1H22 results in line with market consensus
Yonghe Medical Group (Yonghe) announced 1H22 results: Revenue fell 29.0% YoY to Rmb748mn, and net profit dropped 56.5% YoY to Rmb18mn; both results were in line with market consensus.
　　Trends to watch
　　COVID-19 weighs on 1H22 results; repurchase rate improved significantly. In 1H22, revenue from the hair transplant business fell 29.9% YoY to Rmb553mn, and that of medical hair care dropped 26.2% YoY to Rmb188mn, as COVID-19 interrupted operations at more than 30 hair transplant chains. Among disrupted operations were larger outlets in cities that faced more severe COVID-19 resurgences. However, the firm continues to improve internal capability and diversify one-stop hair medical service solutions, in our view. In 1H22, 38,440 patients were clients of Yonghe's medical hair care services, with a repurchase rate of 25.5% (up 3.3ppt YoY).
　　Hair transplant chains continue expanding; Svenson and hair hospitals upgrade. Hair transplant institutions are expanding. Yonghe had 57 hair transplant medical institutions in 1H22 (+5 YoY), with plans to expand to 70 by end-2022. The firm is also strategically expanding the Svenson Medical Hair Care stores. In 1H22, Yonghe mainly focused on Svenson's business development in Guangdong province and completed the construction of nine stores (two of which have commenced operation), with another four stand-alone Svenson stores under construction. Watch upgrades of hair hospitals. Hair hospitals in Beijing and Shanghai will likely complete construction and commence operation this year. We expect this will assist the firm increase market share and influence, maintaining the firm’s competitive advantages.
　　Improving medical service capability; innovation leads upgrades. Doctor system optimization: As of 1H22, all medical institutions operating in the Chinese mainland had arranged for doctors to provide treatment. Yonghe launched a tiered diagnosis and treatment system for hair transplant doctors in February 2022 to help evaluate and classify doctors to help establish a hierarchy. Patient needs monitored carefully; industry-leading service offered. The firm’s brand marketing strategy is based on its offering to women and the hair care business, building the “Yonghe Fa Zhi Chu” Female Hair Transplant clinic and “Svenson” hair care brands to boost brand influence. Technological innovation progresses smoothly. Yonghe has developed and launched an integrated treatment management system to increase treatment efficiency. The first phase of R&D for software to better measure the area of hair loss has ended. The firm says the technology will improve the patient treatment experience and the professionalism of Yonghe’s medical care services.
　　COVID-19 weighs on operating indicators. In 1H22, GM fell 9.4ppt YoY to 64.2%. The firm’s selling and marketing expense ratio dropped 3.0ppt YoY to 51.9%. Net margin declined 1.5ppt YoY to 2.4%. We expect Yonghe’s profitability to improve further with management optimization and COVID-19 containment.
　　Financials and valuation
　　We maintain our 2022 and 2023 EPS forecasts of Rmb0.19 and Rmb0.40. The stock is trading at 33.7x 2022e and 16.2x 2023e P/E. Maintain OUTPERFORM. Given the adjustment of average sector valuation, we cut our TP 14% to HK$11.8 (53.9x 2022e and 25.5x 2023e P/E), offering 57.5% upside.
　　Risks
　　Store expansion and earnings disappoint; COVID-19 resurgence; competition intensifies; medical incidents risks.