Incidents:

On October 16, 2024, the company issued an announcement relating to the acquisition. The listed company plans to acquire 100% of the shares of Chongqing Xinmileage Medical Management Co., Ltd. (hereinafter referred to as “Chongqing Xinmileage”) from Beijing Xinmileage Health Industry Group Co., Ltd. (the controlling shareholder actually controlled) at a purchase price of RMB 0.32 billion.

The core business entities subject to the acquisition were 4 hospitals in Chongqing, and the purchase price was reasonable and fair.

The predecessor of Chongqing Xinmileage, which was the target of the acquisition, was Chongqing Gimpo Medical Industry Investment Co., Ltd., which has been consolidated and acquired by the controlling shareholders of listed companies since 2021. In 2023, Chongqing Xinmileage's revenue was 0.315 billion yuan, net profit excluding supply chain was 1.21 million yuan, and net profit including supply chain was 4.05 million yuan; from January to July 2024, Chongqing Xinmileage's revenue was 0.204 billion yuan, net profit excluding supply chain was 7.43 million yuan, and net profit including supply chain was 9.99 million yuan. The acquisition targets 12 subsidiaries, of which the core business entities are Chongqing Xinmileage Jinyi Hospital Co., Ltd. (“Jinyi Hospital”), Chongqing Xinmileage Shengjing Hospital Co., Ltd. (“Shengjing Hospital”), Chongqing Xinmileage Bai'an Hospital Co., Ltd. (“Bai'an Hospital”), and Chongqing Xinmileage Kanghua Hospital Co., Ltd. (“Kanghua Hospital”). The operating income of the above 4 hospitals in 2023 was 0.064 billion yuan, 0.069 billion yuan, 0.049 billion yuan, 0.041 billion yuan; operating income from January to July 2024 was 0.04 billion yuan, 0.045 billion yuan, 0.032 billion yuan, and 0.027 billion yuan, respectively. Judging from the PB valuation, as of July 2024, the total asset book value of Chongqing Xinmileage was 0.289 billion yuan, and the net asset book value was 0.242 billion yuan. The acquisition premium was relatively low, and the PB valuation was about 1.32 times; judging from the PS valuation, according to the company's official account, based on the industry characteristics of the hospital's growth curve, the PS valuation of this acquisition was about 1 times, which is more reasonable compared to the same industry. We believe that this acquisition is an effective complement to the listed companies' medical service network in the southwest region, and will directly enhance the listed company's performance, and the acquisition price is reasonable and fair.

Build a regional medical institution group, and the asset injection of controlling shareholders launched the “first shot”.

Referring to the company's official account, Chongqing Xinmileage has more than 1,000 beds. After the acquisition was completed, they collaborated with medical institutions such as Chongzhou No. 2 Hospital under the listed company, and the total number of beds in Sichuan and Chongqing reached a scale of nearly 2,000. According to company estimates, Chongqing's new mileage revenue will continue to grow in double digits over the next 5 years, and the group plans to build the Chongqing region into a 0.8-1 billion yuan regional medical group over the next 3 years. According to the investor exchange records announced in June 2024, the controlling shareholder of the company manages nearly 30 level-II and above hospitals across the country, with a total number of beds reaching 0.02 million, which is about twice the asset size of listed companies. Within 5 years after the completion of the company restructuring in June 2022, it is planned to give priority to injecting profitable medical assets into listed companies through self-financing, merger and acquisition funds, merger and acquisition loans, and stock issuance, etc., on the premise of completing the profitable restructuring of hospitals and meeting the requirements of the regulatory authorities.

We believe that the acquisition of Chongqing's new milestone has launched the “first shot” of asset injection for controlling shareholders. With the introduction of policy dividends such as “Opinions on Deepening the M&A and Restructuring Market Reform of Listed Companies”, capital market activity has increased markedly, and the financing environment has improved marginally. It is expected that high-quality medical assets from controlling shareholders will be injected at an accelerated pace, continue to improve the medical service network layout of listed companies, and enhance the performance of listed companies.

Investment advice:

Without considering the Chongqing New Mileage Index, we expect the company's revenue from 2024 to 2026 to be 4.01 billion yuan, 4.399 billion yuan, 4.829 billion yuan, and net profit to mother 0.122 billion yuan, 0.224 billion yuan, and 0.3 billion yuan, respectively. Considering that equity incentive amortization expenses affect the company's apparent performance, referring to H1 in 2024, we assume that the full year of 2024 will be around 0.11 billion, and from this, we estimate that the company's operating net profit for the full year of 2024 is about 0.23 billion yuan. Considering that with the injection of high-quality medical assets by controlling shareholders, listed companies will have high growth potential. If given 50 times PE in 2024, a target price of 3.37 yuan for 6 months will be given a buy-A investment rating.

Risk warning: Controlling shareholders' asset injections fall short of expectations; changes in the capital market financing environment; health insurance payment reform policy risks; risk of collecting and reducing prices in the pharmaceutical sector.