View
2
Download
0
Category
Preview:
Citation preview
Tue, 05 Jan 2016
Equi ty Research Healthcare service sector Healthcare service / China
Healthy China to scale new heights. BUY service provider and specialty device sector Initiate on China Healthcare service and medical device sector to reap (1) ageing
population in China, 2) adoption of two child policy and (3) positive 13th
Five Year
Plan on Healthy China
Buy Healthcare Service Provider and Medical Devices
Top pick Harmonicare (1509 HK, BUY, TP HK$8.70), Chunli Medical (1858 HK,
BUY, TP HK$20.0) and Lifetech Scientific (1302 HK, BUY, TP HK$2.00)
Ageing population stimulates healthcare service demand The 60+ age population in
China is expected to increase from 209mn in 2015 to 244mn/488mn in 2020/2050E and
from 15% of total population to 18%/37%, respectively. As aged 65+ usually spend 3 times
more than working ages person in healthcare spending, we expect China healthcare
market grow from RMB4.1tn in 2014 to RMB8.1tn in 2020E, representing 12.0% CAGR.
Cardiology and orthopedics medical device is expected to benefit from the increasing
healthcare spending driven by ageing population. We expect Chunli Medical (1858 HK) to
reap the joint implant market share in China from overseas players via its CFDA certified
ceramic hip joint products and increase its market share from 3.1% in FY13 to 4.6%/4.9%
in FY15/16E and deliver a 29% earnings CAGR from FY15E to FY18E. We also like
LifeTech (1302 HK) which is likely to reap the left atrial appendage closure (LAAC) device
market from 2016E onward to drive 79% earnings CAGR from FY15E to FY18E.
Liberalization of two child policy benefits gynecological, obstetrics and pediatrics
services providers. Thanks to liberalization of two child policy and increasing Chinese
disposal income per capita, total obstetrics and gynecology market in China is expected to
achieve 21.5% CAGR from RMB201bn in FY15E to RMB360bn in FY18E which driving
23.4% CAGR for China obstetric specialty hospitals revenue from RMB22bn in FY15E to
RMB40bn in 2018E. Harmonicare (1509 HK) is likely to benefit from the rapid market
growth and we expect Harmonic to achieve 36% earnings CAGR from FY15E to FY18E.
Positive 13th
FYP on healthcare service to boost M&A activities We see increasing
M&A activities in non-public hospitals and medical and geriatric care services to reap the
Healthy China 13th
FYP. We keep a close eye on Town Health (3886 HK, NR), HXHC
(8143 HK, NR), BJMH (2389 HK, NR) and CSIH (286 HK, NR),
Top picks We initiate BUY on Harmonicare (1509 HK, TP HK$8.70) based on 35x FY16E,
6% premium to peers. We also initiate BUY on Chunli Medical (1858 HK, TP HK$20.0)
based on 15x FY16E PE, 16% discount to peers, and Lifetech Scientific (1302 HK, TP HK$
2.00) based on 20x FY17E PE to reap the demands for high-end orthopedic and
congenital heart occlude medical devices driven by ageing population in China.
Yuji Fung
+852 2135 0236
yuji.fung@oriental-patron.com.hk
Sector Report
Exhibit 1 . : OP Healthcare service coverage Company Stock code Rating Target Price Closed Price Potential Upside
Harmonicare 1509 HK BUY HK$8.70 HK$6.93 26%
Chunli Medical 1858 HK BUY HK$20.00 HK$14.00 43%
Lifetech Scientific 1302 HK BUY HK$2.00 HK$1.37 46%
Source: Bloomberg, OP Research
Tue, 05 Jan 2016
Healthcare services
Page 2 of 57
Table of Contents
Ageing population stimulates healthcare services demand .......................................................................... 3
Liberalization of two child policy benefits gynecology, obstetrics and pediatrics service providers ...............12
Positive 13th FYP on healthcare service to boost M&A activities ..................................................................16
Harmonicare (1509 HK) – Riding on Gold Monkey ......................................................................................26
Investment risks ..........................................................................................................................................33
Financial Summary– Harmonicare (1509 HK) .............................................................................................35
Chunli Medical (1858 HK) – Market share gain via ceramic femoral head prosthesis ..................................37
Investment risks ..........................................................................................................................................43
Financial Summary– Chunli Medical (1858 HK) ..........................................................................................45
Lifetech Scientific (1302 HK) –Triple leap ....................................................................................................47
Investment risks ..........................................................................................................................................52
Financial Summary– Lifetech Scientific (1302 HK) ......................................................................................54
Tue, 05 Jan 2016
Healthcare services
Page 3 of 57
208.6 244.4 357.7
487.8 12.2%13.4%
16.4%
21.4%
15.2%
17.5%
25.3%
36.5%
10%
20%
30%
40%
0
400
800
1,200
1,600
2010
2012
2014
2016E
2018E
2020E
2022E
2024E
2026E
2028E
2030E
2032E
2034E
2036E
2038E
2040E
2042E
2044E
2046E
2048E
2050E
Population Aged 60+, total Population below Aged 60+, total
Ages 60+ % of tot population (World) Ages 60+ % of tot population (China)
(mn) (%)
Ageing population stimulates healthcare services demand
Increasing proportion of Chinese ageing population
According to World Bank, the population aged 60+ in China is 209mn in 2015,
accounting for 15% of total population, we forecast the population aged 60+ will
increase to 244mn/488mn, representing 18%/37% of total population in
2020/2050E as compared to13%/21% of world proportion of population aged
60+.
Exhibit 2.: Ageing population in China from 2011 to 2050E
Source: World Bank, OP Research
Ageing population spends more on healthcare expenses
According to Centers for Medicare & Medicaid Service (CMS), US national
healthcare expenditure grew 5.3% yoy to US$3.0tn in 2014 or US$9,523 per
capita, and accounted for 17.5% of GDP versus China national healthcare
expenditure grew 23.5% yoy to US$630bn in 2014 or US$460 per capita, and
accounted for 6.0% of GDP in 2014 which is still far behind US’s 17.5%.
Exhibit 3.: Healthcare expenditure comparison between US, Japan, UK and China in 2013
Source: WHO, World Bank, OP research
370
3,600
3,965
9,150
China
UK
Japan
US
Per capita health expenditure (US$)
510
230
505
2,870
China
UK
Japan
US
Total health expenditure (US$ bn) Healthcare expenditure as % of GDP
17.1%
10.3%
9.1%
5.6%
Proportion of China population
aged 60+ will increase from 15%
in 2015 to 18%/37% in 2020/2050E,
higher than world average of
13%/21%.
Healthcare expenditure in China
accounts for 5.6% GDP in 2013,
far behind high-disposal income
countries’ 7.7%
Tue, 05 Jan 2016
Healthcare services
Page 4 of 57
Exhibit 4.: Healthcare Expenditure as % of GDP, 2013
Source: World Bank, OP Research
More importantly, per person healthcare spending for the 65 and older population
was US$18,424 in US and 3 times spending per working-age person (US$6,125)
in 2010, according to CMS. And the healthcare spending is expected to increase
along with age increase from 65 onwards and peak at age 96 from Kaiser Family
Foundation analysis of the US Medicare claim.
Exhibit 5.: Peak of health expenditure per capita in USA 2011
Source: Kaiser Family Foundation, OP Research
As the population of 60+ aged as total population in China is expected to increase
from 15% in 2015 to 18%/37% in 2020/2050E, we expect the healthcare
expenditure in China to grow from RMB4.1tn in 2014 to RMB8.1tn in 2020E,
representing a 12.0% CAGR during 2014 to 2020E and we expect the health
expenditure as percentage of GDP to rise from 6.0% in 2014 to 8.1% in 2020E.
17.1%
11.7%11.3%
10.9%10.3%
9.7% 9.4% 9.1%
7.2%
5.6% 5.1%
4.6%4.0% 4.0%
3.1%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
UnitedStates
France Germany Canada Japan NewZealand
Australia UnitedKingdom
Korea,Rep.
China Egypt,Arab Rep.
Singapore Malaysia India Indonesia
High disposal- income countries = 7.7%
Middle disposal-income countries = 6.8%
0
1,000
2,000
3,000
4,000
5,000
65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 101 103 105
Hospice Inpatient
Skilled nursing facility (SNF) Part B prociders/ services/ supplies
Home health Outpatient
Age 104
Age 89
Age 83
Age 83 Age 96
Age 98
(US$)
Healthcare spending per person
increases along with age increase,
and peak at age 96. Aged 65+
usually spend 3 times more than
working ages person in
healthcare spending
Health expenditure in China is
expected to increase from
RMB4.1tn in 2014 to RMB8.1tn in
2020E, representing 12.0% CAGR
Tue, 05 Jan 2016
Healthcare services
Page 5 of 57
Exhibit 6.: China healthcare expenditure from 2011 to 2020E
Source: WHO Global Health Expenditure Database, World Bank, China Economic Census, OP Research
Ageing population facing severe orthopedic and cardiovascular
threats, leading to a rapid growth of orthopedic and cardiovascular
medical devices
Hypertension is expected to be the most common disease in China in 2015,
affecting 182.7mn people, cardiovascular diseases (CVDs) ranks No. 3 affecting
46.8mn people and Orthopedic and Musculoskeletal diseases rank No.5 affecting
28.1mn people. Ageing population is likely to face more severe orthopedic and
cardiovascular threats, which had the largest number of deaths in 2014,
amounting to 1.96mn deaths. We believe cardiology and orthopedic device
manufacturers will benefit from the ageing population in China for the coming 5
years.
Exhibit 7.: Disease prevalence and number of deaths in China
Disease prevalence (mn people) Deaths in 2014 (people)
Source: National Bureau of Statistics, CFDA, NHFPC, OP Research
3.32 4.10
4.63 5.21
5.85 6.53
7.28 8.09
5.6%
8.1%
0%
2%
4%
6%
8%
10%
0
2
4
6
8
10
2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
China Healthcare Expenditure (RMB tn)
Total Healthcare Expenditure (% of GDP)
5
5.5
6.2
6.3
7.1
7.8
8
9.5
10.3
18.1
22.7
28.1
35
46.8
48.2
182.7
0 50 100 150 200
ESRD
Psychiatric diseases
Ophthalmological disease
Gallbladder disease
Chronic bronchitis
Neurology diseases
Acute gastritis
Cancer
Rheumatoid arthritis
Cerebrovascular diseases
Alimentary system diseases
Musculoskeletal diseases
Respiratory diseases
Cardiovascular diseases
Diabetes
Hypertension
2015E 2008
(mn) 36
63
93
100
172
187
200
226
231
267
337
633
740
1,120
1,960
0 500 1,000 1,500 2,000 2,500
Hepatitis(viral)
Breast Cancer
Urinary/reproductive diseases
Liver diseases
Esophagus cancer
Colorectal cancer
Hypertention
Alimentary system diseases
Diabetes
Stomach cancer
Liver cancer
Myocardial infarction
Lung cancer
Respiratory diseases
Cardiovascular diseases
(000)
Cardiovascular (CVD) ranks No.3
and Orthopedic diseases ranks
No.5 in disease prevalence in
China for 2015E, and CVD caused
most deaths in China for 2014.
Cardiology and orthopedic device
manufactures set to benefit from
the ageing population in China
Tue, 05 Jan 2016
Healthcare services
Page 6 of 57
According to Evaluate MedTech, cardiological devices are expected to be the
second largest medical devices (11.4% worldwide market share) with US$54.2bn
worldwide sales in 2020E, representing 4.4% CAGR from 2014 to 2020E, and
orthopedics medical devices is expected to be the third largest medical devices
(8.8% worldwide market share) with US$42bn worldwide sales, representing
3.2% CAGR from 2014 to 2020E.
Exhibit 8.: WW medtech sales by evaluateMedTech device area: top 15 categories & total market (2014/2020E)
Worldwide sales ($bn) CAGR Wordwide market share Rank
Rank Company 2014 2020 % growth 2014 2020 Chg. (+/-) Chg. (+/-)
1 In vitro diagnostics (IVD) 49.9 67.3 +5.1% 13.3% 14.1% +0.8pp -
2 Cardiology 41.9 54.2 +4.4% 11.2% 11.4% +0.2pp -
3 Orthopedics 34.8 42.0 +3.2% 9.3% 8.8% -0.5pp +1
4 Diagnostic imageing 35.6 40.9 +2.3% 9.5% 8.6% -0.9pp -1
5 Ophthalmics 25.6 33.7 +4.7% 6.8% 7.1% +0.2pp -
6 General & plastic surgery 19.4 24.6 +4.0% 5.2% 5.1% -0.0pp -
7 Drug delivery 18.6 22.3 +3.1% 4.9% 4.7% -0.3pp -
8 Endoscopy 16.3 21.5 +4.8% 4.3% 4.5% +0.2pp -
9 Dental 12.9 16.5 +4.2% 3.4% 3.5% +0.0pp +1
10 Wound management 12.9 15.8 +3.4% 3.4% 3.3% -0.1pp -1
11 Dlabetic care 11.5 14.4 +3.8% 3.1% 3.0% -0.1pp -
12 Nephrology 11.3 13.5 +3.1% 3.0% 2.8% -0.2pp -
13 Ear, Nose & Throat (ENT) 8.5 11.0 +4.3% 2.3% 2.3% +0.0pp +1
14 General hospital & healthcare 8.9 10.9 +3.4% 2.4% 2.3% -0.1pp -1
15 Neurology 6.4 9.5 +6.9% 1.7% 2.0% +0.3pp +1
Top 15 314.4 398.1 +4.0% 83.8% 83.5% -0.5pp -
Other 60.8 79.5 +4.6% 16.2% 16.7% +0.5pp -
Total WW medtech sales 375.2 477.6 +4.1% 100.0% 100.0%
Source: EvaluateMedTech
Exhibit 9.: Top 10 device areas in 2020E, market share & sales growth
(2014-2020E)
Source: EvaluateMedTech, OP Research
0%
2%
4%
6%
8%
10%
12%
14%
16%
2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
% sales growth: CAGR 2014-20
WW
mark
et
sh
are
% i
n 2
020 Diagnostic
imaging Orthopedics
Drug delivery
Wound management
In vitro diagnostics
(IVD)
Cardiology
Ophthalmics
Endoscopy
General & plastic surgery
Dental
Cardiology/orthopedics is
expected to be the second/third
largest medical devices in 2020E
with US$54.2bn/US$42bn
worldwide sales and 4.4%/3.2%
CAGR during 2014 to 2020E,
according to Evaluate MedTech
Tue, 05 Jan 2016
Healthcare services
Page 7 of 57
1,720 2,069 2,447 2,892 3,412 4,029 4,762 5,639 6,645 7,4318,553
2,0742,497
2,9263,376
3,8654,400
4,9825,622
6,3406,967
7,775
2,5843,003
3,4053,824
4,259
4,712
5,181
5,650
6,081
6,735
7,257
1,4971,580
1,635
1,712
1,793
1,875
1,962
2,050
2,137
2,090
2,333
7,8769,149
10,415
11,804
13,330
15,016
16,887
18,961
21,203
23,223
25,918
0
5000
10000
15000
20000
25000
30000
2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Joint Implants Spine Implants Trauma Implants Others Total
(RMB mn)
Chunli Medical (1858 HK) is well positioned to reap this rapid growth
in China's orthopedic implant market
Specifically, the orthopedic implant market in China is expected to achieve 11.7%
CAGR growth from RMB13.3bn in 2014 to RMB25.9mn in 2020E, of which sales
of PRC joint implants experience 16.6% CAGR growth from RMB3.4bn in 2014 to
RMB8.6bn in 2020E, accounted for 33% of orthopedic implant market sales in
China in 2020E as compared to 26% in 2014.
We believe Chunli Medical (CLM) (1858 HK) is well positioned to ride on the
orthopedic medical devices market growth as a leading player in joint prosthesis
products, over 90% of CLM sales in 2014 was generated from joint related
prosthesis products.
We expect CLM to achieve a 50%/26% sales growth in FY15/16E to
RMB202mn/RMB253mn, representing a 4.6%/4.9% market share in China joint
implants market as compared to 3.1% in FY13, thanks to the (1) new product
launch of Ceramic hip joint prosthesis in April 2015 for which CLM is the first
domestic company to secure the CFDA certification and benefit from (2) policy
shift to support “Made in China” as well as long-established relationship with
distributors and hospitals in China.
Exhibit 10.: Sales of orthopedic implant market in PRC from 2010 to 2020E
Source: World Bank, Archives of Internal Medicine, National Institutes of Health, Euromonitor, OP Research
Joint implants market in China is
expected to grow at 16.6% CAGR
from 2014 to 2020E, higher than
the entire orthopedic implant
market’s 11.7% CAGR in same
period.
Contribution of Joint implants
market in China orthopedic
implant market is expected to
increase from 26% in 2014 to 33%
in 2020E
Chunli Medical (CLM) (1858 HK,
BUY) market share in China joint
implant market is expected to
increase from 3.1% in FY13 to
4.6%/4.9% in FY15/FY16E, thanks
to the early bird advantage as the
first domestic player obtained the
ceramic hip joint CFDA
certification and policy shift to
“Made in China”
Tue, 05 Jan 2016
Healthcare services
Page 8 of 57
Cardiovascular diseases (CVDs) – Stroke and connection with Atrial
Fibrillation (AF)
According to WHO, CVDs are the Number 1 cause of death globally and there
are 6 types of CVDs, namely coronary heart disease, stroke, hypertensive heart
disease, inflammatory heart disease, rheumatic heart disease and other forms of
heart diseases. In 2012, 17.5mn people were estimated to have died of CVDs, of
which 7.4mn (42%) were due to coronary heart diseases and 6.7mn (38%) to
stroke.
Exhibit 11.: Global CVDs death breakdown in 2012
Source: WHO, OP Research
Exhibit 12.: Deaths from CVD by ages
Source: WHO
Coronary heart42%
Stroke38%
Hypertensive heart disease
6%
Inflammatory heart disease
3%
Rheumatic heart disease
3%
Others8%
CVDs are the number 1 cause of
death globally and caused 17.5mn
death in 2013, 38% of CVDs death
was due to stroke after 42% from
coronary heart disease
Tue, 05 Jan 2016
Healthcare services
Page 9 of 57
Specifically for stroke, Atrial Fibrillation (AF) is the most common and serious
abnormal heart rhythm that causes AF is when your heart does not beat properly
between 60-100bpm but irregularly between 100-175bpm. AF is more common in
people who are 60 or older and AF is associated with many conditions including
(1) high blood pressure (2) coronary artery disease (3) chronic lung disease (4)
cardiomyopathy (disease of heart muscle that causes heart failure) (5) congenital
heart disease (heart disease present at birth) (6) heart valve disease and (7)
pulmonary embolism (blood clot in lungs). About 15-20% of strokes were due
to AF.
In the presence of AF or an irregular heartbeat, the blood flows inside the left
atrial appendage (LAA), a punch off the left side of the heart, and doesn’t flow out.
This stagnant blood leads to clot formations and these clots can break away and
travel to the brain, causing a stroke.
Exhibit 13.: How Atrial Fibrillation causing a Stroke
Source: European society of cardiology
Exhibit 14.: People with AF are at a greater chance of stroke
Source: Prevention health screenings
For people age 60+, AF is more
common. 15%-20% of strokes
were due to Atrial Fibrillation (AF)
and people with AF are at a
greater chance of stroke
Tue, 05 Jan 2016
Healthcare services
Page 10 of 57
8.3
11.7
6.1
7.2
0
4
8
12
16
2010 2011 2012 2013 2014 2015E2016E2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
China AF Europe AF
(mn)
Left atrial appendage closure (LAAC) is one of the best treatment to
prevent AF induced stroke
According to the Boston Science and World Bank, there are 8.3mn/6.1mn AF
patients in China/Europe in 2015E which is expected to grow to 11.7mn/7.2mn in
2025E, representing 3.5%/1.7% CAGR. Of these, 7.5% to 10% of AF patients
are likely to adopt surgery as an alternative to medication (i.e. for those with
AF in addition to valve or coronary artery disease) while the rest are suitable for
medications (i.e. anticoagulant drug like warfarin) which aim to restore normal
heart rhythm and prevent blood clots.
Exhibit 15.: Atrial Fibrillation (AF) patients in China and Europe
Source: Boston Scientific, World Bank, OP Research
Left atrial appendage closure (LAAC) is an alternative treatment strategy for
blood-thinning medication, especially for the elderly, to reduce the risk of LAA
blood clots from entering the bloodstream, leading to stroke. From a study by
researcher Vivek Y. Reddy, MD, from the electrophysiology center at lcahn
School of Medicine at Mount Sinai, LAAC was more expensive than warfarin in
the 1st year but patients who received LAAC gained more quality adjusted
life-years (QALY). LAAC becomes more cost-effective versus warfarin/novel oral
anticoagulants at 7/5 years and provides an additional 0.506/0.298 life-years and
0.638/0.349 QALY over lifetime compared with warfarin/novel oral anticoagulants.
Exhibit 16.: Watchman LAAC device
Source: Boston Scientific
There are 8.3mn/6.1mn AF
patients in China/European in
2015E and 10% of them are
potential candidate to adopt
surgery as treatment
For elderly, LAAC is an alternative
treatment strategy and is more
cost-effective versus
warfarin/novel oral anticoagulants
at 7/5 years and provides more
quality adjusted life-years
Tue, 05 Jan 2016
Healthcare services
Page 11 of 57
Lifetech Scientific (1302 HK) is one of the four players in left atrial
appendage closure device globally back by Medtronic
Lifetech Scientific (LTS) (1302 HK) is a company focused on cardiac implant
medical devices, including structural heart disease (SHD) products, peripheral
vascular disease (PVD) products, cardiac pacing and electrophysiology. Lifetech
is expected to benefit from the fast growth of cardiovascular patients and
cardiology devices market via its cooperation with Medtronic which is global No. 2
medtech company in terms of sales with 5.4% worldwide market share. Medtronic
is currently the second largest shareholder of LTS with 19% stake.
Exhibit 17.: Medtronic CB’s effect on shareholding structure
Current
outstanding
Assume First Tranche
(Maturity 30/1/2018)
Assume Second Tranche
(Maturity 30/1/2018)
shs (mn) % HK$152mn CB convert at HK$0.475 % HK$2,031mn CB convert at HK$1.00 %
Director Xie Yuehui 782 19.5% 782 18.1% 782 11.7%
Medtronic 760 19.0% 1,080 25.0% 3,431 51.4%
Director Wu Jian Hui 418 10.4% 418 9.7% 418 6.3%
Prosperity (803 HK) 33 0.8% 33 0.8% 33 0.5%
Public 2,008 50.2% 2,008 46.5% 2,008 30.1%
Total 4,000 100.0% 4,320 100.0% 6,671 100.0%
Source: Company, OP Research
LTS plans to launch its LAmbreTM
LAAC product in Europe 1H16 once LTS gets
the CE certification. Currently there are five LAAC products by 4 players in the
LAAC device market, and LAmbreTM
LAAC is believed to be the safest one with
lowest risks, as it can be reused in surgery. We forecast LTS to sell
3000units/10,000units of LAAC in Europe in FY16/17E or 8%/26% market sales,
contributing RMB150mn/RMB500mn revenue, respectively, and accounting for
29%/53% total revenue.
Exhibit 18.: LAAC Products Comparison Table
Products Watchman Amplatzer Cardiac Plug (ACP) Amulet Lambre Larlat
Company Atritech (Boston Scientific Inc) AGA (St. Jude Inc.) AGA (St. Jude Inc.) Lifetech SCI SentreHEART
Registration CE, FDA, CFDA CE CE Waiting CE/CFDA FDA,CE
Size 21,24,27,30,33mm 16-30mm(8 sizes) 16-34mm 16-36mm
Largest size:
W40mm*H20mm*L70
mm
Occlusion of
blood flow Not good Good Good Good Good
Applicable
heart size
Only applicable to long left
atrial
Not applicable to shallow left
atrial All All All
Surgery
security
if the LAAC is too long, it has
pierce risk Safe Safe Safe Safe
Can be reused
in surgery or
not?
No No Yes Yes N/A
Size of
transport
sheathing
14Fr(diameter: 4.7mm) 10-13Fr(diameter: 3-4.3mm) 9-13Fr
(diameter: 3-4.3mm)
8-10Fr
(diameter: 2.7-3.3mm)
12.9Fr
(diameter: 4.3mm)
Thickest Medium Medium Thinnest
Success rate 95% 96% 98% 99.60% -
Source: Left atrial appendage occlusion Review, OP Research
Lifetech Scientific (LTS)
(1302 HK, BUY) target to launch
its LAmbreTM
LAAC device in
Europe in 1H16 and it is the safest
LAAC in the market at the
moment
We forecast LAAC will contribute
RMB150mn/RMB500mn revenue
to LTS in FY16/17E, representing
29%/53% sales
Tue, 05 Jan 2016
Healthcare services
Page 12 of 57
Liberalization of two child policy benefits gynecology, obstetrics and pediatrics service providers Liberalization of two child policy drives obstetrics and pediatrics market with 21.5% CAGR during 2014 to 2017E
On 29 Oct 2015, the Central Committee approved plans to allow all couples to
have two children, which marks the end of one-child policy which has been in
place for 36 years. We expect the impact to be limited in near term and affect
more in middle term. We expect the newborns in China will increase from 17.7mn
in 2015E to 19.1mn in 2018E, and total obstetrics and gynecology market will
experience 21.5% CAGR from RMB200.7bn in 2015E to RMB360.3bn in 2018E.
Exhibit 19.: Newborns and Obstetrics & Gynecology market in China
Source: National Bureau of Statistics of China, iResearch, Frost & Sullivan Report
Increasing disposal income coupled with proportionate increase of
private hospitals to drive specialty hospitals’ revenue growth
Chinese disposal income per capital nearly double from RMB12,472 in 2010 to
RMB20,167 in 2014 and it is expected to further increase by 40% to RMB28,234
in 2018E. Increasing disposal income drives people’s demand for higher standard,
more professional and better healthcare services, thus we see rapid increases for
private specialty hospitals visits/revenue from 5.4mn/RMB3.4bn in 2010 to
11.5mn/RMB8.2bn in 2014, and they are expected to further increase to
24.5mn/RMB21.1bn in 2018E.
The proportion of private specialty hospitals visits/revenue of total specialty
hospitals visits/revenue are expected to increase from 26%/39% in 2010 to
36%/45% in 2014 and further increase to 47%/52% by 2018E.
200.7
360.3
17.7 19.1
0
100
200
300
400
0
10
20
30
40
2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E
Total Obstetrics & Gynecology mkt (RHS) New born in China (LHS)
(RMB bn)(mn)
Total obstetrics and gynecology
market in China is expected to
achieve 21.5% CAGR from
RMB201bn in FY15E to
RMB360bn in FY18E
Increasing Chinese disposal
income stimulates people’s
demand for private specialty
hospital services, private hospital
visits/revenue is expected to
growth from 11.5mn/RMB8.2bn in
2014 to 24.5mn/RMB21.1bn in
2018E
Tue, 05 Jan 2016
Healthcare services
Page 13 of 57
5.3 6.4 7.8 8.8 10.2 11.613.7
16.319.3
3.44.3
5.66.4
8.29.8
12.6
16.3
21.1
0
5
10
15
20
25
30
35
40
45
2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
Public Specialty Hospitals Private Specialty Hospitals
(RMB bn)
Exhibit 20.: Disposable income per capital in China
Source: National Bureau of Statistics of the People’s Republic of China, OP Research
Exhibit 21.: China Specialty Hospitals Visits Growth from 2010 to 2018E
Source: Frost & Sullivan, OP Research
Exhibit 22.: China Specialty Hospitals Revenue Growth from 2010 to 2018E
Source: Frost & Sullivan, OP Research
12,472
15,478
17,439 18,311
20,167
24%
13%
5%
10%
0%
10%
20%
30%
0
10,000
20,000
30,000
2010 2011 2012 2013 2014
Disposable income per capita yoy%
(RMB)
Tue, 05 Jan 2016
Healthcare services
Page 14 of 57
Harmonicare (HMNC) (1509 HK) the No. 1 private obstetrics specialty
hospital in China is set to reap the growth
For the obstetrics and gynecology healthcare services market in China, specialty
hospitals’ revenue is expected to increase from RMB21.5bn in 2015E to
RMB40.4bn 2018E with 23.4% CAGR during the same period.
Exhibit 23.: China obstetrics and gynecology healthcare services market
revenue breakdown from 2010 to 2018E
Source: Frost & Sullivan, OP Research
Harmonicare (HMNC) (1509 HK) is the largest private obstetrics and gynecology
specialty hospital group with 13% market share in terms of revenue. We believe
HMNC has well positioned itself to ride on the liberalization of two child policy and
we forecast HMNC’s revenue/net profit to grow at 23%/36% CAGR from
RMB869mn/RMB87mn in FY15E to RMB1,638mn/RMB218mn in FY18E.
Downstream postpartum care services to be a new revenue stream
catalyst on top of the Golden Monkey Year effect in mid-term
As a downstream expansion of obstetrics and gynecology healthcare services,
postpartum care service is catching increasing attention, as more and more
mothers are demanding professional postpartum care with healthy diet and
neonatal care. We forecast the total postpartum services market in China to grow
from RMB11.7bn in 2015E to RMB42.0bn in 2018E, representing a 3-year CAGR
of 53%.
Due to the weak Sheep Year effect, HMNC’s record a 14.2% decline in delivery to
676 times in it BJ hospital in 1H15, while BJ hospital 1H15 revenue was only
down by 5.1% yoy to RMB75.6mn, thanks to increased revenue from postpartum
care services. From our channel check, BJ and SZ hospital postpartum care
services were up RMB10mn level yoy in 1H15 to about ~RMB20mn revenue,
accounting for 16.8% of these two hospitals 1H15 sales which partially offset the
decline in delivery in BJ hospital. HMNC management plans to actively seek M&A
and/or build new postpartum care service centers to diversify its obstetrics
business. We are positive on the move given HMNC’s brand recognition and
economies of scale.
39.1 48.2 59.6 68.4 83.5 96.4 117.2144.3
176.1
35.342.6
52.158.3
71.182.9
99.2
119.4
143.7
8.710.7
13.415.2
18.4
21.5
26.3
32.6
40.4
0
100
200
300
400
2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
Obstetrics and Gynecology Specialty Hospitals
General Hospitals
Maternal and Child Healthcare Institutions
(RMB bn)
China obstetrics specialty
hospitals revenue is expected to
grow from RMB22bn in 2015E to
RMB40bn in 2018E with 23.4%
CAGR
Harmonicare (HMNC) (1509 HK) is
expected to achieve a 36%
earnings CAGR from FY15E to
FY18E
Downstream postpartum care
service market in China is
expected to achieve 53% CAGR
from FY15E to FY18E
HMNC is diversifying its revenue
mix via postpartum care service
to offset weak year effect and
boost growth in mid-to-long term
Tue, 05 Jan 2016
Healthcare services
Page 15 of 57
Exhibit 24.: China Postpartum services market from 2014 to 2018E
Source: National Bureau of Statistics of China, iResearch, OP Research
5,070
11,682
19,929
30,027
41,946
130%
71% 51%
40%
0%
60%
120%
180%
0
10,000
20,000
30,000
40,000
50,000
2014 2015E 2016E 2017E 2018E
Total Postpartum services market yoy%
(RMB mn)
Tue, 05 Jan 2016
Healthcare services
Page 16 of 57
Positive 13th
FYP on healthcare service to boost M&A activities
“Healthy China” raised by 13th Five Year Plan
On 3 November 2015, the 13th Five Year Plan raised the “Healthy China” concept,
indicating that healthcare industry would be promoted as a strategic industry and
given greater emphasis for the next five years, with the government determined
to solve healthcare problems not resolved during the 12th Five Year Plan. The
healthcare industry market is expected to hit RMB8.0tn in 2020. Key points are
highlighted in the Healthy China plan.
Public hospital reforms and greater involvement of social capital in
hospitals. To improve the efficiency of hospitals, key tasks include: 1)
separation of drugs sales from hospital income 2) expansion limitation of
public hospitals 3) encourage social capital to set up private hospitals 4)
promotion of physician’s multi-sited practices
Commercial insurance will be encouraged to relieve the burden of medical
costs
Establishment of a comprehensive medical care system. Encourage
development of primary medical institutions to provide basic health services
and relieve burden of large hospitals.
Healthcare Service Plan Outline for 2015 to 2020 likely benefit
non-public hospital sector M&A and growth
National Health and Family Planning Commission of the People’s Republic of
China (NHFPC) issued Healthcare Service Plan Outline for 2015-20(全國醫療衛
生服務體系規劃綱要) in March 2015. The outline sets healthcare services target
in 2020 with (1) number of beds per thousand residents will increase to 6 in 2020 from 4.55 in 2013, of which number of beds per thousand residents in public hospital/community hospital will increase to 3.3/1.5 in 2020 from 3.04/0.52 in 2013. Number of general physicians per ten thousand residents will increase to 2 in 2020 from 1.07 in 2013. The outline also sets the appropriate size of hospitals, appropriate number of beds of County/Municipal/Province general hospital is 500/800/1000, avoiding the blind expansion of public hospitals.
Exhibit 25.: Guideline for national healthcare service system development
2015-2020
Indicators 2020 goals 2013
Number of beds per thousand residents 6.00 4.55
Hospital 4.80 3.56
-Public hospital 3.30 3.04
. Provincial hospital and above 0.45 0.39
. Municipal hospital 0.90 0.79
. County-level hospital 1.80 1.26
. Other 0.15 0.60
-Community hospital 1.50 0.52
Primary healthcare institutions 1.20 0.99
Appropriate number of beds of county general hospitals 500 -
Appropriate number of beds of municipal general hospitals 800 -
Appropriate number of beds of province general hospitals 1,000 -
Source: The state council of the People’s Republic of China, OP Research
“Healthy China” raised by 13th
FYP encourages involvement of
social capital and establishment
of comprehensive medical care
system. More M&A activates is
expected on HK capital market
Healthcare service plan outline
for 2015-20 states that number of
beds per thousand residents will
increase to 6 in 2020 from 4.55 in
2013
Tue, 05 Jan 2016
Healthcare services
Page 17 of 57
We see an increasing trend towards greater private hospital usage, in terms of
number of hospital and patient visits. The percentage of outpatients/inpatients
visits of private hospitals increased from 8%/8% in 2010 to 10%/12% in 2013 and
we expect it will further increase to 25%/30% in 2020E. Besides, the percentage
of private hospitals also increase from 32% in 2010 to 48% in 2014, and is
expected to further increase to 60% in 2020E. Overall, healthcare services
spending in China is expected to increase from RMB3.2tn in 2015E to RMB5.7tn
in 2018E with 20.5% CAGR, according to Frost & Sullivan.
Exhibit 26.: China's healthcare services spending
Source: Frost & Sullivan, OP Research
860 1,028 1,245 1,529 1,775 2,104
2,515 3,044
3,685
4,460
1,186 1,373
1,647 1,999
2,315 2,731
3,250
3,917
4,720
5,687
0
1,000
2,000
3,000
4,000
5,000
6,000
2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
Hospitals Primary Healthcare Clinics
Others Total healthcare services spending
(RMB bn)
Improving private or non-public
hospital usage is expected in 13th
FYP, benefiting the non-public
hospital service play and
stimulate M&As activities to
acquire quality hospital services
related asset
Tue, 05 Jan 2016
Healthcare services
Page 18 of 57
Exhibit 27.: Percentage of hospitals quantity in China
Source: Wind, OP Research
Exhibit 28.: Percentage of outpatients visits in China
Source: Wind, OP Research
Exhibit 29.: Percentage of inpatients visits in China
Source: Wind, OP Research
68%63% 58% 55% 52%
40%
32%37% 42% 45% 48%
60%
0%
25%
50%
75%
100%
2010 2011 2012 2013 2014 2020E
Public Hospitals % Private Hospitals%
92% 91% 90% 90%
75%
8% 9% 10% 10%
25%
0%
25%
50%
75%
100%
2010 2011 2012 2013 2020E
Public Hospitals % Private Hospitals%
92% 90% 89% 88%
70%
8% 10% 11% 12%
30%
0%
25%
50%
75%
100%
2010 2011 2012 2013 2020E
Public Hospitals % Private Hospitals%
Tue, 05 Jan 2016
Healthcare services
Page 19 of 57
Exhibit 30.: Policies on healthcare system reform from 2009 to 2015
Date Department Document Key Content
Mar-12 General office of State Council Medical REFORM Plan during the 12th
Five-Year Plan
1. Announce support and target for non-public healthcare
institutions: Non-public hospital beds and patient visits to
reach 20% of total
"十二五"期間深化醫藥衛生體制改革規劃暨
實施方案的通知
2. Loosen requirement for social capital and foreign
investment to participate in healthcare institutions and for
qualified practitioners to open private clinics
3. Guide social capital to participate in public hospital
restructuring through various method and encourage
non-public healthcare institutions to develop towards large
scale healthcare groups
Oct-13 General office of State Council Opinions on Encourageing Development
of Healthcare Services
1. Reinforce on encourageing various capital in medical
institutions
國務院關於促進健康服務發展的若干意見 2. Loosen entry requirement
3. Guide investment and financing policies
4. Layout detailed tax relaxation for social investment in
healthcare system
Jan-14 NHFPC Opinions on Accelerating Social Capital
Investment in Medical and Healthcare
Institutions
Lay out detailed loosening policies on entry barriers for
social-capital investment in healthcare institutions, including
taxation, medical-insurance designation, the approval
process, healthcare informatics and academic support 關於加快發展社會辦醫的若干意見
Apr-14 NDRC Notice on Questions regarding
Implementation of Market Price
Mechanism in Non-Public Healthcare
Institutions
Allow non-public, for-profit hospitals to set service prices
關於非公立醫療機構醫療服務實行市場調
節價有關問題的通知
May-14 General office of State Council 2014 Major Task List on Deepening
Medical and Healthcare System Reform
Set a timeline for further completion of policy support for
social-capital investment in hospitals and healthcare
institutions 深化醫藥衛生體制改革 2014年重點工作任
務
Jun-14 NHFPC Urgent Notice on Controlling the Over
Speed Expansion of Public Hospitals
Announce controls on the expansion of public hospitals to
allow the development of primary facilities and non-public
healthcare institutions 關於控制公立醫院規模過快擴張的緊急通
知
Mar-15 General office of State Council 40th Document of State Council 1. The overall size of healthcare industry is expected to
exceed RMB8.0tn by 2020
國務院 40號文件 2. Loosen restrictions for social capital investment sino-foreign
investment in the healthcare industry
Apr-15 General office of State Council 2014 Wrap-up Report and 2015 Major
Task List on Deepening the Medical and
Healthcare System Reform
Set out a timeline for policy implementation on accelerating
social-capital investment in medical and healthcare institutions
深化醫藥衛生體制改革 2014年工作總結和
2015重點工作任務的通知
May-15 State Council
Guidance on the pilot programs for the
comprehensive reform of urban public
hospitals
Target 100 cities to start pilot hospital reform by end of 2015.
Ensure all county-level and above cities to implement
public hospital reform by 2017. Reduce out-of-pocket
payment to below 30% of total healthcare expenditure by end
of 2017.
國務院辦公廳關於城市公立醫院綜合改革
試點的指導意見
May-15 NHFPC
Notice on decision of the 3rd batch of
national pilot cities for public hospital
reform
Reduce out-of-pocket payment to below 30% of total
healthcare expenditure by en of 2017. Cut drug revenue to
below 30% of total hospital revenue by 2017
關於確定第三批公立醫院改革國家聯繫試
點城市及有關工作的通知
Jun-15 State Council
Several policies and measures for
promoting the accelerated development of
private medical institutions
Further relaxation of market access and expansion of financing
channels. Require inclusion of eligible private medical
institutions into medical insurance coverage and equal
treatment with public medical institutions 關於促進社會辦醫加快發展的若干政策措
施
Dec-15 NHFPC
Searching for public opinions for
formulating construction planning on
Healthy China of 13th FYP
Healthy China is officially regarded as a “national strategy”.
Linkage among hospitals, medical insurance and medicine
reform, separation of clinic from pharmacy.
Internet Plus will become significant technology to deepen the
medical reform and enhance the construction of Healthy China.
“十三五”健康中国建设规划向社会公开征
求意见
Source: OP Research
Tue, 05 Jan 2016
Healthcare services
Page 20 of 57
Public-private partnership (PPP) reforms to support non public
hospital M&A activities
As mentioned in 13th FYP, social capital is encouraged to invest in healthcare
system, including public hospital reforms and setting up private hospitals. There
were frequent mergers & acquisitions in the healthcare industry in 2015 at 13x to
20x+ PE valuation. Hospital services or healthcare service listco are currently
trades above 20x FY15E PE on average with some unique pure play trades
above 50x FY15E PE We expect more listcos will penetrate into the healthcare
service industry in China as a hospital service and/or medical and geriatric care
service players by acquiring quality asset at attractive valuation to boost share
price performance and profit growth from FY16E onwards.
For hospital play, we keep a close eye on Town Health (3886 HK, NR) and
HuaXia Health (8143 HK, NR).
We believe Town Health (3886 HK, NR) will be one of beneficiaries to reap the
robust healthcare service industry growth in China which raised HK$1.75bn by
issuing 1.79bn new shs at HK$0.98 to China Life Insurance Group which became
the company's largest shareholder with 23.90% equity stake in May 2015 and
have announced plans to acquire 51% to 65% equity stake in a Class III A
hospital in Henan with 1200 beds at a consideration not more than HK$1.48bn in
Dec 2015.
HuaXia Health (8143 HK, NR) currently operates 3 Class II composite hospitals
and recently signed a MOU to acquire 8 specialty hospitals in China tier 1 cities at
a consideration of not more than HK$1.2bn. We believe HuaXia may be another
potential specialty hospital play in China similar to HMNC (1509 HK, BUY) or KN
Hospitals (2120 HK, NR)
An increasing number of listed companies are in the stage of transition to a
company focused on healthcare business. They are actively seeking M&A
opportunities in this industry, including elderly nursing homes, “Internet + Medical”
services, and maternal and child health management services. We summarized
the recent announcements of several listed companies stepping into healthcare
industry below.
For medical and geriatric care play, we keep a close eyes on CS Health (286 HK,
NR) and BJ Ent M&H (2389 HK, NR).
Acquisition PE for Healthcare
service and hospital assets range
from 13x to 20x+ in 2015 and we
expect more M&As happen from
FY16E onwards
Medical and geriatric care service
are other hot area in M&As, most
of them by acquiring land bank to
develop geriatric care center,
elderly nursing homes, Internet +
Medical services to reap the
Healthy China 13th
FYP
Tue, 05 Jan 2016
Healthcare services
Page 21 of 57
Exhibit 31.: Comparison table of listco hospital beds, consideration, size and region
Stock
Code
Company Market Value
(HK$ mn)
Hospitals Region No. of
Hospitals
in 2015
No. of
Beds
in 2015
No. of
Hospitals
in 2016
No. of
beds
in 2016
No. of
Hospital
in 2017
No. of
Beds
in 2017
Business Model/Consideration
1509 HarMoniCare 5,331
Beijing HarMoniCare Hospital BeiJing 1 92 1 92 1 92
Self-owned
Chongqing Modern Woman Hospital
ChongQing
1 120 1 120 1 120
Chongqing Dushi Liren Hospital 1 80 1 80 1 80
Chongqing Wanzhou HarMoniCare
Hospital 1 30 1 30 1 30
Chongqing Fuling HarMoniCare
Hospital 1 80 1 80 1 80
Guangzhou Woman Hospital GuangZhou 1 50 1 50 1 50
Shenzhen HarMoniCare Hospital ShenZhen 1 90 1 90 1 90
Wuhan Modern Hospital WuHan 1 100 1 100 1 100
FuZhou Woman Hospital FuZhou 1 60 1 60 1 60
Guiyang Modern Woman Hospital GuiYang
1 60 1 60 1 60
Guangzhou Woman Hospital 1 100 1 100 1 100
Beijing New Hospital BeiJing 1 80 1 80
XiaMen New Hospital XiaMen 1 80 1 80
Nanjing New Hospital Nanjing 1 80
Hangzhou New Hospital HangZhou 1 85
Chongqing New Hospital ChongQing 1 80
11 862 13 1,022 16 1,267
1515 Phoenixhealth 7,554
Jian Gong Hospital
BeiJing
1 405 1 405 1 405 IOT
Mentougou Hospital 1 453 1 453 1 453
Mentougou Traditional 1 120 1 120 1 120
Mentougou MCH 1 30 1 30 1 30
IOT
RMB15mn
Jing Mei Hospital Group 1 1,742 1 1,742 1 1,742 IOT - Not disclosed, 70% equity
Yanhua Hospital Group 1 663 1 663 1 663 IOT
Airport Hospital 1 94 1 94 1 94 "Restructure-operate-transfer"
RMB 100mn Shunyi District No.2 Hospital 1 100 1 100 1 100
China Meitan General Hospital 1 515 1 515 1 515 IOT JV
RMB 350mn Shilong Hospital 1 380 1 380 1 380
Baoding No.1 Central Hospital BaoDing, HeBei
1 1,882 1 1,882 1 2,800
IOT
RMB500mn
Baoding Third Center Hospital 1 304 1 304 1 304
IOT
RMB70mn+20mn(NFP fund)
12 6,688 12 6,688 12 7,606
Source: Company, OP Research
Tue, 05 Jan 2016
Healthcare services
Page 22 of 57
Exhibit 31.: Comparison table of listco hospital beds, consideration, size and region (Contiued)
Stock
Code
Company Market Value
(HK$ mn)
Hospitals Region No. of
Hospitals
in 2015
No. of
Beds
in 2015
No. of
Hospitals
in 2016
No. of
beds
in 2016
No. of
Hospital
in 2017
No. of
Beds
in 2017
Business Model/Consideration
2120 KN Hospital 3,378 5 owned hospitals WenZhou 1 1,913 1 1,913 1 1,913 self-owned
Pingyang Changgeng Ward 1 160 1 160 1 160 IOT
Chengdu Renyi Ward ChengDu 1 37 1 37 1 37
Yanjiao Furen Hospital LangFang, HeBei 1 100 1 100 1 100
Beijing Yining BeiJing 1 38 1 38 1 38
Linhai Kangning TaiZhou,
ShanDong
1 80 1 80 self-owned
Hangzhou Yining HangZhou 1 100 1 100
Shenzhen Yining ShenZhen 1 100 1 100
5 2,248 8 2,528 8 2,528
587 HuaHan
Biopharm
7,984 8 Hospitals GuiZhou 8 5,151 8 5,151 8 5,151 TIOT
Liupanshui City Liang Dou People's
Hospital
(六盤水涼都人民醫院)
LiuPanShui,
GuiZhou
1 1,500 1 1,500 Self-operation
RMB 136mn (68% equity)
Liu Zhi Hospital of Traditional Chinese
Medicine
(六枝中醫院)
1 500 1 500 Self-operation(70% equity)
Tongren City Central Hospital
(銅仁市中心醫院)
TongRen, GuiZhou 1 560 1 560 Self-operation(100% equity)
8 5,151 11 7,711 11 7,711
8143 HuaXia Health 1,665 ZhuHai Kowloon Hospital ZhuHai 1 150 1 150 1 150 100% equity
ChongQing Edwards Hospital ChongQing 1 150 1 150 1 150 50% equity
Jiaxing Dawn Hospital JiaXing, ZheJiang 1 180 1 180 1 180 50% equity
Harbin Specialty Hospital Harbin,
HeiLongJiang
1
Not
disclosed
1
Not
disclosed RMB1.2bn(90% equity)
TianJin Specialty Hospital TianJin 1 1
ChongQing Speciaty Hospital ChongQing 1 1
Qiqihar Composite Hospital
Qiqihar,
HeiLongJiang
1 1
GuiYang Composite Hospital GuiZhou 1 1
2 BeiJing Compositie Hospital BeiJing 1 2
ShenYang Composite Hospital
ShenYang, Liao
Ning
1 1
3 480 11 480 11 480
Source: Company, OP Research
Tue, 05 Jan 2016
Healthcare services
Page 23 of 57
Exhibit 31.: Comparison table of listco hospital beds, consideration, size and region (Contiued)
Stock
Code
Company Market Value
(HK$ mn)
Hospitals Region No. of
Hospitals
in 2015
No. of
Beds
in 2015
No. of
Hospitals
in 2016
No. of
beds
in 2016
No. of
Hospital
in 2017
No. of
Beds
in 2017
Business Model/Consideration
2196 Fosum
Pharma
63,069 Anhui Jimin Cancer Hospital HeFei, AnHui 1 700 1 700 1 700 70% equity
Yueyang Guangji Hospital YueYang, HuNan 1 500 1 500 1 500 55% equity
Suqian Zhongwu Hospital SuQian, JiangSu 1 250 1 250 1 250 55% equity
Chancheng Hospital FoShan,
GuangDong
1 1,200 1 1,200 1 1,200 60% equity
Guangzhou Nanyang Cancer Hospital GuangZhou 1 50 1 50 1 50 50% equity
United Family Hospital BJ,SH,Tianjin,GZ,
QingDao
5 300 5 300 5 300 not disclosed
Taizhou Municipal Zanyang Hospital TaiZhou, ZheJiang - 1 1,200 RMB510mn(75% equity)
Taizhou Zanyang Rehabilitation Centre 1 800
WenZhou Geriatirc Hospital(tentatively
named)
WenZhou,
ZheJiang
500
beds by
2020
RMB 250mn(70.47% equity)
QingDaoChengXing Hospital QingDao,
ShanDong
1600
beds, no
timeline
RMB 400mn(50% equity)
10 3,000 10 3,000 12 5,000
3886 TownHealth 11,951 Hangzhou Shengkang hopsital HangZhou,
ZheJiang
1 500 1 500 1 500 RMB 121mn(49% equity)
Nanshi Hospital of Nanyang NanYang, HeNan 1 1,000 1 1,000 Not more HK$1.75bn
(51%-65% equity)
Nanshi Hospital Youtian Branch 1 50 1 50
Erjiao Branch oof Nanshi Hospital 1 50 1 50
Nanyang City Wulong District Wuhou
Second Community Health Service
Centre
1 10 1 10
1 500 5 1,610 5 1,610
Source: Company, OP Research
Tue, 05 Jan 2016
Healthcare services
Page 24 of 57
Exhibit 32.: Comparison table of listco stepping into healthcare industry
Stock Code Company Date Announcement Details
286 CS Health
Jun-13 Acquisition of 35% equity in Dongguan Southern Medical
University Metabolic Medicines Research and Development
Company Limited(東莞南方醫大代謝醫學研發有限公司)
Consideration: RMB820,000 for acquisition + RMB800,000 for working capital
The company is engaged in R&D of new solutions and products in diagnosis, treatment and prevention of
metabolic diseases.
Dec-13 Change of company name Change to "Common Splendor International Health Industry Group Limited"
Jan-14 Acquisition of 70% equity in Zhao Long International Medical
Investment Management Group Limited
(兆龍國際醫療投資管理)
Consideration: RMB40mn, adjusted to RMB70.88mn in Mar 2015 due to net profits increase
The company is engaged in medicine, ophthalmology, anesthesiology, medical laboratory, pathology, medical
imaging, sales of glasses and accessories, optical instruments and optometry related products.
Aug-15 Capital contribution and acquisition of 100% equity of
DongGuan Ruicheng (東莞市瑞成創投) and 30% equity
interest in Aidigong Maternity Health Group
Consideration: RMB119mn as capital contribution + RMB10mn for acquisition
The company is an investment holding company which has entered into an agreement of acquisition of 30%
equity in Aidigong for RMB129mn.
Aidigong specializes in provision of maternal and child health management services, including Chinese medicine
recuperation, dietary and nutrition, infant intelligence development and postpartum recovery consultations.
Nov-15 Capital contribution and acquisition of 100% equity of
Fengshuo Bio Medical Tech (豐碩生物醫藥科技)
Consideration: RMB60mn as first capital injection of 80% interst + RMB15mn for another 20%
FengShuo Bio Medical Tech is engaged in bio medicine development, production and distribution, it holds 28%
equity in Fengyuan Huake Bio Tech (廣東豐源華科生物科技),which is engaged in plantation and extraction of
saponins, and is an integrated manufacturer of saponins. FengShuo also holds 51% of Guangdong Kelv Bio
Medical Tech Company Limited (廣東科綠生物醫藥科技有限公司), which is engaged in R&D, investment and sale
of natural plan extraction, bio medicine and healthcare food.
2389 BJ Ent M&H
Jan-15 Acquisition of 100% equity in Zhijian Limited, a subsidiary of
Beijing Properties(925)
Consideration: RMB408mn
The company holds 82.24% equity interest of Chaoyang Inland Port, which comprises four parcels of industrial
land with total area of 161.498.66 square meters. BJ Ent M&H plans to demolish buildings on such land, change
the use of such land to elderly care-related and healthy-related.
Jul-15 Change of company name Change to "Beijing Enterprises Medical and Health Industry Group Limited"
Aug-15 Capital injection of 35% equity in Beijing Top-Doctors
Techonology Co., Ltd
(北京良醫聯盟科技有限公司)
Consideration: RMB42mn
The company is engaged in "Internet+Medical" services, including on-line medical consultation, doctors'
appointment services and intelligent medical cooperation with local cities(including online guidance, local house
calls, continuing education and geriatric care community medical services)
Aug-15 Acquisition of 100% equity in Beijing spirit and Beijing xibu Consideration: RMB79.8mn
The two companies are engaged in sales of medical care, geriatric care and household related furniture and
serving major public hospital and geriatric care companies in the PRC.
Nov-15 Acquisition of 51% equity in Fujian Golden Sun Health and
Geriatric Company Limited (福建省金太陽健康養老股份有限
公司)
Consideration: RMB57mn
The company is engaged in providing geriatric and home care services.
Dec-15 Acquisition of land in Shanghai for the purpose of medical
and geriatric care industry
Consideration: RMB92.1mn
The land is used for medical and geriatric care industry
Source: Company, OP Research
Tue, 05 Jan 2016
Healthcare services
Page 25 of 57
Exhibit 32.: Comparison table of listco stepping into healthcare industry (Contiued)
Stock Code Company Date Announcement Details
708 Everg Health
Apr-15 Acquisition of 96.25% equity of Evergrande Wonjin Beauty
Hospital(恒大原辰美容醫院) in Tianjin
Consideration: RMB220,0000
The company has not commenced operation, the remaining 3.75% of equity is held by Wonjin Beauty Medical
Group of Korea, Everg Health and Wonjin Beauty intend to contribute an aggregate of RMB80mn of registered
capital to Evergrande Wonjin, Evergrande Health will be responsible for marketing and providing medical
equipment, Wonjin Beauty will be responsible for the professional medical team, Korean technology, management
model and management process. The profit sharing between Wonjin Beauty and Evergrande Wonjin will be 40:60.
Apr-15 Change of company name Change to "Evergrande Health Industry Group Limited"
Oct-15 Successful bidding of the land use rights of Hainan Boao
Lecheng international medical
tourism pilot zone
Consideration: RMB93.42mn
The land area of the Medical land is 81,234.17 square meters and it will be used for medical purposes with use
right of 50 years.
Dec-15 Successful bidding of the land use rights of a land plot in
Haihua island, Binhai new district,
Danzhou, Hainan Province
Consideration: RMB55.13mn
The land area is 32,701.375 square meters and it will be used for elderly care-related business, the land use right
is 40 years.
383 COL Capital
Oct-15 Increase of equity interest of Aveo China from 30% to 70% Consideration: RMB120mn
The company is engaged in property development and project management businesses in the PRC with focus on
elderly care and retirement community. Aveo China Group has a development, namely Tide Health Campus(天地
健康城), located in Shanghai, it consists of an elderly nursing home, service apartments, independent living units
and a commercial area comprising shopping mall, retail shops and club hall facilities.
Oct-15 Increase of equity interest of Jiatai Construction from
60.52% to 100%
Consideration: RMB592mn
The company owns three well-established operating integrated hospitals consisting of Nanjing Tongren Hospital
(南京同仁醫院)(Class III Integrated Hospital), Kunming Tongren Hospital(昆明同仁醫院)(Class III Ingrated
Hospital),Yunan Xinxinhua Hospital(雲南新新華醫院)(Class II Integrated Hospital). Jiatai Group owns two pieces
of vacant land for medical and health purposes each located near Nanjing Tongren Hospital and Kunming Tongren
Hospital respectively, it also engages in property development operation in Nanjing and owns certain residential
and commercial lands in Lianyungang.
Nov-15 Change of company name Change to "China Medical & Healthcare Group Limited"
Source: Company, OP Research
Tue, 05 Jan 2016
Healthcare services
Page 26 of 57
Harmonicare (1509 HK) – Riding on Gold Monkey Pure play to reap the liberalization of two child policy in China
Golden Monkey Year effect to boost 80% earnings growth in FY16E
Initial BUY with TP HK$8.70 based on 35x FY16E PE, 6% premium to peers which is justified by its 36% earnings CAGR during FY15E – FY18E versus peers’ 17%, in our view.
Pure play to reap the liberalization of two child policy in China Harmonicare (HMNC)
is the largest private obstetrics and gynecology specialty hospital group in China listed on
HKEx in July 2015 with IPO price of HK$7.55 and fund raised HK$1.47bn. HMNC currently
operates 11 specialty hospitals in China, of which the top five are located in BJ, CQ, GZ,
SZ and WH and accounted for 64% sales in 1H15. Despite a weak Sheep Year effect,
HMNC recorded 6.9% yoy increase in inpatient visits to 298k and 8.2% yoy increase in
average spending per visit (ASPV) to RMB1,404 in 1H15. We expect total
inpatient/outpatient visit decline by 11%/18% to 25k/595k in FY15E then rebound by
11%/11% to 27k/662k inpatient/outpatient visits in FY16E, thanks to Golden Monkey year
effect.
Golden Monkey Year to boost 80% earnings growth in FY16E supported by new
hospital expansion/upgrade plan. For the years of Dragon, Tiger, and Monkey, there is
high likelihood for new born in terms of Chinese perspective. The appointments for 1H16E
outpatient are up 50% yoy and we expects a 10%+/15%+ yoy improvement on
ASPV/inpatient visit in FY16E driven by the Golden Monkey Year effect. HMNC plan to add
(1) two new hospitals in BJ and Xiamen by end of FY16E and (2) expanding its existing BJ
Hospital beds from 59 to 75 – 80 beds by end of FY15E to meet the increasing demand for
obstetric services.
New IVF business and downstream expansion to support mid to long-term growth
On 10th Dec, HMNC announced plans to form a strategic alliance with Phayathai Hospital
Group (PHG) in Thailand to promote the in vitro fertilization (IVF) treatment business to
develop new revenue momentum for HMNC in mid-term. HMNC will also actively seek for
downstream expansion opportunities in postpartum care services to diversify its obstetrics
services. In 1H15, SZ & BJ hospital recorded ~100% yoy increase in postpartum care
services to ~RMB20mn+, accounting for 17% SZ & BJ hospital revenue. We expect the
postpartum care services revenue will continuous to increase from 1H17E onwards.
Initiate BUY. We initiate our BUY rating on HMNC with TP HK$8.70 based on 35x FY16E
PE, 6% premium to its peers which is justified by its 36% earning CAGR during FY15E –
FY18E versus peers’ 17%, in our view.
Exhibit 33. : Forecast and Valuation Year to Dec (RMB mn) FY13A FY14A FY15E FY16E FY17E
Revenue 833.2 935.8 868.9 1,089.3 1,384.7
Growth (%) 11.1 12.3 (7.2) 25.4 27.1
Net Profit 65.7 105.1 86.8 156.7 173.0
Growth (%) 214.5 60.0 (17.4) 80.4 10.4
Diluted EPS (HK$) 0.104 0.167 0.138 0.249 0.275
EPS growth (%) 214.5 60.0 (17.4) 80.4 10.4
Change to previous EPS (%) 0.0 0.0
Consensus EPS (HK$) 0.238 0.300
ROE (%) (186.8) (126.1) 17.5 13.7 14.1
P/E (x) 66.3 41.5 50.2 27.8 25.2
P/B (x) (63.5) (42.9) 3.9 3.6 3.4
Yield (%) 1.1 1.7 1.4 2.5 2.8
DPS (HK$) 0.073 0.117 0.097 0.174 0.192
Source: Bloomberg, OP Research
Initial Coverage
BUY
Close price: HK$6.93
Target Price: HK$8.70 (+26%)
Key Data
HKEx code 1509
12 Months High (HK$) 8.40
12 Month Low (HK$) 4.39
3M AvgDail Vol. (mn) 0.91
Issue Share (mn) 770.32
Market Cap (HK$mn) 5,338.35
Fiscal Year 12/2014
Major shareholder (s) Director Lin Yuming 28.33%
Source: Company data, Bloomberg, OP Research
Closing price are as of 4/1/2016
Price Chart
1mth 3mth 6mth
Absolute % -7.8 12.9 29.8
Rel. MSCI CHINA % -5.8 13.9 35.6
PE
Company Profi le Harmonicare is the largest private obstetrics
and gynecology specialty hospital group in
China listed on HKEx in Jul 2015 with IPO
price of HK$7.55 and fund raised
HK$1.47bn. HMNC currently operates 11
hospitals in China, of which the top five are
located in BJ, CQ, GZ, SZ and WH and
accounted for 64% sales in 1H15.
0.01.02.03.04.05.06.07.08.09.0
Jul/15 Sep/15 Nov/15
HK$1509 HK MSCI CHINA
0
10
20
30
40
50
Aug/15 Oct/15 Dec/15
Forward P/E Ratio +1std.
avg.
-1std.
Tue, 05 Jan 2016
Healthcare services
Page 27 of 57
Exhibit 34.: List of hospitals in 2014 (1)
BeiJingHarMoniCare
Hospital
Chongqing Modern Woman
Hospital
Guangzhou Woman
Hospital
Shenzhen HarMoniCare
Hospital
Wuhan Modern
Hospital
Established year Jun-2011 Mar-2006 Jul-2008 Jul-2010 Dec-2005
GFA(square meters) 17,472 12,573 6,980 9,000 13,522
Employees 481 465 321 292 365
Registered beds 72 120 50 90 100
Beds in operation 59 87 50 30 67
ALOS 4.0 6.4 2.8 6.0 4.2
Source: Company
Exhibit 37.: List of hospitals in 2014 (2)
Fuzhou Modern
Woman Hospital
Guiyang Modern
Woman Hospital
Chongqing
WanzhouHarMoniCare
Hospital
Chongqing
FulingHarMoniCare
Hospital
Chongqing
DushiLiren
Hospital
Guiyang
HarMoniCare
Hospital
Established year Jan-2010 Apr-2007 Mar-2009 Jun-2009 Apr-2006 May-2005
GFA(square meters) 8,600 2,921 3,400 7,124 9,300 10,706
Employees 271 159 146 167 249 229
Registered beds 60 60 30 80 80 100
Beds in operation 41 22 25 50 80 50
ALOS 4.7 4.8 5.8 5.1 6.7 5.2
Source: Company
Tue, 05 Jan 2016
Healthcare services
Page 28 of 57
Exhibit 35.: New hospital expansion plan (2016-2017)
Source: Company
Guangzhou
Beijing
Chongqing
Nanjing
Hangzhou
Fuzhou
Xiamen
Shenzhen
WanzhouWuhan
Guiyang
Fuling
Existing hospitals
Existing provinces
Location Expected
opening date
GFA and
registered beds
Departments Estimated capital
commitment
Beijing By the end of
2016
GFA: 20,000m2; 80
registered beds
Gynecology, postpartum care,
pediatrics, and supporting
departments
~RMB132mn
Xiamen By the end of
2016
GFA: 20,000m2; 80
registered beds
Gynecology, postpartum care,
pediatrics, and supporting
departments
~RMB96mn
Nanjing By the end of
2017
GFA: 22,000m2; 80
registered beds
Gynecology, postpartum care,
pediatrics, and supporting
departments
~RMB90mn
Hangzhou By the end of
2017
GFA: 22,000m2; 85
registered beds
Gynecology, postpartum care,
pediatrics, and supporting
departments
~RMB120mn
Chongqing By the end of
2017
GFA: 20,000m2; 80
registered beds
Gynecology, postpartum care,
pediatrics, and supporting
departments
~RMB90mn
Tue, 05 Jan 2016
Healthcare services
Page 29 of 57
Exhibit 36.: Replicable business model led to rapid historical growth
Source: Company
Exhibit 37.: Milestones in Harmonicare’s growth
Source: Company
2014
2003: Established the
1st private women’s
specialty hospital
2011: Established one
hospital in Beijing
2010: investment by
CCBI and established
two hospitals in
Shenzhen and Fuzhou
2008: investment oby
CDH and established
one hospital in
Guangzhou
2009: Established
three hospitals in
Guiyang and
Chongqing
2006: Established two
hospitals in Chongqing
2005: Established one
hospital in Wuhan
2007: Established one
hospital in Guiyang
2003 2004 2005 2006 2007 2008 2009 2010 2011-2015
Established
Shanxi Modern
Woman Hospital
Established
“HarMoniCare”
brand
Established
Guiyang Modern
Woman Hospital
1. Established
Chongqing
Modern Woman
Hospital
2. . Established
Chongqing
Dushi Liren
Hospital
CDH invested in
our Group
Established
Beijing
HarrMoniCare
Hospital
Established
Wuhan Modern
Hospital
Established
Guangzhou
Woman’s Hospital
CCBI Medical
invested in our
Group
Received JCI
accreditation
1. Established
Guiyang
HarrMoniCare
Hospital
2. Established
Wanzhou
HarrMoniCare
Hospital
3. Established
Chongqing Fuling
HarMoniCare
Hospital
1. Established
Fuzhou Modern
Woman Hospital
2. . Established
Shenzhen
HarrMoniCare
Hospital l
Tue, 05 Jan 2016
Healthcare services
Page 30 of 57
612 687 789 740
957
1,252 94 100
109 109
115
115
750 833
936 869
1,089
1,385
0
400
800
1,200
1,600
FY12 FY13 FY14 FY15E FY16E FY17E
Supply of pharmaceuticals and medical devices businessSales of pharmaceuticals and medical devicesProvision of healthcare servicesTotal revenue
(RMBmn)
Exhibit 38.: Rank No. 1 in China obstetrics and gynecology hospitals
Source: Company
Exhibit 39.: Revenue forecast from FY12 to FY17E
Source: Company, OP Research
13.0
5.7
4.6
3.5 2.8
0.0
5.0
10.0
15.0
Group Company A Company B Company C Company D
Market share (%)
# of Obstetrics
and Gynecology Hospitals
11 3 11 3 3
Tue, 05 Jan 2016
Healthcare services
Page 31 of 57
21
66
10587
157173
0.00
50.00
100.00
150.00
200.00
FY12 FY13 FY14 FY15E FY16E FY17E
(RMBmn)
69 123 179 149 197 228 113 120
136 144 182
210
121 94
109 108
142 164
54 61
70 86
114
138
80 81
85 85
113
130
268 310
319 278
324
357
115 25
705 787
898 849
1,072
1,367
0
200
400
600
800
1,000
1,200
1,400
1,600
FY12 FY13 FY14 FY15E FY16E FY17E
BeiJing HarMoniCare Hospital Chongqing Modern Woman HospitalGuangzhou Woman Hospital Shenzhen HarMoniCare HospitalWuhan Modern Hospital Other HospitalsBJ New Hospital XiaMen New HospitalTotal
(RMB mn)
Exhibit 40.: Net profit forecast from FY12 to FY17E
Source: Company, OP Research
Exhibit 41.: Revenue breakdown by hospitals from FY12 to FY17E
Source: Company, OP Research
Exhibit 42.: Key assumptions
Hospital Services 2014 2015E 2016E 2017E
All Hospitals
-Impatient 27,508 24,618 27,436 30,676
yoy% 15% -11% 11% 12%
-Outpatient 723,819 595,000 661,568 756,474
yoy% 11% -18% 11% 14%
-Average spending per visit (RMB) 1,196 1,371 1,555 1,737
yoy% 3% 15% 13% 12%
-Revenue (RMB mn) 898 849 1,072 1,367
yoy% 14% -5% 26% 28%
Source: Company, OP Research
Tue, 05 Jan 2016
Healthcare services
Page 32 of 57
Exhibit 43.: Comparison table of listco hospital beds, consideration, size and region
Stock
Code
Company Market Value
(HK$ mn)
Hospitals Region No. of
Hospitals
in 2015
No. of
Beds
in 2015
No. of
Hospitals
in 2016
No. of
beds
in 2016
No. of
Hospital
in 2017
No. of
Beds
in 2017
Business Model/Consideration
1509 HarMoniCare 5,331
Beijing HarMoniCare Hospital BeiJing 1 92 1 92 1 92
Self-owned
Chongqing Modern Woman Hospital
ChongQing
1 120 1 120 1 120
Chongqing Dushi Liren Hospital 1 80 1 80 1 80
Chongqing Wanzhou HarMoniCare
Hospital 1 30 1 30 1 30
Chongqing Fuling HarMoniCare
Hospital 1 80 1 80 1 80
Guangzhou Woman Hospital GuangZhou 1 50 1 50 1 50
Shenzhen HarMoniCare Hospital ShenZhen 1 90 1 90 1 90
Wuhan Modern Hospital WuHan 1 100 1 100 1 100
FuZhou Woman Hospital FuZhou 1 60 1 60 1 60
Guiyang Modern Woman Hospital GuiYang
1 60 1 60 1 60
Guangzhou Woman Hospital 1 100 1 100 1 100
Beijing New Hospital BeiJing 1 80 1 80
XiaMen New Hospital XiaMen 1 80 1 80
Nanjing New Hospital Nanjing 1 80
Hangzhou New Hospital HangZhou 1 85
Chongqing New Hospital ChongQing 1 80
11 862 13 1,022 16 1,267
Source: Company, OP Research
Tue, 05 Jan 2016
Healthcare services
Page 33 of 57
Investment risks
Unable to retain employees, especially qualified physicians and nurses:
A hospital's success relies highly on its staff, especially physicians and nurses.
The recruitment of qualified physicians and nurses is highly competitive, as the
pool of experienced medical professionals is very limited in China. Key factors
that physicians and nurses will consider when choosing a hospital to work for
include: salaries and compensations, reputation of the hospital, quality of facilities
and supporting staffs, hospital scale and number of patient visits. Harmonicare’s
staff costs (excluding directors’ emoluments) were RMB222.8mn/RMB256.4mn/
RMB283.0mn in FY12/FY13/FY14, representing 29.7%/30.8%/30.2% of total
revenue. We believe Harmonicare will continue to increase staff costs in the
future to retain a sufficient number of qualified physicians and nurses. Besides,
Harmonicare has a good reputation in obstetrics and gynecology industry, we
believe it will not face much difficulty retaining qualified medical professionals.
Opening new hospitals will result in fluctuations of short-term financial
performance or delay of new hospitals: Harmonicare plans to open two new
hospitals in Beijing and Xiamen by the end of 2016, and three new hospitals in
Nanjing, Hangzhou and Chongqing by the end of 2017. There may be delays in
opening new hospitals, and opening new hospitals will result in fluctuations of
short-term financial performance. As the initial investment and expenditures of
opening new hospitals are very large, including renovation costs, rental expenses
and equipment costs, the short-term financial performance may fluctuate.
Generally, it takes two to three years for a new hospital to break even. We believe
Harmonicare has rich experience in managing hospital which will help it the
operate new hospitals and speed up break even points, Besides, the expansion
plan is beneficial for the company over the long haul, in terms of profit growth.
Medical disputes may harm reputation and business: Diagnoses and
treatment of patients are subject to the physicians’ and other medical staffs’
professional judgement, most of which must be made in a short time. Any
incorrect clinical decisions or actions may result in unsatisfactory treatment
results, patient injury or death. Such risks are higher in complex medical
conditions, such as high risk pregnancy, and sometimes the unsatisfactory
treatment results are not caused by clinical decisions. Harmonica is not
adequately insured against losses and liabilities arising from operations. Besides,
there are increasing number of people using violence to solve medical disputes,
which may cause bodily harm to physicians and other staffs. Harmonicare paid
RMB1.5mn/RMB1.8mn/RMB2.7mn as monetary compensation to patients or
their families in FY12/FY13/FY14, representing 0.2%/0.22%/0.28% of total
revenue. We believe Harmonicare has sufficient physicians with high level of
professional knowledge, and obstetrics and gynecology generally has lower
medical risks, therefore the number of medical disputes should be controllable to
an acceptable level.
Tue, 05 Jan 2016
Healthcare services
Page 34 of 57
Exhibit 44.: Management profiles
Name Position Description
Lin Yuming Chairman & CEO Over 17 years of experience in medical industry
Holds a degree in business management and has an educational background in law
One of the pioneers in the private healthcare industry in China
Awarded "Beijing Excellent Entrepreneur"
Fang Zhifeng Executive Director & VP Served as a physician for 7 years, over 20 years of experience in medical industry in China
Zhao Xingli Executive Director & VP Over 10 years of experience in medical industry
Has deep understanding of medical industry in China; one of the founders of "HarMoniCare" brand
So Kin Ching VP Over 10 years of experience in medical industry
Has rich experience in the operation and management of China private obstetrics and gynecology
specialty hospital
Chen Wei VP & Joint Company Secretary Previously served as Managing Director at IBD of Guosen Securities Co., Ltd.
Over 10 years of experience in capital markets
Ren Jinhui Assistant to Chairman Has financial background with 10 years of experience
Has the qualifications of certified public accountant and certified tax agent
Chen Longzhen CFO Previously served as financial director in several listed companies
Over 15 years of experience in financial management
Source: Company, OP Research
Exhibit 45.: Shareholding structure
Source: Company, OP Research
Director
Lin Yuming
Honeycare Int’l
Investment Limited
Tianjin Dinghui
Private Equity Fund
Lin Yurong
& Asso.
CCBI
Investment Limited
28.33% 16.89% 10.21% 7.09% 5.98%
Public
31.5%
Tue, 05 Jan 2016
Healthcare services
Page 35 of 57
Financial Summary– Harmonicare (1509 HK) Year to Dec FY13A FY14A FY15E FY16E FY17E
Year to Dec FY13A FY14A FY15E FY16E FY17E
Income Statement (RMB mn)
Ratios
Provision of hospital services
Gross margin (%) 46.0 50.5 51.0 51.6 48.8
Provision of healthcare services 687 789 740 957 1,252
Operating margin (%) 10.5 14.9 13.3 17.6 15.7
Sales of pharmaceuticals and medical devices 100 109 109 115 115
Net margin (%) 7.9 11.2 10.0 14.4 12.5
Supply of pharmaceuticals and medical devices business 46 37 19 18 18
Selling & dist'n exp/Sales (%) 23.8 23.2 23.9 23.1 22.3
Admin exp/Sales (%) 11.5 11.3 11.4 10.8 10.5
Turnover 833 936 869 1,089 1,385
Payout ratio (%) 70.1 69.9 69.9 69.9 69.9 YoY% 11 12 (7) 25 27
Effective tax (%) 24.9 24.5 25.0 25.0 25.0
COGS (450) (463) (426) (527) (709)
Total debt/equity (%) (526.3) (301.9) 0.0 0.0 0.0
Gross profit 383 472 443 563 675
Net debt/equity (%) (420.3) (229.5) Net cash Net cash Net cash
Gross margin 46.0% 50.5% 51.0% 51.6% 48.8%
Current ratio (x) 0.3 0.3 6.5 4.6 3.2 Other income 1 0 1 1 1
Quick ratio (x) 0.2 0.3 6.4 4.5 3.1
Selling & distribution (198) (217) (208) (251) (309)
Inventory T/O (days) 18 16 16 16 16 Admin (96) (106) (99) (118) (146)
AR T/O (days) 6 5 5 5 5
R&D (2) (2) (2) (3) (3)
AP T/O (days) 18 13 15 15 15
Listing expenses 0 (7) (19) 0 0
Cash conversion cycle (days) 7 8 6 6 6 Other opex (0) (0) 0 0 0
Asset turnover (x) 1.8 2.2 1.0 0.8 0.9
Total opex (296) (333) (328) (372) (458)
Financial leverage (x) (13.4) (5.1) 1.7 1.2 1.2 Operating profit (EBIT) 88 140 116 191 218
EBIT margin (%) 10.5 14.9 13.3 17.6 15.7
Operating margin 10.5% 14.9% 13.3% 17.6% 15.7%
Interest burden (x) 1.0 1.0 1.1 1.1 1.1 Provisions 0 0 0 0 0
Tax burden (x) 0.8 0.8 0.7 0.7 0.7
Interest Income 0 0 16 29 25
Return on equity (%) (186.8) (126.1) 17.5 13.7 14.1 Finance costs 0 0 (9) 0 0
ROIC (%) 0.0 0.0 67.4 69.2 39.2
Profit after financing costs 88 140 122 220 243
Associated companies & JVs (0) (0) (0) 0 0
Year to Dec FY13A FY14A FY15E FY16E FY17E
Pre-tax profit 87 139 122 220 243
Balance Sheet (RMB mn) Tax (22) (34) (31) (55) (61)
Fixed assets 255 203 188 397 658
Minority interests 0 0 (5) (8) (9)
Intangible assets & goodwill 2 4 4 4 4
Net profit 66 105 87 157 173
Associated companies & JVs 8 0 (0) (0) (0) YoY% 215 60 (17) 80 10
Long-term investments 41 32 32 32 32
Net margin 7.9% 11.2% 10.0% 14.4% 12.5%
Other non-current assets 11 9 9 9 9
EBITDA 128 177 149 234 286
Non-current assets 318 249 233 442 702 EBITDA margin 15.4% 18.9% 17.1% 21.5% 20.7%
EPS (RMB) 0.084 0.134 0.110 0.199 0.220
Inventories 22 20 18 23 30 YoY% 215 60 (17) 80 10
AR 15 14 13 16 20
DPS (HK$) 0.073 0.117 0.097 0.174 0.192
Prepayments & deposits 31 30 43 54 69
Other current assets 61 0 0 0 0
Year to Dec FY13A FY14A FY15E FY16E FY17E
Cash 11 72 986 922 761
Cash Flow (RMB mn)
Current assets 140 136 1,061 1,015 881 EBITDA 128 177 149 234 286
Chg in working cap 14 29 (10) 14 19
AP 22 16 17 22 29 Others 0 1 0 0 0
Tax 11 19 31 55 61
Operating cash 142 207 139 248 305
Accruals & other payables 102 114 113 142 180 Tax (18) (17) (19) (31) (55)
Bank loans & leases 0 0 0 0 0
Net cash from operations 124 189 120 217 250
CB & othe debts 354 300 0 0 0
Other current liabilities 2 1 1 1 1
Capex (26) (20) (18) (251) (329)
Current liabilities 490 451 162 220 271 Investments (0) (2) 0 0 0
Dividends received 1 0 0 0 0
Bank loans & leases 0 0 0 0 0 Sales of assets 18 43 0 0 0
CB & othe debts 0 0 0 0 0
Interests received 0 0 16 29 25
Deferred tax & others 34 33 33 33 33 Others 0 0 0 0 0
MI 0 0 5 13 22
Investing cash (8) 21 (3) (222) (304)
Non-current liabilities 34 33 38 46 55 FCF 117 210 117 (5) (53)
Issue of shares 0 19 1,178 0 0
Total net assets (67) (99) 1,094 1,191 1,257 Buy-back 0 0 0 0 0
Minority interests 0 0 0 0 0
Shareholder's equity (67) (99) 1,094 1,191 1,257 Dividends paid (53) (72) (72) (59) (107)
Share capital 0 0 0 0 0
Net change in bank loans 0 0 (300) 0 0
Reserves (67) (99) 1,094 1,191 1,257 Interest paid 0 0 (9) 0 0
Others (66) (96) 0 0 0
BVPS (HK$) (0.11) (0.16) 1.77 1.93 2.04
Financing cash (120) (149) 797 (59) (107)
Total debts 354 300 0 0 0
Net change in cash (3) 61 914 (64) (161)
Net cash/(debts) (282) (228) 986 922 761 Exchange rate or other Adj 0 0 0 0 0
Opening cash 14 11 72 986 922 Closing cash 11 72 986 922 761
CFPS (HK$) 0.197 0.301 0.191 0.346 0.398
Source: Company, OP Research
Tue, 05 Jan 2016
Healthcare services
Page 36 of 57
Exhibit 46.: Peer Group Comparison
Company Ticker Price
Mkt cap
(US$m)
3-mth
avg t/o
(US$m)
PER Hist
(x) PER FY1 (x)
PER
FY2
(x)
EPS
FY1
YoY%
EPS
FY2
YoY%
3-Yr EPS
Cagr (%) PEG (x)
Div
yld
Hist
(%)
Div
yld
FY1
(%)
P/B
Hist
(x)
P/B
FY1
(x)
EV/
Ebitda
Hist
EV/
Ebitda
Cur Yr
Net
gearing
Hist
(%)
Gross
margin
Hist
(%)
Net
margin
Hist
(%)
ROE
Hist
(%)
ROE
FY1 (%)
Sh px
1-mth
%
Sh px
3-mth
%
Harmonicare Medi 1509 HK 6.93 689 0.9 41.5 50.2 27.8 (17.4) 80.4 36.0 1.40 1.7 1.4 (42.92) 3.90 31.4 29.2 (229.5) 50.5 11.2 (126.1) 17.5 (7.8) 20.5
HSI 21,327.12 9.4 10.4 9.4 (9.5) 10.5 2.5 4.24 4.0 3.8 1.15 1.07 12.2 10.3 (4.7) 2.3
HSCEI 9,311.18 6.9 6.9 6.3 (0.2) 10.3 5.1 1.36 4.2 4.4 0.95 0.85 13.7 12.3 (6.4) (1.0)
CSI300 3,469.07 14.6 12.5 11.1 17.2 12.4 9.6 1.3 1.8 2.2 2.0 1.7 13.6 13.3 (3.4) 8.3
Adjusted sector avg* 45.9 40.9 32.3 8.5 29.4 17.4 2.7 0.9 0.8 3.0 3.3 28.7 22.5 1.4 36.9 13.2 13.3 12.1 (3.4) (0.1)
Phoenixhealth 1515 HK 8.50 914 6.9 25.6 24.0 18.1 6.8 32.8 20.3 1.18 0.6 1.4 3.42 3.28 16.9 15.1 0.0 24.7 19.1 14.6 14.0 (16.2) (33.8)
Wenzhou Kangni-H 2120 HK 45.00 424 N/A N/A 45.7 31.9 N/A 43.4 N/A N/A N/A 0.0 N/A N/A 32.9 N/A 0.0 38.8 17.3 21.8 N/A (2.1) N/A
Aier Eye Hsptl-A 300015 CH 28.82 4,333 31.9 91.1 66.9 50.5 36.2 32.5 33.3 2.01 0.3 0.4 12.16 10.69 47.2 38.3 0.0 44.8 12.9 19.2 17.8 (12.6) 4.3
Ikang Health-Adr Kang US 20.44 1,375 9.3 24.9 30.5 23.2 (18.3) 31.3 11.0 2.79 N/A 0.0 2.12 3.60 N/A 14.8 0.0 46.7 9.3 9.1 12.7 10.5 28.0
Kpj Healthcare KPJ MK 4.24 1,012 1.1 30.2 29.9 27.4 1.0 9.2 7.2 4.17 1.9 1.7 3.16 3.18 18.3 15.4 70.1 29.3 5.4 11.8 11.1 (0.5) 1.2
Ihh Healthcare B IHH MK 6.44 12,167 11.1 69.7 56.5 45.7 23.4 23.7 22.8 2.48 0.5 0.5 2.37 2.61 30.5 26.8 8.5 N/A 10.3 3.7 4.5 0.3 7.2
Raffles Medical RFMD SP 4.08 1,648 1.7 33.7 33.2 29.4 1.7 13.0 9.8 3.39 1.3 1.4 4.00 3.96 26.2 24.3 0.0 N/A 18.1 12.5 12.3 (3.1) (7.7)
Bumrungrad Hospi BH TB 206.00 4,151 7.7 54.9 44.0 38.1 24.9 15.3 18.4 2.39 1.0 1.2 12.50 11.89 34.4 27.3 0.0 39.0 17.5 30.2 29.4 (2.8) (7.2)
Bangkok Chain Ho BCH TB 9.00 621 0.9 42.9 47.1 38.5 (9.0) 22.5 10.8 4.34 1.3 1.3 5.38 5.06 20.3 20.0 77.0 30.8 9.8 11.8 11.1 13.2 30.4
Apollo Hospitals APHS IN 1,450.10 3,031 4.2 59.4 51.1 40.8 16.3 25.3 23.6 2.17 0.4 0.5 6.36 5.76 26.0 25.0 45.5 N/A 6.6 11.1 11.8 6.5 0.4
Fortis Healthcar FORH IN 179.25 1,247 2.6 N/A 71.7 36.3 N/A 97.6 (230.4) N/A N/A 0.0 2.05 1.88 56.8 30.5 20.2 N/A (3.6) (3.5) 2.6 7.4 4.7
Ramsay Health RHC AU 67.97 9,906 48.3 36.7 29.4 25.8 24.8 14.1 16.0 1.85 2.1 1.8 8.48 6.94 15.9 13.2 154.6 96.0 5.2 24.3 23.7 4.9 16.8
* Outliners and "N/A" entries are in red and excl. from the calculation of averages
Source: Bloomberg, OP Research
Tue, 05 Jan 2016
Healthcare services
Page 37 of 57
Chunli Medical (1858 HK) – Market share gain via ceramic femoral head prosthesis No. 2 domestic player in China joint implant market with 3.1% market
share in 2013 and expected to increase to 4.6%/4.9% in FY15/16E
First domestic company to secure CDFA certification for ceramic hip joint prosthesis product to reap overseas players’ market share.
Initial BUY with TP HK$20.0 based on 15x FY16E PE, 16% discount to peers, given 29.1% earnings CAGR in FY15E to FY18E
Leading local joint implant play in China Chunli Medical (CLM) is leading domestic
orthopedic medical device manufacturer in China with 3.1% joint implant market share
in terms of revenue in 2013, ranked second among domestic players. CLM listed on
HKEx in Mar 2015 by issuing 16.67mn H-shares at HK$13.88 and fund raised
~HK$230mn used mainly to expand sales and market team, R&D for new products
and funding new production plant in Daxing Biomedicine Industrial Base in BJ which
Phase I is expected to begin operations in 2H17E.
First domestic player with CFDA certified ceramic hip joint prosthesis product
launch to reap overseas players’ market shares On 24th April 2015, CLM
announced it had obtained the CDFA registration certificate for its ceramic hip joint
prosthesis products. As CLM is the first domestic company to obtain such certification,
we believe CLM will benefit from the policy shift to favour “Made in China”.. We
estimate sales of the ceramic hip joint prosthesis product to nearly double from
RMB38mn in FY15E to RMB76mn in FY17E, accounted for 19%/24% sales in
FY15/17E with 4.6%/4.9% market share in China joint implant market.
Propose A-shares issuance for expansion at rich valuation CLM plans to issue
3.65mn A Shares on SHEx or 5% of total enlarged share to raise RMB129.5mn,
implying a total market cap of HK$3.23bn upon success of A-share issuance versus
its latest market cap of HK$1.0bn. CLM have submitted its application to CSRC on 2
Nov 2015. We believe the successful issuance of A-share will be mid-term catalyst to
boost CLM valuation while we expect its completion may happen in late 2016E or
early 2017E.
Initiate BUY We initiate our BUY rating on Chunli Medical with TP HK$20.0 based on
15x FY16E PE, 16% discount to its peers due to small-cap size and lack of liquidity
and analyst coverage. However, we are confident that CLM is able to leverage its
early bird advantage and competitive pricing strategy on its ceramic hip joint products
to reap the overseas players market share in China joint implant market given policy
shift to favour “Made in China”. We estimate CLM to deliver 29.1% earnings CAGR in
FY15E to FY18E versus its peer’s average 23.4%
Initial Coverage
BUY
Close price: HK$14.00
Target Price: HK$20.00 (+43%)
Key Data
HKEx code 1858
12 Months High (HK$) 19.60
12 Month Low (HK$) 8.00
3M AvgDail Vol. (mn) 0.06
Issue Share (mn) 19.17
Market Cap (HK$mn) 968.39
Fiscal Year 12/2014
Major shareholder (s) Shi Chunbao & Family – Non-H shs 62.17%
Source: Company data, Bloomberg, OP Research
Closing price are as of 4/1/2016
Price Chart
1mth 3mth 6mth
Absolute % 0.0 16.9 67.7
Rel. MSCI CHINA % 2.1 17.9 73.5
PE
Company Profi le Chunlli Medical is a leading domestic
orthopedic medical device manufacturer in
China with 3.1% joint implant market share in
terms of revenue in 2013, ranked second
among domestic players. CLM listed on
HKEx in Mar 2015 by issuing 16.67mn
H-shares at HK$13.88 and fund raised
~HK$230mn.
Exhibit 47. : Forecast and Valuation Year to Dec (RMB mn) FY13A FY14A FY15E FY16E FY17E
Revenue 110.5 134.5 201.6 253.0 319.6
Growth (%) 12.7 21.7 49.9 25.5 26.4
Net Profit 32.7 37.0 51.8 73.8 94.2
Growth (%) 2.3 13.4 40.0 42.5 27.5
Diluted EPS (HK$) 0.817 0.926 0.937 1.335 1.702
EPS growth (%) 2.3 13.4 1.2 42.5 27.5
Change to previous EPS (%) 0.0 0.0
Consensus EPS (HK$) 1.025 1.263
ROE (%) 18.8 19.2 16.3 15.8 17.0
P/E (x) 17.1 15.1 14.9 10.5 8.2
P/B (x) 0.0 0.0 0.0 0.0 0.0
Yield (%) 3.6 2.0 0.0 0.0 0.0
DPS (HK$) 0.500 0.275 0.000 0.000 0.000
Source: Bloomberg, OP Research
0.0
5.0
10.0
15.0
20.0
Mar/15 Jun/15 Sep/15 Dec/15
HK$1858 HK MSCI CHINA
0
5
10
15
20
25
May/15 Jul/15 Sep/15 Nov/15
Forward P/E Ratio +1std
.
avg.
-1std.
Tue, 05 Jan 2016
Healthcare services
Page 38 of 57
Exhibit 48.: Top 10 companies in the joint implant segment (by sales value)
Rank Company name Market share in PRC
joint implant market as of 2013 (%)
1 Johnson & Johnson Inc. 15.4%
2 Zimmer Holdings, Inc. 13.4%
3 Waldmar Link GmbH & Co. KG 10.7%
4 Smith & Nephew Plc 9.7%
5 Stryker Corporation 9.0%
6 Biomet, Inc 3.8%
7 Beijing AKEC Medical Co., Ltd. 3.6%
8 Chunli Medical 3.1%
9 Tianjin Zhengtian Medical Device Co., Ltd. 2.7%
10 Tianjin Huajian Orthopaedics Instrument Co., Ltd. 2.4%
Source: Euromonitor
Exhibit 49.: Registration certificate for joint prosthesis products of top 10
companies in China (by sales value of orthopedic implant)
Types of registration certificate
Company name Hip joint
(Titanium)
Hip joint
(Co-Cr-Mo)
Knee
joint
Shoulde
r joint
Elbow
joint
Chunli Medical ✓ ✓ ✓ ✓ ✓
DePuy Orthopeadics, Inc./ DePuy France SAS ✓ ✓ ✓ ✓
Zimmer Holdings, Inc. ✓ ✓ ✓ ✓ ✓
Waldmar Link GmbH & Co. KG ✓ ✓ ✓
✓
Smith & Nephew Plc ✓ ✓ ✓
Stryker Corporation ✓ ✓ ✓ ✓
Biomet, Inc. ✓ ✓ ✓ ✓
Beijing AKEC Medical Co., Ltd
(北京愛康宜誠醫療器材股份有限公司) ✓ ✓ ✓
Tianjin Zhengtian Medical Device Co., Ltd
(天津正天醫療器械有限公司) ✓ ✓
Tianjin Huajian Orthopedics Instrument Co., Ltd
(天津華劍骨科器械有限公司) ✓ ✓
Source: CFDA
Exhibit 50.: Sales model
Source: Company
Chunli Medical
Hospitals
Distributors
(Domestic and
overseas)
Customers
Sub-distributors
Hospitals
Direct sales Sales through distributors Sales on ODM
and OEM bases
Tue, 05 Jan 2016
Healthcare services
Page 39 of 57
Exhibit 51.: Joint prosthesis products overview
Shoulder joint prosthesis Knee joint prosthesis Hip joint prosthesis Elbow joint prosthesis
Source: Company
Exhibit 52.: Spinal products overview
Posterior cervical fixation system CS anterior spinal fixation device (include fixation system in thoracic
and lumbar vertebrae)
Anterior cervical fixation system CF posterior spinal fixation device (include fixation system in thoracic
and lumbar vertebrae)
Source: Company
Exhibit 53.: Production process
Source: Company
Analysis of
X-ray plates of
data
1Design of
product
blueprints
2
Delivery of
raw materials
3
Surface
treatment
6
Fluorescent
inspection
5
Processing
procedures
4
Laser labeling
7
Printing of
labels
8
Ultrasonic
cleaning
9
Delivery to
warehouse
Radiation
sterilisation
Final cleaning
and packaging
101112
Tue, 05 Jan 2016
Healthcare services
Page 40 of 57
Exhibit 54.: Sales and marketing centers expansion plan
Location Service coverage Estimated costs of
establishment (RMB mn)
Year of
establishment
Shanghai Shandong Province, Jiangsu, Anhui,
Zhejiang Province, Fujian Province,
Shanghai
0.8
2015/16
Guangzhou Guangdong Province, Guangxi, Hainan
Province
0.8 2015/16
Zhengzhou Hunan Province, Hubei Province,
Henan Province, Jiang Xi Province
0.8 2015/16
Xi'an Ningxia Province, Xinjiang, Qinghai
Province, Shanxi Province, Gansu
Province
0.8
2015/16
Chengdu Sichuan Province, Yunnan Province,
Xizang, Chongqing
0.8 2015/16
Shenyang Liaoning Province, Jilin Province,
Heilongjiang Province
0.8 2015/16
Source: Company
Exhibit 55.: Ceramic femoral head hip joint product
Source: Company, OP Research
Tue, 05 Jan 2016
Healthcare services
Page 41 of 57
32 33 37
52
74
94
0
25
50
75
100
FY12 FY13 FY14 FY15E FY16E FY17E
(RMBmn)
Exhibit 56.: Revenue breakdown from FY12 to FY17E
Source: Company, OP Research
Exhibit 57.: Net profit from FY12 to FY17E
Source: Company, OP Research
67 77 92 110 128 150
38
52
76
20 23
30
38
51
67
11 10
12
16
22
27
98 111
135
202
253
320
0
100
200
300
400
FY12 FY13 FY14 FY15E FY16E FY17E
Standard joint prosthesis products Ceramic hip joint prosthesis productsCustom joint prosthesis products Spinal productsTotal revenue
(RMBmn)
Tue, 05 Jan 2016
Healthcare services
Page 42 of 57
Exhibit 58.: Existing products pipeline
2014 2015E 2016E 2017E
Standard Joint prosthesis
products,excluding
ceramic hip joint
products
(標準關節假體產品,不含
陶瓷假體)
ASP(RMB) 2,431 2,750 3,025 3,328
yoy% -1% 13% 10% 10%
Sales Volume 37,840 40,000 42,400 44,944
yoy% 20% 6% 6% 6%
Revenue(RMB mn) 92.0 110.0 128.3 149.6
yoy % 19% 20% 17% 17%
Revenue % 68% 55% 51% 47%
GP Margin 72% 71% 70% 70%
Ceramic hip joint
prosthesis products
(陶瓷髖關節假體產品)
ASP(RMB) 10,000 10,500 11,025
yoy % 5% 5%
Sales Volume 3,800 4,940 6,916
yoy % 30% 40%
Revenue(RMB mn) 38 52 76
yoy % 37% 47%
Revenue % 19% 21% 24%
GP Margin 60% 60% 60%
Custom joint prothesis
products
(定制關節假體產品)
ASP(RMB) 9,700 10,000 10,000 10,000
yoy% 15% 3% 0% 0%
Sales Volume 3,100 3,800 5,130 6,669
yoy% 12% 23% 35% 30%
Revenue(RMB mn) 30.096 38.000 51.3 66.7
yoy % 29% 26% 35% 30%
Revenue % 22% 19% 20% 21%
GP Margin 85% 84% 84% 84%
Spinal products
(脊柱產品)
ASP(RMB) 950.0 1,200.0 1,380.0 1,449.0
yoy% -21% 26% 15% 5%
Sales Volume 13,000 13,000 15,600 18,720
yoy% 60% 0% 20% 20%
Revenue(RMB mn) 12.451 15.600 21.5 27.1
yoy % 28% 38% 26%
Revenue % 9% 8% 9% 8%
GP Margin 71% 72% 72% 72%
Other business(其他業務) Revenue(RMB mn) 0.0 0.0 0.0 0.0
yoy %
Total Revenue(RMB mn) 134.534 201.605 252.958 319.615
Source: Company, OP Research
Exhibit 59.: Effects of the A share issue on shareholding structure
Before A-share After A-share
Number of shares % Number of shares %
Domestic shares
Domestic shares in issue 50,000,000 72.285% 50,000,000 68.662%
A shares proposed to be
issued under the A share issue - - 3,650,000 5.012%
H shares 19,170,400 27.715% 19,170,400 26.326%
Total 69,170,400 100.000% 72,820,400 100.000%
Source: Company
Tue, 05 Jan 2016
Healthcare services
Page 43 of 57
Investment risks
Failure or delay in new products launch: Chunli Medical launched one product,
namely Ceramic hip joint prosthesis product in 2015. It has another five products
under development, with one/two/two of them expected to be launched in
2016/2017/2018. New products are exposed to technical risks in the research
and development process, like lack of any meaningful results because of
misjudgment of industry trends or setbacks during trial production or testing
processes in relation to design and quality during mass production. Chunli
Medical may experience failure in launching new products, and cannot cover the
substantial costs of research and development. Even when new products are
launched, it takes time to penetrate the market and there are risks of low market
acceptance, if the revenue of the new products is less than the research and
development expenses, the financial performance will be adversely affected.
However, given the success of ceramic hip joint prosthesis product ( we expect it
will account for 19% of total sales for FY15E ), we believe Chunli Medical has
solid R&D support, good marketing skills and distribution channels, which will
offset the risks of failure or delay in launching new products.
Limited production capacity may not satisfy increasing demand: Chunli
Medical’s utilization rate of production facilities for standard joint prosthesis
products, customized joint prosthesis products and spinal products were 98.9%,
96.2% and 98.9% in 30 Sep 2014. Ability to increase production capacity is
limited before Phase I of Daxing new production base commences operation in
October 2017, which may render Chunli Medical unable to satisfy increasing
demand for the products. We believe Chunli Medical can relieve the problem by
increasing the number of shifts or number of working hours per shift and
purchasing advance equipment and
Government approvals, permits registrations and licenses: The medical
devices industry in China is strictly controlled, and the operation of Chunli Medical
is governed by various regulatory regimes, including licensing and certification
requirements of production, quality, safety and environmental issues. Companies
engaged in production of medical devices are required to obtain “Medical device
production enterprises licences” and “Medical device registration certificate”.
Chunli Medical is required to obtain “Class III medical device registration
certificate” and “Class I medical device registration certificate” for its core
products. The renewal of these licenses is not guaranteed, and may be subject to
significant change in legal framework and certification requirements. We believe
Chunli Medical will keep itself updated with the latest legal framework and
certification requirements.
Tue, 05 Jan 2016
Healthcare services
Page 44 of 57
Exhibit 60.: Management profiles
Name Position Description
Shi Chunbao Chairman& Executive Director Mr. Shi is responsible for providing strategic advice and guidance on the business and operations of
ChunLiMedical, he has over 20 years of experience in the medical device industry. Before founding
ChunLi Medical, Mr. Shi worked at Beijing Peace Joint Prosthesis Factory.Mr. Shi is the spouse of Ms.
Yue.
YueShujun Executive Director & Deputy
General Manager
Ms. Yue is responsible for the internal operations of ChunLi Medical, including logistics, inventory and
day-to-day management. Before founding ChunLi Medical, Mr. Shi worked at Beijing Peace Joint
Prosthesis Factory. Ms. Yue is the spouse of Mr. Shi.
Zhao Shijie Deputy General Manager & CFO Mr. Zhao is mainly responsible for the financial management of ChunLi Medical. Before joining ChunLi
Medical, Mr. Zhao was a project assistant and project manager at the Chongqing branch of Pan-China
Certified Public Accountants LLP (天健會計師事務所).
Source: Company
Exhibit 61.: Shareholding structure
Source: Company
Shi Chunbao
& Family
Orchid China
M.Fund
SPQ Asia
Capital Ltd.
Convoy
(1019 HK)
Town Health
(3886 HK)
62.17% 8.10% 5.12% 5.11% 4.13%
Public
15.37%
Tue, 05 Jan 2016
Healthcare services
Page 45 of 57
Financial Summary– Chunli Medical (1858 HK) Year to Dec FY13A FY14A FY15E FY16E FY17E
Year to Dec FY13A FY14A FY15E FY16E FY17E
Income Statement (RMB mn)
Ratios
Standard joint prosthesis products 77 92 110 128 150
Gross margin (%) 72.4 74.0 71.1 71.0 70.9
Ceramic hip joint prosthesis products 0 0 38 52 76
Operating margin (%) 35.1 32.7 28.0 31.8 33.0
Custom joint prosthesis products 23 30 38 51 67
Net margin (%) 29.5 27.5 25.7 29.2 29.5
Spinal products 10 12 16 22 27
Selling & dist'n exp/Sales (%) 18.2 21.7 22.2 21.2 19.7
Admin exp/Sales (%) 12.4 10.7 12.9 10.1 10.3
Turnover 111 135 202 253 320
Payout ratio (%) 61.2 29.7 0.0 0.0 0.0 YoY% 13 22 50 25 26
Effective tax (%) 14.3 13.7 15.0 15.0 15.0
COGS (30) (35) (58) (73) (93)
Total debt/equity (%) 1.8 1.5 0.7 0.6 0.5
Gross profit 80 100 143 179 227
Net debt/equity (%) Net cash Net cash Net cash Net cash Net cash
Gross margin 72.4% 74.0% 71.1% 71.0% 70.9%
Current ratio (x) 8.8 6.2 8.9 6.4 5.6 Other income 1 1 0 0 0
Quick ratio (x) 7.3 4.8 7.8 5.3 4.5
Selling & distribution (20) (29) (45) (54) (63)
Inventory T/O (days) 276 370 300 300 300 Admin (14) (14) (26) (25) (33)
AR T/O (days) 111 116 116 116 116
R&D (5) (8) (12) (15) (19)
AP T/O (days) 51 155 155 155 155
Business taxes and levies (1) (1) (2) (2) (3)
Cash conversion cycle (days) 337 332 261 261 261 Other opex (2) (3) (2) (3) (3)
Asset turnover (x) 0.6 0.6 0.6 0.5 0.5
Total opex (42) (56) (87) (99) (121)
Financial leverage (x) 1.1 1.1 1.1 1.1 1.1 Operating profit (EBIT) 39 44 56 80 105
EBIT margin (%) 35.1 32.7 28.0 31.8 33.0
Operating margin 35.1% 32.7% 28.0% 31.8% 33.0%
Interest burden (x) 1.0 1.0 1.1 1.1 1.1 Provisions (1) (1) 0 0 0
Tax burden (x) 0.9 0.9 0.9 0.9 0.9
Interest Income 0 0 5 7 6
Return on equity (%) 18.8 19.2 16.3 15.8 17.0 Finance costs (0) 0 (0) (0) (0)
ROIC (%) 0.0 0.0 28.8 26.9 24.0
Profit after financing costs 38 43 61 87 111
Associated companies & JVs 0 0 0 0 0
Year to Dec FY13A FY14A FY15E FY16E FY17E
Pre-tax profit 38 43 61 87 111
Balance Sheet (RMB mn) Tax (5) (6) (9) (13) (17)
Fixed assets 31 40 60 178 254
Minority interests 0 0 0 0 0
Intangible assets & goodwill 36 35 35 35 35
Net profit 33 37 52 74 94
Associated companies & JVs 0 0 0 0 0 YoY% 2 13 40 42 28
Long-term investments 1 1 1 1 1
Net margin 29.5% 27.5% 25.7% 29.2% 29.5%
Other non-current assets 1 1 1 1 1
EBITDA 43 48 62 93 130
Non-current assets 68 77 97 215 291 EBITDA margin 38.7% 35.7% 30.6% 36.9% 40.7%
EPS (RMB) 0.653 0.741 0.749 1.068 1.361
Inventories 23 35 48 60 77 YoY% 2 13 1 42 28
AR 34 43 64 81 102
DPS (HK$) 0.500 0.275 0.000 0.000 0.000
Prepayments & deposits 1 4 5 7 9
Other current assets 9 17 17 17 17
Year to Dec FY13A FY14A FY15E FY16E FY17E
Cash 66 64 251 189 182
Cash Flow (RMB mn)
Current assets 133 163 386 354 386 EBITDA 43 48 62 93 130
Chg in working cap (1) (27) (24) (22) (29)
AP 4 15 25 31 40 Others 6 25 0 0 0
Tax 4 4 9 13 17
Operating cash 48 46 38 71 101
Accruals & other payables 4 4 6 8 10 Tax (20) (22) (4) (9) (13)
Bank loans & leases 1 1 1 1 1
Net cash from operations 28 24 34 62 88
CB & othe debts 2 2 2 2 2
Other current liabilities 0 0 0 0 0
Capex (7) (12) (25) (130) (101)
Current liabilities 15 26 43 55 69 Investments 0 0 0 0 0
Dividends received 0 0 0 0 0
Bank loans & leases 0 0 0 0 0 Sales of assets 0 0 0 0 0
CB & othe debts 0 0 0 0 0
Interests received 0 0 5 7 6
Deferred tax & others 6 8 8 8 8 Others 5 2 0 0 0
MI 0 0 0 0 0
Investing cash (1) (10) (20) (124) (95)
Non-current liabilities 6 8 8 8 8 FCF 27 15 14 (62) (7)
Issue of shares 0 0 185 0 0
Total net assets 180 206 432 506 600 Buy-back 0 0 0 0 0
Minority interests 0 0 0 0 0
Shareholder's equity 180 206 432 506 600 Dividends paid (20) (11) (11) 0 0
Share capital 50 50 69 69 69
Net change in bank loans 0 0 0 0 0
Reserves 130 156 363 437 531 Interest paid 0 0 (0) (0) (0)
Others (2) (6) 0 0 0
BVPS (HK$) 4.50 5.15 7.80 9.14 10.84
Financing cash (22) (17) 174 (0) (0)
Total debts 3 3 3 3 3
Net change in cash 5 (2) 187 (62) (7) Exchange rate or other Adj 0 0 0 0 0
Opening cash 61 66 64 251 189
Closing cash 66 64 251 189 182
CFPS (HK$) 0.705 0.607 0.614 1.120 1.596
Source: Company, OP Research
Tue, 05 Jan 2016
Healthcare services
Page 46 of 57
Exhibit 62.: Peer Group Comparison
Company Ticker Price
Mkt cap
(US$m)
3-mth
avg t/o
(US$m)
PER Hist
(x) PER FY1 (x)
PER
FY2
(x)
EPS
FY1
YoY%
EPS
FY2
YoY%
3-Yr EPS
Cagr (%) PEG (x)
Div
yld
Hist
(%)
Div
yld
FY1
(%)
P/B
Hist
(x)
P/B
FY1
(x)
EV/
Ebitda
Hist
EV/
Ebitda
Cur Yr
Net
gearing
Hist (%)
Gross
margin
Hist
(%)
Net
margin
Hist
(%)
ROE
Hist
(%)
ROE
FY1 (%)
Sh px
1-mth
%
Sh px
3-mth
%
Beijing Chunli-H 1858 HK 14.00 125 0.1 15.1 14.9 10.5 1.2 42.5 29.1 0.54 2.0 0.0 0.00 0.00 (1.3) (4.0) Net cash 74.0 27.5 0.0 16.3 0.0 15.3
HSI 21,327.12 9.4 10.4 9.4 (9.5) 10.5 2.5 4.24 4.0 3.8 1.15 1.07 12.2 10.3 (4.7) 2.3
HSCEI 9,311.18 6.9 6.9 6.3 (0.2) 10.3 5.1 1.36 4.2 4.4 0.95 0.85 13.7 12.3 (6.4) (1.0)
CSI300 3,469.07 14.6 12.5 11.1 17.2 12.4 9.6 1.3 1.8 2.2 2.0 1.7 13.6 13.3 (3.4) 8.3
Adjusted sector avg* 35.4 14.7 18.3 120.7 12.9 (13.6) 0.5 1.2 0.8 2.3 2.3 23.8 13.3 14.7 70.1 8.3 2.9 10.0 8.2 6.3
Pw Medtech Group 1358 HK 1.72 371 0.9 13.7 10.9 9.5 25.8 15.0 20.5 0.53 N/A 0.7 1.09 1.18 8.8 6.9 0.0 72.8 29.0 9.8 10.6 7.5 5.5
Microport Scient 853 HK 3.67 675 0.2 N/A N/A 33.8 N/A N/A (165.8) N/A N/A 0.0 1.96 2.01 42.7 19.9 58.7 68.5 (16.7) (14.5) (0.6) 24.8 15.8
Zimmer Biomet Ho ZBH US 102.59 20,906 117.8 24.1 15.0 13.1 60.8 14.1 26.4 0.57 0.9 0.9 2.09 1.97 22.0 13.4 0.0 73.3 15.4 2.4 10.2 2.0 7.7
Stryker Corp SYK US 92.94 34,901 139.5 68.3 18.2 16.6 275.6 9.6 64.7 0.28 1.5 1.5 4.12 3.88 21.6 13.1 0.0 66.0 5.3 13.8 19.7 (1.5) (3.6)
* Outliners and "N/A" entries are in red and excl. from the calculation of averages
Source: Bloomberg, OP Research
Tue, 05 Jan 2016
Healthcare services
Page 47 of 57
Lifetech Scientific (1302 HK) –Triple leap Brand new star product Lambre
TM LAAO expected to contribute 29%/53%
sales in FY16/17E
Pacemaker enters Chinese market from 2018 with Medtronic’s cooperation
Initial BUY with TP HK$2.00 based on 20x FY17E PE, representing 46% upside, given 79% 3 yrs earnings CAGR versus peers’ 28%.
Launch of star product LambreTM
LAA Occlusion (LAAO) in 2016 to boost up sales
LAAO is the newproduct of Lifetech. It is used in Left Atrial Appendage Closure (LAAC) to
prevent blood clot caused by Atrial Fibrillationi (AF), which has a high probability to cause
stroke, especially for people over 60 years of age. Lifetech is expected to obtain CE
registration for Lambre in 1H16 and CFDA in 2H16, given that currently there are only
three companies producing LAAO and LambreTM LAAO is believed to be the safest one
with lowest risks, we expect LambreTM
LAAO to acquire ~8%/26% market share in
FY16/17E and achieve RMB150mn/RMB500mn revenue, representing 29%/53% of total
sales respectively.
Leveraging Medtronic pacemaker technology, exploit the Chinese pacemaker
market from 2018 onwards Medtronic has a dominating 52% market share of 2013
global pacemaker devices. Under a new agreement signed between Lifetech and
Medtronic, Medtronic will help Lifetech to set up the pacemaker production line, secure
supply of customized components with Medtronic’s patented technology for the
manufacturing of the pacemakers and distribute the Lifetech’s pacemakers in China.
Lifetech’s pacemakers are expected to launch in 2018, and penetrate the market rapidly
given that it has same high quality as Medtronic’s pacemaker and only priced at 2/3 of
Medtronic’s pacemaker price. Given timing uncertainty, we have not taken into account
peacemaker contribution.
Back by strong shareholder. Medtronic is the second largest shareholder of Lifetech with
19% stake, and if it converts all the convertible bonds, it will become the largest
shareholder with 51% stake by Jan 2018. Because of the equity investment, Medtronic is
cooperating with Lifetech in many ways, including development and distribution of
pacemakers in China and exclusive distribution rights of CeraFlex (one of congenital heart
occludes) in Europe, to capture the localization of core medical devices trend in China and
benefit from synergy.
Initiate BUY. We initiate our BUY rating on Lifetech with TP HK$2.00 based on 20x FY17E
PE which we believe is justified by its 79% 3-years earnings CAGR.
Exhibit 63. : Forecast and Valuation Year to Dec (RMB mn) FY13A FY14A FY15E FY16E FY17E
Revenue 231.0 282.7 311.4 519.7 946.7
Growth (%) 27.3 22.4 10.2 66.9 82.2
Adj. Net Profit 12.4 41.9 81.7 162.7 338.6
Growth (%) (62.4) 238.7 95.0 99.1 108.1
Diluted EPS (HK$) 0.004 0.013 0.024 0.047 0.098
EPS growth (%) (95.3) 238.7 80.6 99.1 108.1
Change to previous EPS (%) 4.8 (10.9) 0.0
Consensus EPS (HK$) 0.025 0.038 0.063
ROE (%) 4.6 21.4 85.0 138.6 92.0
P/E (x) 354.3 104.6 57.9 29.1 14.0
P/B (x) 0.0 0.0 0.0 0.0 0.0
Yield (%) 0.0 0.0 0.0 0.0 0.0
DPS (HK$) 0.000 0.000 0.000 0.000 0.000
Initial Coverage
BUY
Close price: HK$1.37
Target Price: HK$2.00 (+46%)
Key Data
HKEx code 1302
12 Months High (HK$) 3.08
12 Month Low (HK$) 0.72
3M AvgDail Vol. (mn) 6.76
Issue Share (mn) 4,000.00
Market Cap (HK$mn) 5,480.00
Fiscal Year 12/2014
Major shareholder (s) Director Xie Yuehui 19.55%
Source: Company data, Bloomberg, OP Research Closing price are as of 4/1/2016
Price Chart
1mth 3mth 6mth
Absolute % -1.4 28.0 31.7
Rel. MSCI CHINA % 0.6 29.1 37.6
PE
Company Profi le Lifetech is a leading domestic cardiac
implant medical device manufacturer.
Medtronic, the global No.2 Medtech
company holds 19% stake in Lifetech, and
will become the largest shareholder with 51%
stake if it converts all the CB by 2018.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Jan/15 Apr/15 Jul/15 Oct/15 Jan/16
HK$1302 HK MSCI CHINA
-200
0
200
400
600
800
1000
1200
1400
Jan/14 Jul/14 Jan/15 Jul/15 Jan/16
Forward P/E Ratio
+1std.
avg.
-1std.
Tue, 05 Jan 2016
Healthcare services
Page 48 of 57
Exhibit 64.: Business development and products pipeline
Source: Company, OP Research
Exhibit 65.: Pacemaker global market share in 2013
Source: Medtronic, Boston Scientific
1999• Established Lifetech Science
2001• HeartR Occluders and Supporter Coronary Stent obtained CFDA registration
2006• Orchid Asia invested in Lifetech, speed up the listing process
2008
• Aegisy obtained CE registration, established a subsidiary in India, acquired Beijing Huipu and ShenZhenQingYuan
2010• SeQure obtained FDA registration, Fustar, Cera ASD obtained CE registration
2011
• Fuster obtained FDA registration; Cera Flex obtained CE registration; get listed on the Hong Kong Exchange GEM Board
2012
• Brought in strategic investment of Medtronic, Spider PFO obtained CE registration, launched LambreTM LAAO clinical trials in Europe
2013
• Listed on the Hong Kong Exchange Main Board, Medtronic helped on rebuild of Bioprosthetic Heart Valve production line
2014-2015
• Introduction of Medtronic pacemaker, LambreTM LAAO’s clinical trials in Europe and China are ready to complete
2015• LambreTM LAAO is expected to obtain CE registration in 1H2016 and CFDA in 2H2016
2018
• Expected to launch pacemaker, leveraging Medtronic technology, breaking monopoly and exploiting China market
2019
• Expected to launch Biodegradable stent, Lifetech is the only company with Iron-based alloy biodegradable stent technology
Obtained CE
registration for the first
time
Obtained FDA
registration for the first
time
Medtronic’s strategic
investment showed its
recognition of Lifetech’s
innovation capability
Medtronic52%
St.Jude30%
Boston6%
Others12%
Tue, 05 Jan 2016
Healthcare services
Page 49 of 57
Exhibit 66.: Leading market position and layout
Source: Company, OP Research
Exhibit 67.: Cooperation with Medtronic via Equity investment and CB issuance
Source: Company, OP Research
Catching up
Innovation
Breakthrough
Lead
• Single product line
• Imitation
HeartR
Imitation – Hard to
enter global market
• Diversified product line
• Innovative technology
Cera
Partially Innovated –
Hard to be recognized
by western countries
• Full product range
• Independent IPR
CeraFlex
Best design and
complete patent
• Innovation
• Lead
2003 2010 2014 2017 2020Chinese market
leadership
BRIC market
leadership
Enter EU market Global leader
Globalization
process
Innovation
process
Resource sharing
with MDT
The best
QS
Brand effect
Global access
Global
leader
Global
high-end
Chinese
low-end
Global
high-end
Cost-effective
mid-end
- Patent protection –
- Same quality -
Chinese low-end
Brand image Strategic cooperation Positioning
Patent protection
High quality
High price
Advanced technology
1. Grafting advanced knowledge and
quality system
2. Developing targeted products
3. Utilizing Medtronic brand effect and
global access
No patent protection
Low cost
No quality assurance
• Global dual-brand strategy
• To reach and serve more patients and physicians
• Synergy brought by Medtronic and Lifetech Cooperation
Tue, 05 Jan 2016
Healthcare services
Page 50 of 57
104 121 137 130 132 135
77 110
145 181 236
310
150
500
181 231
283 311
520
947
0
200
400
600
800
1,000
FY12 FY13 FY14 FY15E FY16E FY17E
Congenltal heart diseases Peripheral vascular diseases
Surgical vascular repair Lambre LAAO
(RMBmn)
Exhibit 68.: Medtronic CB’s effect on shareholding structure
Current
outstanding
Assume First Tranche
(Maturity 30/1/2018)
Assume Second Tranche
(Maturity 30/1/2018)
shs (mn) % HK$152mn CB convert at HK$0.475 % HK$2,031mn CB convert at HK$1.00 %
Director Xie Yuehui 782 19.5% 782 18.1% 782 11.7%
Medtronic 760 19.0% 1,080 25.0% 3,431 51.4%
Director Wu Jian Hui 418 10.4% 418 9.7% 418 6.3%
Prosperity (803 HK) 33 0.8% 33 0.8% 33 0.5%
Public 2,008 50.2% 2,008 46.5% 2,008 30.1%
Total 4,000 100.0% 4,320 100.0% 6,671 100.0%
Source: Company, OP Research
Exhibit 69.: Revenue breakdown forecast from FY12 to FY17E
Source: Company, OP Research
Exhibit 70.: Core net profit forecast from FY12 to FY17E
Source: Company, OP Research
33 12
42
82
163
339
0
100
200
300
400
FY12 FY13 FY14 FY15E FY16E FY17E
(RMBmn)
Tue, 05 Jan 2016
Healthcare services
Page 51 of 57
Exhibit 71.: Key assumptions
2014 2015E 2016E 2017E
Revenue Breakdown
Cogenital heart diseases (CHD) business
微創介入先天性心臟病(CHD)植入物以及相關輸送即支護器械
Heart R (RMB mn) 70.30 69.80 69.62 69.45
% yoy 7% -1% 0% 0%
ASP (RMB) 3,978 3,780 3,591 3,411
% yoy -4% -5% -5% -5%
Vol (k units) 17.67 18.47 19.39 20.36
% yoy 12% 5% 5% 5%
Cera 27.30 28.75 30.04 31.40
% yoy -2% 5% 4% 5%
ASP (RMB) 6,334 6,017 5,717 5,431
% yoy -6% -5% -5% -5%
Vol (k units) 4.31 4.78 5.26 5.78
% yoy 4% 11% 10% 10%
CeraFlex 26.90 18.75 19.60 20.48
% yoy 236% -30% 5% 4%
ASP (RMB) 12,512 11,886 11,292 10,727
% yoy 20% -5% -5% -5%
Vol (k units) 2.15 1.58 1.74 1.91
% yoy 179% -27% 10% 10%
Others 12.76 12.44 13.06 13.71
% yoy -34% -3% 5% 5%
ASP (RMB) 437 437 437 437
% yoy -40% 0% 0% 0%
Vol (k units) 29.18 28.44 29.87 31.36
% yoy 10% -3% 5% 5%
CHD revenue (RMB mn) 137 130 132 135
% yoy 14% -5% 2% 2%
Lambre LAAO (RMB mn) 150.00 500.00
% yoy
233%
ASP (RMB)
50,000 50,000
% yoy
0%
Vol (k units)
3.0 10.0
% yoy
233%
Peripheral vascular diseases (PVD) business
微創介入周邊及其他血管植入物及相關輸送及支護器械
Vena Caval Filter 69.82 78.07 81.97 86.07
yoy% 26% 12% 5% 5%
ASP (RMB) 3,853 3,853 3,853 3,853
% yoy 1% 0% 0% 0%
Vol (k units) 18.12 20.26 21.27 22.34
% yoy 25% 12% 5% 5%
Covered-stent 73.30 100.14 150.21 217.80
yoy% 37% 50% 45%
ASP (RMB) 22,554 22,554 22,554 22,554
% yoy 1% 0% 0% 0%
Vol (k units) 3.25 4.44 6.66 9.66
% yoy 39% 37% 50% 45%
Acellular Bovine Pericardium 0.01 0.40 1.00 2.00
yoy% -95% 3233% 150% 100%
Others 2.29 2.67 3.20 3.84
yoy% 16% 20% 20%
ASP (RMB) 469 469 469 469
% yoy -26% 0% 0% 0%
Vol (k units) 4.88 5.68 6.82 8.18
% yoy 19% 16% 20% 20%
PVD revenue 145.42 181.27 236.38 309.71
% yoy 32% 25% 30% 31%
Total Revenue (RMB mn) 283 311 519 945
% yoy 22% 10% 67% 82%
Source: Company, OP Research
Tue, 05 Jan 2016
Healthcare services
Page 52 of 57
Investment risks
Failure or delay in launch of LambreTM
LAAO: LambreTM
LAAO is expected to
obtain CE registration in 1H16 and CFDA registration in 2H16; however the result
is not assured, other issues may occur and the schedule may be delayed. We
believe the risk is low, as the current feedbacks on clinical trials are satisfactory
and LTS has obtained “green channel” which will speed up its CFDA registration
process.
Failure or delay in launch of pacemaker: LTS’s pacemaker is expected to be
launched in 2018. There may be delays in the research and development process,
clinical trials and registration. We believe the cooperation with Medtronic on
pacemaker will lower the product failure and delay risk.
Third parties may infringe upon LTS’s intellectual property rights: The
success of LTS depends highly on obtaining and maintaining intellectual property
rights and other forms of protection of the product, and defending against
third-party infringements. Third parties may develop similar products, introduce
counterfeits, and infringe patents, brand names and trademarks. In the event that
misappropriation or infringement of intellectual property occurs, LTS needs to
protect its property rights through litigation or other forms of legal proceedings
which invariably are expensive, lengthy and uncertain. Besides, the counterfeits
may damage LTS’s reputation and adversely affect the business. We believe LTS
will take sufficient and appropriate measures to prevent and solve such infringes.
Cooperation with Medtronic: Medtronic is LTS’s second largest shareholder
currently with 19% interest, and it also holds two batches of CB which, if totally
converted, will make Medtronic the largest shareholder with 50.99% interest.
Because of the substantial equity investment in LTS, Medtronic has
comprehensive cooperation with LTS, including technical support and product
distributorship, all of which benefit LTS. If the cooperation relationship is broken,
LTS’s operation will be adversely affected. We believe their relationship is stable
now and will remain so in the long run.
Exchange rate risk of Euro or other emerging countries currency
depreciation: 30% of LTS sales came from outside China in FY14: Europe
(9.1%), India (7.3%), Asia excluding PRC and India (7.6%), South America
(5.1%). If the currencies in these emerging countries or the Euro depreciate, LTS
will experience exchange rate risks. We believe LTS can hedge the currency risks
by entering into some currency derivative contracts.
Tue, 05 Jan 2016
Healthcare services
Page 53 of 57
Exhibit 72.: Management profiles
Name Position Description
Xie Yuehui Chairmand & CEO Mr. Xie has more than 20 years of experience in business management in the PRC, including over 10
years in the medical device industry. Prior to joining Lifetech, Mr. Xie served as General Manager as
Shenzhen Huishibang Technol4ogy Company Limited, Investment manager at a subsidiary of China
Southern Securities and Manager at the domestic trade department of Shenzhen Huihua Group.
Zhang Deyuan CTO Mr. Zhang has more than 20 years of experience in material development. Prior to joining Lifetech,
Mr. Zhang served as deputy director of research institution of Jiangxi Academy of Science Institute
and minister of C material research institution of China 863.
Liu Jianxiong CFO & Company secretary Mr. Liu has nearly 20 years of experience in accounting field. Prior to joining Lifetech, he served as
the accounting services manager of Yantian International Container Terminal Company Limited, the
Financial Controller of Shenzhen Schlumberger Electronic System Solution Co., Ltd, the China
Financial controller of the China Light & Power Group renewable energy division, and the Great China
Corporate controller of Any DATA Group. He has been a member of the Association of Chartered
Certified Accountants since 1997 and a registered tax Agent since 1999.
Han Jiangbo COO Mr. Han has over 20 years of experience in business management, including over 14 years in
operation and business strategy of multi-national companies. Prior to joining Lifetech, Mr. Han worked
in Power-One/ABB/BelFuse(China), EPCOS(Singapore), Sonion(Vietnam) and
Hewlett-Packard(Singapore).
Source: Company, OP Research
Exhibit 73.: Shareholding structure
Source: Company, OP research
Public
44.49%
Director
Xie YuehuiMedtronic B.V.
Director
Wu Jian Hui
Prosperity Intl
(0803 HK)
19.55% 19.00% 10.44% 6.52%
Tue, 05 Jan 2016
Healthcare services
Page 54 of 57
Financial Summary– Lifetech Scientific (1302 HK) Year to Dec FY13A FY14A FY15E FY16E FY17E
Year to Dec FY13A FY14A FY15E FY16E FY17E
Income Statement (RMB mn)
Ratios
Congenltal heart diseases 121 137 130 132 135
Gross margin (%) 81.6 81.4 82.6 83.3 84.4
Peripheral vascular diseases 110 145 181 236 310
Operating margin (%) 17.9 22.8 35.6 40.7 45.4 Surgical vascular repair 0 0 0 1 2
Net margin (%) 5.4 14.8 26.2 31.3 35.8
Lambre LAAO 0 0 0 150 500
Selling & dist'n exp/Sales (%) 22.6 24.4 21.6 18.1 15.1
Admin exp/Sales (%) 27.4 26.8 14.3 13.1 12.2
Turnover 231 283 311 520 947
Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 YoY% 27 22 10 67 82
Effective tax (%) (28.9) (19.5) (20.0) 20.0 20.0
COGS (42) (53) (54) (87) (148)
Total debt/equity (%) 28.4 50.2 217.8 39.5 14.6
Gross profit 189 230 257 433 799
Net debt/equity (%) Net cash Net cash Net cash Net cash Net cash
Gross margin 81.6% 81.4% 82.6% 83.3% 84.4%
Current ratio (x) 4.7 5.9 6.0 4.7 4.0 Other income (1) 12 6 8 12
Quick ratio (x) 4.3 5.4 5.5 4.3 3.6
Selling & distribution (52) (69) (67) (94) (143)
Inventory T/O (days) 280 214 214 214 214 Admin (63) (76) (44) (68) (115)
AR T/O (days) 78 84 84 84 84
R&D (31) (33) (40) (68) (123)
AP T/O (days) 138 39 39 39 39
Other opex 0 0 0 0 0
Cash conversion cycle (days) 220 259 259 259 259
Total opex (146) (178) (152) (230) (381)
Asset turnover (x) 0.5 0.5 0.5 0.7 0.9
Operating profit (EBIT) 41 64 111 212 430
Financial leverage (x) 1.6 2.8 6.4 6.6 3.0 Operating margin 17.9% 22.8% 35.6% 40.7% 45.4%
EBIT margin (%) 17.9 22.8 35.6 40.7 45.4
Provisions 6 (17) 0 0 0
Interest burden (x) (1.3) (1.1) (0.9) 1.0 1.0 Interest Income 4 3 3 4 6
Tax burden (x) (0.2) (0.6) (0.8) 0.8 0.8
Finance costs (10) (11) (12) (12) (12)
Return on equity (%) 4.6 21.4 85.0 138.6 92.0 Net gain/(loss) on convertible notes (84) (105) (202) 0 0
ROIC (%) 0.0 0.0 (77.8) (97.6) (493.0)
Profit after financing costs (42) (66) (100) 203 423
Associated companies & JVs (11) (1) 0 0 0
Year to Dec FY13A FY14A FY15E FY16E FY17E
Pre-tax profit (53) (68) (100) 203 423
Balance Sheet (RMB mn) Tax (12) (13) (20) (41) (85)
Fixed assets 36 57 82 126 209
Minority interests 0 1 0 0 0
Intangible assets & goodwill 32 53 53 53 53
Adj. Net profit 12 42 82 163 339
Associated companies & JVs 1 1 1 1 1 YoY% (62) 239 95 99 108
Long-term investments 69 53 53 53 53
Net margin 5.4% 14.8% 26.2% 31.3% 35.8%
Other non-current assets 17 14 14 14 14
Reported Net profit (65) (80) (120) 163 339
Non-current assets 155 178 204 248 330 EBITDA 48 69 119 224 451
EBITDA margin 20.9% 24.4% 38.4% 43.2% 47.6%
Inventories 33 31 32 51 87 EPS (RMB) 0.003 0.010 0.019 0.038 0.078
AR 49 65 71 119 217
YoY% (95) 239 81 99 108
Prepayments & deposits 18 25 28 46 84 DPS (HK$) 0.000 0.000 0.000 0.000 0.000
Other current assets 40 11 11 11 11
Cash 225 256 313 404 609
Year to Dec FY13A FY14A FY15E FY16E FY17E
Current assets 365 388 455 632 1,008
Cash Flow (RMB mn)
EBITDA 48 69 119 224 451
AP 16 6 6 9 16
Chg in working cap (1) (27) (5) (48) (96)
Tax 18 14 20 41 85 Others (0) (9) 0 0 0
Accruals & other payables 43 46 50 84 153
Operating cash 47 33 114 176 355
Bank loans & leases 0 0 0 0 0 Tax (12) (14) (14) (20) (41)
CB & othe debts 0 0 0 0 0
Net cash from operations 35 20 100 156 314
Other current liabilities 0 0 0 0 0
Current liabilities 77 66 76 134 254
Capex (14) (31) (34) (57) (104)
Investments (17) (0) 0 0 0
Bank loans & leases 0 0 0 0 0
Dividends received 0 0 0 0 0
CB & othe debts 67 78 78 78 78
Sales of assets 0 0 0 0 0
Deferred tax & others 139 266 468 468 468 Interests received 4 3 3 4 6
MI 0 0 0 0 0
Others (99) 39 0 0 0
Non-current liabilities 206 344 546 546 546
Investing cash (126) 10 (31) (53) (98)
FCF (91) 30 69 103 216
Total net assets 236 156 36 199 537
Issue of shares 0 0 0 0 0
Buy-back 0 0 0 0 0
Shareholder's equity 236 156 36 199 537
Minority interests 0 0 0 0 0
Share capital 0 0 0 0 0 Dividends paid 0 0 0 0 0
Reserves 236 156 36 199 537
Net change in bank loans 0 0 0 0 0
Interest paid (1) 0 (12) (12) (12)
BVPS (HK$) 0.07 0.05 0.01 0.06 0.17
Others 119 0 0 0 0
Financing cash 118 0 (12) (12) (12)
Total debts 67 78 78 78 78
Net cash/(debts) 165 187 244 335 540
Net change in cash 26 30 57 91 204 Exchange rate or other Adj 1 1 0 0 0 Opening cash 198 225 256 313 404 Closing cash 225 256 313 404 609
CFPS (HK$) 0.011 0.006 0.029 0.045 0.091
Source: Company, OP Research
Tue, 05 Jan 2016
Healthcare services
Page 55 of 57
Exhibit 74.: Peer Group Comparison
Company Ticker Price
Mkt cap
(US$m)
3-mth
avg t/o
(US$m)
PER Hist
(x) PER FY1 (x)
PER
FY2
(x)
EPS
FY1
YoY%
EPS
FY2
YoY%
3-Yr EPS
Cagr (%) PEG (x)
Div
yld
Hist
(%)
Div
yld
FY1
(%)
P/B
Hist
(x)
P/B
FY1
(x)
EV/
Ebitda
Hist
EV/
Ebitda
Cur Yr
Net
gearing
Hist (%)
Gross
margin
Hist
(%)
Net
margin
Hist
(%)
ROE
Hist
(%)
ROE
FY1 (%)
Sh px
1-mth
%
Sh px
3-mth
%
Lifetech Sci 1302 HK 1.37 707 1.2 104.6 59.2 29.7 80.6 99.1 79.1 0.75 0.0 0.0 0.00 0.00 (2.7) 44.8 Net cash 81.4 14.8 0.0 85.0 (1.4) 24.5
HSI 21,327.12 9.4 10.4 9.4 (9.5) 10.5 2.5 4.24 4.0 3.8 1.15 1.07 12.2 10.3 (4.7) 2.3
HSCEI 9,311.18 6.9 6.9 6.3 (0.2) 10.3 5.1 1.36 4.2 4.4 0.95 0.85 13.7 12.3 (6.4) (1.0)
CSI300 3,469.07 14.6 12.5 11.1 17.2 12.4 9.6 1.3 1.8 2.2 2.0 1.7 13.6 13.3 (3.4) 8.3
Adjusted sector avg* 33.8 17.6 16.1 93.3 9.4 27.6 1.3 2.0 1.6 4.1 4.0 17.7 13.0 29.1 69.7 11.3 11.8 20.3 (0.9) 3.9
Medtronic Plc MDT US 76.92 108,161 418.4 31.5 17.6 15.9 79.5 10.8 30.0 0.58 1.9 2.0 2.07 2.00 25.0 13.2 31.4 68.9 13.2 6.5 11.7 (1.6) 8.1
Boston Scientifc BSX US 18.44 24,805 165.2 N/A 20.1 17.5 N/A 15.0 (336.9) N/A N/A 0.0 3.87 3.71 71.5 15.5 56.9 70.1 (1.6) (6.0) 19.0 (0.4) 9.0
St Jude Medical STJ US 61.77 17,460 112.5 17.5 15.7 14.5 11.8 8.1 10.3 1.52 1.9 1.9 4.36 4.64 13.7 11.9 57.1 70.6 17.8 25.0 27.4 (0.9) (3.2)
Johnson&Johnson JNJ US 102.72 284,220 755.0 17.7 16.6 16.1 6.6 3.5 5.6 2.98 2.9 2.9 3.97 3.90 10.7 11.5 0.0 69.4 22.0 19.9 23.9 (0.2) 9.4
Stryker Corp SYK US 92.94 34,901 139.5 68.3 18.2 16.6 275.6 9.6 64.7 0.28 1.5 1.5 4.12 3.88 21.6 13.1 0.0 66.0 5.3 13.8 19.7 (1.5) (3.6)
Abbott Labs ABT US 44.91 66,993 278.9 29.9 20.8 18.9 43.7 10.5 20.8 1.00 2.1 2.1 3.17 2.88 16.7 13.7 15.6 54.5 11.3 20.7 14.3 (0.9) 8.5
Biosensors Intl BIG SP 0.81 961 3.4 N/A 22.8 21.1 N/A 8.0 (162.2) N/A N/A 0.0 0.93 0.92 (3.7) 8.3 0.0 72.8 (72.9) (19.4) 4.0 0.6 19.1
Terumo Corp 4543 JP 3,680.00 11,762 45.3 36.3 28.4 27.3 27.8 4.1 13.3 2.14 1.0 1.0 2.40 2.31 13.3 11.7 8.1 52.3 7.9 7.8 8.4 (5.0) 9.4
Microport Scient 853 HK 3.67 675 0.2 N/A N/A 33.8 N/A N/A (165.8) N/A N/A 0.0 1.96 2.01 42.7 19.9 58.7 68.5 (16.7) (14.5) (0.6) 24.8 15.8
Shandong Weig-H 1066 HK 5.27 3,044 4.3 18.5 17.0 14.7 9.2 15.6 13.7 1.24 1.7 1.5 2.02 1.85 12.7 11.0 0.0 58.8 20.6 11.5 11.5 (6.9) 0.4
Pw Medtech Group 1358 HK 1.72 371 0.9 13.7 10.9 9.5 25.8 15.0 20.5 0.53 N/A 0.7 1.09 1.18 8.8 6.9 0.0 72.8 29.0 9.8 10.6 7.5 5.5
Lepu Medical-A 300003 CH 36.61 4,549 43.2 70.2 49.9 38.5 40.6 29.9 33.6 1.49 0.4 0.6 8.62 8.16 52.7 36.0 0.0 63.1 25.7 16.0 16.8 (5.9) 14.4
* Outliners and "N/A" entries are in red and excl. from the calculation of averages
Source: Bloomberg, OP Research
Tue, 05 Jan 2016
Healthcare services
Page 56 of 57
Our recent reports
Date Company / Sector Stock Code Title Rating Analyst
29/12/2015
Environmental Utilities -
Waste-To-Energy (WTE)
- Nothing Is a Waste If Used Wisely BUY Bruce Yeung
22/12/2015 Regina Miracle 2199 Site visit takeaway notes NR Walter Woo
18/12/2015 Wasion Group 3393 State-grid tender results inline BUY Bruce Yeung
07/12/2015
Global sporting goods
industry
- How technology changes the way we sport BUY Walter Woo
01/12/2015 In Construction 1500 Showing the real edges to the market BUY Bruce Yeung
27/11/2015 China Water Affairs 855 1HFY16 results inline BUY Bruce Yeung
25/11/2015 Beijing Properties 925 Time to hunt BUY Bruce Yeung
23/11/2015 Sinotrans 598 Buy on rumors BUY Bruce Yeung
29/10/2015 Sinotrans 598 9M15 results inline, but lack catalysts HOLD Bruce Yeung
19/10/2015 Kingdom Holdings 528 Positive outlooks from NDR BUY Bruce Yeung
09/10/2015 Wasion Group 3393 Grow like a flash of lightning BUY Bruce Yeung
05/10/2015 On Time Logistics 6123 On Time with a touch of Alibaba magic BUY Bruce Yeung
21/09/2015 Kingdom Holdings 528 Chairman's buy-back signals strong confidence BUY Bruce Yeung
18/09/2015 Man Wah 1999 Sales growth stronger than expected NR Walter Woo
07/09/2015 Beijing Properties 925 1H15 results missed on higher costs BUY Bruce Yeung
01/09/2015 On Time Logistics 6123 Not to forsake for just a bad year BUY Bruce Yeung
31/08/2015 Shenzhen International 152 Uncertainties looming over 2H15E HOLD Bruce Yeung
27/08/2015 Meidong Auto 1268 Negatives priced in, attractive risk-reward BUY Walter Woo
26/08/2015 EGL 6882 1H15 strong momentum carrying to 2H15 BUY Bruce Yeung
26/08/2015 HC International 2280 2Q15 results disappoint but hopes on horizon BUY Yuji Fung
26/08/2015 Sunny Optical 2382 Lens set business to power higher profits BUY Yuji Fung
26/08/2015 Technovator 1206 1H15 results beat BUY Yuji Fung
26/08/2015 Ju Teng Intl 3336 1H15 results as expected, GPM recovery in sight BUY Yuji Fung
24/08/2015 COOLPAD 2369 1H15 hopes go astray HOLD Yuji Fung
24/08/2015 Kingdom Holdings 528 1H15 results of OBOR hidden gem BUY Bruce Yeung
20/08/2015 Sinotrans 598 1H15 results missed but priced in BUY Bruce Yeung
20/08/2015 Chinasoft Int’l 354 1H15 results in line with expectations BUY Yuji Fung
TERMS FOR PROVISION OF REPORT, DISCLAIMERS AND DISCLOSURES
By accepting this report, you represent and warrant that you are entitled to receive such report in accordance with the restrictions set forth below and agree to be bound by the limitations contained herein. Any failure to comply with these limitations may constitute a violation of law or termination of such services provided to you.
Disclaimer
Research distributed in Hong Kong is intended only for institutional investors whose ordinary business activities involve investing in shares, bonds and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not an institutional investor must not rely on this communication.
The information and material presented herein are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Oriental Patron Securities Limited (“OPSL”) and/or its associated companies and/or its affiliates (collectively “Oriental Patron”) to any registration or licensing requirement within such jurisdiction.
The information and material presented herein are provided for information purposes only and are not to be used or considered as an offer or a solicitation to sell or an offer or solicitation to buy or subscribe for securities, investment products or other financial instruments, nor to constitute any advice or recommendation with respect to such securities, investment products or other financial instruments.
This research report is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. This report is not to be relied upon in substitution for the exercise of independent judgment. Oriental Patron may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them. You should independently evaluate particular investments and you should consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities mentioned in this report.
Information and opinions presented in this report have been obtained or derived from sources believed by Oriental Patron to be reliable, but Oriental Patron makes no representation as to their accuracy or completeness and Oriental Patron accepts no liability for loss arising from the use of the material presented in this report where permitted by law and/or regulation. Further, opinions expressed in this report are subject to change without notice. Oriental Patron does not accept any liability whatsoever whether direct or indirect that may arise from the use of information contained in this report.
The research analyst(s) primarily responsible for the preparation of this report confirm(s) that (a) all of the views expressed in this report accurately reflects his or their personal views about any and all of the subject securities or issuers; and (b) that no part of his or their compensation was, is or will be, directly or indirectly, related to the specific recommendations or views he or they expressed in this report.
Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance.
Oriental Patron, its directors, officers and employees may have investments in securities or derivatives of any companies mentioned in this report, and may make investment decisions that are inconsistent with the views expressed in this report.
General Disclosure
Oriental Patron, its directors, officers and employees, including persons involved in the preparation or issuance of this report, may, to the extent permitted by law, from time to time participate or invest in financing transactions with the issuer(s) of the securities mentioned in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. Oriental Patron may, to the extent permitted by law, act upon or use the information presented herein, or the research or analysis on which they are based, before the material is published. One or more directors, officers and/or employees of Oriental Patron may be a director of the issuers of the securities mentioned in this report. Oriental Patron may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment or investment banking service to the issuers of the securities mentioned in this report.
Regulatory Disclosures as required by the Hong Kong Securities and Futures Commission
Oriental Patron (inclusive of OPSL) which are carrying on a business in Hong Kong in investment banking, proprietary trading or market making or agency broking are not a market maker in the securities of the subject companies mentioned in this report. Unless otherwise specified, Oriental Patron does not have any investment banking relationship with the companies mentioned in this report within the last 12 months. As at the date of this report, Oriental Patron do not have any interests in the subject company(ies) aggregating to an amount equal to or more than 1% of the subject company(ies) market capitalization.
Analyst Certification:
The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.
Rating and Related Definitions
Buy (B) We expect this stock outperform the relevant benchmark greater than 15% over the next 12 months. Hold (H) We expect this stock to perform in line with the relevant benchmark over the next 12 months. Sell (S) We expect this stock to underperform the relevant benchmark greater than 15% over the next 12 month. Relevant Benchmark Represents the stock closing price as at the date quoted in this report.
Copyright © 2015 Oriental Patron Financial Group. All Rights Reserved
This report is being supplied to you strictly on the basis that it will remain confidential. Except as specifically permitted, no part of this presentation may be reproduced or distributed in any manner without the prior written permission of Oriental Patron. Oriental Patron accepts no liability whatsoever for the actions of third parties in this respect.
CONTACT
27/F, Two Exchange Square, www.oriental-patron.com.hk Tel: (852) 2135 0236
8 Connaught Place, Central, Hong Kong yuji.fung@oriental-patron.com.hk Fax:(852) 2135 0295
Recommended