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>The high growth in 23H1 is unsustainable. 23H2 YoY revenue growth would be single-digit. Due to 23H1’s high base, we cannot rule out the possibility of negative growth in 24H1.</li>
<li>In the case of lower-than-expected external M&amp;A activities, Fu Shou Yuan has accumulated a large amount of cash, which would drag down ROE. So, current dividend policy still needs improvement. </li>
<li>Fu Shou Yuan's expansion would be relatively moderate. Double-digit revenue growth can still be expected in the long term. The market value of above RMB15 billion is more reasonable. </li>
</ul>


The high growth in 23H1 is unsustainable. 23H2 YoY revenue growth would be single-digit. Due to 23H1’s high base, we cannot rule out the possibility of negative growth in 24H1.
In the case of lower-than-expected external M&amp;A activities, Fu Shou Yuan has accumulated a large amount of cash, which would drag down ROE. So, current dividend policy still needs improvement. 
Fu Shou Yuan's expansion would be relatively moderate. Double-digit revenue growth can still be expected in the long term. The market value of above RMB15 billion is more reasonable. 


Fu Shou Yuan (1448.HK) - Magic Is About to Disappear, but Is Still Undervalued

China

China Education Group Holdings Limited offers educational services. The Company provides private universities operating services, education training services, and other services. China Education Group Holdings offers services in Hong Kong.

East Buy Holding Limited operates livestreaming platform businesses. The Company provides private label products including agricultural products, food, books, and household goods. East Buy Holding also conducts college education businesses.

Xiamen Unigroup Xue Co., Ltd. offers various educational services. The Company provides after-school tutoring and education consulting. Unigroup Xue also participates in real estate development and investment activities.

China Chunlai Education Group Co., Ltd. provides educational services. The Company offers private higher education services and other services. China Chunlai Education Group provides services in China.

China East Education Holdings Limited provides vocational training educational services. The Company offers culinary education, internet technology education, automotive education, and other services. China East Education Holdings provides services in China.

Zhejiang Yasha Decoration Company Ltd. provides decorating services for large-scale infrastructure, high-end luxury hotel and luxury residential property.

Shanghai Xin Nanyang Co., Ltd., through its subsidiaries, manufactures communication products and industrial equipment, develops cable TV network, security trading, and communication systems, provides network integration, education, and precision processing services.

China Kepei Education Group Limited provides educational services. The Company offers high-quality profession-oriented education services and other services. China Kepei Education Group provides services in China.

China YuHua Education operates private education from kindergarten to university in China.

JH Educational Technology Inc. provides education services. The Company offers higher education, secondary education, and other services. JH Educational Technology provides services in China.

InvoCare Limited owns and operates funeral homes, cemeteries and crematoriums in Australia. The Company's activities include the provision of funerals, burials and cremations through it's funeral home brands including Blackwell, Guardian, George Hartnett, Le Pine, Purslowe, Simplicity Funerals and White Lady Funerals.

Perdoceo Education Corporation provides educational services. The Company offers a variety of bachelor's, associate, and non-degree programs, with a core curricula of information technologies, visual communication and design technologies, business studies, and culinary arts. Perdoceo Education operates in the United States.

Universal Technical Institute Inc., through its Universal Technical Institute (UTI) campuses, provides technical education training. The Schools, through its UTI campuses, offers automotive, collision repair and refinishing, and diesel training. UTI also offers training in motorcycle, marine, and personal watercraft through its Motorcycle and Marine Mechanics Institutes(MMI).

Universal Technical Institute, Inc (UTI US)

SISB operates a premium K-12 international school in Thailand, adopted Singapore, UK and IBDP curriculum as a blended student pathway in schools. SISB was established in 2001 with the school license under the Private School Act. Currently, there are 6 international schools with over 4,000 students.

G8 Education Limited provides community-focused child care for families to foster their child's development.  The Company also conducts a range of child care services that includes child care centers acquisition, child care centers management, and industry-related project management, services and consultancy.

Lung Yen Life Service Corp operates a cemetery and offers funeral and disposition services.

AcadeMedia AB provides educational services. The Company offers pre-school, elementary, secondary, vocational, adult education, comprehensive lesson plans, skills training, and professional rehabilitation services. AcadeMedia operates throughout Sweden.

Laureate Education, Inc. provides educational services. The University offers undergraduate and doctoral degrees in business and management, medical and health sciences, engineering, information technology, architecture, education, law, communications, and hospitality management. Laureate Education operates worldwide.

Propel Funeral Partners Limited provides funeral services. The Company owns and operates funeral homes, cemeteries, crematoria, and related assets, as well as offers funeral, cremation, burial, and mortuary services. Propel Funeral Partners serves individuals and families in Australia and New Zealand.

Perfect Medical Health Management (previously Perfect Shape Medical Limited) offers slimming and beauty treatments. The Company provides fat softens and dissolves services, laser freckle services, and other services. Perfect Shape Medical offers services in 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)