Investment positives

We initiate coverage with a HOLD rating and TP of Rmb44.00, or P/E of 66x 2017e & 52x 2018e.

Why HOLD rating

Hemodialysis in perennial short supply. Medical insurance program to dictate growth driven by low priceand large volume. China has ——340,000 registered late-stage nephrosis patients and >1mn potential patients. Fivetimes more hemodialysis centers are needed to meet demand from existing patients. Although China's medicalinsurance program is increasing the ratio of reimbursement, funding is short. As a result, develop will likely entailramping up with low prices going forward.

Transformation from medical monitoring to hemodialysis with full value chain deployment to reducecost and increase efficiency. Biolight has actively deployed in the full value chain of the hemodialysis industry over2012——2016 by M&A and proprietary development. After its hemodialysis device gains approval in 2017, it will likely havea presence in both hemodialysis devices and consumables. In 2015, it acquired distributors in Shanghai and Guizhou,which could boost 2016e net profit by Rmb20mn and help with downstream distribution of its upstream products.

Scaling up the key for service business. Watch development model of nephrosis hospitals. Chain hospitalswill be needed for the hemodialysis industry to scale up. Both standalones and specialist hospitals have advantages anddisadvantages. Biolight is opting for a hospital model with a specialist focus on nephrosis but also treatment of otherdiseases. This should increase patitent traffic but may hinder business scale expansion at the early stage.

How do we differ from the market1） Ramping up cheaply would be the model for the hemodialysis sector goingforward given the huge market and short funding of medical insurance program, and this requires plenty of low costterminals. 2） Quantitative analysis confirms prerennnial short supply of hemodialysis facilities in the market.

Potential catalysts: 1） Acquisition of nephrosis hospitals. 2） Approval for hemodialysis devices by early-2018.

Financials and valuation

EPS is expected to be Rmb0.45, Rmb0.67 and Rmb0.84 in 2016——2018 with a CAGR of 73%. At present, the medicaldevice sector is trading at 45x 2017e P/E. Our TP is Rmb44.0 （66x 2017e, 52x 2018e P/E） as Biolight is a rarename with full value chain presence, and potential M&A may boost valuation. Initiate with HOLD.

Risks

Results of M&A for nephrosis hospitals. Slow progress in chain hospital model. Sharp earnings fluctuation.