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JINXIN FERTILITY(1951.HK):1H24 RESULTS MISSED;KEEP EYES ON REIMBURSEMENT INCLUSION OF ARS IN SICHUAN AND GUANGDONG

中银国际研究有限公司2024-09-02
  Jinxin Fertility
  1H24 results missed; keep eyes on reimbursement inclusion of ARS in Sichuan and Guangdong
  1H24 topline was below BOCIe, mainly due to ARS awaiting reimbursement scope inclusion in Shenzhen and Chengdu, while margins were eroded by higher overseas labour costs. Jinxin is poised to achieve overseas growth through HRC expansion and exploration in Southeast Asia, yet its short-term performance is weighed by increased costs in overseas markets and low fertility willingness in China. Revised TP down to HK$3.0.
  Key Factors for Rating
  1H24 revenue slightly missed; demand for ARS awaiting for reimbursement scope inclusion: 1H24 revenue increased by 8.2% YoY to RMB1.4bn, 3% below BOCIe, mainly due to weaker-than-expected core ARS segment. The number of IVF cycles grew by 2.1% YoY to 15,051, with Chengdu/ Greater Bay Area/ Kunming and Wuhan/ overseas markets logging the changes of -4.7%/+6.7%/+1.6%/+25.3% YoY, respectively. As per mgmt., Jinxin recorded 10% YoY growth in terms of cycles and revenues in 1Q24, whereas both were flattish YoY in 2Q24 as Chengdu and Shenzhen are still awaiting inclusion of IVF into the scope of medical insurance reimbursement, resulting in longer waiting times and a low turnover rate of patients. July and August performances continue to be affected, with revenue slightly down 1%-2% YoY.
  GPM declined by 1.9ppts to 40.4% in 1H24, primarily due to increased labour costs from recruiting new HRC physicians for US expansion. Administrative expenses increased by 15% YoY to account for 15% of total revenue, but decreased by -1.7% YoY if excl. RMB30.7m ESOP amortisation. Under the combined effect of lower GPM and higher ESOP amortisation, net profit dropped by 15% YoY to RMB190m at a NPM of 13.1% (vs.16.8% in 1H23). Mgmt. estimated that ESOP amortisation will total RMB80m in 2024, but would diminish to RMB50M in 2025, RMB30m in 2026 and less than RMB10m afterwards.
  Update on key business development. According to mgmt., cycle penetration of pre-implantation genetic diagnosis (PGD) has now reached 8%- 9% of Chengdu Xinan Hospital and will continue to increase to 10%-12% in 2025. For Shenzhen business, the management expects to complete the construction of Shenzhen new building by YE24, which will support c.10,000 cycles in 2027 and contribute revenue of RMB800m and net profit of RMB200m. For HRC business in the US, the management aims at HRC to achieve 5-year goals of 1) 40 physicians; 2) US$150m revenue; 3) 20% NPM. We believe these measures demonstrate the company’s dedication to long-term growth, but will weigh on its margins in the near term.
  Key Risks for Rating
  1) Price cuts on ARS; 2) intensified competition in ARS industry; 3) slower-than- expected policy rollout on ARS industry.
  Valuation
  Post results, we cut our 2024-26 revenue forecasts by 5%-7% to factor in soft topline in 1H24, slower-than-expected construction of Shenzhen new building, etc,. We revised down the GPM on increased overseas labour costs. We lifted our WACC from 10.0% to 10.2% and lowered terminal growth from 3.0% to 2.0% to factor in macro and policy uncertainty and low fertility willingness. Revise down TP to HK$3.0 and maintain BUY.

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