We turned bullish on 21E earnings growth (+57% yoy) as Co.’s IOT overhangs being dispelled and post-pandemic recovery
We think CR Medical is a potential 14th Five-Year Plan beneficiary given its SOE background and supports from CR Group
We updated to YE21E TP of HKD6.8. Upgrade to BUY from Neutral on attractive risk/reward and potential policy catalyst ahead
IOT’s worst is in the rear-view mirror
Despite the resolution for Yan Hua hospital remains unclear, we expect the major IOT overhang has been greatly eased as 1) the major IOT asset (accounted for 28% of total EBIT, ~60% of IOT EBIT in FY19), Jing Mei hospital, has finalized a de-risked IOT agreement with largely consistent financial terms, effective from Jan 2020; 2) stock has become attractive since the start of Yan Hua IOT dispute back in 1Q18 while Yan Hua only accounted for ~18% of FY19 total EBIT; 3) the EBIT reduction from Yan Hua IOT is offset by growing sponsor hospitals (representing for 46% of total EBIT in 21E, 15% EBIT CAGR over FY18-21E) via SOE-hospitals consolidation. We thus think market has factored in all IOT negatives and thus the year-long IOT pushback might near end.
A potential 14th five year plan beneficiary
CR Group plays an essential role in SOE-hospitals spin-off reforms over 2017-20 as one of the only six designated SASAC-owned enterprises under the Circular 134 in 2017. CR Healthcare has signed a strategic agreement with Liaoning Healthcare Industry Group with over 10,000 beds. As per Recommendation To 14th Five-Year Plan on Nov 3, govt. stay focus on rebalancing medical resources and accelerating construction of hierarchical diagnosis and tiered treatment system. We expect CR Group to remain a key player on the front thanks to its strong SOE background and well-built nationwide footholds (incl.: 161 medical institutions with 23k+ beds, o/w 13 tier III hospitals), adding growth opportunities and synergies for Co. over the long run.
Upgrade to BUY, eyeing on policy catalystahead
As Co.’s hospitals start returning to normal in 3Q20, we upgraded FY20E/21E earnings forecast by 26%/20%. We rolled forward to YE21 basis and updated SOTP-based TP to HKD6.8 (from HKD5.8), implying 28% upside. As a potential 14th Five-Year plan play, we reckon Co.’s current risk/reward becomes attractive (13x/12x FY21E/22E PER, plus lowered IOT risks). Upgrade to BUY from Neutral.