CR Medical recently finalized the restructuring agreement withJing Mei Group, by establishing JVs with 49% stake
Due to 1Q20 COVID-19, we cut FY20E earnings by 33% and keptFY21E forecast largely unchanged as outbreak mitigates
We rolled forward to end-2020E valuation with TP lifted toHKD5.8 from HKD5.3. Maintain NEUTRAL as stock fairly priced andawait clearer catalysts / better risk/reward profiles
Major IOT overhang eases from Jing Mei resolution
Under the pacts, Co. and Jing Mei Group finalized the cooperationthrough new JV entities with Co.’s holding 49% stake (above our 40%profit sharing estimates). Upon its establishment, Co. should notconsolidate Jing Mei’s financials starting from Jan. 2020. Noting the newJing Mei OT largely consistent with the original IOT terms, we think theresolution should greatly ease market concern on its IOT risks. We thusrevised up our estimation on Co.’s 2021E IOT segment results by ~20%due to higher-than-expected ownership and 2ppt margin expansion in2019, and further expect a diversified overall risk profile as IOT willaccounted for 30% of overall segment results in 2021E vs. 40% in 2019.
COVID-19 disruption loom large in 2020E
Hospital industry has been hardly hit in 1Q20 due to COVID-relatedsuspension of elective procedures. Despite outbreak abates in 2Q20, wenoted authorities are taking more cautious approach in hospitalresumption as onwards uncertainty remains. We thus cut FY20Eearnings by 33% to reflect outbreak impacts while kept 2021E largelyunchanged.
M&A opportunities remains on a long-term perspective
We stay positive on its long-term M&A potential, thanks to 1) CRHealthcare signed a strategic agreement with Liaoning HealthcareIndustry Group with over 10,000 beds, despite lower likelihood of assetinjection in near term; 2) collaboration with CR Healthcare in an M&AorientedCMH Fund. We think these moves should broaden its reachwithin M&A space in China.
Maintain NEUTRAL, and await clearer catalyst
We rolled forward to end-2020E valuation basis and updated SOTPbasedTP to HKD5.8 from HKD5.3. Our revised TP suggests stock isfairly priced and current rally has reflected Co’s recent alleviating IOToverhang. Maintain NEUTRAL and await clearer catalysts ahead.