H O N G K O N G
M o n e y T a l k F r i d a y , 1 5 M a y 2 0 1 5
BUY

Town Health is the first and the largest of healthcare clinic operators in Hong Kong.
Through aggressive M&As, the company has expanded its value chain to offering healthcare and managed-care services, as well as operating beauty salons. By increasing focus on specialty clinics and medical beauty care services and expanding its managed-care operations and hospital business, Town Health aims to drive its future growth. We initiate with a BUY with a target price of HK$2.76
.
WHAT’S NEW

Increasing investment in specialty centres . Town Health operates the largest chain of clinics in Hong Kong. It had 54 general practice clinics and 30 specialty practice clinics as of 31 Dec 2014. While the net margin of its general practice clinics is at 5-7%, that of its specialty practice has been at around 20% in the recent years. Town Health will be setting up eight specialty centres in 2015-17. We expect the specialty centres to contribute HK$30m, HK$156.0m, and HK$277.2m in revenue in 2015-17.

Growth driven by M&As. In 2014, Town Health acquired Dr. Vio and Bonjour Beauty.
Dr. Vio, is one of the top four managed-care operators in Hong Kong, with around 500 corporate clients and providing over 1m consultations per year. As at 2014, Bonjour
Beauty owned 11 beauty salons, 3 skin care clinics and 2 massage shops. We expect
Dr. Vio and Bonjour Beauty to contribute revenue of HK$386.6m and HK$365.4m in
2015 respectively.

Medical tourism and mobile healthcare to boost revenue growth. Town Health has formed a JV with Sino Dynamic to develop a mobile healthcare O2O platform. The platform will provide personal health management across all Town Health's business units. In addition, Town Health plans to expand its client base by providing medical services to patients from mainland China. We expect mobile healthcare and medical tourism to boost revenue growth in 2015-17.

Acquiring hospitals and clinics in China. On 17 Mar 15, Town Health announced the acquisition of a 49% stake in Huayao Medical Group (Huayao). After restructuring,
Huayao will indirectly hold 100% of Hangzhou Shengkang Hospital and Hangzhou
Shuke Medical Clinic, with guarantees profits of Rmb30m, Rmb36m and Rmb42m for
Town Health in 2015-17 respectively. Huayao plans to acquire three clinics in 2015 and is currently in discussions for more healthcare M&As.

Joining forces with China Life. China Life became Town Health's largest shareholder by acquiring HK$1.75b worth of new shares, or 23% of Town Health's enlarged share base. Town Health plans to collaborate with China Life for hospital M&As and medical tourism.

Divesting off non-core businesses. Investment securities and property rental historically caused volatility in Town Health's financial performance. The company plans to gradually divest off its non-strategic investment securities and property rental businesses.

Initiate coverage with a BUY and target price of HK$2.76, 1.3x PEG. Our target price implies a 15.5 % upside.
KEY FINANCIALS
Year to 31 Dec (HK$m) 2013 2014 2015F 2016F
Net turnover
EBITDA
Operating profit (25.8)
Net profit (rep./act.)
Net profit (adj.)
EPS (HK$ cent)
PE (x)
P/B (x)
EV/EBITDA (x)
Dividend yield (%)
Net margin (%)
Net debt/(cash) to equity (%)
Interest cover (x)
ROE (%)
Consensus net profit ()
354.6
12.0
104.6
104.6
2.3
104.6
9.1
916.7
0.5
29.5
13.4 n.a.
9.0
-
494.6
13.3
83.7
83.7
1.8
133.1
5.2
825.7
0.1
16.9
(48.0) n.a.
5.0
-
1,188.9
140.9
106.5
106.5
1.4
174.1
4.4
78.0
0.2
9.0
(69.4) n.a.
3.5
-
1,537.7
263.8
213.9
213.9
2.8
86.7
4.2
41.7
0.3
13.9
(69.5) n.a.
5.3
-
Source: Lesso, Bloomberg, UOB Kay Hian
2017F
1,950.8
398.5
270.9
333.9
333.9
4.3
55.6
4.0
27.6
0.5
17.1
(70.5) n.a.
10.4
-
Share Price
Target Price
Upside
HK$2.39
HK$2.76
+15.5%
COMPANY DESCRIPTION
Town Health International Medical Group provides a wide range of medical and other healthcare services in Hong Kong, including medical and dental services, managed-care operations, laboratory and medical diagnostic services, and cosmetic dermatology services.
Town Health is also engaged in the development of medical businesses in China.
GICS sector
Bloomberg ticker:
Shares issued (m):
Market cap (HK$m):
Market cap (US$m):
Health Care
3886 HK
5,601.2
13,386.9
1,726.7
4.7
3-mth avg daily t'over (US$m):
Price Performance (%)
52-week high/low
1mth 3mth 6mth
HK$3.06/HK$1.03
1yr YTD
Major Shareholders
China Life Group
%
23
Broad Idea
Fubon Financial
18.28
8.36
Bonjour 4.71
FY15 NAV/Share (HK$)
FY15 Net Cash/Share (HK$)
PRICE CHART
(lcy)
3.50
3.00
2.50
2.00
1.50
1.00
0.50
150
100
50
Volume (m)
0
May 14 Jul 14
TOWN HEALTH INTERNATIONAL ME
Town Health International Me/HSI Index
Sep 14 Nov 14 Jan 15 Mar 15
Source: Bloomberg
ANALYST
Serena Shao
+86 21 5404 7225 ext 817 serenashao@uobkayhian.com
Carol Dou
+86 21 5404 7225 ext 811 caroldou@uobkayhian.com
(%)
290
250
210
170
130
90
50
May 15
0.54
0.38
w w w . u t r a d e . c o m . h k 1

H O N G K O N G
M o n e y T a l k F r i d a y , 1 5 M a y 2 0 1 5
- Clinic Chain Business ............................................................................................................... 3
- Beauty Care Services ............................................................................................................... 5
- Hospital Management Business ............................................................................................... 6
- Medical Tourism And Mobile healthcare To Boost Revenue Growth ...................................... 7
- Divestment Of Non-core Business ........................................................................................... 8
- Joining Forces With China Life ................................................................................................. 8
Shareholding Structure ............................................................................................................ 8
Management Team .................................................................................................................... 9
Financials ................................................................................................................................. 10
This report uses the closing prices of 13 May 2015 w w w . u t r a d e . c o m . h k 2

H O N G K O N G
M o n e y T a l k
Town Health is an integrated medical services provider in Hong Kong. It owns 84 medical centres, 11 dental clinics, 9 health check centres, 16 beauty salons, and managed-care operators. Through its newly-acquired 49%-owned JV, it will own a class II hospital and a clinic in China.
CLINIC CHAIN BUSINESS
First and largest clinic chain in Hong Kong . Town Health owns the first and the largest of clinic chains in Hong Kong. As of 31 Dec 2014, its clinic chain includes: a) 54 general-practice clinics which provide comprehensive outpatient services, including consultation, lab testing and vaccination. b) 30 specialty-practice clinics which provide consultation and treatment for cardiology, oncology, dermatology, gastroenterology & herpetology and orthopaedics. c) 9 health check centres. d) 11 dental clinics. e) 3 laboratories for lab testing.
This business generated HK$330.4m in revenue, accounting for 66.8% of the company's total revenue in 2014.
FIGURE 1: SPECIALTY MEDICAL CENTRE
F r i d a y , 1 5 M a y 2 0 1 5
Source: Town Health, UOB Kay Hian
FIGURE 2: NUMBER OF CLINICS OPERATED BY TOWN HEALTH (31 DEC 2014)
2010 2011 2012 2013 2014
Dental
Labs
Total
Source: Town Health, UOB Kay Hian
65 60 56 51 54
14 17 17 20 30
16 13 11 0 9
14 14 12 11 11
2 2 2 1 3
111 106 98 83 107 w w w . u t r a d e . c o m . h k 3

H O N G K O N G
M o n e y T a l k
Specialty centres as growth driver.
There are around 8,000-9,000 clinics in Hong Kong.
Given the intense competition and low bargaining power relative to general-practice doctors, general-practice clinics have relatively low gross margins of 5-7%. In contrast, specialtypractice clinics enjoy high gross margins of 20% as they rely heavily on references from general-practice clinics and managed-care operators and enjoy relatively high service fees.
To boost revenue and segmental gross margin, Town Health is building eight specialty centres covering specialty-practice areas including physiotherapy, general surgery, ENT, invitro fertilisation, ophthalmology, cardiology, plastic surgery and cosmetic dermatology, and orthopedics. The majority interest in the clinics will be owned by Town Health and minority interests will be held by doctors. We estimate that one specialty centre will be opened in
2015, another four in 2016, and three in 2017. We estimate that the specialty centres will contribute HK$30.0m, HK$156.0m, HK$277.2m in 2015, 2016 and 2017 respectively.
MANAGED-CARE OPERATOR
A leading managed-care operator in Hong Kong. In Aug 14, Town Health acquired Dr.
Vio, one of the top four managed-care operators in Hong Kong which has 500 corporate clients and provides over 1m consultations per year. The company serves insurance companies and corporations by managing the healthcare services of their clients and employees respectively. It directs patients to doctors, and collects reimbursements for healthcare expenses from their insurance companies or employees. In return, Dr. Vio charges 15-40% of the reimbursement and refunds the remaining 85-60% to the doctors.
FIGURE 3: WORKFLOW OF DR. VIO
F r i d a y , 1 5 M a y 2 0 1 5
Source: Town Health, UOB Kay Hian
Strong service quality.
According to management, the managed-care operator industry grew at an annual growth rate of 10% in 2014. Dr. Vio ranks fourth in the industry in terms of market share. While Dr. Vio's major competitor, Quality Healthcare (QH) sees revenue of about HK$1b on an annual basis, and grows at a low single-digit growth rate, Dr. Vio has achieved a relatively high revenue growth of 10-11% yoy, given Dr. Vio's strong service quality. Dr. Vio has also enjoyed a relatively high net margin of 10-12% (QH: 5-6%) in the past few years according to management. w w w . u t r a d e . c o m . h k 4

H O N G K O N G
M o n e y T a l k
Strong synergy with clinic services business.
Through integration with Town Health, Dr.
Vio will be able to significantly expand its network of clinics and win more contracts by tapping into Town Health's large network of clinics. Moreover, the acquisition of Dr. Vio will boost revenue of Town Health's clinic chain business thanks to Dr. Vio's large corporate client base which would allow for more referrals of Town Hall’s doctors or medical institutions to patients.
Adjusting marketing strategies and expanding to become a bigger player.
Management is confident over the company’s managed-care operations and plans to grow
Dr. Vio through promotions, marketing campaigns, new branch launches and M&As. To encourage in-network doctors to use Dr. Vio's services, Town Health plans to increase commission rates for in-network doctors who provide specialty-practice services from 60% to
75%. In addition, Town Health will ramp-up marketing activities to secure more contracts.
The company also aims to add one clinic under Dr. Vio. We expect the new clinic will start to generate profit in 2017. Furthermore, Town Health plans to acquire small managed-care operators in Hong Kong to consolidate the fragmented market and support future growth.
BEAUTY CARE SERVICES
Town Health announced its plan to acquire Bonjour Beauty in Aug 14 and consolidated the group in Jan 15. Bonjour Beauty’s key businesses include: a) Eleven beauty salons providing slimming, medical beauty care, manicure, spa & massage services under the About Beauty brand in Hong Kong and Macau, and under the Bonjour Beauty brand in Shanghai, China. b) Three medical beauty clinics providing dermatology treatment and micro-cosmetic beauty treatment, including Ulthera, Thermage, Fraxel Dual and Botox under the Dr.
Protalk brand. The medical devices and technology used by Dr. Protalk have received
US FDA and CE approval.
FIGURE 4: ADVERTISEMENT OF ABOUT
BEAUTY
FIGURE 5: ADVERTISEMENT OF DR. PROTALK
F r i d a y , 1 5 M a y 2 0 1 5
Source: Town Health, UOB Kay Hian Source: Town Health, UOB Kay Hian c) Two massage shops offering foot and body massage services under the Top Comfort brand in Hong Kong.
FIGURE 6: TOP COMFORT OUTLET
Source: Town Health, UOB Kay Hian w w w . u t r a d e . c o m . h k 5

H O N G K O N G
M o n e y T a l k F r i d a y , 1 5 M a y 2 0 1 5
This segment reported revenue of HK$348m in 2014, up 10.5% yoy. Net profit was
HK$35.5m, up 2.9% yoy. In 2014, client visits reached 297,478 and average spending per client was at HK$1186.15.
Closing unprofitable salons.
The beauty care business was hampered by overexpansion and as a result, Bonjour Beauty closed unprofitable beauty salons in 2012-14. Management has confirmed that almost all unprofitable salons have been closed and that it will focus on developing high-margin businesses from 2015.
FIGURE 7: BONJOUR BEAUTY'S NUMBER OF CLIENT VISITS AND AVEREAGE SPENDING
PER CLIENT
Total no. of client visits Average spending per client (HK$)
2012 291,646
2013 319,467
2014 297,478
Source: Town Health, UOB Kay Hian
1,098.12
992.89
1,186.15
Expanding high-margin medical beauty business.
Among Bonjour Beauty's services, the doctor-operated medical beauty clinic business offers a relatively high net margin of over
30% while the average net margin of Bonjour Beauty was 10.2% in 2014. Doctor-operated medical beauty clinic services contributed to only 16% of segmental income in 2014. In 2015,
Town Health plans to set up a plastic surgery centre in Central or Causeway Bay and a medical dermatology centre in Mongkok, Hong Kong. We expect the new medical centres to start contributing to revenue from 2016 onwards. With contributions coming from the two medical centres, we expect the growth rate of Dr. Vio to rise from 5% yoy growth in 2015 to
20% yoy in both 2016 and 2017.
HOSPITAL MANAGEMENT BUSINESS
Town Health announced the acquisition of a 49% stake in Huayao for Rmb151.3m on 17
Mar 15. Huayao indirectly owns Hangzhou Shengkang Hospital and Hangzhou Shuke
Medical Clinic. a) Shengkang Hospital is a Class II for-profit private hospital located on Jiubao Street in
Jianggan District, Hangzhou City. There are large enterprises, including Xizi Otis and
Youcan Group, located near the hospital. It is a designated hospital for Hangzhou City
Basic Medical Insurance, Zhejiang Province Basic Medical Insurance and Employment
Injury Insurance in Hangzhou. The hospital has 99 doctors, 460 beds and medical equipment which include MRI technology. It provides general medical services with a focus on orthopedics and rehabilitation care. The hospital’s bed utilisation rate was at about 68% in 2H14.
FIGURE 8: SHENGKANG HOSPITAL
Source: Town Health w w w . u t r a d e . c o m . h k 6

H O N G K O N G
M o n e y T a l k b) Shuke Medical Clinic is an outpatient medical clinic providing traditional Chinese medical care, Western internal medicine healthcare and dental care services. The clinic is located in Xiacheng District, one of the main residential areas in Hangzhou. The clinic has 20 doctors, serves around 150 outpatients per day and contributes revenue of
Rmb5m per month.
FIGURE 9: SHUKE MEDICAL CLINIC HONESTLY
F r i d a y , 1 5 M a y 2 0 1 5
Source: Town Health
Strong supply chain management ability. Yaohua's CEO, Mr Zhou Lin, has extensive experience in pharmaceutical distribution. Under his management, Shengkang Hospital and
Shuke Medical Clinic are able to directly procure most medical products from suppliers and enjoy high gross margins from the pharmaceutical product sales. The hospital and the clinic on average, generate about 80% and 75% respectively, of their revenue from sales of pharmaceutical products, significantly more than traditional hospitals which generate half of their revenue from medical services and half from pharmaceutical product sales.
Facility and technology upgrade as well as cooperation with large hospitals to support organic growth. With the completion of renovations at its inpatient building in May-
Jun 14, full-year contribution of inpatient services is expected to boost Shengkang Hospital’s revenue in 2015. In addition, the hospital is recruiting medical experts from other hospitals in
Hangzhou and other cities in Zhejiang province. Management plans to increase its number of rehabilitation patients by cooperating with large public hospitals in Hangzhou, which usually need to transfer out rehabilitation patients to make room for patients who require surgery. Management expects that its upgraded facilities and technology as well as cooperation with large hospitals will help boost revenue and profit for the hospital.
Guaranteed net profit. The vendor has guaranteed audited profits (excluding non-recurring and exceptional gains) of no less than Rmb30m, Rmb36m and Rmb42m in 2015-17, implying yoy growth of 20% and 16.7% in 2016 and 2017 respectively.
Acquisitions to support future growth.
Town Health and the other shareholders of
Huayao will contribute a total of Rmb120m to acquire or develop three more clinics in 2015-
16.
MEDICAL TOURISM AND MOBILE HEALTHCARE TO BOOST REVENUE GROWTH.
Town Health has formed a JV with Sino Dynamic to develop mobile healthcare O2O
Platform. Town Health is investing HK$30m for 60% of equity interest and Sino Dynamic is investing HK$22.5m for 40% equity interest in the JV. Sino Dynamic is a full-service enterprise solutions provider specializing in customised transaction-based software solutions and apps for devices. The platform will provide personal health management across all Town
Health's business units. In addition, Town Health plans to expand its client base by providing medical services to patients from mainland China. We expect mobile healthcare and medical tourism to boost revenue growth in 2015-17. w w w . u t r a d e . c o m . h k 7

H O N G K O N G
M o n e y T a l k
DIVESTMENT OF NON-CORE BUSINESSES
Historically, Town Health has been engaged in the investment securities and property rental businesses. The two segments contributed 3.9% to the company’s revenue and 37.2% to its net profit in 2014. Town Health plans to focus completely on its core business and gradually divest off its non-strategic investment in securities and property rental businesses. On 20
Mar 15, the company sold its 60% equity interest in Asset Management International Limited
(Asset Management) for HK$432.7m. Asset Management and its subsidiaries are mainly engaged in the property investment business and incurred a net loss of HK$46.62m in 2014.
The purchaser will pay HK$3.6m in cash and take on Town Health's HK$429.1m debt owed to Asset Management.
JOINS FORCES WITH CHINA LIFE
China Life has agreed to subscribe to 1.79b shares of Town Health at HK$0.98 per share and this would make it the largest shareholder with a 23% stake. Town Health will provide medical services, including clinic services, cosmetic dermatology, and health check and medical diagnostic services to China Life's clients at discounted rates. Given China Life's large client base, management is confident that the discounts offered to China Life's clients will help draw in more clients from Mainland China. In addition, Town Health plans to leverage on China Life's strong ties with the government to acquire/manage more hospitals in China.
F r i d a y , 1 5 M a y 2 0 1 5
Source: Town Health, UOB Kay Hian w w w . u t r a d e . c o m . h k 8

H O N G K O N G
M o n e y T a l k F r i d a y , 1 5 M a y 2 0 1 5
Name Position
Choi Ka Yee, Crystal Chairperson & Executive Director
Choi Chee Ming, GBS, JP
Cho Kwai Chee
Vice-Chairman
Director
& Non-Executive
Founder, Executive Vice Chairman &
Executive Director
Dr. Choi has been appointed as the Vice-Chairman and Non-Executive Director of the group since
February 2006. Dr. Choi is the founder and Chairman of Early Light International (Holdings) Limited and
E. Lite (Choi’s) Holdings Limited. He is the honorary president of the Toys Manufacturer’s Association of Hong Kong, honorary president of the Hong Kong Young Industrialists Council and a court member of The Hong Kong Polytechnic University.
Dr. Cho is the founder, Executive Vice Chairman and Executive Director of the Group. Dr. Cho founded the Group in December 1989 and is now responsible for formulating, overseeing and managing the business and development strategies of the group. He is also a member of the remuneration committee of the group. Dr. Cho graduated from The University of Hong Kong and holds the qualifications of
MBBS (HK), FHKCFP, FRACGP, DCH (London), DCH (RCP&SI), DCH (Glasgow) and DPD (Cardiff).
Hui Ka Wah, Ronnie, JP CEO & Executive Director
Description
Miss Choi was appointed Executive Director and Chairperson in May 06 and Oct 06 respectively. Miss
Choi joined the group in Apr 05 as Director of the corporate finance department. She is also the Vice
Chairman of E. Lite Property Management Ltd.
Ip Chun Heng, Wilson Executive Director
Dr. Hui was appointed CEO and Executive Director in Jun 14 and Jul 14 respectively. He is responsible for executing the company’s strategies. He is a specialist in paediatrics. Dr Hui is CEO & Finance
Director of Hanergy Solar Company (566HK), a solar technology company listed on the main board of
HKEx, and also an independent executive director of a number of listed companies.
Dr. Ip was appointed Executive Director in Jan 15. He is also the CEO of Bonjour Beauty, which operates 17 beauty and health salons. He is also the chairman, CEO and Executive Director of Bonjour
Holdings Ltd (653HK). Dr. Ip has more than 36 years of experience in running retail and services businesses. Dr. Ip is responsible for the overall strategic planning and formulation of Bonjour’s corporate policies. He is also a director of a number of Bonjour subsidiaries.
Lee Chik Yuet
Chan Wing Lok, Brian
Wong Seung Ming
Executive Director
Executive Director & Medical Director
Executive Director & CFO
Mr. Lee was appointed Executive Director in Oct 09. He is also Executive Director of New Ray Medicine
(8180HK), an associated company of Town Health. He is also a director, legal representative and general manager of a subsidiary of Town Health. Prior to joining the company, Mr. Lee had been a practicing solicitor for more than 13 years in Hong Kong, specialising in commercial, corporate finance and investment laws and practices in Hong Kong and China.
Dr. Chan joined the company in 1991 and was appointed Executive Director in Jul 11. He is the chairman of Town Health Medical & Dental Services Ltd, a subsidiary of the company. Dr Chan is currently the Medical Director and is responsible for clinic operational management and business development, and the enhancement and maintenance of service quality.
Mr. Wong was appointed Executive Director and CFO in Jul 14. He is also the company secretary and is responsible for financial control and reporting, corporate finance, tax and risk management.
Source: Town Health, UOB Kay Hian w w w . u t r a d e . c o m . h k 9

H O N G K O N G
M o n e y T a l k
Strong revenue growth supported by M&As. In 2011-14, revenue grew at a CAGR of
13.4% from HK$339.3m to HK$494.6m, due to slow growth of the healthcare and dental clinics business. We expect revenue to rise 140.4% yoy in 2015, mainly due to revenue contribution from the newly acquired Dr. Vio and Bonjour Beauty. We expect the company's revenue to grow 29.3% yoy and 26.9% yoy in 2016 and 2017 respectively, given the increase of specialty centres, medical beauty centres, and clinics under Dr. Vio, and expansion of client base, driven by medical tourism and mobile healthcare services.
FIGURE 10: REVENUE OF TOWN HEALTH
(HK$m)
2,500
2,000
1,500
1,000
500
0
339 342 355
495
1,189
1,538
1,951
80
60
40
20
0
(%)
160
140
120
100
2011 2012 2013 2014 2015F 2016F 2017F
Total revenue yoy (RHS)
Source: Town Health, UOB Kay Hian
Gross margin improvement. Gross margin lingered between 32-35% in 2011-14, which we believe was due to the company’s focus on the healthcare and dental clinic businesses in the past. We expect gross margins of the clinic and health check businesses to improve gradually from 32.5% in 2014 to 51.5% in 2017, given the acquisition of Bonjour Beauty which has a high gross margin of 95% and expansion in high-margin specialty-practice and medical clinic business.
FIGURE 11: GROSS MARGIN OF TOWN HEALTH
(%)
60
49.1
52.3
51.5
50
40
30
20
10
33.6
34.7
33.9
32.5
0
2011 2012
Source: Town Health, UOB Kay Hian
2013 2014 2015F 2016F 2017F
Rising net profit.
Given Town Health’s strong revenue growth, gross margin improvement, and contribution from the newly-acquired hospital management JV, we expect net profit to increase 25.9%, 100.8%, and 56.1% yoy in 2015, 2016, and 2017 respectively.
F r i d a y , 1 5 M a y 2 0 1 5 w w w . u t r a d e . c o m . h k 10

H O N G K O N G
M o n e y T a l k
FIGURE 12: NET PROFIT OF TOWN HEALTH
(HK$m)
400
300
200
100
0
-100
-200
-300
-400
-500
64.2
2011
(435.0)
2012
49.6
2013
84.6
2014
106.5
2015F
Net income attributable to ordinary shareholders
Source: Town Health, UOB Kay Hian
213.9
333.9
2016F 2017F yoy (RHS)
Sufficient cash to support future M&As and expansion.
Town Health had HK$1,078.6m in cash at end-14. It raised HK$1.75b through a share placement with China Life Insurance and HK$900m through placements with Fubon Life, Fubon Insurance, and former major shareholder. As such, we estimate that Town Health will have HK$3.73b cash on hand. We estimate Town Health has set a capex of about HK$200m for 2015, of which HK$100m would be used for investment in specialty centres and medical beauty salons, and HK$100m for the acquisition of hospitals in China. Management estimates that the company will spend
HK$500m-600m in 2016.
(%)
200
100
0
-100
-200
-300
-400
-500
-600
-700
-800
-900
F r i d a y , 1 5 M a y 2 0 1 5 w w w . u t r a d e . c o m . h k 11

w w w . u t r a d e . c o m . h k
H O N G K O N G
M o n e y T a l k F r i d a y , 1 5 M a y 2 0 1 5
Initiate coverage with a BUY and target price of HK$2.76, based on 1.3x PEG. The valuation factors in Town Health's strong growth potential and new business development risks. Given Town Health’s aggressive expansion through M&As, the company will likely deliver rapid EPS growth of 77.05% in 2015-17. Compared with its A-share peers and global peers which are trading at 1.7x PEG and 1.6x PEG respectively, the company is trading at a discount at 1.1x PEG.
FIGURE 13: PEER COMPARISON
(lcy)
EPS
CAGR
O/S 2015F 2016F 2017F 2014 2015F 2016F 2017F 2015F 2014 2014 15F-17F PEG
(lcy) (Rmb) (Rmb) (Rmb) (Rmb) (x) (x) (x) (x) (%) (%) (%) (%) (x)
HONG KONG LISTED
Phoenix Healthcare Group 1515 HK 14.52
Shanghai Fosun
Pharmaceutical 2196
Hua Han Bio-
Pharmaceutical 587
2.39
Average
HK*
Town Health International 3886 HK*
834 12,390 0.276 0.338 0.414 0.603 41.0 33.5 27.4 18.8 5.3 11.1 14.2 33.6
5,601 13,107 0.018 0.014 0.028 0.043 130.6 174.1 86.7 55.6 4.4 3.5 5.0 77.0
55.9 61.7 36.6 25.2 3.6 7.0 10.1 38.6
0.8
1.1
0.9
DOMESTIC LISTED
Aier Eye Hospital Group 300015 CH 42.58
Guizhou Xinbang
Pharmaceutical 002390
Topchoice Medical
Investment
Jinling Pharmaceutical
Guizhou Yibai
655 27,003 0.475 0.629 0.826 1.075 89.7 67.7 51.5 39.6 12.7 13.6 17.1 30.7 1.7
CH 91.56 160 14,267 0.690 0.916 1.217 1.624 132.7 100.0 75.2 56.4 22.7 15.3 19.2 33.2 2.3
000919 CH 19.83 504 9,818 0.391 0.510 0.593 0.660 50.7 38.9 33.4 30.0 4.1 6.2 9.2 13.8 2.4
Hengkang Medical Group
CITIC Securities Co
Average
002219 CH
57.39 23,200 1.217 1.650 1.994 2.110 47.2 34.8 28.8 27.2 6.7 10.2 14.8 13.1 2.2
41.60 616 25,960 0.443 0.600 0.830 1.030 94.0 69.3 50.1 40.4 24.2 10.5 24.8 31.0
600030 CH 33.37 9,839 355,535 1.030 1.425 1.748 2.072 32.4 23.4 19.1 16.1 3.5 3.1 14.4 20.6
China Resources Sanjiu 000999 CH 33.09 979 31,423 1.060 1.243 1.385 1.552 31.2 26.6 23.9 21.3 4.4 9.8 15.4 11.7
Kangmei Pharmaceutical 600518 CH 37.83 2,199 81,594 1.040 1.332 1.694 2.097 36.4 28.4 22.3 18.0 5.6 9.0 18.5 25.5
70.8 53.2 40.6 32.7 10.2 9.1 15.7 24.5
1.6
0.9
2.0
0.9
1.7
US
Concord Medical-Spon ADR CCM US
HCA Holdings Inc
Average
HCA US
6.82
77.73
45 307 0.450 0.240 0.360 0.520 15.2 28.4 18.9 13.1 1.1 3.5 6.3
414 32,205 4.300 5.232 5.723 6.308 18.1 14.9 13.6 12.3 n.a. 6.9 n.a.
16.6 21.6 16.3 12.7 1.1 5.2 6.3
47.2
9.8
28.5
INDIA
Fortis Healthcare Ltd FORH 2.700 -1.922 1.542 4.472 59.4 n.a. 104.1 35.9 1.7 1.1 3.1 n.a.
Apollo Hospitals Enterprise APHS IN 1,235.60 139 173,538 22.770 25.866 32.147 39.531 54.3 47.8 38.4 31.3 5.8 6.2 11.1 23.6
Average
THAILAND****
56.8 47.8 71.2 33.6 3.8 3.7 7.1 23.6
Bangkok Dusit Med Service BDMS TB 20.10 15,491 309,819 0.480 0.554 0.653 0.809 41.9 36.3 30.8 24.8 6.6 8.7 16.9 20.8
Bangkok Chain Hospital Pcl BCH TB
Bumrungrad Hospital Pub BH TB
Average
MALAYSIA******
IHH Healthcare Bhd
KPJ Healthcare Berhad
Average
AUTRALIA*******
Pulse Health Ltd
Healthscope Ltd
PHG AU
Ramsay Health Care Ltd RHC AU
HSO AU
7.75
183.00
SINGAPORE*****
Raffles Medical Group Ltd RFMD SP 4.04
Average
0.53
63.74
2.83
Average
2,494
729
567
19,327 0.210
132,610 3.750
2,314
Average
0.121
48,961
0.007
0.246
4.354
0.132
0.022
0.304
5.049
0.149
0.033
0.363
5.393
0.177
0.039
36.9
48.8
42.5
33.4
72.6
31.5
42.0
36.6
30.6
24.1
25.5
36.2
30.8
27.1
16.1
21.3 4.7 5.2 12.9
33.9 11.2 15.8 27.8
26.7 7.5 9.9 19.2
22.8 4.1 10.6 13.0
47.4 41.1 35.6 30.9 3.0 3.6 8.0
13.6 1.6 2.1 3.2
1,732 4,885 -0.027 0.097 0.107 0.123 n.a. 29.2 26.4 23.0 2.1 0.5 1.2
58.4 28.4 23.3 20.2 4.1 2.8 8.9
17.9
15.8
33.4 30.6 27.1 22.8 4.1 10.6 13.0 15.8
0.092 0.117 0.142 0.171 64.7 51.1 42.1 35.0 2.5 2.7 4.0
4,403 0.136 0.146 0.158 30.2 31.2 29.0 26.8 3.4 4.5 11.9
21.5
11.3
20.9
7.8
14.3
164 85 33.1
202 12,816 1.441 1.995 2.337 2.648 44.2 31.9 27.3 24.1 8.5 5.8 22.3 15.2
12.6
20.3
55.2 45.0 36.4 27.4 6.4 7.1 12.6 24.6
0.4
1.4
0.9
0.5
1.8
2.1
2.0
3.7
2.9
1.5
1.6
1.7
1.7
3.2
2.0 n.a.
1.6
1.6
1.5
1.2
* All per share data in HK$ ** All per share data in US$ *** All per share data in INR **** All per share data in THB
***** All per share data in SGD ****** All per share data in MYR ******* All per share data in AUD
Source: Bloomberg, UOB Kay Hian
12

H O N G K O N G
M o n e y T a l k
SHARE PRICE CATALYST

M&A projects should boost earnings growth.

Business expansion projects in managed-care operations, specialty services, and the medical beauty business, etc.
We highlight the following risks associated with the company:

Integration of the newly-acquired managed-care, beauty salon, and hospital business.
Town Health is new to managing acquired businesses. As such, the company may not be well-versed in managing risks related to business integration and the stability of a new management team.

Cooperation with China Life . China Life has sent a management team to participate in board meetings and to take on decision making. In addition, Town Health hopes to leverage on China Life to acquire hospitals in China and attract clients from China Life's client base. Thus, development of the company will heavily depend on the cooperation with China Life.

Property investment. As of the end-14, Town Health held HK$285.1m worth of investment properties.

Security investment. The company has invested in related and non-related equities which have resulted in considerable fluctuation in earnings. By end-14, Town Health had
HK$278.0m for trading investments and HK$42.6m available-for-sale-investments, or
11.4% of total assets as of Dec-14.

Future projects and business expansion. The company is also planning on launching its dental business in China. We think that there are risks involved when it comes to the launch of a new business.

Policies. The hospitals and clinics under Town Health's JV relies heavily on the sales of pharmaceutical products. Thus, any negative policy affecting private medical institutions to profit from pharmaceutical product sales could have a negative impact on the group's medical services business.

Market concerns about the company's corporate governance. There are market rumors regarding corporate governance about the company. It will take time for the company to build its reputation.
F r i d a y , 1 5 M a y 2 0 1 5 w w w . u t r a d e . c o m . h k 13

M o n e y T a l k
FIGURE 14: PROFIT & LOSS
Year to 31 Dec (HK$m)
Revenue, net
Operating expenses
EBIT
Associate contributions
Net interest income/(expense)
Pre-tax profit
Tax
Minorities
Net profit(rep./act.)
EBITDA
Per share data (Fen)
EPS - diluted
Reported EPS - diluted
Book value per shares (BVPS)
Dividend per share (DPS)
Source: Town Health, UOB Kay Hian
FIGURE 15: BALANCE SHEET
Year to 31 Dec (HK$m)
Cash/Near cash equiv.
Accounts receivable/debtors
Stocks
Other current assets
Current assets
Fixed assets
Investments
Other financial assets
Intangible assets
Other non-current tangible assets
Total non-current assets
Total assets
Accounts payable/creditors
Short-term debt/borrowings
Other current liabilities
Current liabilities
Deferred tax liability
Other non-current liabilities
Total non-current liabilities
Total liabilities
Minority interest - accumulated
Shareholders' equity
Liabilities and shareholders' funds
Source: Town Health, UOB Kay Hian w w w . u t r a d e . c o m . h k
H O N G K O N G
2013
(30)
105
12
2.3
2.3
26.4
1.1
355
(380)
(26)
160
4
138
(4)
2014
1.8
1.8
45.6
4
84
13
0.3
495
(532)
(38)
44
12
18
62
F r i d a y , 1 5 M a y 2 0 1 5
2015F 2016F
1,189 1,538
(1,149) (1,388)
40 149
70 83
12 12
122 245
(20) (40)
5 9
107 214
141 264
1.4 2.8
1.4 2.8
54.3 56.3
0.4 0.8
2017F
15
334
398
4.3
4.3
59.5
1.3
1,951
(1,680)
271
99
12
382
(63)
2013
201
45
12
904
1,163
620
117
58
15
39
850
2,013
58
519
284
0
3
364
94
516
3
1,209
2,013
2014
1,079
148
16
353
1,596
18
1,229
2,824
125
479
252
44
436
0
13
364
345
63
164
352
13
2,115
2,824
2015F 2016F
2,795 2,903
355 459
30 36
353 353
3,533 3,752
505 519
252 252
44 44
393 350
18 18
1,212 1,182
4,745 4,934
227 275
63 63
164 164
453 502
13 13
0 0
13 13
466 514
340 331
3,939 4,089
4,745 4,934
2017F
3,111
582
46
353
4,093
520
252
44
306
18
1,140
5,233
355
63
164
582
13
0
13
594
316
4,323
5,233
14

M o n e y T a l k
FIGURE 16: CASH FLOW
Year to 31 Dec (HK$m)
Operating cashflows
Pre-tax profit
Tax
Deprec. & amort.
Associates
Working capital changes
Non-cash items
Others
Cash from investing activities
Capex (growth)
Investments
Proceeds from sale of assets
Others
Cash from financing activities
Dividend payments
Issue of shares
Proceeds from borrowings
Loan repayment
Others/interest paid
Net increase/(decrease) in cash
Beginning cash
Changes due to forex impact
End cash
Source: Town Health, UOB Kay Hian
FIGURE 17: KEY METRICS
Year to 31 Dec (%)
Growth
Turnover
EBITDA
Pre-tax profit
Net profit
Net profit (adj.)
EPS
Profitability
EBITDA margin
EBIT margin
Gross margin
Pre-tax margin
Net margin
ROE
ROA
ROIC
RONTA
Leverage
Debt to total capital
Debt to equity
Net debt/(cash) to equity
Current ratio (x)
Source: Town Health, UOB Kay Hian w w w . u t r a d e . c o m . h k
H O N G K O N G
2014
(139)
(178)
(83)
(3)
0
(92)
690
(139)
371
19
(4)
51
(44)
394
95
450
11,504
(11,805)
680
883
201
(5)
1,079
2013
(120)
242
(9)
0
0
251
164
0
(381)
83
(6)
38
(160)
(187)
(29)
4
1,348
(1,194)
7
24
176
1
201
F r i d a y , 1 5 M a y 2 0 1 5
2015F 2016F
72 245
122 245
(20) (40)
101 114
0 0
(119) (62)
0 0
(12) (12)
(65) (65)
(85) (85)
0 0
0 0
20 20
1,710 (72)
(32) (64)
1,749 0
0 0
0 0
(8) (8)
1,717 108
1,079 2,795
0 0
2,795 2,903
2017F
(12)
(65)
(85)
0
0
20
(108)
(100)
380
382
(63)
128
0
(54)
0
208
2,903
0
3,111
0
(8)
0
0
2013 n.a.
3.4
(7.3)
33.9
38.9
29.5
3.7 n.a. n.a. n.a. n.a.
9.0
5.7
(4.1)
(1.2)
19.6
30.1
13.4
2.3
2014
(21.4)
2.7
(7.6)
32.5
3.7
16.9
39.5
11.0
(86.8)
(20.0)
(20.0)
2.5
3.0
5.0
3.5
1.5
3.6
(48.0)
4.5
2015F 2016F
140.4 29.3
958.5 87.1
571.1 100.8
27.2 100.8
27.2 100.8
(23.6) 100.8
11.9 17.2
3.3 9.7
49.1 52.3
10.3 15.9
9.0 13.9
3.5 5.3
2.8 4.4
0.8 2.9
3.7 5.2
1.4 1.4
1.6 1.5
(69.4) (69.5)
7.8 7.5
2017F
56.1
20.4
13.9
51.5
19.6
17.1
26.9
51.1
56.1
56.1
56.1
10.4
8.3
6.8
9.6
1.3
1.5
(70.5
7.0
15

H O N G K O N G
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H O N G K O N G
M o n e y T a l k F r i d a y , 1 5 M a y 2 0 1 5
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H O N G K O N G
M o n e y T a l k F r i d a y , 1 5 M a y 2 0 1 5
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