20180823-招商证券_香港_-环球医疗-02666.HK-Solid_1H_results__more_deal_flows_expected_in_2019_8页_1mb

Genertec Universal Medical (2666 HK) - Summary

Core Content

Genertec Universal Medical (2666 HK) reported strong first-half (1H18) results with revenue and adjusted net profit growing by 27% and 35% respectively, slightly ahead of expectations. This growth was driven by robust leasing asset expansion and stable asset yield and borrowing costs. Despite a slight decline in net interest spread (NIS), the company maintained its performance.

The execution of the Xi'an hospital project was delayed, leading to a reduction in the target price (TP) from HK$8.4 to HK$7.9. However, the company still holds a "BUY" rating due to the expected increase in deal flows in 2019 and 2020, particularly due to the ongoing SOE hospital reform. The company is one of the six SOEs primarily involved in healthcare, and the reform is expected to bring significant value through asset transfers.

Main Points

• Strong 1H18 Performance: Revenue and adjusted net profit increased by 27% and 35% respectively, driven by leasing assets growth and stable asset yield and borrowing cost.
• Xi'an Hospital Delay: The delay in the Xi'an hospital project led to a revised TP, but the company's overall outlook remains positive.
• SOE Hospital Reform Momentum: SASAC's policy to spin off SOE hospitals by end-2018 is expected to create more deal opportunities, with some framework agreements likely to be announced by end-2018.
• Potential Value from Asset Transfer: The reform is estimated to transfer "good quality" hospitals with around 90,000 beds, potentially worth RMB2-3bn. The company estimates that obtaining 10,000 beds by 2019-20 could be worth RMB2.9bn.
• Valuation and TP: The SOTP-based TP was revised to HK$7.9, excluding the "option value" of future assets due to uncertainty in transfer pricing.

Key Financials

Shareholding Structure

• China General Technology (Group): 37.7%
• CCP II GP Ltd.: 14.2%
• Hujin: 7.9%
• Free float: 48.1%

Financial Leverage and Performance

• Net gearing (%): Increased from 267% in 2016 to 491% in 2020E, indicating higher leverage.
• EBITDA and EBIT: Adjusted EBITDA and EBIT are projected to grow steadily, with EBITDA reaching RMB2,241 mn in 2019E and RMB2,393 mn in 2020E.
• Profitability Metrics:
  • Gross margin: 64.2% in 2016 to 54.3% in 2020E.
  • Adjusted net profit margin: 32.4% in 2016 to 28.7% in 2020E.
  • ROE (year end): 13.3% in 2016 to 16.0% in 2020E.
  • ROA: 3.0% in 2016 to 2.4% in 2020E.

Strategic Opportunities

• Leasing Business: The leasing business is valued at 1.3x 2019E book value, with a projected equity value of RMB12,061 mn.
• Hospital Management: The enterprise value of hospital management is estimated at RMB782 mn, with a 50% probability of success.
• Deal Flows: The company is expected to benefit from the SOE hospital reform, which could result in significant asset transfers and revenue growth.

Analyst Ratings

• Industry Rating: OVERWEIGHT (expect the sector to outperform the market over the next 12 months)
• Company Rating: BUY (expect the stock to generate 10%+ return over the next 12 months)

Risk and Uncertainty

• The "option value" of future asset transfers from the SOE hospital reform is not included in the TP due to uncertainty in the transfer price.
• The company's TP does not reflect the potential upside from these assets, which could be significant.

Conclusion

Genertec Universal Medical is positioned to benefit from the ongoing SOE hospital reform, which is expected to bring more deal flows and significant value through asset transfers. Despite the delay in the Xi'an hospital project, the company's strong 1H18 results and the potential for future growth continue to support the "BUY" rating. The company's financial performance and strategic positioning make it one of the best risk/reward plays in the healthcare sector.