Phoenix Healthcare:Transforming medical services

Set to become Asia’s largest hospital group

Phoenix Healthcare (PHG) is set to become Asia’s largest hospital group,following last month’s statement that it would acquire China ResourcesHealthcare and CITIC Medical & Health. PHG will enjoy immediate scaleexpansion with a total of 109 hospitals and 12,480 beds, while alsogaining a stronger market position. Given the positive outlook for China’smedical service sector and favourable policy, we forecast a three-yeartarget of HK$22.00, implying 106% potential TSR.

Largest hospital group in Asia

PHG’s acquisition of China Resources Healthcare and CITIC Medical & Healthwould more than double its current bed count and operating profit. Themerger, which would create an entity that will be renamed CR Phoenix, isslated to be completed within the next four months, pending regulatoryapprovals. There should be further upside with potential other asset injectionsto come.

Scale effect and regional synergy

The new company, CR Phoenix, would be China’s biggest hospital group, witha nationwide footprint. By merging with the healthcare units of the country’stwo largest state-owned enterprises, PHG would enhance its ability to captureopportunities in the ongoing public hospital reforms. The much enlarged scalewould help it to rapidly forge a nationwide platform, with the support ofrelevant local governments - an important issue for hospital companies.

Strong organic growth

The operations of PHG’s existing hospitals remain robust, with growth in bothpatient visits and average spend delivering 25% and 17% Cagrs over 2011-15. Meanwhile, Baoding No.1 Central Hospital and Jing Mei Hospital, the twolargest facilities within the group, recorded 20% and 16% revenue growth in2015. We believe these will be able to maintain their growth momentum,backed by PHG’s solid track record.

BUY with HK$15.50 target

PHG currently trades at 24x 16CL PE, a 38% discount to the Hong Kong/Chinalisted hospital average. It is our top hospital group pick, as it enjoys a scarcitypremium in the market. Our one-year target of HK$15.50, is based on a 28x17CL PE. We set our three-year target at HK22.00, based on 28x 19CL PE.