Fushouyuan International Group Co., Ltd.
FU SHOU YUAN INTERNATIONAL GROUP LIMITED

Stock code: 1448
P/E ratio: 10x
Projected price-earnings ratio: 11.5x
Earnings per share: 0.40
Market capitalization: $9 billion
Business Type: Funeral Services
Group Chairman: Bai Xiaojiang
Major Shareholders: Major Shareholders: Perfect Score Group Limited (20.8%)

5-year performance
Year: 2019/2020/2021/2022/2023
Revenue (100 million yuan): 18.5/18.9/23.3/21.7/26.3
Profit (100 million yuan): 5.79/ 6.20/ 7.20/ 6.59/ 7.91
Earnings per share (HKD): 0.28/0.33/0.39/0.33/0.40
Dividend per share (HK$): 0.08/0.09/0.11/0.13/0.39
Net profit ratio: 31.3/32.8/30.9/30.3/30.1
ROE: 15.3/14.4/15.0/12.5/13.9

--Company profile--

[Figure 1] -- The Group provides business categories

Fushouyuan International Group (Fushouyuan) is mainly engaged in funeral and related businesses in China, which can be divided into three main categories:

(i) Graveyard sales and service: sale of cemeteries and provision of cemetery maintenance services.
(ii) Funeral services: funeral arrangements and burial plans and arrangements for funeral ceremonies.
(iii) Other: including the provision of landscaping and cemetery design and construction services; and production and sale of cremation machines and related maintenance services.

In terms of revenue and geographical coverage, Fu Shou Yuan is the largest funeral service provider in China. Fushouyuan is one of the first private enterprises to enter the funeral service industry in China. It operates the funeral business on an enterprise basis, mainly targets the high-end market, and has a certain brand.

Although the 2022 industry was affected by the pandemic, which caused both turnover and profit to decline, the situation had improved markedly by 2023. The 2023 interim results showed a 70% increase in turnover of 1.52 billion over the same period of the previous year, and a profit increase of nearly 80% to 0.46 billion compared to the same period last year. These are all ideal data.

--Leading Funeral Industry in China--

Fushouyuan has a considerable scale in China, and is the industry leader in China in terms of revenue and floor space. Since the vast majority of the funeral industry in China operates on a small-scale model. As a result, there are very few large-scale funeral companies, and these larger and corporatized funeral companies all have some advantages.

Fushouyuan's business has entered more than 40 cities in 19 provinces, autonomous regions, and municipalities directly under the Central Government. In terms of revenue contribution, Shanghai is the largest region, accounting for 40 to 50 percent of total revenue for a long time.

[Figure 2] -- Revenue Ratio by Region

The funeral industry in China is highly fragmented. There are very few businesses operating in the enterprise model. Generally, they only operate in the local area, and there are quite few businesses that can operate in multiple cities.

When Fushouyuan went public in 2013, it was operated in only 8 cities, and the number of cemeteries was 6. Currently, it is operating in more than 40 cities. The number of cemeteries is dozens. Many have been acquired through continuous acquisitions in recent years. It can be seen that Fushouyuan has successfully used enterprise management to continuously expand its business.

--Business Model--

Fushouyuan operates in a similar one-stop model. It first provides funeral services, sells graveyards at the same time, and then provides cemetery maintenance services. Among them, the most profitable one is cemetery sales. The business is not only highly profitable, but is also the main source of revenue for Fushouyuan.

[Figure 3] -- Revenue Ratio by Segment

Therefore, the core part of Fukujuen is actually building a cemetery to sell graveyards. Fushouyuan will buy land, build the entire cemetery on its own, or build a cemetery belonging to Fushouyuan through mergers and acquisitions or buying cemeteries, etc., then distribute the graveyard to customers, and then provide cemetery maintenance services.

Among them, cemeteries are high-end, and have certain requirements in terms of landscape, location, and design, and the graveyards sold will give customers more choices, and customers can participate in some designs, providing customers with more personalized services.

Due to the high-end service, the price is more than double that of the mass market. According to data from recent years, Fukujuen's tomb price is adjusted upward every year, and the price increase is quite large. The current average price is over RMB 0.1 million per seat.

--Brand and advantages--

The funeral industry is a very special industry. The average person does not actively access this product or information on weekdays, and customers tend to choose funeral service providers known to those around them. Although some funeral service providers promote it online, most people still get it through recommendations from acquaintances or hospitals.

In this industry context, there will be a situation where new entrants try to establish popularity and networks, but it is actually not easy. Even if investing resources is to successfully enter the market, it is not an easy and quick thing to do.

Therefore, Fushuyuan, which has a certain scale, network, market, and brand, can maintain its position and advantage among them.

--A moat of market restrictions--

The funeral service industry in China is still a highly regulated industry, and the provision of funeral services is still dominated by the government. Although the cemetery business has been commercialized, when new competitors enter the industry, government approval and registration procedures are much more complicated than before, and this is a moat for existing enterprises, which guarantees the market for existing enterprises.

Furthermore, limited land supply, combined with increasing demand for cemeteries, has exacerbated the rise in tomb prices. Due to factors such as limited land resources and scarce land allocated to cemeteries, it is difficult for new entrants to participate in the funeral business, and it is even more difficult to obtain large areas of land in Tier 1 and 2 cities.

The funeral industry in China is very scattered. Most of them are small in scale, lack brands and popularity, and there are few large-scale and branded funeral companies in the market. Since most of them do not operate in a corporate model, quality is mixed, so the market itself has a certain degree of protection for Fukushuyuan, which targets the high-end market. Meanwhile, Fukushouyuan is the leader of funeral services in China.

--Opportunities at Fukushouyuan--

Fukushouyuan not only has scale and brand, but also has a certain ability to make money. As can be seen from the operating data, Fukusouyuan's turnover has continued to rise, and profits have also continued to grow. The situation is ideal.

Fukushouyuan's net profit rate has been around 30% for many years. This is a very high net profit rate; only a few industries have this level of net profit. It shows that the funeral industry itself is already a profitable industry, and Fushouyuan, which has a brand and quality, is even more profitable. It can be seen that Fukushouyuan itself is already in high returns, and the company is of considerable quality.

Coupled with the company's low debt, stable financial performance, and strong cash flow, all reflect the quality of the enterprise.

[Figure 4] -- Landscape view of one of the cemeteries in Fushou Garden

[Figure 5] -- Different parks in Fushouyuan Cemetery

Due to the development of urbanization in China and the increasing level of knowledge and wealth of people, the funeral industry is in a period of growth, and Fushouyuan's role is a bit like an industry integrator, which will continue to increase its market share.

In 2013, Fushouyuan was listed to raise capital, and most of the capital will be used to develop a new cemetery. Buying land and mergers and acquisitions are the main methods, with the aim of expanding the market.

In recent years, we have seen Fu Shou Yuan actively acquire assets from the same industry, expanding its business. For example, in recent years, land was purchased in Chongqing and Changzhou in Jiangsu Province, a plot of land was purchased by acquiring 80% of the shares in Luoyang Fairy Crane Cemetery, and a plot of land was also purchased through the acquisition of 60% of Huazuyuan in Guangxi.

Fukushouyuan's biggest source of revenue is the sale of graveyards. In recent years, it has continued to increase its graveyard area through purchases and acquisitions. Currently, the total saleable area exceeds 2.2 million square meters. Currently, the area of graveyards sold every year is about 0.03 million to 0.05 million square meters. It can be seen that it holds a considerable amount of land reserves, which is enough to provide for many years of operation after staying. At the same time, Fukujuen earns more than 1 billion dollars a year from the sale of graveyards. Based on the above data, it can already be estimated that the value behind these land reserves is quite large.

--Prospects and Risks--

Although this company is high quality and capable of development, there are several risks to be aware of. First, the funeral industry is unique. Although the company is in a very profitable situation, when the company has certain problems, it is difficult for outsiders to detect, and investors may not be able to fully grasp the situation. Simply put, the industry has some risks that are difficult for investors to detect.

Furthermore, the Chinese government has promoted more environmentally friendly burial methods in recent years, which may have an impact on the long-term development of burial, but due to the high-end location of Fushouyuan products, there is relatively little impact.

At the end of the day, people will always die, and demand will always exist. Many Chinese people still want to be buried. If the government restricts supply, prices will rise, which may be beneficial to the high-end Fushou Garden. However, on the high-end route of Fushouyuan, environmentally friendly burial has little impact on this company.

Of course, Fushouyuan is aware of government policy factors. In recent years, it has strengthened its cremation business. For example, an environmentally friendly cremation machine has obtained a national invention patent and started providing an environmentally friendly cremation machine to a state-run funeral parlor. Management has also indicated that they will step up development related business. Therefore, the general environment can be said to be dangerous organic.

--Regulatory Risks--

Another risk in the industry is policy risk. The government knows that the transparency of the industry is low, enterprises are in a state of high gross profit, and they want to strengthen price regulation. This does have an impact on the industry, because of the high margin advantage and the lucrative situation, which is likely to weaken.

Since Fukushouyuan is high-grade, the impact is relatively small, because the target that the government wants to regulate must be a category that affects the public more. Furthermore, Fukusouyuan itself is already an enterprise operation, and the product itself is highly transparent. Therefore, the policy will have an impact on the entire industry, and although it is there, the impact on Fushouyuan is not significant. The quality of the enterprise will only have a small impact, and the valuation of the enterprise will be slightly lowered.

Furthermore, in recent years, the Chinese government has strengthened supervision of various industries, and the funeral industry has had a certain impact on people's livelihood. In addition, it is a very profitable industry in itself. Therefore, there is indeed a risk of further strengthening the regulation of the industry.

In addition to the fact that this company has accumulated a large amount of land, it currently owns more than 2.8 million square meters of land. In the past, it grew in a continuous land acquisition model. If the government introduced policies targeting such enterprises, such as restricting land acquisition, it would have an adverse impact on this enterprise, and investors should understand the related risks.

The price-earnings ratio of this stock in the past was about 30 times. Even though profits have continued to increase in recent years, the price-earnings ratio valuation has been adjusted to 10-20 times. One reason is that the market will worry about potential regulatory risks, which will reduce the valuation of this stock.

--Recent developments--

Fushouyuan's business growth has slowed in recent years due to factors such as the Chinese economy and the epidemic. However, according to the latest financial data, the situation has improved. In the long run, the company is still of good quality, but there are some factors to keep an eye on.

First, management has updated the direction of the dividend policy in recent years. The goal is to increase the dividend rate to no less than 35%, which will slowly rise to more than 60%.

According to the group, over the years since its listing, the compound annual growth rate of revenue has been over 18%. The new merger project has shown results, the overall profitability is good, and the cash flow level is stable. It believes that various financing methods should be used to improve the efficiency of capital use.

Believing this policy reflects two situations:

First, the business of the enterprise is stable. Different business environments have a certain ability to make money. Cash flow is expected to be strong, so dividend payments will be stable.

Second, due to risks such as Chinese regulations and the fact that the enterprise has developed to a certain point, the company's ability to develop later may be slightly reduced. In the past, management continued to use funds to acquire peers and land, but the current policy has been slightly adjusted, and the capital will slowly increase dividends, reflecting a slight decrease in the company's growth capacity. It will change from bucket 1 to bucket 1-2. The quality is still there, but growth has declined slightly.

--Technological transformation--

[Figure 6] -- Digital Memorial Service

In the past, the Group focused on cemeteries and related maintenance businesses, but in recent years, the central government policy favors the development of simplified, green, and digital funeral services for the industry.

As an industry leader, the Group also adjusts in response to changes in central policies and market demand.

From focusing on traditional cultural heritage in the past, the Group is now at the forefront of the industry, providing services such as birth contracts, online memorials, and even AI communication with ancestors before birth. They have even developed various professional early support services such as palliative care and grief counseling. The long-term goal is to go from “1.0 Cemetery” to “2.0 Cultural Memorial Park” to “3.0 Life Park”, and finally become a “4.0 science and culture enterprise” that truly serves spiritual heritage.

Besides being able to better meet market and policy needs, this kind of adjustment can be more in line with the needs of the market. At the same time, the Group's business was further diversified. In highly homogenous funeral services, we are able to stand out for greater uniqueness, thereby improving competitiveness.

--Investment Strategy--

Overall, Fushouyuan is the largest funeral enterprise in China. It has a certain scale, and targets the high-end market. The service is of a certain quality, has a certain brand and popularity, has considerable ability to make money, is financially stable, and has few debts, so the enterprise is essentially good.

In addition, it is not easy for new competitors to enter the business, so it is beneficial to the original company, so Fu Shou Yuan is a high-quality enterprise.

However, due to the risk factors mentioned above, especially potential regulation, this factor is the most difficult to predict, so it is not appropriate to invest too much in investment strategies.

In terms of corporate valuation, the company's reasonable price-earnings ratio in the past was 20 to 30 times, but due to potential regulatory risks and a decrease in growth power compared to the past, the market adjusted a reasonable price-earnings ratio, believing that 10 to 20 times is the value level of the company's latest situation.

Currently, the price-earnings ratio is about 10 times, and the predicted price-earnings ratio is 11.5 times. It is about a lower position in a reasonable area. There is investment value, but it is necessary to control betting and carry it out in a split mode. It is understood that this stock has the above risks, and it is better to hold it for a long time after investment.

(I am a licensed person in the securities industry and hold the above shares. (The above article is only an analysis of the company and does not constitute an investment offer. Investors should spend time researching the company before investing to decide whether it is suitable for them.)

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