HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<ul>
<li>China recorded 270,000 increases in deaths in 2022 to 10.41m (+2.7% YoY, vs. flat in 2020). This is a sad demographic trend but favourable to <a href="https://www.smartkarma.com/entities/fu-shou-yuan-international" target="_blank" data-smartkarma-citation="entities:18168:1" rel="noopener">Fu Shou Yuan (1448 HK)</a>.  </li>
<li>Death rate of 0.74% has returned to the 1974 level. With termination of "zero COVID" policy, this is poised to increase. This will also stimulate demand for its pre-need services.</li>
<li>Despite a 73% rebound in share price from trough, valuation is still undemanding at 14.4x FY23F PER. This implies a 35% discount to the average of 22x since 2013. </li>
</ul>


China recorded 270,000 increases in deaths in 2022 to 10.41m (+2.7% YoY, vs. flat in 2020). This is a sad demographic trend but favourable to Fu Shou Yuan (1448 HK).  
Death rate of 0.74% has returned to the 1974 level. With termination of "zero COVID" policy, this is poised to increase. This will also stimulate demand for its pre-need services.
Despite a 73% rebound in share price from trough, valuation is still undemanding at 14.4x FY23F PER. This implies a 35% discount to the average of 22x since 2013. 


Fu Shou Yuan (1448 HK): Latest Mortality Rate Supports Long-Term Outlook

HK/China Healthcare Analyst (ex-Fosun Pharma)

Xinyao (Criss) Wang

<ul>
<li>China’s U-turn on COVID policy has led to skyrocketed infection cases/mortality. Demand for funeral services due to additional deaths would surge, so positive sentiment on Fu Shou Yuan could continue.</li>
<li>Fu Shou Yuan's performance is expected to rebound in 22H2 and 23H1 driven by high demand and relaxation of COVID-19 control measures. It’s a good short-term trade with strong catalyst.</li>
<li>The acceleration and resonance of population aging trend, the new urbanization process and the increase of cremation rate of remains provide objective conditions for Fu Shou Yuan’s long-term upward performance.  </li>
</ul>


China’s U-turn on COVID policy has led to skyrocketed infection cases/mortality. Demand for funeral services due to additional deaths would surge, so positive sentiment on Fu Shou Yuan could continue.
Fu Shou Yuan's performance is expected to rebound in 22H2 and 23H1 driven by high demand and relaxation of COVID-19 control measures. It’s a good short-term trade with strong catalyst.
The acceleration and resonance of population aging trend, the new urbanization process and the increase of cremation rate of remains provide objective conditions for Fu Shou Yuan’s long-term upward performance.  


Fu Shou Yuan (1448.HK)- China’s Soaring COVID-19 Death Rate Ignites High Demand for Funeral Services

Thematic (Sector/Industry)

<ul>
<li>Our positive calls on <a href="https://www.smartkarma.com/entities/fu-shou-yuan-international" target="_blank" data-smartkarma-citation="entities:18168:1" rel="noopener">Fu Shou Yuan (1448 HK)</a> and <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (753 HK)</a> and negative call on <a href="https://www.smartkarma.com/entities/china-conch-environment-protection-holdings-ltd" target="_blank" data-smartkarma-citation="entities:4827:1" rel="noopener">Conch Environment (587 HK)</a> have generated the best wins in 2022.</li>
<li>These calls achieved returns of 56.8%, 34.2% and 43.5%, respectively, which we think are remarkable given the losses of 16.3% for HSI and 19.3% for HSCEI YTD.</li>
<li>In 2023, we expect Fu Shou Yuan <a href="https://www.smartkarma.com/entities/fu-shou-yuan-international" target="_blank" data-smartkarma-citation="entities:18168:1" rel="noopener"></a>continue to do well and Conch Environment to remain under pressure. It may be prudent to take some profit on Air China. <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener"></a> </li>
</ul>


Our positive calls on Fu Shou Yuan (1448 HK) and Air China Ltd (753 HK) and negative call on Conch Environment (587 HK) have generated the best wins in 2022.
These calls achieved returns of 56.8%, 34.2% and 43.5%, respectively, which we think are remarkable given the losses of 16.3% for HSI and 19.3% for HSCEI YTD.
In 2023, we expect Fu Shou Yuan continue to do well and Conch Environment to remain under pressure. It may be prudent to take some profit on Air China.  


Our Three Best Calls in 2022: Review and Outlook for 2023

<ul>
<li>The volatile market environment prompted us to seek for companies with secured demand, high earnings quality and solid financial position - <a href="https://www.smartkarma.com/entities/fu-shou-yuan-international" target="_blank" data-smartkarma-citation="entities:18168:1" rel="noopener">Fu Shou Yuan International (1448 HK)</a> fits these criteria.</li>
<li>It has established earnings record, favourable demographic environment, good reserve for growth and upside from geographical expansion. We like its emphasis on shareholder return through rising payout and share buyback. </li>
<li>Its net cash position, which amounted to 20% of the market capitalisation, adds further comfort to us. Meanwhile, valuations are not stretched relative to international peers.</li>
</ul>


The volatile market environment prompted us to seek for companies with secured demand, high earnings quality and solid financial position - Fu Shou Yuan International (1448 HK) fits these criteria.
It has established earnings record, favourable demographic environment, good reserve for growth and upside from geographical expansion. We like its emphasis on shareholder return through rising payout and share buyback. 
Its net cash position, which amounted to 20% of the market capitalisation, adds further comfort to us. Meanwhile, valuations are not stretched relative to international peers.


Fu Shou Yuan (1448 HK): An Everlasting Growth Business

<ul>
<li>Fu Shou Yuan’s 2023 performance was indeed not good, with negative growth in 23H2.Shanghai alone has limited market capacity.No matter how strong it is, it cannot drive the national market.</li>
<li>Fu Shou Yuan has encountered difficulties in external expansion and M&amp;A, so it chooses to increase dividends. However, this means the Company may have to say goodbye to high growth.</li>
<li>The founder's “past bad record” and uncertain business outlook hinder the upward potential of valuation, which requires a high margin of safety.It’s better bought at low price to collect dividends.</li>
</ul>


Fu Shou Yuan’s 2023 performance was indeed not good, with negative growth in 23H2.Shanghai alone has limited market capacity.No matter how strong it is, it cannot drive the national market.
Fu Shou Yuan has encountered difficulties in external expansion and M&amp;A, so it chooses to increase dividends. However, this means the Company may have to say goodbye to high growth.
The founder's “past bad record” and uncertain business outlook hinder the upward potential of valuation, which requires a high margin of safety.It’s better bought at low price to collect dividends.


Fu Shou Yuan (1448.HK) - Due to the Pain Points, Investment Logic Changes

China

Fu Shou Yuan International Group, Ltd. is a death care service provider in China.  The Company operates cemeteries and funeral facilities.

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Fu Shou Yuan (1448 HK)