In the first half of the year, the company achieved operating income/gross profit/net profit of RMB 31.95/16.45/RMB 812 million (same below), an increase of 52.5%/24.0%/10.4% respectively. Financial leasing and consulting and technology achieved growth of 26.2% and 7.6% respectively. State-owned hospital acquisition revenue was 660 million yuan, and net profit was 25.56 million yuan, with a net profit margin of 3.8%. The financial leasing business has exceeded our previous expectations. State-owned hospitals have successfully merged, and the operating conditions are good. The current valuation is attractive, and the purchase rating is good.
Report summary
Financial leasing growth exceeded expectations, net interest spreads increased 26.2% to $1,883 million, and gross profit increased 24.0% to $992 million. Interest-bearing assets increased 14.4% from the end of 2018 to 50.7 billion yuan. Compared to 2018 as a whole, net interest spread increased 18 basis points to 4.28%, and net interest spread increased 22 basis points to 3.45%, mainly due to an increase in the average return on interest-bearing assets by 19 basis points to 8.14%, and the average cost of interest-bearing debt falling by 3 basis points. The company's financing costs have improved markedly since this year, and we believe that net interest spreads and net interest spreads will remain stable in the second half of the year.
State-owned enterprise hospitals were successfully merged. The operating situation is good. Due to the different progress in merging of hospitals, the consolidated revenue of state-owned enterprise hospitals was 665 million yuan during the period, and the total actual revenue of hospitals was 963 million yuan, with a consolidation ratio of 69%. All of them will be consolidated in the second half of the year. A total of 4,193 beds were listed, accounting for 64.5% of the beds previously disclosed by the company as of March of this year (about 6588 beds). We expect other hospitals to join in the second half of the year, and achieve full-year consolidation next year.
It also shows that the overall operation of the hospital is good, with an average annual income of 460,000 yuan per bed, an EBITDA rate of 10.0%, and a net profit margin of 3.8%. During the period, state-owned hospitals signed 1 new contract with a third-tier hospital and 13 level-II hospitals, with a total of more than 5,400 new beds signed. In the future, large-scale management will be gradually realized, operational efficiency will be improved, and hospital groups with advantages in different disciplines will be built through measures such as resource export, management support, and improvement of assessment mechanisms.
Investment advice: We used the SOTP method to value traditional businesses such as financial leasing at HK$7.9 per share (corresponding to 7 times PE in 2019), and hospital investment management business at HK$1.12 per share (corresponding to 30 times PE in 2019). The target price was raised from HK$8.6 to HK$9.03 to buy the rating. Other than the 6,588 state-owned hospital beds that have already been disclosed, the company has yet to disclose the operation of more than 5,000 new beds, so we have not included them in the financial model, so there is still room for improvement in actual revenue/profit.
Risk warning: The slowdown in economic or industry growth has reduced demand for financial leasing and increased bad debts; financing costs have risen; and the progress of improving hospital operations has fallen short of expectations.
