Sound growth in medical services

At the company's Suqian Hospital, work continues to centre on joining the ranks ofgrade 3, class A hospitals. Yizheng Hospital is using new grade 3 hospital standards asits management requirements and developing key specialty services; it has also foundedthe Yizheng Hospital Digital Subtraction Angiography (DSA) Treatment Center inpartnership with Drum Tower Hospital, which is progressing well in our view. AnqingHospital is focusing on market expansion and brand building. But despite these efforts,net profit has worsened at both Suqian Hospital (H116: revenue +4% YoY vs net profit33% YoY) and Anqing Hospital (H116: revenue -4% YoY vs net profit -18% YoY),mainly due to facilities investment and physician salary adjustments. We believeprofitability of its hospitals is poised to improve as Suqian Hospital's investment infacilities ends, and as the company expands its physician resources.

Actively improving integration in its supply chain

Jinling has linked its sales, healthcare and retail pharmacy platforms, and it is alsodistributing more third-party products to grab end-market share. This has supportedrelatively fast growth in pharmaceutical distribution revenue (subsidiary NanjingHuadong Medicine's revenue rose 17.19% YoY in H116). In addition, the companyopened its first DTC/DTP pharmacy in Yizheng in March 2016.

Mailuoning still posting declines

Sales of Mailuoning, one of the company's core products, have continued trendinglower, hampered by government restrictions on adjuvant drugs. Based on IMS data,Jinling's sales revenue from Mailuoning slid 17.24% YoY in 2016.

Valuation: Maintain Rmb17.18 price target, Buy rating

Our Rmb17.18 price target is derived using DCF (WACC 8.2%) and implies 25x 2017EPE. We believe the solid growth potential of Jinling's medical services segment has notbeen fully priced in and maintain our Buy rating.