Incident: The company released its 2023 annual report. In 2023, it achieved operating income of 3,590 billion yuan (+13.59%), net profit attributable to shareholders of listed companies of 30.78 million yuan (-80.29%), and net profit of 29.47 million yuan (-67.83%) after deducting non-return to mother. The first quarter of 2024. The company achieved operating income of 863 million yuan (+9.85%), net profit attributable to shareholders of listed companies of 24.4 million yuan (+12.19%), and net profit of 25.16 million yuan (+22.47%) after deducting net profit not returned to mother? The profitability of the medical service business continues to improve, and the construction of new hospitals is progressing rapidly. In 2023, the company's medical service business achieved revenue of 2,806 billion yuan (+6.21%), gross profit margin of 26.36% (increase of 2.84pct), net profit of 255 million yuan (+47.6%), and net profit margin of 9.0% (increase of 2.5 pct). We believe that the increase in the profitability of the medical service business mainly benefits from: (1) the resumption of growth in diagnosis and treatment volume after the epidemic, the increase in bed usage rate, and the increase in revenue driven scale effects; (2) the company reduced costs and enhanced profitability by improving operating efficiency and carrying out refined management levels. In 2023, many of the company's hospitals led the local medical market share, and achieved market share, effective revenue growth and profitability improvement through various measures. Among them, the revenue of Wafangdian No. 3 Hospital increased 7% year on year, and profit increased 121.61% year on year; the profit of Lankao No. 1 Hospital increased by 43.25% year on year, and profitability increased significantly. The construction of the company's new hospital area progressed rapidly. The 800 beds at Siyang Hospital were officially opened at the end of 2022; construction of the new oncology specialist building at Xuyi County Hospital of Traditional Chinese Medicine began in October 2023, adding 600 additional beds; the 800 beds in the new hospital area of Chongzhou Second Hospital were built according to the standards of the top three hospitals, and it is expected to be put into use by the end of 2024. Lankao No. 1 Hospital is actively preparing to establish an oncology center. The East Campus of Siyang Hospital has been approved for a geriatric hospital license and is actively applying for a cancer hospital license. We believe that as new hospitals are put into use one after another, the number of beds and subject richness in the company's medical service business is expected to increase further, which is expected to drive steady revenue growth, and there is still room for improvement in profitability.

The quality of operations continues to improve, and additional issues are progressing steadily. The company's low apparent profit in 2023 is mainly due to: (1) confirming equity incentive expenses, net profit attributable to shareholders of listed companies in 2023, net profit of $187 million (+104.48%) after deducting non-recurring profit and loss from operations in 2023; (2) confirming credit impairment losses of $112 million. The net cash flow from operating activities in 2023 was 290 million yuan (+8.56%), and the balance ratio at the end of the period was 63.25%, down 5.54 percentage points from the beginning of the year. The company's operating quality continued to improve. At the same time, the company announced that it intends to request the shareholders' meeting to authorize the board of directors to handle the issuance of shares to specific targets through simple procedures; materials have been submitted to the Shenzhen Stock Exchange for targeted additional projects to controlling shareholders. When future increases are completed, it is expected to accelerate matters such as asset injection and epitaxial mergers and acquisitions of controlling shareholders.

Profit forecasting and valuation. We expect the company's revenue from 2024 to 2026 to be 4,006 billion yuan, 4.484 billion yuan, and 5.04 billion yuan, respectively, with year-on-year growth rates of 11.6%, 11.9%, and 11.6% respectively; net profit to mother will be 158 million yuan, 305 million yuan and 445 million yuan respectively, with year-on-year growth rates of 412.2%, 93.7%, and 45.6%, respectively. Based on the closing price on April 29, the corresponding PE will be 53.2, 27.5 and 18.9 times, respectively, maintaining the “buy” rating.

Risk warning: Revenue and profit margins increased less than expected after the completion of the new hospital; the risk of medical accidents; the pharmaceutical sector's revenue fell short of expectations due to factors such as collection.