What's new
Yonghe Medical Group (Yonghe) announced a profit warning for 1H22, attributing an expected decline in earnings mainly to a resurgence of COVID-19 and expansion-related expenses. The firm also announced that it plans to repurchase up to 10% of its own shares. We visited a Yonghe clinic in Xiamen in late July to learn more about the update.
Comments
Clinic operations under near-term pressure from resurgence of COVID-19; competitive advantage strengthened by professionalism, quality service, reputation.
Business under pressure from COVID-19 in 1H22; demand to recover as pandemic fades. The number of discharged patients in the industry declined notably during the COVID-19 pandemic. More than half of the firm’s hair transplant clinics were suspended or restricted, putting considerable pressure on its operations in 1H22. On July 29, 2022, Yonghe announced a 1H22 profit warning, estimating that revenue fell 21.9-36.1% YoY to Rmb673-823mn (vs. Rmb1.05bn in 1H21), and net profit would decline to Rmb11-20mn (vs. Rmb40.40mn in 1H21). We note demand for hair-related healthcare services has been recovering as COVID-19 subsides. We think that, coupled with the firm’s adjusting of its operations and marketing strategies, this will help drive a rebound in the number of patients.
Reform of pricing mechanism facilitates standardization; professionalism, quality service; brand reputation builds competitive advantages. In 2022, Yonghe started reforming its pricing system. As a result, the average price of surgery began to stabilize after a brief period of fluctuation. We believe that this demonstrates the value of the professionalism of the doctors at Yonghe, improving the patient experience and confidence. Thus, the firm has built visible competitive advantages in service and reputation, and Yonghe has cemented its leadership in the regional market.
Research published in authoritative journal; to lead the hair transplant industry in exploring cutting-edge technology. Recently, the results of the joint research between Yonghe and Sun Yat-sen University were published in the International Journal of Molecular Sciences (a global journal on molecular medicine). Their paper reveals that the transformation of fibroblasts to hair-inducing dermal papilla-like cells through small-molecule medicines provides a possibility of hair follicle regeneration for hair loss patients. We expect the firm to deepen its cooperation with top academic institutions and continue delivering academic excellence that leads the hair transplant industry to technological breakthroughs.
Announced share repurchase plan to motivate employees, reflects management confidence in long-term development. On July 26, Yonghe announced that it plans to buy back up to 10% of its own shares over a period of 10 years with an annual limitation within 2%. The firm announced its share repurchase plan despite the impact of a resurgence of COVID-19. We believe this shows that management has confidence in the long-term growth of the company and that it hopes to motivate and retain employees.
Financials and valuation
We cut our 2022 and 2023 EPS forecasts 55.7% and 36.7% to Rmb0.19 and Rmb0.40 given impact of the COVID-19 pandemic.
The stock is trading at 38.7x 2022e and 18.6x 2023e P/E. given the resurgence of COVID-19 resurgence and revisions to sector valuations, we cut our TP 23.3% to HK$13.80 (29.9x 2023e P/E), offering 60.7% upside. Maintain OUTPERFORM.
Risks
Store expansion and earnings fall short of expectations; resurgence of COVID-19; sector competition intensifies; negative impact from medical incidents