1H24 results are basically in line with our expectations

Hygea Healthcare announced 1H24 results: revenue of 2.382 billion yuan, up 35.4% year on year; adjusted net profit of 0.401 billion yuan, up 15.6% year on year; adjusted net operating profit +38.2% year over year (based on operating income and excluding realized and unrealized income from government subsidies, net financial costs, and financial assets included in profit and loss at fair value). The company's performance is generally in line with our expectations.

Development trends

Medical service capabilities continue to improve, and core business growth is impressive. 1) The company's hospital business is growing steadily:

1H24's hospital business revenue was 2.31 billion yuan, +37.2% year-on-year, including inpatient revenue of 1.49 billion yuan and outpatient revenue of 0.81 billion yuan. 1H24's surgery revenue increased 38.6% year on year, and the number of surgeries reached 46,095, mainly benefiting from the continuous improvement of the company's brand influence and reputation and the continuous introduction of new technology and equipment; 2) Oncology specialist capabilities continue to improve and multidisciplinary comprehensive diagnosis and treatment capabilities continue to be strengthened: 1H24's oncology related business revenue was 1.05 billion yuan, up 31.1% year on year, accounting for 43.9% of total revenue. With the continuous strengthening of the company's oncology MDT construction and the improvement of multidisciplinary diagnosis and treatment capabilities, we believe that there is considerable room for future performance growth; 3) The high-quality medical team helps the company develop in the long term: as of the end of June 2024, the group had 7,587 medical professionals, including 1,220 senior professionals and technicians, an increase of 32 over the end of last year.

Endogenous growth momentum is strong, and epitaxial mergers and acquisitions continue to expand the depth and breadth of the medical network. By the end of June 2024, the Group had 16 hospitals, including 4 level-III hospitals and 12 level-II hospitals. 1) Oncology-related dominant disciplines in existing hospitals continue to be empowered: After Chang'an Hospital joined the group, the Department of Oncology and Intensive Medicine was selected for the Xi'an Municipal Clinical Key Specialist Construction Project, and 7 senior subject leaders were introduced to expand the medical talent team; 2) Construction and mergers and acquisitions progressed steadily, and the operation of mergers and acquisitions improved rapidly: the company's hospital construction progressed smoothly. In July, the company's fifth self-built hospital, Dezhou Haijia, was officially opened, with plans to have 1,000 beds; Wuxi and Changzhou Haijia are progressing in an orderly manner. At the same time, the operating quality of the merger and acquisition hospitals improved rapidly, and the net interest rate of Chang'an Hospital and Yixing Haijia was close to the group average.

Operating indicators have remained stable, and share buybacks continue to increase confidence. The overall gross margin of 1H24 was 31.8%, -0.7ppt; the gross margin of the hospital business was 31.1%, which remained stable year over year; adjusted net profit was 0.401 billion yuan, +15.6% year over year. The company focuses on shareholder returns, and the board of directors approved 0.2 billion yuan for later repurchases. We believe that with the continuous empowerment of the company's standardized management and good control of costs, future profitability is expected to continue to be optimized.

Profit forecasting and valuation

Considering changes in the current overall environment and payment situation, the 2024-25 EPS forecast was lowered by 11.9% and 19.4% to 1.24 yuan and 1.44 yuan. The current price corresponds to 11.6/9.7x P/E for 2024-25. Maintaining an outperforming industry rating, considering the downward shift in the valuation center of the A+H share healthcare sector, the target price was lowered by 36.9% to 25.0 yuan, corresponding to 18.2/15.2x P/E in 2024-25, which has 57.0% upside compared to the present.

risks

Hospital expansion and profits fall short of expectations; changes in health insurance policies and payment conditions; risk of medical emergencies.