Investment advice
New Century Healthcare's revenue increased 7.4% year-on-year in the first half of 2017, falling short of expectations, mainly due to slower than expected endogenous growth in the medical service business. The current stock price corresponds to the 2017 forecast price-earnings ratio of 31 times, which is higher than the overall healthcare service industry. We downgraded the New Century Healthcare rating to neutral and maintained the target price of HK$9.12 for the following reasons:
Revenue from healthcare services increased by only 5.2% year over year. This is due to 1) the volume of outpatient and inpatient services increased by 3.3% and 3.0%, respectively, which led to an increase in revenue of 8.2 million yuan; 2) membership card sales revenue increased by 2.8 million yuan. The medical services business accounted for 91.1% of the company's total revenue.
The gross margin of the medical services business fell 0.7 percentage points year over year. Pediatric business revenue increased 7.1% year over year, gross profit margin was 52.0%, an increase of 1.6 percentage points year over year. However, revenue from the obstetrics and gynecology business fell 3.5% year on year, gross profit margin was 27.4%, down 13.0 percentage points year on year. Pregnant women in China tend to give birth in the year of the monkey, resulting in a high base figure in 2016.
What's the biggest difference between us and the market? The new M&A target may not make a significant contribution to the mother's net profit.
Potential catalysts: 1) expansion of mergers and acquisitions, 2) recovery of obstetrics and gynecology business, 3) increased interests in Beijing New Century Women and Children's Hospital and Beijing New Century Ronghe Clinic.
Profit forecasting and valuation
Not considering mergers and acquisitions, only endogenous growth, the 2017/2018 earnings per share forecast was lowered by 12% and 11% to 0.23/0.27 yuan, an increase of 12%/20% over the previous year. The rating was downgraded to neutral, and the target price was maintained at HK$9.12, corresponding to the predicted price-earnings ratio of 36 times/30 times in 2017 and 2018.
risks
The market for maternal and child health care is fiercely competitive; expansion has been slower than anticipated.