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Today, we have the great pleasure of hearing Portuguese investor Diogo Perneta discuss Chinese cemetary operator Anxian Yuan (922 HK —US$45 million).
We’ve been communicating for some time and agreed that Anxian Yuan was worth investigating. It owns a unique cemetery in Hangzhou, China, and trades at a low P/E of just 6.1x, with a 13.3% dividend yield.
Anxian Yuan was formed in 2010 through a reverse merger between electronics company China Boon Holdings and the Anxian Yuan cemetery. Well-connected former government official Shi Hua used the ListCo to take over the asset, and he has since expanded operations to parts of the country.
The company now owns three main assets:
The flagship Zhejiang Anxian Yuan cemetery is located a mere 30 minutes from the Hangzhou city center. According to the China Cemetery Network, it’s ranked as the #23 best cemetery nationwide. The cemetery covers an area of 1,000 acres and is situated on a mountain with picturesque surroundings.
The Fushouyuan Humanistic Memorial Park in Yinchuan, Ningxia Province
The Dashenshan Ecological Cemetery in Niuxin Village, Guizhou Province
Anxian Yuan’s disclosures are poor, so we don’t know the exact revenue split between each of these cemeteries. But the Zhejiang Anxian Yuan cemetery in Hangzhou is quite clearly the jewel of the company.
The company enjoys fat operating margin of 28%. We know that new supply remains limited as the central government is publicly against the building of new cemeteries. And most importantly, tomb prices are not constrained by regulation, giving the company virtually unlimited pricing power.
A tomb at the Hangzhou cemetery costs around CNY 111,000 on average. That’s expensive but not unusual for a Chinese tier 1 city cemetery. A key competitor in Hangzhou － the Jingshan Bamboo Tea Garden － charges CNY 127,000, even though it’s farther away from Hangzhou. So, it’s plausible that Anxian Yuan could raise its prices further.
The industry backdrop is positive. The number of deaths in China grows at around +1.4% each year. This number is likely to go up as the +65 year-old-population has started growing at a +4% yearly rate. These individuals will eventually pass away.
If there’s something to fault the company for it’s excessive share issuance. The share count has gone up over time. Notably, in 2020, Anxian Yuan issued shares through a large rights issue. The company founder and chairman, Shi Hua, bought 85% of those shares, increasing his ownership from 20% to 57%.
Interestingly, those shares were acquired at close to the same share price at which Anxian Yuan is trading today, equivalent to roughly 5x P/E. So, he clearly saw value in the company at the current share price.
Anxian Yuan’s trailing P/E multiple is now 6.1x with a 13.3% dividend yield. The P/E is far lower than the peer group’s 14x median P/E. It’s also lower than its pre-COVID trading range of around 10-15x P/E.
Is the dividend sustainable? Most likely, yes. The company raised a significant amount of capital through its 2020 rights issue, and net cash now represents 82% of the market cap. Yearly cash flows easily cover the current dividend. And it’s remained almost flat over the past four years, suggesting that the current policy is to maintain the dividend per share in absolute terms.
The key risks are government intervention, perhaps through price caps or outright expropriation. There’s also been a downturn in China’s property market, and it’s plausible that tomb prices will also take a hit at some point. Another risk is dilution, as management has shown a willingness to issue shares in the past.
It was encouraging to see the Shi family buy shares in the 2020 rights issue. If they decide to dilute shareholders further, they’ll be hit just as hard as minorities.
The key catalysts are higher tomb prices and the long-term tailwinds of an aging population. Also, note that Anxian Yuan’s contract liabilities increased in the last fiscal year. This suggests that it’s been receiving greater pre-payments for future services. The implication is that we could see greater revenue recognized in FY2025, at least for the portion of revenues contributed from pre-sales.
To read more of Diogo’s work, follow him on Twitter and Substack.
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