Investment positives

We initiate coverage with an OUTPERFORM rating and a target price of Rmb7.37

Why an OUTPERFORM rating?

Sector demand growing rapidly; large growth potential for private healthcare institutions. Domestic demand for cancer care has been rapidly growing in recent years. However, there is sharp difference in cancer care resources between provinces, and unbalanced supply and demand between urban and rural areas. Compared with neighboring regions, at end-2020, Guizhou province lacked both adequate cancer care resources and radiotherapy equipment. Meanwhile, demand for cancer care is increasing in Guizhou, and the provincial medical insurance fund has sufficient funds to pay for medical expenses. We see growth opportunities for private healthcare institutions, and expect rapid growth and notable upside considering the imbalance in supply, and demand and policy supports.

A cancer care leader in Guizhou; increasingly clear governance structure. Xinbang has grown into a leader for cancer care in Guizhou, and the revenue contribution from its core healthcare service has been rising. Following a private placement in 2021, the firm’s chairman Mr. AN Huailue, became its actual controller in an alignment of operation and ownership, conducive to improving governance structure. In addition, negatives such as US trade friction and the COVID-19 pandemic are easing. The firm’s 1-3Q21 revenue was up 10.35% YoY to Rmb4.72bn, and attributable net profit grew 70.73% YoY to Rmb210mn, implying a turnaround in earnings growth.

Focus on healthcare; improving management mechanism to enhance operation and management efficiencies. Hospital business ramping up rapidly: The firm is boosting the revenue growth of its healthcare service through hospital expansion, and the businesses’ revenue reached Rmb1.97bn in 2020 with a CAGR of 13.4% over 2015-2020. We think strong growth will continue as expansion projects start operations. Integrated development of healthcare service, education and R&D: Cancer hospitals facilitate education and R&D, and we think the transformation of the Affiliated Baiyun Hospital of Guizhou Medical University into a teaching hospital will further consolidate the firm’s market leading cancer treatment capabilities in Guizhou province. Improved management mechanism to enhance operation and management efficiency, and boost brand momentum: The firm accelerated integrated development and management in the past two years, and continued to optimize operational and management efficiency. We see solid brand momentum driven by good care, optimized management and ongoing expansion.

How do we differ from the market　　We expect the supply-demand imbalance of cancer care in Guizhou will facilitate Xinbang’s rapid expansion, and the improving management mechanism may generate upside surprise in earnings and expansion, in our view.

Potential catalysts: Sustained growth in healthcare service revenue as Baiyun Hospital Phase III expansion project starts operation; integrated development of healthcare service, education and R&D enhances service capabilities.

Valuation and recommendation

We forecast 2021-2023 EPS at Rmb0.14, Rmb0.17 and Rmb0.21 with CAGR of 24.0%, corresponding to 2022-23 P/E of 34.0x and 28.0x. Given the durable competitiveness of various businesses and promising outlook for growth, we initiate coverage on Xinbang with an OUTPERFORM rating and SOTP-based TP at Rmb7.37, implying 24.5% upside, corresponding to 2022-23 P/E of 42.3x and 34.8x.

Risks

Unfavorable changes in healthcare service policies; disappointing ramp-up of hospitals and improvement of management; medical accidents.