FY22 revenues in line with our forecast
　　Arrail Group (the Group) announced its FY22 earnings. In FY22, the Group’s revenue grew 7.2% YoY to Rmb1,624mn, in line with our expectation. The company’s net profit attributable to shareholders is -Rmb701mn, implying EPS of -Rmb1.21. Adjusted net profit is Rmb66mn slightly beating our expectation mainly due to adjusted items such as the fair value change of convertible redeemable preferred shares exceeding our expectations.
　　Trends to watch
　　According to its annual report, during FY22, the Group opened five new clinics and upgraded three clinics. As of March 31, 2022, the Group had 105 dental clinics and seven hospitals in 15 cities across China. The Group operated a total of 51 Arrail clinics, seven hospitals and 54 Rytime clinics. In addition, the Group revealed there were six clinics and two hospitals with a total of 160 dental chairs under construction. The Group planned to expand its business by opening more clinics and hospitals in tier-1 and tier-2 cities across China.
　　The average revenue per dental chair increased, while the gross margin reduced due to new clinic openings. One of the subordinate brands, Arrail Dental’s revenue increased 8.3% to Rmb0.83bn with the average revenue per dental chair of Rmb1.69mn (6.5% YoY) in FY22, while the other subordinate brand Rytime Dental’s revenue increased 5.9% to Rmb0.79bn with the average revenue per dental chair of Rmb1.06mn (2.9% YoY) in FY22. The revenue from orthodontics and implantology reached Rmb0.37bn and Rmb0.35bn, implying 7.0% and 17.9% YoY. In FY22, the Group’s gross margin fell 3.3ppt to 20.7%, primarily due to the termination of concessions of social security and provident funds, and newly opened clinics and hospitals which are still in the ramping-up period. In our view, the Group will be able to serve more customers of different economic and geographic backgrounds with its dual-brand strategy through “Arrail Dental” and “Rytime Dental” brands.
　　The Group saw number of patient visits rise driven by a higher repeat visit rate. Total patient visits increased 13.7% to 1,558,947 in FY22. The repeat visit rates, defined as the percentage of patients that revisited clinics or hospitals beyond six months after their initial visits, excluding follow-up consultations for the same treatment, were 48.6% in FY22, up 2.8ppt. As of March 31, 2022, the Group has 883 full-time dentists whose average post-qualification experience in the industry is 10.6 years. Dentists with more than five, ten and fifteen years of experience with the Group accounted for 31.4%, 11.1% and 5.1% of its total dentists. The Group expects to continue to focus on quality medical services and on intensifying talent development.
　　Financials and valuation
　　We maintain our FY23 and FY24 adjusted net profit forecasts as Rmb170mn (implying 158.3% YoY growth) and Rmb205mn (implying 20.8% YoY growth) respectively. We maintain our OUTPERFORM rating and the target price of HK$15.44 (based on DCF valuation), offering 26.4% upside.
　　Risks
　　Resurgence of COVID-19; regulatory issues; newly opened hospitals and clinics underperforming; outflow of dentists to other firms; negative media coverage related to customer complaints.