Incidents:

On August 27, 2024, the company released its 2024 interim report. In the first half of 2024, the company achieved operating income of 2.42 billion yuan, a year-on-year increase of 9.53%; realized net profit to mother of 0.174 billion yuan, a year-on-year loss reduction of 21.89%; and realized net profit deducted from non-mother of 0.139 billion yuan, a year-on-year reduction of 45.50%. Looking at a single quarter, the company achieved operating income of 1.248 billion yuan in 2024, up 8.42% year on year, up 6.36% from Q1 in 2024; realized net profit due to mother -0.069 billion yuan, reducing loss by 53.43% year on year; realized net profit deducted from non-mother - 0.049 billion yuan, reducing loss by 67.63% year on year.

Its hospitals have continued to climb, and their business volume and revenue volume have increased markedly.

In 2024, H1's total number of outpatient emergency services was 1.2513 million, up 17.15% year on year, and 0.1003 million inpatient services, up 16.76% year on year. Judging from the business split, the company's two core hospitals have continued to climb. Both business volume and revenue volume have increased significantly, the profitability of high-tech hospitals has increased dramatically, and the net loss of the central hospital has narrowed.

1) High-tech Hospital: In 2024, H1 Xi'an Gaoxin Hospital achieved revenue of 0.772 billion yuan, an increase of 8.69% over the previous year; achieved net profit of 49.46 million yuan, an increase of 43.63% over the previous year. In terms of business volume, the hospital's outpatient emergency service volume was 0.5616 million, up 3.32% year on year; the number of inpatient services was 0.0324 million, up 6.23% year on year; the highest number of outpatient emergency services per day was 3,872, with the highest number of hospitalized patients.

2) Central Hospital: In 2024, H1 Xi'an International Medical Center Hospital (including the North Hospital) achieved operating income of 1.634 billion yuan, a year-on-year increase of 14.68%; realized net profit of 78.27 million yuan, a year-on-year reduction of 49.29%. In terms of business volume, the hospital's outpatient emergency services were 0.6897 million, an increase of 31.48%; the number of inpatient services was 0.0679 million, an increase of 22.56% over the previous year; the highest number of outpatient emergency services per day was 5,095, with a maximum of 3,949 patients per day.

Operating indicators continue to improve, and it is expected to turn a loss into a profit.

In 2024, H1's profitability increased dramatically, with overall gross margin reaching 9.49%, up 1.73 pct year on year; deducted non-net interest rate reached (-5.74%), up 5.79 pct year on year. We believe that the increase in the company's profitability is mainly due to the fact that fixed costs are no longer increasing in the process of increasing revenue volume. In 2024, H1's management expense ratio was 11.52%, a year-on-year decrease of 1.56pct; the sales expense ratio was 0.47%, a year-on-year decrease of 0.18pct; and the financial expenses ratio was 3.66%, a decrease of 1.37pct year-on-year. Looking at quarterly operating trends, the company's overall gross margin in Q1 2024 and Q2 2024 was 7.87% and 11.04% respectively, net loss to mother was 0.105 billion yuan and 0.69 million yuan respectively, after deducting non-net loss was 0.09 billion yuan and 49 million yuan respectively, and operating cash flow was 0.219 billion yuan and 306 million yuan respectively. We believe that as revenue volume continues to rise, the company's gross margin increases month-on-month, net loss narrows month-on-month, operating cash flow increases month-on-month, and operating indicators continue to improve, and the company is expected to turn losses into profits as a whole.

Investment advice:

We expect the company's revenue from 2024 to 2026 to be 5.457 billion yuan, 6.281 billion yuan, 7.073 billion yuan, and net profit to mother of -0.061 billion yuan, 0.195 billion yuan, and 0.37 billion yuan, respectively. Considering that the company is currently in a critical period of turning losses into profits, we used the PS valuation method to give the company a buy-A investment rating. The target price for 6 months is 4.83 yuan, which is equivalent to 2 times the PS valuation in 2024.

Risk warning: health insurance payment reform risk; risk of medical malpractice; hospital climbing progress falls short of expectations; progress in reversing losses falls short of expectations.