Recent situation of the company
Hagia Medical announced on May 26, 2021 that it plans to acquire a 99% stake in Guangji Hospital in Hezhou, Guangxi Province for no more than 641.6 million yuan. Haijiya announced its intention to acquire a tertiary general hospital in southern China on January 25, 2021. This acquisition announcement is the official landing of the previous intention.
Comment
The business of the subject matter to be acquired is in good condition. Hezhou Guangji Hospital is a private for-profit third-level general hospital, including orthopaedics, nephrology, urology, oncology, emergency department and so on. Since its establishment, the hospital has established a good reputation in the local area. By the end of 2020, the number of registered beds in the hospital was 548. In 2020, the number of outpatients was about 300000, and the number of hospitalizations was about 30, 000. From 2019 to 2020, the hospital income was 375 million yuan and 362 million yuan respectively, the net profit was 12.546 million yuan and 18.422 million yuan, and the corresponding net interest rate was 3. 35% and 5.08%. Due to the existence of audit-sex adjustment, the actual net profit and net interest rate were higher than the disclosed value, and the corresponding acquisition consideration was reasonable. Part of the consideration for the acquisition will be paid for by loans, and banks will provide loans with a total principal of up to 272 million yuan at an annual interest rate of 4.3 per cent.
There is a strong demand for tumors in Hezhou area, and the supply gap brings opportunities for development. Hezhou area is densely populated, with a registered population of 2.48 million by the end of 2019, and it is located at the junction of Guangdong, Hunan and Guangxi provinces. The transportation is convenient and can cover a large number of people in the surrounding areas, bringing exuberant medical demand. At the same time, there is a high incidence of nasopharyngeal carcinoma in Guangdong, and radiotherapy is the first choice for the treatment of nasopharyngeal carcinoma, which further aggravates the urgent need for oncology treatment (especially radiotherapy). However, at present, the oncology medical resources in Hezhou and its surrounding areas are scarce, the oncology departments of major hospitals are not strong departments, and the absolute number and per capita ownership of radiotherapy equipment such as linear accelerators in the city are on the low side, resulting in a serious imbalance between supply and demand.
The acquisition is expected to strengthen the layout of South China. According to the company's acquisition announcement, Hezhou Guangji Hospital has sufficient land resources for further construction, and after the acquisition, the company will actively introduce Hagia's superior multidisciplinary oncology diagnosis and treatment services. and through fine management output to improve the hospital's operating efficiency and profit quality. We believe that the company is expected to firmly grasp the development opportunity brought by the tumor medical supply gap, rapidly increase its local market share, and achieve sustained high performance growth. From a medium-and long-term point of view, we believe that the company is expected to quickly establish influence in South China with the help of Hezhou Guangji Hospital, laying a solid foundation for the company to form a network layout in South China in the future.
Valuation proposal
Taking into account the acceleration of the company's extension mergers and acquisitions, we raised the EPS forecast for 2021-2022 by 2.5%. 9.7% to 0.68 yuan and 1.02 yuan respectively, corresponding to an increase of 147.1% and 50.4% respectively over the same period last year. To maintain the outperform industry rating, taking into account the recent upward valuation of the sector, we raised our target price by 13.0% to HK $86.8 (based on DCF valuation), which is 13.3% higher than the current share price.
Risk
Hospital expansion and profits fall short of expectations; changes in health insurance policy; risk of medical emergencies.