New Stocks Outlook | Will Saint Bella spend 770 million to create an industry unicorn, is it worth it?

High-end postpartum center brand Saint Bella has taken a key step towards listing in Hong Kong. Specifically, Beikang International formally listed on the Hong Kong Stock Exchange under the name of Saint Bella Group. According to the Hong Kong Stock Exchange disclosure on June 25, SAINT BELLA INC. has submitted an application for listing on the main board. The prospectus shows that in 2023, Saint Bella is the largest comprehensive family care brand group in China in terms of revenue, with businesses covering postpartum care centers (including postpartum care and postpartum recovery services), home care services, functional foods for women's health, and others. Among them, the postpartum care business under the brands Saint Bella, Bella ISLA, and baby bella operates 59 high-end postpartum care centers. In terms of performance, the sales revenue in 2021, 2022, and 2023 are approximately 390 million yuan, 589 million yuan, and 775 million yuan respectively, with corresponding income of approximately 259 million yuan, 472 million yuan, and 560 million yuan, achieving a compound annual growth rate of 47%. However, despite the rapid growth in business scale, the profitability of the Saint Bella Group continues to be under pressure, with a cumulative net loss of 770 million yuan over the past three years. After Saint Bella Group's filing, the market had some criticism about its performance losses, sparking many discussions. Questions were raised about whether high-end postpartum centers are a good business, and whether they can create a good investment target for secondary market investors after the listing. To answer these questions, it is first necessary to analyze the reasons behind Saint Bella's losses. High labor costs of 280 million yuan: Defining industry service standards Although postpartum confinement practices have been a tradition in China for centuries, the mainland postpartum care industry has only developed for over 20 years, still in its infancy. According to Frost & Sullivan report, the penetration rate of postpartum care services in mainland China in 2023 is 16.2%, with the penetration rate of postpartum care centers standing at 5.5%. In comparison, South Korea and Taiwan have penetration rates of approximately 60% for postpartum care services. Despite this, one enterprise, AIDIGONG (00286), went public in Hong Kong via reverse takeover, but recorded net losses of -383 million HK dollars, 35 million HK dollars, -178 million HK dollars, and -177 million HK dollars from 2020 to 2023, accumulating over 700 million HK dollars in losses over the past four years. It is noteworthy that these enterprises that ventured into the market with losses have opened up a blue ocean market, and Saint Bella Group is among them, potentially being the ultimate winner. From their perspective, the reason Saint Bella Group could break through in the competitive field of family care is through professional, standardized, digitized, and customized services, redefining and changing modern family care to establish a unique competitive advantage. When interpreting the development philosophy of Saint Bella Group, professionalism is the primary focus in building brand reputation, and the first essence of professionalism lies in the expertise of its employees. Since family care service operations are labor-intensive, in 2023, Saint Bella Group had a total of 1,229 employees, with nursing staff numbering 696, accounting for 56.6% - the highest number of nursing staff among all brands in the industry. From 2021 to 2023, Saint Bella Group invested a total of 280 million yuan in labor costs. In 2023, labor costs accounted for 34.3% of total sales costs. The allocation of such a high proportion of service personnel and costless investment in training have shaped Saint Bella's service system. With the support of a professional team, Saint Bella Group continues to innovate in the postpartum care model in its postpartum care centers. Public information shows that each mother and baby pair at Saint Bella postpartum centers is provided with two full-time nursing staff, rotating to provide personalized nursing services 24 hours a day. The baby Bella postpartum center also offers multiple care modes, allowing customers to choose between 24-hour mother and baby care or a combination of 12 hours of one-on-one daytime care and 12 hours of concentrated baby care at night. The women's full-cycle care brand Bella isla focuses on female postnatal mental health. Saint Bella Group has also taken the lead in establishing industry service standards in collaboration with the American Certification Association and doctoral experts, and systematically training nursing experts. Currently, Saint Bella Group has set service standards and compiled standard operating procedures (SOP) for maternal and infant care. All postpartum care centers under the group follow the SOP, covering key business processes, including detailed division of labor, maternal and infant care procedures, and sales and marketing. The promotion of SOP enhances business scalability and strengthens quality control to ensure consistent service quality. Therefore, using nearly 300 million yuan in labor costs for nursing staff training and system construction, Saint Bella has developed high-quality service standards, established a professional nursing capacity moat, and fundamentally set itself apart from its competitors. 30 million R&D expenses: Digitally empowering operational efficiency In addition to having a professional team of nursing experts, Saint Bella Group seems to have an obsession with the digitization and standardization of the family care industry. The prospectus shows that by 2023, the research and development team at Saint Bella Group consisted of 38 employees, the majority being IT professionals. From 2021 to 2023, the company has spent over 30 million yuan in total on research and development, a rare investment scale for a service-oriented company. Where did all this money go? According to the prospectus, Saint Bella Group has independently developed a set of industry service software as a service (SAAS) and nursing service platforms, despite the significant costs involved, which will yield long-term benefits. It is reported that Saint Bella's nursing service platform is deployed throughout the network of postpartum care centers, and its service processes are continuously updated and improved. Through SaaS deployment, the quality and efficiency of services at new centers can be rapidly improved. With the assistance of the nursing service platform, nursing experts can monitor the vital signs of mothers and babies in real-time, record data with the client's consent, utilizing accumulated maternal and infant care knowledge and collected data to design personalized operational procedures for each client. Furthermore, Saint Bella Group has entered into a strategic cooperation agreement with an artificial intelligence company to explore digital solutions for operational efficiency and customer service personalization.The application of large-scale language models in operation. The group's ultimate goal is to apply AIoT devices, large language models, and other artificial intelligence technologies to transform its IT infrastructure into an integrated comprehensive platform called Beacon Intelligence.Believe that Sanbella is a technology group company wearing the coat of a postpartum care center. With the support of a professional care team and a digital operating model, Sanbella provides systematic, professional, personalized high-quality services, creating a high level of satisfaction among its customer base. In 2023, the average customer ratings for Sanbella and Xiaobella postpartum centers were 9.62 and 9.34 respectively, saving the group a significant amount in marketing expenses. 106 million marketing expenses: Diversified expansion of brand influence The prospectus shows that in 2021, 2022, and 2023, Sanbella's postpartum center business accumulated sales and distribution expenses reached 106 million RMB. While this may seem high, it is still relatively low compared to others in the industry. In 2023, AIDIGONG's annual sales and distribution expenses reached 116 million HKD, with a corresponding revenue of 555 million HKD, resulting in a sales expense ratio of about 21%; Yoho Medicine, a listed company in the medical services industry, had sales and marketing expenses as high as 1.044 billion RMB in 2023, with revenue of 1.777 billion RMB and a sales expense ratio of about 59%. Sanbella's 106 million marketing expenses accounted for only 13.66% of its 776 million revenue, which is significantly lower than its competitors. Why can Sanbella achieve rapid business growth with a relatively low percentage of sales expenses? Official information shows that Sanbella Group relies on word-of-mouth marketing and mainly through online marketing services and products, including shopping information platforms, social media platforms, and e-commerce platforms. Sanbella Group has successfully held "Pregnancy Museums" exhibitions in several cities in China; partnered with Tesla to launch a short-term project in multiple cities in China called "Wave and Stop for Pregnant Women," providing free transportation services for pregnant women. Sanbella has also partnered with UCCA Ullens Contemporary Art Center to customize armpit swim rings for newborns, aiming to solve safety issues associated with traditional neck ring swimming and make newborn swimming more comfortable and safe. It seems that Sanbella's brand has enhanced brand recognition and image through researching user psychology, capturing user needs, and promoting the brand through diversified marketing methods. Although Sanbella's expenses are on the rise, resulting in pressure on profits, the company's rapid business expansion, improvement in business structure, and cost efficiency control have led to a significant improvement in profit quality. Therefore, unlike its competitors who heavily invest in marketing expenses, Sanbella continues to optimize hardware, enhance staff training, deepen standardization, and develop technology. In 2023, Sanbella Group's comprehensive gross profit margin rose to 36.5%, a 6.6% year-on-year increase; during the same period, the net cash flow from operating activities reached 56.703 million RMB, a new high in nearly three years. In 2023, the gross profit margin of the postpartum center business reached 34.1%, a 5.4 percentage point increase year-on-year, higher than AIDIGONG's 21.8% gross profit margin during the same period by 12.3 percentage points. Clearly, Sanbella's early significant investment in standardization is starting to pay off, and there may be a diminishing marginal effect in the future. Furthermore, Sanbella Group is actively exploring a second growth curve. According to iResearch data, the proportion of mothers of 0-3 year olds from the 80s to 95s who choose postpartum centers during confinement has reached 18.3%, the same as those choosing postpartum nanny services. In this context, Sanbella Group aims to leverage synergies with postnatal care businesses through investment, acquisitions, and new business lines, to continue optimizing profit capability. In 2021, Sanbella Group strategically entered the women's health functional food business by acquiring Guanghe Hall. In addition to selling their products in self-operated online stores on e-commerce platforms, they have also started exploring cross-selling in the group's postpartum centers and through their own online channels. In 2023, Sanbella Group's women's health functional food business achieved revenue of 70.954 million RMB, a 68.1% year-on-year increase; gross profit margin reached 63.3%, a 19.6 percentage point increase year-on-year. In the future, this business sector may have even higher growth potential, bringing higher gross profit and performance growth to Sanbella Group. According to a Frost & Sullivan report, the female healthcare food market in mainland China has vast growth potential. The market size has increased from 40.4 billion RMB in 2018 to 70.8 billion RMB in 2023, with a compound annual growth rate of 11.9%. It is expected that the market size will increase to 177.1 billion RMB by 2030, with a compound annual growth rate of 13.5% from 2024 to 2030. It is reported that Sanbella Group has also launched the Yu Family Home Care service, invested in Hangzhou Meihua Hospital, and partnered with the lifestyle magazine Robb Report HongKong, to empower its main business in creating a family care ecosystem. Is Sanbella really losing money? The prospectus shows that based on non-Hong Kong financial reporting standards measures (i.e., adjusted EBITDA and adjusted annual (loss)/profit) as additional financial metrics. In 2023, Sanbella Group's adjusted EBITDA was 61 million RMB, a more than 31-fold year-on-year increase; the adjusted annual profit was 21 million RMB, reversing a loss to a profit year-on-year. It is well-known that non-Hong Kong financial reporting standards, by excluding some non-recurring items, can more accurately reflect the company's operating cash flow and core business profitability. The reason why Sanbella Group is losing money under Hong Kong accounting standards is mainly due to fair value changes in financial instruments issued to investors (ordinary shares with preferential rights and warrants issued to pre-listed investors). According to the prospectus, the increase in the fair value of these financial instruments is recognized as fair value losses, a non-cash item that will not recur in the fiscal year after listing, as the preferential rights will terminate just before the listing. It is understood that many companies may incur large initial investments and operating costs when expanding into new businesses, thus issuing preference shares to finance their long-term strategic development. Issuing preference shares may result in short-term losses, but in the long run, it may help the company seize market opportunities.Achieve greater growth.In the Hong Kong stock market, internet giants such as Tencent (00700) and MEITUAN-W (03690) have issued preferred shares based on their financing needs. Before its IPO, Meituan incurred significant losses due to changes in the fair value of its convertible redeemable preferred shares. From 2015 to 2017, the losses were respectively 10.5 billion yuan, 5.8 billion yuan, and 19 billion yuan. However, after the adjustment for "preferred shares fair value", the losses for the three years were reduced to 5.9 billion yuan, 5.4 billion yuan, and 2.85 billion yuan. After going public, both Tencent and Meituan have created substantial investment returns for investors due to their strong business growth. It is believed that losses from preferred shares are not necessarily negative, the key is to see if the company has a clear strategic plan and execution capability, and whether it can achieve profitability in the future. Looking at the steady growth of Shengbela Group's business scale, and its profitability under non-Hong Kong financial reporting standards, it is moving towards the vision of "reshaping the home care industry", with good business and profit growth prospects. It is believed that Shengbela has spent 770 million yuan, but has acquired the leading position in the maternity center industry, and has achieved a profitable form after adjustment in 2023, which makes the company more capable of leading in the future in the field of family quality care, and building a globally leading family care brand group. This investment in long-term value and determination may eventually create an attractive investment target that generates excellent returns for investors.