The market has plummeted but consolidated against the trend, with a compound growth rate of 30% in the next 10 years, and a new leader in medical services will be born?
Gushengtang (02273.HK) Since its listing, the valuation has not been low, and the trend has been relatively strong, even in the recent situation of Hong Kong stocks and Hang Seng Medical.
Recently, however, a strong short-selling force has suddenly accumulated.
During the period from December 12th to 15th, the proportion of short sales exceeded 40% in one fell swoop. And the latest data shows that as of December 22, the short selling ratio fell back to 26%.
Source: iFinfin
So why are the short-selling forces eyeing Gushengtang? Is Gushengtang overrated? Can the bears succeed?
The trigger for shorting
There are several reasons to go short.
The first is the spread of panic caused by the Hygeia crash.
The capital market often compares Hygeia with Gushengtang, both of which belong to the medical service track + strong M&A ability. On December 12, Hygeia plummeted 22%.
It was also at this time that Gushengtang's short orders increased significantly, with the highest short selling ratio reaching 46.86%. Looking at the chart below, on December 15, the amount of open short sales was as high as 230 million, which was 1 times that of the previous one.
Source: iFinfin
But the two are fundamentally different. Hygeia's plunge was caused by weaker-than-expected guidance, which is not a problem at the moment, and the performance continues to exceed expectations.
In the first half of the year, Gushengtang achieved revenue of 703 million, an increase of 40.3% year-on-year. The adjusted net profit was 102 million, an increase of 63.8% year-on-year, which is obviously a high growth trend.
The company said in a recent conference call that it expects annual revenue growth to be 40%+ year-on-year and profit growth to be 45%+. More importantly, it has also set the tone for future high growth, stating that the profit growth rate will be higher than the revenue growth rate in the next few years, and the operating cash flow growth rate will be higher than the profit growth rate.
The second is the reduction of shareholder holdings, reflecting the lack of optimism about the future.
In the fourth quarter, according to Futu statistics, executive Huang Jingsheng sold 468,000 shares, corresponding to 20.47 million yuan. Huang Jingsheng is a relatively influential figure in the investment community, and his actions to reduce his holdings naturally make investors worried.
But in fact, Huang Jingsheng has been with Gushengtang for 12 years, and as an investor, the company has finally gone public, and it is understandable to cash out.
不光黄晶生，像Eight Roads Shareholdings Limited、FMR LLC、Pandanus Partners L.P.等一级股东，基本都撤退完了，减持比例高达30%以上，粗略估算套现金额在23亿以上。
Now that cornerstone investors should have basically reduced their cuts, the company has no major selling pressure. Moreover, shareholder selling pressure can only determine the short-term trend, and the long-term push of the valuation center ultimately depends on long-term funds. The Gushengtang trend can also verify this.
Gushengtang entered the Shenzhen-Hong Kong Stock Connect in March last year, and its shareholding ratio has climbed to 38% in one and a half years. surpassed Hygeia in one fell swoop and ranked 8th in the entire Hong Kong stock medical industry. These long-term funds not only undertook the billions of selling pressure of first-class PE, but also drove Gushengtang to go against the trend, which is very powerful. Now Beishui is still increasing its position in Gushengtang, and long-term funds have become the mainstay behind Gushengtang.
Source: iFinfin
Third, it is rumored to carry out additional stock issuance.
This is basically nonsense. There was an additional issuance in March, and there is no reason to increase the issuance so soon. Moreover, its current cash equivalents are 1.3 billion, and its interest-bearing liabilities are only more than 20 million, so it has abundant funds, even if it wants to carry out mergers and acquisitions next, its own funds are completely sufficient. Now the actual controller holds 30% of the shares, which is not high, and there is no reason to dilute it again.
The above three points are the reasons for the sharp rise in the power of bears in the short term, which is a one-time effect and at the same time does not hold very well.
But in the long run, how big will the impact of consumption downgrade on Gushengtang, and whether Gushengtang's business model will work? This is probably the biggest question point for the bears.
The impact of consumption downgrade on Gushengtang
Medical care is divided into serious medical care and consumer medical care. The so-called serious medical treatment is centered on curing diseases and saving people. Consumer medical care, on the other hand, is the core goal of spiritual consumption such as appearance, such as medical beauty and dentistry.
As a traditional Chinese medicine medical chain service organization, Gushengtang is classified by the market as a consumer medical track, so it will be worried about consumption downgrade.
But in fact, it is not the same as medical cosmetology, Gushengtang's customers only go to see a doctor when they have needs, and the core of concern is whether the disease can be cured, and a good doctor is essentially helping patients save money.
It can be seen that the overall customer return rate of Gushengtang has increased from 50.9% in 2018 to 67.3% in the first half of 2023, and the return rate of member customers has remained above 85% in the same period. If the disease is not cured, the doctors are not high-quality enough, and it is impossible to have such a high return rate, and the overall customer return rate is still increasing year by year.
As for whether there is a consumption downgrade, judging from the known data, its unit price is still increasing under the overall bad environment this year. In the first half of this year, the unit price of members and all customers was 614 yuan and 546 yuan respectively, an increase of 42 yuan and 15 yuan respectively compared with the same period last year.
Taking a step back, price is relative. If consumption downgrading is the trend, in fact, in many fields, the price of TCM is cheaper than that of Western medicine, and ordinary people will be more likely to choose TCM. In recent years, the penetration rate of TCM diagnosis and treatment has been rising, which is evidenced by this.
According to Frost & Sullivan's forecast, the outpatient penetration rate of TCM diagnosis and treatment is expected to increase from 13.3% in 2019 to 16.6% in 2025.
Is the business model working?
The underlying logic of Gushengtang is a good doctor.
Doctors also need a platform to perform after semi-retirement or retirement, and Gushengtang can provide this platform. And these doctors are all over 50 years old, which happens to be the golden age of traditional Chinese medicine, which is equivalent to Gushengtang's continuous access to the dividends of high-quality doctors.
With high-quality doctors, the return rate increases, word of mouth is transmitted, and Gushengtang does not need to invest too high drainage costs. Many TCM clinics are difficult to make a profit, most of which is due to high marketing costs. Gushengtang's drainage cost is only less than 0.5% of revenue, which is very low.
Judging from the current data, Gushengtang's business model has run through.
In the past, it was difficult for the first store started by Gushengtang to be profitable for 7 years, but now the business model has continued to evolve, and the self-built stores have achieved breakeven in 3-5 months in the same city, and about 8 months across the city to achieve breakeven.
On average, Gushengtang's acquired stores can recover their investment costs in only 47 months. After the integration of assets, the performance is also accelerating. Taking Shanghai Jinyue store as an example, it was acquired in 2018 and recovered its investment cost in less than 3 years, with a compound growth rate of 63% in revenue during the 2018-1H21 period.
After the model is run, the next step is to copy the profit from 1 to N. Gushengtang said that it will be more active in opening new stores in the future, and is confident that the annual profit growth rate will be 30% in the next 10 years.
It is worth mentioning that in 2013, the profit of Aier Ophthalmology was only 200 million, and after the model ran through and accelerated expansion, the annual profit also grew at a growth rate of 30%, and now the profit is more than 10 times that of the original. In 2013, the market value of Aier was only more than 10 billion, and now it has exceeded 100 billion. Now Gushengtang, which has a market value of 10 billion, is it not like Aier ten years ago?
Is 50 times more expensive?
Based on the well-known environment, industries and companies with high growth certainty will become extremely scarce this year and beyond. Coupled with the recent introduction of gaming policies, the market will further strengthen the recognition of certainty and give high valuations to certainty.
From the industry level, the macro policies faced by Gushengtang are very friendly. First, under the normalization of the Sino-US game, it is imperative to revitalize more advantageous traditional Chinese medicine, and the epidemic has proven the effectiveness of traditional Chinese medicine. Second, the scissors gap between the supply and demand of medical services has continued to widen in recent years, and the policy will also support the society to run medical services and effectively expand supply.
From the performance level, Gushengtang's caliber is to insist that the profit in the next 10 years will achieve a compound growth rate of 30%, while the profit growth rate is higher than the revenue growth rate, and the operating cash flow growth rate is higher than the profit growth rate.
From the above perspective, Gushengtang is a rare "certainty" in the market, and it deserves to enjoy a valuation premium and continue to improve. Moreover, its high valuation is only temporary, and it can be quickly digested through high growth in the future.
Will it become a new leader in medical services?
Of course, if you believe it, there are already some prescient long-term funds that have begun to believe and continue to run into the market. If you don't believe it, it is also true that there is a sudden increase in short orders at the moment, but bears are also potential bulls.
The underlying logic of Gushengtang is correct, the macro policy is friendly, it is in an industry with low concentration, increased penetration rate, and will not roll up (competitors are public hospitals that can't roll up), and can eat the dividends of high-quality doctors, and the business model has also run through.
Once you can prove yourself with your performance quarter by quarter, you will cover shorts at that time, and even deduce a more extreme short market. In addition, the positive fundamentals will also strengthen the continuous entry of long-term funds, further pushing up the valuation and market value, forming a continuous positive feedback, and Gushengtang may become a new leader in medical services.
Some analysts have said that all companies that can give long-term results should give a high valuation premium, and those companies that can't look too long should give a relatively large valuation discount. This certainty will be verified quarter by quarter next year.