The company currently has 60 medical institutions in 11 cities across the country (including more than 12 hospitals), 29 medical institutions are located in the mainland, and 31 are located in Hong Kong
We believe the company is expected to benefit from the Hong Kong Special Administrative Region Government's gradual relaxation of the epidemic prevention policy
We upgraded the company to a shareholding increase rating. Based on the fact that the risk-to-reward ratio of the company's stock price has become attractive, we are optimistic about the company's extended M&A strategy
The company is transforming into a multi-specialty medical service organization
The company achieved a great deal from extended mergers and acquisitions in the first half of '22. The company wholly acquired 60% of the shares in Guest Ophthalmology Specialist Center and Optometrist Eye Examination Center. The company also purchased Shenzhen Elkangjian Dental and three Hong Kong dental clinics in the field of dental services. At the same time, the company has also entered other specialties such as medical aesthetics, family medicine, and oncology. The company expects to achieve synergies and cost savings by strengthening its healthcare service platform. We think this validates that the company is in an advantageous position in the increasing number of mergers and acquisitions in the health services industry, and these opportunities mainly come from smaller healthcare service providers that have been hit hard by the pandemic. We believe the company will continue its aggressive M&A strategy in '22, mainly based on 1) smaller institutions still being negatively affected by the epidemic prevention measures in the first half of '22, 2) the company's platform can empower smaller institutions and achieve synergies (such as importing patient traffic and improving operational efficiency), and 3) a cash-rich and sound balance sheet (forecast of HK$274 million at the end of FY22).
Results for the first half of '22 were affected by the pandemic
Total revenue for the first half of '22 increased by about 69% year on year to about HK$882 million. The increase was mainly due to COVID-19 antigen testing sales and extended mergers and acquisitions. However, in the first half of '22, the original ophthalmology business in Hong Kong and the Mainland was disrupted by the pandemic. Overall gross margin fell 6.4 percentage points to 27.9% as a result. Net cash was HK$444 million at the end of the first half of '22 (HK$203 million at the end of '21). Despite completing multiple mergers and acquisitions and being tested by the epidemic, the company's net cash remained at a high level, reflecting that the company's operating cash flow was still stable in the first half of '22.
The rating was raised to increase holdings, and the risk-to-reward ratio of the company's stock price is becoming attractive to us to keep our profit forecast and target price unchanged at HK$4.8 based on the DCF valuation method. After experiencing a recent general decline in the global market, the company's risk-to-reward ratio is already attractive (net profit forecast for FY23 increased 48% year over year, and the predicted price-earnings ratio for FY23 was 29 times, corresponding to PEG less than 1 times). As a result, we upgraded the company's rating to increase ownership, and we are optimistic about the company's extended mergers and acquisitions and multi-specialty healthcare provider transformation strategies. Investment risks: Expansion falling short of expectations, COVID-19, regulation, and health insurance risks.
