Events: The company released its three-quarter report for 2023. In the first three quarters of 2023, the company achieved operating income of 2,507 billion yuan (+7.51%); net profit attributable to shareholders of listed companies of 33.42 million yuan (-70.34%); net profit attributable to shareholders of listed companies after deduction of 29.69 million yuan (-48.41%).

In the third quarter of 2023, the company achieved operating income of 900 million yuan (+11.09%); net profit attributable to shareholders of listed companies - 23.59 million yuan (-137.87%); net profit attributable to shareholders of listed companies after deduction - 19.9 million yuan (-222.60%).

Factors such as asset impairment and increased incentive costs affected apparent performance, and the medical service business grew steadily.

We believe that the company's losses in the third quarter were mainly due to: (1) confirmed credit impairment losses of about 31 million yuan; (2) the gross margin for the third quarter was 26.59%, which showed a certain decline compared to the first quarter and the second quarter. Due to stable medical service business trends and cost structures, we believe that changes in gross margin were mainly affected by factors such as changes in the business scope of the pharmaceutical sector. The company's management expenses for the first three quarters of 2023 were 440 million yuan (+44.11%), mainly due to the increase in amortized equity incentive expenses, which had a negative impact on the company's apparent performance. Excluding equity incentive amortization expenses, net profit attributable to shareholders of listed companies from operations in the first three quarters of 2023 (excluding equity incentive amortization expenses) was 140 million yuan (+142.67%), and net profit attributable to shareholders of listed companies from operations in the third quarter (excluding equity incentive amortization expenses) was 24.06 million yuan (+51.33%). The medical service business maintained a steady growth trend. In the first three quarters of 2023, it achieved revenue of 2.113 billion yuan (+5.7%) and medical service business profit of 187 million yuan (+56.9%), of which the medical service business in the third quarter achieved 712 million yuan (+4.83%) and net profit of 38.91 million yuan (+33.44%). We believe that with the increase in the utilization rate of beds in our hospitals and the peak of diagnosis and treatment in the fourth quarter, medical service business revenue and profit margins have maintained good growth throughout the year.

The quality of operations continues to improve, and the construction of new hospitals continues to advance. The net operating cash flow for the first three quarters of 2023 was 179 million yuan (+83.5%), and the balance ratio as of the end of the third quarter was 65.01%, down 3.7 percentage points from the beginning of the year, and the company's operating quality continued to improve. At present, the construction of the company's new hospital area continues to advance. In October 2023, construction of the Xuyi Hengshan Cancer Hospital complex officially began; in terms of other projects, construction of the new hospital area of Chongzhou No. 2 Hospital in Sichuan began in September 2022, with a total construction area of 110,000 square meters and 800 planned beds. It is expected to be put into use by the end of 2024. It is expected to be put into use by the end of 2024. The new hospital area is planned to have 600 beds. It has been approved for cancer hospital license. It is expected that it will be put into use in 2025, as the new hospital area is continuously invested. With the increase in usage and number of beds, there is still plenty of room for growth in the company's medical service business revenue in the long run.

Earnings forecasts and valuations. We expect the company's operating income from 2023 to 2025 to be 3,533 billion yuan, 4.131 billion yuan and 4.933 billion yuan, respectively, with year-on-year growth rates of 12.1%, 16.9% and 19.4% respectively; net profit of the net profit of 72 million yuan, 283 million yuan and 394 million yuan respectively, with year-on-year growth rates of -53.4%, 291.4% and 38.9%, respectively. Based on the closing price of November 14, the corresponding PE was 152.1, 38.9 and 28.0 times, respectively, maintaining the “buy” rating.

Risk warning: The progress of additional issuance/asset injection is lower than expected; the progress of hospital expansion is slowing down, causing revenue growth to fall short of expectations; the rate of increase in bed utilization after the construction of the new hospital area is lower than expected, affecting profitability; risk of medical accidents; the pharmaceutical sector is affected by adverse policies such as collection, etc., and performance is lower than expected.