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JINXIN FERTILITY(1951.HK):POST-COVID RECOVERY LARGELY IN LINE;OVERSEAS EXPANSION BRINGS MORE UPSIDE

中银国际研究有限公司2024-04-02
  Jinxin Fertility
  Post-Covid recovery largely in line; overseas expansion brings more upside
  JXR recorded revenue up 18% YoY of RMB2.79bn, largely in line with our estimation but 3% below market consensus, thanks to the gradual recovery of ARS demand post Covid. Total number of IVF cycles grew by 16.2% YoY to 30,368 with success rate reaching 57.5% (vs. 55.6% in 2022). HRC saw resilient rebound in ARS demand in US, with 3800+ IVF cycles finished in 2023, per management. The management expects the IVF cycle number of HRC to exceed the pre-Covid level (4,500 in 2018) in 2024, and to maintain topline growth of 10%-15% with promising margin in 2024. Cut 12-month TP to HK$3.7 and Maintain BUY.
  Key Factors for Rating
  2023 revenue largely in line yet profit missed. Revenue increased by 18% YoY to RMB2.79bn, largely in line with BOCI estimation, thanks to the gradual recovery of ARS demand post Covid. Total number of IVF cycles grew by 16.2% YoY to 30,368, with Chengdu & Greater Bay Area/ Yunnan & Wuhan / US & Laos business up 6.0%/ 42.7%/ 11.7% YoY to 22,260/ 4,261/ 3,847, respectively, and success rate reached record high to 57.5% (vs. 55.6% in 2022).
  GPM substantially improved by 5.2ppts to 42.1%, buoyed by the (1) normalization of hospital operations and (2) effective cost control on drugs and consumables, and Opex ratio down by 1.6ppts mainly on lower G&A expense ratio. Net profit increased by 194% YoY to RMB345m at a NPM of 12.4% (vs. 5.1% in 2022), below market expectation, while normalized net profit (adjusted for M&A and ESOP amortization and other one-off loss) up 72% YoY to RMB470m. The management provided the FY24 full-year guidance of 15% YoY organic growth (M&A excluded) in net profit.
  Key Risks for Rating
  1) Price cuts on ARS; 2) intensified competition in ARS industry; 3) slower-than expected policy rollout on ARS industry; 4) inefficient consolidation of new acquired hospitals; 5) limited suitable M&A targets in China.
  Valuation
  Post results, we cut our sales estimates on ARS services given the delayed opening of Shenzhen new building while lift up the management services sales on strong recovery and expansion in US operations. We revise up the S&M expense ratio by 3ppts due to heavier promotional activities expected in the US. Cut 12-month TP to HK$3.7 (WACC: 10.0%, terminal growth of 3.0% unchanged). Maintain BUY. Eyes on policy rollouts and overseas expansion.
  Business Updates
  Chengdu: The management shared that the diversified new services started in 2021, including dentistry, dermatology, medical aesthetics, and children’s rehabilitation, have grew rapidly in revenue, offsetting the negatives on obstetrics from the lowered birth rate in China. For 3rd-gen IVF, Chengdu finished 141 cycles in 6 months and the management estimates the 3rd-gen IVF to contribute sales of RMB80m-100m in the future on average price of RMB50,000- 60,000 and 1600 cycles (10% of cycles done in Chengdu Xinan)
  Shenzhen: The new building will commence the operation in 2Q25, later than previous guidance of 1Q2024. The management saw revenue up 20% YoY in 1Q24, yet expects some erosion on profit margin in 2024 and 2025, mainly blamed on (i) cost incurred by team building in advance in 2024, and (ii) RMB69m of expense on D&A, maintenance and property tax in 2025.
  The US: The US operation saw resilient rebound in ARS demand, with 3800+ IVF cycles finished in 2023. The management expects the number of IVF cycles to exceed the pre-Covid level (4500 in 2018) in 2024 on its solid operation and cheaper flight tickets. JXR will launch 2 new sites in 4Q24 and 1H25 in west Los Angeles and San Francisco, respectively, and continue the expansion at a pace of 1-2 sites per year.
  Financially speaking, HRC is expected to maintain topline growth of 10%-15% with improving margin in 2024 after digesting the severance payment and litigation costs. For the CAPEX, management reckons that the net cash flow from US operations is sufficient to cover the expansion-related expenditure.
  Kunming and Wuhan recorded net loss of RMB28m in 2023 (vs. loss of RMB70m in 2022) and the mgmt. expects the business to breakeven in 2024 on strong momentum of Yunnan. However, Wuhan business might need one more year to return to the growth track, per management.
  Southeast Asia: Laos realized profit with c.30 IVF cycles completed. JXR expects to enter a high-potential market in 1H24 under collaboration with a local partner.

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