Entering next phase of M&A via Luzhou hospital deal
GUM, on Dec 29 2021, announced it has entered a capital increase agreement to acquire an 83.33% stake in Anhui Luzhou Hospital and become the controlling shareholder, for a consideration of RMB200mn.
Anhui Luzhou Hospital is a for-profit tertiary hospital located in sub-center of the Yangtze River Delta, w/ planned capacity of 600 beds. The proposed strategic acquisition will enable GUM to expand its hospital foothold into Anhui provinces, which is expected to commence operation in 1Q23E. Co. aims to form the Anhui Luzhou Hospital into a regional flagship hospital with state-of-the-art technology in the next 5 years, specializing in precision oncology, nephrology, obstetrics & gynecology, orthopedics and rehabilitation. The deal also marks GUM’s hospital business has moved into next stage of growth, after great fruition of SOE hospital reform based on Circular No. 134 over the last three years.
SOE-hospitals consolidation largely on track
As of Sep 30, 2021, Co. has consolidated 42 medical institutions (o/w 3 tertiary and 20 secondary) since the reform, with a total of operating capacity of 10,330 beds. Of note, Co. has another two large SOE assets to consolidate in 2022E-23E, namely China MCC ( 中 国 五 矿 集 团 ) hospitals (~3,800 beds) and Pangang’s hospitals (攀钢医院) (~1,400 beds). Co. expects to complete the consolidation of China MCC hospitals in 1H22E and aims to expand its total bed capacity to c.30k by 2025E w/ net margin to 8-10% by 2025E (up from current average of 3-4%.).
Proven M&A ability in hospital space; Maintain BUY
We trimmed FY21E/22E earnings by 4%/4% to reflect Omicron disruption in 1Q22E and delayed consolidation of Pangang’s hospitals. We updated our SOTP-based TP to HKD10.8 from HKD9.5 as we rolled FY22E valuation basis and RMB/HKD appreciation. We expect Co. is better positioned to pursue more M&A opportunities from FY22E and beyond. Maintain BUY.