EC Healthcare (ECH) reported FY1H23 revenue of HK$1,893mn, up by 31% YoY, in which revenue from aesthetic medical and beauty and wellness (collectively, consumer medical) segment declined by 2% YoY, caused by store closures in April and a gradual recovery thereafter in HK as well as regulatory headwinds and COVID disruptions in Mainland. However, 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 lockdowns in HK. As HK-Mainland border reopening will be officially resumed on 8 Jan 2023, we expect ECH will directly benefit.
The HK-Mainland border reopening is expected to support FY24 business growth, especially for consumer medical services. Since the Chinese government actively adjusted pandemic control measures in end- 2022, the quarantine-free travel between HK and Mainland has been widely anticipated by the market. On 5 Jan 2023, the State Council and HK government announced new policies to officially allow border reopening for travellers starting from 8 Jan 2023 (link 1 & link 2). We believe ECH will substantially benefit from HK-Mainland border reopening, given that 30-40% of ECH’s total revenue were contributed from cross-border travellers before the pandemic, according to ECH’s management. As HK-Mainland travelling will be resumed on a gradual basis, revenue from cross-border travellers will also be largely generated in FY24 (ended Mar 2024). Previously, ECH’s consumer medical services were disrupted by the strict pandemic control measures adopted in HK and Mainland, and we think border reopening will have more positive impacts on this part of business for ECH. We forecast revenue of ECH’s consumer medical services to grow by 17%/40%/25% YoY in FY23/FY24 /FY25, respectively.
Enhancing service capabilities during the pandemic to better capture consumption recovery opportunities from cross-border tourists.
Despite the harsh macro environment after pandemic outbreak, ECH has been persistently implementing its M&A strategy to diversify its service portfolio in the past three years. Total M&A execution value amounted to HK$641/HK$219mn in FY22/FY1H23. Notable M&A deals include Bayley & Jackson, a premium HK-based dental chain, multiple HK-based veterinary clinics, and a share subscription of a hospital grade medical building in Tsim Sha Tsui of HK. Compared with its pre-pandemic service structure centering on consumer medical categories (accounting for 71% of total revenue in FY19), ECH has now offered customers with more options in specialized medical services, such as dental, medical imaging and veterinary services.
The enhanced services capabilities put ECH in a good position to meet diversified medical demand for both local and cross-border customers.
Maintain BUY. We raised our TP to HK$11.02, based on a 10-year DCF model (WACC: 11.8%, terminal growth: 2.0%), to reflect customer traffic resumption from HK-mainland border reopening.