We are optimistic that the company's profit growth in '21 will reach 57% year-on-year, mainly due to the release of IOT asset risks, as well as post-pandemic recovery

We believe that China Resources Healthcare is expected to use its state-owned enterprise background and China Resources Group's support to become a beneficiary stock of the 14th Five-Year Plan

We switched the valuation to the end of '21, raised the target price to HK$6.8, and raised the rating from neutral to buying, based on the risk returns attracted by the company, and potential policy catalysts

IOT risk release completed

Although the final plan of Yanhua Hospital has not yet been determined, we expect that the main risks from IOT (investment/operation/handover) have been released: 1) The company's main IOT asset, Jingmei Hospital (accounting for 28% of the overall EBIT for FY19, accounting for about 60% of IOT EBIT), the new IOT agreement came into effect in January 2020, reducing the risk of the original IOT model and basically maintaining the financial terms of the original model; 2) After the outbreak of the Yanhua Hospital IOT (18% overall EBIT for FY19) issue in the first quarter of '18, the company's current valuation It is already attractive; 3) The merger of state-owned enterprise hospitals has made the company's host hospitals (accounting for 46% of the overall EBIT in '21, and the compound annual growth rate of EBIT in the 18-21 fiscal year reached 15%) to offset the decline in EBIT caused by Yanhua IOT. Therefore, we believe that the current market has reflected all the negative factors of IOT, and that market concerns about IOT that have been going on for more than a year may come to an end.

Potential Beneficiary Stocks of the 14th Five-Year Plan

According to Document No. 134 of 17, China Resources Group, as one of the six designated enterprises belonging to the State Assets Administration Commission, played an important role in the 2017-20 state-owned enterprise hospital divestment reform. China Resources Health has signed a strategic agreement with Liaoning Healthcare Industry Group, which has more than 10,000 beds. According to the “14th Five-Year Plan” plan proposal issued on November 3, the Chinese government will speed up the expansion of high-quality medical resources and a balanced regional layout, and speed up the construction of a hierarchical diagnosis and treatment system. We expect China Resources Group to continue to play a key role at the forefront of this reform, bringing long-term growth opportunities and creating synergies to the company with its state-owned enterprise background and strong national business layout (including 161 medical institutions with more than 23,000 beds, 13 of which are tertiary hospitals).

Move up to buying, focus on policy catalysts

As the company's hospitals have gradually returned to normal in the third quarter, we raised our profit forecast for fiscal year 20/21 by 26%/20%, respectively. The valuation base period rolled to the end of 2021, and the target price based on the classification plus total valuation method was raised from HK$5.8 to HK$6.8, meaning there is room for 28% growth. As a potential beneficiary stock of the 14th Five-Year Plan, we think the company's current risk/return is attractive (13x/12x price-earnings ratio for fiscal year 21/22, plus reduced IOT asset risk). Upgraded from neutral to buy rating.