Solid results achieved in 2H16; reiterate Buy on strong growth outlook
UM reported revenue/core profit of RMB1.45bn/483m in 2H16, representingYoY growth of 20%/29%, respectively. The robust growth is driven by thegrowth of lease assets and an improved interest spread. On the supply chainbusiness for First Affiliated Hospital of Xi’an Jiaotong University, the progressis largely on track. Management guided profit of RMB30-50m this year and thecompletion of the Han Dan First Hospital deal is expected in 3Q17. We expectprofit will ramp up significantly in 2018 due to the full-year consolidation ofthese two hospitals. We model RMB47m/194m profit for the hospitalmanagement business in 2017/2018, respectively.
Guiding healthy growth for the leasing business
The financial leasing business achieved 34% growth in revenue in 2H16, drivenby 26% growth in interest-earning assets. We highlight that the interest spreadwidened to 343bps in 2H16 vs. 316bps in 1H16 and 266bps in 2H15. Theincrease is mainly due to lower interest costs from optimization of the debtstructure. The company guided that the interest spread is likely to decreaseslightly to approximately 3.0% in 2017, due to competition in the medicalleasing business. However, the growth of interest earnings assets is likely tobe maintained at over 20%.
Hospital business is largely on track
For First Affiliated Hospital of Xi’an Jiaotong University, drugs/consumablessales were approximately RMB1.2bn/0.8bn in 2016. The company targets tocontrol almost 100% of drug sales with its supply chain JV by YE17, while itmay take a longer time for consumables, due to the large number of suppliers.Additionally, management targets to complete the deal with Handan Hospitalin 3Q17 this year. Management thus expects profit from hospital managementto be RMB30-50m this year.
Maintain price target of HKD9.6; risks
We use an SOTP approach for valuation due to the different nature of thehospital management and leasing business, and we roll over to 2018estimates. For leasing, we applied 1.1x on 2018 BVPS (vs. 1.2x on 2017E BVPSbefore), in line with the average for Chinese lessors. For hospital management,we applied 30x on 2018E EPS (vs. 45x on 2017 EPS previously). We believe30x is justified, as its Asian peers are trading at 25x with 20% growth in 2019(vs. 106% for Universal). Key risks include delays in hospital projects, assetquality deterioration in leasing business, and interest rate fluctuations.