I don’t deny that what attracted me to see Jinxin reproduction (01951) was the stock price. After Jinxin was listed, it was only close to HK $8 three times. The first time it was listed soon, the second time it plummeted in March 2020, and the latest one was in the beginning of 2022. I didn’t come to see this stock because of the concept of three children. Because I think there is no evidence that real gold and silver stimulus policies (no matter how much) can promote residents’ reproductive desire in historical countries.
In addition, there is no clear answer whether the increase in home life can stimulate fertility in the two years of the epidemic. The fertility rate in most countries decreased during the epidemic, while the fertility rate in the Nordic countries increased significantly in the past two years. Is this because the epidemic has not dragged down the local economy? Then why did Iceland, as one of the countries most affected by the financial tsunami, record an increase in fertility in 2008?
Readers familiar with me know that I don’t like macro speculation. I don’t think it’s easier to predict the fertility rate than GDP, index point or interest rate level after three fed interest rate discussions. This article is just a fundamental analysis of the company , I only believe in the historical data in the financial report and the valuation judgment based on it.
medical or consumption
is Jinxin reproductive a medical stock or a consumer stock? this problem needs to be clarified before we can continue to study the company. I previously wrote an article on private colleges and higher vocational education stocks listed in Hong Kong. I think Jinxin medical or the whole ARS industry is very similar to higher vocational education (except P / E ratio):
They are highly regulated industries and can only be operated with extremely difficult licenses;
Compared with the supply capacity, the demand is far greater than the supply;
The industry is still in the early stage of development; It has the prospect of stable price increase;
Strong willingness to receive services locally, and the national expansion needs to be completed through mergers and acquisitions (licenses are also the reason);
Both face competition mainly from public service providers (public universities for education vs. public hospitals for assisted reproduction);
Objective data (employment rate in the first year of education and success rate of ARS) are not the main factors for consumers to make purchase decisions, but word-of-mouth (famous doctors) and ranking (universities). Highlight the consumer decision-making characteristics of consumer companies. Not only consumer stocks, but also optional consumer stocks;
Consumers may only spend once in their life.
ARS is not a cutting-edge technology, and there is no substantial breakthrough in the long-term success rate . The American clinic under Jinxin is the earliest American IVF pioneer in the 1980s. So far, the success rate is the same as that of many clinics in Jinxin, and the success rate difference with other peers in China is also in the single digit percentage.
Take a specific figure. In the first half of 2021, the total revenue of Jinxin was 860 million yuan, while the R & D cost in the same period was only 5 million yuan. Have you seen the medical stocks whose R & D investment accounted for only 0.6% of the revenue? it’s all right. Put your position right. Consumer stocks can also make money.
industry overview
The global prevalence of infertility increased from 11% in 1997 to 15.4% in 2018 and is expected to reach 17.2% in 2023. The increase of infertility is mainly due to the increase of the average age of first birth and unhealthy living habits related to the environment.
Jinxin has business in China and the United States. As shown above, the infertility rate and its development trend are almost the same in the two countries.
The size of the global assisted reproductive market is about US $30 billion, with an average annual growth rate of CAGR of about 5%. Due to the difference of development degree, the growth rate of ARS market in China is significantly higher than that in other regions, close to the middle double digits.
The above figure shows the comparison of three generations of IVF (from left to right). The vast majority of patients only need to use the first and second generation IVF technology, which are mature technologies 30-40 years ago, and there is no significant breakthrough.
There are basically only two ways to improve the success rate:
\u3000\u30001。 Hardware environment: use cleaner laboratory environment and advanced quality control system;
\u3000\u30002。 Talent: use more experienced embryologists and doctors: observe the embryo environment, transfer time, implantation location, etc. are related to talent experience.
market penetration and prospects
There are about 50 million infertile couples in China. The penetration rate of assisted reproductive health care in 2018 was only 7% , while only 568000 patients received assisted reproductive services that year. China has 300000 + test tube babies a year. The growth rate of patients receiving ARS services in a single year is about 8.5%, and the expected growth rate of egg retrieval cycles is in the medium unit (14.2%). The success rate of IVF egg retrieval cycle in the industry is about 45%, while that in Jinxin is 54%.
Assisted reproductive services also benefit from factors such as not limited by medical insurance, flexible pricing and not limited by outpatient service capacity.
competition pattern
At present, the number of IVF oocyte collection cycles in public hospitals accounts for 90%, while the largest private hospitals are state-owned institutions, Hunan CITIC Xiangya and Jinxin reproductive system hospitals. the overall market is scattered , and the top 10 and 20 service providers account for 26% and 36% of the market. In 2018, Jinxin’s IVF oocyte retrieval cycles accounted for 3.1% of the market share, while revenue accounted for 3.9%.
In the United States, Jinxin medical obtains its clinic income in California through agreement. California is favored by high-income Chinese and native people. The additional advantages are as follows: surrogacy is legal and regulated, California clinics are more than other states, and talents are concentrated; The success rate is higher than the national level. In 2018, 63% of international patients visiting the United States seeking ARS services came from China. The compound annual growth rate of patients in the future (after the epidemic) is even higher than the number of IVF patients in China (the base is low). In the United States, patients have access to comprehensive assisted reproductive services regardless of their marital status, race and sexual orientation. Women without partners can freeze their eggs or choose donor sperm for pregnancy. It is also natural that the price is high.
The California clinic HRC, which is controlled by Jinxin through the management service agreement, accounts for 1.9% and 2.5% of the decentralized assisted reproduction market in the United States according to the number of egg retrieval cycles and income, ranking second and fifth in the country respectively. If calculated according to the egg retrieval cycle of Chinese patients seeking services for entering the United States, HRC ranks first in the United States. (2017)
The above figure shows the comparison of assisted reproductive success rate provided by CDC in the United States: the western United States is higher than that in the United States, while California is the highest, while Jinxin’s HRC success rate is higher than the state average in each age group.
Hospitals and clinics under
In the history of Jinxin, there is only one hospital, Xi’nan hospital in Chengdu. Other hospitals were acquired in different periods.
Among them, Shenzhen Zhongshan urology hospital was acquired in early 2017, while California HRC clinic group was acquired by the end of 2018 (both were completed before the IPO in 2019). When listed, these three groups of hospitals / clinics are the main force of the company. Among them, the number of IVF cycles in Xi’nan hospital is 11000 per year, while the number of cycles in Shenzhen is 5300 per year, and the number of cycles in California HRC is 5000 per year.
The periodic ASP charge in Shenzhen is slightly higher than that in Chengdu. In 2018, the ASP charge in Chengdu was 42000 yuan, while that in Shenzhen was 49000 yuan. The ASP per cycle of HRC California is about 140000 yuan or more. In addition to Chengdu Xinan, the shareholding ratio of Shenzhen Zhongshan Hospital is 74%, and 79.44% of the economic benefits of the hospital can be obtained through contractual arrangements. While the shareholding of HRC California is wholly-owned, it collects 90% of the total income of the clinic as management fee income through management agreement arrangement.
After listing, the company acquired 75% equity of Wuhan Huangpu hospital in June 2020 at a cash price of HK $485 million; In August, it formed JV Mengmei life (Marketing operation organization, outputting patients) and invested HK $235 million equivalent, 51% of the shares; In June 2021, it acquired 19.33% minority interests in Jiuzhou hospital and hewanjia hospital in Kunming at a price equivalent to HK $45.8 million. In addition, an IVF license was purchased in Laos in 2020. Since only the license was photographed, the price was not high and was not disclosed, and there was no income in 2020 and 2021, the Laos project is expected to start climbing after Yunnan has been connected with the high-speed railway for 4 hours (opened in December 2021).
After the IPO, the most significant contribution to the purchase of a new hospital is Wuhan Jinxin hospital. The management expects the production capacity to climb to 3000 IVF egg retrieval cycles within 3 years (2023). The long-term capacity of the hospital can reach 6000 +.
The company’s IPO raised HK $2.8 billion, of which 20% is planned to be used to acquire hospitals. At present, it has been used almost by acquiring Wuhan Huangpu hospital. At the beginning of February 2021, the company placed 80 million new shares in the secondary market at a placing price of HK $15.85/share and raised HK $1.27 billion. it is roughly estimated that this fund-raising can buy two ARS institutions with production capacity similar to Wuhan hospital.
In the fund-raising communication, the company said to investors: Although the covid epidemic has brought challenges to the industry in the short term, it has also brought rare opportunities for strategic acquisition. Today, when looking at this fund-raising, we must recognize the company’s timing ability, place the shares in time at the high point of the stock price, and maximize the capital. Only half of the praise was given, because the hospital with the same capacity as Wuhan hospital has not been carried out one year after the company raised new shares in the secondary market (there is no breakthrough in Beijing, Tianjin, Hebei and the Yangtze River Delta). The only small acquisition is a minority stake in two hospitals in Kunming.
rough calculation of acquisition value
Jinxin has made three significant acquisitions in history: Shenzhen, California and Wuhan hospital. The capacity of the three institutes at the time of acquisition was 40004500 and 1000 egg taking cycles respectively. Dividing the acquisition cost by the production capacity, the single cycle values of the three hospitals are HK $211000, HK $837000 and HK $645000 respectively. The single cycle ASP of the United States is about four times that of China, which is reflected in the cost ratio of the first two acquisitions. The higher purchase price in Wuhan in a single cycle is due to the low production capacity before hospital renovation. Based on Wuhan’s production capacity reaching 3000 in three years, the purchase price of the cycle is also about HK $200000. This 4000 capacity, 40000 yuan cycle ASP corresponds to the 442 relationship of the single cycle purchase price of HK $200000, which is a good rough benchmark for valuation comparison. this benchmark can not only be used to quickly judge the significant acquisition value made by the company in the future, but also evaluate the valuation of Jinxin company itself.
From the perspective of the company’s management, if the company’s market value is significantly higher than this price, it should place and issue new shares, and buy potential acquisition targets with a valuation lower than or equal to this price. After all, I use 30 times P / E ratio to buy the target of 10 times P / E ratio, and the P / E ratio will become 20 times.
historical financial indicators
The actual performance of the company two years after listing and the historical performance of the previous three years constitute five years of financial data. Due to frequent acquisitions, the capital expenditure is huge, the ROIC is significantly reduced, and the free cash flow is basically negative every year.
In 2020, the whole industry will be greatly affected by the covid epidemic. However, Jinxin’s business recovery speed is faster than that of its peers. The group’s business in 2020 was flat compared with that in 2019 in Chengdu, and the business revenue in Shenzhen fell by 11% (even if the cross-border guests in Hong Kong were excluded), while the industry average recorded a decline of 20-30%. The epidemic also affected the passenger flow from China to California (which has not recovered until today), but the number of local patient cycles in the United States still recorded an increase of 5.1% in 2020 compared with 2019.
The highest operating profit after tax in the history of the group was in 2019, reaching 450 million yuan. According to the market value of 17.9 billion yuan in that year, it has a price earnings ratio of 40 times. With this number in mind, the revenue forecast and valuation below will be used for comparison.
revenue forecast and valuation multiple
the three major income types of Jinxin are: Auxiliary Reproductive income (ARS income), auxiliary medical revenue and management service income. Chengdu hospital, Shenzhen Zhongshan Hospital and Wuhan hospital belong to this kind of income, that is, direct revenue. In the United States, HRC hospital is a management fee model, which is related to some requirements of local regulations in the United States related to overseas shareholding. 90% of all the total revenue of American clinics will be recorded as Jinxin’s management fee revenue. The management fee agreement of HRC in the United States began in 2019 and is renewed every 20 years, which can be understood as perpetual.
In addition, Chengdu Jinjiang reproductive center and Jinxin reproductive center are hospitals operated in cooperation with Jinxin group (company). Jinxin fertility center mainly assists Jinjiang in IVF treatment and does some auxiliary medical services. Due to the low gross profit margin, the company has suspended its cooperation with Jinxin (from 2019). The joint operation mode of Jinjiang reproductive center also charges similar consulting fees, which is not strictly linked to the unit price of IVF cycle, but closely linked to the number of patients. This management income fluctuates greatly every year, which is very different from the management mode of HRC, and it is expected that this cooperation mode will not be opened in the future expansion of Jinxin.
The last one is the auxiliary medical revenue, which generally refers to the pre IVF cycle pre-treatment of hospitals without third-generation test tube qualification, or the gene screening and diagnosis services of hospitals with third-generation qualification, such as HRC in the United States. Such auxiliary medical services can generally reach more than 10% of IVF treatment income.
Key growth assumptions
the above table is the prediction table of future growth rate of each hospital, which can be said to be very conservative and has large potential space. because China predicts that the number of IVF cycles in the industry will increase by 13-15% in the next few years, as a leader of private enterprises and a better reception capacity than public hospitals, the probability can be higher than the growth rate of the industry.
The growth rate of unit price should be increased by increasing the proportion of VIP services. The growth rate of about 5% I use assumes that the proportion of VIP service mix remains unchanged, and the unit price is also conservative.
Of course, as one of the most reliable growth drivers in the future: M & A, we can’t predict. in the past, there was a significant capacity acquisition every two years or so: Shenzhen in early 2017, California HRC at the end of 2018, and Wuhan in mid-2020. At this pace, there should be 3000-5000 cycles of capacity M & A in 202220242026. But as a fundamental analysis, let’s not make these assumptions, Lee. Revenue projections for all forecast periods are based on existing licences and hospitals.
As predicted in the above table, the total revenue of the company in 2028 is RMB 4.77 billion and the after tax operating profit is RMB 1.62 billion. At present, the market value is RMB 18 billion, which is equivalent to 25 times of after tax operating profit in 2022 and 21.6 times of that in 23 years. According to the number of cycles in 2022, each cycle is 600000 yuan, which is equivalent to 530000 yuan in 2023.
historical repurchase and shareholders
In history, the company has repurchased 12.53 million shares at an average price of HK $9.28, involving about HK $116 million. If the stock repurchase is regarded as a kind of dividend distribution, the cumulative repurchase amount of the company in two years is equivalent to 13.5% of the net profit in two years and 6.75% per year.
The company has no individual major shareholders, all internal shareholders are collectively held, and no single shareholder holds more than 2% (at least not in the open). The main cornerstone shareholders of the institution during the listing period are as follows (the issue price is HK $8.54):
Hillhouse invested 64.25m shares with us $70 million, OrbiMed invested 27.54m shares with us $30 million, and Huiqiao capital invested 27.54m shares with us $30 million. In addition, Warburg Pincus (Huaping), the main shareholder, held 447 million shares before and after listing, accounting for 18.77% (i.e. the IPO did not sell old shares), but by July 2021, its position had been reduced by more than half, leaving 8.81% of the shares. Hillhouse (the entire Hillhouse fund integration) increased its position to 187 million shares, becoming the main shareholder of the company, accounting for 7.7%. Other cornerstone shareholders have not disclosed recently, but the number of shares has not changed as of the first quarter of last year. In addition, early investors included Sequoia and Wuxi Apptec Co.Ltd(603259) . These holdings are less than 5% and do not need to be disclosed continuously.
finally, let’s talk about high stock price cash out and related party acquisition transactions. after the lifting of the ban period, there was a cash out of HK $15-16 by major shareholders, and the company also made a placement of new shares at the same price. If the development company of issuing new shares at a high price is positive, selling old shares by major shareholders will hurt confidence (the so-called ugly eating).
In addition, a large number of acquisitions of the company are bought by major shareholders and then sold to listed companies. Are there risks of transferring benefits to major shareholders and hollowing out the company? In particular, there is no shareholding structure of individual major shareholders. Investors who have long invested in Chinese stocks are very taboo about this. Finally, we should return to the fundamentals and examine one acquisition by one. If you still remember that the large-scale significant acquisitions of the company mentioned above are all over HK $200000 a cycle, and the current valuation of the company still has more than RMB 500000 a cycle, so it can be judged that there are no favorable conditions for benefit transfer.
