Event Review:

Aoyuan Health Life Group Co., Ltd. (referred to as "Aoyuan Health" or "the Company") announced on April 22 that it plans to acquire an 80% stake in Le Life Wisdom Community Service Group Co., Ltd. (hereinafter referred to as "Le Life", stock code 837249.OC) for 248 million yuan. Based on this, we communicated with the management of the company.

Comments:

Maintain a highly recommended rating with a target price of HK $10.12 per share. Based on the communication with the management, we adjusted the forecast. Our model shows that the acquisition will significantly improve the healthy managed area of the Olympic Park as well as the scale of income and net profit. We give a valuation of HK $10.12 per share, equivalent to 27.8x 2020 PE and 19.4x 2021 PE.

The target of the acquisition is valued at 310 million yuan, corresponding to 16.0 x 2018 PE, the price is relatively reasonable. In 2018, Le Life achieved an income of 417 million yuan and a net profit of 19.34 million yuan. The acquisition is valued at 16.0 x 2018 PE. Leshi is an affiliated property company of Beijing Han shares (000615.SZ). China Aoyuan Group recently acquired a 29.99% stake in Jinghan shares.

The area under management has increased by 150% and is expected to exceed 4600 million square meters by the end of 2020. By the end of 2019, the health management area of the Olympic Garden was 1508.2 million square meters. After the acquisition of Le Life, it will bring 2263 million square meters of managed area, and the company's managed area will directly increase by 150%. Together with other areas under management from the Chinese Olympic Garden and third parties, we estimate that the area under management will reach 4621 million square meters by the end of 2020, achieving the company's original two-year target ahead of schedule.

With the expansion of revenue and profits, the overall profitability was slightly affected. After being incorporated into Le Life, we expect the company's revenue to reach 1.631 billion yuan in 2020, an increase of 15.4% over the pre-acquisition forecast and 81.1% over 2019. The net profit of homing in 2020 is expected to reach 238 million yuan, up 3.5 per cent from the pre-acquisition forecast and 46.6 per cent from the same period in 2019. The profit level of Le Life is lower than that of Olympian Health, which we expect to dilute the company's profit margin in the short term, and the gross profit margin and net profit margin for 2020 will be 2.5 and 1.7 percentage points lower than the previous forecast to 31.5% and 14.6%, respectively.

Risk hint: the integration of the acquisition target failed, and the company's business mainly relied on China's Aoyuan Group.