Healthcare service/ China Healthcare service sector service...BUY, TP HK$20.0) and Lifetech Scientific (1302 HK, BUY, TP HK$2.00) Ageing population stimulates healthcare service demand

Tue, 05 Jan 2016

Equi ty Research Healthcare service sector Healthcare service / China

Healthy China to scale new heights. BUY service provider and specialty device sector Initiate on China Healthcare service and medical device sector to reap (1) ageing

population in China, 2) adoption of two child policy and (3) positive 13th

Five Year

Plan on Healthy China

Buy Healthcare Service Provider and Medical Devices

Top pick Harmonicare (1509 HK, BUY, TP HK$8.70), Chunli Medical (1858 HK,

BUY, TP HK$20.0) and Lifetech Scientific (1302 HK, BUY, TP HK$2.00)

Ageing population stimulates healthcare service demand The 60+ age population in

China is expected to increase from 209mn in 2015 to 244mn/488mn in 2020/2050E and

from 15% of total population to 18%/37%, respectively. As aged 65+ usually spend 3 times

more than working ages person in healthcare spending, we expect China healthcare

market grow from RMB4.1tn in 2014 to RMB8.1tn in 2020E, representing 12.0% CAGR.

Cardiology and orthopedics medical device is expected to benefit from the increasing

healthcare spending driven by ageing population. We expect Chunli Medical (1858 HK) to

reap the joint implant market share in China from overseas players via its CFDA certified

ceramic hip joint products and increase its market share from 3.1% in FY13 to 4.6%/4.9%

in FY15/16E and deliver a 29% earnings CAGR from FY15E to FY18E. We also like

LifeTech (1302 HK) which is likely to reap the left atrial appendage closure (LAAC) device

market from 2016E onward to drive 79% earnings CAGR from FY15E to FY18E.

Liberalization of two child policy benefits gynecological, obstetrics and pediatrics

services providers. Thanks to liberalization of two child policy and increasing Chinese

disposal income per capita, total obstetrics and gynecology market in China is expected to

achieve 21.5% CAGR from RMB201bn in FY15E to RMB360bn in FY18E which driving

23.4% CAGR for China obstetric specialty hospitals revenue from RMB22bn in FY15E to

RMB40bn in 2018E. Harmonicare (1509 HK) is likely to benefit from the rapid market

growth and we expect Harmonic to achieve 36% earnings CAGR from FY15E to FY18E.

Positive 13th

FYP on healthcare service to boost M&A activities We see increasing

M&A activities in non-public hospitals and medical and geriatric care services to reap the

Healthy China 13th

FYP. We keep a close eye on Town Health (3886 HK, NR), HXHC

(8143 HK, NR), BJMH (2389 HK, NR) and CSIH (286 HK, NR),

Top picks We initiate BUY on Harmonicare (1509 HK, TP HK$8.70) based on 35x FY16E,

6% premium to peers. We also initiate BUY on Chunli Medical (1858 HK, TP HK$20.0)

based on 15x FY16E PE, 16% discount to peers, and Lifetech Scientific (1302 HK, TP HK$

2.00) based on 20x FY17E PE to reap the demands for high-end orthopedic and

congenital heart occlude medical devices driven by ageing population in China.

Yuji Fung

+852 2135 0236

[email protected]

Sector Report

Exhibit 1 . : OP Healthcare service coverage Company Stock code Rating Target Price Closed Price Potential Upside

Harmonicare 1509 HK BUY HK$8.70 HK$6.93 26%

Chunli Medical 1858 HK BUY HK$20.00 HK$14.00 43%

Lifetech Scientific 1302 HK BUY HK$2.00 HK$1.37 46%

Source: Bloomberg, OP Research

Tue, 05 Jan 2016

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Table of Contents

Ageing population stimulates healthcare services demand .......................................................................... 3

Liberalization of two child policy benefits gynecology, obstetrics and pediatrics service providers ...............12

Positive 13th FYP on healthcare service to boost M&A activities ..................................................................16

Harmonicare (1509 HK) – Riding on Gold Monkey ......................................................................................26

Investment risks ..........................................................................................................................................33

Financial Summary– Harmonicare (1509 HK) .............................................................................................35

Chunli Medical (1858 HK) – Market share gain via ceramic femoral head prosthesis ..................................37


Financial Summary– Chunli Medical (1858 HK) ..........................................................................................45

Lifetech Scientific (1302 HK) –Triple leap ....................................................................................................47


Financial Summary– Lifetech Scientific (1302 HK) ......................................................................................54

Tue, 05 Jan 2016

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208.6 244.4 357.7

487.8 12.2%13.4%

16.4%

21.4%

15.2%

17.5%

25.3%

36.5%

10%

20%

30%

40%

0

400

800

1,200

1,600

2010

2012

2014

2016E

2018E

2020E

2022E

2024E

2026E

2028E

2030E

2032E

2034E

2036E

2038E

2040E

2042E

2044E

2046E

2048E

2050E

Population Aged 60+, total Population below Aged 60+, total

Ages 60+ % of tot population (World) Ages 60+ % of tot population (China)

(mn) (%)

Ageing population stimulates healthcare services demand

Increasing proportion of Chinese ageing population

According to World Bank, the population aged 60+ in China is 209mn in 2015,

accounting for 15% of total population, we forecast the population aged 60+ will

increase to 244mn/488mn, representing 18%/37% of total population in

2020/2050E as compared to13%/21% of world proportion of population aged

60+.

Exhibit 2.: Ageing population in China from 2011 to 2050E

Source: World Bank, OP Research

Ageing population spends more on healthcare expenses

According to Centers for Medicare & Medicaid Service (CMS), US national

healthcare expenditure grew 5.3% yoy to US$3.0tn in 2014 or US$9,523 per

capita, and accounted for 17.5% of GDP versus China national healthcare

expenditure grew 23.5% yoy to US$630bn in 2014 or US$460 per capita, and

accounted for 6.0% of GDP in 2014 which is still far behind US’s 17.5%.

Exhibit 3.: Healthcare expenditure comparison between US, Japan, UK and China in 2013

Source: WHO, World Bank, OP research

370

3,600

3,965

9,150

China

UK

Japan

US

Per capita health expenditure (US$)

510

230

505

2,870

China

UK

Japan

US

Total health expenditure (US$ bn) Healthcare expenditure as % of GDP

17.1%

10.3%

9.1%

5.6%

Proportion of China population

aged 60+ will increase from 15%

in 2015 to 18%/37% in 2020/2050E,

higher than world average of

13%/21%.

Healthcare expenditure in China

accounts for 5.6% GDP in 2013,

far behind high-disposal income

countries’ 7.7%

Tue, 05 Jan 2016

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Exhibit 4.: Healthcare Expenditure as % of GDP, 2013

Source: World Bank, OP Research

More importantly, per person healthcare spending for the 65 and older population

was US$18,424 in US and 3 times spending per working-age person (US$6,125)

in 2010, according to CMS. And the healthcare spending is expected to increase

along with age increase from 65 onwards and peak at age 96 from Kaiser Family

Foundation analysis of the US Medicare claim.

Exhibit 5.: Peak of health expenditure per capita in USA 2011

Source: Kaiser Family Foundation, OP Research

As the population of 60+ aged as total population in China is expected to increase

from 15% in 2015 to 18%/37% in 2020/2050E, we expect the healthcare

expenditure in China to grow from RMB4.1tn in 2014 to RMB8.1tn in 2020E,

representing a 12.0% CAGR during 2014 to 2020E and we expect the health

expenditure as percentage of GDP to rise from 6.0% in 2014 to 8.1% in 2020E.

17.1%

11.7%11.3%

10.9%10.3%

9.7% 9.4% 9.1%

7.2%

5.6% 5.1%

4.6%4.0% 4.0%

3.1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

UnitedStates

France Germany Canada Japan NewZealand

Australia UnitedKingdom

Korea,Rep.

China Egypt,Arab Rep.

Singapore Malaysia India Indonesia

High disposal- income countries = 7.7%

Middle disposal-income countries = 6.8%

0

1,000

2,000

3,000

4,000

5,000

65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 101 103 105

Hospice Inpatient

Skilled nursing facility (SNF) Part B prociders/ services/ supplies

Home health Outpatient

Age 104

Age 89

Age 83

Age 83 Age 96

Age 98

(US$)

Healthcare spending per person

increases along with age increase,

and peak at age 96. Aged 65+

usually spend 3 times more than

working ages person in

healthcare spending

Health expenditure in China is

expected to increase from

RMB4.1tn in 2014 to RMB8.1tn in

2020E, representing 12.0% CAGR

Tue, 05 Jan 2016

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Exhibit 6.: China healthcare expenditure from 2011 to 2020E

Source: WHO Global Health Expenditure Database, World Bank, China Economic Census, OP Research

Ageing population facing severe orthopedic and cardiovascular

threats, leading to a rapid growth of orthopedic and cardiovascular

medical devices

Hypertension is expected to be the most common disease in China in 2015,

affecting 182.7mn people, cardiovascular diseases (CVDs) ranks No. 3 affecting

46.8mn people and Orthopedic and Musculoskeletal diseases rank No.5 affecting

28.1mn people. Ageing population is likely to face more severe orthopedic and

cardiovascular threats, which had the largest number of deaths in 2014,

amounting to 1.96mn deaths. We believe cardiology and orthopedic device

manufacturers will benefit from the ageing population in China for the coming 5

years.

Exhibit 7.: Disease prevalence and number of deaths in China

Disease prevalence (mn people) Deaths in 2014 (people)

Source: National Bureau of Statistics, CFDA, NHFPC, OP Research

3.32 4.10

4.63 5.21

5.85 6.53

7.28 8.09

5.6%

8.1%

0%

2%

4%

6%

8%

10%

0

2

4

6

8

10

2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

China Healthcare Expenditure (RMB tn)

Total Healthcare Expenditure (% of GDP)

5

5.5

6.2

6.3

7.1

7.8

8

9.5

10.3

18.1

22.7

28.1

35

46.8

48.2

182.7

0 50 100 150 200

ESRD

Psychiatric diseases

Ophthalmological disease

Gallbladder disease

Chronic bronchitis

Neurology diseases

Acute gastritis

Cancer

Rheumatoid arthritis

Cerebrovascular diseases

Alimentary system diseases

Musculoskeletal diseases

Respiratory diseases

Cardiovascular diseases

Diabetes

Hypertension

2015E 2008

(mn) 36

63

93

100

172

187

200

226

231

267

337

633

740

1,120

1,960

0 500 1,000 1,500 2,000 2,500

Hepatitis(viral)

Breast Cancer

Urinary/reproductive diseases

Liver diseases

Esophagus cancer

Colorectal cancer

Hypertention

Alimentary system diseases

Diabetes

Stomach cancer

Liver cancer

Myocardial infarction

Lung cancer

Respiratory diseases

Cardiovascular diseases

(000)

Cardiovascular (CVD) ranks No.3

and Orthopedic diseases ranks

No.5 in disease prevalence in

China for 2015E, and CVD caused

most deaths in China for 2014.

Cardiology and orthopedic device

manufactures set to benefit from

the ageing population in China

Tue, 05 Jan 2016

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According to Evaluate MedTech, cardiological devices are expected to be the

second largest medical devices (11.4% worldwide market share) with US$54.2bn

worldwide sales in 2020E, representing 4.4% CAGR from 2014 to 2020E, and

orthopedics medical devices is expected to be the third largest medical devices

(8.8% worldwide market share) with US$42bn worldwide sales, representing

3.2% CAGR from 2014 to 2020E.

Exhibit 8.: WW medtech sales by evaluateMedTech device area: top 15 categories & total market (2014/2020E)

Worldwide sales ($bn) CAGR Wordwide market share Rank

Rank Company 2014 2020 % growth 2014 2020 Chg. (+/-) Chg. (+/-)

1 In vitro diagnostics (IVD) 49.9 67.3 +5.1% 13.3% 14.1% +0.8pp -

2 Cardiology 41.9 54.2 +4.4% 11.2% 11.4% +0.2pp -

3 Orthopedics 34.8 42.0 +3.2% 9.3% 8.8% -0.5pp +1

4 Diagnostic imageing 35.6 40.9 +2.3% 9.5% 8.6% -0.9pp -1

5 Ophthalmics 25.6 33.7 +4.7% 6.8% 7.1% +0.2pp -

6 General & plastic surgery 19.4 24.6 +4.0% 5.2% 5.1% -0.0pp -

7 Drug delivery 18.6 22.3 +3.1% 4.9% 4.7% -0.3pp -

8 Endoscopy 16.3 21.5 +4.8% 4.3% 4.5% +0.2pp -

9 Dental 12.9 16.5 +4.2% 3.4% 3.5% +0.0pp +1

10 Wound management 12.9 15.8 +3.4% 3.4% 3.3% -0.1pp -1

11 Dlabetic care 11.5 14.4 +3.8% 3.1% 3.0% -0.1pp -

12 Nephrology 11.3 13.5 +3.1% 3.0% 2.8% -0.2pp -

13 Ear, Nose & Throat (ENT) 8.5 11.0 +4.3% 2.3% 2.3% +0.0pp +1

14 General hospital & healthcare 8.9 10.9 +3.4% 2.4% 2.3% -0.1pp -1

15 Neurology 6.4 9.5 +6.9% 1.7% 2.0% +0.3pp +1

Top 15 314.4 398.1 +4.0% 83.8% 83.5% -0.5pp -

Other 60.8 79.5 +4.6% 16.2% 16.7% +0.5pp -

Total WW medtech sales 375.2 477.6 +4.1% 100.0% 100.0%

Source: EvaluateMedTech

Exhibit 9.: Top 10 device areas in 2020E, market share & sales growth

(2014-2020E)

Source: EvaluateMedTech, OP Research

0%

2%

4%

6%

8%

10%

12%

14%

16%

2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%

% sales growth: CAGR 2014-20

WW

mark

et

sh

are

% i

n 2

020 Diagnostic

imaging Orthopedics

Drug delivery

Wound management

In vitro diagnostics

(IVD)

Cardiology

Ophthalmics

Endoscopy

General & plastic surgery

Dental

Cardiology/orthopedics is

expected to be the second/third

largest medical devices in 2020E

with US$54.2bn/US$42bn

worldwide sales and 4.4%/3.2%

CAGR during 2014 to 2020E,

according to Evaluate MedTech

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1,720 2,069 2,447 2,892 3,412 4,029 4,762 5,639 6,645 7,4318,553

2,0742,497

2,9263,376

3,8654,400

4,9825,622

6,3406,967

7,775

2,5843,003

3,4053,824

4,259

4,712

5,181

5,650

6,081

6,735

7,257

1,4971,580

1,635

1,712

1,793

1,875

1,962

2,050

2,137

2,090

2,333

7,8769,149

10,415

11,804

13,330

15,016

16,887

18,961

21,203

23,223

25,918

0

5000

10000

15000

20000

25000

30000

2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Joint Implants Spine Implants Trauma Implants Others Total

(RMB mn)

Chunli Medical (1858 HK) is well positioned to reap this rapid growth

in China's orthopedic implant market

Specifically, the orthopedic implant market in China is expected to achieve 11.7%

CAGR growth from RMB13.3bn in 2014 to RMB25.9mn in 2020E, of which sales

of PRC joint implants experience 16.6% CAGR growth from RMB3.4bn in 2014 to

RMB8.6bn in 2020E, accounted for 33% of orthopedic implant market sales in

China in 2020E as compared to 26% in 2014.

We believe Chunli Medical (CLM) (1858 HK) is well positioned to ride on the

orthopedic medical devices market growth as a leading player in joint prosthesis

products, over 90% of CLM sales in 2014 was generated from joint related

prosthesis products.

We expect CLM to achieve a 50%/26% sales growth in FY15/16E to

RMB202mn/RMB253mn, representing a 4.6%/4.9% market share in China joint

implants market as compared to 3.1% in FY13, thanks to the (1) new product

launch of Ceramic hip joint prosthesis in April 2015 for which CLM is the first

domestic company to secure the CFDA certification and benefit from (2) policy

shift to support “Made in China” as well as long-established relationship with

distributors and hospitals in China.

Exhibit 10.: Sales of orthopedic implant market in PRC from 2010 to 2020E

Source: World Bank, Archives of Internal Medicine, National Institutes of Health, Euromonitor, OP Research

Joint implants market in China is

expected to grow at 16.6% CAGR

from 2014 to 2020E, higher than

the entire orthopedic implant

market’s 11.7% CAGR in same

period.

Contribution of Joint implants

market in China orthopedic

implant market is expected to

increase from 26% in 2014 to 33%

in 2020E

Chunli Medical (CLM) (1858 HK,

BUY) market share in China joint

implant market is expected to

increase from 3.1% in FY13 to

4.6%/4.9% in FY15/FY16E, thanks

to the early bird advantage as the

first domestic player obtained the

ceramic hip joint CFDA

certification and policy shift to

“Made in China”

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Cardiovascular diseases (CVDs) – Stroke and connection with Atrial

Fibrillation (AF)

According to WHO, CVDs are the Number 1 cause of death globally and there

are 6 types of CVDs, namely coronary heart disease, stroke, hypertensive heart

disease, inflammatory heart disease, rheumatic heart disease and other forms of

heart diseases. In 2012, 17.5mn people were estimated to have died of CVDs, of

which 7.4mn (42%) were due to coronary heart diseases and 6.7mn (38%) to

stroke.

Exhibit 11.: Global CVDs death breakdown in 2012

Source: WHO, OP Research

Exhibit 12.: Deaths from CVD by ages

Source: WHO

Coronary heart42%

Stroke38%

Hypertensive heart disease

6%

Inflammatory heart disease

3%

Rheumatic heart disease

3%

Others8%

CVDs are the number 1 cause of

death globally and caused 17.5mn

death in 2013, 38% of CVDs death

was due to stroke after 42% from

coronary heart disease

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Specifically for stroke, Atrial Fibrillation (AF) is the most common and serious

abnormal heart rhythm that causes AF is when your heart does not beat properly

between 60-100bpm but irregularly between 100-175bpm. AF is more common in

people who are 60 or older and AF is associated with many conditions including

(1) high blood pressure (2) coronary artery disease (3) chronic lung disease (4)

cardiomyopathy (disease of heart muscle that causes heart failure) (5) congenital

heart disease (heart disease present at birth) (6) heart valve disease and (7)

pulmonary embolism (blood clot in lungs). About 15-20% of strokes were due

to AF.

In the presence of AF or an irregular heartbeat, the blood flows inside the left

atrial appendage (LAA), a punch off the left side of the heart, and doesn’t flow out.

This stagnant blood leads to clot formations and these clots can break away and

travel to the brain, causing a stroke.

Exhibit 13.: How Atrial Fibrillation causing a Stroke

Source: European society of cardiology

Exhibit 14.: People with AF are at a greater chance of stroke

Source: Prevention health screenings

For people age 60+, AF is more

common. 15%-20% of strokes

were due to Atrial Fibrillation (AF)

and people with AF are at a

greater chance of stroke

Tue, 05 Jan 2016

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8.3

11.7

6.1

7.2

0

4

8

12

16

2010 2011 2012 2013 2014 2015E2016E2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

China AF Europe AF

(mn)

Left atrial appendage closure (LAAC) is one of the best treatment to

prevent AF induced stroke

According to the Boston Science and World Bank, there are 8.3mn/6.1mn AF

patients in China/Europe in 2015E which is expected to grow to 11.7mn/7.2mn in

2025E, representing 3.5%/1.7% CAGR. Of these, 7.5% to 10% of AF patients

are likely to adopt surgery as an alternative to medication (i.e. for those with

AF in addition to valve or coronary artery disease) while the rest are suitable for

medications (i.e. anticoagulant drug like warfarin) which aim to restore normal

heart rhythm and prevent blood clots.

Exhibit 15.: Atrial Fibrillation (AF) patients in China and Europe

Source: Boston Scientific, World Bank, OP Research

Left atrial appendage closure (LAAC) is an alternative treatment strategy for

blood-thinning medication, especially for the elderly, to reduce the risk of LAA

blood clots from entering the bloodstream, leading to stroke. From a study by

researcher Vivek Y. Reddy, MD, from the electrophysiology center at lcahn

School of Medicine at Mount Sinai, LAAC was more expensive than warfarin in

the 1st year but patients who received LAAC gained more quality adjusted

life-years (QALY). LAAC becomes more cost-effective versus warfarin/novel oral

anticoagulants at 7/5 years and provides an additional 0.506/0.298 life-years and

0.638/0.349 QALY over lifetime compared with warfarin/novel oral anticoagulants.

Exhibit 16.: Watchman LAAC device

Source: Boston Scientific

There are 8.3mn/6.1mn AF

patients in China/European in

2015E and 10% of them are

potential candidate to adopt

surgery as treatment

For elderly, LAAC is an alternative

treatment strategy and is more

cost-effective versus

warfarin/novel oral anticoagulants

at 7/5 years and provides more

quality adjusted life-years

Tue, 05 Jan 2016

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Lifetech Scientific (1302 HK) is one of the four players in left atrial

appendage closure device globally back by Medtronic

Lifetech Scientific (LTS) (1302 HK) is a company focused on cardiac implant

medical devices, including structural heart disease (SHD) products, peripheral

vascular disease (PVD) products, cardiac pacing and electrophysiology. Lifetech

is expected to benefit from the fast growth of cardiovascular patients and

cardiology devices market via its cooperation with Medtronic which is global No. 2

medtech company in terms of sales with 5.4% worldwide market share. Medtronic

is currently the second largest shareholder of LTS with 19% stake.

Exhibit 17.: Medtronic CB’s effect on shareholding structure

Current

outstanding

Assume First Tranche

(Maturity 30/1/2018)

Assume Second Tranche


shs (mn) % HK$152mn CB convert at HK$0.475 % HK$2,031mn CB convert at HK$1.00 %

Director Xie Yuehui 782 19.5% 782 18.1% 782 11.7%

Medtronic 760 19.0% 1,080 25.0% 3,431 51.4%

Director Wu Jian Hui 418 10.4% 418 9.7% 418 6.3%

Prosperity (803 HK) 33 0.8% 33 0.8% 33 0.5%

Public 2,008 50.2% 2,008 46.5% 2,008 30.1%

Total 4,000 100.0% 4,320 100.0% 6,671 100.0%

Source: Company, OP Research

LTS plans to launch its LAmbreTM

LAAC product in Europe 1H16 once LTS gets

the CE certification. Currently there are five LAAC products by 4 players in the

LAAC device market, and LAmbreTM

LAAC is believed to be the safest one with

lowest risks, as it can be reused in surgery. We forecast LTS to sell

3000units/10,000units of LAAC in Europe in FY16/17E or 8%/26% market sales,

contributing RMB150mn/RMB500mn revenue, respectively, and accounting for

29%/53% total revenue.

Exhibit 18.: LAAC Products Comparison Table

Products Watchman Amplatzer Cardiac Plug (ACP) Amulet Lambre Larlat

Company Atritech (Boston Scientific Inc) AGA (St. Jude Inc.) AGA (St. Jude Inc.) Lifetech SCI SentreHEART

Registration CE, FDA, CFDA CE CE Waiting CE/CFDA FDA,CE

Size 21,24,27,30,33mm 16-30mm(8 sizes) 16-34mm 16-36mm

Largest size:

W40mm*H20mm*L70

mm

Occlusion of

blood flow Not good Good Good Good Good

Applicable

heart size

Only applicable to long left

atrial

Not applicable to shallow left

atrial All All All

Surgery

security

if the LAAC is too long, it has

pierce risk Safe Safe Safe Safe

Can be reused

in surgery or

not?

No No Yes Yes N/A

Size of

transport

sheathing

14Fr(diameter: 4.7mm) 10-13Fr(diameter: 3-4.3mm) 9-13Fr

(diameter: 3-4.3mm)

8-10Fr

(diameter: 2.7-3.3mm)

12.9Fr

(diameter: 4.3mm)

Thickest Medium Medium Thinnest

Success rate 95% 96% 98% 99.60% -

Source: Left atrial appendage occlusion Review, OP Research

Lifetech Scientific (LTS)

(1302 HK, BUY) target to launch

its LAmbreTM

LAAC device in

Europe in 1H16 and it is the safest

LAAC in the market at the

moment

We forecast LAAC will contribute

RMB150mn/RMB500mn revenue

to LTS in FY16/17E, representing

29%/53% sales

Tue, 05 Jan 2016

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Liberalization of two child policy benefits gynecology, obstetrics and pediatrics service providers Liberalization of two child policy drives obstetrics and pediatrics market with 21.5% CAGR during 2014 to 2017E

On 29 Oct 2015, the Central Committee approved plans to allow all couples to

have two children, which marks the end of one-child policy which has been in

place for 36 years. We expect the impact to be limited in near term and affect

more in middle term. We expect the newborns in China will increase from 17.7mn

in 2015E to 19.1mn in 2018E, and total obstetrics and gynecology market will

experience 21.5% CAGR from RMB200.7bn in 2015E to RMB360.3bn in 2018E.

Exhibit 19.: Newborns and Obstetrics & Gynecology market in China

Source: National Bureau of Statistics of China, iResearch, Frost & Sullivan Report

Increasing disposal income coupled with proportionate increase of

private hospitals to drive specialty hospitals’ revenue growth

Chinese disposal income per capital nearly double from RMB12,472 in 2010 to

RMB20,167 in 2014 and it is expected to further increase by 40% to RMB28,234

in 2018E. Increasing disposal income drives people’s demand for higher standard,

more professional and better healthcare services, thus we see rapid increases for

private specialty hospitals visits/revenue from 5.4mn/RMB3.4bn in 2010 to

11.5mn/RMB8.2bn in 2014, and they are expected to further increase to

24.5mn/RMB21.1bn in 2018E.

The proportion of private specialty hospitals visits/revenue of total specialty

hospitals visits/revenue are expected to increase from 26%/39% in 2010 to

36%/45% in 2014 and further increase to 47%/52% by 2018E.

200.7

360.3

17.7 19.1

0

100

200

300

400

0

10

20

30

40

2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E

Total Obstetrics & Gynecology mkt (RHS) New born in China (LHS)

(RMB bn)(mn)

Total obstetrics and gynecology

market in China is expected to

achieve 21.5% CAGR from

RMB201bn in FY15E to

RMB360bn in FY18E

Increasing Chinese disposal

income stimulates people’s

demand for private specialty

hospital services, private hospital

visits/revenue is expected to

growth from 11.5mn/RMB8.2bn in

2014 to 24.5mn/RMB21.1bn in

2018E

Tue, 05 Jan 2016

Healthcare services

Page 13 of 57

5.3 6.4 7.8 8.8 10.2 11.613.7

16.319.3

3.44.3

5.66.4

8.29.8

12.6

16.3

21.1

0

5

10

15

20

25

30

35

40

45

2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Public Specialty Hospitals Private Specialty Hospitals

(RMB bn)

Exhibit 20.: Disposable income per capital in China

Source: National Bureau of Statistics of the People’s Republic of China, OP Research

Exhibit 21.: China Specialty Hospitals Visits Growth from 2010 to 2018E

Source: Frost & Sullivan, OP Research

Exhibit 22.: China Specialty Hospitals Revenue Growth from 2010 to 2018E


12,472

15,478

17,439 18,311

20,167

24%

13%

5%

10%

0%

10%

20%

30%

0

10,000

20,000

30,000

2010 2011 2012 2013 2014

Disposable income per capita yoy%

(RMB)

Tue, 05 Jan 2016

Healthcare services

Page 14 of 57

Harmonicare (HMNC) (1509 HK) the No. 1 private obstetrics specialty

hospital in China is set to reap the growth

For the obstetrics and gynecology healthcare services market in China, specialty

hospitals’ revenue is expected to increase from RMB21.5bn in 2015E to

RMB40.4bn 2018E with 23.4% CAGR during the same period.

Exhibit 23.: China obstetrics and gynecology healthcare services market

revenue breakdown from 2010 to 2018E


Harmonicare (HMNC) (1509 HK) is the largest private obstetrics and gynecology

specialty hospital group with 13% market share in terms of revenue. We believe

HMNC has well positioned itself to ride on the liberalization of two child policy and

we forecast HMNC’s revenue/net profit to grow at 23%/36% CAGR from

RMB869mn/RMB87mn in FY15E to RMB1,638mn/RMB218mn in FY18E.

Downstream postpartum care services to be a new revenue stream

catalyst on top of the Golden Monkey Year effect in mid-term

As a downstream expansion of obstetrics and gynecology healthcare services,

postpartum care service is catching increasing attention, as more and more

mothers are demanding professional postpartum care with healthy diet and

neonatal care. We forecast the total postpartum services market in China to grow

from RMB11.7bn in 2015E to RMB42.0bn in 2018E, representing a 3-year CAGR

of 53%.

Due to the weak Sheep Year effect, HMNC’s record a 14.2% decline in delivery to

676 times in it BJ hospital in 1H15, while BJ hospital 1H15 revenue was only

down by 5.1% yoy to RMB75.6mn, thanks to increased revenue from postpartum

care services. From our channel check, BJ and SZ hospital postpartum care

services were up RMB10mn level yoy in 1H15 to about ~RMB20mn revenue,

accounting for 16.8% of these two hospitals 1H15 sales which partially offset the

decline in delivery in BJ hospital. HMNC management plans to actively seek M&A

and/or build new postpartum care service centers to diversify its obstetrics

business. We are positive on the move given HMNC’s brand recognition and

economies of scale.

39.1 48.2 59.6 68.4 83.5 96.4 117.2144.3

176.1

35.342.6

52.158.3

71.182.9

99.2

119.4

143.7

8.710.7

13.415.2

18.4

21.5

26.3

32.6

40.4

0

100

200

300

400

2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Obstetrics and Gynecology Specialty Hospitals

General Hospitals

Maternal and Child Healthcare Institutions

(RMB bn)

China obstetrics specialty

hospitals revenue is expected to

grow from RMB22bn in 2015E to

RMB40bn in 2018E with 23.4%

CAGR

Harmonicare (HMNC) (1509 HK) is

expected to achieve a 36%

earnings CAGR from FY15E to

FY18E

Downstream postpartum care

service market in China is

expected to achieve 53% CAGR

from FY15E to FY18E

HMNC is diversifying its revenue

mix via postpartum care service

to offset weak year effect and

boost growth in mid-to-long term

Tue, 05 Jan 2016

Healthcare services

Page 15 of 57

Exhibit 24.: China Postpartum services market from 2014 to 2018E

Source: National Bureau of Statistics of China, iResearch, OP Research

5,070

11,682

19,929

30,027

41,946

130%

71% 51%

40%

0%

60%

120%

180%

0

10,000

20,000

30,000

40,000

50,000

2014 2015E 2016E 2017E 2018E

Total Postpartum services market yoy%

(RMB mn)

Tue, 05 Jan 2016

Healthcare services

Page 16 of 57

Positive 13th

FYP on healthcare service to boost M&A activities

“Healthy China” raised by 13th Five Year Plan

On 3 November 2015, the 13th Five Year Plan raised the “Healthy China” concept,

indicating that healthcare industry would be promoted as a strategic industry and

given greater emphasis for the next five years, with the government determined

to solve healthcare problems not resolved during the 12th Five Year Plan. The

healthcare industry market is expected to hit RMB8.0tn in 2020. Key points are

highlighted in the Healthy China plan.

Public hospital reforms and greater involvement of social capital in

hospitals. To improve the efficiency of hospitals, key tasks include: 1)

separation of drugs sales from hospital income 2) expansion limitation of

public hospitals 3) encourage social capital to set up private hospitals 4)

promotion of physician’s multi-sited practices

Commercial insurance will be encouraged to relieve the burden of medical

costs

Establishment of a comprehensive medical care system. Encourage

development of primary medical institutions to provide basic health services

and relieve burden of large hospitals.

Healthcare Service Plan Outline for 2015 to 2020 likely benefit

non-public hospital sector M&A and growth

National Health and Family Planning Commission of the People’s Republic of

China (NHFPC) issued Healthcare Service Plan Outline for 2015-20(全國醫療衛

生服務體系規劃綱要) in March 2015. The outline sets healthcare services target

in 2020 with (1) number of beds per thousand residents will increase to 6 in 2020 from 4.55 in 2013, of which number of beds per thousand residents in public hospital/community hospital will increase to 3.3/1.5 in 2020 from 3.04/0.52 in 2013. Number of general physicians per ten thousand residents will increase to 2 in 2020 from 1.07 in 2013. The outline also sets the appropriate size of hospitals, appropriate number of beds of County/Municipal/Province general hospital is 500/800/1000, avoiding the blind expansion of public hospitals.

Exhibit 25.: Guideline for national healthcare service system development

2015-2020

Indicators 2020 goals 2013

Number of beds per thousand residents 6.00 4.55

Hospital 4.80 3.56

-Public hospital 3.30 3.04

. Provincial hospital and above 0.45 0.39

. Municipal hospital 0.90 0.79

. County-level hospital 1.80 1.26

. Other 0.15 0.60

-Community hospital 1.50 0.52

Primary healthcare institutions 1.20 0.99

Appropriate number of beds of county general hospitals 500 -

Appropriate number of beds of municipal general hospitals 800 -

Appropriate number of beds of province general hospitals 1,000 -

Source: The state council of the People’s Republic of China, OP Research

“Healthy China” raised by 13th

FYP encourages involvement of

social capital and establishment

of comprehensive medical care

system. More M&A activates is

expected on HK capital market

Healthcare service plan outline

for 2015-20 states that number of

beds per thousand residents will

increase to 6 in 2020 from 4.55 in

2013

Tue, 05 Jan 2016

Healthcare services

Page 17 of 57

We see an increasing trend towards greater private hospital usage, in terms of

number of hospital and patient visits. The percentage of outpatients/inpatients

visits of private hospitals increased from 8%/8% in 2010 to 10%/12% in 2013 and

we expect it will further increase to 25%/30% in 2020E. Besides, the percentage

of private hospitals also increase from 32% in 2010 to 48% in 2014, and is

expected to further increase to 60% in 2020E. Overall, healthcare services

spending in China is expected to increase from RMB3.2tn in 2015E to RMB5.7tn

in 2018E with 20.5% CAGR, according to Frost & Sullivan.

Exhibit 26.: China's healthcare services spending


860 1,028 1,245 1,529 1,775 2,104

2,515 3,044

3,685

4,460

1,186 1,373

1,647 1,999

2,315 2,731

3,250

3,917

4,720

5,687

0

1,000

2,000

3,000

4,000

5,000

6,000

2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Hospitals Primary Healthcare Clinics

Others Total healthcare services spending

(RMB bn)

Improving private or non-public

hospital usage is expected in 13th

FYP, benefiting the non-public

hospital service play and

stimulate M&As activities to

acquire quality hospital services

related asset

Tue, 05 Jan 2016

Healthcare services

Page 18 of 57

Exhibit 27.: Percentage of hospitals quantity in China

Source: Wind, OP Research

Exhibit 28.: Percentage of outpatients visits in China


Exhibit 29.: Percentage of inpatients visits in China


68%63% 58% 55% 52%

40%

32%37% 42% 45% 48%

60%

0%

25%

50%

75%

100%

2010 2011 2012 2013 2014 2020E

Public Hospitals % Private Hospitals%

92% 91% 90% 90%

75%

8% 9% 10% 10%

25%

0%

25%

50%

75%

100%

2010 2011 2012 2013 2020E


92% 90% 89% 88%

70%

8% 10% 11% 12%

30%

0%

25%

50%

75%

100%

2010 2011 2012 2013 2020E


Tue, 05 Jan 2016

Healthcare services

Page 19 of 57

Exhibit 30.: Policies on healthcare system reform from 2009 to 2015

Date Department Document Key Content

Mar-12 General office of State Council Medical REFORM Plan during the 12th

Five-Year Plan

1. Announce support and target for non-public healthcare

institutions: Non-public hospital beds and patient visits to

reach 20% of total

"十二五"期間深化醫藥衛生體制改革規劃暨

實施方案的通知

2. Loosen requirement for social capital and foreign

investment to participate in healthcare institutions and for

qualified practitioners to open private clinics

3. Guide social capital to participate in public hospital

restructuring through various method and encourage

non-public healthcare institutions to develop towards large

scale healthcare groups

Oct-13 General office of State Council Opinions on Encourageing Development

of Healthcare Services

1. Reinforce on encourageing various capital in medical

institutions

國務院關於促進健康服務發展的若干意見 2. Loosen entry requirement

3. Guide investment and financing policies

4. Layout detailed tax relaxation for social investment in

healthcare system

Jan-14 NHFPC Opinions on Accelerating Social Capital

Investment in Medical and Healthcare

Institutions

Lay out detailed loosening policies on entry barriers for

social-capital investment in healthcare institutions, including

taxation, medical-insurance designation, the approval

process, healthcare informatics and academic support 關於加快發展社會辦醫的若干意見

Apr-14 NDRC Notice on Questions regarding

Implementation of Market Price

Mechanism in Non-Public Healthcare

Institutions

Allow non-public, for-profit hospitals to set service prices

關於非公立醫療機構醫療服務實行市場調

節價有關問題的通知

May-14 General office of State Council 2014 Major Task List on Deepening

Medical and Healthcare System Reform

Set a timeline for further completion of policy support for

social-capital investment in hospitals and healthcare

institutions 深化醫藥衛生體制改革 2014年重點工作任

務

Jun-14 NHFPC Urgent Notice on Controlling the Over

Speed Expansion of Public Hospitals

Announce controls on the expansion of public hospitals to

allow the development of primary facilities and non-public

healthcare institutions 關於控制公立醫院規模過快擴張的緊急通

知

Mar-15 General office of State Council 40th Document of State Council 1. The overall size of healthcare industry is expected to

exceed RMB8.0tn by 2020

國務院 40號文件 2. Loosen restrictions for social capital investment sino-foreign

investment in the healthcare industry

Apr-15 General office of State Council 2014 Wrap-up Report and 2015 Major

Task List on Deepening the Medical and

Healthcare System Reform

Set out a timeline for policy implementation on accelerating

social-capital investment in medical and healthcare institutions

深化醫藥衛生體制改革 2014年工作總結和

2015重點工作任務的通知

May-15 State Council

Guidance on the pilot programs for the

comprehensive reform of urban public

hospitals

Target 100 cities to start pilot hospital reform by end of 2015.

Ensure all county-level and above cities to implement

public hospital reform by 2017. Reduce out-of-pocket

payment to below 30% of total healthcare expenditure by end

of 2017.

國務院辦公廳關於城市公立醫院綜合改革

試點的指導意見

May-15 NHFPC

Notice on decision of the 3rd batch of

national pilot cities for public hospital

reform

Reduce out-of-pocket payment to below 30% of total

healthcare expenditure by en of 2017. Cut drug revenue to

below 30% of total hospital revenue by 2017

關於確定第三批公立醫院改革國家聯繫試

點城市及有關工作的通知

Jun-15 State Council

Several policies and measures for

promoting the accelerated development of

private medical institutions

Further relaxation of market access and expansion of financing

channels. Require inclusion of eligible private medical

institutions into medical insurance coverage and equal

treatment with public medical institutions 關於促進社會辦醫加快發展的若干政策措

施

Dec-15 NHFPC

Searching for public opinions for

formulating construction planning on

Healthy China of 13th FYP

Healthy China is officially regarded as a “national strategy”.

Linkage among hospitals, medical insurance and medicine

reform, separation of clinic from pharmacy.

Internet Plus will become significant technology to deepen the

medical reform and enhance the construction of Healthy China.

“十三五”健康中国建设规划向社会公开征

求意见

Source: OP Research

Tue, 05 Jan 2016

Healthcare services

Page 20 of 57

Public-private partnership (PPP) reforms to support non public

hospital M&A activities

As mentioned in 13th FYP, social capital is encouraged to invest in healthcare

system, including public hospital reforms and setting up private hospitals. There

were frequent mergers & acquisitions in the healthcare industry in 2015 at 13x to

20x+ PE valuation. Hospital services or healthcare service listco are currently

trades above 20x FY15E PE on average with some unique pure play trades

above 50x FY15E PE We expect more listcos will penetrate into the healthcare

service industry in China as a hospital service and/or medical and geriatric care

service players by acquiring quality asset at attractive valuation to boost share

price performance and profit growth from FY16E onwards.

For hospital play, we keep a close eye on Town Health (3886 HK, NR) and

HuaXia Health (8143 HK, NR).

We believe Town Health (3886 HK, NR) will be one of beneficiaries to reap the

robust healthcare service industry growth in China which raised HK$1.75bn by

issuing 1.79bn new shs at HK$0.98 to China Life Insurance Group which became

the company's largest shareholder with 23.90% equity stake in May 2015 and

have announced plans to acquire 51% to 65% equity stake in a Class III A

hospital in Henan with 1200 beds at a consideration not more than HK$1.48bn in

Dec 2015.

HuaXia Health (8143 HK, NR) currently operates 3 Class II composite hospitals

and recently signed a MOU to acquire 8 specialty hospitals in China tier 1 cities at

a consideration of not more than HK$1.2bn. We believe HuaXia may be another

potential specialty hospital play in China similar to HMNC (1509 HK, BUY) or KN

Hospitals (2120 HK, NR)

An increasing number of listed companies are in the stage of transition to a

company focused on healthcare business. They are actively seeking M&A

opportunities in this industry, including elderly nursing homes, “Internet + Medical”

services, and maternal and child health management services. We summarized

the recent announcements of several listed companies stepping into healthcare

industry below.

For medical and geriatric care play, we keep a close eyes on CS Health (286 HK,

NR) and BJ Ent M&H (2389 HK, NR).

Acquisition PE for Healthcare

service and hospital assets range

from 13x to 20x+ in 2015 and we

expect more M&As happen from

FY16E onwards

Medical and geriatric care service

are other hot area in M&As, most

of them by acquiring land bank to

develop geriatric care center,

elderly nursing homes, Internet +

Medical services to reap the

Healthy China 13th

FYP

Tue, 05 Jan 2016

Healthcare services

Page 21 of 57

Exhibit 31.: Comparison table of listco hospital beds, consideration, size and region

Stock

Code

Company Market Value

(HK$ mn)

Hospitals Region No. of

Hospitals

in 2015

No. of

Beds

in 2015

No. of

Hospitals

in 2016

No. of

beds

in 2016

No. of

Hospital

in 2017

No. of

Beds

in 2017

Business Model/Consideration

1509 HarMoniCare 5,331

Beijing HarMoniCare Hospital BeiJing 1 92 1 92 1 92

Self-owned

Chongqing Modern Woman Hospital

ChongQing

1 120 1 120 1 120

Chongqing Dushi Liren Hospital 1 80 1 80 1 80

Chongqing Wanzhou HarMoniCare

Hospital 1 30 1 30 1 30

Chongqing Fuling HarMoniCare

Hospital 1 80 1 80 1 80

Guangzhou Woman Hospital GuangZhou 1 50 1 50 1 50

Shenzhen HarMoniCare Hospital ShenZhen 1 90 1 90 1 90

Wuhan Modern Hospital WuHan 1 100 1 100 1 100

FuZhou Woman Hospital FuZhou 1 60 1 60 1 60

Guiyang Modern Woman Hospital GuiYang

1 60 1 60 1 60

Guangzhou Woman Hospital 1 100 1 100 1 100

Beijing New Hospital BeiJing 1 80 1 80

XiaMen New Hospital XiaMen 1 80 1 80

Nanjing New Hospital Nanjing 1 80

Hangzhou New Hospital HangZhou 1 85

Chongqing New Hospital ChongQing 1 80

11 862 13 1,022 16 1,267

1515 Phoenixhealth 7,554

Jian Gong Hospital

BeiJing

1 405 1 405 1 405 IOT

Mentougou Hospital 1 453 1 453 1 453

Mentougou Traditional 1 120 1 120 1 120

Mentougou MCH 1 30 1 30 1 30

IOT

RMB15mn

Jing Mei Hospital Group 1 1,742 1 1,742 1 1,742 IOT - Not disclosed, 70% equity

Yanhua Hospital Group 1 663 1 663 1 663 IOT

Airport Hospital 1 94 1 94 1 94 "Restructure-operate-transfer"

RMB 100mn Shunyi District No.2 Hospital 1 100 1 100 1 100

China Meitan General Hospital 1 515 1 515 1 515 IOT JV

RMB 350mn Shilong Hospital 1 380 1 380 1 380

Baoding No.1 Central Hospital BaoDing, HeBei

1 1,882 1 1,882 1 2,800

IOT

RMB500mn

Baoding Third Center Hospital 1 304 1 304 1 304

IOT

RMB70mn+20mn(NFP fund)

12 6,688 12 6,688 12 7,606


Tue, 05 Jan 2016

Healthcare services

Page 22 of 57

Exhibit 31.: Comparison table of listco hospital beds, consideration, size and region (Contiued)

Stock

Code


(HK$ mn)


Hospitals

in 2015

No. of

Beds

in 2015

No. of

Hospitals

in 2016

No. of

beds

in 2016

No. of

Hospital

in 2017

No. of

Beds

in 2017


2120 KN Hospital 3,378 5 owned hospitals WenZhou 1 1,913 1 1,913 1 1,913 self-owned

Pingyang Changgeng Ward 1 160 1 160 1 160 IOT

Chengdu Renyi Ward ChengDu 1 37 1 37 1 37

Yanjiao Furen Hospital LangFang, HeBei 1 100 1 100 1 100

Beijing Yining BeiJing 1 38 1 38 1 38

Linhai Kangning TaiZhou,

ShanDong

1 80 1 80 self-owned

Hangzhou Yining HangZhou 1 100 1 100

Shenzhen Yining ShenZhen 1 100 1 100

5 2,248 8 2,528 8 2,528

587 HuaHan

Biopharm

7,984 8 Hospitals GuiZhou 8 5,151 8 5,151 8 5,151 TIOT

Liupanshui City Liang Dou People's

Hospital

(六盤水涼都人民醫院)

LiuPanShui,

GuiZhou

1 1,500 1 1,500 Self-operation

RMB 136mn (68% equity)

Liu Zhi Hospital of Traditional Chinese

Medicine

(六枝中醫院)

1 500 1 500 Self-operation(70% equity)

Tongren City Central Hospital

(銅仁市中心醫院)

TongRen, GuiZhou 1 560 1 560 Self-operation(100% equity)

8 5,151 11 7,711 11 7,711

8143 HuaXia Health 1,665 ZhuHai Kowloon Hospital ZhuHai 1 150 1 150 1 150 100% equity

ChongQing Edwards Hospital ChongQing 1 150 1 150 1 150 50% equity

Jiaxing Dawn Hospital JiaXing, ZheJiang 1 180 1 180 1 180 50% equity

Harbin Specialty Hospital Harbin,

HeiLongJiang

1

Not

disclosed

1

Not

disclosed RMB1.2bn(90% equity)

TianJin Specialty Hospital TianJin 1 1

ChongQing Speciaty Hospital ChongQing 1 1

Qiqihar Composite Hospital

Qiqihar,

HeiLongJiang

1 1

GuiYang Composite Hospital GuiZhou 1 1

2 BeiJing Compositie Hospital BeiJing 1 2

ShenYang Composite Hospital

ShenYang, Liao

Ning

1 1

3 480 11 480 11 480


Tue, 05 Jan 2016

Healthcare services

Page 23 of 57

Exhibit 31.: Comparison table of listco hospital beds, consideration, size and region (Contiued)

Stock

Code


(HK$ mn)


Hospitals

in 2015

No. of

Beds

in 2015

No. of

Hospitals

in 2016

No. of

beds

in 2016

No. of

Hospital

in 2017

No. of

Beds

in 2017


2196 Fosum

Pharma

63,069 Anhui Jimin Cancer Hospital HeFei, AnHui 1 700 1 700 1 700 70% equity

Yueyang Guangji Hospital YueYang, HuNan 1 500 1 500 1 500 55% equity

Suqian Zhongwu Hospital SuQian, JiangSu 1 250 1 250 1 250 55% equity

Chancheng Hospital FoShan,

GuangDong

1 1,200 1 1,200 1 1,200 60% equity

Guangzhou Nanyang Cancer Hospital GuangZhou 1 50 1 50 1 50 50% equity

United Family Hospital BJ,SH,Tianjin,GZ,

QingDao

5 300 5 300 5 300 not disclosed

Taizhou Municipal Zanyang Hospital TaiZhou, ZheJiang - 1 1,200 RMB510mn(75% equity)

Taizhou Zanyang Rehabilitation Centre 1 800

WenZhou Geriatirc Hospital(tentatively

named)

WenZhou,

ZheJiang

500

beds by

2020

RMB 250mn(70.47% equity)

QingDaoChengXing Hospital QingDao,

ShanDong

1600

beds, no

timeline

RMB 400mn(50% equity)

10 3,000 10 3,000 12 5,000

3886 TownHealth 11,951 Hangzhou Shengkang hopsital HangZhou,

ZheJiang

1 500 1 500 1 500 RMB 121mn(49% equity)

Nanshi Hospital of Nanyang NanYang, HeNan 1 1,000 1 1,000 Not more HK$1.75bn

(51%-65% equity)

Nanshi Hospital Youtian Branch 1 50 1 50

Erjiao Branch oof Nanshi Hospital 1 50 1 50

Nanyang City Wulong District Wuhou

Second Community Health Service

Centre

1 10 1 10

1 500 5 1,610 5 1,610


Tue, 05 Jan 2016

Healthcare services

Page 24 of 57

Exhibit 32.: Comparison table of listco stepping into healthcare industry

Stock Code Company Date Announcement Details

286 CS Health

Jun-13 Acquisition of 35% equity in Dongguan Southern Medical

University Metabolic Medicines Research and Development

Company Limited(東莞南方醫大代謝醫學研發有限公司)

Consideration: RMB820,000 for acquisition + RMB800,000 for working capital

The company is engaged in R&D of new solutions and products in diagnosis, treatment and prevention of

metabolic diseases.

Dec-13 Change of company name Change to "Common Splendor International Health Industry Group Limited"

Jan-14 Acquisition of 70% equity in Zhao Long International Medical

Investment Management Group Limited

(兆龍國際醫療投資管理)

Consideration: RMB40mn, adjusted to RMB70.88mn in Mar 2015 due to net profits increase

The company is engaged in medicine, ophthalmology, anesthesiology, medical laboratory, pathology, medical

imaging, sales of glasses and accessories, optical instruments and optometry related products.

Aug-15 Capital contribution and acquisition of 100% equity of

DongGuan Ruicheng (東莞市瑞成創投) and 30% equity

interest in Aidigong Maternity Health Group

Consideration: RMB119mn as capital contribution + RMB10mn for acquisition

The company is an investment holding company which has entered into an agreement of acquisition of 30%

equity in Aidigong for RMB129mn.

Aidigong specializes in provision of maternal and child health management services, including Chinese medicine

recuperation, dietary and nutrition, infant intelligence development and postpartum recovery consultations.

Nov-15 Capital contribution and acquisition of 100% equity of

Fengshuo Bio Medical Tech (豐碩生物醫藥科技)

Consideration: RMB60mn as first capital injection of 80% interst + RMB15mn for another 20%

FengShuo Bio Medical Tech is engaged in bio medicine development, production and distribution, it holds 28%

equity in Fengyuan Huake Bio Tech (廣東豐源華科生物科技),which is engaged in plantation and extraction of

saponins, and is an integrated manufacturer of saponins. FengShuo also holds 51% of Guangdong Kelv Bio

Medical Tech Company Limited (廣東科綠生物醫藥科技有限公司), which is engaged in R&D, investment and sale

of natural plan extraction, bio medicine and healthcare food.

2389 BJ Ent M&H

Jan-15 Acquisition of 100% equity in Zhijian Limited, a subsidiary of

Beijing Properties(925)

Consideration: RMB408mn

The company holds 82.24% equity interest of Chaoyang Inland Port, which comprises four parcels of industrial

land with total area of 161.498.66 square meters. BJ Ent M&H plans to demolish buildings on such land, change

the use of such land to elderly care-related and healthy-related.

Jul-15 Change of company name Change to "Beijing Enterprises Medical and Health Industry Group Limited"

Aug-15 Capital injection of 35% equity in Beijing Top-Doctors

Techonology Co., Ltd

(北京良醫聯盟科技有限公司)


The company is engaged in "Internet+Medical" services, including on-line medical consultation, doctors'

appointment services and intelligent medical cooperation with local cities(including online guidance, local house

calls, continuing education and geriatric care community medical services)

Aug-15 Acquisition of 100% equity in Beijing spirit and Beijing xibu Consideration: RMB79.8mn

The two companies are engaged in sales of medical care, geriatric care and household related furniture and

serving major public hospital and geriatric care companies in the PRC.

Nov-15 Acquisition of 51% equity in Fujian Golden Sun Health and

Geriatric Company Limited (福建省金太陽健康養老股份有限

公司)


The company is engaged in providing geriatric and home care services.

Dec-15 Acquisition of land in Shanghai for the purpose of medical

and geriatric care industry

Consideration: RMB92.1mn

The land is used for medical and geriatric care industry


Tue, 05 Jan 2016

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Exhibit 32.: Comparison table of listco stepping into healthcare industry (Contiued)

Stock Code Company Date Announcement Details

708 Everg Health

Apr-15 Acquisition of 96.25% equity of Evergrande Wonjin Beauty

Hospital(恒大原辰美容醫院) in Tianjin

Consideration: RMB220,0000

The company has not commenced operation, the remaining 3.75% of equity is held by Wonjin Beauty Medical

Group of Korea, Everg Health and Wonjin Beauty intend to contribute an aggregate of RMB80mn of registered

capital to Evergrande Wonjin, Evergrande Health will be responsible for marketing and providing medical

equipment, Wonjin Beauty will be responsible for the professional medical team, Korean technology, management

model and management process. The profit sharing between Wonjin Beauty and Evergrande Wonjin will be 40:60.

Apr-15 Change of company name Change to "Evergrande Health Industry Group Limited"

Oct-15 Successful bidding of the land use rights of Hainan Boao

Lecheng international medical

tourism pilot zone


The land area of the Medical land is 81,234.17 square meters and it will be used for medical purposes with use

right of 50 years.

Dec-15 Successful bidding of the land use rights of a land plot in

Haihua island, Binhai new district,

Danzhou, Hainan Province


The land area is 32,701.375 square meters and it will be used for elderly care-related business, the land use right

is 40 years.

383 COL Capital

Oct-15 Increase of equity interest of Aveo China from 30% to 70% Consideration: RMB120mn

The company is engaged in property development and project management businesses in the PRC with focus on

elderly care and retirement community. Aveo China Group has a development, namely Tide Health Campus(天地

健康城), located in Shanghai, it consists of an elderly nursing home, service apartments, independent living units

and a commercial area comprising shopping mall, retail shops and club hall facilities.

Oct-15 Increase of equity interest of Jiatai Construction from

60.52% to 100%


The company owns three well-established operating integrated hospitals consisting of Nanjing Tongren Hospital

(南京同仁醫院)(Class III Integrated Hospital), Kunming Tongren Hospital(昆明同仁醫院)(Class III Ingrated

Hospital),Yunan Xinxinhua Hospital(雲南新新華醫院)(Class II Integrated Hospital). Jiatai Group owns two pieces

of vacant land for medical and health purposes each located near Nanjing Tongren Hospital and Kunming Tongren

Hospital respectively, it also engages in property development operation in Nanjing and owns certain residential

and commercial lands in Lianyungang.

Nov-15 Change of company name Change to "China Medical & Healthcare Group Limited"


Tue, 05 Jan 2016

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Harmonicare (1509 HK) – Riding on Gold Monkey Pure play to reap the liberalization of two child policy in China

Golden Monkey Year effect to boost 80% earnings growth in FY16E

Initial BUY with TP HK$8.70 based on 35x FY16E PE, 6% premium to peers which is justified by its 36% earnings CAGR during FY15E – FY18E versus peers’ 17%, in our view.

Pure play to reap the liberalization of two child policy in China Harmonicare (HMNC)

is the largest private obstetrics and gynecology specialty hospital group in China listed on

HKEx in July 2015 with IPO price of HK$7.55 and fund raised HK$1.47bn. HMNC currently

operates 11 specialty hospitals in China, of which the top five are located in BJ, CQ, GZ,

SZ and WH and accounted for 64% sales in 1H15. Despite a weak Sheep Year effect,

HMNC recorded 6.9% yoy increase in inpatient visits to 298k and 8.2% yoy increase in

average spending per visit (ASPV) to RMB1,404 in 1H15. We expect total

inpatient/outpatient visit decline by 11%/18% to 25k/595k in FY15E then rebound by

11%/11% to 27k/662k inpatient/outpatient visits in FY16E, thanks to Golden Monkey year

effect.

Golden Monkey Year to boost 80% earnings growth in FY16E supported by new

hospital expansion/upgrade plan. For the years of Dragon, Tiger, and Monkey, there is

high likelihood for new born in terms of Chinese perspective. The appointments for 1H16E

outpatient are up 50% yoy and we expects a 10%+/15%+ yoy improvement on

ASPV/inpatient visit in FY16E driven by the Golden Monkey Year effect. HMNC plan to add

(1) two new hospitals in BJ and Xiamen by end of FY16E and (2) expanding its existing BJ

Hospital beds from 59 to 75 – 80 beds by end of FY15E to meet the increasing demand for

obstetric services.

New IVF business and downstream expansion to support mid to long-term growth

On 10th Dec, HMNC announced plans to form a strategic alliance with Phayathai Hospital

Group (PHG) in Thailand to promote the in vitro fertilization (IVF) treatment business to

develop new revenue momentum for HMNC in mid-term. HMNC will also actively seek for

downstream expansion opportunities in postpartum care services to diversify its obstetrics

services. In 1H15, SZ & BJ hospital recorded ~100% yoy increase in postpartum care

services to ~RMB20mn+, accounting for 17% SZ & BJ hospital revenue. We expect the

postpartum care services revenue will continuous to increase from 1H17E onwards.

Initiate BUY. We initiate our BUY rating on HMNC with TP HK$8.70 based on 35x FY16E

PE, 6% premium to its peers which is justified by its 36% earning CAGR during FY15E –

FY18E versus peers’ 17%, in our view.

Exhibit 33. : Forecast and Valuation Year to Dec (RMB mn) FY13A FY14A FY15E FY16E FY17E

Revenue 833.2 935.8 868.9 1,089.3 1,384.7

Growth (%) 11.1 12.3 (7.2) 25.4 27.1

Net Profit 65.7 105.1 86.8 156.7 173.0

Growth (%) 214.5 60.0 (17.4) 80.4 10.4

Diluted EPS (HK$) 0.104 0.167 0.138 0.249 0.275

EPS growth (%) 214.5 60.0 (17.4) 80.4 10.4

Change to previous EPS (%) 0.0 0.0

Consensus EPS (HK$) 0.238 0.300

ROE (%) (186.8) (126.1) 17.5 13.7 14.1

P/E (x) 66.3 41.5 50.2 27.8 25.2

P/B (x) (63.5) (42.9) 3.9 3.6 3.4

Yield (%) 1.1 1.7 1.4 2.5 2.8

DPS (HK$) 0.073 0.117 0.097 0.174 0.192


Initial Coverage

BUY

Close price: HK$6.93

Target Price: HK$8.70 (+26%)

Key Data

HKEx code 1509

12 Months High (HK$) 8.40

12 Month Low (HK$) 4.39

3M AvgDail Vol. (mn) 0.91

Issue Share (mn) 770.32

Market Cap (HK$mn) 5,338.35

Fiscal Year 12/2014

Major shareholder (s) Director Lin Yuming 28.33%

Source: Company data, Bloomberg, OP Research

Closing price are as of 4/1/2016

Price Chart

1mth 3mth 6mth

Absolute % -7.8 12.9 29.8

Rel. MSCI CHINA % -5.8 13.9 35.6

PE

Company Profi le Harmonicare is the largest private obstetrics

and gynecology specialty hospital group in

China listed on HKEx in Jul 2015 with IPO

price of HK$7.55 and fund raised

HK$1.47bn. HMNC currently operates 11

hospitals in China, of which the top five are

located in BJ, CQ, GZ, SZ and WH and

accounted for 64% sales in 1H15.

0.01.02.03.04.05.06.07.08.09.0

Jul/15 Sep/15 Nov/15

HK$1509 HK MSCI CHINA

0

10

20

30

40

50

Aug/15 Oct/15 Dec/15

Forward P/E Ratio +1std.

avg.

-1std.

Tue, 05 Jan 2016

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Page 27 of 57

Exhibit 34.: List of hospitals in 2014 (1)

BeiJingHarMoniCare

Hospital

Chongqing Modern Woman

Hospital

Guangzhou Woman

Hospital

Shenzhen HarMoniCare

Hospital

Wuhan Modern

Hospital

Established year Jun-2011 Mar-2006 Jul-2008 Jul-2010 Dec-2005

GFA(square meters) 17,472 12,573 6,980 9,000 13,522

Employees 481 465 321 292 365

Registered beds 72 120 50 90 100

Beds in operation 59 87 50 30 67

ALOS 4.0 6.4 2.8 6.0 4.2

Source: Company

Exhibit 37.: List of hospitals in 2014 (2)

Fuzhou Modern

Woman Hospital

Guiyang Modern

Woman Hospital

Chongqing

WanzhouHarMoniCare

Hospital

Chongqing

FulingHarMoniCare

Hospital

Chongqing

DushiLiren

Hospital

Guiyang

HarMoniCare

Hospital

Established year Jan-2010 Apr-2007 Mar-2009 Jun-2009 Apr-2006 May-2005

GFA(square meters) 8,600 2,921 3,400 7,124 9,300 10,706

Employees 271 159 146 167 249 229

Registered beds 60 60 30 80 80 100

Beds in operation 41 22 25 50 80 50

ALOS 4.7 4.8 5.8 5.1 6.7 5.2

Source: Company

Tue, 05 Jan 2016

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Exhibit 35.: New hospital expansion plan (2016-2017)

Source: Company

Guangzhou

Beijing

Chongqing

Nanjing

Hangzhou

Fuzhou

Xiamen

Shenzhen

WanzhouWuhan

Guiyang

Fuling

Existing hospitals

Existing provinces

Location Expected

opening date

GFA and

registered beds

Departments Estimated capital

commitment

Beijing By the end of

2016

GFA: 20,000m2; 80

registered beds

Gynecology, postpartum care,

pediatrics, and supporting

departments

~RMB132mn

Xiamen By the end of

2016

GFA: 20,000m2; 80

registered beds



departments

~RMB96mn

Nanjing By the end of

2017

GFA: 22,000m2; 80

registered beds



departments

~RMB90mn

Hangzhou By the end of

2017

GFA: 22,000m2; 85

registered beds



departments

~RMB120mn

Chongqing By the end of

2017

GFA: 20,000m2; 80

registered beds



departments

~RMB90mn

Tue, 05 Jan 2016

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Exhibit 36.: Replicable business model led to rapid historical growth

Source: Company

Exhibit 37.: Milestones in Harmonicare’s growth

Source: Company

2014

2003: Established the

1st private women’s

specialty hospital

2011: Established one

hospital in Beijing

2010: investment by

CCBI and established

two hospitals in

Shenzhen and Fuzhou

2008: investment oby

CDH and established

one hospital in

Guangzhou

2009: Established

three hospitals in

Guiyang and

Chongqing

2006: Established two

hospitals in Chongqing


hospital in Wuhan


hospital in Guiyang

2003 2004 2005 2006 2007 2008 2009 2010 2011-2015

Established

Shanxi Modern

Woman Hospital

Established

“HarMoniCare”

brand

Established

Guiyang Modern

Woman Hospital

1. Established

Chongqing

Modern Woman

Hospital

2. . Established

Chongqing

Dushi Liren

Hospital

CDH invested in

our Group

Established

Beijing

HarrMoniCare

Hospital

Established

Wuhan Modern

Hospital

Established

Guangzhou

Woman’s Hospital

CCBI Medical

invested in our

Group

Received JCI

accreditation

1. Established

Guiyang

HarrMoniCare

Hospital

2. Established

Wanzhou

HarrMoniCare

Hospital

3. Established

Chongqing Fuling

HarMoniCare

Hospital

1. Established

Fuzhou Modern

Woman Hospital

2. . Established

Shenzhen

HarrMoniCare

Hospital l

Tue, 05 Jan 2016

Healthcare services

Page 30 of 57

612 687 789 740

957

1,252 94 100

109 109

115

115

750 833

936 869

1,089

1,385

0

400

800

1,200

1,600

FY12 FY13 FY14 FY15E FY16E FY17E

Supply of pharmaceuticals and medical devices businessSales of pharmaceuticals and medical devicesProvision of healthcare servicesTotal revenue

(RMBmn)

Exhibit 38.: Rank No. 1 in China obstetrics and gynecology hospitals

Source: Company

Exhibit 39.: Revenue forecast from FY12 to FY17E


13.0

5.7

4.6

3.5 2.8

0.0

5.0

10.0

15.0

Group Company A Company B Company C Company D

Market share (%)

# of Obstetrics

and Gynecology Hospitals

11 3 11 3 3

Tue, 05 Jan 2016

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Page 31 of 57

21

66

10587

157173

0.00

50.00

100.00

150.00

200.00


(RMBmn)

69 123 179 149 197 228 113 120

136 144 182

210

121 94

109 108

142 164

54 61

70 86

114

138

80 81

85 85

113

130

268 310

319 278

324

357

115 25

705 787

898 849

1,072

1,367

0

200

400

600

800

1,000

1,200

1,400

1,600


BeiJing HarMoniCare Hospital Chongqing Modern Woman HospitalGuangzhou Woman Hospital Shenzhen HarMoniCare HospitalWuhan Modern Hospital Other HospitalsBJ New Hospital XiaMen New HospitalTotal

(RMB mn)

Exhibit 40.: Net profit forecast from FY12 to FY17E


Exhibit 41.: Revenue breakdown by hospitals from FY12 to FY17E


Exhibit 42.: Key assumptions

Hospital Services 2014 2015E 2016E 2017E

All Hospitals

-Impatient 27,508 24,618 27,436 30,676

yoy% 15% -11% 11% 12%

-Outpatient 723,819 595,000 661,568 756,474

yoy% 11% -18% 11% 14%

-Average spending per visit (RMB) 1,196 1,371 1,555 1,737

yoy% 3% 15% 13% 12%

-Revenue (RMB mn) 898 849 1,072 1,367

yoy% 14% -5% 26% 28%


Tue, 05 Jan 2016

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Exhibit 43.: Comparison table of listco hospital beds, consideration, size and region

Stock

Code


(HK$ mn)


Hospitals

in 2015

No. of

Beds

in 2015

No. of

Hospitals

in 2016

No. of

beds

in 2016

No. of

Hospital

in 2017

No. of

Beds

in 2017


1509 HarMoniCare 5,331

Beijing HarMoniCare Hospital BeiJing 1 92 1 92 1 92

Self-owned

Chongqing Modern Woman Hospital

ChongQing

1 120 1 120 1 120

Chongqing Dushi Liren Hospital 1 80 1 80 1 80

Chongqing Wanzhou HarMoniCare

Hospital 1 30 1 30 1 30

Chongqing Fuling HarMoniCare

Hospital 1 80 1 80 1 80

Guangzhou Woman Hospital GuangZhou 1 50 1 50 1 50

Shenzhen HarMoniCare Hospital ShenZhen 1 90 1 90 1 90

Wuhan Modern Hospital WuHan 1 100 1 100 1 100

FuZhou Woman Hospital FuZhou 1 60 1 60 1 60

Guiyang Modern Woman Hospital GuiYang

1 60 1 60 1 60

Guangzhou Woman Hospital 1 100 1 100 1 100

Beijing New Hospital BeiJing 1 80 1 80

XiaMen New Hospital XiaMen 1 80 1 80

Nanjing New Hospital Nanjing 1 80

Hangzhou New Hospital HangZhou 1 85

Chongqing New Hospital ChongQing 1 80

11 862 13 1,022 16 1,267


Tue, 05 Jan 2016

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Page 33 of 57

Investment risks

Unable to retain employees, especially qualified physicians and nurses:

A hospital's success relies highly on its staff, especially physicians and nurses.

The recruitment of qualified physicians and nurses is highly competitive, as the

pool of experienced medical professionals is very limited in China. Key factors

that physicians and nurses will consider when choosing a hospital to work for

include: salaries and compensations, reputation of the hospital, quality of facilities

and supporting staffs, hospital scale and number of patient visits. Harmonicare’s

staff costs (excluding directors’ emoluments) were RMB222.8mn/RMB256.4mn/

RMB283.0mn in FY12/FY13/FY14, representing 29.7%/30.8%/30.2% of total

revenue. We believe Harmonicare will continue to increase staff costs in the

future to retain a sufficient number of qualified physicians and nurses. Besides,

Harmonicare has a good reputation in obstetrics and gynecology industry, we

believe it will not face much difficulty retaining qualified medical professionals.

Opening new hospitals will result in fluctuations of short-term financial

performance or delay of new hospitals: Harmonicare plans to open two new

hospitals in Beijing and Xiamen by the end of 2016, and three new hospitals in

Nanjing, Hangzhou and Chongqing by the end of 2017. There may be delays in

opening new hospitals, and opening new hospitals will result in fluctuations of

short-term financial performance. As the initial investment and expenditures of

opening new hospitals are very large, including renovation costs, rental expenses

and equipment costs, the short-term financial performance may fluctuate.

Generally, it takes two to three years for a new hospital to break even. We believe

Harmonicare has rich experience in managing hospital which will help it the

operate new hospitals and speed up break even points, Besides, the expansion

plan is beneficial for the company over the long haul, in terms of profit growth.

Medical disputes may harm reputation and business: Diagnoses and

treatment of patients are subject to the physicians’ and other medical staffs’

professional judgement, most of which must be made in a short time. Any

incorrect clinical decisions or actions may result in unsatisfactory treatment

results, patient injury or death. Such risks are higher in complex medical

conditions, such as high risk pregnancy, and sometimes the unsatisfactory

treatment results are not caused by clinical decisions. Harmonica is not

adequately insured against losses and liabilities arising from operations. Besides,

there are increasing number of people using violence to solve medical disputes,

which may cause bodily harm to physicians and other staffs. Harmonicare paid

RMB1.5mn/RMB1.8mn/RMB2.7mn as monetary compensation to patients or

their families in FY12/FY13/FY14, representing 0.2%/0.22%/0.28% of total

revenue. We believe Harmonicare has sufficient physicians with high level of

professional knowledge, and obstetrics and gynecology generally has lower

medical risks, therefore the number of medical disputes should be controllable to

an acceptable level.

Tue, 05 Jan 2016

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Exhibit 44.: Management profiles

Name Position Description

Lin Yuming Chairman & CEO Over 17 years of experience in medical industry

Holds a degree in business management and has an educational background in law

One of the pioneers in the private healthcare industry in China

Awarded "Beijing Excellent Entrepreneur"

Fang Zhifeng Executive Director & VP Served as a physician for 7 years, over 20 years of experience in medical industry in China

Zhao Xingli Executive Director & VP Over 10 years of experience in medical industry

Has deep understanding of medical industry in China; one of the founders of "HarMoniCare" brand

So Kin Ching VP Over 10 years of experience in medical industry

Has rich experience in the operation and management of China private obstetrics and gynecology

specialty hospital

Chen Wei VP & Joint Company Secretary Previously served as Managing Director at IBD of Guosen Securities Co., Ltd.

Over 10 years of experience in capital markets

Ren Jinhui Assistant to Chairman Has financial background with 10 years of experience

Has the qualifications of certified public accountant and certified tax agent

Chen Longzhen CFO Previously served as financial director in several listed companies

Over 15 years of experience in financial management


Exhibit 45.: Shareholding structure


Director

Lin Yuming

Honeycare Int’l

Investment Limited

Tianjin Dinghui

Private Equity Fund

Lin Yurong

& Asso.

CCBI

Investment Limited

28.33% 16.89% 10.21% 7.09% 5.98%

Public

31.5%

Tue, 05 Jan 2016

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Page 35 of 57

Financial Summary– Harmonicare (1509 HK) Year to Dec FY13A FY14A FY15E FY16E FY17E

Year to Dec FY13A FY14A FY15E FY16E FY17E

Income Statement (RMB mn)

Ratios

Provision of hospital services

Gross margin (%) 46.0 50.5 51.0 51.6 48.8

Provision of healthcare services 687 789 740 957 1,252

Operating margin (%) 10.5 14.9 13.3 17.6 15.7

Sales of pharmaceuticals and medical devices 100 109 109 115 115

Net margin (%) 7.9 11.2 10.0 14.4 12.5

Supply of pharmaceuticals and medical devices business 46 37 19 18 18

Selling & dist'n exp/Sales (%) 23.8 23.2 23.9 23.1 22.3

Admin exp/Sales (%) 11.5 11.3 11.4 10.8 10.5

Turnover 833 936 869 1,089 1,385

Payout ratio (%) 70.1 69.9 69.9 69.9 69.9 YoY% 11 12 (7) 25 27

Effective tax (%) 24.9 24.5 25.0 25.0 25.0

COGS (450) (463) (426) (527) (709)

Total debt/equity (%) (526.3) (301.9) 0.0 0.0 0.0

Gross profit 383 472 443 563 675

Net debt/equity (%) (420.3) (229.5) Net cash Net cash Net cash

Gross margin 46.0% 50.5% 51.0% 51.6% 48.8%

Current ratio (x) 0.3 0.3 6.5 4.6 3.2 Other income 1 0 1 1 1

Quick ratio (x) 0.2 0.3 6.4 4.5 3.1

Selling & distribution (198) (217) (208) (251) (309)

Inventory T/O (days) 18 16 16 16 16 Admin (96) (106) (99) (118) (146)

AR T/O (days) 6 5 5 5 5

R&D (2) (2) (2) (3) (3)

AP T/O (days) 18 13 15 15 15

Listing expenses 0 (7) (19) 0 0

Cash conversion cycle (days) 7 8 6 6 6 Other opex (0) (0) 0 0 0

Asset turnover (x) 1.8 2.2 1.0 0.8 0.9

Total opex (296) (333) (328) (372) (458)

Financial leverage (x) (13.4) (5.1) 1.7 1.2 1.2 Operating profit (EBIT) 88 140 116 191 218

EBIT margin (%) 10.5 14.9 13.3 17.6 15.7

Operating margin 10.5% 14.9% 13.3% 17.6% 15.7%

Interest burden (x) 1.0 1.0 1.1 1.1 1.1 Provisions 0 0 0 0 0

Tax burden (x) 0.8 0.8 0.7 0.7 0.7

Interest Income 0 0 16 29 25

Return on equity (%) (186.8) (126.1) 17.5 13.7 14.1 Finance costs 0 0 (9) 0 0

ROIC (%) 0.0 0.0 67.4 69.2 39.2

Profit after financing costs 88 140 122 220 243

Associated companies & JVs (0) (0) (0) 0 0


Pre-tax profit 87 139 122 220 243

Balance Sheet (RMB mn) Tax (22) (34) (31) (55) (61)

Fixed assets 255 203 188 397 658

Minority interests 0 0 (5) (8) (9)

Intangible assets & goodwill 2 4 4 4 4

Net profit 66 105 87 157 173

Associated companies & JVs 8 0 (0) (0) (0) YoY% 215 60 (17) 80 10

Long-term investments 41 32 32 32 32

Net margin 7.9% 11.2% 10.0% 14.4% 12.5%

Other non-current assets 11 9 9 9 9

EBITDA 128 177 149 234 286

Non-current assets 318 249 233 442 702 EBITDA margin 15.4% 18.9% 17.1% 21.5% 20.7%

EPS (RMB) 0.084 0.134 0.110 0.199 0.220

Inventories 22 20 18 23 30 YoY% 215 60 (17) 80 10

AR 15 14 13 16 20

DPS (HK$) 0.073 0.117 0.097 0.174 0.192

Prepayments & deposits 31 30 43 54 69

Other current assets 61 0 0 0 0


Cash 11 72 986 922 761

Cash Flow (RMB mn)

Current assets 140 136 1,061 1,015 881 EBITDA 128 177 149 234 286

Chg in working cap 14 29 (10) 14 19

AP 22 16 17 22 29 Others 0 1 0 0 0

Tax 11 19 31 55 61

Operating cash 142 207 139 248 305

Accruals & other payables 102 114 113 142 180 Tax (18) (17) (19) (31) (55)

Bank loans & leases 0 0 0 0 0

Net cash from operations 124 189 120 217 250

CB & othe debts 354 300 0 0 0

Other current liabilities 2 1 1 1 1

Capex (26) (20) (18) (251) (329)

Current liabilities 490 451 162 220 271 Investments (0) (2) 0 0 0

Dividends received 1 0 0 0 0

Bank loans & leases 0 0 0 0 0 Sales of assets 18 43 0 0 0

CB & othe debts 0 0 0 0 0

Interests received 0 0 16 29 25

Deferred tax & others 34 33 33 33 33 Others 0 0 0 0 0

MI 0 0 5 13 22

Investing cash (8) 21 (3) (222) (304)

Non-current liabilities 34 33 38 46 55 FCF 117 210 117 (5) (53)

Issue of shares 0 19 1,178 0 0

Total net assets (67) (99) 1,094 1,191 1,257 Buy-back 0 0 0 0 0

Minority interests 0 0 0 0 0

Shareholder's equity (67) (99) 1,094 1,191 1,257 Dividends paid (53) (72) (72) (59) (107)

Share capital 0 0 0 0 0

Net change in bank loans 0 0 (300) 0 0

Reserves (67) (99) 1,094 1,191 1,257 Interest paid 0 0 (9) 0 0

Others (66) (96) 0 0 0

BVPS (HK$) (0.11) (0.16) 1.77 1.93 2.04

Financing cash (120) (149) 797 (59) (107)

Total debts 354 300 0 0 0

Net change in cash (3) 61 914 (64) (161)

Net cash/(debts) (282) (228) 986 922 761 Exchange rate or other Adj 0 0 0 0 0

Opening cash 14 11 72 986 922 Closing cash 11 72 986 922 761

CFPS (HK$) 0.197 0.301 0.191 0.346 0.398


Tue, 05 Jan 2016

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Page 36 of 57

Exhibit 46.: Peer Group Comparison

Company Ticker Price

Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER Hist

(x) PER FY1 (x)

PER

FY2

(x)

EPS

FY1

YoY%

EPS

FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

Div

yld

Hist

(%)

Div

yld

FY1

(%)

P/B

Hist

(x)

P/B

FY1

(x)

EV/

Ebitda

Hist

EV/

Ebitda

Cur Yr

Net

gearing

Hist

(%)

Gross

margin

Hist

(%)

Net

margin

Hist

(%)

ROE

Hist

(%)

ROE

FY1 (%)

Sh px

1-mth

%

Sh px

3-mth

%

Harmonicare Medi 1509 HK 6.93 689 0.9 41.5 50.2 27.8 (17.4) 80.4 36.0 1.40 1.7 1.4 (42.92) 3.90 31.4 29.2 (229.5) 50.5 11.2 (126.1) 17.5 (7.8) 20.5

HSI 21,327.12 9.4 10.4 9.4 (9.5) 10.5 2.5 4.24 4.0 3.8 1.15 1.07 12.2 10.3 (4.7) 2.3

HSCEI 9,311.18 6.9 6.9 6.3 (0.2) 10.3 5.1 1.36 4.2 4.4 0.95 0.85 13.7 12.3 (6.4) (1.0)

CSI300 3,469.07 14.6 12.5 11.1 17.2 12.4 9.6 1.3 1.8 2.2 2.0 1.7 13.6 13.3 (3.4) 8.3

Adjusted sector avg* 45.9 40.9 32.3 8.5 29.4 17.4 2.7 0.9 0.8 3.0 3.3 28.7 22.5 1.4 36.9 13.2 13.3 12.1 (3.4) (0.1)

Phoenixhealth 1515 HK 8.50 914 6.9 25.6 24.0 18.1 6.8 32.8 20.3 1.18 0.6 1.4 3.42 3.28 16.9 15.1 0.0 24.7 19.1 14.6 14.0 (16.2) (33.8)

Wenzhou Kangni-H 2120 HK 45.00 424 N/A N/A 45.7 31.9 N/A 43.4 N/A N/A N/A 0.0 N/A N/A 32.9 N/A 0.0 38.8 17.3 21.8 N/A (2.1) N/A

Aier Eye Hsptl-A 300015 CH 28.82 4,333 31.9 91.1 66.9 50.5 36.2 32.5 33.3 2.01 0.3 0.4 12.16 10.69 47.2 38.3 0.0 44.8 12.9 19.2 17.8 (12.6) 4.3

Ikang Health-Adr Kang US 20.44 1,375 9.3 24.9 30.5 23.2 (18.3) 31.3 11.0 2.79 N/A 0.0 2.12 3.60 N/A 14.8 0.0 46.7 9.3 9.1 12.7 10.5 28.0

Kpj Healthcare KPJ MK 4.24 1,012 1.1 30.2 29.9 27.4 1.0 9.2 7.2 4.17 1.9 1.7 3.16 3.18 18.3 15.4 70.1 29.3 5.4 11.8 11.1 (0.5) 1.2

Ihh Healthcare B IHH MK 6.44 12,167 11.1 69.7 56.5 45.7 23.4 23.7 22.8 2.48 0.5 0.5 2.37 2.61 30.5 26.8 8.5 N/A 10.3 3.7 4.5 0.3 7.2

Raffles Medical RFMD SP 4.08 1,648 1.7 33.7 33.2 29.4 1.7 13.0 9.8 3.39 1.3 1.4 4.00 3.96 26.2 24.3 0.0 N/A 18.1 12.5 12.3 (3.1) (7.7)

Bumrungrad Hospi BH TB 206.00 4,151 7.7 54.9 44.0 38.1 24.9 15.3 18.4 2.39 1.0 1.2 12.50 11.89 34.4 27.3 0.0 39.0 17.5 30.2 29.4 (2.8) (7.2)

Bangkok Chain Ho BCH TB 9.00 621 0.9 42.9 47.1 38.5 (9.0) 22.5 10.8 4.34 1.3 1.3 5.38 5.06 20.3 20.0 77.0 30.8 9.8 11.8 11.1 13.2 30.4

Apollo Hospitals APHS IN 1,450.10 3,031 4.2 59.4 51.1 40.8 16.3 25.3 23.6 2.17 0.4 0.5 6.36 5.76 26.0 25.0 45.5 N/A 6.6 11.1 11.8 6.5 0.4

Fortis Healthcar FORH IN 179.25 1,247 2.6 N/A 71.7 36.3 N/A 97.6 (230.4) N/A N/A 0.0 2.05 1.88 56.8 30.5 20.2 N/A (3.6) (3.5) 2.6 7.4 4.7

Ramsay Health RHC AU 67.97 9,906 48.3 36.7 29.4 25.8 24.8 14.1 16.0 1.85 2.1 1.8 8.48 6.94 15.9 13.2 154.6 96.0 5.2 24.3 23.7 4.9 16.8

* Outliners and "N/A" entries are in red and excl. from the calculation of averages


Tue, 05 Jan 2016

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Chunli Medical (1858 HK) – Market share gain via ceramic femoral head prosthesis No. 2 domestic player in China joint implant market with 3.1% market

share in 2013 and expected to increase to 4.6%/4.9% in FY15/16E

First domestic company to secure CDFA certification for ceramic hip joint prosthesis product to reap overseas players’ market share.

Initial BUY with TP HK$20.0 based on 15x FY16E PE, 16% discount to peers, given 29.1% earnings CAGR in FY15E to FY18E

Leading local joint implant play in China Chunli Medical (CLM) is leading domestic

orthopedic medical device manufacturer in China with 3.1% joint implant market share

in terms of revenue in 2013, ranked second among domestic players. CLM listed on

HKEx in Mar 2015 by issuing 16.67mn H-shares at HK$13.88 and fund raised

~HK$230mn used mainly to expand sales and market team, R&D for new products

and funding new production plant in Daxing Biomedicine Industrial Base in BJ which

Phase I is expected to begin operations in 2H17E.

First domestic player with CFDA certified ceramic hip joint prosthesis product

launch to reap overseas players’ market shares On 24th April 2015, CLM

announced it had obtained the CDFA registration certificate for its ceramic hip joint

prosthesis products. As CLM is the first domestic company to obtain such certification,

we believe CLM will benefit from the policy shift to favour “Made in China”.. We

estimate sales of the ceramic hip joint prosthesis product to nearly double from

RMB38mn in FY15E to RMB76mn in FY17E, accounted for 19%/24% sales in

FY15/17E with 4.6%/4.9% market share in China joint implant market.

Propose A-shares issuance for expansion at rich valuation CLM plans to issue

3.65mn A Shares on SHEx or 5% of total enlarged share to raise RMB129.5mn,

implying a total market cap of HK$3.23bn upon success of A-share issuance versus

its latest market cap of HK$1.0bn. CLM have submitted its application to CSRC on 2

Nov 2015. We believe the successful issuance of A-share will be mid-term catalyst to

boost CLM valuation while we expect its completion may happen in late 2016E or

early 2017E.

Initiate BUY We initiate our BUY rating on Chunli Medical with TP HK$20.0 based on

15x FY16E PE, 16% discount to its peers due to small-cap size and lack of liquidity

and analyst coverage. However, we are confident that CLM is able to leverage its

early bird advantage and competitive pricing strategy on its ceramic hip joint products

to reap the overseas players market share in China joint implant market given policy

shift to favour “Made in China”. We estimate CLM to deliver 29.1% earnings CAGR in

FY15E to FY18E versus its peer’s average 23.4%

Initial Coverage

BUY



Key Data

HKEx code 1858




Issue Share (mn) 19.17

Market Cap (HK$mn) 968.39

Fiscal Year 12/2014

Major shareholder (s) Shi Chunbao & Family – Non-H shs 62.17%

Source: Company data, Bloomberg, OP Research

Closing price are as of 4/1/2016

Price Chart

1mth 3mth 6mth

Absolute % 0.0 16.9 67.7

Rel. MSCI CHINA % 2.1 17.9 73.5

PE

Company Profi le Chunlli Medical is a leading domestic

orthopedic medical device manufacturer in

China with 3.1% joint implant market share in

terms of revenue in 2013, ranked second

among domestic players. CLM listed on

HKEx in Mar 2015 by issuing 16.67mn

H-shares at HK$13.88 and fund raised

~HK$230mn.


Revenue 110.5 134.5 201.6 253.0 319.6

Growth (%) 12.7 21.7 49.9 25.5 26.4

Net Profit 32.7 37.0 51.8 73.8 94.2

Growth (%) 2.3 13.4 40.0 42.5 27.5

Diluted EPS (HK$) 0.817 0.926 0.937 1.335 1.702

EPS growth (%) 2.3 13.4 1.2 42.5 27.5

Change to previous EPS (%) 0.0 0.0

Consensus EPS (HK$) 1.025 1.263

ROE (%) 18.8 19.2 16.3 15.8 17.0

P/E (x) 17.1 15.1 14.9 10.5 8.2

P/B (x) 0.0 0.0 0.0 0.0 0.0

Yield (%) 3.6 2.0 0.0 0.0 0.0

DPS (HK$) 0.500 0.275 0.000 0.000 0.000


0.0

5.0

10.0

15.0

20.0

Mar/15 Jun/15 Sep/15 Dec/15


0

5

10

15

20

25

May/15 Jul/15 Sep/15 Nov/15

Forward P/E Ratio +1std

.

avg.

-1std.

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Exhibit 48.: Top 10 companies in the joint implant segment (by sales value)

Rank Company name Market share in PRC

joint implant market as of 2013 (%)

1 Johnson & Johnson Inc. 15.4%

2 Zimmer Holdings, Inc. 13.4%

3 Waldmar Link GmbH & Co. KG 10.7%

4 Smith & Nephew Plc 9.7%

5 Stryker Corporation 9.0%

6 Biomet, Inc 3.8%

7 Beijing AKEC Medical Co., Ltd. 3.6%

8 Chunli Medical 3.1%

9 Tianjin Zhengtian Medical Device Co., Ltd. 2.7%

10 Tianjin Huajian Orthopaedics Instrument Co., Ltd. 2.4%

Source: Euromonitor

Exhibit 49.: Registration certificate for joint prosthesis products of top 10

companies in China (by sales value of orthopedic implant)

Types of registration certificate

Company name Hip joint

(Titanium)

Hip joint

(Co-Cr-Mo)

Knee

joint

Shoulde

r joint

Elbow

joint

Chunli Medical ✓ ✓ ✓ ✓ ✓

DePuy Orthopeadics, Inc./ DePuy France SAS ✓ ✓ ✓ ✓

Zimmer Holdings, Inc. ✓ ✓ ✓ ✓ ✓

Waldmar Link GmbH & Co. KG ✓ ✓ ✓

✓

Smith & Nephew Plc ✓ ✓ ✓

Stryker Corporation ✓ ✓ ✓ ✓

Biomet, Inc. ✓ ✓ ✓ ✓

Beijing AKEC Medical Co., Ltd

(北京愛康宜誠醫療器材股份有限公司) ✓ ✓ ✓

Tianjin Zhengtian Medical Device Co., Ltd

(天津正天醫療器械有限公司) ✓ ✓

Tianjin Huajian Orthopedics Instrument Co., Ltd

(天津華劍骨科器械有限公司) ✓ ✓

Source: CFDA

Exhibit 50.: Sales model

Source: Company

Chunli Medical

Hospitals

Distributors

(Domestic and

overseas)

Customers

Sub-distributors

Hospitals

Direct sales Sales through distributors Sales on ODM

and OEM bases

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Exhibit 51.: Joint prosthesis products overview

Shoulder joint prosthesis Knee joint prosthesis Hip joint prosthesis Elbow joint prosthesis

Source: Company

Exhibit 52.: Spinal products overview

Posterior cervical fixation system CS anterior spinal fixation device (include fixation system in thoracic

and lumbar vertebrae)

Anterior cervical fixation system CF posterior spinal fixation device (include fixation system in thoracic

and lumbar vertebrae)

Source: Company

Exhibit 53.: Production process

Source: Company

Analysis of

X-ray plates of

data

1Design of

product

blueprints

2

Delivery of

raw materials

3

Surface

treatment

6

Fluorescent

inspection

5

Processing

procedures

4

Laser labeling

7

Printing of

labels

8

Ultrasonic

cleaning

9

Delivery to

warehouse

Radiation

sterilisation

Final cleaning

and packaging

101112

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Exhibit 54.: Sales and marketing centers expansion plan

Location Service coverage Estimated costs of

establishment (RMB mn)

Year of

establishment

Shanghai Shandong Province, Jiangsu, Anhui,

Zhejiang Province, Fujian Province,

Shanghai

0.8

2015/16

Guangzhou Guangdong Province, Guangxi, Hainan

Province

0.8 2015/16

Zhengzhou Hunan Province, Hubei Province,

Henan Province, Jiang Xi Province

0.8 2015/16

Xi'an Ningxia Province, Xinjiang, Qinghai

Province, Shanxi Province, Gansu

Province

0.8

2015/16

Chengdu Sichuan Province, Yunnan Province,

Xizang, Chongqing

0.8 2015/16

Shenyang Liaoning Province, Jilin Province,

Heilongjiang Province

0.8 2015/16

Source: Company

Exhibit 55.: Ceramic femoral head hip joint product


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32 33 37

52

74

94

0

25

50

75

100


(RMBmn)

Exhibit 56.: Revenue breakdown from FY12 to FY17E


Exhibit 57.: Net profit from FY12 to FY17E


67 77 92 110 128 150

38

52

76

20 23

30

38

51

67

11 10

12

16

22

27

98 111

135

202

253

320

0

100

200

300

400


Standard joint prosthesis products Ceramic hip joint prosthesis productsCustom joint prosthesis products Spinal productsTotal revenue

(RMBmn)

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Exhibit 58.: Existing products pipeline

2014 2015E 2016E 2017E

Standard Joint prosthesis

products,excluding

ceramic hip joint

products

(標準關節假體產品,不含

陶瓷假體)

ASP(RMB) 2,431 2,750 3,025 3,328

yoy% -1% 13% 10% 10%

Sales Volume 37,840 40,000 42,400 44,944

yoy% 20% 6% 6% 6%

Revenue(RMB mn) 92.0 110.0 128.3 149.6

yoy % 19% 20% 17% 17%

Revenue % 68% 55% 51% 47%

GP Margin 72% 71% 70% 70%

Ceramic hip joint

prosthesis products

(陶瓷髖關節假體產品）

ASP(RMB) 10,000 10,500 11,025

yoy % 5% 5%

Sales Volume 3,800 4,940 6,916

yoy % 30% 40%

Revenue(RMB mn) 38 52 76

yoy % 37% 47%

Revenue % 19% 21% 24%

GP Margin 60% 60% 60%

Custom joint prothesis

products

(定制關節假體產品)

ASP(RMB) 9,700 10,000 10,000 10,000

yoy% 15% 3% 0% 0%

Sales Volume 3,100 3,800 5,130 6,669

yoy% 12% 23% 35% 30%

Revenue(RMB mn) 30.096 38.000 51.3 66.7

yoy % 29% 26% 35% 30%

Revenue % 22% 19% 20% 21%

GP Margin 85% 84% 84% 84%

Spinal products

(脊柱產品)

ASP(RMB) 950.0 1,200.0 1,380.0 1,449.0

yoy% -21% 26% 15% 5%

Sales Volume 13,000 13,000 15,600 18,720

yoy% 60% 0% 20% 20%

Revenue(RMB mn) 12.451 15.600 21.5 27.1

yoy % 28% 38% 26%

Revenue % 9% 8% 9% 8%

GP Margin 71% 72% 72% 72%

Other business(其他業務) Revenue(RMB mn) 0.0 0.0 0.0 0.0

yoy %

Total Revenue(RMB mn) 134.534 201.605 252.958 319.615


Exhibit 59.: Effects of the A share issue on shareholding structure

Before A-share After A-share

Number of shares % Number of shares %

Domestic shares

Domestic shares in issue 50,000,000 72.285% 50,000,000 68.662%

A shares proposed to be

issued under the A share issue - - 3,650,000 5.012%

H shares 19,170,400 27.715% 19,170,400 26.326%

Total 69,170,400 100.000% 72,820,400 100.000%

Source: Company

Tue, 05 Jan 2016

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Investment risks

Failure or delay in new products launch: Chunli Medical launched one product,

namely Ceramic hip joint prosthesis product in 2015. It has another five products

under development, with one/two/two of them expected to be launched in

2016/2017/2018. New products are exposed to technical risks in the research

and development process, like lack of any meaningful results because of

misjudgment of industry trends or setbacks during trial production or testing

processes in relation to design and quality during mass production. Chunli

Medical may experience failure in launching new products, and cannot cover the

substantial costs of research and development. Even when new products are

launched, it takes time to penetrate the market and there are risks of low market

acceptance, if the revenue of the new products is less than the research and

development expenses, the financial performance will be adversely affected.

However, given the success of ceramic hip joint prosthesis product ( we expect it

will account for 19% of total sales for FY15E ), we believe Chunli Medical has

solid R&D support, good marketing skills and distribution channels, which will

offset the risks of failure or delay in launching new products.

Limited production capacity may not satisfy increasing demand: Chunli

Medical’s utilization rate of production facilities for standard joint prosthesis

products, customized joint prosthesis products and spinal products were 98.9%,

96.2% and 98.9% in 30 Sep 2014. Ability to increase production capacity is

limited before Phase I of Daxing new production base commences operation in

October 2017, which may render Chunli Medical unable to satisfy increasing

demand for the products. We believe Chunli Medical can relieve the problem by

increasing the number of shifts or number of working hours per shift and

purchasing advance equipment and

Government approvals, permits registrations and licenses: The medical

devices industry in China is strictly controlled, and the operation of Chunli Medical

is governed by various regulatory regimes, including licensing and certification

requirements of production, quality, safety and environmental issues. Companies

engaged in production of medical devices are required to obtain “Medical device

production enterprises licences” and “Medical device registration certificate”.

Chunli Medical is required to obtain “Class III medical device registration

certificate” and “Class I medical device registration certificate” for its core

products. The renewal of these licenses is not guaranteed, and may be subject to

significant change in legal framework and certification requirements. We believe

Chunli Medical will keep itself updated with the latest legal framework and

certification requirements.

Tue, 05 Jan 2016

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Shi Chunbao Chairman& Executive Director Mr. Shi is responsible for providing strategic advice and guidance on the business and operations of

ChunLiMedical, he has over 20 years of experience in the medical device industry. Before founding

ChunLi Medical, Mr. Shi worked at Beijing Peace Joint Prosthesis Factory.Mr. Shi is the spouse of Ms.

Yue.

YueShujun Executive Director & Deputy

General Manager

Ms. Yue is responsible for the internal operations of ChunLi Medical, including logistics, inventory and

day-to-day management. Before founding ChunLi Medical, Mr. Shi worked at Beijing Peace Joint

Prosthesis Factory. Ms. Yue is the spouse of Mr. Shi.

Zhao Shijie Deputy General Manager & CFO Mr. Zhao is mainly responsible for the financial management of ChunLi Medical. Before joining ChunLi

Medical, Mr. Zhao was a project assistant and project manager at the Chongqing branch of Pan-China

Certified Public Accountants LLP (天健會計師事務所).

Source: Company


Source: Company

Shi Chunbao

& Family

Orchid China

M.Fund

SPQ Asia

Capital Ltd.

Convoy

(1019 HK)

Town Health

(3886 HK)

62.17% 8.10% 5.12% 5.11% 4.13%

Public

15.37%

Tue, 05 Jan 2016

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Financial Summary– Chunli Medical (1858 HK) Year to Dec FY13A FY14A FY15E FY16E FY17E



Ratios

Standard joint prosthesis products 77 92 110 128 150

Gross margin (%) 72.4 74.0 71.1 71.0 70.9

Ceramic hip joint prosthesis products 0 0 38 52 76

Operating margin (%) 35.1 32.7 28.0 31.8 33.0

Custom joint prosthesis products 23 30 38 51 67

Net margin (%) 29.5 27.5 25.7 29.2 29.5

Spinal products 10 12 16 22 27


Admin exp/Sales (%) 12.4 10.7 12.9 10.1 10.3

Turnover 111 135 202 253 320

Payout ratio (%) 61.2 29.7 0.0 0.0 0.0 YoY% 13 22 50 25 26

Effective tax (%) 14.3 13.7 15.0 15.0 15.0

COGS (30) (35) (58) (73) (93)

Total debt/equity (%) 1.8 1.5 0.7 0.6 0.5

Gross profit 80 100 143 179 227

Net debt/equity (%) Net cash Net cash Net cash Net cash Net cash

Gross margin 72.4% 74.0% 71.1% 71.0% 70.9%

Current ratio (x) 8.8 6.2 8.9 6.4 5.6 Other income 1 1 0 0 0

Quick ratio (x) 7.3 4.8 7.8 5.3 4.5



AR T/O (days) 111 116 116 116 116

R&D (5) (8) (12) (15) (19)

AP T/O (days) 51 155 155 155 155

Business taxes and levies (1) (1) (2) (2) (3)

Cash conversion cycle (days) 337 332 261 261 261 Other opex (2) (3) (2) (3) (3)

Asset turnover (x) 0.6 0.6 0.6 0.5 0.5

Total opex (42) (56) (87) (99) (121)

Financial leverage (x) 1.1 1.1 1.1 1.1 1.1 Operating profit (EBIT) 39 44 56 80 105

EBIT margin (%) 35.1 32.7 28.0 31.8 33.0

Operating margin 35.1% 32.7% 28.0% 31.8% 33.0%

Interest burden (x) 1.0 1.0 1.1 1.1 1.1 Provisions (1) (1) 0 0 0

Tax burden (x) 0.9 0.9 0.9 0.9 0.9

Interest Income 0 0 5 7 6

Return on equity (%) 18.8 19.2 16.3 15.8 17.0 Finance costs (0) 0 (0) (0) (0)

ROIC (%) 0.0 0.0 28.8 26.9 24.0

Profit after financing costs 38 43 61 87 111

Associated companies & JVs 0 0 0 0 0


Pre-tax profit 38 43 61 87 111


Fixed assets 31 40 60 178 254



Net profit 33 37 52 74 94

Associated companies & JVs 0 0 0 0 0 YoY% 2 13 40 42 28


Net margin 29.5% 27.5% 25.7% 29.2% 29.5%


EBITDA 43 48 62 93 130

Non-current assets 68 77 97 215 291 EBITDA margin 38.7% 35.7% 30.6% 36.9% 40.7%

EPS (RMB) 0.653 0.741 0.749 1.068 1.361

Inventories 23 35 48 60 77 YoY% 2 13 1 42 28

AR 34 43 64 81 102

DPS (HK$) 0.500 0.275 0.000 0.000 0.000

Prepayments & deposits 1 4 5 7 9



Cash 66 64 251 189 182

Cash Flow (RMB mn)

Current assets 133 163 386 354 386 EBITDA 43 48 62 93 130

Chg in working cap (1) (27) (24) (22) (29)

AP 4 15 25 31 40 Others 6 25 0 0 0

Tax 4 4 9 13 17

Operating cash 48 46 38 71 101

Accruals & other payables 4 4 6 8 10 Tax (20) (22) (4) (9) (13)





Capex (7) (12) (25) (130) (101)

Current liabilities 15 26 43 55 69 Investments 0 0 0 0 0


Bank loans & leases 0 0 0 0 0 Sales of assets 0 0 0 0 0


Interests received 0 0 5 7 6

Deferred tax & others 6 8 8 8 8 Others 5 2 0 0 0

MI 0 0 0 0 0

Investing cash (1) (10) (20) (124) (95)

Non-current liabilities 6 8 8 8 8 FCF 27 15 14 (62) (7)

Issue of shares 0 0 185 0 0

Total net assets 180 206 432 506 600 Buy-back 0 0 0 0 0


Shareholder's equity 180 206 432 506 600 Dividends paid (20) (11) (11) 0 0

Share capital 50 50 69 69 69

Net change in bank loans 0 0 0 0 0

Reserves 130 156 363 437 531 Interest paid 0 0 (0) (0) (0)

Others (2) (6) 0 0 0

BVPS (HK$) 4.50 5.15 7.80 9.14 10.84

Financing cash (22) (17) 174 (0) (0)

Total debts 3 3 3 3 3

Net change in cash 5 (2) 187 (62) (7) Exchange rate or other Adj 0 0 0 0 0

Opening cash 61 66 64 251 189

Closing cash 66 64 251 189 182

CFPS (HK$) 0.705 0.607 0.614 1.120 1.596


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Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER Hist

(x) PER FY1 (x)

PER

FY2

(x)

EPS

FY1

YoY%

EPS

FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

Div

yld

Hist

(%)

Div

yld

FY1

(%)

P/B

Hist

(x)

P/B

FY1

(x)

EV/

Ebitda

Hist

EV/

Ebitda

Cur Yr

Net

gearing

Hist (%)

Gross

margin

Hist

(%)

Net

margin

Hist

(%)

ROE

Hist

(%)

ROE

FY1 (%)

Sh px

1-mth

%

Sh px

3-mth

%

Beijing Chunli-H 1858 HK 14.00 125 0.1 15.1 14.9 10.5 1.2 42.5 29.1 0.54 2.0 0.0 0.00 0.00 (1.3) (4.0) Net cash 74.0 27.5 0.0 16.3 0.0 15.3

HSI 21,327.12 9.4 10.4 9.4 (9.5) 10.5 2.5 4.24 4.0 3.8 1.15 1.07 12.2 10.3 (4.7) 2.3

HSCEI 9,311.18 6.9 6.9 6.3 (0.2) 10.3 5.1 1.36 4.2 4.4 0.95 0.85 13.7 12.3 (6.4) (1.0)

CSI300 3,469.07 14.6 12.5 11.1 17.2 12.4 9.6 1.3 1.8 2.2 2.0 1.7 13.6 13.3 (3.4) 8.3

Adjusted sector avg* 35.4 14.7 18.3 120.7 12.9 (13.6) 0.5 1.2 0.8 2.3 2.3 23.8 13.3 14.7 70.1 8.3 2.9 10.0 8.2 6.3

Pw Medtech Group 1358 HK 1.72 371 0.9 13.7 10.9 9.5 25.8 15.0 20.5 0.53 N/A 0.7 1.09 1.18 8.8 6.9 0.0 72.8 29.0 9.8 10.6 7.5 5.5

Microport Scient 853 HK 3.67 675 0.2 N/A N/A 33.8 N/A N/A (165.8) N/A N/A 0.0 1.96 2.01 42.7 19.9 58.7 68.5 (16.7) (14.5) (0.6) 24.8 15.8

Zimmer Biomet Ho ZBH US 102.59 20,906 117.8 24.1 15.0 13.1 60.8 14.1 26.4 0.57 0.9 0.9 2.09 1.97 22.0 13.4 0.0 73.3 15.4 2.4 10.2 2.0 7.7

Stryker Corp SYK US 92.94 34,901 139.5 68.3 18.2 16.6 275.6 9.6 64.7 0.28 1.5 1.5 4.12 3.88 21.6 13.1 0.0 66.0 5.3 13.8 19.7 (1.5) (3.6)



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Lifetech Scientific (1302 HK) –Triple leap Brand new star product Lambre

TM LAAO expected to contribute 29%/53%

sales in FY16/17E

Pacemaker enters Chinese market from 2018 with Medtronic’s cooperation

Initial BUY with TP HK$2.00 based on 20x FY17E PE, representing 46% upside, given 79% 3 yrs earnings CAGR versus peers’ 28%.

Launch of star product LambreTM

LAA Occlusion (LAAO) in 2016 to boost up sales

LAAO is the newproduct of Lifetech. It is used in Left Atrial Appendage Closure (LAAC) to

prevent blood clot caused by Atrial Fibrillationi (AF), which has a high probability to cause

stroke, especially for people over 60 years of age. Lifetech is expected to obtain CE

registration for Lambre in 1H16 and CFDA in 2H16, given that currently there are only

three companies producing LAAO and LambreTM LAAO is believed to be the safest one

with lowest risks, we expect LambreTM

LAAO to acquire ~8%/26% market share in

FY16/17E and achieve RMB150mn/RMB500mn revenue, representing 29%/53% of total

sales respectively.

Leveraging Medtronic pacemaker technology, exploit the Chinese pacemaker

market from 2018 onwards Medtronic has a dominating 52% market share of 2013

global pacemaker devices. Under a new agreement signed between Lifetech and

Medtronic, Medtronic will help Lifetech to set up the pacemaker production line, secure

supply of customized components with Medtronic’s patented technology for the

manufacturing of the pacemakers and distribute the Lifetech’s pacemakers in China.

Lifetech’s pacemakers are expected to launch in 2018, and penetrate the market rapidly

given that it has same high quality as Medtronic’s pacemaker and only priced at 2/3 of

Medtronic’s pacemaker price. Given timing uncertainty, we have not taken into account

peacemaker contribution.

Back by strong shareholder. Medtronic is the second largest shareholder of Lifetech with

19% stake, and if it converts all the convertible bonds, it will become the largest

shareholder with 51% stake by Jan 2018. Because of the equity investment, Medtronic is

cooperating with Lifetech in many ways, including development and distribution of

pacemakers in China and exclusive distribution rights of CeraFlex (one of congenital heart

occludes) in Europe, to capture the localization of core medical devices trend in China and

benefit from synergy.

Initiate BUY. We initiate our BUY rating on Lifetech with TP HK$2.00 based on 20x FY17E

PE which we believe is justified by its 79% 3-years earnings CAGR.


Revenue 231.0 282.7 311.4 519.7 946.7

Growth (%) 27.3 22.4 10.2 66.9 82.2

Adj. Net Profit 12.4 41.9 81.7 162.7 338.6

Growth (%) (62.4) 238.7 95.0 99.1 108.1

Diluted EPS (HK$) 0.004 0.013 0.024 0.047 0.098

EPS growth (%) (95.3) 238.7 80.6 99.1 108.1

Change to previous EPS (%) 4.8 (10.9) 0.0

Consensus EPS (HK$) 0.025 0.038 0.063

ROE (%) 4.6 21.4 85.0 138.6 92.0

P/E (x) 354.3 104.6 57.9 29.1 14.0

P/B (x) 0.0 0.0 0.0 0.0 0.0

Yield (%) 0.0 0.0 0.0 0.0 0.0

DPS (HK$) 0.000 0.000 0.000 0.000 0.000

Initial Coverage

BUY



Key Data

HKEx code 1302




Issue Share (mn) 4,000.00

Market Cap (HK$mn) 5,480.00

Fiscal Year 12/2014

Major shareholder (s) Director Xie Yuehui 19.55%

Source: Company data, Bloomberg, OP Research Closing price are as of 4/1/2016

Price Chart

1mth 3mth 6mth

Absolute % -1.4 28.0 31.7

Rel. MSCI CHINA % 0.6 29.1 37.6

PE

Company Profi le Lifetech is a leading domestic cardiac

implant medical device manufacturer.

Medtronic, the global No.2 Medtech

company holds 19% stake in Lifetech, and

will become the largest shareholder with 51%

stake if it converts all the CB by 2018.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan/15 Apr/15 Jul/15 Oct/15 Jan/16


-200

0

200

400

600

800

1000

1200

1400

Jan/14 Jul/14 Jan/15 Jul/15 Jan/16

Forward P/E Ratio

+1std.

avg.

-1std.

Tue, 05 Jan 2016

Healthcare services

Page 48 of 57

Exhibit 64.: Business development and products pipeline


Exhibit 65.: Pacemaker global market share in 2013

Source: Medtronic, Boston Scientific

1999• Established Lifetech Science

2001• HeartR Occluders and Supporter Coronary Stent obtained CFDA registration

2006• Orchid Asia invested in Lifetech, speed up the listing process

2008

• Aegisy obtained CE registration, established a subsidiary in India, acquired Beijing Huipu and ShenZhenQingYuan

2010• SeQure obtained FDA registration, Fustar, Cera ASD obtained CE registration

2011

• Fuster obtained FDA registration; Cera Flex obtained CE registration; get listed on the Hong Kong Exchange GEM Board

2012

• Brought in strategic investment of Medtronic, Spider PFO obtained CE registration, launched LambreTM LAAO clinical trials in Europe

2013

• Listed on the Hong Kong Exchange Main Board, Medtronic helped on rebuild of Bioprosthetic Heart Valve production line

2014-2015

• Introduction of Medtronic pacemaker, LambreTM LAAO’s clinical trials in Europe and China are ready to complete

2015• LambreTM LAAO is expected to obtain CE registration in 1H2016 and CFDA in 2H2016

2018

• Expected to launch pacemaker, leveraging Medtronic technology, breaking monopoly and exploiting China market

2019

• Expected to launch Biodegradable stent, Lifetech is the only company with Iron-based alloy biodegradable stent technology

Obtained CE

registration for the first

time

Obtained FDA

registration for the first

time

Medtronic’s strategic

investment showed its

recognition of Lifetech’s

innovation capability

Medtronic52%

St.Jude30%

Boston6%

Others12%

Tue, 05 Jan 2016

Healthcare services

Page 49 of 57

Exhibit 66.: Leading market position and layout


Exhibit 67.: Cooperation with Medtronic via Equity investment and CB issuance


Catching up

Innovation

Breakthrough

Lead

• Single product line

• Imitation

HeartR

Imitation – Hard to

enter global market

• Diversified product line

• Innovative technology

Cera

Partially Innovated –

Hard to be recognized

by western countries

• Full product range

• Independent IPR

CeraFlex

Best design and

complete patent

• Innovation

• Lead

2003 2010 2014 2017 2020Chinese market

leadership

BRIC market

leadership

Enter EU market Global leader

Globalization

process

Innovation

process

Resource sharing

with MDT

The best

QS

Brand effect

Global access

Global

leader

Global

high-end

Chinese

low-end

Global

high-end

Cost-effective

mid-end

- Patent protection –

- Same quality -

Chinese low-end

Brand image Strategic cooperation Positioning

Patent protection

High quality

High price

Advanced technology

1. Grafting advanced knowledge and

quality system

2. Developing targeted products

3. Utilizing Medtronic brand effect and

global access

No patent protection

Low cost

No quality assurance

• Global dual-brand strategy

• To reach and serve more patients and physicians

• Synergy brought by Medtronic and Lifetech Cooperation

Tue, 05 Jan 2016

Healthcare services

Page 50 of 57

104 121 137 130 132 135

77 110

145 181 236

310

150

500

181 231

283 311

520

947

0

200

400

600

800

1,000


Congenltal heart diseases Peripheral vascular diseases

Surgical vascular repair Lambre LAAO

(RMBmn)

Exhibit 68.: Medtronic CB’s effect on shareholding structure

Current

outstanding

Assume First Tranche


Assume Second Tranche


shs (mn) % HK$152mn CB convert at HK$0.475 % HK$2,031mn CB convert at HK$1.00 %

Director Xie Yuehui 782 19.5% 782 18.1% 782 11.7%

Medtronic 760 19.0% 1,080 25.0% 3,431 51.4%

Director Wu Jian Hui 418 10.4% 418 9.7% 418 6.3%

Prosperity (803 HK) 33 0.8% 33 0.8% 33 0.5%

Public 2,008 50.2% 2,008 46.5% 2,008 30.1%

Total 4,000 100.0% 4,320 100.0% 6,671 100.0%


Exhibit 69.: Revenue breakdown forecast from FY12 to FY17E


Exhibit 70.: Core net profit forecast from FY12 to FY17E


33 12

42

82

163

339

0

100

200

300

400


(RMBmn)

Tue, 05 Jan 2016

Healthcare services

Page 51 of 57

Exhibit 71.: Key assumptions

2014 2015E 2016E 2017E

Revenue Breakdown

Cogenital heart diseases (CHD) business

微創介入先天性心臟病(CHD)植入物以及相關輸送即支護器械

Heart R (RMB mn) 70.30 69.80 69.62 69.45

% yoy 7% -1% 0% 0%

ASP (RMB) 3,978 3,780 3,591 3,411

% yoy -4% -5% -5% -5%

Vol (k units) 17.67 18.47 19.39 20.36

% yoy 12% 5% 5% 5%

Cera 27.30 28.75 30.04 31.40

% yoy -2% 5% 4% 5%

ASP (RMB) 6,334 6,017 5,717 5,431

% yoy -6% -5% -5% -5%

Vol (k units) 4.31 4.78 5.26 5.78

% yoy 4% 11% 10% 10%

CeraFlex 26.90 18.75 19.60 20.48

% yoy 236% -30% 5% 4%

ASP (RMB) 12,512 11,886 11,292 10,727

% yoy 20% -5% -5% -5%

Vol (k units) 2.15 1.58 1.74 1.91

% yoy 179% -27% 10% 10%

Others 12.76 12.44 13.06 13.71

% yoy -34% -3% 5% 5%

ASP (RMB) 437 437 437 437

% yoy -40% 0% 0% 0%

Vol (k units) 29.18 28.44 29.87 31.36

% yoy 10% -3% 5% 5%

CHD revenue (RMB mn) 137 130 132 135

% yoy 14% -5% 2% 2%

Lambre LAAO (RMB mn) 150.00 500.00

% yoy

233%

ASP (RMB)

50,000 50,000

% yoy

0%

Vol (k units)

3.0 10.0

% yoy

233%

Peripheral vascular diseases (PVD) business

微創介入周邊及其他血管植入物及相關輸送及支護器械

Vena Caval Filter 69.82 78.07 81.97 86.07

yoy% 26% 12% 5% 5%

ASP (RMB) 3,853 3,853 3,853 3,853

% yoy 1% 0% 0% 0%

Vol (k units) 18.12 20.26 21.27 22.34

% yoy 25% 12% 5% 5%

Covered-stent 73.30 100.14 150.21 217.80

yoy% 37% 50% 45%

ASP (RMB) 22,554 22,554 22,554 22,554

% yoy 1% 0% 0% 0%

Vol (k units) 3.25 4.44 6.66 9.66

% yoy 39% 37% 50% 45%

Acellular Bovine Pericardium 0.01 0.40 1.00 2.00

yoy% -95% 3233% 150% 100%

Others 2.29 2.67 3.20 3.84

yoy% 16% 20% 20%

ASP (RMB) 469 469 469 469

% yoy -26% 0% 0% 0%

Vol (k units) 4.88 5.68 6.82 8.18

% yoy 19% 16% 20% 20%

PVD revenue 145.42 181.27 236.38 309.71

% yoy 32% 25% 30% 31%

Total Revenue (RMB mn) 283 311 519 945

% yoy 22% 10% 67% 82%


Tue, 05 Jan 2016

Healthcare services

Page 52 of 57

Investment risks

Failure or delay in launch of LambreTM

LAAO: LambreTM

LAAO is expected to

obtain CE registration in 1H16 and CFDA registration in 2H16; however the result

is not assured, other issues may occur and the schedule may be delayed. We

believe the risk is low, as the current feedbacks on clinical trials are satisfactory

and LTS has obtained “green channel” which will speed up its CFDA registration

process.

Failure or delay in launch of pacemaker: LTS’s pacemaker is expected to be

launched in 2018. There may be delays in the research and development process,

clinical trials and registration. We believe the cooperation with Medtronic on

pacemaker will lower the product failure and delay risk.

Third parties may infringe upon LTS’s intellectual property rights: The

success of LTS depends highly on obtaining and maintaining intellectual property

rights and other forms of protection of the product, and defending against

third-party infringements. Third parties may develop similar products, introduce

counterfeits, and infringe patents, brand names and trademarks. In the event that

misappropriation or infringement of intellectual property occurs, LTS needs to

protect its property rights through litigation or other forms of legal proceedings

which invariably are expensive, lengthy and uncertain. Besides, the counterfeits

may damage LTS’s reputation and adversely affect the business. We believe LTS

will take sufficient and appropriate measures to prevent and solve such infringes.

Cooperation with Medtronic: Medtronic is LTS’s second largest shareholder

currently with 19% interest, and it also holds two batches of CB which, if totally

converted, will make Medtronic the largest shareholder with 50.99% interest.

Because of the substantial equity investment in LTS, Medtronic has

comprehensive cooperation with LTS, including technical support and product

distributorship, all of which benefit LTS. If the cooperation relationship is broken,

LTS’s operation will be adversely affected. We believe their relationship is stable

now and will remain so in the long run.

Exchange rate risk of Euro or other emerging countries currency

depreciation: 30% of LTS sales came from outside China in FY14: Europe

(9.1%), India (7.3%), Asia excluding PRC and India (7.6%), South America

(5.1%). If the currencies in these emerging countries or the Euro depreciate, LTS

will experience exchange rate risks. We believe LTS can hedge the currency risks

by entering into some currency derivative contracts.

Tue, 05 Jan 2016

Healthcare services

Page 53 of 57



Xie Yuehui Chairmand & CEO Mr. Xie has more than 20 years of experience in business management in the PRC, including over 10

years in the medical device industry. Prior to joining Lifetech, Mr. Xie served as General Manager as

Shenzhen Huishibang Technol4ogy Company Limited, Investment manager at a subsidiary of China

Southern Securities and Manager at the domestic trade department of Shenzhen Huihua Group.

Zhang Deyuan CTO Mr. Zhang has more than 20 years of experience in material development. Prior to joining Lifetech,

Mr. Zhang served as deputy director of research institution of Jiangxi Academy of Science Institute

and minister of C material research institution of China 863.

Liu Jianxiong CFO & Company secretary Mr. Liu has nearly 20 years of experience in accounting field. Prior to joining Lifetech, he served as

the accounting services manager of Yantian International Container Terminal Company Limited, the

Financial Controller of Shenzhen Schlumberger Electronic System Solution Co., Ltd, the China

Financial controller of the China Light & Power Group renewable energy division, and the Great China

Corporate controller of Any DATA Group. He has been a member of the Association of Chartered

Certified Accountants since 1997 and a registered tax Agent since 1999.

Han Jiangbo COO Mr. Han has over 20 years of experience in business management, including over 14 years in

operation and business strategy of multi-national companies. Prior to joining Lifetech, Mr. Han worked

in Power-One/ABB/BelFuse(China), EPCOS(Singapore), Sonion(Vietnam) and

Hewlett-Packard(Singapore).



Source: Company, OP research

Public

44.49%

Director

Xie YuehuiMedtronic B.V.

Director

Wu Jian Hui

Prosperity Intl

(0803 HK)

19.55% 19.00% 10.44% 6.52%

Tue, 05 Jan 2016

Healthcare services

Page 54 of 57

Financial Summary– Lifetech Scientific (1302 HK) Year to Dec FY13A FY14A FY15E FY16E FY17E



Ratios

Congenltal heart diseases 121 137 130 132 135

Gross margin (%) 81.6 81.4 82.6 83.3 84.4

Peripheral vascular diseases 110 145 181 236 310

Operating margin (%) 17.9 22.8 35.6 40.7 45.4 Surgical vascular repair 0 0 0 1 2

Net margin (%) 5.4 14.8 26.2 31.3 35.8

Lambre LAAO 0 0 0 150 500


Admin exp/Sales (%) 27.4 26.8 14.3 13.1 12.2

Turnover 231 283 311 520 947

Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 YoY% 27 22 10 67 82

Effective tax (%) (28.9) (19.5) (20.0) 20.0 20.0

COGS (42) (53) (54) (87) (148)

Total debt/equity (%) 28.4 50.2 217.8 39.5 14.6

Gross profit 189 230 257 433 799

Net debt/equity (%) Net cash Net cash Net cash Net cash Net cash

Gross margin 81.6% 81.4% 82.6% 83.3% 84.4%

Current ratio (x) 4.7 5.9 6.0 4.7 4.0 Other income (1) 12 6 8 12

Quick ratio (x) 4.3 5.4 5.5 4.3 3.6



AR T/O (days) 78 84 84 84 84

R&D (31) (33) (40) (68) (123)

AP T/O (days) 138 39 39 39 39

Other opex 0 0 0 0 0

Cash conversion cycle (days) 220 259 259 259 259

Total opex (146) (178) (152) (230) (381)

Asset turnover (x) 0.5 0.5 0.5 0.7 0.9

Operating profit (EBIT) 41 64 111 212 430

Financial leverage (x) 1.6 2.8 6.4 6.6 3.0 Operating margin 17.9% 22.8% 35.6% 40.7% 45.4%

EBIT margin (%) 17.9 22.8 35.6 40.7 45.4

Provisions 6 (17) 0 0 0

Interest burden (x) (1.3) (1.1) (0.9) 1.0 1.0 Interest Income 4 3 3 4 6

Tax burden (x) (0.2) (0.6) (0.8) 0.8 0.8

Finance costs (10) (11) (12) (12) (12)

Return on equity (%) 4.6 21.4 85.0 138.6 92.0 Net gain/(loss) on convertible notes (84) (105) (202) 0 0

ROIC (%) 0.0 0.0 (77.8) (97.6) (493.0)

Profit after financing costs (42) (66) (100) 203 423

Associated companies & JVs (11) (1) 0 0 0


Pre-tax profit (53) (68) (100) 203 423


Fixed assets 36 57 82 126 209



Adj. Net profit 12 42 82 163 339

Associated companies & JVs 1 1 1 1 1 YoY% (62) 239 95 99 108


Net margin 5.4% 14.8% 26.2% 31.3% 35.8%


Reported Net profit (65) (80) (120) 163 339

Non-current assets 155 178 204 248 330 EBITDA 48 69 119 224 451

EBITDA margin 20.9% 24.4% 38.4% 43.2% 47.6%

Inventories 33 31 32 51 87 EPS (RMB) 0.003 0.010 0.019 0.038 0.078

AR 49 65 71 119 217

YoY% (95) 239 81 99 108

Prepayments & deposits 18 25 28 46 84 DPS (HK$) 0.000 0.000 0.000 0.000 0.000


Cash 225 256 313 404 609


Current assets 365 388 455 632 1,008

Cash Flow (RMB mn)

EBITDA 48 69 119 224 451

AP 16 6 6 9 16

Chg in working cap (1) (27) (5) (48) (96)

Tax 18 14 20 41 85 Others (0) (9) 0 0 0

Accruals & other payables 43 46 50 84 153

Operating cash 47 33 114 176 355

Bank loans & leases 0 0 0 0 0 Tax (12) (14) (14) (20) (41)




Current liabilities 77 66 76 134 254

Capex (14) (31) (34) (57) (104)

Investments (17) (0) 0 0 0



CB & othe debts 67 78 78 78 78

Sales of assets 0 0 0 0 0

Deferred tax & others 139 266 468 468 468 Interests received 4 3 3 4 6

MI 0 0 0 0 0

Others (99) 39 0 0 0

Non-current liabilities 206 344 546 546 546

Investing cash (126) 10 (31) (53) (98)

FCF (91) 30 69 103 216

Total net assets 236 156 36 199 537

Issue of shares 0 0 0 0 0

Buy-back 0 0 0 0 0

Shareholder's equity 236 156 36 199 537


Share capital 0 0 0 0 0 Dividends paid 0 0 0 0 0

Reserves 236 156 36 199 537

Net change in bank loans 0 0 0 0 0

Interest paid (1) 0 (12) (12) (12)

BVPS (HK$) 0.07 0.05 0.01 0.06 0.17

Others 119 0 0 0 0

Financing cash 118 0 (12) (12) (12)

Total debts 67 78 78 78 78

Net cash/(debts) 165 187 244 335 540

Net change in cash 26 30 57 91 204 Exchange rate or other Adj 1 1 0 0 0 Opening cash 198 225 256 313 404 Closing cash 225 256 313 404 609

CFPS (HK$) 0.011 0.006 0.029 0.045 0.091


Tue, 05 Jan 2016

Healthcare services

Page 55 of 57



Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER Hist

(x) PER FY1 (x)

PER

FY2

(x)

EPS

FY1

YoY%

EPS

FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

Div

yld

Hist

(%)

Div

yld

FY1

(%)

P/B

Hist

(x)

P/B

FY1

(x)

EV/

Ebitda

Hist

EV/

Ebitda

Cur Yr

Net

gearing

Hist (%)

Gross

margin

Hist

(%)

Net

margin

Hist

(%)

ROE

Hist

(%)

ROE

FY1 (%)

Sh px

1-mth

%

Sh px

3-mth

%

Lifetech Sci 1302 HK 1.37 707 1.2 104.6 59.2 29.7 80.6 99.1 79.1 0.75 0.0 0.0 0.00 0.00 (2.7) 44.8 Net cash 81.4 14.8 0.0 85.0 (1.4) 24.5

HSI 21,327.12 9.4 10.4 9.4 (9.5) 10.5 2.5 4.24 4.0 3.8 1.15 1.07 12.2 10.3 (4.7) 2.3

HSCEI 9,311.18 6.9 6.9 6.3 (0.2) 10.3 5.1 1.36 4.2 4.4 0.95 0.85 13.7 12.3 (6.4) (1.0)

CSI300 3,469.07 14.6 12.5 11.1 17.2 12.4 9.6 1.3 1.8 2.2 2.0 1.7 13.6 13.3 (3.4) 8.3

Adjusted sector avg* 33.8 17.6 16.1 93.3 9.4 27.6 1.3 2.0 1.6 4.1 4.0 17.7 13.0 29.1 69.7 11.3 11.8 20.3 (0.9) 3.9

Medtronic Plc MDT US 76.92 108,161 418.4 31.5 17.6 15.9 79.5 10.8 30.0 0.58 1.9 2.0 2.07 2.00 25.0 13.2 31.4 68.9 13.2 6.5 11.7 (1.6) 8.1

Boston Scientifc BSX US 18.44 24,805 165.2 N/A 20.1 17.5 N/A 15.0 (336.9) N/A N/A 0.0 3.87 3.71 71.5 15.5 56.9 70.1 (1.6) (6.0) 19.0 (0.4) 9.0

St Jude Medical STJ US 61.77 17,460 112.5 17.5 15.7 14.5 11.8 8.1 10.3 1.52 1.9 1.9 4.36 4.64 13.7 11.9 57.1 70.6 17.8 25.0 27.4 (0.9) (3.2)

Johnson&Johnson JNJ US 102.72 284,220 755.0 17.7 16.6 16.1 6.6 3.5 5.6 2.98 2.9 2.9 3.97 3.90 10.7 11.5 0.0 69.4 22.0 19.9 23.9 (0.2) 9.4

Stryker Corp SYK US 92.94 34,901 139.5 68.3 18.2 16.6 275.6 9.6 64.7 0.28 1.5 1.5 4.12 3.88 21.6 13.1 0.0 66.0 5.3 13.8 19.7 (1.5) (3.6)

Abbott Labs ABT US 44.91 66,993 278.9 29.9 20.8 18.9 43.7 10.5 20.8 1.00 2.1 2.1 3.17 2.88 16.7 13.7 15.6 54.5 11.3 20.7 14.3 (0.9) 8.5

Biosensors Intl BIG SP 0.81 961 3.4 N/A 22.8 21.1 N/A 8.0 (162.2) N/A N/A 0.0 0.93 0.92 (3.7) 8.3 0.0 72.8 (72.9) (19.4) 4.0 0.6 19.1

Terumo Corp 4543 JP 3,680.00 11,762 45.3 36.3 28.4 27.3 27.8 4.1 13.3 2.14 1.0 1.0 2.40 2.31 13.3 11.7 8.1 52.3 7.9 7.8 8.4 (5.0) 9.4

Microport Scient 853 HK 3.67 675 0.2 N/A N/A 33.8 N/A N/A (165.8) N/A N/A 0.0 1.96 2.01 42.7 19.9 58.7 68.5 (16.7) (14.5) (0.6) 24.8 15.8

Shandong Weig-H 1066 HK 5.27 3,044 4.3 18.5 17.0 14.7 9.2 15.6 13.7 1.24 1.7 1.5 2.02 1.85 12.7 11.0 0.0 58.8 20.6 11.5 11.5 (6.9) 0.4

Pw Medtech Group 1358 HK 1.72 371 0.9 13.7 10.9 9.5 25.8 15.0 20.5 0.53 N/A 0.7 1.09 1.18 8.8 6.9 0.0 72.8 29.0 9.8 10.6 7.5 5.5

Lepu Medical-A 300003 CH 36.61 4,549 43.2 70.2 49.9 38.5 40.6 29.9 33.6 1.49 0.4 0.6 8.62 8.16 52.7 36.0 0.0 63.1 25.7 16.0 16.8 (5.9) 14.4



Tue, 05 Jan 2016

Healthcare services

Page 56 of 57

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27/08/2015 Meidong Auto 1268 Negatives priced in, attractive risk-reward BUY Walter Woo

26/08/2015 EGL 6882 1H15 strong momentum carrying to 2H15 BUY Bruce Yeung

26/08/2015 HC International 2280 2Q15 results disappoint but hopes on horizon BUY Yuji Fung

26/08/2015 Sunny Optical 2382 Lens set business to power higher profits BUY Yuji Fung

26/08/2015 Technovator 1206 1H15 results beat BUY Yuji Fung

26/08/2015 Ju Teng Intl 3336 1H15 results as expected, GPM recovery in sight BUY Yuji Fung

24/08/2015 COOLPAD 2369 1H15 hopes go astray HOLD Yuji Fung

24/08/2015 Kingdom Holdings 528 1H15 results of OBOR hidden gem BUY Bruce Yeung

20/08/2015 Sinotrans 598 1H15 results missed but priced in BUY Bruce Yeung

20/08/2015 Chinasoft Int’l 354 1H15 results in line with expectations BUY Yuji Fung

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http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1571&type=company&pdf_path=/upload/File/Wasion%20Group%20(3393%20HK)%20State-grid%20tender%20results%20inline%20-%20BUY.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=58&type=sector&pdf_path=/upload/File/Global%20sporting%20goods%20industry%20-%20How%20technology%20changes%20the%20way%20we%20sport.pdf







http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1570&type=company&pdf_path=/upload/File/In%20Construction%20(1500%20HK)%20Showing%20the%20real%20edges%20to%20the%20market%20-%20BUY.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1569&type=company&pdf_path=/upload/File/China%20Water%20Affairs%20(855%20HK)%201HFY16%20results%20inline%20-%20BUY.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1568&type=company&pdf_path=/upload/File/Beijing%20Properties%20(925%20HK)%20Time%20to%20hunt%20-%20BUY.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1567&type=company&pdf_path=/upload/File/Sinotrans%20(598%20HK)%20Buy%20on%20rumors%20-%20BUY.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1566&type=company&pdf_path=/upload/File/Sinotrans%20(598%20HK)%209M15%20results%20inline,%20but%20lack%20catalysts%20-%20HOLD.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1565&type=company&pdf_path=/upload/File/Kingdom%20(528%20HK)%20Positive%20outlooks%20from%20NDR%20-%20BUY.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1564&type=company&pdf_path=/upload/File/Wasion%20Group%20(3393%20HK)%20Grow%20like%20a%20flash%20of%20lightning%20-%20BUY.pdf




http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1563&type=company&pdf_path=/upload/File/On%20Time%20Logistics%20(6123%20HK)%20On%20Time%20with%20a%20touch%20of%20Alibaba%20magic%20-%20BUY.pdf








http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1562&type=company&pdf_path=/upload/File/Kingdom%20(528%20HK)%20%20Chairmans%20buy-back%20signals%20strong%20confidence%20-%20BUY.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1561&type=company&pdf_path=/upload/File/Man%20Wah%20Holdings%20(1999%20HK)%20Sales%20growth%20stronger%20than%20expected%20-%20NR.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1560&type=company&pdf_path=/upload/File/Beijing%20Properties%20(925%20HK)%201H15%20results%20missed%20on%20higher%20costs%20-%20BUY.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1558&type=company&pdf_path=/upload/File/Shenzhen%20International%20(152%20HK)%20Uncertainties%20looming%20over%202H15E%20-%20HOLD.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1557&type=company&pdf_path=/upload/File/Meidong%20Auto%20(1268%20HK)%20Negatives%20priced%20in,%20attractive%20risk-reward%20-%20BUY.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1556&type=company&pdf_path=/upload/File/EGL%20(6882%20HK)%201H15%20strong%20momentum%20carrying%20to%202H15%20-%20BUY.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1555&type=company&pdf_path=/upload/File/HC%20International%20(2280%20HK)%202Q15%20results%20disappoint%20but%20hopes%20on%20horizon%20-%20BUY.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1554&type=company&pdf_path=/upload/File/Sunny%20Optical%20(2382%20HK)%20Lens%20set%20business%20to%20power%20higher%20profits%20-%20BUY.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1553&type=company&pdf_path=/upload/File/Technovator%20(1206%20HK)%201H15%20results%20beat%20-%20BUY.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1552&type=company&pdf_path=/upload/File/Ju%20Teng%20Intl%20(3336%20HK)%201H15%20results%20as%20expected,%20GPM%20recovery%20in%20sight%20-%20BUY.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1551&type=company&pdf_path=/upload/File/Coolpad%20(2369%20HK)%201H15%20hopes%20go%20astray%20-%20HOLD.pdf






http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1550&type=company&pdf_path=/upload/File/Kingdom%20Holdings%20(528%20HK)%201H15%20results%20of%20OBOR%20hidden%20gem%20-%20BUY.pdf






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http://www.oriental-patron.com.hk/opsl/dl_count.php?id=1548&type=company&pdf_path=/upload/File/Chinasoft%20Intl%20(354%20HK)%201H15%20results%20in%20line%20with%20expectations%20-%20BUY.pdf






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