Sima Ophthalmology is a leading ophthalmic service provider in Hong Kong and Guangdong, committed to using advanced treatment technologies to provide services for patients with complex ophthalmic diseases. Ophthalmology market is a good vertical segmentation of the medical market, based on its strong pricing power, high capital intensity and relatively limited competition within the private market. Frost Sullivan estimates that China's private eye service market will reach 33 billion yuan in 2021, with a compound annual growth rate of 18% from 2016 to 2022.
We expect the company's adjusted net profit to grow at a compound annual rate of 44% in 2017-19, which is mainly driven by the steady growth of Hong Kong business and the rapid development of Beijing and Shenzhen. We cover it for the first time and give it a neutral rating with a target price of HK $5.2. mainly considering that the stock price has risen to four times its listing price.
Deeply ploughing the difficult and complicated diseases of ophthalmology to realize the value orientation of differentiation
Founded in Hong Kong, Sima (with a market share of 4.7 per cent of Hong Kong's private ophthalmic services market of HK $3.5 billion) has become one of the leading private ophthalmic service providers in Guangdong, accounting for 5.4 per cent of the province's market size of 686 million yuan. The company mainly provides the treatment of difficult and complicated diseases in ophthalmology through differential competition. It is worth noting that Sima's revenue from Chinese mainland's eye diseases accounted for 80% of the company's total Chinese mainland revenue in 2016, compared with 50-60% of competitors'. The company has a strong team of international ophthalmologists, keeps abreast of the latest medical developments, implements a visionary management model, has an in-depth understanding of the industry, and adopts consistent standards that follow international best practices, thus standing out from the competition. Replicating successful models in other parts of China, with a strong network in Hong Kong and an important layout in Shenzhen, the company plans to further expand its service network, opening a hospital in Beijing in the fourth quarter of 17, a new surgery centre in Mong Kok, Hong Kong, and a satellite clinic in Kwun Tong in the first quarter of 18 years. The company also plans to build or acquire ophthalmic hospitals, centers and clinics in first-tier cities and Guangdong-Hong Kong-Macau Greater Bay Area cities in China.
Estimated analysis we expect income to grow at a compound annual rate of 28 per cent in 2017-18-19, while adjusted net profit is 44 per cent. Our target price is HK $5.20, based on a price-to-earnings ratio of 44 times 2018 excluding cash, equivalent to 1 times PEG and a 15 per cent discount to industry leader Al (300015 CH, unrated).
Investment summary
Sima Ophthalmology is one of the leading ophthalmic service providers in Hong Kong and Shenzhen.
Although both markets are relatively fragmented, with Sima accounting for about 5% of each market, the company prides itself on using advanced treatment technologies to provide services to patients with complex eye diseases (such as the treatment of corneal and external eye diseases, glaucoma, vitreoretinal diseases, eye plastic surgery and orbital diseases). This makes the company's gross profit margin in Chinese mainland and the share of revenue from eye diseases higher than those of its peers. In Hong Kong, the company's professionalism enables it to continue to attract talent and build brand awareness. Therefore, the contribution of income growth and per capita income of ophthalmologists is higher than that of their peers.
Frost Sullivan estimates that China's private eye services market will be 14 billion yuan in 2016 and will reach 33 billion yuan in 2021, with a compound annual growth rate of 18 percent from 2016 to 2022. We continue to be optimistic about the huge demand in the market for high-end private ophthalmic services. The growth is driven by rising prevalence of eye diseases in China, an aging population, increased demand for high-quality private services and scientific and technological progress.
Based on our previous research on several vertical market segments of health care in China, we have identified ophthalmology and rehabilitation as one of the best investment areas. based on its strong pricing power (there is a large amount of out-of-pocket medical expenditure), high capital intensity (a large amount of equipment investment is needed to deal with the shortage of ophthalmologists) and relatively limited competition within the private market (public medical institutions still dominate the market).
With its strong network in Hong Kong and its important position in Shenzhen, the company plans to further expand its service network, opening a hospital in Beijing in the fourth quarter of 17 and a new surgery center in Mong Kok, Hong Kong at the same time. A satellite clinic was opened in Kwun Tong in the first quarter of 18 years. The company also plans to build or acquire ophthalmic hospitals, centers and clinics in first-tier cities and Guangdong-Hong Kong-Macau Greater Bay Area in China.
We expect annual income in 2017-18-19 to be HK $291 million / 439 million / 520 million respectively, representing a compound annual growth rate of 28%. We forecast that the adjusted net profit for 2017-18-19 will be HK $68 million / 108 million / 134 million respectively, with a compound annual growth rate of 43 per cent. Considering that Sima's current share price has quadrupled from its listing price of HK $2.90 in mid-January, we cover the neutral rating for the first time, with a target price of HK $5.20, based on a price-to-earnings ratio of 44 times 2018 excluding cash, which also reflects a 15 per cent discount to Eye (300015 CH, unrated). At the same time, we also list the valuation results of the corresponding discounted cash flow method as a reference.
