Main points of investment

The cost growth rate far exceeded the income, and the company's profit margin declined significantly: the company's third quarterly report showed that the company's revenue in the third quarter was 438 million yuan, an increase of 31.58% over the same period last year, and its net profit was 58.01 million yuan, a sharp drop of 46.84% over the same period last year. The net profit after deducting non-return was 51.55 million yuan, a sharp drop of 41.15% over the same period last year. At the same time, the company achieved a cumulative revenue of 1.212 billion yuan in the first three quarters, a sharp increase of 60.19% over the same period last year, a slight increase of 6.16% over the same period last year, and a slight decrease of 6.43% over the same period last year. The substantial increase in the company's operating income is mainly due to the consolidation of subsidiaries. However, due to resource integration and sales promotion, the company's management and sales expenses have increased significantly, the overall operating cost has increased significantly, and the profit margin has dropped sharply. The changing trend of the mismatch between net profit and revenue Chongzhou second Hospital completed equity delivery, growth is expected: the company bought 70% of the equity of Chongzhou second Hospital with 124 million yuan, the equity delivery has been completed, Chongzhou second Hospital is officially included in the consolidated scope. The historical net interest rate of Chongzhou second Hospital is relatively low, and it will be increased with the entry of Hengkang. The undistributed profits of Chongzhou second Hospital in 2016, 2017 and 2018 are all attributed and distributed to the company, and the company undertakes to inject all the profits of the target company from 2016 to 2018 into the capital reserve of the target company, which will be shared by all shareholders and used for the development and construction of the target company. From 2019, the shareholders of the target company will distribute dividends in proportion to their actual contribution.

The pharmaceutical sector is sound: the company's pharmaceutical sector remains stable, the sales volume and prices of traditional Chinese medicine slices increase, and the profit margin increases. We expect the pharmaceutical sector to achieve a growth rate of 20% and 25% for the whole year.

With the expansion of the scope of the table, the scale of medical services has increased significantly: with the influence of factors such as the comprehensive consolidation of hospitals such as Wasan and Xuyi acquired in 2015, as well as the formal consolidation of the new layout of Chongzhou second Hospital this year, the company's performance has greatly improved; at the same time, the company's newly signed cooperation framework agreement plans to layout third-party services, and the profit scale of the target company is huge. If the acquisition is completed successfully, the scale of the service sector will be greatly expanded. We expect the company's service sector to achieve 100% growth for the whole year.

With efforts in the fourth quarter, the performance is expected to be equal to the sum of the first three quarters: the company expects to achieve a net profit of 410 million-480 million in 2016, doubling on the basis of 202 million yuan in the first three quarters, with a growth rate of 26.69%. The rapid growth mainly comes from the endogenous growth of drugs and the continuous expansion of the scope of consolidation. Profit forecast: we forecast that the operating income of Hengkang Medical (000219) from 2016 to 2019 is 1.934 billion yuan, 2.197 billion yuan, 2.392 billion yuan and 2.51 billion yuan respectively; the net profit attributed to the parent company is 425 million yuan, 505 million yuan, 550 million yuan and 603 million yuan respectively; equivalent to 0.22,0.27,0.29,0.32 yuan EPS in 2016-2019 The corresponding dynamic PE is 59.6 times, 48.6 times, 45.2 times and 41.0 times, respectively. The company's extension of mergers and acquisitions has greatly improved its performance, so we give it a "overweight" rating.

Risk hints: the risk that the medical service sector can not achieve endogenous growth; the risk that performance compensation cannot be reached; the risk that the pharmaceutical sector cannot break through; the risk that health products and daily chemical business are difficult to meet expectations; national policy risks, etc.