Rate increase positive for core business; substantial upside from hospitalmanagement
　　UM reported revenue/core profit of RMB1.65bn/579m in 1H17, representing YoYgrowth of 32%/49%, respectively. The net interest spread （NIS） expanded to364bps in 1H17, from 345bps in 2H16 and 316bps in 1H16. This is driven bya 45bp YoY decrease in cost and 12bp decrease in yield. As a rate increaseis expected, we believe an NIS expansion cycle is likely to start. Additionally,management expects RMB200-300m revenue from the GPO business in 2H17,while it remains optimistic on the rapid increase of acquisitions of SOE hospitals,as SASAC is determined to spin off these assets by YE18. We reiterate UM as atop pick due to the substantial upside ahead.
　　Anticipate an intensive period of hospital acquisitions
According to an official notice from SASAC on August 3, all enterprise hospitalsthat belong to SOEs would have to be spun off by year-end 2018. Out of fourstrategic options recommended by SASAC, selling these assets to SOEs withhealthcare focus, appears to be the most likely scenario. Out of 1,000 tier 2 orabove assets, there are 600 quality hospitals that would be targets for UM.
　　The sweet cycle of rate increase
　　For 1H17, GM and OPM expanded to 65.3%/ 50.1%, vs. 62.8%/ 46.9% in 1H16.
　　We attribute the margin expansion to lowered cost rates of interest-bearingliabilities. Revenue of financial leasing business grew 30% YoY in 1H17, drivenby a 29% increase in interest-earning assets and improved interest spread.Management indicated that the 11bp decline of the yield was primarily due tocompetition. And the 59bp decline of the average cost rate of debt was due torepayment of loans with higher rates. We expect both NIS and NIM to expandin the next few years.
　　Reducing PT to HKD9.4 due to slight delay in hospital management business;risks
　　We use an SOTP approach for valuation, due to the different nature of the hospitalmanagement and leasing business. For leasing, we apply 1.2x on 2018E BVPS （vs.1.1x used previously）， as the leasing business outperformed in 1H17. For hospitalmanagement, we apply 30x on 2018E EPS. We believe 30x is justified, as its Asianpeers are trading at 27x with 16% growth in 2019 （vs. 87% for Universal）。 Key risksinclude delays in hospital projects, asset quality deterioration in leasing business,and interest rate fluctuations.