1H22 earnings roughly in line with our expectations
Fu Shou Yuan (FSY) announced that revenue fell 20.6% YoY in 1H22 to Rmb906mn and net profit attributable to shareholders declined 28.9% YoY to Rmb261mn. We attribute the YoY decline to COVID-19 resurgences over mid-March to May affecting businesses in some regions that make a significant contribution to earnings (e.g., Shanghai and northeastern China). The 1H22 earnings are roughly in line with our expectations. FSY plans to pay an interim dividend of HK$0.06/sh, a dividend payout ratio at around 41.5%.
Burial services: Revenue from this business segment fell 24.9% YoY in 1H22. Revenue from sales of burial plots services for ordinary business purpose in comparable cemeteries declined 24.9% YoY (sales volume fell 26.8% YoY; ASP rose 2.5% YoY, mainly on the combined effect of product mix, contributions from various cemeteries, and an increase in value). Revenue from the sales of burial plots services for ordinary business purposes in newly acquired or newly developed cemeteries increased Rmb4.99mn YoY, mainly due to the contribution from Anhui Longmen, which FSY acquired in August 2021. In 1H22, FSY completed the acquisition of the remaining 10% equity interest in the Liaoning Guanlingshan project, and the firm completed a second capital injection into the Zhuolu Yuanbaoshan project, increasing its stake to 51%.
Funeral services: Revenue from this business segment rose 1.4% YoY in 1H22. Revenue from comparable funeral facilities and services declined 4.1% YoY, and the volume of services rose 4.4% YoY, but ASP fell 8.1% YoY, mainly as some funeral facilities increased cooperation with local governments and began providing basic memorial services during 1H22. Revenue from newly acquired or newly constructed facilities totaled Rmb8.94mn, mainly contributed by the Linquan funeral facility constructed in 2021. The Linquan funeral facility is primarily engaged in catering to funeral services which had a lower ASP than other value-added services.
Operating profit margin fell 4.4ppt YoY to 45.1% in 1H22. The operating profit margin of FSY’s burial services declined 2.9ppt YoY in 1H22 to 53.9%, mainly as revenue from full-fledged cemeteries amid COVID-19 declined in some regions (e.g., Shanghai, Heilongjiang, and Liaoning), while developing cemeteries with low operating profit margins made a growing contribution to revenue of this segment. The operating profit margin of FSY’s funeral services dropped 2.1ppt YoY to 13.3% in 1H22, mainly as certain value-added services and products could not be provided amid COVID-19, while some funeral facilities expanded cooperation with the government and started delivering basic memorial services with relatively low profit margins. FSY’s “other services” business segment suffered an operating loss of around Rmb4.39mn, mainly due to investments in the R amp;D of technologies and products for cremation machines and “Fu Shou Cloud” (which focuses on the application of technology to combine death care and internet services).
Trends to watch
Watch demand recovery, policies, and the potential of digital innovative businesses. We think demand for cemetery services was delayed by COVID-19 in 1H22 and that such demand will likely recover in 2H22 (monthly revenue of FSY rose 12.6% YoY in June). In June, an official at the Ministry of Civil Affairs proposed accelerating reforms for the death care service industry, to solve the problem that public welfare and commercial death care service agencies are not separated . On August 19, the Ministry of Civil Affairs released a legislative work plan to revise regulations on death care services in 2022 . On August 16, FSY launched its “Digital Cemetery (Shanghai) Huixin Valley” project (covering an area of about 4,500sqm), and we believe the company is likely to attract incremental customers with digital innovative services and attractive pricing.
Financials and valuation
Given the impact from COVID-19, we lower our 2022 earnings forecast 5% to Rmb763mn, but keep our 2023 forecast intact. The stock is trading at 13x 2022e and 11x 2023e P/E. We maintain OUTPERFORM but lower our target price 10% to HK$7 (18x 2022e and 15x 2023e P/E), offering 36% upside.
Risks
Disappointing organic growth of existing projects and/or external expansion; policy headwinds.