Having loss someone close to you can be a traumatic experience. Anyone who has gone through the hassles of funeral and burial arrangement will understand the difficulties during those period, including having to make quick decision on how to handle your loss ones within tight schedule. It is during such emotional period that we as end-users would probably have least advantage when negotiating with death care providers. Here I am wondering: Why not invest in such business?
Apologies for being rude if I have brought back those traumatic experience that you have experienced. In return, I would like to share with you on a related company that is listed in Hong Kong Stock Exchange.
Fu Shou Yuan International Group (Bloomberg Code = 1448:HK) was established back in 1994 and listed on 19th December 2013. It provides premium funeral and burial related services, as well as auxiliary services (tomb maintenance services, flowers arrangement, etc).
Its main business includes organizing funeral and burial ceremonies, sales of burial plots and relevant maintenance services. In addition, the company also offers burial plots’ design and landscaping, as well as flowers and caskets’ arrangement. The company is currently operated in China only.
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What attracted me is the inherent lucrative and yet necessary services provided by death care providers. Fu Shou Yuan also appears to be the best candidate among its global peers, with the highest GPM and EBIT-M, as well as strongest balance sheet. It has not gone unnoticed by the investors, with share price climbing >150% from its low at HKD 3.07 in 2015!
Have you missed the boat? Check out the 6 key highlights below before deciding:
No.1: Inherent characteristics in Chinese Culture on Death Care Spending
(Source: Annual Reports)
Funeral traditions and customs have been an important part of Chinese culture for over 5,000 years. The teaching of Confucian has strong influence on Chinese culture until today, which advocates the ethics of filial piety and respect for the elderly (Source: Prospectus). Chinese demonstrate their practice of filial piety through the care and support of the elderly while they are alive, and a proper burial when they have passed away. Such strong influence of Confuscianism, supported by increasing disposable income of the Chinese have led to lavish funeral and burial ceremonies by the Chinese. This is reflected in the changes of selling price over the years.
No.2: Aging Chinese Population
(Source: Company Presentation FY2017)
According to populationpyramid.net, China population aged 60 and above have increased to approx. 204 million in 2017, from 116 million in 1997. This is due to aging of baby boomers who are born in between 1945 and 1965. With the average life expectancy in China around 76.11 years (Source: data.worldbank.org), this group of elders would likely be the customer of death care industry in less than 20 years’ time (“touch wood”). According to Company Presentation FY2017, the total deaths in China has been on the gradual rise, reaching 9.8 million in 2016. This is a significant figure, as compared with:
- US total death = 2.71 million (2015) [Source: cdc.gov]
- Indonesia total death = 1.69 million (2017) [Source: indexmundi.com]
- Pakistan total death = 1.56 million (2016) [Source: Wikipedia.org]
No. 3: Large Land Reserve
(Source: Company Presentation FY2017)
One of the main business is the sale of burial plots, and this is subjected to the availability of the land. Over the years, the company continues to build up its land reserve, through acquisitions of other local death care providers with cemetery land assets. If you refer to the figure above, you would find that there is still abundance of land which can be converted to burial plots.
No. 4: Rooms for Growth within China
(Source: Annual Report)
Fu Shou Yuan is considered one of the top 5 death care providers in China by revenue, and the top 5 death care providers are only accounted for 3.1% market share by revenue in 2012 (Source: Prospectus). Death care industry in China is highly fragmented, with state-owned enterprise occupying a substantial market share. The remaining being small private owners serving local market instead of regional market in China. This type of market structure provides abundance of acquisition opportunity for Fu Shou Yuan to expand its footprint, which currently covered only 12 out of 23 provinces in China.
No. 5: Selling Pre-need Contracts as New Growth Driver
Death care providers in developed countries such as Dignity (UK), SCI (US), InvoCare (AUS) and PFP (AUS) have significant portion of their sales originate from pre-need contracts. In contrary, Fu Shou Yuan is still highly reliant on sales of burial plots and funeral services. This indicates a potential new source of revenue as well as float for Fu Shou Yuan. According to Company Presentation FY2017, the company has achieved sales of 1,174 contract in FY2017, and planning to expand its reach from 2 cities to 13 cities!
No.6: High Degree of Commitment from Management
(Source: Annual Report, Prospectus)
Having a management team with aligned interest with shareholders is a critical consideration, especially if you are planning for long term holding. In Fu Shou Yuan, the shareholding of management team, represented by shareholders Mr. Tan Tize Shune and UBS Trustees (BVI) Limited is more than 25%. In addition, shareholding of the parent companies, represented by Perfect Score is more than 22%. Altogether, they represent a total shareholding in the excess of 47%.
Fu Shou Yuan International Group is a leading death care provider, focusing on premium segment of the industry. The future growth of the company is sustained with inherent filial piety culture, increasing disposable income, large landbank reserve in China as well as committed management team. Before you decided to skip through the rest of the content and click “BUY’, do note that there will always be risks associated with any investment.
As we all know, death care industry thrives with decreasing life expectancy, and vice versa. A major scientific breakthrough in life sciences and better public health awareness that would increase life expectancy will harm the business of death care industry. Next, significant portion of revenue is derived from sales of burial plots, which are essentially land owned by China government. In China, all land belongs to the government, including cemetery land. Should there be a change in government policy or decision, both assets and hence profitability of Fu Shou Yuan will be affected.
At the time of writing, Fu Shou Yuan International Group is trading at HKD 8.70 (or PE of 28.53x Earning FY2017). This would convert to an aggressive growth expectation of more than 25% in coming 5 years, and I would wait for further corrections before deciding on next move.
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