Performance is in line with expectations, financial leasing is still the main force
Global Healthcare announced its 2017 results, with total revenue of 3.4 billion yuan, an increase of 27% over the same period last year, slightly lower than our expected 3.55 billion yuan. Net profit rose 31.7% year-on-year to 1.15 billion yuan, slightly higher than our expected 1.14 billion yuan. The net interest rate increased from 32.2% in 2016 to 32.8% in 2017. In 2017, the EPS was 0.67 yuan, with a dividend of HK $0.24 per share and a dividend yield of 3.5 per cent. The company's financial leasing income reached 2.46 billion yuan in 2017, an increase of 27% over the same period last year, accounting for 72%, slightly lower than our expected growth rate of 30%. The significant improvement in performance in the first half of 2017 was mainly due to the postponement of some business orders caused by accounting nodes. Interest-bearing assets rose 30% year-on-year to 30.3 billion yuan, with an average yield of 8.14% (compared with 8.4% in 16 years), mainly because the company faced fierce competition in the market, resulting in a decline in the rate of return on interest-bearing assets. The interest-bearing liability is 24.4 billion yuan, with an average cost rate of 4.63% (compared with 5.09% in 16 years), mainly because the company is actively adjusting its cost structure to increase the financing of foreign currency borrowing at a time when domestic financing costs are rising. As a result, the company's cost-side control has made a significant contribution to performance, with the net interest margin reaching an all-time high of 3.51% in 2017 and directly bringing the net interest rate to an all-time high of 32.8%. The leverage ratio was 3.6 in 2017 (compared with 2.96 in 2016) and the non-performing asset ratio was 0.78 per cent (compared with 0.81 per cent in 2016). The two businesses of company consulting and department upgrading generated revenue of 700 million yuan and 180 million yuan respectively, up 17% and 15% from the same period last year.
In the face of tight liquidity, higher interest rates and increasingly fierce competition in the financial leasing market caused by financial deleveraging in the future, we retain the possibility that the company's net interest margin may peak and fall, so we downgrade the growth forecast of the company's financial leasing business in 2018 from the original 27% to 24% to 3.05 billion yuan.
In the long run, with the promotion of health care reform measures such as graded diagnosis and treatment, two-vote system, and medical couplet, the demand of existing hospital customers for equipment and hospital infrastructure will gradually increase, and there is still room for improvement in single passenger volume. Therefore, on the whole, we have confidence in the company's financial leasing business to maintain a relatively stable growth rate. At the same time, we believe that accelerating the transformation to hospital investment management business is a necessary direction to boost performance and valuation.
The projects of Xi'an Jiaotong University and Handan have been postponed again, and the profit of new business has a long way to go, so the forecast has been lowered.
In the annual report, the company split the hospital investment management business with an income of 77.47 million yuan, corresponding to a gross profit of 600000 yuan and a gross profit margin of 8%. We believe that the company's business income mainly comes from the purchase and sales of pharmaceutical consumables generated by Shaanxi Huahong Company and the first affiliated Hospital of Xi'an Jiaotong University in 2017, rather than new business income. At present, the focus of the market is whether the hospital investment management business brings obvious profit contribution to the company, but the progress of the project with Xi'an Jiaotong University and Handan is slower than expected. As for the first affiliated Hospital of Xi'an Jiaotong University, the company completed the testing of the Sunshine Purchasing platform in March 18, but the next step of the supply chain still takes time. In Handan, it was originally expected that the signing of the cooperation contract at the end of the 17th year was also postponed for some reason, and the final examination and approval is now under way, and we expect to finally raise the current profit until at least the fourth quarter of 2018. On the whole, compared with the hospitals cooperated by Shanghai Fosun Pharmaceutical, Phoenix Medical, and far East Hongxin, which are owned by Hong Kong stocks, most of them are private, with an income of less than 100 million yuan, and the global medical cooperation project has a larger income scale and good qualification. we are optimistic about the future development of the company's hospital investment. However, profitability is a sign for Hong Kong stock investors to examine whether Global Healthcare is successful or not, so whether it is the supply chain business or the Handan project, the company still needs to accelerate the implementation of profitability. Based on the judgment of the slowdown in the progress of the two projects, we reduced the contribution of the hospital investment management business to the company to 207 million yuan in 2018.
Valuation: price-to-earnings ratio of 7.3x in 2018, reduced from "buy" to "hold", TP HK $7.4
We use SOTP valuation. In terms of financial leasing, compared with the 7x price-to-earnings ratio of far East Hongxin in 2018, Global maintains a high level of net interest margin. We believe that the company's financial leasing business will maintain 24% growth in 2018 and give the business a valuation of 7.3x PE in 2018. We expect the company's traditional business net profit to contribute 1.38 billion yuan in 2018. In terms of hospital management business, as the global "supply chain + PPP" business has not been profitable for a long time, compared with Phoenix's price-to-earnings ratio of about 22x in 2018, we give global a more conservative price-to-earnings ratio of 15x, and we reduce the profit of hospital investment management business to 600000 yuan in 2018. Due to the small contribution of profits, the contribution of hospital management business to valuation is not obvious. Overall, we expect EPS to be HK $1.02 in 2018, corresponding to a 2018 PE valuation of 7.3x, with a target price lowered from HK $9 to HK $7.4, from "buy" to "hold".
Risk tips: blocked supply chain negotiations, delay in the landing of new projects, the impact of the interest rate increase cycle, and so on.