Aier Eye Hospital:Kicking off the asset injection with an accretive deal

Updates on private placement; an accretive asset injection deal

    We highlight the following updates for Aier: 1) the private placement is likely toraise RMB2.4bn while Chairman Chen would purchase at least 20% of theplacement; 2) RMB1.2bn would be spent on the construction of newheadquarters in Changsha, scheduled to be completed in 2020. With increasedcapacity, management expects the Changsha flagship hospital to achieveRMB700-800m sales vs. RMB200m at present; 3) the company wouldpurchase a 55-90% stake in nine hospitals at RMB580m from its M&A funds,suggesting an accretive acquisition as the deal is valued at 13x 2017 profitwhile the company is trading at 43x 2017 EPS, per DBe.

    An accretive deal of injecting nine hospitals from M&A funds

    The company aims to acquire a majority stake in nine hospitals from its offbalancesheet investment funds. These nine hospitals generated total sales ofRMB176m/138m and profit of RMB24.5m/-10.6m in 7m16/2015 respectively.

    Management indicated that growth for these hospitals is likely to be 40-50%in the next few years. As Aier would purchase a 55-90% stake in these ninehospitals at RMB580m, it suggests a valuation of 19x/13x on annualized profitin 2016/2017, assuming 45% growth in 2017. The represents an accretive dealas Aier is trading at 54x/43x EPS, per DBe in 2016/2017 respectively.

    Construction of Changsha headquarters; growth recovery on track

    Aier would spend RMB1.2bn on building new headquarters in Changsha, likelyto be completed in 2020. The headquarters would include a new hospital withincreased capacity. Management indicated that the new Changsha facilitycould reach RMB700-800m sales vs. c.RMB200m at present, driven by largercapacity and deeper penetration for cataract surgery. On the growth outlook,management indicated that sales growth in 4Q16 has recovered to over 30%,while they would target 30% growth in the next five years.

    Increased target price to RMB42.0 from RMB39.0; risks

    Our TP is based on 31 x 2017E EV/EBITDA vs. the 30x we used previously. Webelieve the timely injection now, ahead of our previous expectation of 1H17, islikely to alleviate the concerns of temporary growth deceleration due to ahiccup in the cataract business. We believe 31x is justified, as its Asian-listedpeers are trading at 20x 2017E EV/EBITDA, with 14% EBITDA growth in 2017E(vs. 31% for Aier). Key risks: expansion delays; slower ASP/volume growth.