“Investors Network” Xie Yingjie

At the beginning of the new year, Aier Eye Hospital Group Co., Ltd. (hereinafter referred to as “Aier Ophthalmology”, 300015.SZ) once again revealed that its hospitals were punished for reusing disposable medical devices.

As a leading enterprise in the domestic ophthalmology chain, Aier Ophthalmology excels at its merger and acquisition fund model, supporting performance through continuous acquisition of hospitals. However, the increasing scale has also brought about internal control problems. Medical disputes have repeatedly caused public opinion crises, and the market's attitude towards Aier Ophthalmology is quite divided.

Some institutions are optimistic about the future prospects of ophthalmology, considering the company's steady leading position and its unique hierarchical chain advantage. Investors are also concerned that under the accelerated expansion model, the company's management costs and difficulties have increased, leading to quality issues.

mired in doctor-patient disputes

Benefiting from the massive release of demand for ophthalmology care, the ophthalmology sector has received much attention in recent years, but the performance of Aier Ophthalmology, which is a leader in the industry, is not optimistic.

At the end of 2023, news of a doctor hammering a patient on the head during surgery brought Aier Ophthalmology into the spotlight. Subsequently, Guigang Aier Ophthalmology was revealed to have extensively bribed public officials.

On December 23, 2023, the Guangxi “Guigang Discipline Inspection” WeChat account issued a notice: An investigation team has been set up to inspect and deal with the relevant situation in accordance with regulations, discipline and law. In response to the bribery incident, Aier Ophthalmology did not respond.

And this is just the tip of the iceberg of their medical disputes. In recent years, Aier Ophthalmology has been pushed to the forefront of public opinion due to issues such as “inducing the elderly to perform cataract surgery to defraud medical insurance” and the suspected bribery of Suqian Aier Eye Hospital. The reason behind this is the safety and health of patients.

In addition, Aier Ophthalmology was named by the Market Supervisory Authority for posting false advertisements. According to Tianyancha risk information, many hospitals under Aier Ophthalmology have been punished for illegal use of medical insurance funds, price fraud, unlicensed medical practice, and broken surgical instruments.

According to Tianyan Research, recently, Xiangyang Aier Eye Hospital Co., Ltd. was fined 5,000 yuan by the Xiangyang Municipal Health Commission for reusing disposable medical devices due to failure to implement relevant national regulations, standards and regulations in disinfection management.

Aier Ophthalmology's expansion strategy inevitably collides with supervision, but this level of punishment does not seem to hinder the company's desire for growth. The company indicated risk in its financial report that the incidence of medical disputes and medical accidents is relatively low, but as the number of outpatients and surgeries continues to increase, the absolute number is likely to rise.

Affected by this, over the past few days, Aier Ophthalmology's stock price hit Waterloo and hit a three-year low. It has now fallen 60% from the July 2021 high of 42.64 yuan.

As of the close of trading on January 30, Aier Ophthalmology reported 13.2 yuan/share, with a rolling price-earnings ratio of 36.77 times. The total market value was 123.1 billion yuan, which evaporated sharply from the highest market value (385.1 billion yuan).

Rapid expansion and high reputation

According to public information, Aier Ophthalmology was founded in 2003 and launched in 2009. It is mainly engaged in diagnosis and treatment of various ophthalmic diseases, surgical services, and medical optometry equipment. The medical network layout covers China, Europe, the United States, Southeast Asia and other countries and regions. As of June 2023, there were 816 hospitals, ophthalmology centers and clinics under its brand.

From 2018 to 2022, the company's revenue increased from 8 billion yuan to 16.110 billion yuan, and net profit to mother increased from 1 billion yuan to 2,524 billion yuan. In the first three quarters of 2023, Aier Ophthalmology's revenue was 16.05 billion yuan, up 23% year on year, and net profit to mother was 3.181 billion yuan, up 35% year on year.

The secret to Aier Ophthalmology's scale growth is to use M&A funds to incubate new hospitals outside of the body, adopt a “listed company+PE” strategy, establish multiple merger and acquisition funds with professional investment institutions, and use M&A funds to build or acquire ophthalmology hospitals from outside the system.

About 70% of the initial investment in a new merger and acquisition hospital came from Aier Ophthalmology's M&A fund, and the rest came from individual partners, etc. When the hospital makes a profit, it is placed in a listed company, and eventually merged into the listed company's statements, thereby reducing the impact of the new hospital's growth period on net profit.

As far as the group is concerned, it can expand more hospitals with less money, and when the hospital is not profitable in the early stages of construction, since the hospital is still “outside the body,” the losses reflected in the statements will be diluted and then bought back after profit.

But that doesn't mean the company can rest easy. As of the end of the third quarter of 2023, Aier Ophthalmology had a total goodwill of 5.901 billion yuan on its books, accounting for nearly 30% of the company's net assets. This means that if the operating conditions of the subject of the acquisition fall short of expectations, Aier Ophthalmology is still at risk of impairment of goodwill.

Taking the merger and acquisition in September 2023 as an example, Aier Ophthalmology announced the acquisition of some shares in 7 hospitals including Tangshan Air and Hengdong Air.

According to the company's acquisition announcement, the total revenue of the 7 medical institutions planned to be acquired in 2022 was 187 million yuan, net profit was -6.703 million yuan, and the net interest rate was -3.6%; the total revenue for the first three quarters of 2023 was 179 million yuan, net profit was 10.475 million yuan, and the net interest rate was 5.9%. It can be seen from this that the profitability of the mergers and acquisitions mentioned above is not optimistic.

It is worth noting that the amount of goodwill impairment calculated by the company showed an upward trend. From 2020 to 2022, Aier Ophthalmology's cumulative goodwill impairment was 788 million yuan, 987 million yuan, and 1,127 million yuan, respectively.

Market attitudes are now divided

As the overall market supply volume of the ophthalmology circuit continues to expand, private ophthalmology service companies have been listed one after another, and competition for market share has intensified. Against this backdrop, the unit price of Aier Ophthalmology showed a continuous downward trend, from 1,578 yuan three years ago to around 1,450 yuan recently.

As a result, the epitaxial expansion of Aier Ophthalmology has continued. In January 2023, Aier Ophthalmology won 14 hospitals including Shaoxing Air and Zhoushan Air in one fell swoop. In September, the company spent 860 million yuan to acquire some shares in 19 medical institutions including Hainan Air and Zaozhuang Aier; in November, it was announced that it plans to purchase some shares in 7 hospitals including Tangshan Air and Hengdong Air to further improve the market layout.

Marketing investment has also increased. The company's sales expenses reached 1,707 billion yuan in the first three quarters of 2023, exceeding the full year of 2022. According to Tonghuashun data, in the first three quarters of 2023, the company ranked second in marketing expenses in the pharmaceutical service sector.

Eyre Ophthalmology is in an awkward situation. Expansion may cause the market to “vote with its feet”; without expansion, it will also face a situation where competitors grab food. The company had to consider balancing rapid store expansion with increasing customer unit prices to reduce costs.

According to financial reports, refractive projects, optometry service projects, and cataract projects account for the top three businesses, and business growth is basically steady. It can be said that serving myopic people accounts for “half” of the increase in performance.

“Private ophthalmology hospitals are currently focusing on developing consumer projects such as optometry. Their ability to treat fundus disease is limited, and the ceiling is not high. In the future, the development of ophthalmology technology will tend to be more advanced, such as eye surgery, interdisciplinary neurology, etc., which may challenge the operation of private ophthalmology hospitals.” An ophthalmologist at Guangdong's top three hospitals said.

This also shows that Aier Ophthalmology's main business is narrow and homogenized, and a large number of eye disease treatment needs have yet to be met. Take the cataract project as an example. The gross margin of this business has been declining for three consecutive years. The latest gross margin is around 37%, which has limited impact on profits.

There were major differences in the agency's attitude towards Eyre Ophthalmology. According to some institutions, Aier Ophthalmology is still actively transforming and has achieved some results. Investors are also concerned that under the accelerated expansion model, the cost and difficulty of managing the company will increase, leading to problems such as doctor-patient disputes. What is predictable is that capital will maintain a more cautious investment attitude.

According to the latest research report by GF Securities, considering the continuously increasing demand for diagnosis and treatment in ophthalmology, the company's stable leading position and its unique hierarchical chain advantage, the company's net profit from 2023 to 2025 is estimated to be 35/46.09/6.066 billion yuan, respectively. At the same time, it was suggested that the company may face the risk of changes in industry policies, the risk of increased market competition, and the risk of medical accidents.

Faced with sluggish stock prices, Aier Ophthalmology has bought back the market several times to show its confidence in future prospects. In October 2023, the company announced that it plans to use its own funds to repurchase the company's shares through centralized bidding transactions to implement an equity incentive plan or employee stock ownership plan, with a total capital of not less than 200 million yuan and no more than 300 million yuan.

As of January 2 this year, the company has repurchased approximately 11.31 million shares, accounting for 0.12% of the total share capital, and the total transaction amount is about 204 million yuan. (Produced by Thinking Finance) ■