Benefiting from the historic market-based opportunities of the medical industry, China has entered an aging society, and residents' demand for medical treatment will grow over a long period of time. China's per capita medical resources and health expenses have continued to grow rapidly for many years, yet there is still a clear gap with developed countries. The introduction of medical reform policies such as national hierarchical diagnosis and treatment and zero drug surcharges has caused hospitals at all levels to face the redistribution of patient traffic and medical resources, and the upgrading and transformation has already begun. The company's entry into the top three hospitals in 2016 is an example. This is demand at the top of the pyramid in the field of medical services. The market space is huge, and there are few suppliers. Starting in the top three, the hospital investment management business pioneered the domestic pioneering concept and direction of Global Healthcare in hospital investment management business, which is different from Phoenix Healthcare (1515.HK) and Far East Hongxin (3360.HK). The company does not acquire hospitals or change the nature of hospitals. Instead, it helps the top three hospitals carry out renovation and expansion projects as partners and participants. This concept takes into account the interests and demands of many parties, and it is hoped that a long-term cooperative relationship will be established with the hospital and the government where the hospital is located. Global Healthcare has a unique advantage in cooperating with the top three hospitals based on its background as a central enterprise of General Technology Group, the majority shareholder, and its expertise in the medical field. The company signed a contract with the First Affiliated Hospital of Xi'an Jiaotong University in 2016, and the International Dry Port Hospital has now completed the bidding process. Cooperation projects between the company and two other top three hospitals — the Second Affiliated Hospital of Zheng University and the First Hospital of Handan — continue to advance. The high starting point and high positioning have left room for imagination in this part of the company's business. The core advantages of focus+professionalism, central enterprise background+market-based incentives and remuneration The company has firmly focused on the medical industry and built a high-quality professional medical service team. There are more than 600 consultants, and more than 45% have master's degrees. The company's core strengths are the financing advantages of central enterprises plus market-based incentives and remuneration mechanisms. The company has now established a comprehensive medical service system that includes services such as medical finance, medical consulting, department upgrades, and hospital investment management, etc., and the synergy between various sectors is obvious. Among them are financial leasing businesses that are developing steadily, as well as hospital investment management, consulting, and department upgrade businesses with huge potential, which have both stability and vitality. Regarding the increase in interest rate levels and the zero addition of hospital drugs, we believe that the market's two biases against companies will be corrected: 1. Higher interest rate levels or are not favorable to the company's financing business (the company's central enterprise identity financing advantage is far superior to that of competitors, followed by non-financial business - consulting and management business already accounts for 30-40% of the company's profits. After the supply chain business ratio is further increased, the non-financial business will account for 50% of profits); 2. The market believes that zero drug surcharges will adversely affect the company. On the contrary, the supply chain business is an important transformation path for future hospitals after seeking zero bonuses, and the cooperative supply chain model between companies and hospitals is the biggest beneficiary. Investment recommendations We forecast that in 2017-2018, the company's revenue growth rates will be 30% and 54%, net profit growth rates of 35% and 25% respectively, and the corresponding EPS will be HK$0.69 and HK$0.86, respectively. Based on our confidence in the company's strength and business model development prospects, we gave the company a “buy” rating. Using the segmented valuation method, we conservatively estimated the company's reasonable market value at RMB 15 billion, corresponding to a reasonable valuation of HK$9.9, with a 60% increase from the closing price of HK$6.17 on August 11. The reasonable valuations corresponding to 2017-2019 PE were 12.7, 10.1, and 8.9 times, respectively. Risk warning 1. There have been adverse changes in medical reform and PPP policies; 2. The company's hospital investment management business has not progressed as expected; 3. The rapid rise in interest rates has caused the company's costs to rise too fast.