Incidents:

On June 6, the company announced a draft equity incentive plan. The number of restricted shares to be granted is 8 million shares, accounting for about 1.52% of the company's total share capital, or 4.63 yuan per share. The incentive targets include directors, middle and senior management, core technical (business) personnel, key managers of subsidiary companies, and core technical (business) personnel. The unlocking conditions are based on 2015. The net profit growth rate in 2016-2018 was not less than 15%, 30%, 45%, and the corresponding year-on-year growth rate was not less than 15.0%, 13.0%, and 11.5%.

Investment logic:

1. In the context of hierarchical diagnosis and treatment, the grassroots level will become the main patient entrance and hierarchical diagnosis and treatment has always been a top priority in medical reform. By optimizing the allocation of medical resources, doctors at different levels can form an effective division of labor and collaboration, alleviating the current shortage of medical services to a certain extent. Primary medical institutions include urban community health service centers and clinics, rural township hospitals, village health rooms, etc. The “Guiding Opinions of the General Office of the State Council on Promoting the Construction of a Hierarchical Diagnosis and Treatment System” clearly lays out the goals of system construction during the “13th Five-Year Plan” period. “Two years of gradual improvement, initial results; five years of comprehensive improvement, mature formalization”. By 2020, primary diagnosis at the grassroots level, two-way referral, rapid division of treatment, and hierarchical diagnosis and treatment models linked up and down will be gradually completed. In May of this year, the Guangdong Provincial Government website published the “Guangdong Province's Implementation Plan for Accelerating the Construction of a Hierarchical Diagnosis and Treatment System”, which proposes that by 2017, the rate of visits within counties in the province will increase to around 90%, and that the number of patients treated by primary medical and health institutions will reach more than 65% of the total medical treatment volume; it will push experts and famous doctors to primary medical and health institutions to provide diagnosis and treatment services or set up doctors' studios at the grass-roots level, gradually reducing the proportion of outpatient clinics in large hospitals and encouraging large hospitals to gradually abolish outpatient clinics.

2. The family doctor contract system will become the main form of implementation of primary care, becoming the foundation for hierarchical diagnosis and treatment The family doctor system refers to a service system where general practitioners establish a long-term and stable service relationship with the contracted families to maintain the health of the contracted families throughout the process. In cities, family doctors are mainly community doctors, while in rural areas they are mainly village doctors. There are many benefits: 1) It can solve patients' trust in primary physicians very well; 2) doctors are familiar with the patient's physical condition and are convenient for health management; 3) Family doctors can analyze the condition from an overall perspective rather than a specialist perspective, which is conducive to the diagnosis of certain diseases; 4) Family doctors can provide door-to-door services for inconvenient patients; 5) Family doctors can provide more effective information on referrals.

Judging from international experience, whether it is a country with a national health service system, a social medical insurance system, or a commercial insurance system, most of them establish general practitioner or family doctor systems (including the United States, the United Kingdom, Japan, Germany, Australia, etc.) through the establishment of a general practitioner or family doctor system (including the United States, the United Kingdom, Japan, Germany, Australia, etc.) to jointly provide hierarchical diagnosis and treatment services. Li Bin, director of the National Health and Family Planning Commission, proposed strengthening the team of rural doctors and striving for every family to have a qualified family doctor by 2020.

3. As physicians practice more often, practice freely, and the maturity of auxiliary conditions, opening clinics will become the choice of more doctors. Physicians in more than 90% of countries around the world practice freely, while in China, doctors need to achieve the transformation from “unit person” to “member of society.” Only when doctors' resources are marketed can the price of medical services truly reflect the value of doctors' labor, obtain professional dignity, mobilize their enthusiasm and sense of responsibility to work, and can the problem of scarce resources for doctors be solved fundamentally. In the health-care system of mainstream countries, private clinics run by doctors account for more than 50% of the total number of medical services, but there is a big gap in our country.

Now this situation is changing, including 1) countries and regions introducing policies to encourage qualified physicians to set up individual clinics, such as Guangdong Province allows deputy senior doctors in public hospitals to open private clinics; 2) with the rise of portable medical testing equipment and third-party testing companies, pharmacies will have a more complete range of categories under the trend of outflow of prescriptions; 3) the gradual popularization of management software for assisted physicians, Internet consultation referrals, and telemedicine. First, famous doctors who have accumulated a certain amount of patient resources took the lead in opening clinics from within the system. I learned from various doctor communities that there are more and more doctors with this idea. As various conditions gradually mature, independent practice will become the choice of more doctors.

4. Seize the entrances to primary care in cities and rural areas, and build a closed-loop primary Internet medical company whose traditional main business is a multimedia communication system and smart city solution provider. In 2015, healthcare was determined as the main development direction for the future. In 2014, a digital operating room application and a premium medical exchange platform were launched; in 2015, the company acquired 26.11% of the shares of Henan Xinyihua Medical Technology Co., Ltd., a leading enterprise in the new agricultural cooperation system in Henan Province, signed a strategic cooperation framework agreement with Ebao Connected Medical Information Technology (Beijing) Co., Ltd. and obtained 9.09% of the shares; it announced a private distribution plan in July 2015 (which has now reached the second feedback stage). The proposed capital will not exceed 770 million yuan, of which 660 million will be used for primary care and family doctor service platform construction projects.

The company currently has two major doctors' platforms, urban and rural. The former mainly brings together outstanding doctors with independent entrepreneurs. The company helps them accumulate patients in the early stages, establish personal brands, and independently open clinics after conditions are ripe. The company can invest in shares and obtain revenue share by providing information systems, brand management, etc. to the clinic; the latter performs health management services, including health management before diagnosis and rehabilitation management after diagnosis, by distributing portable medical tests and other equipment to village doctors. At the same time, it can provide services for left-behind elderly and children, so that migrant workers can understand the health status of family members in real time through the app. At the same time, the company obtained medical data resources through Easy Insurance. eInsurance can legally use patient data with support from the Ministry of Human Resources and Social Affairs to serve patients, including outpatient data, inpatient data, doctor data, hospital data, etc. Through data analysis, personal health warnings can be carried out, risk alerts for regional health can be carried out, and through pension insurance data, the income situation of various groups of people can be reflected. At the same time, the company said it will consider acquiring suitable hospitals and cooperating with insurance companies in the future to focus on related strategic opportunities.

5. Familiar with the direction of change and the profit model is clear. The first “buy” rating was given. In the context of hierarchical diagnosis and treatment, primary care will become the main entry point for patients in the future; and family physicians will become the main implementation form of primary care and the foundation of hierarchical diagnosis and treatment; as physicians practice more frequently and freely practice, and the maturity of auxiliary conditions, opening a clinic will become the choice of more doctors. The company has a deep understanding and understanding of the changing trends in the industry: 1) grasping the two major resources of village doctors and doctors with the ability and will to practice freely, thereby obtaining entry points for primary care in rural and urban areas; 2) The profit model is clear. By actively arranging offline resources such as clinics and portable medical testing equipment through fixed increases, it can invest in shares in cities and obtain revenue share by providing information systems, brand management, etc. for clinics. In rural areas, profits can be made through health management before diagnosis and rehabilitation management after diagnosis; 3) After obtaining data from the Ministry of Human Resources and Social Affairs, individual and population health management can be carried out through data analysis; 4) In the later stages, they will actively cooperate with hospitals and insurance companies to open up payers, achieve referrals from higher and lower levels, and achieve a closed loop of grass-roots Internet medical care in hierarchical diagnosis and treatment.

The company's long-term layout of grass-roots Internet medicine is inseparable from the rich project management and implementation experience of the core personnel of the medical business team. Mr. Yuan, the head of Premium Medical Exchange, is a medical doctor at Shanghai Jiaotong University and an orthopedic surgeon at Zhejiang Second Hospital. After his resignation, Mr. Yang, the sales director, has 12 years of sales experience in foreign-funded pharmaceutical companies, and the technical director was the R&D director of Store No. 1. The target of this equity incentive plan includes 6 executives and 153 middle management. After implementation, it will bring new vitality to the company. Without considering the impact of additional issues and mergers and acquisitions, we expect the company's 2016-2018 EPS to be 0.07, 0.11, and 0.17 yuan respectively. The corresponding price-earnings ratio is valued 137, 94, and 60 times, giving it a “buy” rating for the first time.

6. Risk warning. Uncertain risks of non-public offerings of projects; policy risk.