Clear direction for development of healthcare services

We are positive on Jinling's development of the healthcare services segment throughthe "financial investment + brand cooperation" model, in view of its strong operatingresults achieved in 2015. For the healthcare services segment, our forecasts for 2016-18 revenue growth are 42%/45%/45%, gross margins are 30%/31%/31% andcontributions to gross profit are 32.1%/39.4%/46.5%.

Main business mix improved; healthcare services had bigger revenue share

The healthcare services segment's 2015 revenue came to cRmb700m (+29.79% YoY),increasing its contribution to total revenue by 2ppts to 21.73%. The company's mainbusinesses posted steady growth in 2015, with the healthcare services segmentmaintaining strong momentum. Among the company's three hospitals, Suqian Hospitalposted 2004-15 revenue CAGR of 24% and net profit CAGR of 29%; Yizheng Hospitalposted 2012-15 revenue CAGR of 49% and net profit CAGR of 79%; and AnqingShihua Hospital's 2015 net margin stood at 5%.

TCM segment likely to see recovery in growth in next 3 years

The TCM segment's 2015 revenue was Rmb505m, down 5.26% YoY; and grossmargin was 25%, down 9ppts YoY. We attribute the TCM segment's revenue declineto tender price control. However, this year's favourable policies for the TCM industryand stability of raw material prices should help stabilise the gross margin. Given thatthe company's TCM segment is likely to recover as the impact of the adverse drugreactions to Mailuoning fade, our forecasts for 2016-18 revenue growth are5%/5%/5%.

Valuation: Raising PT to Rmb17.18; maintain Buy rating

Considering the strong outlook for the healthcare services segment, we raise our 2018EEPS and lift our medium-term ROIC from 22% to 22.5%. Our DCF-based PT ofRmb17.18 assumes 8.2% WACC and implies 31x 2016E PE. The company's shares aretrading at 23x 2016E PE, below the historical average and also below the average ofthe pharmaceutical industry. We believe the solid growth potential of Jinling'shealthcare services segment has not been fully priced in and maintain our Buy rating.