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

Looking back at Chaoju Eye's history in the capital market, although the company already listed in Hong Kong stocks as early as 2021, the overall stock price has always shown a downward trend. Compared with the company's issue price of HK$10 three years ago, it has dropped by nearly two-thirds.

According to the news, 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 stock prices.

As the saying goes, “golden eyes, silver teeth, copper bones”. Despite being on the popular circuit of ophthalmology, Chaoju Ophthalmology's revenue scale is far different from that of leading companies. This is probably also one of the reasons why Chaoju Ophthalmology is difficult to win favor with investors.

The sharp rise in volume and price boosts the improvement of profit indicators

According to the Zhitong Finance App, Chaoju Ophthalmology is inherited from the century-old medical family Zhonghetang. The company's predecessor, Chaoju Ophthalmology Clinic, was established in 1988, and the business map is gradually expanding nationwide, with Inner Mongolia as the center. As of December 31, 2023, Chaoju Ophthalmology operates a network of 31 ophthalmology hospitals and 29 optometry centers, spanning seven provinces and autonomous regions in China.

For the year ended December 31, 2023, the company achieved revenue of 1,369 million yuan, an increase of 38.3% year on year; net profit of 229 million yuan, an increase of 21.9% year on year. According to the company, the increase in revenue was mainly due to the recovery in demand for ophthalmology services, the Group's ability to receive increased patient visits, industry recovery, and improvements in China's post-COVID-19 economic environment.

Specifically, the company's business is divided into consumer ophthalmology services and basic ophthalmology services. Among them, consumer ophthalmology services include refractive correction (including presbyopia correction), prevention and control of myopia, dry eye, eye plastic surgery, and provision of optometry products and services. Basic ophthalmology services include treatment of common ophthalmology diseases such as cataracts, glaucoma, strabismus, and fundus diseases.

In 2023, consumer ophthalmology and basic ophthalmology achieved revenue of 709 million yuan and 654 million yuan respectively, up 30.64% and 46.26% year-on-year respectively, accounting for 51.79% and 47.76% of revenue, respectively, and gross margins of 49.14% and 41.55%, respectively. Thanks to the release of demand for eye diseases such as cataracts due to the backlog of the epidemic, basic ophthalmology services recorded a higher growth rate.

In 2023, the company's hospital outpatient services and optometry centers both experienced a “sharp rise in volume and price”, which led to an increase in the company's overall profitability. The overall gross margin increased to 45.4% from 43.9% in the same period in 2022. Specifically, the number of hospital outpatient visits was 1.128,700, up 19.50% year on year; the unit price of hospital outpatient service customers increased from 626 yuan/time to 698 yuan/time, up 11.5% year on year; the number of visits by optometry center customers was 120,200, up 17.88% year on year, and the unit price of optometry center customers increased from 746 yuan to 806 yuan, an increase of 8.04%.

At the same time, the company's sales costs have also risen. The sales expenditure rate in 2023 was 7.67%, an increase of 1.48 percentage points over the previous year, mainly due to the increase in marketing expenses for the construction and acquisition of hospitals.

What are the opportunities for “small but beautiful” regional leaders?

According to the Zhitong Finance App, in 2023, benefiting from the increase in residents' eye health awareness and the rebound in demand for consumer ophthalmology services after the epidemic, the performance of most listed private ophthalmology medical institutions recorded an increase. For example, Aier Ophthalmology's revenue and net profit to mother all increased by more than 20% year-on-year, and Puri Ophthalmology's net profit to mother reached 268 million yuan, recording a year-on-year growth rate of 1202.56%.

Meanwhile, in the first quarter of 2024, venture capital activity in the global ophthalmology sector also ushered in significant growth, indicating that the market remains optimistic about the market prospects of ophthalmology care. According to industry research data, the compound growth rate of the ophthalmology market will reach 6.63% from 2023 to 2030.

In 2023, outward mergers and acquisitions will continue to be an expansion strategy for many private ophthalmology institutions. In 2023 alone, the ophthalmology industry had more than 5 mergers and acquisitions worth hundreds of millions of dollars.

Take Aier Ophthalmology, a leader in the segment. According to statistics, in 2023, Aier Ophthalmology acquired a total of 41 ophthalmology hospitals, and also established Ningde Gutian Aier Ophthalmology Clinic Co., Ltd., Quanzhou Licheng Aier Ophthalmology Clinic Co., Ltd., and Quanzhou Taiwanese Investment Zone Aier Ophthalmology Clinic Co., Ltd. in Fujian.

Since 2024, the trend of mergers and acquisitions in the industry has not abated. For example, ZEISS Healthcare has reached a merger and acquisition of Dutch ophthalmology DORC, with a transaction amount of up to 985 million euros, about 1.06 billion US dollars or 7.7 billion yuan; Puri Ophthalmology also recently publicly revealed that the company also has 8 new hospitals in the process of preparing, and it is expected that most of them will open within the year, and will continue to advance the overall layout strategy of “national chaining+city integration”.

Although injecting assets acquired through mergers and acquisitions into listed companies can further enhance performance, behind this “racing horse racing” model, there are also a series of hidden concerns such as financial pressure and the risk of impairment of goodwill.

From 2019 to 2021, Aier Group's balance ratios were 91.18%, 63.63%, and 65.84% respectively, and the balance ratio continued to be high; by the end of 2023, Aier Ophthalmology had a book reputation of 6.533 billion yuan, and the total goodwill impairment reserves calculated by the company from 2017 to 2023 was 1,377 billion yuan.

According to Chaoju Ophthalmology's disclosure, as of December 31, 2023, the company's goodwill was 206 million yuan, and several hospital business mergers were completed within 2023. The goodwill generated by the business merger was about 105 million yuan, and the risk of future impairment of goodwill cannot be ignored.

Furthermore, in terms of revenue scale, Chaoju Ophthalmology's revenue scale is far different compared to leading companies such as Aier Ophthalmology, Huaxia Ophthalmology, and Puri Ophthalmology. According to statistics from Intelligent Research Consulting, currently in the ophthalmology medical service industry, Aier Ophthalmology's market share far exceeds that of other companies. In 2022, the market share is about 11.3%, and its outpatient and surgical volume also ranks among the highest in the industry.

According to the Zhitong Finance App, domestic ophthalmology consumption areas are mainly concentrated in the eastern part of the country and populated areas. For example, East China, North China, Central China, and South China are the main consumption regions.

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

(Map showing the location of Chaoju Eye Hospital)

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

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

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

With the revenue scale already “lagging behind,” Chaoju Ophthalmology will obviously face greater financial pressure if it wants to compete with its peers in the more profitable eastern region. Future financing by means of bonds or bank loans will increase the company's financial risk; if financing is carried out through channels such as additional issuance in the secondary market, stock prices will also bear more downward pressure.

Up to now, Chaoju Ophthalmology's stock price is already in the historical undervaluation range. Under the overall rise in the general market, there may be an overfall and rebound in the short term; however, in the medium to long term, there is still a certain gap in the company's overall competitiveness compared to the industry. If the market's expectations for subsequent performance are insufficient, there is limited room for the company's stock price to rise in the future.