New stock preview: Facing the dual challenges of market share and performance growth, can Hong Kong stocks bring new opportunities for AWEI AIFU?

On September 13, Avivef Hospital Management Group Limited (hereinafter referred to as Avivef) updated its prospectus, with CITIC SEC as the exclusive sponsor. It is worth mentioning that at the end of 2021, Avivef had submitted an application for listing guidance on the A-share market and had it accepted. However, considering the timing and uncertainty of an A-share listing, Avivef withdrew its A-share guidance application at the end of 2023 and turned to the Hong Kong stock market. Now, over half a year has passed, so what progress has Avivef made in its business during this period? The ART market space is rapidly expanding, with Avivef's market share being only 1% due to market dispersion. Founded in 2006, Avivef is a one-stop provider of assisted reproductive technology (ART) and ancillary services through four franchise hospitals: Jihe Hospital, in Zhanjiang, Guangdong Province; Aiwei Hospital in Tianjin; Avivef Hospital in Jieyang, Guangdong Province; and Avivef Hospital in Kunming, Yunnan Province. The company focuses on providing ART and ancillary services to patients with infertility issues and has attracted patients from 15 provinces and municipalities in China. As of June 30, 2024, Avivef has treated over 100,000 patients, carried out over 65,000 IVF cycles, completed over 78,000 embryo transfers (including fresh and frozen embryo transfers), and brought over 36,000 test-tube babies into the world. According to Frost & Sullivan data, in 2023, Avivef's hospitals ranked fourth among private ART service providers in China, accounting for approximately 1.0% of the total IVF cycles performed in China that year. ART is one of the three main methods of treating infertility, which includes artificial insemination, in vitro fertilization, and embryo transfer (IVF-ET). This technology bypasses infertility causes and procedures by carrying out ART surgery in a highly controlled laboratory environment, achieving fertilization and early embryo development in optimal conditions, thus assisting the natural reproductive process. The infertility rate in China is calculated by dividing the number of infertile couples by the number of couples of childbearing age (women aged 15 to 49). The infertility rate in China has increased from around 9% in 1990 to 12% in 2007 and further to about 15% in 2010 and 17% in 2020 due to changes in natural environment such as environmental pollution, as well as changes in social environment like delayed childbirth, smoking, alcohol consumption, staying up late, sedentary lifestyle, increased mental stress, and other factors. With the rising prevalence of infertility among couples, the number of infertile couples in China increased from 55.4 million couples in 2018 to 58 million couples in 2023. Sullivan expects this number to rise to 67.4 million couples by 2030. Infertility can be treated through medication, surgery, and ART. Since ART bypasses the natural reproductive process and implements ART procedures in optimal conditions for fertilization and embryo development through a highly controlled laboratory environment, it can effectively increase the success rate compared to other methods. In recent years, the penetration rate of ART services has been increasing. The total number of IVF cycles in China has increased from 684,000 cases in 2018 to 815,700 cases in 2023, with a compound annual growth rate of 3.6%. Due to the continuous growth in demand for ART services and the increasing affordability of people, it is expected that the total number of IVF cycles will reach 1.2099 million in 2027 and 1.5924 million in 2030, with compound annual growth rates of 10.4% and 9.6%, respectively. The market size of ART services in China has also been increasing year by year, from 25.2 billion yuan in 2018 to 30.8 billion yuan in 2023, with a compound annual growth rate of 4.1%. With the continued growth in demand for ART services, the Chinese ART services market is expected to continue to grow rapidly, reaching 47.4 billion yuan in 2027 and 63 billion in 2030, with compound annual growth rates of 11.4% and 9.9%, respectively. Currently, the majority of ART services are provided by public hospitals, but private hospitals are growing faster. The number of IVF cycles conducted by public medical institutions increased from 623,900 cases in 2018 to 723,200 cases in 2023, with a compound annual growth rate of 3.0%, and it is expected to further increase to 1.0436 million in 2027 and 1.3454 million in 2030, with compound annual growth rates of 9.6% and 8.8%, respectively. The number of IVF cycles conducted by private medical institutions increased from 60,100 cases in 2018 to 92,500 cases in 2023, with a compound annual growth rate of 9.0%, and it is expected to further increase to 166,400 by 2027 and 246,900 by 2030, with compound annual growth rates of 15.8% and 14.1%, respectively. In terms of market size, the market size of ART services provided by public medical institutions increased from 22 billion yuan in 2018 to 26.5 billion yuan in 2023, with a compound annual growth rate of 3.8%, and it is expected to further increase to 38.4 billion yuan in 2027 and 48.1 billion in 2030, with compound annual growth rates of 9.7% and 7.9%, respectively. The market size of ART services provided by private medical institutions increased from 3.2 billion yuan in 2018 to 4.4 billion yuan in 2023, with a compound annual growth rate of 6.5%, and it is expected to further increase to 9.1 billion yuan in 2027 and 14.9 billion yuan in 2030, with compound annual growth rates of 20.2% and 17.9%, respectively. The market is large enough, but competition is also intense. From the competitive landscape perspective, competition among private hospitals is relatively dispersed, with the market share of the top-ranked hospital accounting for only 3.7% of IVF cycles, and Avivef's market share of IVF cycles is 1.0%, ranking fourth. There is still room for improvement. Despite the large space in the assisted reproductive industry and intense market competition, Avivef's performance in recent years has been average. According to the prospectus, Avivef's operating income in 2021, 2022, and 2023 were respectively 420 million yuan, 407 million yuan, and 494 million yuan; and the corresponding net profits were 94.562 million yuan, 64.51 million yuan.70,000 RMB and 6474.9 million RMB. Regarding the decrease in revenue in 2022, Aevi IVF stated in its prospectus that due to the cessation of operations at the Shenzhen Gynecology Hospital at the end of June 2021, it generated revenue of 9.2 million RMB in 2021, which was not present in 2022; in addition, the patient visits were also affected by the COVID-19 pandemic, especially at the Tianjin Aevi Hospital and Kunming Aevi IVF Hospital. The increase in revenue in 2023 is mainly due to the increase in the number of IVF cycles at the Zhanjiang Jiuhao Hospital and Tianjin Aevi Hospital, which is a result of adjustments to epidemic prevention measures in 2023 and the relocation of Tianjin Aevi Hospital to a more convenient location with a larger area on the transportation network.Therefore, the performance in the first half of 2024 is the performance of Ivy IVF under normal operation. According to the prospectus, Ivy IVF achieved operating income of 251 million yuan and a net profit of 37.648 million yuan in the first half of 2024, an increase of 8.7% and 11.11% respectively compared to the same period in 2023. It is not difficult to see that its organic growth is average. In terms of revenue by business segment, ART services are the main source of company revenue, accounting for about 90% of total revenue. It is worth noting that in recent years, the success rate of hospitals under Ivy IVF has declined significantly. Data shows that the success rate of conventional IVF decreased from 58.4% in 2021 to 51.4% in the first half of 2024; the success rate of ICSI also decreased from 51.8% in 2021 to 45.5% in the first half of 2024. Regarding the continuous decline in success rates, Ivy IVF stated in the prospectus that this is mainly due to the fact that the average age of patients received by the company in 2023 is higher than that in 2022, and more patients with serious gynecological diseases such as uterine cavity diseases are received, leading to more cases of clinical pregnancy failure. Although Ivy IVF's success rate is declining, based on the calculation of 2022, the company's success rate is 57.2%, higher than the industry average of 51.6%. However, compared to other hospitals, Ivy IVF lacks a PGT license. Although PGT technology is not widely used in ART services in China, PGT technology can improve success rates, so the lack of this license may still affect patient visits. In addition, in recent years, per capita expenditure of IVF patients at Ivy IVF has increased year by year, from 52,000 yuan in 2021 to 60,000 yuan in the first half of 2024. However, Ivy IVF's gross profit margin and net profit margin are declining. The company's sales gross profit margin decreased from 45.9% in 2021 to 44.3% in the first half of 2024; the net profit margin decreased from 22.5% in 2021 to 15% in the first half of 2024. Furthermore, Ivy IVF has not expanded for over a decade, relying solely on the 4 hospitals established in the past, which may also be one of the main reasons for the slow growth of Ivy IVF's performance. In the Hong Kong fundraising of Ivy IVF, there is no expansion plan. The proceeds of the fundraising are mainly used for hospital equipment procurement, renovation and upgrading, and some funds are used to obtain the qualification of a third-level specialist hospital for its Zhanjiang Jiuye Hospital under Ivy IVF, in order to obtain a PGT license. In summary, although assisted reproduction is a big business, Ivy IVF's performance is mediocre. On the one hand, the company has not expanded for over 10 years, still relying on the 4 hospitals; on the other hand, the market is highly competitive, although the industry concentration is low, Ivy IVF's market share is not high compared to the top companies in the industry, and there is no expansion plan in the Hong Kong fundraising, so it can be foreseen that the future growth of Ivy IVF's performance will also be limited.