HARMONICARE MEDICAL:Taikang gets on board

Transaction highlights. On 16 Nov 2016, Harmonicareannounced that Taikang Insurance Group will become one ofits substantial shareholders through the purchase of acombined 26.44% interest from several of the company’sexisting shareholders, including the Lin family, the controllingshareholder, and CDH and CCBI Investments. Averageconsideration is HK$6.54/share, an 11% premium over the shareprice close on 16 Nov or a 31% premium over the 30-dayaverage closing price. This values Harmonicare at 40.8x FY16Fand 25.7x FY17F based on our earnings estimates. Uponcompletion of the deal, CDH and CCBI will be fully exited fromtheir investments in Harmonicare while the Lin family will retaina c.43% stake and remain the largest shareholder.

Potential to become Taikang’s offshore healthcare platform.

Established in 1996, Taikang Insurance Group is a leadinginsurance and financial services group in China. In addition toinsurance and asset management, one of Taikang’s three corebusinesses is health & elderly care. In our view, Harmonicarecould eventually become the offshore platform for Taikang’shealthcare business. Taikang’s health & elderly care operationscomprise high-end hospitals, rehabilitation centers, clinics andelderly homes.

We raise our target price. Following the announcement, weraise our target price for Harmonicare from HK$5.10 to HK$6.30,using a higher multiple of 25x FY17F P/E (vs. 20x previously). TheTaikang transaction aside, we believe Harmonicare’s OBsegment will continue to see strong growth. The negativeimpact of the Wei Zexi incident seems to be fading, which isgood news for the recovery taking place in the GYN segment.