Xinhua Medical's 2016 performance was lower than expected.
Xinhua Medical announced its 2016 results: operating income was 8.364 billion yuan, up 10.72% over the same period last year; net profit attributed to the parent company was 35 million yuan, down 87.67% from the same period last year, corresponding to earnings per share of 0.09 yuan. At the same time, the company announced its results for the first quarter of 2017. 1Q2017's operating income was 2.108 billion yuan, an increase of 18.69% over the same period last year, and the net profit attributed to the parent company was 44 million yuan, an increase of 2.8% over the same period last year.
Trend of development
Goodwill impairment is a drag on performance: in 2016, the company reported a total of 143 million yuan in goodwill impairment to two subsidiaries, Yuanyue in Shanghai and Yingde in Chengdu. As the domestic GMP transformation was basically completed in 2015, the orders of pharmaceutical equipment companies declined significantly, and the performance of the two companies was affected, so the goodwill impairment was included.
At present, the company is in a strategic transition period of development: in the past few years, the company has achieved rapid development through extension expansion, but now it seems that the overall business line of the company has aged. The pharmaceutical equipment and hospital equipment where the main income is located are facing greater competition, and the prosperity of the industry is gradually declining. The company is also actively adjusting its development strategy. At present, the company has set up three major business departments: in vitro Diagnostic products Division, Medical Services Division, and Kidney Health Services Division. The follow-up core development point is in medical consumables and medical services, which is in line with the development direction of the industry. But at present, the company's business structure is in a period of transition, and the decline in performance is the pain of the transition period.
Rapid expansion of hemodialysis business: the company's board of directors examined and passed the "Bill on Investment in Hemodialysis Industry" and planned to invest 132 million yuan to establish hemodialysis centers in Shandong, Henan, Sichuan, Hunan, Hubei and other provinces. At the same time, combined with the investment in medical service business, the company will establish kidney disease specialist hospitals as flagship stores of hemodialysis centers in key prefectural and municipal cities, build hemodialysis centers in the surrounding areas, and open up the hemodialysis market.
We cut our earnings per share forecast for 2017 by 4% from 0.66 yuan to 0.63 yuan. The earnings per share forecast for 2018 will be cut by 1% from 0.73 yuan to 0.72 yuan.
Valuation and suggestion
At present, the company's stock price corresponds to the company's 2017 / 2018 P / A / E / 31X/27X. Taking into account the increased competition in the industry, we maintain the recommended rating, but lower the target price by 19.35% to 25.00 yuan, which is 28.27% upside from the current share price. The target price corresponds to the 2017 Placer E for 2018 40X/35X.
The risk of impairment of goodwill.