DB view post NDR
We hosted CEO/CFO for NDR last Friday, and felt more comfortable with the newmanagement team. While majority of the questions from investors are focused onYanhua and near-term risk management, we believe the two key issues for valuecreation are 1） whether the new management team could execute more M&A;2） whether the new team could extract value from IOT contracts as effectively asthe previous team.
What if Honghui walks away? While Honghui is the largest GPO andcontributes to more than 70% profit for the listed co, CRP could replaceHonghui within days if that happens, according to management. Webelieve there could be near-term hiccups, if it were to happen. That beingsaid, we believe the chance is relatively low.
What if other hospitals in Beijing terminate GPO contracts? We believethe risk is quite low, as political/economic situation has changedprofoundly in the past 2-3 years vs. 2010 when these contracts werelocked.
Will Yanhua terminate management contract too? We conservativelymodeled this scenario already, while CRP indicated the contract is stillin place, while expecting at least RMB36m management fee （RMB27mprofit after tax） in 2H17.
What is the impact on GPO contract termination from Yanhua? Net profitgenerated from this hospital on GPO was RMB57m in 2016.
Will CRP accelerate asset injection? We continue to expect this to happen,however we assume acquisition multiples （on P/E basis） would be no lessthan current trading multiple on T+1 basis. We have high conviction suchdeals would be accretive on T+3 basis.
Maintaining PT of HKD13.8; Buy on weakness; risksOur PT is based on 18x 2018E EBITDA. We believe 18x is justified, as its Asianpeers are trading at 18x with 6% growth in 2019E （vs. 17% for CRP）。 We do notbelieve current stock price reflects significant advantage for CRP to execute moredeals. Key risks include impact from zero mark policy, delayed integration of newlyacquired hospitals and reimbursement control.