Aier Eye Hospital:Positioning for stable growth

Key takeaways from dbAccess China healthcare service tour

    Chairman Chen attended the briefing and articulated near/mid/long operationalpriorities. For the near term, Aier is targeting three objectives: 1) the integrationof four acquired ex-China assets; 2) the opening of 200facilities by YE17vs. 180now; and 3) meeting the RMB100m sales target for 15-17facilities that openedin the 2014/2015period in provincial capitals. For expansion in prefecture-levelcities, management cautioned that a reasonable length of time is required to allowa meaningful revenue ramp-up as establishing an RIDS takes time.

    More growth drivers than expected; old pony with new tricks

    Chairman Chen anticipates 30% growth in the next 5-10years, driven by M&Aand organic growth. The company sees substantial growth opportunities ahead,including prefecture/county level growth in the mid/long term, and growth inmature/sub-mature hospitals with mid-teen/more than 20% growth respectivelyin the mid term. For example, the oldest flagship hospital, Changsha Aier Hospital,has a target of RMB300m in 2017, vs. RMB233m / RMB212m in 2016/2015,respectively. The growth acceleration was mainly driven by increased investmentin equipment and personnel. Management also indicated that Aier is largerthan the top 2-9competitors combined, while capital, talent and its first-moveradvantage remain key to its competitive edge.

    Key statistics review for 1Q17and 2016

    For cataract surgery, we expect growth to pick up in 2Q17from a low base in2Q16as the company was affected by the Putian incident. As a reminder, revenuegrowth in 1Q17, 4Q16, 3Q16, and 2Q16was 26%/33%/3%/10% respectively. Weestimate that organic growth for 1Q17would be 14% excluding new hospitals.Additionally, volume/ASP growth in 2016was 14%/8% vs. 49%/-6% in 2015, asper our estimates. For excimer surgery, volume/ASP growth was 20%/13% in2016vs. 18%/11% in 2015. The ASP growth was ascribed to service mix changetowards high-end procedures. On volume, the growth was driven by VFLS and ICLwith 100% and 50% growth respectively. We highlight VFLS and ICL accountedfor 45%/13% of sales within excimer surgery in 2016vs. 29%/11% in 2015.

    Maintaining price target of RMB28.7; risks

    Our TP is based on 25x EV/EBITDA on 2018EBITDA, in line with the approachwe use for hospital companies. We believe 25x is justified as its Asia peers aretrading at 18x with 16% growth in 2019(vs. the 29% we model for Aier). Key risksinclude delays in geographical expansion and slower ASP/volume growth.