The 2017 performance is in line with our expectations. The company's total revenue in 2017 was 1.389 billion yuan, an increase of 12.0% over the same period last year. Core net profit (excluding non-core fees: initial public offering expenses, accrued interest expenses, exchange gains and losses and loss on the sale of plant and equipment) increased by 26.8 per cent year-on-year to 170 million yuan. The company's revenue is 1.9% lower than we expected, and the net profit is 0.2% lower than expected, and the performance is basically in line with our expectations. The company declares a final dividend of 0.16 yuan per share, with a dividend ratio of 34.2%. The special services business continued to be the main driver of the company's growth, with revenue rising 14.4 per cent year-on-year to 134 million yuan, accounting for 9.6 per cent of total revenue. The income from general medical services was 1.124 billion yuan, an increase of 10.9 percent over the same period last year, accounting for 89.6 percent of the total income. The company's new business, hospital management and drug sales revenue accounted for the remaining 0.8%.

Enter the hospital service market in Anhui Province. The company has reached an agreement with the seller to acquire a 57% stake in Anhui Hualin, which operates a second-level rehabilitation hospital, a first-class general hospital, nine rehabilitation centers and a vocational training school in Anhui province. The acquisition price includes (1) 58.66 million yuan to acquire a 49.71% stake in Anhui Hualin, and (2) a capital injection of 20 million yuan at the same time. The profit guarantee of the acquired company is 6 million yuan in 2018, 11 million yuan in 2019 and 15.5 million yuan in 2020, which is valued at 23 times / 12.5 times / 9.9 times forecast earnings in 2018-19-20 respectively. Management believes that the acquisition is an important step into the Anhui hospital market, and the acquired company has one of the best rehabilitation teams in eastern China, which can enhance the company's treatment in the field of rehabilitation in the future. The acquisition is expected to close on March 18 this year. Taking into account the profit guarantee of this acquisition and taking into account the loss of interest income arising from the acquisition, we believe that this acquisition will bring 0.3% 1.8% / 2.5% increase in the company's annual net profit in 2018-19-20.

Zhonglian Cardiovascular Hospital is expected to achieve strong growth. The hospital began operation in March 2017, and according to the management contract, Kanghua will charge 200000 yuan for hospital management services, accounting for 5% of the hospital's total revenue. Kanghua's hospital management business income increased from 1.1 million yuan in 2017 to 3.1 million yuan in 2018. Zhonglian Hospital was included in the scope of health insurance payment in November 2017. the second phase of the hospital is expected to be completed in 2018-19, and the management is optimistic about the hospital's future revenue growth potential.

More mergers and acquisitions are expected in 2018. Anhui Hualin is Kanghua's first major acquisition since it went public in 2016. Considering that the most recent acquisitions are paid for by internal funds, the company still has HK $827 million on its books (93.9 per cent of the amount raised in the listing has not yet been used). Management revealed that they have conducted an in-depth inspection of several hospitals and are expected to make considerable progress in the acquisition of new hospitals in 2018.

Maintain the buy rating with the target price unchanged at HK $14.6. We are still optimistic about Kanghua's sound tertiary hospital business in Dongguan, and believe that the hospital business can maintain steady growth. In addition, we expect that future potential acquisitions will drive the company's revenue and profit growth. Based on the existing business, we expect the company's revenue to grow at a compound annual growth rate of 13.7% in 2017-20, and its core net profit to grow at a compound annual rate of 17.3%. Potential acquisitions will become a new growth point for the company's business in the future. As a result, we maintain our buy rating with a target price of HK $14.6. Our target price corresponds to 20.1 times / 17.1 times forecast earnings for 2018 Compact 19, which is in line with the industry average valuation. However, we believe that the development of new business will be a potential catalyst for the company's share price.