Event

The company resumes trading nearly one month after suspension, during which the company announces the receipt of the CSRC's "notice of closure" and the announcement that the actual controller receives the notice of administrative penalty in advance, and in view of the minor violations committed by the company, no administrative penalty shall be imposed and the case shall be closed, the risk of delisting and suspension of listing of the company shall be lifted. At the same time, the company successively announced that it intends to acquire 70% of PRPDiagnostic Imaging Pty Ltd through Hengkang Medical Investment (Australia), a wholly-owned subsidiary, at a cost of nearly 1.7 billion yuan (RMB), and signed a "Strategic Cooperation Framework Agreement" with Maanshan Central Hospital Co., Ltd., which stipulates that after the completion of the restructuring, Hengkang Medical intends to transfer not less than 70% of the shares held by shareholders of Maanshan Hospital (Sanjia Comprehensive) of Maanshan Hospital.

Alarm lifted, unfavorable factors affecting the operation and development of the company

The case, which lasted for more than a year, was finally closed with the result of the CSRC's "minor violations and no administrative penalty". At the same time, the company's long-term delisting and suspension of listing risk was lifted. We believe that the unfavorable factors affecting the company's operation and development are basically eliminated, and the re-opening of the company's refinancing approval channel is conducive to the company's follow-up hospital mergers and acquisitions and refinancing administrative examination and approval.

Acquire scarce top three general hospitals and establish the leading position of domestic hospitals in medical service.

At present, there are many restrictions on the restructuring and listing of public hospitals in China, and it is necessary to achieve policy breakthroughs in the aspects of personnel, ownership, operation and so on. In the development of hospital medical services, the company insists on self-construction and acquisition at the same time, taking hospitals at or above the county level as the target of acquisition, the difficulty of acquisition is relatively low, and the county-level central hospital is the first choice for medical treatment in the county, and the source of patients is guaranteed. In recent years, it has acquired WA third Hospital, Xuyi Hospital, Liaoyu Hospital, Ganxi Hospital, and the purchase of major assets of the second Chongzhou Hospital has been basically completed, and it has also reached a framework agreement on appraisal and cooperation with Lankao County people's Hospital. At present, the company has formed a holding company of 8 second-level or above comprehensive (specialist) hospitals, with more than 9000 approved beds, and contributed 1.193 billion yuan in revenue to medical services in 2016. This time, the company signed a "Strategic Cooperation Framework Agreement" with Maanshan Central Hospital Co., Ltd., which stipulates that after the completion of the restructuring, Hengkang Medical intends to transfer not less than 70% of the shares held by the shareholders of Maanshan Hospital (three comprehensive). The first acquisition opportunity of a scarce third-class first-class hospital, establishing the leading position of domestic hospital medical service.

Acquisition of Australian medical imaging companies to consolidate the company's third-party medical imaging business

In terms of medical imaging, after Shanghai Renying Medical Imaging was established in August last year, Renying and Aotai Medical, an imaging equipment company, set up a joint venture "Hengkang Aotai Medical Imaging" (holding 60%) in May this year to make imaging services and equipment complementary. The company plans to acquire 70% of PRP Diagnostic Imaging Pty Ltd through its wholly-owned subsidiary Hengkang Medical Investment (Australia) at a cost of nearly 1.7 billion yuan (RMB), introduce the medical resources of foreign high-quality imaging companies, learn excellent operation and management experience, and continue to consolidate the company's third-party medical imaging business. The profit situation of the target company PRP is good, with a net profit of 183 million yuan (RMB) in fiscal year 2016. The EBITDA multiple of the company's acquisition of PRP is only 10.99 times. Assuming that the acquisition ratio is 70%, it can increase the equity profit and loss of the listed company by about 120 million yuan, and significantly thicken the company's EPS per share (about 0.068 yuan per share in 2016).

Hospital as the core, medicine + medical imaging + doctor group cohesion

The hospital is the core. Centering on hospital resources, the company can not only carry out supply chain services within the hospital group to realize GPO procurement of drugs (consumables) in private hospitals; at the same time, the company can also set up doctors' group and medical imaging center to cut into the telemedicine diagnosis business, and realize the interconnection and sharing of excellent doctor resources and medical imaging diagnosis in its hospital system. We believe that the company's "one core and three wings" big health industry pattern has basically taken shape, that is, hospitals as the core, drugs, imaging and doctors groups as the development wings.

Profit forecast and valuation

The company's main business is divided into (pharmaceutical) industry and medical services. On the industrial side, the series of single-minded drugs has continued to decline in the past two years, giving the company a growth rate of 0,5 and 10 per cent in 2017-2019; the business of prepared slices of traditional Chinese medicine assumes a growth rate slightly higher than that of the industry at a high base of 2016, with an average annual growth rate of 15 per cent from 2017 to 2019; and other businesses such as health food and daily chemical are basically the same, giving growth of 5 per cent a year. We estimate that from 2017 to 2019, industrial business revenue will be 10.9, 12.2 and 1.37 billion yuan, respectively, an increase of 11.8%, 13.1% and 13.2% over the same period last year. In terms of medical service business, the purchase of major assets of the second Chongzhou Hospital has been completed, and the West Jiangxi Cancer Hospital officially opened in August last year. Regardless of future mergers and acquisitions of other hospitals, we predict that the internal income of existing hospitals from 2017 to 2019 will be 15.5, 19.4 and 2.33 billion yuan, with growth rates of 30%, 25% and 20%, respectively. The total operating income of the merger of the two businesses in 2017-2019 is 26.4\ 31.6\ 3.71 billion yuan. We predict that in 2017-2019, the net profit of shareholders vested in the listed company is 4.7 billion yuan, the reference share capital is 1.865 billion shares, and the EPS is 0.26 PE 0.36 yuan respectively. The current stock price corresponds to the current stock price, which is twice that of 46-39-33 in 2017-2019. The PE (TTM) of Shenwan secondary medical service industry is about 76 times, and the historical PE-Band fluctuation range of Hengkang Medical in the past 3 years is 50-70 times. The current valuation is at the lower edge of the range, comprehensively considering the company's continued hospital extension mergers and acquisitions in the future, and maintaining the "buy" rating.

Risk hint

Medical malpractice, price fluctuation of prepared pieces of traditional Chinese medicine, hospital acquisition progress and integration effect are not as expected.