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TOWN HEALTH INTERNATIONAL MEDICAL GROUP
(3886 HK)
BUY
(Initiate Coverage)
Growing Into An Integrated Medical Service Provider
 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.
Share Price
WHAT’S NEW
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.
 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.
HK$2.39
Target Price
HK$2.76
Upside
+15.5%
COMPANY DESCRIPTION
GICS sector
Health Care
Bloomberg ticker:
3886 HK
Shares issued (m):
5,601.2
Market cap (HK$m):
13,386.9
Market cap (US$m):
1,726.7
3-mth avg daily t'over (US$m):
4.7
Price Performance (%)
52-week high/low
HK$3.06/HK$1.03
1mth
3mth
6mth
1yr
(8.8)
(14.6)
81.1
137.1
YTD
95.9
Major Shareholders
%
China Life Group
Broad Idea
Fubon Financial
Bonjour
23
18.28
8.36
4.71
FY15 NAV/Share (HK$)
FY15 Net Cash/Share (HK$)
0.54
0.38
PRICE CHART
TOWN HEALTH INTERNATIONAL ME
(lcy)
(%)
Town Health International Me/HSI Index
3.50
290
3.00
250
2.50
210
KEY FINANCIALS
Year to 31 Dec (HK$m)
Net turnover
EBITDA
Operating profit
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 ()
2.00
170
2013
2014
2015F
2016F
2017F
1.50
354.6
12.0
(25.8)
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
(37.6)
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
39.5
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
149.3
213.9
213.9
2.8
86.7
4.2
41.7
0.3
13.9
(69.5)
n.a.
5.3
-
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
-
1.00
Source: Lesso, Bloomberg, UOB Kay Hian
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130
90
0.50
150
50
Volume (m)
100
50
0
May 14
Jul 14
Sep 14
Nov 14
Jan 15
Mar 15
May 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
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Contents
An Integrated Medical Services Provider ............................................................................... 3
Business Overview ................................................................................................................... 3
- Clinic Chain Business ............................................................................................................... 3
- Managed-care Operator ........................................................................................................... 4
- 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
Valuation .................................................................................................................................. 12
Risks ......................................................................................................................................... 13
Financial Statements .............................................................................................................. 14
This report uses the closing prices of 13 May 2015
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An Integrated Medical Services Provider
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.
Business Overview
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
Source: Town Health, UOB Kay Hian
FIGURE 2: NUMBER OF CLINICS OPERATED BY TOWN HEALTH (31 DEC 2014)
General Practice
Specialty Practice
Health Check
Dental
Labs
Total
2010
2011
2012
2013
2014
65
14
16
14
2
111
60
17
13
14
2
106
56
17
11
12
2
98
51
20
0
11
1
83
54
30
9
11
3
107
Source: Town Health, UOB Kay Hian
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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
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.
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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
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
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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$1186.15.
Closing unprofitable salons. The beauty care business was hampered by overexpansion
and as a result, Bonjour Beauty closed unprofitable beauty salons in 2012-14. Management
has confirmed that almost all unprofitable salons have been closed and that it will focus on
developing high-margin businesses from 2015.
FIGURE 7: BONJOUR BEAUTY'S NUMBER OF CLIENT VISITS AND AVEREAGE SPENDING
PER CLIENT
Total no. of client visits
2012
2013
2014
291,646
319,467
297,478
Average spending per client (HK$)
1,098.12
992.89
1,186.15
Source: Town Health, UOB Kay Hian
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
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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
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 MayJun 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 201516.
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.
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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.
Shareholding Structure
Source: Town Health, UOB Kay Hian
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Management Team
Name
Position
Description
Choi Ka Yee, Crystal
Chairperson & Executive Director
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.
Choi Chee Ming, GBS, JP
Vice-Chairman
Director
Non-Executive
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.
Cho Kwai Chee
Founder, Executive Vice Chairman &
Executive Director
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
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.
Ip Chun Heng, Wilson
Executive Director
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
Executive Director
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.
Chan Wing Lok, Brian
Executive Director & Medical Director
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.
Wong Seung Ming
Executive Director & CFO
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
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Financials
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
(%)
160
1,951
2,000
120
1,538
1,500
100
1,189
80
1,000
500
339
342
355
140
60
495
40
20
0
0
2011
2012
2013
2014
2015F
Total revenue
2016F
2017F
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
50
40
33.6
34.7
33.9
32.5
2011
2012
2013
2014
52.3
51.5
2016F
2017F
30
20
10
0
2015F
Source: Town Health, UOB Kay Hian
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.
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FIGURE 12: NET PROFIT OF TOWN HEALTH
(HK$m)
400
300
200
100
0
-100
-200
-300
-400
-500
333.9
64.2
49.6
84.6
106.5
2014
2015F
213.9
(435.0)
2011
2012
2013
Net income attributable to ordinary shareholders
2016F
(%)
200
100
0
-100
-200
-300
-400
-500
-600
-700
-800
-900
2017F
yoy (RHS)
Source: Town Health, UOB Kay Hian
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.
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Valuation
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
Name
HONG KONG LISTED
Phoenix Healthcare Group
Shanghai Fosun
Pharmaceutical
Hua Han BioPharmaceutical
Town Health International
Average
DOMESTIC LISTED
Aier Eye Hospital Group
Guizhou Xinbang
Pharmaceutical
Topchoice Medical
Investment
Jinling Pharmaceutical
Guizhou Yibai
Pharmaceutic
Hengkang Medical Group
CITIC Securities Co
China Resources Sanjiu
Kangmei Pharmaceutical
Average
US
Concord Medical-Spon ADR
HCA Holdings Inc
Average
INDIA
Fortis Healthcare Ltd
Apollo Hospitals Enterprise
Average
Stock
code
Price
Shares
13 May 15 O/S
(lcy)
Market
Cap
(lcy)
----------------------EPS-------------------2014 2015F 2016F 2017F
(Rmb) (Rmb) (Rmb) (Rmb)
-----------------------PE--------------------2014 2015F 2016F 2017F
(x)
(x)
(x)
(x)
PRB
2015F
(%)
ROA
2014
(%)
ROE
2014
(%)
EPS
CAGR
15F-17F
(%)
PEG
(x)
1515 HK
14.52
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
0.8
2196 HK
29.50
403
78,514
0.920
1.069
1.265
1.528
25.0
21.5
18.2
15.1
3.1
6.8
13.5
19.6
0.9
587 HK*
3886 HK*
1.70
2.39
7,372
5,601
12,606
13,107
0.063
0.018
0.097
0.014
0.120
0.028
0.150
0.043
26.8
130.6
55.9
17.5
174.1
61.7
14.2
86.7
36.6
11.3
55.6
25.2
1.8
4.4
3.6
6.7
3.5
7.0
7.9
5.0
10.1
24.4
77.0
38.6
0.6
1.1
0.9
300015 CH
42.58
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
002390 CH
39.40
500
19,518
0.320
0.438
0.650
0.875
123.1
90.0
60.6
45.0
8.0
3.7
7.8
41.3
1.5
600763 CH
000919 CH
91.56
19.83
160
504
14,267
9,818
0.690
0.391
0.916
0.510
1.217
0.593
1.624
0.660
132.7
50.7
100.0
38.9
75.2
33.4
56.4
30.0
22.7
4.1
15.3
6.2
19.2
9.2
33.2
13.8
2.3
2.4
600594 CH
002219 CH
600030 CH
000999 CH
600518 CH
57.39
41.60
33.37
33.09
37.83
396
616
9,839
979
2,199
23,200
25,960
355,535
31,423
81,594
1.217
0.443
1.030
1.060
1.040
1.650
0.600
1.425
1.243
1.332
1.994
0.830
1.748
1.385
1.694
2.110
1.030
2.072
1.552
2.097
47.2
94.0
32.4
31.2
36.4
70.8
34.8
69.3
23.4
26.6
28.4
53.2
28.8
50.1
19.1
23.9
22.3
40.6
27.2
40.4
16.1
21.3
18.0
32.7
6.7
24.2
3.5
4.4
5.6
10.2
10.2
10.5
3.1
9.8
9.0
9.1
14.8
24.8
14.4
15.4
18.5
15.7
13.1
31.0
20.6
11.7
25.5
24.5
2.2
1.6
0.9
2.0
0.9
1.7
CCM US
HCA US
6.82
77.73
45
414
307
32,205
0.450
4.300
0.240
5.232
0.360
5.723
0.520
6.308
15.2
18.1
16.6
28.4
14.9
21.6
18.9
13.6
16.3
13.1
12.3
12.7
1.1
n.a.
1.1
3.5
6.9
5.2
6.3
n.a.
6.3
47.2
9.8
28.5
0.4
1.4
0.9
FORH IN
APHS IN
160.45
1,235.60
463
139
74,316 2.700
173,538 22.770
-1.922
25.866
1.542
32.147
4.472
39.531
59.4
54.3
56.8
n.a.
47.8
47.8
104.1
38.4
71.2
35.9
31.3
33.6
1.7
5.8
3.8
1.1
6.2
3.7
3.1
11.1
7.1
n.a.
23.6
23.6
n.a.
1.6
1.6
0.480
0.210
3.750
0.554
0.246
4.354
0.653
0.304
5.049
0.809
0.363
5.393
41.9
36.9
48.8
42.5
36.3
31.5
42.0
36.6
30.8
25.5
36.2
30.8
24.8
21.3
33.9
26.7
6.6
4.7
11.2
7.5
8.7
5.2
15.8
9.9
16.9
12.9
27.8
19.2
20.8
21.5
11.3
17.9
1.5
1.2
3.2
2.0
THAILAND****
Bangkok Dusit Med Service BDMS TB
Bangkok Chain Hospital Pcl BCH TB
Bumrungrad Hospital Pub BH TB
Average
20.10
7.75
183.00
15,491 309,819
2,494 19,327
729
132,610
SINGAPORE*****
Raffles Medical Group Ltd
Average
RFMD SP
4.04
567
2,314
0.121
0.132
0.149
0.177
33.4
33.4
30.6
30.6
27.1
27.1
22.8
22.8
4.1
4.1
10.6
10.6
13.0
13.0
15.8
15.8
1.7
1.7
MALAYSIA******
IHH Healthcare Bhd
KPJ Healthcare Berhad
Average
IHH MK
KPJ MK
5.98
4.24
8,215
1,036
48,961
4,403
0.092
0.141
0.117
0.136
0.142
0.146
0.171
0.158
64.7
30.2
47.4
51.1
31.2
41.1
42.1
29.0
35.6
35.0
26.8
30.9
2.5
3.4
3.0
2.7
4.5
3.6
4.0
11.9
8.0
20.9
7.8
14.3
2.0
3.7
2.9
AUTRALIA*******
Pulse Health Ltd
Ramsay Health Care Ltd
Healthscope Ltd
Average
PHG AU
RHC AU
HSO AU
0.53
63.74
2.83
164
202
1,732
85
12,816
4,885
0.007
1.441
-0.027
0.022
1.995
0.097
0.033
2.337
0.107
0.039
2.648
0.123
72.6
44.2
n.a.
58.4
24.1
31.9
29.2
28.4
16.1
27.3
26.4
23.3
13.6
24.1
23.0
20.2
1.6
8.5
2.1
4.1
2.1
5.8
0.5
2.8
3.2
22.3
1.2
8.9
33.1
15.2
12.6
20.3
0.5
1.8
2.1
1.5
55.2
45.0
36.4
27.4
6.4
7.1
12.6
24.6
1.6
Average
* All per share data in HK$ ** All per share data in US$ *** All per share data in INR
***** All per share data in SGD ****** All per share data in MYR ******* All per share data in AUD
Source: Bloomberg, UOB Kay Hian
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**** All per share data in THB
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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.
Risks
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$42.6m available-for-sale-investments, or
11.4% of total assets as of Dec-14.

Future projects and business expansion. The company is also planning on launching
its dental business in China. We think that there are risks involved when it comes to the
launch of a new business.

Policies. The hospitals and clinics under Town Health's JV relies heavily on the sales of
pharmaceutical products. Thus, any negative policy affecting private medical institutions
to profit from pharmaceutical product sales could have a negative impact on the group's
medical services business.

Market concerns about the company's corporate governance. There are market
rumors regarding corporate governance about the company. It will take time for the
company to build its reputation.
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FIGURE 14: PROFIT & LOSS
Year to 31 Dec (HK$m)
2013
2014
2015F
2016F
2017F
Revenue, net
Operating expenses
EBIT
Associate contributions
Net interest income/(expense)
Pre-tax profit
Tax
Minorities
Net profit(rep./act.)
EBITDA
355
(380)
(26)
160
4
138
(4)
(30)
105
12
495
(532)
(38)
44
12
18
62
4
84
13
1,189
(1,149)
40
70
12
122
(20)
5
107
141
1,538
(1,388)
149
83
12
245
(40)
9
214
264
1,951
(1,680)
271
99
12
382
(63)
15
334
398
Per share data (Fen)
EPS - diluted
Reported EPS - diluted
Book value per shares (BVPS)
Dividend per share (DPS)
2.3
2.3
26.4
1.1
1.8
1.8
45.6
0.3
1.4
1.4
54.3
0.4
2.8
2.8
56.3
0.8
4.3
4.3
59.5
1.3
Source: Town Health, UOB Kay Hian
FIGURE 15: BALANCE SHEET
Year to 31 Dec (HK$m)
2013
2014
2015F
2016F
2017F
Cash/Near cash equiv.
Accounts receivable/debtors
Stocks
Other current assets
Current assets
Fixed assets
Investments
Other financial assets
Intangible assets
Other non-current tangible assets
Total non-current assets
Total assets
Accounts payable/creditors
Short-term debt/borrowings
Other current liabilities
Current liabilities
Deferred tax liability
Other non-current liabilities
Total non-current liabilities
Total liabilities
Minority interest - accumulated
Shareholders' equity
Liabilities and shareholders' funds
201
45
12
904
1,163
620
117
58
15
39
850
2,013
58
364
94
516
3
0
3
519
284
1,209
2,013
1,079
148
16
353
1,596
479
252
44
436
18
1,229
2,824
125
63
164
352
13
0
13
364
345
2,115
2,824
2,795
355
30
353
3,533
505
252
44
393
18
1,212
4,745
227
63
164
453
13
0
13
466
340
3,939
4,745
2,903
459
36
353
3,752
519
252
44
350
18
1,182
4,934
275
63
164
502
13
0
13
514
331
4,089
4,934
3,111
582
46
353
4,093
520
252
44
306
18
1,140
5,233
355
63
164
582
13
0
13
594
316
4,323
5,233
Source: Town Health, UOB Kay Hian
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FIGURE 16: CASH FLOW
Year to 31 Dec (HK$m)
2013
2014
2015F
2016F
2017F
(381)
83
(6)
38
(160)
(187)
(29)
(120)
242
(9)
0
0
251
164
0
4
1,348
(1,194)
7
24
176
1
201
371
19
(4)
51
(44)
394
95
(139)
(178)
(83)
(3)
0
(92)
690
(139)
450
11,504
(11,805)
680
883
201
(5)
1,079
72
122
(20)
101
0
(119)
0
(12)
(65)
(85)
0
0
20
1,710
(32)
1,749
0
0
(8)
1,717
1,079
0
2,795
245
245
(40)
114
0
(62)
0
(12)
(65)
(85)
0
0
20
(72)
(64)
0
0
0
(8)
108
2,795
0
2,903
380
382
(63)
128
0
(54)
0
(12)
(65)
(85)
0
0
20
(108)
(100)
0
0
0
(8)
208
2,903
0
3,111
2013
2014
2015F
2016F
2017F
Growth
Turnover
EBITDA
Pre-tax profit
Net profit
Net profit (adj.)
EPS
3.7
n.a.
n.a.
n.a.
n.a.
n.a.
39.5
11.0
(86.8)
(20.0)
(20.0)
(21.4)
140.4
958.5
571.1
27.2
27.2
(23.6)
29.3
87.1
100.8
100.8
100.8
100.8
26.9
51.1
56.1
56.1
56.1
56.1
Profitability
EBITDA margin
EBIT margin
Gross margin
Pre-tax margin
Net margin
ROE
ROA
ROIC
RONTA
3.4
(7.3)
33.9
38.9
29.5
9.0
5.7
(4.1)
(1.2)
2.7
(7.6)
32.5
3.7
16.9
5.0
3.5
1.5
3.6
11.9
3.3
49.1
10.3
9.0
3.5
2.8
0.8
3.7
17.2
9.7
52.3
15.9
13.9
5.3
4.4
2.9
5.2
20.4
13.9
51.5
19.6
17.1
10.4
8.3
6.8
9.6
Leverage
Debt to total capital
Debt to equity
Net debt/(cash) to equity
Current ratio (x)
19.6
30.1
13.4
2.3
2.5
3.0
(48.0)
4.5
1.4
1.6
(69.4)
7.8
1.4
1.5
(69.5)
7.5
1.3
1.5
(70.5
7.0
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 (%)
Source: Town Health, UOB Kay Hian
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IMPORTANT DISCLOSURES FOR U.S. PERSONS
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