Introduction:

For many forward-looking companies, profit is not the goal; profit is like oxygen, food, water, and blood that the human body needs; these things are not the purpose of life.

But without them, there is no life.

—— “An Evergreen Foundation”

The third quarter of 2024 was a litmus test.

The growth in market segments such as medical aesthetics, ophthalmology, and dentistry all showed fatigue. Faced with this challenge, the growth of listed companies has experienced large-scale stagnation, and the phenomenon of performance decline or even loss has become commonplace.

The beta of the times is fluctuating, but individual alphas are prominent at the same time.

On November 29, Riel Group released its semi-annual results report for the end of the third quarter of 2024. The performance report showed that the company not only achieved revenue growth, but also maintained positive profits.

The change in market expectations for the Rhyl Group began with the performance in 2023 — despite the impact of the dental implant collection policy, the Riel Group achieved its first annual profit. Entering the first half of 2024, the Riel Group continued to maintain its profit trend and continued this good performance in the third quarter, showing a continuous positive development trend.

Although it is gratifying to maintain profits, as stated in the book “The Evergreen Foundation”, which is one of the training materials for Rhyl Group executives, profit is not the ultimate goal, but one of the means and results of enterprise development.

Investors are more concerned about where to go in the future.

I. Stock Thinking in the Age of Stock

Amidst macroeconomic fluctuations, many industries will inevitably experience cyclical fluctuations from trough to peak, and the dental care service industry cannot escape this pattern. However, not all industries can successfully return to a growth trajectory after fluctuations.

Figure: Industry capital cycle

As the dental care service industry enters an era of stock, investors are generally concerned about two core issues:

1. Does the stock age of the dental care service industry indicate the decline of the industry? This is directly related to the long-term development prospects of the industry.

2. In a situation where it is still unknown when the stock era will end, how should enterprises adapt and achieve development.

Regarding the first question, despite a downward trend in health service consumption, the aging trend has brought a clear growth point to the dental industry. Currently, the degree of aging in China is similar to that of the US in the 1970s. Drawing on the experience of developed countries, this demand is expected to continue to grow at a high level. In the short term, both supply and demand experienced marginal improvements. From the demand side, in the second half of 2024, with the frequent introduction of policies to stimulate consumption, policy effects are expected to gradually become apparent, driving a marginal improvement in downstream demand. From the supply side, in the first half of 2024, there was a decline in the registration of large dental institutions in the number of dental medical service institutions nationwide. The management of Tongce Medical recently publicly stated that the dental industry is speeding up clearance. The number of service members in Zhejiang Province has been reduced from more than 8,000 in the same period last year to more than 6,000 this year, mainly due to the withdrawal of institutions with insufficient cash flow.

As for the second question, we should be objective.

Despite the challenges posed by the slowing growth rate of the industry, the stock era was not entirely unfavorable. The stock era is a catalyst for the restructuring of the competitive landscape of the industry, and the market is undergoing a major reshuffle. In this era, enterprises need to practice internal skills and enhance their market share and future competitiveness. As Marathon Capital points out, the core of long-term investment is not the popularity of demand, but the competitive advantage of the enterprise.

In this context, Riel Group's performance reports and market performance provide some insight. Zou Qifang told reporters that the Riel Group has made adjustments in its business strategy, shifting from an incremental mindset to a stock mindset. This means that Rhyl Group's business logic is shifting from a model of bearing temporary losses in exchange for high growth in the past to a model that focuses on profit and improving quality and efficiency. Riel Group insists on being customer-oriented, deeply cultivating existing regional markets and improving refined management. Rhyl Group drives new stores that have not yet been profitable through profitable old stores, turning all new stores opened earlier into profit contributors, strengthening resource sharing among clinics, and promoting them to make profits as soon as possible.

Under the inventory mindset, Rhyl Group can amplify the flywheel effect and achieve a virtuous cycle of cost and scale. It is by leveraging growth inertia that the Group has steadily improved operating efficiency and achieved scale growth, stabilizing expectations from the outside world for the company's continued profit.

II. A New Growth Paradigm in the Stock Era

The inventory era means the end of the phase of rapid growth, so enterprises must have clear trade-offs and focus, and practice refined management in order to enter the stage of high-quality growth under the new inventory paradigm.

The same is true of the Riel Group.

In terms of store expansion, the Group pays great attention to refined management, focusing on the stock market. By extracting highlights, forming best-practice SOPs and replicating and promoting them in first-line stores, the Group improves service quality and customer experience. At the same time, the Group actively seeks new market opportunities and maintains opportunities for extended business growth.

It is worth mentioning that the horse-racing field incremental development paradigm is no longer working. In the field of health services, epitaxial expansion is often seen as an effective means of rapid growth. In the past, some medical groups were frequentmergers and acquisitionsLet's do it on a large scale, and even extend our reach to the county-level sinking market. However, as demand for primary hospitals in these markets dwindles, this aggressive expansion strategy often becomes a heavy burden.

In contrast to this, Rhyl Group has adopted a more prudent expansion strategy — the group focuses on encryption in the same city and enhances service capabilities by increasing the number of dental chairs.

In the first half of fiscal year 2024, Rhyl Group opened 2 dental hospitals through self-construction and in vitro equity participation, and the total number of seats in the group reached 1,608.

The picture on the left is Ruitai Dental Haidian Hospital, and the picture on the right is Ruitai Tongshan Dental Xueqian Street Hospital

In June 2024, Ruitai Dental Clinic officially opened its 12th store in Jiangsu and the second dental specialist hospital, Ruitai Tongshan Dental School Qianjie Hospital. Rhyl Group has made comprehensive improvements in the hospital's operating scale, personnel composition, software and hardware equipment. In September, Ruitai Dental Haidian Hospital opened. This is another second-level specialist hospital opened by Ruitai Dental in Beijing. It has an area of more than 3,000 square meters and 56 dental chairs. It is an important foothold for the Rhyl Group in western Beijing. The same city encryption method enables the Riel Group to more effectively cultivate individual stores with the influence and resources of existing brands, and accelerate the entry of new stores into a profitable state. The Rhyl Group previously publicly stated that the profit cycle for newly built hospitals is expected to be around three years, and profits can be achieved.

The steady store expansion model reflects the steady and steady development strategy of the Riel Group, which is conducive to ensuring that every expansion brings about long-term and sustainable value growth.

In terms of refined customer management, the Group gains long-term growth momentum by cultivating valuable core consumers. In response to incremental customer acquisition, the Group has achieved efficient new customer drainage and conversion with excellent word-of-mouth effects; in terms of increasing customer stickiness, the Group focuses on providing personalized services covering the entire life cycle of customers, and further expanding the scope of services to comprehensive health management on a household basis. According to financial reports, in the six months up to September 30, 2024, Rhyl Group's loyal customer follow-up rate was as high as 47.4%, and about 20% of new patients were recommended by existing patients. This data fully confirms the Group's strong customer stickiness and good reputation.

Rhyl Group has always upheld the principle of respecting the natural laws of dental treatment and is committed to providing customers with dental care services throughout the life cycle. Compared to the service model in ophthalmology that ends with a single operation, dental care services are a long-term requirement throughout a patient's life. From cavities prevention and fissure closure in childhood, to various types of dental treatment and beauty in youth and adulthood, to complex surgeries such as dental implants in middle and old age, oral health needs continue to evolve with age. These needs are not only about daily oral care, but are also closely linked to natural changes in body structure that occur with age, such as unavoidable problems such as loose gums.

Unlike dental clinics that only focus on high-priced projects, Rhyl Group's core competitiveness lies in its comprehensive and in-depth dental service system. This service model not only shows greater rigidity and sustainability, but has also become one of the key factors for the high stability of the Group's customers. As a result, the Rhyl Group has been able to continue to accumulate a large number of highly sticky long-term customers like a snowball.

The Group not only extends the customer value chain, but also uses the family as the service unit to bind family customers through refined treatment and high-quality services, expand the service value radius, and enhance the overall value of customers.

Specifically, Rhyl Group has introduced a membership model to focus on family oral health. Through multi-department collaborative diagnosis and treatment, members are provided with customized and comprehensive personalized oral treatment plans to deeply meet the dental diagnosis and treatment needs of families. In order to attract family customers, Rhyl Group is also exploring and collaborating more on leading treatment technology in the field of children, including the establishment of an early pediatric correction center.

At Rhyl Group, you can often see this kind of heartwarming scene: generations of customers brought their children and even grandchildren to the hospital, creating a scene where three generations were in the same room. This cross-generational customer growth has shown a high level of customer stickiness.

This model has enabled Rhyl Group to successfully integrate dental care services into customers' daily lives, become their trusted health partner, and enable the company to maintain steady development at different stages of the cycle.

3. Grasp the delicate balance between stock and expansion

Inventory thinking is essentially exploring and establishing a delicate balance between stock and expansion. This balance perfectly balances the maximum utilization and optimal allocation of current resources. At the same time, it is also necessary to reserve sufficient space and resources for future expansion to ensure the potential and vitality of sustainable development.

Rhyl Group's stock thinking is not only based on the present, but also looks to the future to build a solid foundation for future development. The Group's future strategic layout focuses on two core areas: strengthening doctor team building and actively embracing technological innovation, especially the application of artificial intelligence.

In the field of dentistry, doctors' expertise is at the core of competition. Dental services are largely dependent on doctors' craftsmanship, and are extremely dependent on doctors. Dentists have a long training cycle, usually 3 to 5 years. In addition, patients and doctors need to establish a long-term cooperative relationship. For example, orthodontic treatment may take up to two years, and dental implants are divided into phase 1 and 2, so it takes a long time to establish a trusting relationship with the doctor.

Therefore, Rhyl Group pays special attention to talent reserves to guarantee future growth.

Zou Qifang said, “Riel is willing to invest resources to cultivate talents, create a harmonious working atmosphere for employees, and help them grow. In fact, some of Riel's core talents are the backbone of training through school recruitment.” During the reporting period, Rhyl Group stepped up campus recruitment efforts to reserve talents for future development. Currently, school enrollment accounts for nearly 20% of the doctors' team. Of these, more than 30% of school admissions have taken management positions at all levels, and at the same time insisted on recruiting specialist dentists and senior dentists to ensure that clinical capabilities are always in a leading position in the industry.

Rhyl Group focuses on the professional development of employees, provides continuous training and learning opportunities to help employees improve their professional skills; provides employees with a clear career promotion path, encourages internal promotion, and can attract and retain excellent dental talents. According to the performance report, Rhyl Group has 934 dentists, of which more than 47.1% have a master's degree or higher; dentists have an average of 11.4 years of industry experience, and many doctors have the titles and qualifications of attending physicians or subject leaders, reflecting the professionalism and rich experience of Rhyl Group's dental team. Dentists who have served in Rhyl Group for more than 5, 10, and 15 years accounted for 44.1%, 16.2%, and 6.7% of the total, respectively. This indicates that Rhyl Group has performed well in terms of dentist retention.

From a long-term perspective, while consolidating its talent advantage, Riel Group also continues to explore technological frontiers and promote the upgrading and transformation of medical services through scientific and technological innovation.

Rhyl Group actively embraces technology, especially the construction of digital platforms. As early as 2010, the company hired IBM to build a platform. By 2017, the company began building mobile terminals and intelligent systems, and invested tens of millions of yuan to develop systems and build its own teams. Rhyl Group is also actively promoting the application of digital technology to enable the entire diagnosis and treatment cycle with intelligent means.

Zou Qifang said that the digital technologies currently used by the Riel Group include digital dental scans, dental implant navigation systems, etc. These technologies can improve the accuracy and efficiency of diagnosis and treatment. At the same time, the Group is closely monitoring the development and trend of AI.

Rhyl Group proposed the concept of “Digital Intelligence WE”, which aims to empower medical and customer service services through digital technology and AI technology. According to the performance report, Rhyl Group is actively promoting the use of artificial intelligence to read dental tablets, identify items requiring treatment and provide initial treatment plans, thereby reducing clinical omissions, assisting doctors in formulating diagnosis plans, and improving medical efficiency and patient experience.

Through these measures, the Riel Group has not only improved the quality of medical services, reduced costs and increased efficiency, but also laid a solid foundation for future sustainable development. This long-term strategic planning and emphasis on talent and technology will enable the Riel Group to maintain a leading position in the competition in the future.

epilogue

The best companies also have downturns, and there are big winners in industries where growth has stagnated.

Peter Lynch once said, “Steer clear of hot stocks in popular industries. Excellent company stocks in unpopular industries and industries that are not growing tend to be the most profitable big bulls.”

Peter Lynch refers to these companies as “flowers of the desert,” and they usually form a monopoly advantage, can gain a larger market share in a stagnant market; they also have characteristics such as low costs, avoidance of debt, and employee ownership of shares. Since July 2024 alone, Rhyl Group's employee options program platform has repurchased 5.6475 million shares at a cost of about HK$23 million, accounting for about 1% of the company's total share capital after the IPO. All of these shares will be used to motivate employees to help employees grow together with the company.

Can the Rhyl Group achieve long-term, sustainable value growth in the inventory era?

Let's wait and see.