Main points of investment

Event

The company released its 2017 interim report yesterday night, with revenue of 1.109 billion yuan and net profit of 165 million yuan, up 43.33% and 15.05% respectively over the same period last year. Revenue growth is mainly due to the increase in income from prepared pieces of traditional Chinese medicine during the period and the addition of Chongzhou second Hospital, which was included in the consolidated statement in the second half of 2016.

With the steady growth of medical business, waiting for hospitals outside the system to inject into listed companies in the first half of the year, the company's medical income was 683 million yuan, an increase of about 25% over the same period last year, accounting for 61.6% of the total revenue in the first half of the year. Part of the increase in medical income is due to the combined impact of the Chongzhou second Hospital in the first half of the year. We predict that the Chongzhou second Hospital will maintain its revenue scale of last year, and the revenue in the first half of the year is expected to be more than 80 million. Excluding the combined impact of the Chongzhou second Hospital, the company's original medical business achieved revenue of about 600 million yuan in the first half of the year, with an endogenous growth rate of about 10%, maintaining steady growth. The acquisition of a 70% stake in Australian imaging company PRP Holdings has completed the delivery procedures and will begin to be consolidated in the second half of the year, which will help to speed up the establishment of an independent domestic imaging center and the introduction of international advanced management and diagnostic technology.

In terms of the acquisition of hospital target reserves, the company has acquired 99.9% equity of Lankao first Hospital Co., Ltd., Lankao Shenyang Hospital Co., Ltd., and Lankao Oriental Hospital Co., Ltd., through the merger and acquisition fund Jingfuhuayue. Through Jingfuhuacai acquired 70.27% of the shares of Siyang County people's Hospital, targeting several high-quality county hospitals above the second level in advance. In addition, in the first half of the year, we signed a "Strategic Cooperation Framework Agreement" with Maanshan Central Hospital Co., Ltd., acquiring no less than 70% of the equity of Maanshan Hospital (third-class comprehensive), and obtaining the opportunity of merger and acquisition of scarce third-class and first-class hospitals. At present, there are sufficient reserves to be injected into hospitals outside the listed company system, waiting for the company's medical service business line to be greatly expanded.

The business of prepared pieces of traditional Chinese medicine benefits from its hospital channels, and it enjoys super-drug welfare treatment with good business maintenance. it is not affected by bidding and lowering drug prices, and the hospital can maintain a sales bonus. The company's traditional Chinese medicine business has benefited from the continuous expansion of its hospital channels. The revenue of the traditional Chinese medicine business in the first half of the year was 294 million yuan, due to a low base in the same period last year, with a high year-on-year growth rate of 451.52%, accounting for 26.59% of total revenue and a gross profit margin of 37.3%. It increased by 12.14 percentage points year-on-year and contributed a net profit of 105 million yuan. The business of prepared slices of traditional Chinese medicine is mainly carried out by Hengkangyuan Pharmaceutical Co., Ltd. Hengkangyuan has increased the investment in prepared slices of traditional Chinese medicine and increased the scale of the company's prepared slices of traditional Chinese medicine. combined with the business line of medical services in the company's hospitals, the business of prepared slices of traditional Chinese medicine has gradually entered the hospitals under the company. achieve substantial growth. Due to the sales through the company system, the intermediate links are less, the business maintenance is better, and the profit space is thick.

The profit of the pharmaceutical business continues to decline due to the impact of the two-vote system.

In the first half of the year, the income of Duyiwei and other pharmaceutical business was 98.93 million yuan, which was basically the same as that of the previous year (down 4.5 percent from the same period last year), but profits were affected by the implementation of the two-vote system, sales costs increased significantly, and borrowing led to an increase in financial expenses. The net profit of Kangxian Duyiwei Biopharmaceutical Co., Ltd. decreased by 50.27% compared with the same period last year, and the net profit in the first half of the year was 17.4 million yuan. We believe that the decline in revenue of the pharmaceutical business has basically hit bottom. At present, the revenue of the pharmaceutical business accounts for only 9% of the total revenue, and the continued decline in profits has little impact on the overall profit of the company.

Profit forecast and valuation

The company's main business is divided into (pharmaceutical) industry and medical services. On the industrial side, the series of single-minded drugs has continued to decline in the past two years, giving the company a growth rate of 0,5 and 10 per cent in 2017-2019; the business of prepared slices of traditional Chinese medicine assumes a growth rate slightly higher than that of the industry at a high base of 2016, with an average annual growth rate of 15 per cent from 2017 to 2019; and other businesses such as health food and daily chemical are basically the same, giving growth of 5 per cent a year. We estimate that from 2017 to 2019, industrial business revenue will be 10.9, 12.2 and 1.37 billion yuan, respectively, an increase of 11.8%, 13.1% and 13.2% over the same period last year. In terms of medical service business, the purchase of major assets of the second Chongzhou Hospital has been completed, and the West Jiangxi Cancer Hospital officially opened in August last year. Regardless of future mergers and acquisitions of other hospitals, we predict that the internal income of existing hospitals from 2017 to 2019 will be 15.5, 19.4 and 2.33 billion yuan, with growth rates of 30%, 25% and 20%, respectively. The total operating income of the merger of the two businesses in 2017-2019 is 26.4\ 31.6\ 3.71 billion yuan. We predict that in 2017-2019, the net profit of shareholders vested in the listed company is 4.7 billion yuan, the reference share capital is 1.865 billion shares, and the EPS is 0.26 PE 0.36 yuan respectively. The current stock price corresponds to the current stock price, which is twice that of 47-39-34 in 2017-2019. The PE (TTM) of Shenwan second-tier medical service industry is about 102x, and the PE-Band fluctuation range of Hengkang Medical in the past 3 years is 50-70 times. The current valuation is at the lower edge of the range, comprehensively considering the company's continued hospital extension mergers and acquisitions in the future, and maintaining the "buy" rating.

Risk hint

Medical malpractice, price fluctuation of prepared pieces of traditional Chinese medicine, hospital acquisition progress and integration effect are not as expected.