The current situation of the company
Last week, we visited Beijing New Century Children's Hospital and communicated with the management in Beijing.
We believe that: 1) the market potential of private paediatric services is huge. 2) Pediatrics has higher barriers to entry and stronger anti-risk ability than other specialties.
Comment
The profitability of women's and children's hospitals will be further improved in the new century. In 2016, the hospital began to turn a profit (the estimated net profit margin was about 15%), mainly due to: 1) the recovery of the obstetrics and gynaecology business (accounting for 51% of the hospital's income in 2016), and 2) the rational allocation of paediatric resources by management. The hospital's net profit margin is expected to exceed 20% in 2017, and the increase in the hospital's net profit margin will also make a significant contribution to the company's net profit growth. In addition, the company will also actively dispatch services with higher unit costs to the Children's Hospital in the new century to ensure its steady growth. In the Beijing area, the company also plans to open a hospital, some clinics and a telemedicine diagnosis center to meet the market demand in Beijing.
Replicable business models lay a solid foundation for expansion. After more than 10 years of experience, the company has the ability to systematically and efficiently complete the establishment of new medical institutions. In 2015, the company began providing hospital consulting services (which accounted for 6 per cent of total revenue in 2016), promoting PPP project experience and exploring expansion opportunities in second-tier cities. Among the hospitals currently providing management consulting services, Qingdao New Century Women's and Children's Hospital plans to open in 2017 to provide gynaecology, obstetrics and pediatrics services, with 121 beds designed. Already opened are Tianjin Heping New Century Women's and Children's Hospital (operational in 2013), Chengdu New Century Women's and Children's Hospital (operational in 2014) and Suzhou New Century Children's Hospital (operational in 2015).
Valuation proposal
The company's current share price corresponds to 25 times 2017 earnings and 22 times 2018 earnings. Maintain recommended ratings and earnings forecasts, consider a move up the valuation hub, and raise the target price by 4% to HK $9.12.
Risk.
The competition in the medical market for women and children is fierce.