Fushouyuan Stock Analysis

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1. Market share analysis

Since the main business segments are burial service, funeral service auxiliary services, here is an analysis of FSY’s position in separate areas.(See EXHIBIT 6)

The charts as shown in appendix indicate that FSY is the only company that ranks top 5 in all three business segments. It is also the only company among these top 5s that is listed on stock market, indicating an obvious edge over its competitors.

2. Comparison with H-listed companies

a. Anxian Yuan China Holdings Ltd.安贤园中国控股有限公司

With only one cemetery in Hangzhou, Anxian Yuan is quite small in scale, not to mention its share price is below one HKD, thus a penny stock.

b. Sage International Group Ltd. 仁智国际集团

Sage is in a worse situation than Anxian Yuan, with share price below one HKD and negative net profit in 2015.

c. Nirvana Asia Ltd. 富贵生命国际有限公司

Nirvana Asia Ltd. was the strongest potential competitor to FSY because of a number of similar financial benchmarks. Its business is mainly focused on Southeast Asia and it is planning to expand business to China mainland. However, Nirvana was delisted on October 7th. With Nirvana’s delisting, H-listed companies in burial&funeral industry will be even rare and can be expected to catch more attention, which is a good news to FSY. (See EXHIBIT 7 for comparison of balance sheet, cash flow statement and income statement)

Conclusion: FSY is no doubt the biggest burial&funeral Company in China and also the only one with a nationwide brand name. FSY leads China’s death care service by offering premium services, integrating resources and expanding domains.

Investment summary

1 advantageous position

The operation of the company can be divided into 3 parts: cemetery service, funeral service and other supporting services. And 85% of the company’s revenue comes from cemetery service. On the other hand, the strict constraint of burial plots has driven the price greatly. Fu Shou Yuan will definitely get great profits from the increasing price of plots. In 2015, the average price of cemetery sold by FSY is 104159 RMB, increased by 15.6% from 2014. However, compared with skyrocketing cemetery price, the costs of cemetery owned by FSY are very low（See EXHIBIT 8a）. And the reasons is that most of the cemeteries are obtained long times ago by only hundreds or even tens of yuan per square meter. Fu Shou Yuan, which operates good burial plots and at the same time has greater power in acquiring profitable plots, will obtain advantageous position in this industry.

2 Leading financial positions

One characteristic that outstands Fu Shou Yuan among its peers is the sustainable high rate of margin. From the EXIHIBIT 8b we can see that the company obtain a margin of 80%, which proved a leading position compared with its peers. Such a high margin, which mainly comes from the huge profit space in sales of cemetery, acts as a powerful supporter for its daily operation. In addition, the company keeps growing operating cash flow year by year, from 162 million in 2013 to 370 million in 2015. And the low debt asset ratio also reflects its financial strength.

3 M&A brings new opportunities

FSY also makes strength to acquire less well-operated enterprises and cemeteries and transform them into profitable ones.. In 2015, it accomplished several acquisitions including Guanlingshan Cultural Garden, Anyang Garden and so on, which has generated revenues of 138.4 million, compared with 140 million revenues coming from the original cemeteries. So the acquisition activities play an important role in expanding business and driving profits..

4 R&D project－Environment friendly cremator

In China, 80% of the cremators in operation now have been used more than 10 years, which are very old and lead to severe air pollution. As there are more environmental requirements among industries, it becomes urgent for the whole industry to solve the gas contamination of cremators. And seizing the opportunity, FSY managed to develop environmental friendly cremators, which came into the trial production stage in 2015 and achieved 9.2 million profits. In the following years, the increasing demand of funeral service will drive the sales of environmental friendly cremators and lead to great profits for FSY.

Valuation and Recommendation

DDM method

To forecast the income statement of FSY, we combine the data of ROE and payout ratio to predict the growth rate of dividend per share from 2016E to 2020E. Moreover, we calculate the perpetuity growth rate of dividend by using weighted average growth rate of GDP and industry’s growth rate.

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To find the intrinsic value of FSY, a 5-year discounted dividend model was conducted. In this approach, a β of 0.76 and a WACC of 7.89% are used.

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Our calculation for the NPV per share of the equity of FSY is HK$ 7.66. The stock price in the past 3 months was traded in a range of 4.4-5.6, corresponding to a discount of 26.89% to 47.89% discount of our calculation price. Thus our target price is HK$7.66 in this approach, representing a 60.25% upside. (Oct 11th, 4.78HKD).

Rf

2.79%

k1(cost of liabilities)

5.48%

Rm

11.1%

k2(cost of equity)

9.10%

β

0.76

WACC

7.89%

Sum of Discount dividend per share

7.66

A sensitivity analysis on both weighed average cost of capital (WACC) and perpetuity