TRANSLATION: With the stock price dropping nearly 50% within 4 months, can a profit announcement trigger a rebound for ARRAIL GROUP (06639)?

On November 19, ARRAIL GROUP (06639) released its interim report for the first half of the 2026 financial year ending September 30, 2025, reporting a profit of more than 20 million yuan before tax, an increase from 7.4 million yuan in the same period last year. The company attributed the increase in profit to the operational improvement brought about by the company's AI-enabled clinical and business management systems, the continuous recovery of patient demand and service volume, and the company's strict cost reduction and efficiency improvement plan. Benefiting from the positive financial report, ARRAIL GROUP's stock price rose steadily after the opening, with an increase of up to 11.32% in the morning session, before a slight decrease and ultimately closing up by 9.43%, ending the six-day decline. Looking back over time, after a wave of upward trends in July this year pushed the stock price to a high of 2.90 Hong Kong dollars, ARRAIL GROUP entered a downward cycle for nearly four months, with the stock price falling to a low of 1.59 Hong Kong dollars on November 18, a 45.17% decrease from the previous high. Obviously, ARRAIL GROUP, in the oversold zone, needs a catalyst to boost stock price rebound. Can this positive performance serve as that key catalyst? Could Share Repurchases Be the Key Support for Stock Prices? On March 10 this year, the list of companies eligible for the Hong Kong stock connect was formally adjusted, and ARRAIL GROUP was removed from the list during the review period due to its market value performance falling short of the standard. Although from March 10 to March 19 this year, the percentage of shares held by the Hong Kong stock connect in ARRAIL GROUP decreased significantly along with its stock price, dropping from 11.48% to 10.24%, the rate of decrease slowed significantly thereafter. Especially from September this year onwards, as the company's stock price continued to decline, there were few transactions of Hong Kong stock connect funds on the market, and their share holding percentage only decreased by 0.11%. Normally, after a company is removed from the list, it often faces one-way selling pressure from on-market Hong Kong stock connect funds. However, for ARRAIL GROUP, after eight months, the impact of selling pressure from Hong Kong stock connect funds has clearly decreased to a minimum. Why can ARRAIL GROUP maintain stability amidst the selling pressure of Hong Kong stock connect funds but experience a continuous decline in stock price after the selling pressure dissipates? This may have something to do with the company's buyback strategy. Throughout last year, ARRAIL GROUP's stock price fluctuated continuously. As a result, the company continued to repurchase shares to stabilize market confidence. In 2024, ARRAIL GROUP repurchased a total of 17.36 million shares, accounting for 3.08% of the total share capital. However, in the face of selling pressure from being removed from the stock connect, frequent buyback operations did not have much support on its stock price. But gradually, as the selling pressure from being removed from the stock connect eased in April, ARRAIL GROUP's stock price showed signs of weakening, prompting the company's management to begin small-scale repurchases to "test" the market sentiment. Statistics show that ARRAIL GROUP began another round of buybacks in April this year. However, unlike the strategy of repurchasing over a million shares in a single day last year, the company's current buyback strategy involves "small steps, fast runs", conducting multiple small-scale buybacks. From April 3 to May 23, ARRAIL GROUP has repurchased a total of 21 times, with each repurchase involving approximately 7-9 thousand shares, and a repurchase of only 1000 shares on April 14. The company has repurchased a total of 1.543 million shares this year, accounting for 0.27% of the total share capital. Although ARRAIL GROUP's buyback strategy involves "small steps, fast runs", this strategy still has a positive impact on the company's stock price increase. After the second buyback was announced on April 7, the company's stock price surged by 8.38% the next day. As the company continued its buyback, the stock price continued to rise. On May 23, the day after the final buyback in this round, ARRAIL GROUP's stock price increased slightly by 0.89%. Although this showed that the marginal effect of continuous repurchases on stock price stimulation had decreased, after the buyback ended on May 26, the stock price fell, followed by sideways oscillations and a "seven-day decline" in stock price plunges, until a new round of stock price increases occurred after the company released its financial report for the 2025 financial year. Will the positive performance become a catalyst for stock price rebound? According to the "2024 Global Medical and Health Investment and Financing Analysis Report", in 2024, there were a total of 811 financing transactions in the primary market of the domestic medical and health industry, a decrease of 37.6% from 2023; the total financing amount was 7.3 billion U.S. dollars, a decrease of 33% from 2023. Among these, there were a total of 13 investment and financing transactions in the dental industry, accounting for 1.6% of the total financing transactions; the total financing amount was approximately 900 million yuan, accounting for 12.32% of the total financing amount. In these 13 financing transactions, there were 11 upstream dental companies and only 2 midstream and downstream companies. The cooling of investment and financing activity reflects the challenges faced by the midstream and downstream sectors of the dental service industry, and from a direct perspective, in 2025, the number of dental clinics in China exceeded 150,000 (with an annual growth rate of 12%), but the industry's average profit margin plummeted from 28% in 2019 to 9% currently. While ARRAIL has slowed its expansion, small and medium-sized dental clinics have experienced a wave of closures, with the number of closures in 2024 increasing by about 45% compared to the previous year. Behind the industry's cooling, regulatory tightening and the impact of centralized procurement are objective reasons that cannot be ignored. Therefore, in order to go against the trend in the industry's winter, the company's development strategy choices are crucial. Looking back at the interim and annual reports for the 2024 financial year, ARRAIL GROUP's shift from expansion to stable development is clear. In fact, prior to the 2024 financial year, ARRAIL GROUP's development strategy was mainly focused on expansion. According to its prospectus data, ARRAIL GROUP opened 16 new dental clinics in 2019 and 10 in 2020, with a rapid expansion rate. Mature and profitable stores accounted for a decreasing proportion. In the 2020 financial year, mature stores only accounted for 35% (gross profit margin of 20.2%), while expanding stores accounted for 49% (gross profit margin of -30.8%). However, following the global public health events and the impact of centralized procurement, resulting in a significant transformation trend in the domestic dental medical service industry, ARRAIL GROUP also shifted its focus to the existing market, aiming to improve the fine management of existing dental clinics, with certain results. For example, in the interim report for the first half of 2025, ARRAIL GROUP stated that as of September 30, 2024, the company had a total of 123 stores in 15 cities in China, including 112 dental clinics and 11 hospitals. According to the comparison of the first half of the year, there was no significant change in revenue, number of patients, or profit compared to the same period last year, and the expansion of stores did not change, indicating that the company had entered a period of platform adjustment, with a temporary slowdown in expansion. However, on the other hand, the slowdown in expansion has to some extent mitigated the negative impact of expansion on the company's profits, as reflected in the financial report, showing that the company achieved an apparent net profit of nearly 4 million yuan in the current period, once again achieving positive growth. Fine management combined with cost control allowed ARRAIL GROUP to achieve steady growth performance again in the 2025 Financial Report: with revenue of approximately 1.688 billion yuan, a decrease of only 3.3% year-on-year; at the same time, net profit for the period increased to 162 million yuan, a growth of 20.5% year-on-year. This is also one of the important reasons for ARRAIL GROUP's stock price rise of over 30% in July after the lack of support from stock buybacks. Looking at the Q3 financial report of A-share companies such as Topchoice Medical, which relies on scale advantages and capital operations to maintain a slight increase in revenue, while competitors such as Whole Shine Medical Technology saw net profit plummet by nearly 300% and incurred losses. This indirectly indicates that the overall environment of the domestic dental medical service industry, with weakened market demand and intensified competition, has not completely improved. In this context, ARRAIL GROUP achieving a profit of more than 20 million yuan before tax in the first half of 2026 beyond a certain extent indicates the sustainability of its fine management strategy. Due to the continuous decline in stock price, ARRAIL GROUP's PB valuation is only 0.51 times, far below the industry average of 1.63 times, a 3% discount compared to the company's average PB value in the past three months, and it is also in the oversold zone below the BOLL line on a technical level. These conditions provide certain conditions for a possible stock price rebound for ARRAIL GROUP in the future.