Company background

Jinling is a successful example of a domestic listed company investing in hospitals.Suqian Hospital, since its acquisition by Jinling in 2004, has seen profitability rise quicklyand steadily for nine consecutive years, with a net profit CAGR of 33% in 2004-14. Webelieve the company is likely to replicate the Suqian model to its other hospitals, suchas Yizheng Hospital and Anqing Hospital. We expect the company to develop rapidlythrough expansion into multiple locations. Given its hospital resources and experiencein medical facility operations, we are positive on the company's prospects in medicalservices, at a time when China is encouraging private investment in hospitals.

Financial investment + brand cooperation, healthcare have a good outlook

Through the "financial investment + brand cooperation" model, Jinling can not onlyavoid direct competition with Grade A Class 3 public hospitals by establishinggeographical advantages; but can also resolve the bottleneck of physician resourcesthrough cooperation with large public hospitals. We believe this model provides scopefor capital, management and policy advantages. We are optimistic about the prospectsfor this model, as well as its successful replication. We expect revenue in the healthcareservice segment to grow more than 40% in 2016.

Drug segment likely to recover

Among Jinling's main businesses, chemical drugs account for 50%, healthcare servicesaccount for 23% and TCM accounts for 23%. The company's core TCM offering is theMailuoning injection, which is highly recognised clinically in China. Despite weaker salesover the past two years, following reports of adverse drug reactions to TCM injections,we think the product is likely to strengthen with the implementation of new GMPstandards and end of the downward cycle of tender prices. We expect growth to stayat 5%.

Valuation: Price target of Rmb15.65; Buy

Our DCF-based price target of Rmb15.65 (WACC 8.1%) implies 28x 2016E PE. Wemaintain our Buy rating.