Hygeia reported weak 2024 results, with total revenue up 9% YoY to RMB4.4bn and net profit declining 12.6% YoY to RMB598m, below market and our expectation. Gross margin deteriorated by 1.6ppts to 29.9%. Despite supportive policies such as prepayments to designated medical institutions, we expect tight medical fund budget and strict DRGs execution to continue to weigh on Hygeia’s growth. Post results, we cut 2025-26E revenue by 27-29% on poor 2024 results and challenging macro environment. Slashed TP to HK$18 and maintained BUY on (i) its cheap valuation, (ii) Hygeia’s execution abilities, and (iii) unmet demands for oncology treatment.
　　Key Factors for Rating
　　2024 results missed: Hygeia reported weak 2024 results, with total revenue up 9% YoY to RMB4.4bn (vs. RMB5.2bn of market consensus) and net profit declining 12.6% YoY to RMB598m (vs. RMB798m of market consensus), below market and our expectations. Non-IFRS adjusted NP was RMB602.3m, down 15.6% YoY. Mgmt. attributed the sharp deterioration in 2H24 performance (total revenue -11% YoY, hospital business -9% YoY) vs 1H24 (total revenue +35% YoY, hospital business +37% YoY) to industry-wide challenges from deepening medical insurance reform and stricter control over medical fund expenditure. GPM decreased by 3.1ppts QoQ to 27.8% in 2H24. By business segment, revenue from oncology/non-oncology was RMB2.0bn/2.5bn in 2024, up 10.4%/8.0% YoY. Hygeia logged +23.8% YoY growth in patient visits, 96,993 surgical cases and +21.2% YoY growth in surgical revenue in 2024. Excluding one-off impacts of nucleic acid tests impairment, non-operating revenue tax, finance costs arising from previous M&A, adj. NPM remained stable at c.16%, per mgmt.
　　Focus on cost control while remain prudent on capex and M&A: Hygeia has implemented stringent cost control measures in the face of industry headwinds, including a 10% reduction in non-medical staff, which reduced admin expense ratio by 0.3ppt YoY to 9.8%. Meanwhile, the company is aligning with regulatory efforts to curb drug expenses while fostering technical service revenue through disciplined brand development. Regarding its self-constructed hospitals, Wuxi Hygeia Hospital (Class III, 800-1,000 beds) is scheduled to pass inspection and commence operation in 2025 and Changshu Hygeia Hospital (Class III, 800-1,200 beds) is scheduled in 2026. The mgmt. expects the number of beds to increase to 16,000 by 2026. (vs.12,000). With construction nearing completion, the management expects a decrease in CAPEX (with yearly maintenance CAPEX of c.RMB200). Meanwhile, Hygeia may need some time before returning to M&A-driven expansion. Overall, Hygeia did not provide 2025 growth guidance.
　　Key Risks for Rating
　　(i) Changes in regulatory regime for the healthcare services industry; (ii) worse- than-expected impact from DRG/DIP rollouts; and (iii) unable to construct and run new self-built hospitals in a highly efficient way.
　　Valuation
　　Post result, we cut 2025-26E revenues by 27-29% and revised down our GPM estimates, as we expect tight medical fund budget and strict DRGs execution to continue to weigh on Hygeia’s growth despite the operation of new hospitals. We revised 2025-26E admin expense ratios to reflect Co.’s effort to control cost. Rolled over our DCF model, and slashed 12-month DCF-based TP to HK$18.0 (WACC:10.6%, terminal growth:2.0%) and maintain BUY rating on (i) undemanding valuation, (ii) operational discipline, and (iii) exposure to growing oncology demand.