In-depth analysis: Injection of assets with improving profitability to drive share price
- Potential asset injection from parent is a share price in 2022. While the market has concerns on the profitability of those assets, we believe the profitability has largely improved in 2021 and can further improve post injection
- Parent co’s c.80% stake in the assets to be injected will ensure control and smooth integration after injection
- Maintain BUY for the catalysts above, HK$9.40 TP
We had arranged a full-day non-deal roadshow for the company’s top management in late March.
Reading through the annual results announcements of 2019, 2020, 2021, only the 2021 statement mentioned that the company plans to “inject high-quality medical resources from the China Resources Group at opportune times”. We believe the possibility of asset injection from the parent company has now increased. Therefore, investors attending the non-deal roadshow were interested to figure out the profitability of this occurring.
Based on the 2021 results presentation of the company, we estimate the potential asset injection can double the capacity of the company in terms of bed numbers. The hospital assets that could be injected are in the Liaoning and Jiangxi Provinces, with 12,115 beds and annual revenue of Rmb3.9bn in aggregate. The company had mentioned that the profitability of an asset injection had improved in 2021, and we believe this is more so for the hospitals in Liaoning which make up 80% of the assets earmarked. Our reasons are as follows:
- Based on SINA citing figures from State-owned Assets & Supervision Administration Commission in Jan 2022 (????????????????????|????|????|??????_????_??? (sina.com.cn) ) , the parent company has been managing the hospitals in Liaoning for three years. There are 35 medical institutes under management in Liaoning. Out of these hospitals, the number of hospitals that incurred a net loss has decreased from 22 three years ago to 6. The aggregate net loss of these loss-making hospitals has narrowed from Rmb160m to Rmb12m in three years.
- Based on the parent company’s website (??????–???? (crhealthcare.com.hk) ), the hospitals in Liaoning have been successful in 2021 and are the benchmark for other hospitals within the group. This achievement is recognised by the State-owned Assets Supervision & Administration Commission.
We estimate the annual net profit of those assets is at least Rmb118m. The basis of our estimate is:
- The parent company has assigned Yoee Supply Chain to implement collective procurement of drugs and medical consumables for the hospitals in Liaoning province; annual cost savings is c.Rmb130m (see: ??????????????,??????? (chinamscp.com) )
- As mentioned in the SINA report above, the aggregate net loss of the 6 loss-making hospitals in Liaoning is close to Rmb12m.
- Annual cost savings of Rmb130m minus net loss of Rmb12m = Rmb118m.
A smooth integration with the company after asset injection is crucial to achieve synergy. A good control of these assets is the key towards smooth integration. The parent company owns c.80% stake in those hospitals in Liaoning and Jiangxi provinces. We believe the parentco will transfer the stake to the company which is able to undertake a smooth integration of the acquired assets.
The timing and valuation of the injection is still unclear. This will be a significant acquisition for the company, as the number of beds to be acquired is about the same as the company already owns. We estimate that might involve the issuance of new shares, but it won’t happen in the near term, as the stock is still trading at below 1x P/B now.
Another point of interest from investors attending the non-deal road show is favourable policy for SOE hospitals. While the market focuses on the possible increase of subsidy to SOE hospitals, based on our discussion with the company during the road show, we estimate the government will also increase the opportunity for doctors in SOE hospitals in terms of upgrading their professional ranking (e.g., from junior doctor to mid-level doctor) by allocating more R&D projects there. Participation in these projects and issuing academic papers are major ways to gain recognition in the industry and upgrade their professional ranking. These projects are mainly allocated by the National Health Commission and Ministry of Science & Technology to government hospitals. Thus, increasing these projects in SOE hospitals will increase the opportunity for doctors there to upgrade their professional ranking. This is crucial for attracting talent in the long run.
Maintain BUY. TP HK$9.40.