Good Prospects if management is strategic. Fair value between 4 - 9 HKD.

Summary

• Estimated Liquidating Value - March 2024 - 0.16 HKD
• Business Value Range 4 - 9 HKD.
• Dividend Record - 11 years uninterrupted.

Prospects

In assessing 1830's prospects over the longer term, we must scrutinize the following governing elements that drive operational results for signs of possible unfavourable changes in the future, vis:

1. General Industry - aesthetic beauty and medical industry.
2. Target Market: The primary market is Hong Kong, with satellite markets in Macau and China and certain "overseas markets", such as Australia and Singapore. The typical clientele is a medium to high-end, with an average spending of $5,000 US per annum.
3. The financial position of the company. Are there any red flags that may point to financial trouble in the future?
4. Competition - E.g. Oasis Group.
5. Management

On the face of it, we can expect the industry to remain relevant as people will continue to want to look and feel good. This, in turn, means clients may return for non-invasive beauty treatments, hair regrowth, pain management, fertility and preventative care.

The typical client is a medium-to-high incoming earner who spends approximately $5,000 USD per annum. This spend is split roughly 70/30 in favour of aesthetic medical. The majority of the operating results are derived from Hong Kong (80%), with the rest of the world accounting for the 20% balance. This is despite the fact that the "overseas" store floor area is roughly equal to that of Hong Kong. This tells us that 1830 has maintained Hong Kong as its core market since its inception.

If past earnings are to be taken as a proxy for future earning power and existing business conditions prevail, Perfect Medical is expected to earn between 400 to 550 million (HKD) in free cash flow per year. This is derived by taking the operating earnings plus depreciation and amortisation and other non-cash charges less the average annual amount of capitalised expenditures over the past 10 years and including a conservative 5% increase year on year for the business to maintain its competitive advantage, has been applied to capex.

As logic would dictate, for the business to increase operating profit significantly, and assuming costs are under control, which they seem to be, either or all of the following scenarios must occur.

1. A drastic increase in the number of high-income earners in Hong Kong that visit 1830 for its services
2. Significant increase in sales volumes from "overseas" markets to match or exceed Hong Kong
3. All the above.

The first may prove difficult as there is only so much clientele that the business can capture in Hong Kong. Of course, the business could reduce its service costs in an effort to attract the lower end of the market, but this becomes a race to the bottom. This places a premium on strategic diversification of location or clientele. Results in Singapore and Australia have not been encouraging despite being in business for more than 2 years now. It is unclear why this is the case, although, during a visit to the Sydney store last year, I couldn't help but notice the clientele was predominantly of Asian origin. Is this the intended approach, or is it just a case of poor exposure to the Australian market? If the latter, there is an opportunity to increase sales volumes there.

The balance sheet shows that the business is conservatively financed. Common stockholders do not have securities ahead of the common to contend with, although no doubt they would want to see their stake after all liabilities increase. One sure way would be for management to repurchase some of the outstanding shares, currently at circa 1.26 billion. There is a caveat here, however, senior management continued to have a significant stake in 1830 (70%).

On the competition front, 1830 must protect its business in Hong Kong at all costs, as this is its primary source of operating profits. Close attention to its competitors is warranted, E.g. Oasis Group, 1161:HK, which states its core goal is to strengthen its Hong Kong high-end beauty operation.

In summary, can we expect the company to remain in business and continue as it did in good and bad times? I argue in the affirmative, although its strategic diversification in the next couple of years will be key. Hong Kong's business undoubtedly has to remain profitable. Any unfavorable events here will have a material impact on the group. As long as senior management continues to own a majority stake, we can postulate they will make decisions that are in the best interest of the business.

NB: This is not buy, hold, advice. Just my own thoughts.