Growth outlook largely immune to pandemic
? We expect ECH’s business to remain resilient due to stable medical and aesthetic medical services demand, despite the rising Covid-19 cases.
? We see the M&A trend continuing in FY23F and a strong recovery in beauty/ aesthetic medical services once the Omicron outbreak in HK is contained.
? Maintain Add. TP lowered to HK$13.16 on 28%/29% EPS cuts in FY22F/23F.
Short-term pandemic headwinds provide good buying opportunity
We believe the recent share price weakness, following HK’s fifth Covid-19 wave caused by the Omicron variant, provides a good buying opportunity as we expect EC Healthcare’s (ECH) overall business to remain resilient due to stable medical and aesthetic medical services demand. We expect the pandemic in HK to be largely contained after universal Covid-19 testing (likely a lockdown of the city for 9-15 days, with 3 tests for all c.7.5m residents) in late-Mar (likely on 17 Mar). We also expect beauty parlours to reopen after a closure of 103 days (8 Jan to 20 Apr) with the high possibility of a relaxation in social-distancing measures, even though there may still be a few Covid-19 cases.
Ongoing M&As continue to lead medical services’ rapid growth
ECH spent c.HK$400m to complete six major acquisitions in FY22F, namely a physiotherapy business; 2 veterinary chains; 5 medical centres with 30 registered medical practitioners (Premier Medical Group); 7 dental clinics with 32 dentists (Bayley & Jackson); 12 clinics; and a medical network. We estimate the above acquired medical assets to contribute profits of c.HK$15m in FY22F and c.HK$35m in FY23F. We are positive on ECH’s M&As strategy in a market downturn which will help the company expand its medical
services coverage and strengthen its practitioners count at a relatively low price (most of the acquisitions at 5-8x P/E). We expect continued strong revenue growth for medical services of 52%/24% yoy in FY23F/24F, remaining the company’s earnings driver.
Cut FY22-24F EPS, mainly due to suspension of beauty services
We cut FY22F/23F EPS by 28%/29% to reflect the 103 days of service suspension in beauty services (c.20% of FY22F revenue), c.30% decrease in visitors to aesthetic medical services (c.30% of FY22F revenue) and c.15% decrease to medical services (c.46% of FY22F revenue) during the pandemic. Our model assumes the Omicron variant in HK will be contained by Jun 22, after which there will be a strong recovery in beauty/aesthetic medical services in 2QFY23F, boosted by the relaxation in social-distancing measures and HK$10,000 consumption voucher. We lower our FY24F EPS mainly due to slower network expansion in China in FY23F, with the further delay in China-HK border re-opening.
Maintain Add with a lower target price of HK$13.16
Stay invested. We expect solid EPS growth of 33%/66% in FY23F/24F helped by a rapidly growing medical services segment (expanding discipline coverage and increase in specialists via organic growth and M&As) as well as stable growth of services floor space in aesthetic/beauty services. Our TP is lower at HK$13.16 due to EPS cuts and lower target multiple of 25x (previously 30x), still 1x PEG, reflecting the long-term earnings outlook. Rerating catalysts include inclusion in the Stock-Connect programme (effective 7 Mar 2022), easing of Omicron pandemic in HK, China-HK border reopening in summer 2022, and accelerating China network expansion. Risk: prolonged Omicron pandemic in HK