Final Phoenix Presentation

Analysts:

Phoenix Healthcare Group (1515 HK)

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Logo

Company Overview

Risks

Industry Assessment

Valuation

Summary

Investment Thesis

Sources:

Investment Thesis

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Investment Thesis Phoenix Healthcare Group (PHG) offers exposure to the expanding market for

non-state managed healthcare services in China, amid the current environment of deregulation.

Healthcare management companies can skim the profitable aspects of the healthcare sector while leaving less profitable operating segments and less desirable locations for state-owned enterprises (SOE).

As a first mover, Phoenix has been able to secure a larger market share and reputation than competitors. This, along with an asset-light business model and value chain integration has allowed the company to achieve high profit margins and strong earnings growth with no LT debt• Increasing numbers of hospitals under management due to strong

government relationships will grow revenue with sustainable, high margins• The PHG business model of assuming hospital management, bringing in its

own management, IT, and supply groups, realigning incentives, and reaping increased profit levels, all with minimal investment, makes for a sustainable and scalable model

Watchlist Recommendation: Add to the Watchlist Valuation Recommendation (USD): Hold Monitor & update quarterly

• Buy Price: $7.95 • Sell Price: $11.35• Current Price: $15.32

Company Overview

Sources:

Background and Context

Business Model Analysis

SCT Analysis


Annual Report 2013, S&:P Capital IQ

Company Overview

• PHG is the largest IOT (invest-operate-transfer) private hospital group in China, and is likely to continue to grow at an outsized pace due to its demonstrated track record and government relationships that support winning future management contracts.

• PHG is contracted to manage state-owned hospitals, runs a drug/medical device supply chain management business, and has direct ownership of one hospital (Jian Gong Hospital)

• PHG operates in 3 core businesses: General Hospital Service (44.8% FY14 Revenues), Supply Chain (50.2%), and Hospital Management Service (5.0%)

• Drivers for revenue include hospital management fees, supply chain revenue, and Jian Gong Hospital revenue

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Company Overview

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SCT Analysis



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Phoenix Healthcare Group Co. Ltd. owns and operates hospitals and clinics. Their only client is the Chinese government. The company

has three sources of revenue streams:

The deepening of healthcare system reform continues in China. As a pioneer of the IOT model, (or ROT model, i.e. Restructure-Operate-Transfer) for public hospital reform, the Group will have ample development opportunities to win new hospital contracts under the support of new reform policies. Its leading share and prior demonstrated track record strongly positions Phoenix to be the top candidate for these new contract opportunities.

Hospital Management Service (RV% 44.8)

• Consistent recurring revenue-hospital contract that last 20 years

• Asset light-high revenue business model

General Hospital Service (RV% 5.0)

• Works on hospitals directly owned by govt

• Takes failing hospitals, makes infrastructure investment and turns them around

Supply Chain Business (RV% 50.2)

• Bargaining power due to large hospital network

• Power over choosing pharmaceuticals/suppliers allows higher margins

Company Overview

Sources:



SCT AnalysisSCT Analysis

Single Company Tool

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Name: Phoenix Healthcare Group Co in HKD currencySingle Company Tool Averages

FY End: 12/14 10 Year 5 Year 3 Year 1 Year T12 GraphsMultiples

PE * 40.89 43.95 PB * 5.87 6.31 EV/S * 7.11 7.11 EV/EBITDA * 29.11 29.11 Dividend Yield 0.0% 0.0% 0.4% 1.2% 0.0%OFCF/Equity * 0.98 0.98 0.97 0.98 (0.13)

Growth and Margins

Sales Growth 49.7% 35.6% 35.6%Gross Profit Margin 24.1% 24.3% 24.7% 24.7%Operating Margin 19.4% 20.8% 21.2% 21.2%Net Profit Margin 12.6% 14.2% 19.1% 19.1%

DuPont Analysis

NI/S (Profitability) 12.6% 14.2% 19.1% 19.1%S/TA (Efficiency) 55.3% 58.3% 60.4% 60.4%TA/OE (Leverage) 1.55 1.39 1.16 1.16 ROE 11.1% 11.9% 13.4% 13.4%Altman Z 8.12 12.52 22.53 24.09 ROIC ** 27.1% 25.3% 19.1% 39.4%ROIC *** 4.1% 8.2% 10.7% 10.4% 10.4%ROA 13.6% 12.8% 12.3% 12.8%

OtherMarket Capitalization 2,190 4,381 7,301 11,923 12,823

CapEx % of Net Income 34.0% 19.5% 7.2% 7.2%Net-net (CA-TL)/MC 10.6% 9.9%

Returns versus the HSI Index1515 HK Avg. Ann. Returns 15.9% 7.6%HSI Avg. Ann. Returns 13.2% 6.1% 13.1% 5.3% 18.1%

Difference 10.5% -10.6%* Harmonic mean calculations. ^ Period calculations only (not averages)

** ROIC = EBIT/(Average of CA-CL+NPP&E) T12 = Trailing 12 Months

*** Bloomberg ROIC = Trailing 12M Earnings/(Average Total Invested Capital)

“Asset-light” business model

Company generates very high returns

High growth opportunity

Strong margins increasing with transition to IOT model

Industry Assessment

Sources:

Relative Performance

SWOT Analysis

Competitor Analysis

CompetitorAnalysis

Bloomberg

Industry Analysis

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3 Year Industry Tool 1515 HK 2196 HK 3886 HK 000919 CH 300015 CH BDMS TB RFMD SP HCA US Average Rank

MultiplesPHOENIXH

EALTHFOSUN

PHARMA-HTOWN

HEALTHJINLING

PHARM-AAIER EYE

HSPTL-ABANGKOK DUSIT MD

RAFFLES MEDICAL

HCA HOLDINGS

INC

PE- 50.70 19.22 42.00 28.89 50.70 28.00 24.82 11.95 32.03 7 / 8PB- 5.40 2.37 0.92 2.10 6.79 4.92 3.79 3.76 6 / 7EV/S- 5.04 4.39 6.39 1.75 5.97 4.50 4.70 1.48 4.28 6 / 8EV/EBITDA- 20.92 31.09 63.19 14.38 24.40 20.98 20.57 7.81 25.42 4 / 8Dividend Yield- 0.40 1.57 0.71 1.72 0.54 0.53 1.58 7.18 1.78 8 / 8

OFCF/Equity- -1.0% 1.0% -2.1% -2.4% 7.1% 3.2% 18.4% -40.8% -2.1% 4 / 8Operations

Sales Growth Rates- 10.6% 7.7% 4.3% 2.8% 7.5% 4.2% 3.5% 2.5% 5.4% 1 / 8GPM- 24.3% 43.7% 33.7% 23.6% 45.2% 35.2% 0.0% 0.0% 25.7% 5 / 8OM- 20.8% 9.7% -17.7% 8.6% 16.3% 14.9% 20.3% 13.7% 10.8% 1 / 8NPM- 14.2% 18.4% -32.1% 6.5% 11.8% 14.3% 20.4% 4.8% 7.3% 4 / 8

DuPontNI/S (Profitability)- 14.2% 18.4% -32.1% 6.5% 11.8% 14.3% 20.4% 4.8% 7.3% 4 / 8S/TA (Effi ciency)- 0.58 0.32 0.19 0.75 0.90 0.66 0.60 1.18 0.65 6 / 8

TA/OE (Leverage)- 1.39 1.73 1.25 1.30 1.22 1.83 1.23 (4.11) 0.73 6 / 8ROE- 11.9% 10.0% -8.6% 6.3% 13.0% 17.0% 15.2% -23.5% 5.2% 4 / 8

Altman Z- 12.52 2.88 5.52 5.78 21.30 4.81 11.89 1.52 8.28 2 / 8ROIC- 25.3% 13.6% -5.5% 9.1% 26.6% 21.3% 17.5% 30.4% 17.3% 3 / 8ROA- 12.8% 3.4% -3.5% 6.7% 15.7% 10.5% 13.1% 16.6% 9.4% 4 / 8

Industry Assessment

Sources:


SWOT Analysis

Competitor Analysis


Bloomberg

Relative Performance Analysis

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Industry Assessment

Sources:


SWOT Analysis

Competitor Analysis

SWOT Analysis

SWOT Analysis

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SStrengths

WWeaknesses

OOpportunities

TThreats

Market & Competitor Structure

Buyer Behavior Company Moats Company Business Model

• Current high level of government influence creates profitable opportunities

• SOE’s aren’t concerned about being profitable, which allows PHG to skim profits without concern

• Company operating model would not be difficult to recreate in the long-term

• Low capital intensity and high margins provide a headstart for PHG

• Network effect provides safety

• As the company transitions more to IOT model, they will diversify their own risk

• Network effect will cause the company to become more profitable over time

• Recurring revenue from IOT segment

• Lack of advantages from network effect will decrease margins and create an effective barrier to new entrants

• Adverse change in government policy would be harmful

• Change in reg-ulation could alter competitive state

• Changes in government policy could affect profits

• Competition for contracts could decrease revenue

• Securing more IOT contracts in the Beijing area would allow the company greater operating efficiencies

Risks

Sources:

Risks

Risk Type Probability of Occurrence

Level of Impact

Ability to mitigate

Company Specific

Operating Inefficiencies M H H

Industry Level

Wage Growth in Healthcare Industry M M LTightening of Government Policy L H L

Business Cycle

Specific

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Risk Analysis and Mitigants

Valuation

Sources:

RC Drivers

Valuation Models

Earnings Estimates Analysis

RC Drivers

10K, Press Releases, Bloomberg

Revenue and Cost Drivers

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In Millions of CNY except Per ShareFY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 201912 Months Ending 2010-12-31 2011-12-31 2012-12-31 2013-12-31 2014-12-31 Forecast Forecast Forecast Forecast Forecast

HospitalsGeneral Hospitals 11 11 11 11 11 11Specialty Hospitals 2 2 2 2 2 2Community Clinics 28 28 28 28 28 28

Total Visits (000) 1,366 2,256 3,050 3,423 3,935 4,329 4,761 5,237 5,761 6,337 65.2% 35.2% 12.2% 15.0% 10.0% 10.0% 10.0% 10.0% 10.0%

Spending per visit 288 226 249 259 307 337 371 408 449 494 -21.7% 10.1% 4.3% 18.3% 10.0% 10.0% 10.0% 10.0% 10.0%

Beds in operation 2891 2897 3194 3323 3390 3526 3667 3813 3966 41240.2% 10.3% 4.0% 2.0% 4.0% 4.0% 4.0% 4.0% 4.0%

Beds Occupancy RateRevenue per bed

Revenue (mns) 394.1 509.5 758.0 887.4 1,206.3 1,459.6 1,766.1 2,137.0 2,585.7 3,128.7 Supply Chain Business 89.3 166.1 314.6 376.2 605.9 General Hospital Service 288.4 324.0 403.1 470.4 540.2 Hospital Management Service 16.3 19.4 40.3 40.8 60.1

Intersegment Revenue 61.8 98.3 116.4 103.5 175.9 193.5 212.8 234.1 257.5 283.2 Supply Chain Business 61.8 98.3 116.4 103.5 175.9

59.1% 18.3% -11.0% 69.9%

Revenue Including Intersegment Revenue455.9 607.8 874.4 990.9 1,382.1 1,653.0 1,978.9 2,371.1 2,843.2 3,412.0 33% 44% 13% 39% 20% 20% 20% 20% 20%

Supply Chain Business 151.1 264.4 431.0 479.7 781.8 General Hospital Service 288.4 324.0 403.1 470.4 540.2 Hospital Management Service 16.3 19.4 40.3 40.8 60.1

Growth RatesVisits 10% 10% 10% 10% 10%Spending per visit 10% 10% 10% 10% 10%Beds in operation 4% 4% 4% 4% 4%Bed Occupancy Rate

Supply Chain Business 10% 10% 10% 10% 10%

Valuation

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RC Drivers

Valuation Models




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2016 EEG

2015 EEG

Valuation

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RC Drivers

Valuation Models


Valuation Models

Other Charts

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Poor management of Earning estimates

Valuation

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RC Drivers

Valuation Models


Valuation Models

Forecasting Assumptions

Dec Dec Dec Dec Dec Dec Geometric/Average2014 A 2015 2016 2017 2018 2019 5Y Hist 10Y Hist

Sales Growth* 35.9% 20.0% 20.0% 20.0% 20.0% 20.0%Gross Margin 27.9% 28.1% 28.1% 28.1% 28.1% 28.1% 28.3% 28.3%EBITDA Margin 24.4% 24.4% 24.4% 24.4% 24.4% 24.4% 23.5% 23.5%Operating (EBIT) Margin 21.2% 21.7% 22.3% 22.8% 23.1% 23.4% 19.4% 19.4%Net Profit Margin 19.1% 19.2% 19.3% 19.4% 19.4% 19.4% 12.6% 12.6%Dividends per Share 0.05 0.10 0.12 0.15 0.18 0.21 Dividend Growth* 0.0% 88.1% 20.5% 20.5% 20.3% 20.1% 0.0% 0.0%Dividend Yield 0.5% 0.5% 0.6% 0.8% 0.9% 1.1% 0.2% 0.2%PE/EPS Growth 0.54 2.70 2.31 1.92 1.62 1.36 EPS Growth* 77.2% 21.2% 20.5% 20.5% 20.3% 20.1%Diluted EPS 0.28 0.34 0.40 0.49 0.59 0.70

BB Analysts Mean 0.31 0.41 0.53Deviation (from Analysts Mean) 0.02 0.00 0.03Consensus Analysts Std. Deviation 0.02 (0.00) -0.04Number of Estimates 6 6 6

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Valuation

Sources:

RC Drivers

Valuation Models


Valuation Models

Valuation ModelsIV. Summary and Composite Models Differential 50% AnalystI. Intrinsic Value Models: Used Ke: 6.2% Firm Ke: 6.2% Buy Price Δ Current Price Action Sell Price Δ C. Price Weight

1. Dividend Discount Model (PE Terminal): Term. PE: 25.0 $13.68 -28.9% Sell $20.52 6.7% 15%2. Dividend Discount Model (PBV Terminal): Term PBV: 4.40 $13.19 -31.4% Sell $19.79 2.9% 15%3. Free Cash Flow to the Firm (FCFF) WACC: 6.2% $19.20 -0.1% Hold $28.81 49.8% 15%4. Free Cash Flow to Equity (FCFE) Sust. Growth: 3.0% $19.09 -0.7% Hold 28.64 48.9% 15%

II. Acquisition/Breakup Models:

1. Value of Operations plus Cash (Working Capital less debt) $4.51 -76.6% Sell $6.76 -64.8% 10%2. Liquidation Value (last historical year) - 0.0% -

III. Relative Value Models

1. Versus the S&P 500 Buy: 1.75 Sell: 2.25 $9.64 -49.9% Sell $12.40 -35.5% 15%2. Versus the S5HCPS INDEX IndustryBuy: 1.50 Sell: 2.00 10.74$ -44.1% Sell 14.32 -25.5% 15%

IV. Composite Models

1. Average of All Models All Models $12.87 -33.1% Sell $16.40 -14.7%2. Average - Max/Min Min: 4.51 Max: 19.20 13.27 -31.0% Sell 19.13 -0.5%

V. Analysts Weighted Forecasts

1. Weighted by Analysts Forecasts 13.28$ -30.9% Sell $19.35 100%

Current Price 19.23$

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Valuation

Sources:

RC Drivers

Valuation Models


Valuation Models

Valuation Models

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IV. Summary and Composite Models Differential 50% AnalystI. Intrinsic Value Models: Used Ke: 15.0% Firm Ke: 6.2% Buy Price Δ Current Price Action Sell Price Δ C. Price Weight

1. Dividend Discount Model (PE Terminal): Term. PE: 25.0 $9.23 -52.0% Sell $13.85 -28.0% 15%2. Dividend Discount Model (PBV Terminal): Term PBV: 4.40 $8.91 -53.7% Sell $13.36 -30.5% 15%3. Free Cash Flow to the Firm (FCFF) WACC: 15.0% $5.75 -70.1% Sell $8.63 -55.1% 15%4. Free Cash Flow to Equity (FCFE) Sust. Growth: 3.0% $5.72 -70.2% Sell 8.59 -55.3% 15%

II. Acquisition/Breakup Models:

1. Value of Operations plus Cash (Working Capital less debt) $4.51 -76.6% Sell $6.76 -64.8% 10%2. Liquidation Value (last historical year) - 0.0% -

III. Relative Value Models

1. Versus the S&P 500 Buy: 1.75 Sell: 2.25 $9.64 -49.9% Sell $12.40 -35.5% 15%2. Versus the S5HCPS INDEX IndustryBuy: 1.50 Sell: 2.00 10.74$ -44.1% Sell 14.32 -25.5% 15%

IV. Composite Models

1. Average of All Models All Models $7.79 -59.5% Sell $9.74 -49.3%2. Average - Max/Min Min: 4.51 Max: 10.74 7.85 -59.2% Sell 11.37 -40.9%

V. Analysts Weighted Forecasts

1. Weighted by Analysts Forecasts 7.95$ -58.6% Sell $11.35 100%

Current Price 19.23$

Summary

Sources:

Summary

Summary

Phoenix Healthcare Group is the largest IOT private hospital group in

China

Its prior success and reputation position the company to take advantage of

the expanding need for cost-effective healthcare in China as the

population continues to age.

PHG’s ability to attract and incentivize China’s top Medical Professionals

make it an attractive choice for customers.

PHG’s asset-light business model that produces high margins with limited

capital requirements and ongoing scale benefits from its supply chain

business make it an appealing option for investors Watchlist Recommendation: Add to Watchlist

Valuation Recommendation (USD): Hold Monitor & update • Buy Price: $7.95

• Sell Price: $11.35

• Current Price: $15.32

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Final Phoenix Presentation