Excluded from the MSCI Global Small Cap Index, Chaoju Ophthalmology is "falling behind"?

author:Zhitong Finance APP

In the early morning of May 15, Beijing time, MSCI, an international index compilation company, announced the results of the quarterly index adjustment in May 2024: in this adjustment, 21 Hong Kong stocks were included in the MSCI Global Small Cap Index, and 29 were excluded, and Chaoju Ophthalmology (02219), a well-known listed ophthalmology chain group, was excluded.

Looking back on the history of Chaoju Ophthalmology in the capital market, although the company has landed on the Hong Kong stock market as early as 2021, the overall stock price has always been on a downward trend, and now it has fallen by nearly two-thirds compared with the company's issue price of HK$10 three years ago.

On the news side, the company recently announced its 2023 results, achieving both revenue and net profit growth. However, judging from the market reaction, the positive performance did not significantly boost the stock price.

As the saying goes, "golden eyes, silver teeth, copper bones", although it is in the popular track of ophthalmology, the revenue scale of Chaoju Ophthalmology is far from that of the head enterprises, which may also be one of the reasons why Chaoju Ophthalmology is difficult to win the favor of investors.

Excluded from the MSCI Global Small Cap Index, Chaoju Ophthalmology is "falling behind"?

The rise in volume and price boosted the improvement of profitability indicators

According to Zhitong Financial APP, Chaoju Ophthalmology is inherited from Zhonghetang, a century-old medical family, and established the company's predecessor Chaoju Ophthalmology Clinic in 1988, and with Inner Mongolia as the center, its business territory has gradually expanded nationwide. As of December 31, 2023, Chaoju Ophthalmology operated a network of 31 eye hospitals and 29 optometry centers across seven provinces and autonomous regions in China.

For the year ended December 31, 2023, the company achieved revenue of 1.369 billion yuan, a year-on-year increase of 38.3%; The net profit was 229 million yuan, a year-on-year increase of 21.9%. According to the company, the revenue growth was mainly due to the recovery of demand for ophthalmic services, as well as the improvement of the group's ability to receive increased patient visits, the recovery of the industry and the improvement of China's post-COVID economic environment.

Excluded from the MSCI Global Small Cap Index, Chaoju Ophthalmology is "falling behind"?

Specifically, the Company's business is divided into consumer ophthalmology services and basic ophthalmic services, of which consumer ophthalmology services include refractive correction (including presbyopia correction), myopia prevention and control, dry eye, oculoplastic surgery and the provision of optometric products and services, while basic ophthalmology services include the treatment of common ophthalmic diseases such as cataracts, glaucoma, strabismus, fundus diseases.

In 2023, consumer ophthalmology and basic ophthalmology will achieve revenue of 709 million yuan and 654 million yuan, a year-on-year increase of 30.64% and 46.26%, respectively, with revenue accounting for 51.79% and 47.76%, respectively, and gross profit margin of 49.14% and 41.55%, respectively. Thanks to the release of demand for eye diseases such as cataracts, which has accumulated during the epidemic, basic ophthalmology services have recorded a higher growth rate.

In 2023, the company's hospital outpatient services and optometry centers both experienced "volume and price increases", driving the company's overall profitability to improve, and the overall gross profit margin increased from 43.9% in the same period of 2022 to 45.4%. Specifically, the number of outpatient visits in the hospital was 1,128,700, a year-on-year increase of 19.50%, and the unit price of hospital outpatient services increased from 626 yuan/time to 698 yuan/time, an increase of 11.5% year-on-year; The number of visits to optometry centers was 120,200, a year-on-year increase of 17.88%, and the unit price of optometry centers increased from 746 yuan to 806 yuan, an increase of 8.04%.

Excluded from the MSCI Global Small Cap Index, Chaoju Ophthalmology is "falling behind"?

At the same time, the company's cost of sales also increased, with a sales expense ratio of 7.67% in 2023, an increase of 1.48 percentage points year-on-year, mainly due to the increase in marketing expenses for new and acquired hospitals.

Where is the opportunity for a "small but beautiful" regional leader?

According to Zhitong Financial APP, in 2023, benefiting from the improvement of residents' awareness of eye health and the rebound in consumer ophthalmic service demand after the epidemic, the performance of most listed private ophthalmic medical institutions will record an increase, such as Aier Ophthalmology's revenue and net profit attributable to the parent company increased by more than 20% year-on-year, and the net profit attributable to the parent of Preh Ophthalmology reached 268 million yuan, recording a year-on-year growth rate of 1202.56%.

Excluded from the MSCI Global Small Cap Index, Chaoju Ophthalmology is "falling behind"?

In the first quarter of 2024, venture capital activity in the global ophthalmology sector also saw a significant increase, indicating that the market remains optimistic about the market outlook for ophthalmic healthcare. Industry research data shows that from 2023 to 2030, the ophthalmology market will grow at a compound growth rate of 6.63%.

Excluded from the MSCI Global Small Cap Index, Chaoju Ophthalmology is "falling behind"?

In 2023, outbound mergers and acquisitions will continue to be an expansion strategy for many private ophthalmic medical institutions. In 2023 alone, there will be more than 5 mergers and acquisitions in the ophthalmology industry with a transaction value of hundreds of millions of dollars.

Taking Aier Ophthalmology, a leader in the subdivided field, as an example, according to statistics, Aier Ophthalmology will acquire a total of 41 ophthalmology hospitals in 2023, and at the same time, Ningde Gutian Aier Ophthalmology Clinic Co., Ltd., Quanzhou Licheng Aier Ophthalmology Clinic Co., Ltd. and Quanzhou Taiwanese Investment Zone Aier Ophthalmology Clinic Co., Ltd. will be newly established in Fujian.

Since 2024, the momentum of mergers and acquisitions in the industry has not decreased, such as Zeiss Medical has reached the acquisition of the Dutch ophthalmic DORC, with a transaction value of up to 985 million euros, about 1.06 billion US dollars or 7.7 billion yuan; Preh Ophthalmology also recently publicly revealed that the company still has 8 new hospitals in the process of preparation, most of which are expected to open within the year, and will continue to promote the overall layout strategy of "national chain + city integration".

Although the injection of acquired assets into listed companies can further increase performance, behind this "staking and staking land" model, there are also a series of hidden concerns such as financial pressure and goodwill impairment risk.

From 2019 to 2021, the asset-liability ratios of Aier Group were 91.18%, 63.63% and 65.84% respectively, and the asset-liability ratio continued to be high; As of the end of 2023, the book goodwill of Aier Ophthalmology was 6.533 billion yuan, and the total goodwill impairment provision made by the company from 2017 to 2023 was 1.377 billion yuan.

According to the disclosure of Chaoju Ophthalmology, as of December 31, 2023, the company's goodwill was 206 million yuan, and a number of hospital business consolidations were completed in 2023, and the goodwill generated by the business combination was about 105 million yuan, and the risk of goodwill impairment in the future cannot be ignored.

In addition, in terms of revenue scale, the revenue scale of Chaoju Ophthalmology is also far from that of many leading companies such as Aier Ophthalmology, Huaxia Ophthalmology, and Purui Ophthalmology. According to the statistics of Zhiyan Consulting, at present, in the ophthalmic medical service industry, Aier Ophthalmology's market share far exceeds that of other companies, with a market share of about 11.3% in 2022, and its outpatient volume and surgical volume are also among the forefront of the industry.

Excluded from the MSCI Global Small Cap Index, Chaoju Ophthalmology is "falling behind"?

According to Zhitong Financial APP, the domestic ophthalmology consumption areas are mainly concentrated in the eastern part of the country and the population concentration areas, such as East China, North China, Central China, and South China are the main consumption areas.

At present, the strategic layout of Chaoju Ophthalmology is mainly located in Inner Mongolia, and in recent years, it has also radiated to North China and East China. As of December 31, 2023, the company's network of 31 ophthalmology hospitals is mainly located in Mengxi, Mengdong, Zhedong, northern Zhejiang, northern Jiangsu, Ningxia and Beijing, and 29 optometry centers are mainly located in Mengxi, Mengdong, eastern Zhejiang, northern Zhejiang and northern Jiangsu.

Excluded from the MSCI Global Small Cap Index, Chaoju Ophthalmology is "falling behind"?

(Map of the location of Chaoju Eye Hospital)

According to the Frost & Sullivan Report, among private ophthalmology hospitals, in terms of total revenue in 2020, Chaoju Ophthalmology ranked first in Inner Mongolia, second in North China and fifth in China.

Looking ahead, Chaoju Ophthalmology plans to continue to consolidate its leading position in North China and enhance its market position in key regions such as the Yangtze River Delta region.

Although Chaoju Ophthalmology has become a regional ophthalmology leader in Inner Mongolia, it is clear that it will not be as easy to expand into the already competitive eastern region. Not to mention that Aier Ophthalmology has achieved coverage in most provincial capital cities and prefecture-level cities in recent years, Huaxia Ophthalmology has also focused on mergers and acquisitions in the Yangtze River Delta region, and put forward the goal of accounting for more than 30% of the revenue in the Yangtze River Delta region.

In the case that the scale of revenue has "fallen behind", Chaoju Ophthalmology will obviously face greater financial pressure if it wants to compete with its peers for the more profitable eastern market. If the company is financed by bonds or bank loans in the future, it will increase the company's financial risk; If the financing is raised through channels such as additional issuance in the secondary market, the stock price will also be subject to more downward pressure.

Up to now, Chaoju Ophthalmology's share price has been in the historically low valuation range, and in the case of the overall rise of the market, there may be an over-falling rebound in the short term; However, in the medium and long term, the company's comprehensive competitiveness is still far behind its peers, and if the market's expectations for follow-up performance are insufficient, the company's stock price will have limited room to rise in the future.