Analysts: Phoenix Healthcare Group (1515 HK) 1 Logo
Analysts:
Phoenix Healthcare Group (1515 HK)
1
Logo
Company Overview
Risks
Industry Assessment
Valuation
Summary
Investment Thesis
Sources:
Investment Thesis
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Investment Thesis Phoenix Healthcare Group (PHG) offers exposure to the expanding market for
non-state managed healthcare services in China, amid the current environment of deregulation.
Healthcare management companies can skim the profitable aspects of the healthcare sector while leaving less profitable operating segments and less desirable locations for state-owned enterprises (SOE).
As a first mover, Phoenix has been able to secure a larger market share and reputation than competitors. This, along with an asset-light business model and value chain integration has allowed the company to achieve high profit margins and strong earnings growth with no LT debt• Increasing numbers of hospitals under management due to strong
government relationships will grow revenue with sustainable, high margins• The PHG business model of assuming hospital management, bringing in its
own management, IT, and supply groups, realigning incentives, and reaping increased profit levels, all with minimal investment, makes for a sustainable and scalable model
Watchlist Recommendation: Add to the Watchlist Valuation Recommendation (USD): Hold Monitor & update quarterly
• Buy Price: $7.95 • Sell Price: $11.35• Current Price: $15.32
Company Overview
Sources:
Background and Context
Business Model Analysis
SCT Analysis
Background and Context
Annual Report 2013, S&:P Capital IQ
Company Overview
• PHG is the largest IOT (invest-operate-transfer) private hospital group in China, and is likely to continue to grow at an outsized pace due to its demonstrated track record and government relationships that support winning future management contracts.
• PHG is contracted to manage state-owned hospitals, runs a drug/medical device supply chain management business, and has direct ownership of one hospital (Jian Gong Hospital)
• PHG operates in 3 core businesses: General Hospital Service (44.8% FY14 Revenues), Supply Chain (50.2%), and Hospital Management Service (5.0%)
• Drivers for revenue include hospital management fees, supply chain revenue, and Jian Gong Hospital revenue
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Company Overview
Sources:
Background and Context
Business Model Analysis
SCT Analysis
Business Model Analysis
Business Model Analysis
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Phoenix Healthcare Group Co. Ltd. owns and operates hospitals and clinics. Their only client is the Chinese government. The company
has three sources of revenue streams:
The deepening of healthcare system reform continues in China. As a pioneer of the IOT model, (or ROT model, i.e. Restructure-Operate-Transfer) for public hospital reform, the Group will have ample development opportunities to win new hospital contracts under the support of new reform policies. Its leading share and prior demonstrated track record strongly positions Phoenix to be the top candidate for these new contract opportunities.
Hospital Management Service (RV% 44.8)
• Consistent recurring revenue-hospital contract that last 20 years
• Asset light-high revenue business model
General Hospital Service (RV% 5.0)
• Works on hospitals directly owned by govt
• Takes failing hospitals, makes infrastructure investment and turns them around
Supply Chain Business (RV% 50.2)
• Bargaining power due to large hospital network
• Power over choosing pharmaceuticals/suppliers allows higher margins
Company Overview
Sources:
Background and Context
Business Model Analysis
SCT AnalysisSCT Analysis
Single Company Tool
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Name: Phoenix Healthcare Group Co in HKD currencySingle Company Tool Averages
FY End: 12/14 10 Year 5 Year 3 Year 1 Year T12 GraphsMultiples
PE * 40.89 43.95 PB * 5.87 6.31 EV/S * 7.11 7.11 EV/EBITDA * 29.11 29.11 Dividend Yield 0.0% 0.0% 0.4% 1.2% 0.0%OFCF/Equity * 0.98 0.98 0.97 0.98 (0.13)
Growth and Margins
Sales Growth 49.7% 35.6% 35.6%Gross Profit Margin 24.1% 24.3% 24.7% 24.7%Operating Margin 19.4% 20.8% 21.2% 21.2%Net Profit Margin 12.6% 14.2% 19.1% 19.1%
DuPont Analysis
NI/S (Profitability) 12.6% 14.2% 19.1% 19.1%S/TA (Efficiency) 55.3% 58.3% 60.4% 60.4%TA/OE (Leverage) 1.55 1.39 1.16 1.16 ROE 11.1% 11.9% 13.4% 13.4%Altman Z 8.12 12.52 22.53 24.09 ROIC ** 27.1% 25.3% 19.1% 39.4%ROIC *** 4.1% 8.2% 10.7% 10.4% 10.4%ROA 13.6% 12.8% 12.3% 12.8%
OtherMarket Capitalization 2,190 4,381 7,301 11,923 12,823
CapEx % of Net Income 34.0% 19.5% 7.2% 7.2%Net-net (CA-TL)/MC 10.6% 9.9%
Returns versus the HSI Index1515 HK Avg. Ann. Returns 15.9% 7.6%HSI Avg. Ann. Returns 13.2% 6.1% 13.1% 5.3% 18.1%
Difference 10.5% -10.6%* Harmonic mean calculations. ^ Period calculations only (not averages)
** ROIC = EBIT/(Average of CA-CL+NPP&E) T12 = Trailing 12 Months
*** Bloomberg ROIC = Trailing 12M Earnings/(Average Total Invested Capital)
“Asset-light” business model
Company generates very high returns
High growth opportunity
Strong margins increasing with transition to IOT model
Industry Assessment
Sources:
Relative Performance
SWOT Analysis
Competitor Analysis
CompetitorAnalysis
Bloomberg
Industry Analysis
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3 Year Industry Tool 1515 HK 2196 HK 3886 HK 000919 CH 300015 CH BDMS TB RFMD SP HCA US Average Rank
MultiplesPHOENIXH
EALTHFOSUN
PHARMA-HTOWN
HEALTHJINLING
PHARM-AAIER EYE
HSPTL-ABANGKOK DUSIT MD
RAFFLES MEDICAL
HCA HOLDINGS
INC
PE- 50.70 19.22 42.00 28.89 50.70 28.00 24.82 11.95 32.03 7 / 8PB- 5.40 2.37 0.92 2.10 6.79 4.92 3.79 3.76 6 / 7EV/S- 5.04 4.39 6.39 1.75 5.97 4.50 4.70 1.48 4.28 6 / 8EV/EBITDA- 20.92 31.09 63.19 14.38 24.40 20.98 20.57 7.81 25.42 4 / 8Dividend Yield- 0.40 1.57 0.71 1.72 0.54 0.53 1.58 7.18 1.78 8 / 8
OFCF/Equity- -1.0% 1.0% -2.1% -2.4% 7.1% 3.2% 18.4% -40.8% -2.1% 4 / 8Operations
Sales Growth Rates- 10.6% 7.7% 4.3% 2.8% 7.5% 4.2% 3.5% 2.5% 5.4% 1 / 8GPM- 24.3% 43.7% 33.7% 23.6% 45.2% 35.2% 0.0% 0.0% 25.7% 5 / 8OM- 20.8% 9.7% -17.7% 8.6% 16.3% 14.9% 20.3% 13.7% 10.8% 1 / 8NPM- 14.2% 18.4% -32.1% 6.5% 11.8% 14.3% 20.4% 4.8% 7.3% 4 / 8
DuPontNI/S (Profitability)- 14.2% 18.4% -32.1% 6.5% 11.8% 14.3% 20.4% 4.8% 7.3% 4 / 8S/TA (Effi ciency)- 0.58 0.32 0.19 0.75 0.90 0.66 0.60 1.18 0.65 6 / 8
TA/OE (Leverage)- 1.39 1.73 1.25 1.30 1.22 1.83 1.23 (4.11) 0.73 6 / 8ROE- 11.9% 10.0% -8.6% 6.3% 13.0% 17.0% 15.2% -23.5% 5.2% 4 / 8
Altman Z- 12.52 2.88 5.52 5.78 21.30 4.81 11.89 1.52 8.28 2 / 8ROIC- 25.3% 13.6% -5.5% 9.1% 26.6% 21.3% 17.5% 30.4% 17.3% 3 / 8ROA- 12.8% 3.4% -3.5% 6.7% 15.7% 10.5% 13.1% 16.6% 9.4% 4 / 8
Industry Assessment
Sources:
Relative Performance
SWOT Analysis
Competitor Analysis
Relative Performance
Bloomberg
Relative Performance Analysis
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Industry Assessment
Sources:
Relative Performance
SWOT Analysis
Competitor Analysis
SWOT Analysis
SWOT Analysis
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SStrengths
WWeaknesses
OOpportunities
TThreats
Market & Competitor Structure
Buyer Behavior Company Moats Company Business Model
• Current high level of government influence creates profitable opportunities
• SOE’s aren’t concerned about being profitable, which allows PHG to skim profits without concern
• Company operating model would not be difficult to recreate in the long-term
• Low capital intensity and high margins provide a headstart for PHG
• Network effect provides safety
• As the company transitions more to IOT model, they will diversify their own risk
• Network effect will cause the company to become more profitable over time
• Recurring revenue from IOT segment
• Lack of advantages from network effect will decrease margins and create an effective barrier to new entrants
• Adverse change in government policy would be harmful
• Change in reg-ulation could alter competitive state
• Changes in government policy could affect profits
• Competition for contracts could decrease revenue
• Securing more IOT contracts in the Beijing area would allow the company greater operating efficiencies
Risks
Sources:
Risks
Risk Type Probability of Occurrence
Level of Impact
Ability to mitigate
Company Specific
Operating Inefficiencies M H H
Industry Level
Wage Growth in Healthcare Industry M M LTightening of Government Policy L H L
Business Cycle
Specific
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Risk Analysis and Mitigants
Valuation
Sources:
RC Drivers
Valuation Models
Earnings Estimates Analysis
RC Drivers
10K, Press Releases, Bloomberg
Revenue and Cost Drivers
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In Millions of CNY except Per ShareFY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 201912 Months Ending 2010-12-31 2011-12-31 2012-12-31 2013-12-31 2014-12-31 Forecast Forecast Forecast Forecast Forecast
HospitalsGeneral Hospitals 11 11 11 11 11 11Specialty Hospitals 2 2 2 2 2 2Community Clinics 28 28 28 28 28 28
Total Visits (000) 1,366 2,256 3,050 3,423 3,935 4,329 4,761 5,237 5,761 6,337 65.2% 35.2% 12.2% 15.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Spending per visit 288 226 249 259 307 337 371 408 449 494 -21.7% 10.1% 4.3% 18.3% 10.0% 10.0% 10.0% 10.0% 10.0%
Beds in operation 2891 2897 3194 3323 3390 3526 3667 3813 3966 41240.2% 10.3% 4.0% 2.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Beds Occupancy RateRevenue per bed
Revenue (mns) 394.1 509.5 758.0 887.4 1,206.3 1,459.6 1,766.1 2,137.0 2,585.7 3,128.7 Supply Chain Business 89.3 166.1 314.6 376.2 605.9 General Hospital Service 288.4 324.0 403.1 470.4 540.2 Hospital Management Service 16.3 19.4 40.3 40.8 60.1
Intersegment Revenue 61.8 98.3 116.4 103.5 175.9 193.5 212.8 234.1 257.5 283.2 Supply Chain Business 61.8 98.3 116.4 103.5 175.9
59.1% 18.3% -11.0% 69.9%
Revenue Including Intersegment Revenue455.9 607.8 874.4 990.9 1,382.1 1,653.0 1,978.9 2,371.1 2,843.2 3,412.0 33% 44% 13% 39% 20% 20% 20% 20% 20%
Supply Chain Business 151.1 264.4 431.0 479.7 781.8 General Hospital Service 288.4 324.0 403.1 470.4 540.2 Hospital Management Service 16.3 19.4 40.3 40.8 60.1
Growth RatesVisits 10% 10% 10% 10% 10%Spending per visit 10% 10% 10% 10% 10%Beds in operation 4% 4% 4% 4% 4%Bed Occupancy Rate
Supply Chain Business 10% 10% 10% 10% 10%
Valuation
Sources:
RC Drivers
Valuation Models
Earnings Estimates Analysis
Earnings Estimates Analysis
Earnings Estimates Analysis
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2016 EEG
2015 EEG
Valuation
Sources:
RC Drivers
Valuation Models
Earnings Estimates Analysis
Valuation Models
Other Charts
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Poor management of Earning estimates
Valuation
Sources:
RC Drivers
Valuation Models
Earnings Estimates Analysis
Valuation Models
Forecasting Assumptions
Dec Dec Dec Dec Dec Dec Geometric/Average2014 A 2015 2016 2017 2018 2019 5Y Hist 10Y Hist
Sales Growth* 35.9% 20.0% 20.0% 20.0% 20.0% 20.0%Gross Margin 27.9% 28.1% 28.1% 28.1% 28.1% 28.1% 28.3% 28.3%EBITDA Margin 24.4% 24.4% 24.4% 24.4% 24.4% 24.4% 23.5% 23.5%Operating (EBIT) Margin 21.2% 21.7% 22.3% 22.8% 23.1% 23.4% 19.4% 19.4%Net Profit Margin 19.1% 19.2% 19.3% 19.4% 19.4% 19.4% 12.6% 12.6%Dividends per Share 0.05 0.10 0.12 0.15 0.18 0.21 Dividend Growth* 0.0% 88.1% 20.5% 20.5% 20.3% 20.1% 0.0% 0.0%Dividend Yield 0.5% 0.5% 0.6% 0.8% 0.9% 1.1% 0.2% 0.2%PE/EPS Growth 0.54 2.70 2.31 1.92 1.62 1.36 EPS Growth* 77.2% 21.2% 20.5% 20.5% 20.3% 20.1%Diluted EPS 0.28 0.34 0.40 0.49 0.59 0.70
BB Analysts Mean 0.31 0.41 0.53Deviation (from Analysts Mean) 0.02 0.00 0.03Consensus Analysts Std. Deviation 0.02 (0.00) -0.04Number of Estimates 6 6 6
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Valuation
Sources:
RC Drivers
Valuation Models
Earnings Estimates Analysis
Valuation Models
Valuation ModelsIV. Summary and Composite Models Differential 50% AnalystI. Intrinsic Value Models: Used Ke: 6.2% Firm Ke: 6.2% Buy Price Δ Current Price Action Sell Price Δ C. Price Weight
1. Dividend Discount Model (PE Terminal): Term. PE: 25.0 $13.68 -28.9% Sell $20.52 6.7% 15%2. Dividend Discount Model (PBV Terminal): Term PBV: 4.40 $13.19 -31.4% Sell $19.79 2.9% 15%3. Free Cash Flow to the Firm (FCFF) WACC: 6.2% $19.20 -0.1% Hold $28.81 49.8% 15%4. Free Cash Flow to Equity (FCFE) Sust. Growth: 3.0% $19.09 -0.7% Hold 28.64 48.9% 15%
II. Acquisition/Breakup Models:
1. Value of Operations plus Cash (Working Capital less debt) $4.51 -76.6% Sell $6.76 -64.8% 10%2. Liquidation Value (last historical year) - 0.0% -
III. Relative Value Models
1. Versus the S&P 500 Buy: 1.75 Sell: 2.25 $9.64 -49.9% Sell $12.40 -35.5% 15%2. Versus the S5HCPS INDEX IndustryBuy: 1.50 Sell: 2.00 10.74$ -44.1% Sell 14.32 -25.5% 15%
IV. Composite Models
1. Average of All Models All Models $12.87 -33.1% Sell $16.40 -14.7%2. Average - Max/Min Min: 4.51 Max: 19.20 13.27 -31.0% Sell 19.13 -0.5%
V. Analysts Weighted Forecasts
1. Weighted by Analysts Forecasts 13.28$ -30.9% Sell $19.35 100%
Current Price 19.23$
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Valuation
Sources:
RC Drivers
Valuation Models
Earnings Estimates Analysis
Valuation Models
Valuation Models
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IV. Summary and Composite Models Differential 50% AnalystI. Intrinsic Value Models: Used Ke: 15.0% Firm Ke: 6.2% Buy Price Δ Current Price Action Sell Price Δ C. Price Weight
1. Dividend Discount Model (PE Terminal): Term. PE: 25.0 $9.23 -52.0% Sell $13.85 -28.0% 15%2. Dividend Discount Model (PBV Terminal): Term PBV: 4.40 $8.91 -53.7% Sell $13.36 -30.5% 15%3. Free Cash Flow to the Firm (FCFF) WACC: 15.0% $5.75 -70.1% Sell $8.63 -55.1% 15%4. Free Cash Flow to Equity (FCFE) Sust. Growth: 3.0% $5.72 -70.2% Sell 8.59 -55.3% 15%
II. Acquisition/Breakup Models:
1. Value of Operations plus Cash (Working Capital less debt) $4.51 -76.6% Sell $6.76 -64.8% 10%2. Liquidation Value (last historical year) - 0.0% -
III. Relative Value Models
1. Versus the S&P 500 Buy: 1.75 Sell: 2.25 $9.64 -49.9% Sell $12.40 -35.5% 15%2. Versus the S5HCPS INDEX IndustryBuy: 1.50 Sell: 2.00 10.74$ -44.1% Sell 14.32 -25.5% 15%
IV. Composite Models
1. Average of All Models All Models $7.79 -59.5% Sell $9.74 -49.3%2. Average - Max/Min Min: 4.51 Max: 10.74 7.85 -59.2% Sell 11.37 -40.9%
V. Analysts Weighted Forecasts
1. Weighted by Analysts Forecasts 7.95$ -58.6% Sell $11.35 100%
Current Price 19.23$
Summary
Sources:
Summary
Summary
Phoenix Healthcare Group is the largest IOT private hospital group in
China
Its prior success and reputation position the company to take advantage of
the expanding need for cost-effective healthcare in China as the
population continues to age.
PHG’s ability to attract and incentivize China’s top Medical Professionals
make it an attractive choice for customers.
PHG’s asset-light business model that produces high margins with limited
capital requirements and ongoing scale benefits from its supply chain
business make it an appealing option for investors Watchlist Recommendation: Add to Watchlist
Valuation Recommendation (USD): Hold Monitor & update • Buy Price: $7.95
• Sell Price: $11.35
• Current Price: $15.32
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