Low valuation + safety margin + performance flexibility, Global Medical is favored.
Global Healthcare has risen by about 20% since September 26. We believe that there are three main reasons for stock price catalysis: 1) Hong Kong stocks have risen by 30% so far this year, with a price-to-earnings ratio of 13x, which is close to the level of the Shanghai Stock Exchange. Outstanding stocks have temporarily reached high valuations and share prices. Therefore, the market prefers stocks with low valuations, safety margins and growth potential. Global Healthcare has a price-to-earnings ratio of 9x in 2017, and annual net profit growth is stable at 30% compared with the same period last year. Therefore, it has attracted the attention of the mainland market. 2) at the policy level, in August 2017, the State-owned assets Supervision and Administration Commission and other six ministries issued a document requiring the divestiture of hospitals under the jurisdiction of non-medical enterprises by the end of 2018. Global Healthcare, as a state-owned enterprise with medical care as its main business, is expected to acquire a number of high-quality third-class and second-class hospitals in the future (such as aerospace department, military engineering department, etc.), there is a potential policy benefit may further boost the valuation. 3) the company has been listed for two years and is currently in the stage of replacing the old and new shareholders, and Hong Kong shareholders are gradually being replaced by mainland investors: since October, the proportion of shares held by mainland Hong Kong shares has increased from 6% to 7%. As mainland investors gradually grasp the pricing power; 4) the international dry port hospital geological survey operation has been officially launched, which means that the international dry port hospital project has entered the substantive construction stage.
To maintain the forecast of 30% net profit growth for the whole year, accelerating the transformation of investment management business is the key.
At present, the fundamentals of the company have not changed much. 17H1 performance income increased by 32.2% year-on-year to 1.65 billion yuan (RMB), and net profit increased by 48.6% year-on-year to 800 million yuan. However, in the face of factors such as a slowdown in the cyclical recovery in the second half of the year and tight liquidity, we retain the possibility that the net interest margin may peak and fall, so we maintain our forecast for profit growth of 30 per cent to 1.06 billion yuan in 2017. Global relies on the two central enterprises, China General Technology Group and CITIC, and has a close relationship with large hospitals, with low financing costs and generous interest margins, demonstrating its stronger strengths. With the promotion of health care reform measures such as graded diagnosis and treatment, two-vote system and medical couplet, the company still has considerable room for growth in medical financial leasing and investment management, so it maintains confidence in the company's long-term performance growth. Thanks to the high growth of financial leasing business, the company's current valuation of PB and PE is 1.62x and 9.5x respectively, which is significantly higher than that of far East Hongxin (PB 1.12x, PE 7.7x), which is the first in the industry. In the future, we believe that accelerating the transformation to hospital investment management business is a necessary direction to boost performance and valuation.
With the steady progress of hospital investment and management, the supply chain is expected to land in 2018, and the certainty of profit is the focus of attention.
We believe that at present, the focus of the market is whether the hospital investment management business brings obvious profit contribution to the company. With regard to the supply chain business of Xi'an Jiaotong University, the company said that in the process of orderly progress, the procurement of basic facilities (including warehouses, cold chain vehicles, etc.) has been gradually completed, and the supply of consumable drugs has begun. The Sunshine Purchasing platform jointly built by Global and the first affiliated Hospital of Xijiao Jiaotong will end its trial operation at the end of October. However, we believe that at present, the first affiliated Hospital of Xi'an Jiaotong University has more than 700 agents, although the company aims to win all the supply chain revenue by 2017, but there is also a certain degree of difficulty and uncertainty. Therefore, although the supply chain business will generate revenue in 2017, the performance may not be as high as expected, and we expect the supply chain to contribute 10 million yuan in profits in 2017. However, we maintain confidence that the company will basically complete the supply chain management in 2018 and achieve a profit of about 150-200 million yuan.
In terms of hospital management, we expect Handan first Hospital to land on Q4 in 2017. in addition, with the implementation of the policy of divestiture of hospitals in state-owned enterprises, a number of hospitals should cooperate with Global Healthcare after 2018. Compared with Hong Kong stock Shanghai Fosun Pharmaceutical, Phoenix Medical, far East Hongxin cooperative hospitals, most of them are private, and the income is less than 100 million yuan, the global medical cooperation project is of high quality and the income is deterministic, we are optimistic about the development of the company's hospital investment in the future. Profitability is a sign for Hong Kong stock investors to examine whether the company is successful or not, so whether it is the supply chain business or the Handan project, the company still needs to accelerate the implementation of profitability.
Valuation
We use SOTP valuation. In terms of financial leasing business, compared with far East Hongxin, Global Healthcare has a competitive advantage in interest-bearing assets interest rate, net interest margin, leverage ratio and non-performing assets rate. We think it is worth the valuation of 8x PE in 2018. In terms of hospital management business, due to the global "supply chain + PPP"
Business has just begun, so compared to Phoenix's price-to-earnings ratio of around 23x in 2018, we give global a more conservative price-to-earnings ratio of 15x. The EPS for 2017-2019 is HK $0.85, HK $1.01 and HK $1.26. We give the 2018 PE of 9x with a target price of HK $9, maintaining a "buy" rating.
Risk tips: tightening of macro policies, shortage of funds, slow progress of supply chain projects, etc.