The operating capacity of the hosting hospital has been improved, leading to an increase in the profits of medical services.
China Resources Phoenix Medical is a private hospital group in China, which mainly provides general hospital services, hospital management services and related supply chain services in China. At the end of 2017, the Group managed and operated a total of 106 medical institutions in 6 provinces and cities. The turnover in 2017 was 1.88 billion, an increase of 23% over the same period last year. Net profit after deducting non-recurrent gains and losses (related to joint medical care) increased by 52 per cent to 420 million yuan compared with the same period last year.
Favorable factors
The target number of operating beds will reach 24000 by 2020, and a management service agreement will be concluded with Taian Hospital to expand the hospital network. In March 2018, the Group announced the signing of an agreement with Taian Development to provide operation and management services for Taian Hospital and charge fixed management fees and performance management fees. Taian Hospital will develop into a second-level general hospital featuring brain and cardiovascular departments, operating about 500 beds. This is the first project exported by the group without investment and pure management, which represents the market's affirmation of the company's management. The company aims to have 24000 operating beds by the end of 2020, 1.3 times more than the current operating capacity of 10391 beds, equivalent to a compound annual growth rate of 32 per cent over the next three years. It is expected that the company will continue to promote such projects to achieve the target of operating beds.
The operation ability of the hosting hospital has been improved, which has led to an increase in the profits of medical services. The group's profit contribution increased by 24% to 608 million in 2017. According to different types of hospitals, the profit contribution rates of for-profit hospitals, hosting hospitals and IOT hospitals are 17.1%, 5.4%, 11.9%, 18.3%, 23.4%, 58.3%, respectively. Among them, the profit contribution rates of hosting hospitals such as Sanjiu brain Department, Huaihe Mine, Xukuang and WISCO hospitals are relatively low. It is mainly due to the short time for acquisition to be integrated into listed companies. In spite of this, the hosting hospital has become the engine of profit growth in 2017, with a profit increase of 53.55 million yuan over 16 years, an increase of 60% over the same period last year, mainly due to the start-up of group procurement organization (GPO) business and supply chain business. We believe that the future profit growth point of the stock hospital still lies in the GPO business and the supply chain business of the holding hospital. First of all, the GPO business is the income collected by the subsidiary of the group as the distributor, and with the expansion of the hospital network, the scale effect will bring the improvement of the bargaining power to the upstream suppliers; secondly, with the continuous integration of the supply chain business and the improvement of medical service efficiency, the profit contribution rate to the group will be improved.
After the withdrawal of the two shareholders, the leading medical service industry has formed a collectivization mechanism dominated by central enterprises, with strong policy adaptability.
In 2017, health care reform policies such as the "two-vote system" and "zero bonus" have been rolled out in most parts of China, but the aggregate medical service income of the group's hospitals reached 6.3 billion yuan, an increase of 7.1% over the same period last year. The number of outpatients / hospitalizations / surgeries increased by 3.2%, 4.1%, 4.4% respectively. Under the health care reform policy, the company is still operating steadily. After the withdrawal of the second shareholder, China Resources holds 36% of the shares as a single major shareholder, forming a collectivization mechanism dominated by central enterprises. As the leader of China's medical service industry, the group has a complete format, participates in the restructuring of public hospitals early, and is rich in restructuring cases, which is helpful for the company to capture the dividends of public hospital restructuring.
Our valuation model shows a target price of HK $11.32. The company's current price corresponds to an 18-year forecast enterprise value multiple (EV/EBITDA) of 15 times, which is relatively undervalued compared with 22 times of Hong Kong-listed medical companies. Our valuation is based on the discounted cash flow method, and the target price is 11.32 yuan, corresponding to the 18-year forecast enterprise value multiple of 18 times. There is 12% room for growth compared to the current price, so we give China Resources Phoenix Medical a "buy" rating.
The financial situation of the group is sound and the quality of profit growth is good. The group has long maintained a low debt level and was in a net cash position at the end of 2014-2016, with an interest-bearing debt ratio of only 3.1 per cent in 2017. And the upper limit of the interest-bearing debt ratio of the group is 40%, and the financing space is huge, which provides a guarantee for the internal operation of the group and the expenditure of extension growth. In 2017, operating activities brought cash flow of 4.595 million yuan, with a net current ratio of about 1.12. The growth of profits was guaranteed by cash.