Aier Eye Hospital:Maintaining strong growth momentum

A solid quarter; retaining Buy on strong growth momentum.

    Solid growth achieved for the three major segments Aier reported revenue/core profit of RMB1.2bn/151m in 1Q17, representing YoY growth of 31%/25% respectively. This represents an acceleration when compared with the growth of 26%/19% for revenue/core profit in 2016. We attribute the robust results to the consolidation of nine hospitals from the asset injection deal, while the three major business segments continued to exhibit decent growth. For 2017, we expect the growth momentum to continue, and the consolidation of Clinica Baviera in 4Q17 is likely to add another leg of growth. We model 35%/29% growth for revenue/core profit in 2017.

    Solid growth achieved for the three major segments.

    Excimer surgery, cataract surgery, and optometry achieved YoY growth of 36%, 26%, and 32% in 1Q17, compared with 36%, 22%, and 37% in 2016, respectively. The company attributed the robust growth to strong demand growth in China and the solid brand image of Aier, as well as improving product mix towards high-end services. On the acquisition front, the company completed the deal for AW Healthcare Management in the US in March 2017. We believe the acquisition of Clinica Baviera is on track and we expect the consolidation of financials in 4Q17.

    Margin eroded slightly in 1Q17.

    Gross margin and operating margin registered 44.1% and 17.3%, respectively, in 1Q17, compared with 45.5% and 18.0% in 1Q16. We attribute the slight decline to the consolidation of nine hospitals acquired from the M&A fund of the company. We continue to expect operating margin improvement for Aier as the new hospitals ramp up.

    Maintaining price target of RMB43.0; risks.

    Our valuation is based on EV/EBITDA multiple, in line with the approach we use for hospital companies in our coverage. Our TP is based on 25x EV/EBITDA on 2018 EBITDA, vs. the 24x we used previously due to recent sector re-rating. We believe 25x is justified as its Asia-listed peers are trading at 18x with a 7% CAGR from 2017 to 2019 (vs. the 36% we model for Aier). Key risks include delays in geographical expansion and slower ASP/volume growth.