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>
<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>'s share price rebound over the last two days may have well-reflected the special dividend proposal. It has, however, opened up the room for disappointment. </li>
<li>Assuming the same special DPS as last time, it is sitting on a 9% yield. The dividend sustainability is uncertain, and without this, it will be only 4.7% for FY25.</li>
<li>Earnings have been cut by 32.5% over the last six months on consumption downgrade. This near-term headwind will overshadow its long-term story.  </li>
</ul>



Fu Shou Yuan (1448 HK)'s share price rebound over the last two days may have well-reflected the special dividend proposal. It has, however, opened up the room for disappointment. 
Assuming the same special DPS as last time, it is sitting on a 9% yield. The dividend sustainability is uncertain, and without this, it will be only 4.7% for FY25.
Earnings have been cut by 32.5% over the last six months on consumption downgrade. This near-term headwind will overshadow its long-term story.  


Fu Shou Yuan (1448 HK): Another Special Dividend Proposal

<ul>
<li>The special dividend actually exceeded investors' expectations. As long as the dividend yield is higher than the risk-free rate, then Fu Shou Yuan is worth holding for the long term.</li>
<li>Fu Shou Yuan's 2024 full-year performance could fall short of expectations. As the business model is not as excellent as previously imagined, long-term growth rate would fall to single digit.</li>
<li>Since high valuation is unsustainable without the support of strong future growth momentum, investors who pursue for capital gains could consider taking profits by taking advantage of share price rally.</li>
</ul>


The special dividend actually exceeded investors' expectations. As long as the dividend yield is higher than the risk-free rate, then Fu Shou Yuan is worth holding for the long term.
Fu Shou Yuan's 2024 full-year performance could fall short of expectations. As the business model is not as excellent as previously imagined, long-term growth rate would fall to single digit.
Since high valuation is unsustainable without the support of strong future growth momentum, investors who pursue for capital gains could consider taking profits by taking advantage of share price rally.


Fu Shou Yuan (1448 HK) - The Special Dividend Beat Expectations, but Concerns Remain

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)