The company maintained steady growth in the first half of 2018. The company's revenue in the first half of the year was 2,095 million yuan, up 26.7% year on year; net profit was 733 million yuan, up 26.7% year on year. In various business segments, financial leasing, industry equipment and financing consulting, department upgrades, and hospital investment management achieved revenue of 1,550 million yuan, 430 million yuan, 1,083 million yuan, and 507 million yuan respectively, up 26.0%, 22.0%, 28.2%, and 129.0% over the previous year.
Interest-bearing assets grew steadily, and net interest spreads were basically the same as 17H2, reaching 1.50 billion yuan and 800 million yuan in revenue and gross profit of the financial leasing business, respectively, up 26.0% and 22.4% year-on-year. From the end of 2017, average interest-bearing assets increased 26.0% or $7.90 billion to $38.22 billion, and interest-bearing liabilities increased 24.8%, or $6.06 billion to $30.47 billion. Net interest spread and net interest spread decreased slightly by 0.01ppt and 0.06ppt compared to 17H2, to 4.26% and 3.33%, respectively. In an environment where domestic financing costs are rising, the company has kept the cost ratio stable through strategies such as increasing the proportion of corporate bonds, direct financing, foreign currency financing, and immediate financing. However, in order to control risk, the company will adopt a more careful customer selection strategy, and customers will have strong bargaining power. As a result, the profit margins of the leasing business will be under some pressure. We believe that net interest spreads and net interest spreads will decrease slightly in the second half of the year and next year.
The hospital investment management business achieved progress. Contracts were signed with Xi'an First Affiliated Hospital and Handan Hospital in August, marking substantial progress in the hospital's investment management business. The supply chain business of the First Affiliated Hospital of Xi'an already contributed 57 million in revenue and 4.06 million gross profit in 2018H1. We expect to be able to take over 6% and 40% of the supply chain business in 18-19, respectively. The cooperation of Handan First Hospital is progressing smoothly. We expect the company to take over 30% of its supply chain business in 2019 and charge a service fee of 5% of the total revenue of Handan First Hospital. We expect that in 2018-2020, the hospital investment management business will achieve revenue of 114 million, 997 million yuan, and 1,999 million yuan, and gross profit of 9 million, 147 million yuan, and 233 million yuan respectively.
It is expected that the acquisition of state-owned enterprises and the divestment of hospitals will be implemented. According to the requirements of the State Assets Administration Commission, the divestment reform of state-owned enterprises operating medical institutions will basically be completed by the end of 2018. According to management, hospitals that meet certain operating conditions have a total of 3-4 million beds. We assume that the company will acquire 10,000 of these beds. If we estimate the annual revenue of 400-500,000 single beds and a net profit margin of 4-5%, it will contribute 4 to 5 billion dollars in revenue and 16—250 million in net profit. On September 14, the company successfully reached a cooperation agreement with Yantai Seaport Hospital, holding (65% of the shares), a 500-bed level-II hospital, marking the company's initial progress in the state-owned hospital acquisition business.
Investment advice: We value traditional businesses such as financial leasing, industry financing consulting, and department upgrades using the SOTP method. Traditional businesses such as financial leasing, industry financing consulting, and department upgrades are valued at 7 times PE of 2019 net profit, and hospital investment management business is valued at 20 times PE. Corresponding to the stock price of HK$8.6, there is room for 47% increase from the current price. We have yet to incorporate the state-owned hospital merger and acquisition business into the financial model. If it progresses smoothly, there will be a lot of room for valuation improvement.
Risk warning: The slowdown in economic or industry growth has reduced demand for financial leasing and increased bad debts; financing costs have risen; supply chain business takeover has fallen short of expectations.