by quarter, up by 21%/11% QoQ in FY1Q23/FY2Q23, following a 19% QoQ decline in FY4Q22 due to COVID lock down in HK. Medical service segment delivered a strong rebound, with revenue up by 48% YoY to HK$1,175mn in FY1H23, while revenue from aesthetic medical and beauty and wellness segment underwent a 2% YoY decline to HK$607mn, caused by store closures in April and a gradual recovery thereafter in HK as well as regulatory headwinds and COVID disruptions in the Mainland.Aside from the above-mentioned operation difficulties in HK and the Mainland, the YoY decline in attributable net profit was also mainly triggered by rising costs due to inflation, temporarily low operation leverage of the Company’s newly established service sites, and the increasing D&A expenses from newly acquired business.
　　Relaxation of COVID control measures in HK set to boost growth of medical services, especially for consumer medical services in FY2H23.The strong growth of medical services in FY1H23 was mostly driven by the organic growth with surging demand and rising healthcare awareness due to COVID in HK. For the aesthetic medical and beauty and wellness segment, it experienced store closures for 20 days in HK, an average of 26 days in Shenzhen and 122 days in Shanghai, due to COVID control measures in each city in FY1H23. With the relaxation of COVID control measures in HK where ECH generated 92% of total revenue in FY1H23, we expect the Company will continue its revenue growth trend in medical services and is likely to see effective recovery on its consumer medical services in FY2H23, which we expect will significantly improve net profit margin as well.
　　Continuing M&A strategy amid uncertain macro environment. In　FY1H23, the value of executed M&A deals by ECH reached HK$219mn.The Company entered into a share subscription of 30% issued shares of a hospital grade medical building in Tsim Sha Tsui of HK with initial capital contribution of HK$254mn. ECH plans to transfer the building to become a one-stop centre for premium medical and medical aesthetic services in the core area of HK. Additionally, ECH acquired 60% of equity interest of Pioneer Evolution at a consideration of HK$36.4mn, further enhancing its capabilities in multi-disciplinary healthcare services with 9 clinics and 23 full- time registered medical practitioners. Facing with uncertain macro environment in HK and the Mainland, ECH can leverage its abundant financial resources and strong business integration capabilities to enhance its leading position in the healthcare market in the Greater Bay area.
　　Maintain BUY. We revised our TP to HK$10.34, based on a 10-year DCF model (WACC: 11.8%, terminal growth: 2.0%), to reflect higher cost in business expansion and uncertain recovery of consumer medical services.