Incidents:

On August 21, 2024, the company released its 2024 interim report. In the first half of 2024, the company achieved operating income of 1.82 billion yuan, an increase of 12.20% year on year; realized net profit of 0.06 billion yuan, an increase of 5.27% year on year; realized net profit deducted from mother 0.059 billion yuan, an increase of 18.46% year on year. Looking at a single quarter, in 2024, the company achieved operating income of 0.957 billion yuan, a year-on-year increase of 14.41%; realized net profit due to mother 0.036 billion yuan, an increase of 1.02% year on year; realized net profit after deducting non-return to mother 0.034 billion yuan, an increase of 15.40% year on year.

The medical service sector remains stable, and the pharmaceutical sector is actively expanding and increasing.

The company adheres to the “medical+pharmaceutical” two-wheel drive business model: 1) The company's medical service sector remained stable. In 2024, H1 achieved revenue of 1.45 billion yuan, an increase of 2.98% over the previous year. Among them, the subsidiary of Wafangdian Third Hospital achieved revenue of 0.33 billion yuan, the subsidiary of Lankao No. 1 Hospital achieved revenue of 0.221 billion yuan, and the subsidiary of Siyang County People's Hospital achieved revenue of 0.305 billion yuan. 2) The company's pharmaceutical sector is actively expanding and increasing. In 2024, H1 achieved revenue of 0.371 billion yuan, an increase of 72.63% over the previous year. We estimate that mainly due to the development of new business, the company will continue to consolidate its market position in a series of proprietary Chinese medicines with a unique flavor as the core, actively extend the upstream and downstream industrial chain of proprietary Chinese medicines, and promote market development for consumer products such as oral health care.

Gross profit margin is under phased pressure, and net profit from operating income is over 100 million.

In 2024, H1's overall gross margin was 29.06%, a year-on-year decrease of 3.70pct, of which the gross margin for medical services was 24.76%, a year-on-year decrease of 2.64pct. We estimate that it is mainly related to factors such as a relatively high base for the same period last year, adjustments in medical insurance payment policies, and increased talent costs for hospital expansion; the gross margin of the pharmaceutical business was 45.86%, a decrease of 19.93 pcts year on year. We speculate that it is mainly due to the relatively low gross margin of new businesses such as Chinese herbal medicines. In terms of period expenses, in 2024, H1's sales expenses rate was 6.49%, which was basically the same; the management expenses ratio was 14.11%, a decrease of 3.25% year over year. We estimate that it was mainly due to the reduction in equity incentive amortization expenses; the financial expenses ratio was 3.45%, which was basically the same as the previous year. If equity incentive amortization expenses are excluded, H1 will achieve net operating profit of 0.107 billion yuan in 2024.

We attach great importance to discipline construction and improve the quality of medical care.

The company attaches great importance to discipline construction. In the first half of 2024, 6 provincial and municipal key specialties were added. As of June 2024, the company's hospitals had 37 provincial and municipal key specialties and key disciplines. Empowered by the controlling shareholder, the company's hospitals participated in and set up professional committees on traditional Chinese medicine, imaging, oncology, nuclear medicine, geriatrics, gastroenterology, nephrology and blood purification, pediatrics, neurology, cardiology, emergency medicine, orthopedics, general surgery, etc. Through the establishment of professional committees, we enhance communication among hospitals, strengthen discipline construction in hospitals, improve the quality of medical services, and build a medical team with a higher degree of specialization and better technical level.

Endogenous+epitaxial two-wheel drive, focusing on fixed growth.

The company adheres to the “endogenous+epitaxial” two-wheel drive expansion model: 1) In terms of endogenous growth, the company actively expands the construction of the existing hospital area, and the 800 beds in the new Siyang Hospital campus will be officially opened at the end of 2022; construction of the new cancer specialist building of Xuyi Hospital of Traditional Chinese Medicine will begin in October 2023, and is expected to start using the 800 beds in the new hospital area of Chongzhou Second Hospital according to the standards of the top three hospitals; Lankao No. 1 Hospital is actively preparing to build an oncology center; Siyang Hospital East Hospital has been actively applying for a geriatric hospital license Oncology hospital license. 2) In terms of epitaxial growth, according to investor exchange records announced in June 2024, the company's controlling shareholders manage 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 company's restructuring is completed in June 2022, it is planned to inject profitable high-quality medical assets into listed companies as soon as possible through self-financing, merger and acquisition funds, merger and acquisition loans, and stock issuance. Considering that both endogenous expansion and epitaxial mergers and acquisitions require financial support, we recommend focusing on the increase in majority shareholders' approval. In January 2024, the company announced that the targeted issuance plan had submitted application materials to the Shenzhen Stock Exchange. Due to restrictions on the market financing environment, progress was lower than expected. After acceptance by the Shenzhen Stock Exchange, the company is expected to complete the issuance implementation in 6-7 months.

Investment advice:

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 the impact of equity incentive amortization expenses on the company's apparent performance, with reference to 2024 H1, we assume that the full year of 2024 will be around 0.11 billion yuan. From this, we estimate that the company's net operating profit for the full year of 2024 is about 0.23 billion yuan. Considering that the company's endogenous and epitaxial growth is high, if the company is given 30 times PE in 2024, a target price of 2.04 yuan for 6 months will be given a buy-A investment rating.

Risk warning: New pharmaceutical business development falls short of expectations; fixed growth falls short of expectations; majority shareholders' asset injections fall short of expectations; health insurance payment reform policy risks.