The third quarter of 2024 is an epoch-making watershed. An unprecedented large-scale stagnation has occurred in the consumer healthcare field. From medical beauty, ophthalmology, dentistry, pharmaceutical retail, branded Chinese medicine, growth hormone to self-funded vaccines, the leaders in various segments have become old and collectively lost their growth potential. The mismatch between business model, product structure and consumer market is one of the reasons for the predicament, but it is so difficult for a company to get out of the path dependence that created its former glory. Now there are two problems. First, how does the market value companies that have lost their growth but are still profitable? When a company stops growing, the only investment attraction is high dividends, but consumer healthcare companies are almost all stingy. Second, when will consumption pick up?

When will the consumption inflection point come? Japan's situation from 1990 to 1997 is inspiring. Consumption of entertainment services is strong. After the Japanese bubble burst in 1990, stock prices and real estate prices fell, causing damage to the balance sheet of the household sector and shrinking its consumption capacity, which had a greater compression effect on commodity consumption expenditure than service consumption. Durable goods consumption expenditure was compressed to the highest extent, followed by non-durable goods consumption and catering service consumption. Against the background of increasing household financial vulnerability, entertainment service consumption has a relatively better performance due to its smaller diminishing marginal utility.

The elderly play a supporting role in domestic consumption. According to Southwest Securities, the average propensity to consume (the ratio of consumption expenditure to disposable income) of households with two or more workers is used as an indicator to measure the willingness of Japanese households to consume. The indicator has generally shown a downward trend since 1985, but it rebounded slightly from 71.3% to 74.7% during the period of 1998-2005, especially driven by the group over 55 years old. According to a BOJ report in 2012, the consumption tendency of the working age group is lower, while the consumption tendency of the elderly group is higher. The baby boomers (born in the 1940s and 1950s), as the biggest beneficiary group of the rapid economic development stage, have a higher consumption tendency than the previous and next generations. After retirement age, they are more willing to spend on projects including renovating houses, traveling, spending for their children and grandchildren, and medical care.

Low-price strategy is more competitive. From 1991 to 1998, Uniqlo seized the dividends brought by changes in consumption trends with its popular positioning and affordable characteristics, and achieved rapid expansion of the number of stores in Japan. In 1998, Uniqlo launched a low-priced star product - polar fleece, which led to a rapid rise in the stock price of its parent company, Fast Retailing Group, from 171.4 yen in early 1999 to 5,300 yen in November 2000. The changes in Japan's alcohol consumption also confirm that the low-price strategy is more advantageous. Suntory launched sparkling wine in 1994, which tastes and smells similar to beer, but the price is only about 60% of the price of ordinary beer, and quickly occupied the market share. When will the consumption turning point come? Real estate mainly affects consumption through the "housing price-wealth effect-consumption propensity" channel. According to Guosheng Securities, referring to Japan's experience, when the proportion of real estate in residents' wealth drops below 50% and the decline in housing prices narrows to 1-2%, consumption propensity may be desensitized to the decline in real estate, and then consumption will stabilize and rebound.

The proportion of real estate + land (land in Japan can be privately owned) in Japanese residents' wealth was higher than 50% before 1998. As the bubble burst and housing prices fell, its proportion gradually fell below 50%, and has stabilized at around 37% in recent years. From 1991 to 1998, before the bursting of the Japanese real estate bubble, Japanese housing prices fell rapidly. Tokyo housing prices fell 45% from their peak, with an average annual decline of 5.6%. During the same period, residents' consumption propensity continued to decline, and the wealth loss effect pointing to the decline in housing prices dominated. From 1999 to 2012, in the late stage of the bursting of the Japanese real estate bubble, the decline of Japanese house prices gradually slowed down, and Tokyo house prices continued to fall by 23%, with an average annual decline of 1.7%. During the same period, residents' consumption propensity fluctuated and rebounded, and the trend was negatively correlated with house prices, which may be related to the reduction of real estate crowding out and the release of pent-up demand. The degree of aging in China is similar to that of Japan around 1996. In 2023, the proportion of real estate wealth is about 57%, and it may drop to about 55% in 2024.

How to understand that the consumption in the sinking market is more resilient? In the first half of 2024, the growth rate of social retail sales in first-tier cities in China was -0.67%, the growth rate of social retail sales in second-tier cities was 3.13%, and the combined growth rate of first- and second-tier cities was 1.98%. The growth rate of social retail sales in third- and fourth-tier cities was 4.76%. After the balance sheet of residents is damaged, they will compress consumption expenditures. In August 2024, the average price of second-hand housing in first-tier and second-tier cities in China fell by 5.4% and 8.9% year-on-year, respectively, and the year-on-year decline in third- and fourth-tier cities was 5.1%. According to Western Securities, taking the housing price/income ratio into consideration, the housing price/income ratios of first-tier and second-tier cities in the first half of 2024 were 26.3 and 11.2 respectively, significantly higher than 7.9 in third-tier and fourth-tier cities. This means that although the housing price declines in first-tier and third-tier cities are similar, the assets of residents in first-tier cities have shrunk by more than three times relative to their incomes, resulting in weaker consumption performance.

This third quarter report also marks that investors have entered a low desire stage, and they are not ashamed of the decline in year-on-year growth in performance, but proud of still having profits. However, a large number of original segment leaders have lost their growth potential and are in a state of decline, and the corresponding valuation model will also change, which is a new topic for the market. Referring to the low growth and low dividends of Livzon Group and Kangyuan in the past two years, their dynamic PE is about 15 times.

In medical beauty, Aimei's revenue in Q3 2024 was 719 million yuan, a year-on-year increase of 1%, and its net profit was 465 million yuan, a year-on-year increase of 2%, and its performance growth rate dropped to the lowest since its listing. The willingness of mid- to high-end consumption tends to be conservative. It is expected that the Hi-Body series, which focuses on basic care effects for mass consumption, will continue to grow by relying on the advantages of high frequency and moderate price. The sales of high-end gel products (Bonida) and regeneration products (Rubai and Rusheng series) will slow down in the short term due to their high prices and long effect manifestation period.

Medical beauty consumption is addictive and has high repurchase resilience. The innovation of anti-aging and skin regeneration and repair technology will release incremental demand. The leading medical beauty companies are expected to stabilize first in consumer healthcare in the future. Haohai Biotech was a flash in the pan. In the first half of 2024, hyaluronic acid revenue was 417 million yuan, a year-on-year increase of 51%. In the second half of 2024, revenue was 670 million yuan, a year-on-year increase of 0.22%. Net profit was 106 million yuan, a year-on-year decrease of 13%. It is estimated that it was affected by medical beauty. The impact of the unexpected decline in terminal demand and the price reduction of ophthalmic intraocular lenses. Huaxi Bio's revenue in Q3 2024 was 1.064 billion yuan, a year-on-year decrease of 7%, and its net profit was 20 million yuan, a year-on-year decrease of 77%, making it the most depressed medical beauty company. Affected by the decline in consumer sentiment and internal brand adjustments, the functional skin care business accelerated its decline.

In ophthalmology, Xingqi Eye Medicine's revenue in Q3 2024 was 547 million yuan, a month-on-month increase of 1%, and its net profit was 121 million yuan, a month-on-month decrease of 10%. 0.01% atropine eye drops were approved for listing in March this year. After only half a year, there is no momentum for volume growth, and the logic of large single products has been falsified. JD Pharmacy shows that Xingqi Eye Medicine's 0.01% atropine eye drops are 331 yuan/box, and the annual treatment cost is about 3,850 yuan, which is only One-tenth of its in-hospital preparations are at a disadvantage in competition. According to feedback from buyers at JD Pharmacy, the medicine prescribed in late October was still produced in March. Optoelectronics' orthokeratology business accelerated its decline in 2024Q3. The number of custom lens orders received by the factory has declined every month compared with last year. If there is no major change in domestic high-end consumption and industry conditions, this situation is expected to remain in the short term. The industry has started a price war, and the price of homogeneous orthokeratology lenses has gradually declined overall.

Ophthalmology hospitals are the worst. In 2024Q3, Huaxia Ophthalmology's net profit fell 23% year-on-year. The consumption environment was relatively weak, and consumer businesses such as refractive and optometry grew weakly. The cataract business was affected by the high base of the previous year and faced great challenges. Pre Eye Hospital, He's Ophthalmology, and Guangzheng Ophthalmology lost money in 2024Q3 respectively. Losses were 27 million yuan, 8 million yuan, and 22 million yuan. The external expansion model puts pressure on profits. The rigid expenses such as depreciation and amortization of various assets, labor costs, and period expenses generated after the official opening of the new hospital have a greater impact on the growth of costs and expenses, while profitability is dragged down by the downward trend in consumption. Aier Eye Hospital relies on operating inertia to barely maintain the scene. In the third quarter of 2024, its revenue was 5.756 billion yuan, a year-on-year decrease of 0.68%, and its net profit was 1.402 billion yuan, a year-on-year decrease of 4.56%. Its performance resilience crushed its peers, but its valuation was crushed by its own dynamic PE of nearly 30 times. Goodwill is 8.7 billion yuan, an increase of 33% from the beginning of this year, and it still relies on the path of external expansion. On July 29, Aier Eye Hospital acquired another 35 hospitals, with an overall net profit of 18.6015 million yuan in 2023. Except for Fuzhou Aier, the remaining 34 target hospitals are all municipal and county-level hospital projects. The gross profit margins of all listed ophthalmology hospitals declined year-on-year in Q3 2024, and the intensified competition has put great pressure on the terminal customer unit price.

In dentistry, Tongce Medical's revenue in Q3 2024 was 823 million yuan, a year-on-year increase of 0.04% and a month-on-month increase of 17.15%. The net profit was 188 million yuan, a year-on-year decrease of 9.10% and a month-on-month increase of 37.97%. The month-on-month increase reflects the prosperity of the traditional peak season, but the year-on-year increase has lost its growth.
In the first three quarters, the number of outpatient visits of Tongce Medical increased by 6.5% year-on-year, while the revenue decreased by 1.36% year-on-year, indicating that the terminal customer unit price has decreased. Among them, the customer unit price of Dandelion Hospital was 740 yuan, a year-on-year decrease of about 5%. The children's and adolescent business declined. In the first three quarters, the revenue of pediatric dentistry decreased by 1.3% year-on-year, and the revenue of orthodontics decreased by 6.2% year-on-year. Affected by the downgrade of consumption, patients prefer fixed orthodontics with lower customer unit price. Currently, the number of fixed orthodontics accounts for 85%, and invisible 15%. In the first three quarters, the income of implant business for middle-aged and elderly people increased by 11.7% year-on-year, and the number of dental implants reached 48,000, an increase of 30% year-on-year, of which centralized procurement accounted for 78.6%. Compared with ophthalmology hospitals, dental hospitals pay more attention to endogenous growth, and Tongce Medical's performance is expected to stabilize earlier.

In pharmaceutical retail, the sluggishness of drug stores has more complex factors. The supply-side stores are in excess, while the decline in consumption, the reduction in individual accounts, online price comparisons, stricter supervision, and takeaway medicine purchases have all caused the demand side to shrink. Yifeng Pharmacy was the only listed pharmacy to achieve positive profit growth in 2024Q3, with a net profit of 313 million yuan, a year-on-year increase of 6.38%, and 679 new stores in a single quarter. The net profits of Dasanlin, Yixintang, Laobaixing, and Jianzhijia in 2024Q3 decreased by 21.95%, 94.16%, 37.32%, and 68.46% year-on-year, respectively, and 536, 225, 622, and 57 new stores were added in a single quarter.
The overcapacity in the pharmacy industry is still worsening, and there is downward pressure on the daily average floor efficiency.

Growth hormone, which is targeted at adolescents, is no longer a natural outlet. Anke Bio's performance has accelerated its decline, with revenue of 622 million yuan in Q3 2024, a year-on-year decrease of 15%, and net profit of 174 million yuan, a year-on-year decrease of 33%. In the first three quarters of 2024, Changchun High-Tech's growth hormone revenue remained basically flat. Jinsai Pharmaceutical's revenue in Q3 2024 was 3.011 billion yuan, a year-on-year increase of 1%, and net profit of 1.07 billion yuan, a year-on-year decrease of 20%. It is still difficult to be optimistic in the long term, and innovation and transformation are the inevitable path.
The downward pressure on the terminal customer unit price has increased, which means that the price war may spread from self-paid vaccines to the entire consumer medical field. It is really a difficult time.

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