Asian Insights SparX

China Hospital Sector Refer to important disclosures at the end of this report

DBS Group Research . Equity

20 Oct 2016

Unique framework to pick winners

ANALYST Mark KONG, CFA +852 2820 4619 [email protected]

• •

•

We expect hospital industry revenue CAGR to be 14% in 2016-20 as prices of medical services increase rapidly. Well-run hospitals can outpace industry growth. But public financial disclosure alone may not tell the full story on their financial status & earnings potential. In view of this challenge, we developed an unique framework to identify long-term winners. Phoenix Healthcare (1515 HK) is our top pick.

Prices uptrend of medical services: positive for the hospital sector. To compensate the hospitals for declining drug sales due to price cuts, the government is allowing the prices of medical services to surge. Provinces like Jiangsu are seeing prices surge by >20%. This can drive hospital industry revenue to grow at 14% CAGR (2016-20). Listed hospital stocks will benefit as services contributed 17-88% of their sales (1H16). Unique framework to pick long-term sector winner. Wellrun hospitals can outpace industry growth. But, public financial disclosure alone may not tell the full story. In view of this challenge, we interviewed with 43 finance managers in 27 hospitals and reviewed the websites of >400 hospitals to derive an analytical framework that would aid our assessment. We looked at recognition from the government and industry organisations to assess a hospital’s financial status and growth potential.

Recommendation and valuation Co mp an y

Phoenix Healthcare * (1515 HK) Rici Healthcare (1526 HK) Wenzhou Kangning 'H'* (2120 HK) Harmonicare Medical (1509 HK) Univ ersal Medical (2666 HK)

Pric e HK $

T arg et p ric e HK $

R ec

Mkt c ap F Y 1 7 F U S$ m PE

13.1

17.90

BUY

1,409

2.23

n.a.

NR

457

39.2

50.00

BUY

369

30.1

4.66

n.a.

NR

455

23.1

6.5

n.a.

NR

1,438

7.5

29.5 n.a.

Source: Thomson Reuters, *DBS Vickers

Top pick: Phoenix Healthcare. Phoenix Healthcare, a hospital operator fulfilled most of the criteria in our framework. We believe its earnings can grow at 56% CAGR (2015-18), driven by asset injections from its largest shareholder China Resources Healthcare (a state-owned enterprise (SOE) under the Central Government), and operation efficiency enhancement. Two share price catalysts include the possible stake increase by China Resources Healthcare and the potential acquisition / cooperation with SOE hospitals.

ASIAN INSIGHTS ed-TH/JS/ sa- DL

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination.

Table of Contents Prices of medical services in China on an uptrend

3 

A checklist to identify hospitals that will benefit from this uptrend in the long run

5 

Rationale behind each criterion in our checklist

6 

The effectiveness of the above criteria

19 

Analysis of hospitals through our checklist

20 

Company profiles

26 

Phoenix Healthcare (1515 HK) – Initiate coverage

26 

Wenzhou Kangning Hospital (2120 HK)

52 

Harmonicare Medical Holdings Limited (1509 HK)

59 

Rici Healthcare Holdings (1526 HK)

61 

Universal Medical Financial & Technology (2666 HK)

63 

Appendix 1: Comparison of hospital industry in Mainland China & Hong Kong

65 

Appendix 2: Comparison of listed hospital companies

67 

ASIAN INSIGHTS Page 2

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

Prices of medical services in China on an uptrend Policies are driving the prices of medical services up. The prices of medical services in hospitals are rising. According to “Opinion on promoting the price reform of medical services” issued by National Health & Family Planning Commission (“NHFPC”) in July 2016 (“推進醫療服務價格改 革的意見”), the government intends to raise the prices of medical services such as diagnosis, surgery, rehabilitation, and nursing, and Chinese medicines. The National Development & Reform Commission is requiring all provinces to submit the proposal to increase the prices of medical services by the end of 2016. In principle, the prices of medical services provided by public hospitals and medical services in private hospitals that are covered by public medical insurance are set to increase as a result. As they formed >80% medical services revenue of the hospital industry, we believe their surge will benefit the whole industry as a whole. Local governments are gradually raising the prices of medical services. In practise, some provincial governments have already raised prices. In October 2015, Jiangsu provincial government raised prices for surgeries for children aged below 6 by 20%, and the prices of extremely complicated surgeries (class 4) by 75%. In 2015-16, Anhui provincial government increased the prices of certain medical services by 20-50%. We believe more provinces will increase prices on more and more of their medical services. Reasons behind uptrend in prices of medical services. The government is pressing down revenue from the sale of drugs in public hospitals. Increasing prices of medical services is to compensate for the drop in revenue from drugs sales, which could be 60-90% of the decline depending on the provinces. The reason why China wants to control drug sales of public hospitals is mainly because public medical insurance programs are getting financially stretched. We estimate those programs finance c.50% of patients’ medical expenditure. Their annual cash outflow are rising faster than inflow, according to an article by the Ministry of Human Resources & Social Security (“MHRSS”) issued in February 2016. In some provinces, the annual cash outflow is more than the inflow. An ageing population would increase the deficit as those aged >60 do not need to contribute cash to those programs. Hence, provinces with a higher ageing population will see a lower proportion contributing to these health programs. Therefore, the Chinese government needs to relook at the entire medical expenditure breakdown, and pressing drug sales in public hospitals is a major measure to control expenditure. Drug sales in public hospitals is a major area that can be controlled to reduce medical cost because there is an overprescription of drugs in China. As a percentage of total

ASIAN INSIGHTS Page 3

revenue of public hospitals, drugs sales make up a substantially higher percentage in China relative to other countries. In 2014, drugs sales accounted for 38% of total revenue of public hospitals in China. Hong Kong’s was less than 7% while developed countries was c.10% on average. The government has taken various measures to reduce drug sales in public hospitals including: 1)

Requiring public hospitals to reduce the contribution from drug sales to total revenue to 30%. The ratio has been declining, from 40% in 2012 to 38% in 2014.

2)

In the past, public hospitals were allowed to mark up by 15% over procurement cost when selling drugs, which was an attractive avenue to generate net income. The government is now removing the mark-up in public hospitals in 200 cities. We believe more and more cities will be included. Without the mark-up, hospitals will no longer be incentivised generate income from drug sales.

3)

Provincial governments have imposed price cuts on drugs.

We estimate the mark-up on drug prices contributed over 50% of net income of public hospitals, and the removal of the mark-up will have a significant impact on net income. To compensate for the decline in revenue and net income, the central government is allowing these hospitals to increase the prices of medical services. In fact, the price of medical services in China is still very low. For example, in Changsha (Hunan province), outpatient consultation fee is Rmb5 and in Dongguan (Guangdong province), the fee for hair washing services on bed (it takes nearly 30 mins) is just Rmb15. There is plenty of room for prices of medical services to rise. Hence, we believe prices of medical services will continue to rise for the next few years. Revenue breakdown of public hospitals in China (2014) Science & education project income 0.4% Financial subsidy 7.7%

Others 1.9%

Registration 0.3% Body check 10.7% Treatment 10.8% Operation 4.1%

Sales of drugs 38.0%

Other medical services 12.9%

Sales of medical consumables 9.6% Nursing 1.3%

Beds 2.3%

Source: NHFPC

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector Thanks to trend of rising prices of medical services and an increase in patient visits, we expect total revenue for the hospital industry in China to grow at 14% CAGR in 201620, with public hospitals at 13%, while private hospitals is stronger at 23% (see the following chart) as they rely more on services rather than sales of drugs.

Public

4,023 2020E

451 3,554 2019E

3,136 2018E

294 2,774 2017E

241 2,455 2016E

197 2,157 2015E

2014

132 1,643

1,884

2013

108 2012 1,421

2011

0

2010 970

1,000

59

2,000

1,164 81

3,000

162

4,000

361

RMB bn 5,000

558

Revenue of China Hospitals (Rmb bn)

Private

Source: NHFPC, Frost & Sullivan

ASIAN INSIGHTS Page 4

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

A checklist to identify hospitals that will benefit from this uptrend in the long run As the price of medical services rise in general, hospital stocks should benefit as a significant portion of their revenue is from medical services (see the following chart). Medical services contribution to total revenue (1H16) 100%

88%

85%

74%

80% 60%

Although many hospitals will benefit from the uptrend in prices of medical services, we believe only hospitals with excellent medical and operational capabilities will stand out in the long run. It is difficult to judge a hospital’s medical and operational capability by only looking at financials disclosed in announcement of HKEX. Therefore, after talking to 43 heads/staff in the finance departments in 27 hospitals and an experienced doctor, and reviewing websites of >400 hospitals, we have developed a checklist of criteria to identify hospitals with strong fundamentals (see the following table). The checklist focuses on two aspects of a hospital: 1.

Is its financial status solid ? (criteria 1 to 5) ’Financial status‘ here means the ability to consistently generate sufficient cash flow to settle liabilities to suppliers and financial institutions. We assess this by looking at the recognition by government and authoritative international industry organisations.

2.

Is its earnings growth potential strong? (criteria 6 to 9) We assess this by mainly looking at its expertises in key areas and sources of doctors supply.

29%

40%

Phoenix Healthcare (1515 HK)**

Wenzhou Kangning (2120 HK)

Harmonicare (1509 HK)

0%

Universal Medical (2666 HK)*

20%

Rici Healthcare (1526 HK)

17%

*Universal Medical does not directly provide medical services in hospitals. It provides medical equipment leasing services, clinical department upgrade services, and financing advisory services to public hospitals. Thus, as its hospital customers benefit from rising revenue of medical services, Universal Medical will benefit. ** DBS Vickers’ estimates Source: Companies, DBS Vickers

The checklist to identify hospitals of good quality So lid f in an c ial s t at u s

R ec o g n it io n f ro m t h e g o v ern men t 1: 2: 3: 4:

Is it Is it Is it Is it

directly under a Central gov ernment department (e.g. National Health & F amily Planning Commission) ? classified as a Grade A Tax Pay er ? a designated medical institute of public basic medical insurance graded "A A " or abov e ? located in a prov ince w ith public medical insurance programs in sound financial status ?

R ec o g n it io n f ro m au t h o rit at iv e in t ern at io n al in d u st ry o rg an isat io n 5: Does it meet the operational standards set by J oint Commission International of USA ? Earn in g s g ro w t h p o t en t ial

Ex p ert in k ey areas 6: Is it a w ell recognized expert prov iding serv ices to an area w ith a supply shortage? 7: Is it a w ell recognized expert in public / state-ow ned enterprise hospital reform ?

Su f f ic ien t su p p ly o f d o c t o rs 8: Has it been designated by gov ernment to prov ide on-site training for junior doctors / fresh graduates from medical school?

O t h ers 9: Is it a designated hospital for at least tw o international insurance companies prov iding cov erage for their ov erseas policy holders w orking/trav eling in China? Source: DBS Vickers

ASIAN INSIGHTS Page 5

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

Rationale behind each criterion in our checklist Criterion 1: Is it directly under a Central government department ? For example, there are 44 hospitals directly under the National Health & Family Planning Commission (NHFPC) (see the following table). NHFPC is a department of the central government. To be operating directly under NHFPC implies

that the hospital is directly supported by the central government. This can mean sufficient financial resources for operations.

Hospitals directly under National Health & Family Planning Commission (NHFPC) 衛 計 委 直 屬 直 管 醫 院 名 單 （ 44所 ） N ame in Ch in es e 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44

北京醫院 中日友好醫院 中國醫學科學院北京協和醫院 中國醫學科學院阜外心血管病醫院 中國醫學科學院腫瘤醫院 中國醫學科學院整形外科醫院 中國醫學科學院血液病醫院 中國醫學科學院皮膚病醫院 北京大學第一醫院 北京大學人民醫院 北京大學第三醫院 北京大學口腔醫院 北京大學第六醫院 吉林大學第一醫院 吉林大學第二醫院 吉林大學中日聯誼醫院 吉林大學口腔醫院 復旦大學附屬中山醫院 復旦大學附屬華山醫院 復旦大學附屬兒科醫院 復旦大學附屬婦產科醫院 復旦大學附屬眼耳鼻喉科醫院 復旦大學附屬腫瘤醫院 山東大學齊魯醫院 山東大學第二醫院 華中科技大學同濟醫學院附屬協和醫院 華中科技大學同濟醫學院附屬同濟醫院 華中科技大學同濟醫學院附屬梨園醫院 中南大學湘雅醫院 中南大學湘雅二醫院 中南大學湘雅三醫院 中山大學附屬第一醫院 中山大學孫逸仙紀念醫院 中山大學附屬第三醫院 中山大學腫瘤防治中心 中山大學中山眼科中心 中山大學附屬口腔醫院 四川大學華西醫院 四川大學華西第二醫院 四川大學華西口腔醫院 四川大學華西第四醫院 西安交通大學醫學院第一附屬醫院 西安交通大學醫學院第二附屬醫院 西安交通大學醫學院附屬口腔醫院

N ame in En g lis h ( if av ailab le) Beijing Hospital China-J apan F riendship Hospital Peking Union M edical College Hospital F uw ai Hospital, CA M S & PUM C Cancer Hospital Chinese A cademy of M edical Sciences Plastic Surgery Hospital, CA M S, PUM C N/A N/A Peking Univ ersity F irst Hospital Peking Univ ersity People's Hospital Peking Univ ersity Third Hospital Peking Univ ersity School of Stomatology Peking Univ ersity Sixth Hospital The F irst Hospital of J ilin Univ ersity The Second Hospital of J ilin Univ ersity N/A Hospital of Stomatology , J ilin Univ ersity Zhongshan Hospital, F udan Univ ersity Huashan Hospital, F udan Univ ersity Children's Hospital of F udan Univ ersity Obstetrics and Gy necology Hospital of F udan Univ ersity Ey e & ENT Hospital of F udan Univ ersity F udan Univ ersity Shanghai Cancer Center Qilu Hospital of Shandong Univ ersity The Second Hospital of Shandong Univ ersity Union Hospital Tongji M edical College of HUST Tongji M edical College of HUST Liy uan Hospital of Tongji M edical College of HUST Xiangy a Hospital Central South Univ ersity The Second Xiangy a Hospital of Central South Univ ersity The Third Xiangy a Hospital of Central South Univ ersity The F irst A ffiliated Hospital, Sun Yat-sen Univ ersity Sun Yat-sen M emorial Hospital, Sun Yat-sen Univ ersity The Third A ffiliated Hospital, Sun Yat-sen Univ ersity Sun Yat-sen Univ ersity Cancer Center Zhongshan Ophthalmic Center, Sun Yat-sen Univ ersity Hospital of Stomatology , Sun Yat-sen Univ ersity West China Hospital, Sichuan Univ ersity West China Second Univ ersity Hospital West China Hosptal of Stomatology Sichuan Univ ersity No.4 West China Teaching Hospital, Sichuan Univ ersity The F irst A ffiliated Hospital of Xi'an J iaotong Univ ersity The Second A ffiliated Hospital of Xi'an J iaotong Univ ersity Hospital of Stomatology Xi'an J iaotong Univ ersity

Source: NHFPC, DBS Vickers

ASIAN INSIGHTS Page 6

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector Although the above 44 hospitals only make up a very tiny portion of the total number of hospitals in China, their contribution to total hospitals’ revenue and net income in China is much higher (see the following table). On average, their revenues and net income are much higher than other hospitals (see the following table). Selected data on hospitals in China N u mb er o f h o sp it al

2014

% c o n t rib u t red b y h o sp it als d irec t ly u n d er NH F PC

Hospitals directly under NHF PC* A ll public hospitals in China A ll hospitals in China

44 12,897 25,860

0.3% 0.2%

T o t al rev en u e (R mb b n ) Hospitals directly under NHF PC* A ll public hospitals in China A ll hospitals in China

2014 108 1,884 2,046

5.7% 5.3%

T o t al n et in c o me (R mb b n ) * * Hospitals directly under NHF PC* A ll public hospitals in China A ll hospitals in China

2014 6 86 93

7.0% 6.5%

A v erag e rev en u e p er h o sp it al ( R mb m)

2014

Hospitals directly under NHF PC* A ll public hospitals in China A ll hospitals in China

2,454 146 79

A v erag e n et in c o me p er h o sp it al ( R mb m)

2014

Hospitals directly under NHF PC* A ll public hospitals in China A ll hospitals in China

138 7 4

Source: NHFPC, DBS Vickers * DBS Vickers’ estimates based on “The accounts of National Health & Family Planning Commission 2014 (國家衛生計生委 2014 年部門決 算)” **Total net income = Total revenue – Total expenditure

ASIAN INSIGHTS Page 7

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

Criterion 2: Is it classified as a Grade A Tax Payer ? According to “Trial Measures For Grading of Tax Payment Credit (納稅信用等級評定管理試行辦法)” issued by State Administration of Taxation, only entities with good tax payment record can be classified as a Grade A Tax Payer by government. In our view, a good tax payment record implies the entity is able to consistently generate earnings and net cash inflow. Thus, if a hospital is classified as a Grade A Tax Payer, it is a sign of good financial status. We can check if a hospital is a Grade A Tax Payer by visiting this website: http://hd.chinatax.gov.cn/fagui/action/InitCredit.do .

ASIAN INSIGHTS Page 8

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

Criterion 3: Is it a designated medical institute of public basic medical insurance graded as “AA” or above ? The cash inflow of a hospital in China is mainly generated from two sources: A)

Funds from the patients. Outpatients usually settle their bills right after consulting the doctors. Before admission, inpatients normally need to deposit a sum of money that is sufficient for a few days' stay. Thus, cash flow from patients is usually healthy at most times;

B)

Public medical insurance programs. These programs finance a significant portion of patients’ hospital expenses. But not all hospitals are able to make collections in a timely manner. Payment delays usually occur. Some hospitals are even unable to be fully reimbursed for the expenses incurred. However, if the hospital is a designated medical institute of public basic medical insurance graded as “AA” or above (AAA is higher than AA), it will have higher warranty on cash collection from public medical insurance programmes. According to “Opinion on implementing tiered management of designated medical institute of basic medical insurance” (關於實行基本醫療保險定點醫療機 構分級管理的意見) issued by Ministry of Human Resources & Social Security, public medical insurance programmes will give preferential treatment to AAA hospitals and AA hospitals (e.g. high prepaid portion of their budgeted expenses, and clearing their payments first before other medical institutes). For example, in Shenzhen, at the beginning of each month, public medical insurance programmes will prepay 100% of AAA hospitals’ budgeted monthly expenses reimbursable from the programmes. It is 70% for AA hospitals. Based on the document, in each city, there are less than 10% of hospitals that will be graded as AA or above.

With such preferential treatment granted, we believe the financial status of AAA and AA hospitals should be much better than many other hospitals.

ASIAN INSIGHTS Page 9

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

Criterion 4: Is it located in a province with public medical insurance programs in sound financial status ? 2)

As discussed above, public medical insurance programs are of great importance to the cash inflow of a hospital. If a hospital is located in an urban area with public medical insurance programs in sound financial status, it is easier for it to collect its reimbursable expenses on a timely basis. In our view, there are two signs indicating sound financial status of a provincial urban public medical insurance programme: 1)

The annual income of the programs equals to at least 1.1x of the programs’ annual expense each year in the last five years. That implies the programs had always been running with decent surplus (income always 10% higher than expenses). The track record implies the programs are well managed.

Based on National Bureau of Statistics, eleven provinces met the above requirements, namely: Hebei, Shanxi, Jilin, Shanghai, Fujian, Jiangxi, Guangdong, Guangxi, Hainan, Tibet, and Shaanxi (see the following tables).

The reserve of the programs equals to at least 1.5x of its annual expense. That implies the reserve is sufficient to cover all expenses in the next 18 months even if there is no income;

Provincial urban public medical insurance programs*: cumulative reserve/annual expenditure (x)

Nationwide/全國 Beijing/北京 Tianjin/天津 Hebei/河北 Shanxi/山西 Inner Mongolia/內蒙古 Liaoning/遼寧 Jilin/吉林 Heilongjiang/黑龍江 Shanghai/上海 Jiangsu/江蘇 Zhejiang/浙江 Anhui/安徽 Fujian/福建 Jiangxi/江西 Shandong/山東 Henan/河南 Hubei/湖北 Hunan/湖南 Guangdong/廣東 Guangxi/廣西 Hainan/海南 Chongqing/重慶 Sichuan/四川 Guizhou/貴州 Yunnan/雲南 Tibet/西藏 Shaanxi/陝西 Gansu/甘肅 Qinghai/青海 Ningxia/寧夏 Xinjiang/新疆

2009 1.53 0.89 0.45 1.55 1.79 1.55 1.47 2.06 1.94 0.73 1.58 1.84 1.64 2.18 1.83 1.25 1.75 1.63 1.70 2.29 2.32 1.66 1.74 1.81 1.61 1.35 1.88 1.45 1.25 1.55 1.55 1.20

2010 1.43 0.67 0.49 1.62 1.65 1.36 1.39 1.91 1.83 0.68 1.60 1.54 1.54 1.92 1.71 1.18 1.54 1.52 1.41 2.25 2.08 1.45 1.51 1.73 1.46 1.25 1.99 1.65 1.40 1.83 1.47 1.13

2011 1.39 0.53 0.47 1.64 1.57 1.19 1.23 1.81 1.73 0.89 1.51 1.74 1.43 1.90 1.71 1.17 1.52 1.46 1.31 2.03 2.06 1.46 1.43 1.65 1.46 1.35 2.07 1.64 1.27 1.66 1.41 1.13

2012 1.38 0.39 0.56 1.69 1.62 1.15 1.14 1.86 1.57 1.29 1.44 1.71 1.38 1.95 1.59 1.25 1.53 1.27 1.24 2.07 1.82 1.39 1.18 1.53 1.20 1.29 2.58 1.73 1.09 1.60 1.37 1.15

2013 1.34 0.33 0.49 1.64 1.57 1.12 1.11 1.69 1.44 1.65 1.45 1.49 1.42 2.06 1.63 1.23 1.60 1.16 1.17 1.94 1.75 1.42 0.98 1.42 1.03 1.20 2.17 1.63 1.00 1.31 1.22 1.33

2014 1.31 0.37 0.47 1.78 1.50 1.18 1.08 1.76 1.37 1.85 1.40 1.42 1.38 2.10 1.58 0.93 1.49 1.02 1.19 1.91 1.68 1.53 0.92 1.39 0.91 1.16 2.03 1.53 0.98 1.33 1.11 1.33

Source: National Bureau of Statistics *The programs refer to those for employees in corporations and residents in urban areas

ASIAN INSIGHTS Page 10

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

Provincial urban public medical insurance programs*: annual income/annual expenditure (x)

Nationwide/全國 Beijing/北京 Tianjin/天津 Hebei/河北 Shanxi/山西 Inner Mongolia/內蒙古 Liaoning/遼寧 Jilin/吉林 Heilongjiang/黑龍江 Shanghai/上海 Jiangsu/江蘇 Zhejiang/浙江 Anhui/安徽 Fujian/福建 Jiangxi/江西 Shandong/山東 Henan/河南 Hubei/湖北 Hunan/湖南 Guangdong/廣東 Guangxi/廣西 Hainan/海南 Chongqing/重慶 Sichuan/四川 Guizhou/貴州 Yunnan/雲南 Tibet/西藏 Shannxi/陝西 Gansu/甘肅 Qinghai/青海 Ningxia/寧夏 Xinjiang/新疆

2009 1.31 1.15 1.03 1.42 1.37 1.38 1.38 1.65 1.62 1.16 1.26 1.27 1.36 1.29 1.57 1.22 1.37 1.34 1.46 1.35 1.46 1.84 1.33 1.35 1.41 1.30 1.66 1.49 1.32 1.26 1.30 1.24

2010 1.22 1.03 1.11 1.36 1.25 1.22 1.19 1.21 1.23 1.10 1.26 1.24 1.21 1.19 1.30 1.19 1.22 1.23 1.07 1.35 1.38 1.30 1.24 1.37 1.26 1.14 1.55 1.40 1.30 1.41 1.24 1.17

2011 1.25 1.01 1.06 1.31 1.28 1.17 1.13 1.33 1.27 1.28 1.25 1.37 1.25 1.28 1.31 1.23 1.25 1.29 1.14 1.39 1.35 1.35 1.28 1.35 1.32 1.23 1.42 1.30 1.23 1.24 1.20 1.21

2012 1.25 1.00 1.14 1.35 1.36 1.19 1.11 1.33 1.17 1.48 1.25 1.40 1.22 1.33 1.29 1.27 1.26 1.13 1.16 1.38 1.24 1.22 1.27 1.22 1.11 1.18 1.46 1.36 1.10 1.23 1.36 1.22

2013 1.21 1.01 1.05 1.26 1.26 1.17 1.12 1.21 1.11 1.51 1.23 1.24 1.26 1.40 1.31 1.21 1.28 1.11 1.14 1.33 1.17 1.21 1.15 1.17 1.05 1.14 1.25 1.31 1.06 1.08 1.23 1.33

2014 1.19 1.06 1.14 1.28 1.14 1.16 1.08 1.23 1.11 1.41 1.18 1.24 1.18 1.35 1.25 1.14 1.18 1.05 1.17 1.29 1.19 1.23 1.12 1.21 1.03 1.13 1.28 1.20 1.11 1.15 1.15 1.24

Source: National Bureau of Statistics *The programs refer to those for employees in corporations and residents in urban areas

ASIAN INSIGHTS Page 11

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

Criterion 5: Does it meet the operational standards set by Joint Commission International of U.S.A ? Financial status significantly affects the quality of a hospital’s operations. Therefore, we believe the authoritative international industry organisations will consider the financial status of a hospital when evaluating if the hospital meets their standards. Joint Commission International (JCI) of the USA is one of the very few foreign hospital industry organisations that sets standards to assess the operational quality of overseas hospitals. JCI was established by the Joint Commission (JC) in 1998 and is the largest hospital rating organisation in the

USA, and has its headquarters in Chicago. JC has already completed the rating of c.20,000 healthcare institutes in the USA. As a branch of JC, JCI focuses on offering rating services to hospitals outside the USA. JCI has already completed the review and rating for over 500 hospitals in over 50 countries. In China, 47 hospitals meet JCI standards (see the following table), which include an assessment of financial status (see the following table). Thus, we believe the hospitals which meet such standards should be financially sound.

Hospitals that meet Joint Commission International Accreditation Standards N a m e in Ch i n e s e

N ame

A mcare W omen's and Children's Hospit al-T ianJ in Beijing J ian G ong Hospital (Healt h Palace Hospital) Beijing SmileA ngel Children's Hospit al Beijing Unit ed F amily Hospit al Co., Lt d. Beijing Unit ed F amily Rehabilit ation Hospit al Beijing Y anhua Hospital Cangnan People's Hospital Changning M at ernit y & Inf ant Health Hospital, 上海市長寧區婦幼保健院 Shanghai Chengdu A ngel W omen's and Children's Hospital 成都安琪兒婦產醫院 成 都 安 琪 兒 婦 產 醫 院 ( 西 院 ) Chengdu W est A ngel W omen's & Children's Hospit al Clif f ord Hospit al 祈福醫院 F uda Cancer Hospit al 廣州復大腫瘤醫院 G uangzhou W omen and Children's M edical Center 廣州市婦女兒童醫療中心 Hainan M odern W omen & Inf ant s Hospit al 海南現代婦嬰醫院 HO M E W omen's and Children's Hospit al (Shenzhen) 深圳和美婦兒科醫院 Huangshi Cent ral Hospit al 黃石市中心醫院 Hunan Cancer Hospit al 湖南省腫瘤醫院 Hunan Children's Hospit al 湖南省兒童醫院 Hunan W ant W ant Hospital 湖南旺旺醫院 J inan A ima M at ernity Hospital 濟南艾瑪婦產醫院 K unming Sino-UK A ngel W omen's & Children's 昆明中英安琪兒婦產醫院 Hospital Luoy ang O rt hopedic - T raumat ological Hospital of 河南省洛陽正骨醫院 Henan Prov ince M ary 's O rthopedic Hospit al, Beijing 北京麥瑞骨科醫院 M odern Hospital G uangzhou 廣州現代醫院 Nanchang Renai M at ernit y Hospit al 南昌仁愛婦產醫院 南 京 醫 科 大 學 友 誼 整 形 外 科 Nanjing M edical Univ ersit y F riendship Plast ic Surgery Hospital 醫院 Ningbo F ourth Hospital 寧波市第四醫院 NJ HSCB O bst etrics and G y necology Hospit al 南京華世佳寶婦產醫院 Q uzhou K echeng People's Hospital 衢州柯城區人民醫院 Ruian People's Hospit al 瑞安市人民醫院 Shanghai Pudong Hospital 上海市浦東醫院 Shanghai Unit ed F amily Hospital Inc. 上海和睦家醫院 Shenzhen Shek ou People's Hospit al 深圳市蛇口人民醫院 T EDA Internat ional Cardiov ascular Hospit al 泰達國際心血管病醫院 T he F irst Peoples Hospit al O f J iande 建德市第一人民醫院 T ianjin Ninghe Hospit al 天津寧河區醫院 T ianjin Unit ed F amily Hospit al 天津和睦家醫院 W uhai M at ernit y and Child Healt h Care Hospital 烏海市婦幼保健院 W uxi No.2 People's Hospital 無錫市第二人民醫院 X i'an A ngel W omen's & Children's Hospit al 西安安琪兒婦產醫院 X i'an Q ujiang O bstet rics & G y necology Hospit al 西安曲江婦產醫院 X igu District of Lanzhou City People's Hospital 蘭州市西固區人民醫院 Y inZ hou People's Hospit al, Ningbo, China 鄞州人民醫院 Y unnan Richland Hospit al 雲南瑞奇德醫院 Y uY ao People's Hospit al of Z he J iang Prov ince 浙江省余姚市人民醫院 Z hangjiagang A oy ang Hospit al 張家港澳洋醫院 Z henjiang F irst People's Hospital 鎮江市第一人民醫院 天津美中宜和婦兒醫院 北京市健宮醫院 北京嫣然天使兒童醫院 北京和睦家醫院 北京和睦家康復醫院 北京燕化醫院 蒼南縣人民醫院

J CI J CI A c c r e d it a t io n 1 S t a t u s A c c re d i t a t i o n 1 Hospit al Program A ccredited Since 23 M ay 2015 Hospit al Program A ccredited Since 03 J uly 2010 Hospit al Program A ccredited Since 26 A pril 2014 Hospit al Program A ccredited Since 01 September 2005 Hospit al Program A ccredited Since 07 Nov ember 2014 Hospit al Program A ccredited Since 26 J une 2010 Hospit al Program A ccredited Since 08 Nov ember 2014 Hospit al Program

A ccredited Since 29 A pril 2016

Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program

A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited V oluntarily A ccredited A ccredited

Hospit al Program

A ccredited Since 06 December 2014

Hospit al Program

A ccredited Since 17 December 2010

Hospit al Program Hospit al Program Hospit al Program

A ccredited Since 08 M ay 2015 A ccredited Since 18 O ct ober 2014 A ccredited Since 04 J une 2016

Hospit al Program

A ccredited Since 17 J anuary 2013

Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program Hospit al Program

A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited A ccredited

Since 30 J une 2012 Since 31 O ct ober 2015 Since 20 December 2003 Since 21 M arch 2014 Since 15 December 2012 Since 24 M ay 2013 Since 29 O ct ober 2011 Since 25 A pril 2015 Since 25 J anuary 2014 W ithdraw n f rom A ccredit ation Since 14 December 2013 Since 21 Nov ember 2015

Since Since Since Since Since Since Since Since Since Since Since Since Since Since Since Since Since Since Since Since Since

09 17 02 04 12 03 13 19 01 21 15 20 08 03 22 01 16 27 19 10 27

F ebruary 2013 December 2010 A pril 2016 J uly 2015 September 2015 J uly 2008 J uly 2013 J une 2009 A ugust 2015 J anuary 2012 Nov ember 2014 O ct ober 2012 A ugust 2015 O ct ober 2015 A ugust 2015 M ay 2014 M ay 2015 M arch 2015 M arch 2016 J anuary 2015 A pril 2013

Source: http://www.jointcommissioninternational.org/about-jci/jci-accredited-organizations/

ASIAN INSIGHTS Page 12

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

JCI Standards on financials Ex t rac t s f ro m " J o in t Co mmis s io n In t ern at io n al A c c red it at io n S t an d ard s f o r H o s p it a ls , 5 t h ed it io n "

O u r v iew

F acility M anagement and Safety 4.2 (F MS.4.2) The hospital plans and budgets for upgrading or replacing key sy stems, buildings, or components based on the facility inspection and in keeping w ith law s and We believ e J CI w ill make sure the hospital has the regulations. "budgets". Without a sound financial status, w e believ e the hospital is unable to hav e the M easurable Elements of F M S.4.2 "budgets" that satisfy J CI. Successfully meeting of ...2. The hospital plans and budgets for upgrading or replacing sy stems, buildings, or this standard means the hospital is in good financial status w hich allow s it to set the "budgets". components needed for the continued operation of a safe, secure, and effectiv e facility ... ...3. Hospital leadership applies the budgeted resources to prov ide for a safe and secure facility in accordance w ith approv ed plans. F acility M anagement and Safety 9.2 (F MS.9.2) The hospital utility sy stems program ensures that potable w ater and electrical pow er are av ailable at all times and establishes and implements alternativ e sources of w ater If the hospital does not hav e sufficient financial resources, it cannot ensure that potable w ater and and pow er during sy stem disruption, contamination, or failure. electrical pow er are alw ay s av ailable. The meeting of this standard implies that the hospital has M easurable Elements of F M S.9.2 sufficient financial resources. 1. Potable w ater is av ailable 24 hours per day , 7 day s a w eek. 2. Electrical pow er is av ailable 24 hours a day , 7 day s a w eek...... M anagement of Information 1 (MOI.1) The hospital plans and designs information management processes to meet internal and external information needs. M easurable Elements of M OI.1 ...2. The information needs of those w ho manage the hospital are considered in the planning process......

We believ e "the information needs" include the need for financial information as it is crucial for hospital management. To ensure the hospital meets this standard, w e believ e J CI w ill look at the information gathering sy stem (including financial information) of the hospital carefully . A hospital w hich meets this standard should hav e an effectiv e financial reporting sy stem.

Human Subjects Research Programs 1.1 (HRP.1.1) Hospital leadership complies w ith all regulatory and professional requirements and prov ides adequate resources for effectiv e operation of the research program. M easurable Elements of HRP.1.1 ... 2. Hospital leadership has a process for budgeting to prov ide adequate resources for effectiv e operation of the research program...

If the hospital does not hav e sufficient financial resources, w e believ e it w ill not be able "to prov ide adequate resources for effectiv e operation of the research programme" w hich satisfies J CI. The meeting of this standard implies that the hospital has sufficient financial resources.

Source: Joint Commission International Accreditation Standards for Hospitals, 5th edition, Effective 1st April 2014

ASIAN INSIGHTS Page 13

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

JCI Standards on financials (continued) Ex t rac t s f ro m " J o in t Co mmis s io n In t ern at io n al A c c red it at io n St an d ard s f o r H o s p it als , 5 t h ed it io n " A ccreditation Participation Requirements 4 (A PR.4) The hospital permits on-site ev aluations of standards and policy compliance or v erification of quality and safety concerns, reports, or regulatory authority sanctions at the discretion of J CI (J oint Commission International). Rationale for A PR.4

O u r v iew

This requirement ensures that J CI can assess the hospital thoroughly w hich increases the credibility of the standard.

...it is important that J CI has the right to enter all or any portion of the hospital on an announced or unannounced basis to confirm standards and accreditation policy compliance and/or ev aluate patient safety and quality concerns at any time during all phases of accreditation.... Quality Improv ement and Patient Safety 3 (QPS.3) The quality and patient safety program uses current scientific and other information to support patient care, health professional education, clinical research, and management. Measurable Elements of QPS.3 ...4. Current professional and other information supports management....

"Current professional and other information supports management." We believ e the "information" here includes financial information of the hospital as it can effectiv ely support the management of a hospital. To ensure the hospital meets this standard, w e believ e J CI w ill look at the information gathering sy stem (including financial information) of the hospital carefully . A hospital w hich meets this standard should hav e an effectiv e financial reporting sy stem.

Quality Improv ement and Patient Safety 4 (QPS.4) The quality and patient safety program includes the aggregation and analy sis of data to support patient care, hospital management, and the quality management program and participation in external databases. Intent of QPS.4 The quality and patient safety program collects and analy zes aggregate data to support patient care and hospital management. A ggregate data prov ide a profile of the hospital ov er time and allow the comparison of the hospital's performance w ith other organizations, particularly on the hospitalw ide measures selected by leadership... Measurable Elements of QPS.4

"A ggregate data and information support patient care, hospital management." We believ e the "data and information" here includes financial data and information of the hospital as it can effectiv ely support hospital management. To ensure the hospital meets this standard, w e believ e J CI w ill look at the information gathering & analy sis sy stem (including financial information) of the hospital carefully . A hospital w hich meets this standard should hav e an effectiv e financial reporting & analy sis sy stem.

... 2. A ggregate data and information support patient care, hospital management, professional practice rev iew , and the ov erall quality and patient safety program. Leadership, and Direction 7 (GLD.7) Hospital leadership makes decisions related to the purchase or use of resources human and technical - w ith an understanding of the quality and safety implications of those decisions. Measurable Elements of GLD.7

The phase "... ev aluate and improv e the quality of its resource purchasing and allocation decisions... " prompts us to believ e J CI w ill check if the hospital has a sy stem to ensure effectiv e use of financial resources.

...4. Hospital leadership monitors the results of its decisions and uses the data to ev aluate and improv e the quality of its resource purchasing and allocation decisions.

Source: Joint Commission International Accreditation Standards for Hospitals, 5th edition, Effective 1st April 2014

ASIAN INSIGHTS Page 14

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

Criterion 6: Is it a well recognized expert providing services to an area with a supply shortage? There are many ways to assess if a hospital is a well recognized expert in such an area. For example, if the hospital is granted the qualification “Key National Hospital for Specialized Clinical” by the NHFPC or State Administration of Traditional Chinese Medicine, it should be a recognized expert in a specific medical area. The government will provide subsidies to these hospitals to further develop their capabilities. Due to the recognition, it will be easier for the hospital to attract patients and thereby generate revenue. If the medical area recognised is an area facing a supply shortage, revenue growth potential is much higher. Among the 19 categories of specialty hospitals classified by NHFPC, five had bed utilisation rates of over 90% in three consecutive years (see the following table). It is very likely that these medical services are facing a supply shortage. If a hospital is recognized in these areas, they should be able to grow their revenue by capturing the unmet demand.

Bed utilisation of specialty hospitals Uti l i z a ti o n o f b e d s (%) Dental hospital Ophthalmic hospital Otolaryngologic hospital Cancer hospital Cardiovascular hsopital Chest hospital Blood diseases hospital Obstetric & gynecology hospital Pediatric hospital Psychiatirc hospital Infectious Diseases Hospital Dermatology hospital Tuberculosis hospital Leprosy hospital Occupational Diseases hospital Orthopedic hospital Rehabilitation hospital Plastic Surgery hospital Beauty hospital Ave ra g e

2012 2013 2014 48.9% 43.3% 41.1% 62.2% 61.6% 60.6% 61.0% 61.7% 59.9% 106.8% 107.5% 106.7% 86.0% 86.8% 82.4% 101.6% 100.0% 95.3% 88.8% 83.1% 82.5% 66.6% 63.9% 62.9% 103.8% 103.3% 103.8% 97.4% 96.5% 97.6% 95.5% 94.4% 93.4% 56.1% 50.4% 50.5% 94.8% 93.8% 96.6% 20.2% 28.8% 34.0% 87.2% 82.8% 84.4% 74.7% 74.2% 75.0% 71.4% 69.3% 71.5% 49.6% 48.0% 42.3% 20.9% 20.2% 21.1% 9 0 .1 % 8 9 .0 % 8 8 .0 %

Source: NHFPC

ASIAN INSIGHTS Page 15

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

Criterion 7: Is it a well recognized expert in public / state-owned enterprise hospital reform ? If a company has successfully transformed a public / stateowned enterprise (SOE) hospital into a profitable private hospital, either by change of ownership or operating under management contract for an agreed period, it will have more opportunities to expand through acquisitions / cooperations with hospitals under SOE, thanks to the recently released policies: A)

According to “Report on reform of state-owned assets’ management & organization by the state council” issued in June 2016 “(國務院關於國有資 產管理與體制改革情況的報告) , it was stated that “…SOEs should accelerate the spin-off of its social services institutes…..part of the SOE hospitals should change its ownership….”

B)

According to the “State council’s guidance on promoting the structural change of central SOE” issued in July 2016, (國務院辦公廳關於推動中央企

ASIAN INSIGHTS Page 16

業結構調整與重組的指導意見), “….medical institutes ran by central SOEs should be revoked, merged with or transferred to other parties…” For many SOEs, hospitals are non-core assets and are mostly poorly run. Offloading them can alleviate the burden of these SOEs. So, the government welcomes players with experience in transforming public hospitals to take over these underperforming hospitals. This creates opportunities for these experienced players to grow. We estimate that there are around 3,000 SOE hospitals in China, of which around 1,230 are owned by central SOE hospitals. These are all potential targets for M&A / co-operation.

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

Criterion 8: Has it been designated by government to provide on-site training for junior doctors / fresh graduates from medical school? Without qualified doctors, a hospital is unable to provide medical services to generate revenue. It is well known that there is a supply shortage of qualified doctors in China. If the hospital is designated by the government to provide onsite training for junior doctors and fresh graduates from medical schools, it is easier for these hospitals to attract talent, comparing to hospitals without the qualification.

ASIAN INSIGHTS Page 17

In China, all graduates from medical schools must go through three years of on-site training in hospitals. Out of c.28,000 hospitals, there are only 559 hospitals (as at Feb 2015) qualified to provide on-site training. The qualification automatically attracts young talents from many other universities to these hospitals. During the three years, the hospital is able to observe and pick the right people by offering them career opportunities and attractive remuneration packages.

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

Criterion 9: Is it a designated hospital for at least two leading international insurance companies providing coverage for their overseas policy holders working or travelling in China? We believe the international insurance companies are stringent in selecting designated hospitals for their overseas policy holders working or travelling in China. It is because these clients are mostly educated professionals and their requirements for hospital services are usually higher than others. Therefore, being selected as a designated hospital is a strong recognition of its service quality and can boost the future income for those hospitals to a certain extent. This further strengthens their sound financial status. According to Bloomberg, in terms of total insurance reserve as of December 2015, Allianz SE (ALV GR), AXA (CS FP), Metlife (MET US) and Prudential Financial (PRU US) were the largest, 2nd largest, 3rd largest and 4th largest insurance companies globally. In our view, being selected by any two of these leading insurance companies as a designated hospital is recognition of the hospital's medical capabilities.

ASIAN INSIGHTS Page 18

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

The effectiveness of the above criteria To test the effectiveness of the above criteria, we looked at several hospitals through our framework. We discovered that hospitals that meet our criteria tend to be in sound financial status and vice versa. Case Study 1: Beijing Jishuitan Hospital (北京積水潭醫院) is ranked as top-tier grade A by the government. Top-tier grade A is the highest level according to the government’s classification. Despite this classification, it fails to meet criteria 1-5, which assess financial status. Actually, the financial status of this hospital is not very ideal as it incurred a net loss of Rmb100m in 2015, according to Beijing Business Today (the link: http://www.p5w.net/news/cjxw/201607/t20160707_15 10076.htm ). Case Study 2: Affiliated Hospital of Guilin Medical University (桂林醫學院附屬醫院) is ranked as top-tier grade A too. It fails to meet criteria 1, 2, 3 and 5. These criteria are all related to financial status too. Actually, this hospital was found to have falsified accounting data and information, according to People.cn (the link: http://politics.people.com.cn/n1/2016/0509/c100128336489.html ). Case Study 3: Jian Gong Hospital (北京巿健宮醫院) is owned by Phoenix Healthcare (1515 HK). It meets criteria 2, 5 and 7. As a major asset of Phoenix Healthcare, Jian Gong Hospital helped the group to gain confidence from investors when the group was planning for its listing on the HKEX in 2013.

ASIAN INSIGHTS Page 19

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

Analysis of hospitals through our checklist In our view, there are five major hospital plays listed in HKEX: Phoenix Healthcare (1515 HK), Wenzhou Kangning (2120

HK), Harmonicare (1509 HK), Rici Healthcare (1526 HK), Universal Medical (2666 HK). They generate over 50% of their revenue from medical services or services provided to hospitals. Here are the hospital profiles of these companies (see the following table).

Hospital profiles of major hospital companies listed in HK

H o s p it als u n d er t h e c o mp an y ' s man ag emen t

T ier: top/ mid / b as ic

G rad e: A /B/C

Profit making*** Non profit making*** Non profit making*** Non profit making*** Non profit making***

mid

A

Beijing

396

J un-16

top

n/a

Beijing

663

J un-16

mid

A

Beijing

466

J un-16

top

n/a

Beijing

1,789

J un-16

mid

A

Beijing

120

J un-16

Management contract*

Non profit making***

mid

A

Beijing

34

J un-16

Management contract*

Non profit making*** Non profit making*** Non profit making*** Non profit making***

mid

n/a

Beijing

168

J un-16

basic

n/a

Beijing

100

J un-16

top

A

1,888

J un-16

mid

A

Baoding (Heibei prov ince) Baoding (Heibei prov ince)

243

J un-16

R elat io n s h ip w it h t h e g ro u p

N at u re

N u mb er o f b ed s u n d er L o c at io n o p erat io n

L as t u p d at e

P h o e n i x H e a l t h c a r e (1 5 1 5 H K ) J ian Gong Hospital

80% stake

北京市健宮醫院 Yan Hua Hospital Group

Management contract*

北京燕化醫院 Mentougou Hospital

Management contract*

北京市門頭溝區醫院 J ing Mei Hospital Group

Management contract*

北京京煤集團總醫院 Mentougou Traditional Chinese M edicine Hospital

Management contract*

北京市門頭溝區中醫醫院 Mentougou Hospital for Women & Children

北京市門頭溝區婦幼保健 院 Shuny i A irport Hospital

順義區空港醫院 Shuny i No.2 Hospital

Management contract*

順義區第二醫院 Baoding No.1 Center Hospital

Management contract*

保定市第一中心醫院 Baoding Third Center Hospital

Management contract*

保定市第三中心醫院 Wuhan Iron & Steel Hospital Group**

51% stake + Management contract*

Non profit making***

top

n/a

Wuhan (Hubei prov ince)

1,868

Dec-15

100% stake + Management contract*

Non profit making***

top

n/a

Huaibei (A nhui prov ince)

2,765

Dec-15

100% stake + Management contract* 100% stake + Management contract*

Non profit making*** Non profit making***

mid

n/a

Xuzhou (J iangsu prov ince) A Guangzhou (Guangdong prov ince)

400

Dec-15

776

Dec-15

武鋼總醫院 Huaibei Miner General Hospital Group**

淮北礦工總醫院 Xuzhou Mining Hospital**

徐州礦山醫院 Guangdong 999 Brain Hospital**

top

廣東三九腦科醫院

*Management contract: The group does not own the hospital but has the management rights of the hospital for an agreed period. During the period, the group will earn revenue from the hospital by providing management services or/and drugs & medical consumables procurement services. **The hospital will be injected by China Resources Healthcare in 4Q16 ***Difference between profit-making and non-profit making hospital: Profit-making - the stakeholders can distribute its profit at will. Non profitmaking: the stakeholders cannot distribute its profit to parties outside the hospital. Thus, to share the financial resources of this hospital, the company managing this hospital will charge a management or procurement fee. ****Universal Medical co-operates with the First Affiliated hospital of Xian Jiaotong University in two ways: 1) Universal Medical will spend at most Rmb2bn to build a new hospital for the First Affiliated hospital of Xian Jiaotong University. It will be a top-tier grade A hospital with c.1,000 beds, named as “International Land Port Hospital”. Universal Medical will participate in the operations of the hospital; 2) Universal Medical will establish a JV with the First Affiliated hospital of Xian Jiaotong with an 80% stake and investment of Rmb28m. Starting from 2017, the JV will procure drugs and medical consumables for the First Affiliated hospital of Xian Jiaotong, International Land Port Hospital and other third-party hospitals. We estimate that to generate annual revenue of at least Rmb2bn to Universal Medical. Source: DBS Vickers

ASIAN INSIGHTS Page 20

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector Hospital profiles of major hospital companies listed in HK (con’t)

H o s p it als u n d er t h e c o mp an y ' s man ag emen t

R elat io n s h ip w it h t h e g ro u p

T ier: top/ mid / b as ic

G rad e: A /B/C

Profit making***

top

B

Nantong (J iangsu prov ince)

520

J un-16

Non profit making***

top

A Xian (Shaanxi prov ince)

2541

Dec-15

Profit making*** Profit making*** Profit making*** Profit making*** Profit making*** Profit making*** Profit making***

top

A

980

J un-16

n/a

n/a

260

J un-16

n/a

n/a

180

J un-16

n/a

n/a

420

J un-16

n/a

n/a

240

J un-16

n/a

n/a

200

J un-16

n/a

n/a

Wenzhou (Zhejiang prov ince) Wenzhou (Zhejiang prov ince) Qingtian (Zhejiang prov ince) Cangnan (Zhejiang prov ince) Yongjia (Zhejiang prov ince) Yueqing (Zhejiang prov ince) Pingy ang (Zhejiang prov ince)

175

J un-16

Profit making*** Profit making*** Profit making*** Profit making*** Profit making*** Profit making*** Profit making***

n/a

n/a

37

J un-16

n/a

Chengdu (Sichuan prov ince) n/a Sanhe (Hebei prov ince)

200

J un-16

n/a

n/a

Beijing

38

J un-16

n/a

n/a

Linhai (Zhejiang prov ince) n/a Shenzhen (Guangdong prov ince) n/a Pingy ang (Zhejiang prov ince) n/a Quzhou (Zhejiang prov ince)

80

J un-16

50

J un-16

80

J un-16

50

J un-16

N at u re

N u mb er o f b ed s u n d er L o c at io n o p erat io n

L as t u p d at e

R i c i H e a l t h c a r e (1 5 2 6 H K ) Nantong Rich hospital

100% stake

南通瑞慈醫院 U n i ve r s a l M e d i c a l (2 6 6 6 H K ) The F irst A ffiliated hospital of Xian J iaotong Univ ersity ****

M anagement contract*

西安交通大學第一附屬醫 院 W e n z h o u K a n g n i n g (2 1 2 0 H K ) Wenzhou Kangning hospital

100% stake

溫州康寧 Wenzhou Yining hospital

100% stake

溫州怡寧老年醫院 Qingtian Kangning hospital

100% stake

青田康寧 Cangnan Kangning hospital

100% stake

蒼南康寧 Yongjia Kangning hospital

100% stake

永嘉康寧 Yueqing Kangning hospital

100% stake

樂清康寧 Pingy ang Changgeng w ard hospital

M anagement contract*

平陽長庚 Chengdu Reny i w ard hospital

M anagement contract*

成都仁一 Yanjiao F uren hospital

M anagement contract*

燕郊輔仁 Beijing Yining hospital

49% stake

北京怡寧 Linhai Kangning hospital

80% stake

臨海康寧 Shenzhen Yining hospital

52% stake

深圳怡寧 Pingy ang Kangning hospital

100% stake

平陽康寧 Quzhou Yining hospital

60% stake

衢州怡寧

n/a n/a n/a

*Management contract: The group does not own the hospital but has the management rights of the hospital for an agreed period. During the period, the group will earn revenue from the hospital by providing management services or/and drugs & medical consumables procurement services. **The hospital will be injected by China Resources Healthcare in 4Q16 ***Difference between profit-making and non-profit making hospital: Profit-making - the stakeholders can distribute its profit at will. Non profitmaking: the stakeholders cannot distribute its profit to parties outside the hospital. Thus, to share the financial resources of this hospital, the company managing this hospital will charge a management or procurement fee. ****Universal Medical co-operates with the First Affiliated hospital of Xian Jiaotong University in two ways: 1) Universal Medical will spend at most Rmb2bn to build a new hospital for the First Affiliated hospital of Xian Jiaotong University. It will be a top-tier grade A hospital with c.1,000 beds, named as “International Land Port Hospital”. Universal Medical will participate in the operations of the hospital; 2) Universal Medical will establish a JV with the First Affiliated hospital of Xian Jiaotong with an 80% stake and investment of Rmb28m. Starting from 2017, the JV will procure drugs and medical consumables for the First Affiliated hospital of Xian Jiaotong, International Land Port Hospital and other third-party hospitals. We estimate that to generate annual revenue of at least Rmb2bn to Universal Medical. Source: DBS Vickers

ASIAN INSIGHTS Page 21

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector Hospital profiles of major hospital companies listed in HK (con’t)

H o s p it als u n d er t h e c o mp an y ' s man ag emen t

T ier: top/ mid / b as ic

G rad e: A /B/C

Profit making*** Profit making***

n/a

n/a

Beijing

72

Dec-15

n/a

n/a

Chongqing

120

Dec-15

Profit making*** Profit making***

n/a

n/a

Guangzhou (Guangdong prov ince) n/a Shenzhen (Guangdong prov ince)

50

Dec-15

90

Dec-15

83% stake

Profit making***

n/a

n/a

F uzhou (F ujian prov ince)

60

Dec-15

95.5% stake

Profit making***

n/a

n/a

Chongqing

80

Dec-15

96.5% stake

Profit making***

n/a

n/a

Guiy ang (Guizhou prov ince)

60

Dec-15

97% stake

Profit making***

n/a

n/a

Chongqing

30

Dec-15

100% stake

Profit making***

n/a

n/a

Guiy ang (Guizhou prov ince)

100

Dec-15

96.5% stake

Profit making***

n/a

n/a

Chongqing

80

Dec-15

100% stake

Profit making***

n/a

n/a

Wuhan (Hubei prov ince)

100

Dec-15

R elat io n s h ip w it h t h e g ro u p

N at u re

N u mb er o f b ed s u n d er L o c at io n o p erat io n

L as t u p d at e

H a r mo n i c a r e (1 5 0 9 H K ) Beijing Harmonicare hospital

100% stake

北京和美婦兒醫院 Chongqing Modern Woman hospital

100% stake

重慶現代女子醫院 Guangzhou Woman hospital

97% stake

廣州女子醫院 Shenzhen Harmonicare hospital

92% stake

n/a

深圳和美婦兒醫院 F uzhou Modern Woman hospital

福州現代婦產醫院 Chongqing Dushi Liren Hospital

重慶都市儷人醫院 Guiy ang Modern Woman Hospital

貴陽現代 Chongqing Wanzhou HarM oniCare Hospital

重慶萬州和美 Guiy ang HarMoniCare Hospital

貴陽和美醫院 Chongqing F uling HarM oniCare Hospital

重慶涪陵和美醫院 Wuhan Modern Obstetrics and Gy necology Hospital

武漢現代婦產醫院

*Management contract: The group does not own the hospital but has the management rights of the hospital for an agreed period. During the period, the group will earn revenue from the hospital by providing management services or/and drugs & medical consumables procurement services. **The hospital will be injected by China Resources Healthcare in 4Q16 ***Difference between profit-making and non-profit making hospital: Profit-making - the stakeholders can distribute its profit at will. Non profitmaking: the stakeholders cannot distribute its profit to parties outside the hospital. Thus, to share the financial resources of this hospital, the company managing this hospital will charge a management or procurement fee. ****Universal Medical co-operates with the First Affiliated hospital of Xian Jiaotong University in two ways: 1) Universal Medical will spend at most Rmb2bn to build a new hospital for the First Affiliated hospital of Xian Jiaotong University. It will be a top-tier grade A hospital with c.1,000 beds, named as “International Land Port Hospital”. Universal Medical will participate in the operations of the hospital; 2) Universal Medical will establish a JV with the First Affiliated hospital of Xian Jiaotong with an 80% stake and investment of Rmb28m. Starting from 2017, the JV will procure drugs and medical consumables for the First Affiliated hospital of Xian Jiaotong, International Land Port Hospital and other third-party hospitals. We estimate that to generate annual revenue of at least Rmb2bn to Universal Medical. Source: DBS Vickers

ASIAN INSIGHTS Page 22

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector We will now look at those hospitals through our checklist (see the following table). The more criteria they meet, the better quality they are. Analysis of hospitals through our checklist H o sp it als u n d er t h e c o mp an y ' s man ag emen t

1

2

3

Crit erio n 4 5 6

7

8

9

P h o e n i x H e a l t h c a r e (1 5 1 5 H K) J ian Gong Hospital Yan Hua Hospital Group Mentougou Hospital J ing Mei Hospital Group Mentougou Traditional Chinese Medicine Hospital Mentougou Hospital for Women & Children Shuny i A irport Hospital Shuny i No.2 Hospital Baoding No.1 Center Hospital Baoding Third Center Hospital Wuhan Iron & Steel Hospital Group** Huaibei Miner General Hospital Group** Xuzhou Mining Hospital** Guangdong 999 Brain Hospital**

Y* Y* Y* Y* Y* Y* Y* Y* Y* Y*

北京市健宮醫院 北京燕化醫院 北京市門頭溝區醫院 北京京煤集團總醫院 北京市門頭溝區中醫醫院 北京市門頭溝區婦幼保健院 順義區空港醫院 順義區第二醫院 保定市第一中心醫院 保定市第三中心醫院 武鋼總醫院 淮北礦工總醫院 徐州礦山醫院 廣東三九腦科醫院

Y Y

Y Y Y Y Y Y Y Y Y Y Y Y Y

Y Y

Y Y

Y

Y Y

Y

Y

R i c i H e a l t h c a r e (1 5 2 6 H K ) Nantong Rich hospital

Y

南通瑞慈醫院

U n i ve r s a l M e d i c a l (2 6 6 6 H K) The F irst A ffiliated hospital of Xian J iaotong Univ ersity

西安交通大學第一附屬醫院

Y

Y

Y

Y

Y

W e n z h o u Ka n g n i n g (2 1 2 0 H K) Wenzhou Kangning hospital Wenzhou Yining hospital Qingtian Kangning hospital Cangnan Kangning hospital Yongjia Kangning hospital Yueqing Kangning hospital Pingy ang Changgeng ward hospital Chengdu Reny i ward hospital Yanjiao F uren hospital Beijing Yining hospital Linhai Kangning hospital Shenzhen Yining hospital Pingy ang Kangning hospital Quzhou Yining hospital

Y

溫州康寧 溫州怡寧老年醫院 青田康寧 蒼南康寧 永嘉康寧 樂清康寧 平陽長庚 成都仁一 燕郊輔仁 北京怡寧 臨海康寧 深圳怡寧 平陽康寧 衢州怡寧

Y

Y

Y

H a r mo n i c a r e (1 5 0 9 H K ) Beijing Harmonicare hospital Chongqing Modern Woman hospital Guangzhou Woman hospital Shenzhen Harmonicare hospital F uzhou Modern Woman hospital Chongqing Dushi Liren Hospital Guiy ang Modern Woman Hospital Chongqing Wanzhou HarMoniCare Hospital Guiy ang HarMoniCare Hospital Chongqing F uling HarMoniCare Hospital Wuhan Modern Obstetrics and Gy necology Hospital

北京和美婦兒醫院 重慶現代女子醫院 廣州女子醫院 深圳和美婦兒醫院 福州現代婦產醫院 重慶都市儷人醫院 貴陽現代 重慶萬州和美 貴陽和美醫院 重慶涪陵和美醫院 武漢現代婦產醫院

Y

Y

Y Y Y Y

Y

Y Y

Source: DBS Vickers *All these hospitals are owned or operated by Beijing Phoenix United Hospital Management Consulting Co. Ltd which is classified as Grade A Tax Payer. It is wholly owned by Phoenix Healthcare.

ASIAN INSIGHTS Page 23

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector Phoenix Healthcare (1515 HK, BUY, TP: 17.9) Financial status. We believe the financial status of the hospitals under the group's management is solid because 60% of its hospital capacities (in terms of bed numbers) meet at least one criterion under criteria 1 to 5. There are two more reasons leading us to believe Phoenix Healthcare’s financial status is solid: 1) China Resources Healthcare (CR Healthcare) will be its largest shareholder after an asset injection in 4Q16, with a least a 35.7% stake. It is a company owned by China Resources Group. China Resources Group is one of the 103 state-owned enterprises (SOEs) directly under Stateowned Assets Supervision & Administration Commission. The support of this central SOE strengthens its financial status; 2) As of June 2016, Phoenix Healthcare had net cash of Rmb800m; Earnings growth potential. We think the potential is strong because: 1) Except Guangdong 999 Brain Hospital, all of its hospitals meet criterion 7. They were formerly SOE / public hospitals which have been transformed into private hospitals or hospitals managed under management contract. The group is an expert in this aspect. As discussed above, recently released policies allow more SOE hospitals to be involved in M&A or managed by sophisticated private companies. Riding on this opportunity and the support from China Resources Group, the company can accelerate its earnings growth. 2) Two of its hospitals meet criterion 9. They account for c.22% of the group’s hospital capacities and are well recognised by international insurance companies. This can help to attract patients and thus generate revenue. 3) Two of its hospitals meet criterion 8. They account for c.32% of the group’s hospital capacities. As they are qualified to provide on-site training to graduates from medical schools, it would be easier to attract talents which is crucial for long-term growth. We project the earnings of the group to grow at 56% CAGR in 2015-18F, driven by hospital acquisitions from CR Healthcare in 4Q16, more medical services offerings, and lower procurement cost thanks to its larger scale.

Universal Medical (2666 HK, Not rated) Financial status. We believe the financial status of the hospital under the company’s management is solid because it meets criterion 1 which means it is a hospital directly under NHFPC which is a department in the central

ASIAN INSIGHTS Page 24

government. The support from NHFPC strengthens its financial standing. Universal Medical's own financial status is solid too. Its parent company is China General Technology (which owns a 37.7% stake). That is one of 103 SOEs directly under State-owned Assets Supervision & Administration Commission. The support from the parent company reinforces its financial strength too. Earnings growth potential. Universal Medical will procure drugs and medical consumables for the First Affiliated Hospital of Xian Jiaotong University. We estimate that to start early next year and can generate revenue and earnings of c.Rmb2bn and c.Rmb160m respectively, equal to 91% and 24% of its revenue and earnings in 2015. We think the hospital has great growth potential because: 1) It meets criterion 6. That means it is well recognised in several medical areas with supply shortages. Those areas include: a) Anti-cancer department. The department is recognized as a “Key National Hospital for Specialized Clinical” by the central government. This is an area in supply shortage as evidenced by >105% bed utilisation of cancer hospitals in 2012-14; b) It is qualified to provide organ transplant services. There are only 169 hospitals in China licensed to provide such services. 2) It meets criterion 7. The hospital is a public hospital under NHFPC. It hands over the management of drugs & medical consumables procurement to Universal Medical. This is a good start. Universal Medical may attract other public hospitals to let it procure those materials for them. The group had already signed framework agreements with Handan First Hospital and The Second Affiliated Hospital of Zhengzhou University. The materialisation of those agreements could accelerate the group's earnings growth. 3) It meets criterion 8. Compared to hospitals which are not qualified to provide on-site training to graduates from medical school, it would be easier for the hospital to attract talents for long-term growth. In 1H16, the group generated c.85% of revenue from three kinds of services provided to hospitals: medical equipment leasing services (58%), clinical department upgrade services (6%), industry/equipment/financing advisory services (21%). The growth of these revenue will be driven by annual increase of hospital customers by >100, single-digit increase of leasing income per hospital customer, and more value added services to offer (e.g. helping hospitals to develop their ability to treat cerebral stroke. According to Bloomberg, the consensus projects the earnings of the group to grow at a CAGR of 38% in 201618.

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector Wenzhou Kangning (2120 HK, BUY, TP: 50.00) Financial status. Although the majority of its hospitals do not meet criteria 1 to 5, we believe the group's overall financial status is healthy because: 1) It had net cash of Rmb459m as of June 2016; 2) It is able to pay dividend (Rmb0.25 per share for 2015A). This is a sign of healthy cash flow management. Earnings growth potential. We see strong potential. Its flagship hospital Wenzhou Kangning, which generated >50% of its earnings, meets criterion 6. NHFPC has granted the “Key National Hospital for Specialized Clinical” qualification to Wenzhou Kangning. This is a strong recognition for its capability in psychiatric treatments. Psychiatric healthcare services are in short supply because there are c.20m patients suffering from serious mental diseases who need inpatient services but only 300k beds are available. The company is expanding its network to capture the opportunity. And because it meets criterion 8 and is qualified to provide on-site training to attract talents, it would find it easier to recruit sufficient staffs to expand in this market.

of large corporations in different regions. Relative to them, Rici’s network is much smaller. It focuses only on Eastern China. We have concerns about the growth prospects of this business given the competition as discussed above. 2) Hospital contributed 37% of sales in 1H16. Out of the hospital's total revenue, drug sales made up 55% in 1H16. One of the reasons that the hospital can generate earnings is that it can add a mark-up over its procurement cost when selling drugs. The government has been requiring more and more hospitals to remove the mark-up since 2014. Rici’s hospital will be impacted by this policy in the future, which would affect its profitability. Our preliminary estimates suggest that, excluding IPO expenses, the group’s normalised earnings will grow by 134% and 53% in 2016 and 2017 to Rmb92m and Rmb140m respectively, driven by (i) health screening centres which commenced operations in 2014-15 and are gradually turning profitable. These account for 38% of the total number of centres; 2) the group will open eight new health screening centres in 2016-17, and some could start to contribute in 2017.

We project the company's earnings to grow by 28% in 16F18F, driven by network expansion.

Harmonicare (1509 HK, BUY, Not rated) Rici Healthcare (1526 HK, BUY, Not Rated) Financial status. Although the group's hospital does not meet any of criteria 1 to 5, we believe its financials should be healthy after raising over HK$800m capital in its IPO in October 2016. It will turn from net debt to net cash position following that. Earnings growth potential. The hospital meets criterion 6, its paediatric department has been granted “Key National Hospital for Specialized Clinical” status and paediatric services are in short supply as evidenced by >100% utilisation of beds in 2012-14. So, we believe the company could have great potential in this aspect. But we have two concerns about this company: 1) Health screening centres contributed 63% of sales in 1H16. The group is the fourth largest private player in health screening industry, but its market share was just 0.6% based on 2015 sales. There is intense competition from: a) Public medical institutes (82% market share). Their prices are very competitive relative to private players; b) Private hospitals (7% market share). They can provide many other medical services to cater to customers who are interested in other services besides health screening.; c) Private health screening groups with nationwide networks (6% market share). Their networks are large enough to support employees

ASIAN INSIGHTS Page 25

Financial status. We believe the financial status of the hospitals under the group management is solid. Four of its hospitals which accounted for c.36% of its revenue in 1H16, meet criterion 2. That means they are stable tax payers which is a sign of good financial status. Also, as of June 2016, Harmonicare was holding net cash of Rmb1.2bn. That further fortifies its financial status. Earnings growth potential. One of its hospitals, Beijing Harmonicare hospital meets criterion 9, that means it is well recognised by international insurance companies. We believe that hospital can grow in the long run. However, as an operator of obstetrics & gynaecology hospitals, it might be facing industry overcapacity. According to NHFPC, the bed utilisation of obstetrics & gynaecology hospitals were below 67% in 2012-14. That implies there are many idle capacities in this segment which intensify competition and impact the price of services. In 1H16, the spending per patient visit of the company was Rmb1,374, representing a 2.1% h-o-h drop and a 1.3% y-o-y drop. Total patient visits fell 1%. We think this might be the result of competition due to industry overcapacities, which create uncertainty for the company’s long-term growth. According to Bloomberg, the consensus is projecting the company’s earnings to grow at a CAGR of 30% in 2016-18.

VICKERS SECURITIES

China/Hong Kong Company Focus

Phoenix Healthcare Bloomberg: 1515 HK Equity

Refer to important disclosures at the end of this report

| Reuters: 1515.HK

DBS Group Research . Equity

20 Oct 2016

BUY (Initiation)

Riding on support from China Resources Group

Last Traded Price ( 19 Oct 2016): HK$13.10 (HSI : 23,305) Price Target 12-mth: HK$17.9 (37% upside)

Asia’s largest hospital company. Running c.12,000 beds by Dec 2016, the company is the largest hospital group in Asia. It generates >60% of its sales from provision of drugs / consumables procurement and management services to various hospitals under management contracts. The rest is generated from the private hospital it owns. We project its earnings to grow by 54% CAGR in 2015-18F driven by hospital acquisitions from China Resources Healthcare (CR Healthcare, a company owned by China Resources Group - a state-owned enterprise (SOE) under the central government), more medical services offerings, and lower procurement cost due to its larger scale.

Potential Catalyst: M&A Where we differ: in line Analyst Mark Kong CFA, +852 2820 4619 [email protected] Price Relative HK$

Relative Index

17.2

229

15.2

209

13.2

189 169

11.2

149 9.2

129

7.2

109

5.2 Nov-13

89 Nov-14

Nov-15

Phoenix Healthcare (LHS)

Forecasts and Valuation FY Dec (RMB m) Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex) (core profit) EPS (RMB) EPS (HK$) Core EPS (HK$) Core EPS (RMB) EPS Gth (%) Core EPS Gth (%) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) Core PE (X) P/Cash Flow (X) P/Free CF (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (RMB) Other Broker Recs:

Relative HSI (RHS)

2015A 1,372 271 248 167

2016F 1,611 380 387 267

2017F 2,821 721 727 500

2018F 3,481 908 913 628

167

267

500

629

0.20 0.24 0.24 0.20 (26.3) (26.3) 0.24 0.11 2.42 55.7 55.7 40.2 46.6 31.2 0.9 5.4 CASH 9.9

0.29 0.34 0.34 0.29 43.4 43.4 0.34 0.12 1.72 38.8 38.8 37.2 42.6 24.5 0.9 7.6 CASH 14.5

0.39 0.44 0.44 0.39 31.8 31.8 0.44 0.22 2.04 29.5 29.5 28.7 30.8 18.5 1.7 6.4 CASH 23.6

0.48 0.56 0.56 0.48 25.5 25.7 0.56 0.28 2.38 23.5 23.4 21.4 22.6 14.2 2.1 5.5 CASH 25.2

New 0.334 B: 5

New 0.389 S: 2

New 0.469 H: 2

ICB Industry: Health Care ICB Sector: Health Care Equipment & Services Principal Business: Healthcare

Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX

ed-JS / sa- DL

Share price driver 1: CR Healthcare may increase its stake. CR Healthcare will be the largest shareholder of the group with 35.7% stake after injecting 70% of its hospitals facilities in 4Q16. But it cannot control the board as its representation in terms of members will be limited to 36%, not including the Chairman. To better protect the hospitals injected, we believe it will increase its stake in 2016-20. Looking at the five listed companies owned by China Resources Group on the HKEX, China Resources Group has >50% in these companies. We believe Phoenix Healthcare should not be an exception. Share price driver 2: Acquisition of more SOE hospitals. In Jun & Jul, the Central government required SOEs to accelerate the offloading of non-core assets such as hospitals in 2016-20. There should be c.3000 SOE hospitals available for M&A. CR Healthcare has been growing through acquiring SOE hospitals since 2011. Leveraging on the favourable policies and support from China Resources Group, either its relationship with local governments or financial, M&A for the company could accelerate. Since IPO in 2013, 8 out of 14 share price turning points were driven by M&A. So, acquiring more SOE hospitals will boost the company’s share price like in the past. Valuation: Our TP of HK$17.9 is based on 40x 17F PE, representing c.30% premium over the group’s historical average since IPO. It deserves the premium as its financial strength and growth potential will be stronger after CR Healthcare becomes its largest shareholder. Key Risks to Our View: The speed of hospital acquisition is slower than expected. At A Glance Issued Capital (m shrs) Mkt. Cap (HK$m/US$m) Major Shareholders China Resources Healthcare (%) Management (%) Free Float (%) 3m Avg. Daily Val. (US$m)

834 10,929 / 1,409 35.7 19.5 44.8 5.2

Company Focus Phoenix Healthcare

INVESTMENT THESIS Profile

Rationale

Running c.12,000 beds by Dec 2016, the company is the largest hospital group in Asia. The company generates >60% of its revenue from provision of drugs / consumables procurement and management services to various hospitals under management contracts. The rest is generated from the private hospital it owns. After assets injection in 4Q16, China Resources Healthcare will be the largest shareholder of the company with 35.7% stake.

We project its earnings to grow by 54% CAGR in 2015-18F driven by hospital acquisitions from China Resources Healthcare (CR Healthcare, a company owned by China Resources Group - a state-owned enterprise (SOE) under the central government), more medical services offerings, and lower procurement cost thanks to its larger scale..

Valuation

Risks

Our TP of HK$17.9 is based on 40x 17F PE, representing c.30% premium over the group’s historical average since IPO. It deserves the premium as its financial strength and growth potential will be stronger after CR Healthcare becomes its largest shareholder.

Gradual removal of price mark-up on drugs in hospitals may impact revenue of supply chain business. Supply chain business contributed >50% to revenue. This covers the drugs & medical consumables procurement services provided to hospitals. Hence, its growth is tied to the volume of drugs sold by hospitals. In the past, hospitals were very active in selling drugs as they were allowed a 15% mark up over procurement cost when selling drugs. Since 2014, the government has started to remove the mark-up gradually, and this has taken away their incentive to sell drugs. Pharmaceutical industry sales growth decelerated from 20% in 2013 to c.10% in 1H16. The hospitals under the group’s management may be impacted by this policy and eventually affect the supply chain business revenue.

Hospitals’ bed capacity may fall after the end of the management contracts. Post injection from CR Healthcare, the number of beds under Phoenix Healthcare’s management will be c.12000. We understand that 47% are not owned by Phoenix Healthcare, and are managed under management contracts until 2030-55. The risk is that the management contract may not be renewed which could significantly impact the group’s revenue.

Source: DBS Vickers

ASIAN INSIGHTS Page 27

VICKERS SECURITIES

Company Focus Phoenix Healthcare

SWOT analysis

Strengths

Weaknesses

•

Strong support from its single largest shareholder China Resources Healthcare and its parent company China Resources Group which is a state-owned enterprise (SOE)

•

•

Successful track record in public hospital reform

•

As the largest hospital group in terms of beds under operation, its large scale will help to lower procurement cost

Over 40% of hospital capacity is not owned by the group and is operated under management contracts. After the end of contract, it may lose these capacities.

Opportunities

Threats

•

More SOE hospitals will become available for M&A as the government requires SOEs to offload their non-core businesses like hospitals

•

•

More opportunities to co-operate with public hospitals in Hebei province as the local government there is encouraging its public hospitals to co-operate with private parties to improve operating efficiency.

ASIAN INSIGHTS Page 28

Over 70% of revenue is related to drugs procurement services provided to hospitals. Drugs sales of hospitals may drop as hospitals are not allowed to profit from selling drugs in the long run which may impact the group’s drug procurement services revenue.

VICKERS SECURITIES

Company Focus Phoenix Healthcare

Key company information

Hospitals under operation Name

R elat ion ship w it h t h e g ro up

T ier: t op / mid / basic

G rade: A /B /C

L oc at io n

Number o f L ast bed s u pd at e u n der op erat ion

J ian Gong Hospital Yan Hua Hospital Group Mentougou Hospital J ing Mei Hospital Group Mentougou Traditional Chinese Medicine Hospital

80% stake Management contract* Management contract* Management contract* Management contract*

making*** making*** making*** making*** making***

mid top mid top mid

A n/a A n/a A

Beijing Beijing Beijing Beijing Beijing

396 663 466 1,789 120

J un-16 J un-16 J un-16 J un-16 J un-16

Mentougou Hospital for Women & Children

Management contract* Non profit making***

mid

A

Beijing

34

J un-16

Shuny i Airport Hospital Shuny i No.2 Hospital Baoding No.1 Center Hospital

Management contract* Non profit making*** Management contract* Non profit making*** Management contract* Non profit making***

mid basic top

n/a n/a A

Beijing Beijing Baoding (Heibei prov ince)

168 100 1,888

J un-16 J un-16 J un-16

Baoding Third Center Hospital

Management contract* Non profit making***

mid

A

Baoding (Heibei prov ince)

243

J un-16

51% stake + Management Non profit making*** contract*

top

n/a

Wuhan (Hubei prov ince)

1,868

Dec-15

Huaibei Miner General Hospital Group**

100% stake + Non profit making*** Management contract*

top

n/a

Huaibei (Anhui prov ince)

2,765

Dec-15

Xuzhou Mining Hospital**

100% stake + Non profit making*** Management contract*

mid

n/a

Xuzhou (J iangsu prov ince)

400

Dec-15

Guangdong 999 Brain Hospital**

100% stake + Non profit making*** Management contract*

top

A

776

Dec-15

999 Medical Clinic (Shenzhen)**

100% stake + Management contract*

Profit making

n/a

n/a

Unknown

Unknown

top

n/a

Guangzhou (Guangdong prov ince) Shenzhen (Guangdong prov ince) Unknown

Wuhan Iron & Steel Hospital Group**

Hospital(s) possibily injected by CITIC Medical & Healthcare (still in negotiation)

Profit Non profit Non profit Non profit Non profit

Nat u re

Dec-15

700

Dec-15

Source: company, DBS Vickers * Management contract: The group will make an investment in the hospital, part of which is refundable. In exchange, the group will have management rights of the hospital for an agreed period. During this period, the group will earn revenue from the hospital by providing management services and drugs & medical consumables procurement services. ** The hospital will be injected by China Resources Healthcare in 4Q16 ***Difference between profit-making and non-profit hospitals: Profit-making - the stakeholders can distribute profit at will. Non profit-: the stakeholders cannot distribute its profit to external parties.

ASIAN INSIGHTS Page 29

VICKERS SECURITIES

Company Focus Phoenix Healthcare

Estimated COGS breakdown of each segment

Revenue breakdown in 1H16 Hospital management services** 6%

General hospitals services* 40%

General hospital services - COGS

Medical devices & consumable s 20% Staff costs 18%

Supply chain business*** 54%

Drugs 52%

Others 10%

Source: company, DBS Vickers *General hospital services: Revenue from Jian Gong Hospital, the private hospital owned by the group, which is a profit-making hospital by nature

Hospital management services - COGS

**Hospital management services: Management services fees from the hospitals operated under management contracts ***Supply chain business: Drugs & medical consumables procurement services provided to the hospitals operated under management contracts

Amortization of investment in hospitals under management contracts 100%

Gross margin of each segment 100% 80% 60% 40%

Supply chain business - COGS

20% 0% 2010

2011

2012

2013

2014

2015

General hospitals services Hospital management services Supply chain business

1H16 Medical devices & consumables 40%

Source: company, DBS Vickers

Drugs 60%

Source: DBS Vickers

ASIAN INSIGHTS Page 30

VICKERS SECURITIES

Company Focus Phoenix Healthcare

Shareholding structure

P h oenix Healthcare ( 1 5 15 HK)

16.11%

35.7% China Resources Healthcare

0.82%

Chairlady & founder Ms. Xu Jie & parties acting in concert with her

44.79%

CFO Mr. Jiang Tianfan

2.07% CEO Mr. Liang Hongze

Public

0.51% Other directors

Source: company, DBS Vickers * CITIC Medical & Health also intends to inject their medical services businesses into Phoenix Healthcare for a stake in Phoenix Healthcare. CITIC Medical & Healthcare is still in talks with the group to finalise the deal. If CITIC Medical & Healthcare successfully injects the assets, the shareholding structure will be: China Resources Healthcare 32.43%, CITIC Medical & Healthcare 9.15%, Chairlady 14.63%, CEO 1.88%, CFO 0.74%, Other directors 0.47%, Public 40.7%

ASIAN INSIGHTS Page 31

VICKERS SECURITIES

Company Focus Phoenix Healthcare

Share price drivers

Major trends of Phoenix Healthcare’s share price HK$ 18

B

A

16 14

C

12 10 8 6 4 2 0 Nov-13

May-14

Dec-14

Jul-15

Feb-16

Sep-16

Source: Bloomberg Finance L.P., DBS Vickers

Looking at the chart above, we identified three major trends for Phoenix Healthcare’s share price movement since its IPO in Dec 2013: 1) Uptrend from Dec 2013 to May 2015: This was mainly driven by market anticipation for M&A to boost earnings growth. We believe the group had shared its M&A plans during meetings with potential investors before its IPO in 2013. This triggered expectations that the group’s earnings would grow rapidly through M&A. This was strengthened by an investment of Rmb15m for the management rights of Mentougou healthcare hospital for women & children (Sep 2014), JV established with Beijing Jing Mei Group to manage Jing Mei Group General Hospital (Dec 2014), and an investment of HK$180m for a 20% stake in UMP (722 HK) (Mar 2015).

3) Uptrend from Feb 2016 to now: Again, this was mainly driven by market anticipation for M&A. When the group announced the issue of new shares to acquire hospitals from CR Healthcare in Apr 2016, the share price rose. After the deal, CR Healthcare will be the largest shareholder of the group with 35.7% stake. The market believes that support from CR Healthcare will significantly strengthen the group’s financial status and growth prospectus. When CR Healthcare and the group jointly unfolded their plans to investors in Sep 2016, the share price went up further.

To sum up, there were two major factors moving the group’s share price: M&As and major shareholders’ reducing / increasing their stakes.

2) Downtrend from May 2015 to Feb 2016: This was mainly driven by major shareholders’ reducing their stakes. The turning point for the share price occurred in May 2015 when major shareholder Mr. Zhu Zhiwei reduced his stake significantly from 21.48% to 3.19%. We believe this caused the market to have doubts about the group’s prospects. When Mr. Xu Baorui (father of Phoenix Healthcare’s founder Ms. Xu Jie) reduced his stake from 29.97% to 21.76% in Oct 2015, the share price dropped much further.

ASIAN INSIGHTS Page 32

VICKERS SECURITIES

Company Focus Phoenix Healthcare

Notable share price events

31000

5

29000

25000 23000

4

21000 19000

10

2

27000

6

18

9

7

16

12 14

8

12 10

11

8

3 1

17000 Nov-13

14

6

13

4 May-14 HSI Index (LHS)

Dec-14

Jul-15

Feb-16

Sep-16

Phoenix Healthcare (RHS)

Source: Bloomberg Finance L.P., DBS Vickers

ASIAN INSIGHTS Page 33

VICKERS SECURITIES

Company Focus Phoenix Healthcare

Notable events moving Phoenix Healthcare’s share price Turning point 1

Timing occur Dec-13

2

Mar-14

3

Jun-14

4

Sep-14

5

Nov-14

6

Dec-14

7

Jan-15

8

Mar-15

9

May-15

10

Jul-15

11

Sep-15

12

Oct-15

13

Apr-16

14

Sep-16

Share price direction Event Nature of the event Up We believe the company shared its M&A plans during meetings with potential M&A investors before its IPO in Nov 2014. Investors believed that M&A would accelerate its growth. Hence, the share price shot up right after IPO. Down One of the IPO sponsors issued a report citing the group's comment on M&A: "M&As M&A are highly challenging to forecast". This could have created concerns that the M&A plans promised during IPO may not be realized. Up The company issued positive profit alert that 1H14 earnings would increase Positive profit alert significantly on a y-o-y basis. Up The company announced plans to invest Rmb15m to Mentougou healthcare hospital M&A for women & children (located in Mentougou district of Beijing) for the right to manage the hospital and receive performance based annual management fees until Dec 2030. This was the first M&A of the company since IPO in Nov 2013. Down End of pre-IPO investors lock-up period. Relative to the IPO offer price of HK$7.38, Major shareholders the share price had surged by over 100% by then. We believe the market was reduced/increased stake concerned that the pre IPO investors may make an exit. Up Phoenix Healthcare announced to jointly establish a company with Beijing Jing Mei M&A Group (Stake: Phoenix Healthcare 70%, Beijing Jing Mei Group 30%). This company will own Jing Mei Group General Hospital. In 2014, Phoenix Healthcare was operating 3622 beds, where only 11% or 403 beds were owned by the group. The number of beds owned by the group could increase to over 2100 after the deal. Down Major shareholder Mr. Zhu Zhiwei reduced his stake from 21.48% to 16.27% at Major shareholders HK$14.3 p.s. reduced/increased stake Up Phoenix Healthcare and its management announced to invest HK$180m for 20% M&A stake of UMP Healthcare (clinic operator in Hong Kong). Phoenix Healthcare and UMP will also establish a 50:50 joint venture to develop clinic network in mainland China. Down Major shareholder Mr. Zhu Zhiwei reduced stake from16.27% to 3.19% at price of Major shareholders HK$15.35 p.s. reduced/increased stake Down The share price is moving in the same direction as Hang Seng index. Macro stock market movement M&A Up Phoenix healthcare will invest Rmb500m in No.1 Central Hospital in Baoding of Hebei province for the management rights of the hospital until Sep 2035 from the government. The hospital was operating 1882 beds in 2015. That equals to 51% of beds number under Phoenix Healthcare's management in 2015. The group will also invest Rmb70m in Third Centre Hospital in Baoding before Jan 2017, in exchange for the management rights of the hospital until 2035 from the government. Meanwhile, the group will establish a special purpose charity fund of Rmb20m for the hospital to offer charitable medical services to citizens. During the period, the hospital will offer a fixed annual return on the investment principal, plus management fee. The hospital was operating 224 beds in 2015, or 6% of beds number under the group’s management in 2015. Down Mr. Xu Baorui (father of Phoenix Healthcare's founder Ms. Xu Jie) reduced stake from Major shareholders 29.97% to 21.76% at price of HK$13.05 p.s. reduced/increased stake M&A Up The company announced the acquisition of hospitals and elderly care institutions from China Resources Healthcare. Total operating bed numbers will double after the deal. In exchange, the company will issue 463m new shares at HK$8.04 p.s to China Resources Healthcare. In May 2016, Phoenix Healthcare announced the issue of 130.6m new shares at HK$9.5 per share to CITIC Medical & Health ("CITIC Med") to acquire its hospitals (around 700 beds). If both deals materialize, the stake of China Resources Healthcare and CITIC Medical & Healthcare in Phoenix Healthcare will be 32.42% and 9.15%. If only the deal with China Resources Healthcare materialize, China Resources Healthcare's stake in Phoenix Healthcare will be 35.7%. Up The management of Phoenix Healthcare, China Resources Healthcare, China M&A Resources Holdings (parent company of China Resources Healthcare) met with investors to unfold their plans after M&A.

Source: DBS Vickers

ASIAN INSIGHTS Page 34

VICKERS SECURITIES

Company Focus Phoenix Healthcare

In future, we believe M&As and major shareholders’ reducing / increasing their stakes will continue to have an impact on share price. In the next four years, we see three share price catalysts related to these factors:

1) Acquiring SOE hospitals together with CR Healthcare (related to M&As). CR Healthcare will be the single largest shareholder of Phoenix Healthcare after the injection of its hospitals with 5,809 beds (70% of its hospital assets in terms of bed numbers) in 4Q16. It will have 35.7% stake in Phoenix Healthcare. Four out of eleven directors on Phoenix Healthcare’s board will be assigned by CR Healthcare. “Phoenix Healthcare” will be renamed as “China Resources Phoenix Healthcare” after the deal. It will become the flagship group for CR Healthcare’s hospital business. We believe it will continue to implement CR Healthcare’s strategy. Actually, the strategy of both CR Healthcare and Phoenix Healthcare has always been to acquire hospitals established by SOE (please see the following tables). Hospitals transferred from SOEs made up c.70% and 77% of CR Healthcare and Phoenix Healthcare own capacities in 2015 (in terms of bed numbers).Their acquisition of SOE hospitals should accelerate due to recent favourable policies: A)

B)

According to “Report on reform of state-owned assets’ management & organization by the state council” issued in June 2016 (國務院關於國有資產 管理與體制改革情況的報告), it was stated that “…SOEs should accelerate the spin-off of its social services institutes…..part of the SOE hospitals should change its ownership….” According to the “State council’s guidance on promoting the structural change of central SOE” issued in Jul 2016, (國務院辦公廳關於推動中央企業 結構調整與重組的指導意見), “….medical institutes ran by central SOEs should be revoked, merged with or transferred to other parties…”

Leveraging on the relationship and the favourable policies, Phoenix Healthcare will be able to accelerate its acquisition pace, so as to achieve faster earnings growth. The acquisition of more SOE hospitals can be a catalyst for the share price. Acquisition history of CR Healthcare T ime Oct-11 Apr-12

Feb-13

Dec-14

Dec-14

J an-15

Dec-15

Hospit als t o acquire / t ransf er Establishment of CR Healthcare K uming Children's Hospit al CR Healthcare acquired a 66% stake in the hospital. The rest of the stake is owned by Kuming Health & Family Planning Commission. Wugang Hospit al CR Healthcare acquired a 51% stake in the hospital from Wuhan Iron & Steel (Group) Corp ("WISCO"). The rest of the stake is owned by WISCO. X uk uang Hospit al China Resources Group transferred its 100% stake in the hospital to CR Healthcare.

Remark s

WISCO is a SOE

We believe the hospital was originally owned by a SOE involved in the coal mining business Huaibei Mining Huaik uang Hospit al CR Healthcare acquired 100% stake in the Group is a SOE hospital from Huaibei Mining Group. 999 clinic (Shenzhen) China Resources Asset Management transferred 999 clinic (Shenzhen) to CR Healthcare. Guangdong 999 Brain Hospit al China Resources Sanjiu (000999 CH) transferred 100% of Guangdong 999 Brain Hospital to China Resources Group for Rmb320m. We believe China Resources Group transferred Guangdong 999 Brain Hospital to CR Healthcare in 1Q16.

Source: company, DBS Vickers

For many SOEs, hospitals are non-core assets and are mostly poorly run. Offloading them can alleviate the burden for these SOEs. As a result of the above policies, more SOE hospitals will be available for acquisition. We estimate that there around 3000 SOE hospitals in China, of which, around 1,230 are owned by central SOE hospitals. These are all potential M&A targets for Phoenix Healthcare. CR Healthcare is owned by China Resources Group. It is one of the 103 central SOEs under the State-owned Assets Supervision & Administration Commission and has a strong relationship with many local governments.

ASIAN INSIGHTS Page 35

VICKERS SECURITIES

Company Focus Phoenix Healthcare

Acquisition history of Phoenix Healthcare T ime Hospit als t o ac quire / t ransf er Sep 00 to J ian Gong Hospit al J un 12 The founder of Phoenix Healthcare, Ms. Xu J ie and the group acquired 80% stake in the hospital for Rmb331.7m from Beijing Construction Engineering Group. The hospital's status was changed from a public hospital to profit-making priv ate hospital in 2000. F eb-08 Y an Hua Hospit al The group promised to inv est Rmb222m in the hospital in exchange for its management rights until 2055 from Ms. Xu J ie, the founder of Phoenix Healthcare. Of this, Rmb150m is refundable to the group. Yan Hua Hospital orginally belonged to Sinopec Beijing Yanshan Company . It was a public hospital. In J an 2005, it changed its status to a priv ate hospital (but non-profit making) and its entire stake was sold to Ms. Xu J ie. J ul-10 M ent ougou Hospit al The group promised to inv est Rmb75m (refundable to the group) in exchange for the management rights of the hospital until 2030 from local gov ernment. May -11 J ing M ei Hospit al The group inv ested Rmb150m in the hospital for the management rights of the hospital until 2030 from Beijing J ingmei Group. J un-12 M ent ougou T radit ional Chinese M edic ine Hospit al The group promised to inv est Rmb25m (refundable to the group) in exchange for the management rights of the hospital until 2030 from local gov ernment. Sep-14 M ent ougou Hospit al f or w omen & c hildren The group promised to inv est Rmb15m in exchange for the management rights of the hospital until 2030 from local gov ernment. May -15 Shuny i airport hospit al and Shuny i No.2 hospit al The group inv ested Rmb100m for the management rights of the hospitals until 2035 from local gov ernment. The hospitals will refund Rmb5m to the group annually from 2016 to 2035. Sep-15 No.1 Central Hospital The group will inv est Rmb500m for the management rights of the hospital until 2035 from local gov ernment. During the period, the hospital will offer a fixed annual return on the inv estment principal, plus management fee. The rev enue of the hospital in 2014 was Rmb950m, equiv alent to 79% of the group's rev enue in 2014 Sep-15 Third Centre Hospital The group will inv est Rmb70m before J an 2017 for the management rights of the hospital until 2035 from local gov ernment. Meanwhile, the group will establish a special purpose charity fund of Rmb20m for the hospital to offer charitable medical serv ices to citizens. During the period, the hospital will offer a fixed annual return on the inv estment principal, plus management fee. The rev enue of the hospital in 2014 was Rmb60m, equal to 5% of the group's rev enue in 2014

Remark Beijing Construction Engineering Group is a SOE.

Sinopex Beijing Yanshan Company is a SOE.

Beijing J ingmei Group is a SOE

Source: company, DBS Vickers

ASIAN INSIGHTS Page 36

VICKERS SECURITIES

Company Focus Phoenix Healthcare 2)

Acquisition of public hospitals in Hebei province (related to M&A). In 2015, all hospitals under Phoenix Healthcare’s operations were based in Beijing. The group is expanding through acquisition of hospitals in Beijing and adjacent regions (such as Baoding in Hebei province). With hospitals concentrated in one area, the group can lower the procurement cost for drugs and medical consumables through bulk purchases. Also, medical resources can be shared among hospitals, for example, doctors can rotate between different hospitals in the chain. This is one of reasons that the group announced that it is co-operating with two public hospitals in Baoding (the most populated city in Hebei province) in Sep 2015 (see ”Acquisition history of Phoenix Healthcare”).

Stake of China Resources Group in HK listed companies Co mp an y China Resources Beer China Resources Power China Resources Land China Resources Gas China Resources Cement

St o c k c o d e 291 HK 836 HK 1109 HK 1193 HK 1313 HK

St ak e L ast u p d at e 51.91% 20-Oct-16 62.99% 20-Oct-16 61.27% 20-Oct-16 63.95% 20-Oct-16 73.34% 20-Oct-16

Source: Bloomberg Finance L.P., DBS Vickers

We expect more co-operation efforts with public hospitals in Hebei to take place due to the favourable policy. According to “Hebei provincial healthcare service system planning 2016-20” (河北省政府衛生服務體系規 劃 2016-2020 年”, “…..in regions with a lot of public hospitals, local government should support the ownership change of certain hospitals. It should also support private parties with good reputation to participate into the ownership change…”. In Hebei, there were 530 government owned public hospitals in 2014, which are all potential targets for Phoenix Healthcare to co-operate. Each new project could be a positive share price catalyst for Phoenix Healthcare as in the past.

3)

CR Healthcare may increase stake in Phoenix Healthcare (related to major shareholders increasing stake). Although CR Healthcare is the single largest shareholder of Phoenix Healthcare with 35.7% stake after the injection of hospital assets, it does not have absolute control of Phoenix Healthcare. It can only appoint 36% of the board members. The Chairman of Phoenix Healthcare is not appointed by CR Healthcare, a position that wields substantial power. Questions arising at any board meeting are determined by a majority of votes. In the event of a lack of a majority vote, the Chairman holds the additional or casting vote. It is possible for the decision to go against CR Healthcare. Therefore, to have better control on the hospitals injected, we believe CR Healthcare will increase its stake and appoint more members to the board. This could also be a share price catalyst. We note that China Resources Group holds more than 50% in companies listed in Hong Kong within its group (please see the following table). We believe Phoenix Healthcare is not an exception.

ASIAN INSIGHTS Page 37

VICKERS SECURITIES

Company Focus Phoenix Healthcare Earnings growth drivers

Phoenix Healthcare’s revenue

Hospital injection from CR Healthcare. CR Healthcare will inject hospitals with 5809 beds in total to Phoenix Healthcare in 4Q16. The number of beds under Phoenix Healthcare’s management will increase almost double (by 99%) relative to the number of beds as at June 2016. As these are non-profit hospitals, Phoenix Healthcare is not entitled to dividends, profits, cash flow and residue assets of these hospitals. To benefit from the acquisition, Phoenix Healthcare will offer hospital management services and supply chain service (procurement of drugs & medical consumables) contracts. Thus, we project revenue from hospital management services and supply chain business to surge by 138% and 115% in 2017 respectively, which would lift total revenue by 75% in 2017.

Source: DBS Vickers

Higher patient visits & spending on the back of more medical services offering and better allocation of clinical resources. In 2018, we project the group’s total number of in-patients and out-patients to surge by c.10% and c.10% and spending per in-patient and out-patient to grow by c.10% and c.10%, driven by:

Lower procurement cost thanks to better economies of scale. We project the gross margin of supply chain business to increase by 1-2ppt p.a. in 2015-18 thanks to lower procurement costs for drugs and medical consumables resulting from enlarged operating scale. That will enable group’s gross margin to expand by 1-4ppt p.a. in 2015-18.

2,000 1,000

2018F

2017F

2016F

2015

2014

2013

2012

General hospitals services Hospital management services Supply chain business

Gross margin of the group and different segments 100% 80% 60% 40% 20%

2018F

2017F

2016F

2015

2014

2013

2012

0%

Reallocation of clinical resources to meet patient demand. For example, Jian Gong Hospital has cut resources in its paediatric department and increased resources for cardiology and orthopaedic departments. This is mainly due to structural changes of patient needs.

Thanks to the increase in patient visit and spending, we forecast total revenue will increase by 23% in 2018.

2011

2010

0

2011

2)

Increase in the range of medical services offered by each hospital. After the injection of CR Healthcare’s hospitals, the group will have more doctors specialised in different areas who can be rotated among different hospitals within the group. This would allow each hospital to offer a wider range of medical services. For example, Guangdong 999 Brain Hospital is very strong in treating brain diseases, and its experts could help in other hospitals, hence allowing other hospitals to offer more services to treat brain diseases;

3,000

2010

1)

Rmb mn 4,000

Overall General hospitals services Hospital management services Supply chain business

Source: DBS Vickers

Potential M&A in future. Potential M&A should come from: 1)

As discussed above, acquisition of public hospitals in Hebei province and SOE hospitals;

2)

The group is in talks with CITIC Med for injection of hospital assets. It plans to issue 130.6m new shares at HK$9.5 per share to CITIC Med to acquire its top tier hospitals that has around 700 beds. This will add 12% to the group’s number of beds as at June 2016. The deal is yet to be finalised.

We have not factored in potential M&A in our earnings forecast, which could trigger earnings estimates upgrade once unrealised.

ASIAN INSIGHTS Page 38

VICKERS SECURITIES

Company Focus Phoenix Healthcare Competitive edges Strong support from China Resources Group. CR Healthcare will be the single largest shareholder with a 35.7% stake (minimum) after its hospitals are injected into Phoenix Healthcare. CR Healthcare is owned by the central SOE China Resources Group. Due to this relationship, we believe China Resources Group will support Phoenix Healthcare in future. This is crucial as acquisition of SOE hospitals and public hospitals is a major strategy for the Phoenix Healthcare. Leveraging on the support from China Resources Group – be it financial or good relationships with local governments – it will be easier for Phoenix Healthcare to obtain the green light from local governments in acquiring/co-operating with SOEs/public hospitals. Well recognized expert on public hospital reform. The founder of Phoenix Healthcare, Ms. Xu Jie privatised Jian Gong Hospital in 2000. This was the first privatisation of a SOE hospital in Beijing. More importantly, it was profitable. Thereafter, Phoenix Healthcare participated in privatisation / management structure changes of many SOE and public hospitals. Thanks to its track record, Phoenix Healthcare is now a well-recognised expert on public hospital reform. This recognition will help the group to gain trust from local governments for potential acquisitions or co-operation with SOE and public hospitals in the future. Competitive scale in the hospital industry. By end of 2016, the group should be managing hospitals close to 12,000 beds. It will be the largest hospital group in China. Huge scale should lead to better economies of scale, which would lead to lower procurement cost of drugs & medical consumables through centralized bulk procurement system. Drugs is the largest cost item for a hospital, accounting for c.35% of total cost based on our estimate. Therefore, lower unit cost of drugs will give Phoenix Healthcare cost advantage.

ASIAN INSIGHTS Page 39

VICKERS SECURITIES

Company Focus Phoenix Healthcare Valuation Since its IPO in Dec 13, on average, Phoenix Healthcare has been trading at 31x 1-yr forward PE, according to Bloomberg. Going forward, we believe it should trade at 40x 17F PE, which represents 30% premium above its historical average. We believe the premium is deserved as Phoenix Healthcare’s fundamentals should strengthen after CR Healthcare, which is a company owned by central SOE China Resources Group, becomes the single largest shareholder in 4Q16. There are two advantages following this change: 1) Phoenix Healthcare will be transformed from a private group to a group which has strong support from central SOE. Its financial stability should be better. 2) Leveraging on the support from CR Healthcare and its parent company China Resources Group, Phoenix Healthcare should find it easier to gain the trust of local governments. This should make it easier to obtain the green light when it wants to acquire or co-operate with public/SOEs hospitals which is a source of earnings growth. Another reason why we think the counter should trade at least at 40x 17F PE is that hospital stocks listed in emerging markets are trading at a similar level. Looking at the major hospital stocks listed in Hong Kong, Mainland China and other emerging markets, Bloomberg consensus has forecasted FY17F-19F earnings for seven of them, including IHH (IHH MK), Bangkok Dusit Med (BDMS TB), Ramsay Health Care (RHC AU), Bumrungrad Hospital (BH TB), Apollo Hospital (APHS IN), Fortis Healthcare (FORH IN), Siloam (SILO IJ). On average, they are trading at 43x 17F PE and their projected earnings CAGR in FY17F-19F is 17% on average (the range: 6-28%). We project the earnings CAGR (17F-19F) of Phoenix Healthcare to be 27%, stronger than most of its regional peers. Its earnings CAGR could be further boosted by acquisitions or cooperations with new SOE hospitals. In view of its stronger earnings growth potential, the valuation of the group should at least be at a similar level with its peers in emerging markets. So, we think that Phoenix Healthcare should trade at 40x 17F PE or higher. Using a fair value of 40x FY17F PE, we derive a TP of HK$17.9 for Phoenix Healthcare.

ASIAN INSIGHTS Page 40

VICKERS SECURITIES

Company Focus Phoenix Healthcare Risks and concerns Gradual removal of price mark-up on drugs in hospitals may impact revenue of supply chain business. Supply chain business contributed 54% to revenue of Phoenix Healthcare in 1H16. This covers the drugs & medical consumables procurement services provided to hospitals. Hence, its growth is tied to the volume of drugs sold by hospitals. In the past, hospitals were very active in selling drugs as they were allowed a 15% mark up over procurement cost when selling drugs. Since 2014, the government has started to remove the mark-up gradually, and this has taken away the incentive to sell drugs. Pharmaceutical industry sales growth decelerated from 20% in 2013 to c.10% in 1H16. The hospitals under the group’s management may be impacted by this policy and eventually affect the supply chain business revenue. Hospitals’ bed capacity may fall after the end of the management contracts. Post injection from CR Healthcare, the number of beds under Phoenix Healthcare’s management will be c.12000. We understand that 47% are not owned by Phoenix Healthcare, and are managed under management contracts until 2030-55. The risk is that the management contract may not be renewed which could significantly impact the group’s revenue. Uncertainty on M&A. Acquisition and co-operation with nonprofit making hospitals is a major growth strategy of the group. The progress of this is subject to negotiations with the target hospitals and local governments, which creates uncertainty.

ASIAN INSIGHTS Page 41

VICKERS SECURITIES

Company Focus Phoenix Healthcare Financials

We expect revenue to surge in 2017 because the hospitals’ scale will double after injection of hospitals from CR Healthcare.

Gross margin (%) 100% 80% 60% 40% 20%

2018F

2017F

2016F

2015

2014

2013

2012

2011

0%

2010

Revenue. Revenue growth in 2012 and 2014 were particularly strong at 49% and 36% respectively. The growth in 2012 was due to: 1) The group had started to manage Jing Mei Hospital in May 2011, which contributed for the full year in 2012. Revenue from hospital management services & supply chain business from Jing Mei Hospital made up 16% of total revenue in 2012; 2) The revenue from general hospital services (or Jian Gong Hospital; owned by the group) increased by 24%, thanks to a 29% increase in patient visits on the back of capacity expansion. The growth in 2014 was mainly driven by supply chain business underpinned by a 26% increase in outpatient visits and 11% increase in in-patient visits.

Overall General hospitals services Hospital management services Supply chain business

Source: company, DBS Vickers

Revenue (Rmb m) Operating expenses as a % of revenue. Operating expenses includes distribution, admin and other costs. The ratio was particularly high in 2013 and 2015. In 2013, there was IPO expenses of Rmb22m. In 2015, there was Rmb42m of initial recognition of costs of share-based payments. Going forward, thanks to better economies of scale, we project this ratio to gradually drop.

5%

2018F

0%

2017F

Gross margin. In 2010-15, the group’s gross margin was largely stable at 24-25%. We expect it to increase by 1-4ppt p.a. in 2015-18. This is mainly driven by the gross margin expansion of supply chain business by 1-2ppt p.a. during the period, thanks to procurement savings as a result of an enlarged operating scale after CR Healthcare injects its hospital assets. Supply chain business will make up 55-70% of group revenue in 2016-18.

10%

2016F

Source: company, DBS Vickers

15%

2015

General hospitals services Hospital management services Supply chain business

Operating expenses* % in revenue

2014

2018F

2017F

2016F

2015

2014

2013

2012

2011

2010

0

2013

1,000

2012

2,000

2011

3,000

2010

Rmb mn 4,000

Source: company, DBS Vickers *Operating expenses includes distribution, admin and other cost

ASIAN INSIGHTS Page 42

VICKERS SECURITIES

Company Focus Phoenix Healthcare Net interest income (expense). Net interest expense increased significantly in 2011 and steadily in 2012 and 2013, as the group raised debt of Rmb200m in 2H10 for hospital investments. In 2014, the group recognised net interest income, as it had raised net proceeds of close to Rmb1.4bn in 4Q13 and it generated interest income. The drop in net interest income in 2015 was due to an increase in interest expense from Rmb1m to Rmb27m. This is because the group withdrew from a syndicated loan agreement for US$150m and there was transaction cost of Rmb27m charged. Going forward, we project the group to generate stable net interest income like what it did in 2014.

Equity. In 4Q13, the company raised net proceeds of close to Rmb1.4bn through its IPO. Thus, the equity increased drastically in 2013. Equity Rmb mn 3,000 2,500 2,000 1,500

Net interest income (expense)

1,000

Rmb mn 60

500

50

20

2018F

2017F

2016F

2015

2014

2013

2012

2010

30

2011

0

40

Source: company, DBS Vickers

10 0 (10) (20)

2018F

2017F

2016F

2015

2014

2013

2012

2011

2010

(30)

Source: company, DBS Vickers

ASIAN INSIGHTS Page 43

VICKERS SECURITIES

Company Focus Phoenix Healthcare

Corporate milestones Event Sep-00

The founder of Phoenix Healthcare, Ms. Xu Jie acquired a 66% stake in Beijing Jian Gong Hospital for Rmb52.8m, the first SOE hospital in Beijing that was successfully transformed into a profitable private hospital.

Jan-05

Ms. Xu Jie acquired the entire stake in Yan Hua Hospital. It was originally a public hospital under Sinopex Beijing Yanshan Company. In Jan 05, it changed its status into a private but non-profit making hospital and its stake was sold to Ms. Xu Jie.

Nov-07

Phoenix Healthcare was established

Dec-07

The 66% stake in Beijing Jian Gong Hospital was transferred to Phoenix Healthcare.

Feb-08

The group promised to invest Rmb222m in Yan Hua Hospital in exchange for its management rights until 2055 from Ms. Xu Jie. Of this, Rmb150m is refundable to the group.

Jan 09 &

Phoenix Healthcare injected Rmb150m and Rmb128.9m in June 09 and June 12 respectively into Beijing Jian Gong Hospital. Its stake

Jun 12

increased from 66% to 80%.

Jul-10

The group promised to invest Rmb75m (refundable to the group) in exchange for the management rights of Mentougou Hospital until 2030 from local government.

May-11 Jun-12

The group invested Rmb150m in the hospital for the management rights of Jing Mei Hospital until 2030 from Beijing Jingmei Group. The group promised to invest Rmb25m (refundable to the group) in exchange for the management rights of Mentougou Traditional Chinese Medicine Hospital until 2030 from local government.

Nov-13 Sep-14

IPO on the Hong Kong Stock Exchange. Offer price per share was HK$7.38. The net proceeds raised was close to Rmb1.4bn. The group promised to invest Rmb15m in exchange for the management rights of Mentougou Hospital for women & children until 2030 from local government.

May-15

The group invested Rmb100m for the management rights of Shunyi airport hospital and Shunyi No.2 hospital until 2035 from local government. The hospitals will refund Rmb5m to the group annually in 2016-35.

Sep-15

The group will invest Rmb500m for the management rights of No.1 Central Hospital until 2035 from local government. During the period, the hospital will offer a fixed annual return on the investment principal, plus management fee. The revenue of the hospital in 2014 was Rmb950m, equal to 79% of the group’s revenue in 2014.

Sep-15

The group will invest Rmb70m before Jan 2017 for the management rights of Third Centre Hospital until 2035 from local government. Meanwhile, the group will establish a special purpose charity fund of Rmb20m for the hospital to offer subsidised medical services to citizens. During the period, the hospital will offer a fixed annual return on the investment principal, plus management fee. The revenue of the hospital in 2014 was Rmb60m, equal to 5% of the group’s revenue in 2014

Apr-16

The group announced that it is acquiring hospitals and elderly care institutions from China Resources Healthcare. Total bed numbers under the company's operation will double after the deal. In exchange, the company will issue 463m new shares at HK$8.04 per share to China Resources Healthcare.

May-16

In May 2016, Phoenix Healthcare announced the issue of 130.6m new shares at HK$9.5 p.s. to CITIC Medical & Health ("CITIC Med") to acquire its hospitals (around 700 beds). If both deals materialize, the stake of China Resources Healthcare and CITIC Medical & Healthcare in Phoenix Healthcare will be 32.42% and 9.15%. If only the deal with China Resources Healthcare materialize, China Resources Healthcare's stake in Phoenix Healthcare will be 35.7%.

Source: company, DBS Vickers

ASIAN INSIGHTS Page 44

VICKERS SECURITIES

Company Focus Phoenix Healthcare

Management profiles Key Management Team

Name Ms. Xu Jie (52 years old)

Mr. Liang Hongze (joined in 2004, 44 years old)

Mr. Zhang Xiaodan (joined in 2010, 40 years old)

Mr. Xu Zechang (joined in 2004, 53 years old)

Mr. Jiang Tianfan (joined in 2008, 35 years old)

Current Appointment Founder, Chairman, Executive Director

Previous Experience

-

Administrator, Jian Gong Hospital (2000 to 2007)

-

Legal Representative / Administrator, Dalian New Century Hospital (1998 to 2000), Shenzhen Phoenix Hospital (1995 to 1998), Traumatic Hospital of Jilin (1998 to 1995)

Chief Executive Officer, Executive Director

-

Investment Director, Shanghai Chunda Investment Management Co., Ltd (2002 to 2004)

-

Investment Banking Senior Manager, Industrial Securities Co., Ltd (2000 to 2002)

-

Accountant, China Financial Computerization Corp (1993 to 1997)

Executive General Manager, Executive Director

Vice General Manager, Executive Director

Investment Director/ Chief Financial Officer/ General Manager, Phoenix Healthcare Group (2004 to 2013)

Senior Manager, CITIC Trust Co. Ltd (2008 to 2010) Certification and inspection of pharmaceutical products for Pharmaceutical Certification Management Center of the State Food and Drug Administration (2006 to 2008)

-

Associate Researcher, Xiyuan Hospital of China Academy of Chinese Medical Sciences (1998 to 2000)

-

Executive Administrator, Mentougou Hospital ( 2011 to present)

-

Executive Administrator, Yan Hua Hospital (2007 to 2010)

-

Vice Administrator, Jian Gong Hospital (2005 to 2007)

-

Executive Administrator, Wuxi New District Hospital (2004 to 2005)

-

Attending doctor/Vice Director doctor/Vice Director/Acting Director, Cardiology Department, the Military General Hospital of Beijing (1991 to 2003)

-

Resident Physician, General Hospital of the People’s Liberation Army of China (1984 to 1991)

Chief Financial Officer, Executive Director -

Executive Director, UMP Healthcare Holdings Limited (since 2015) General Manager, Jian Gong Hospital (2010 to 2011)

-

General Manager, Yan Hua Hospital (2010)

-

General Manager, Beijing New Oriental School Elite English Center (2005 to 2007)

-

Director of Domestic and International Exams Department, Nanjing New Oriental School (2002 to 2005)

Mr. Shan Baojie (joined in 2011, 44 years old)

Deputy General Manager, Executive Director

-

Various roles, State Food and Drug Administration of the PRC (1998 to 2011)

-

General Manager’s office, Northeast Pharmaceutical Group Co., Ltd. (1992 to 1998)

Mr. Cheng Libing (joined in 2010, 51 years old)

Vice Chairman, Executive Director

-

Deputy General Manager, Beijing Huaren Intech Hospital Management Consulting Co., Ltd (2006 to 2010)

-

Deputy General Manager, Beijing Intech Eye Hospital Co., Ltd / Intech Medical Chain (2008 to 2010)

-

Various positions including general manager assistant, Beijing Kangchen Pharmaceutical Co., Ltd (1999 to 2002)

-

Resident doctor, Dongzhimen Hospital Affiliated to Beijing University of Traditional Chinese Medicine (1988 to 1998)

-

Chief Executive Officer, Pok Oi Hospital (joined as Internal Audit Manager in 2003)

-

Principal Auditor, Audit Commission of the government of the HKSAR (1980 to 2003)

Mr. Kwong Kwok Kong (68 years old)

Independent non-executive Director

Source: Company, DBS Vickers

ASIAN INSIGHTS Page 45

VICKERS SECURITIES

Company Focus Phoenix Healthcare

Key Management Team (con’t) Ms. Cheng Hong (46 Independent years old) non-executive Independent nonDirector executive Director

Mr. Sun Jianhua (40 years old)

Mr. Lee Kar Chung Felix (33 years old)

-

Marketing Director/ General Manager, CITIC Trust Co., Ltd (since 2010)

-

Chairman of the board of supervisors / General Manager, Orient Fund Management (2004 to 2010)

-

General Manager of Beijing branch/ Assistant to the CEO, Northeast Securities Co., Ltd. (2000 to 2004)

-

Deputy General Manager, Changchun Jiefang Road Branch of Northeast Securities (1999 to 2000)

Independent non-executive Director

-

Managing director of investment banking division, Guosen Securities Co., Ltd (joined in 2005)

-

Daton Securities Co., Ltd (2003 to 2005), Industrial Securities Co., Ltd. (2001 to 2003), CITIC securities Co., Ltd. (1999 to 2000)

Independent non-executive Director

-

Senior Vice President, Chow Tai Fook Enterprises Limited

-

Executive Director, UMP Healthcare Holdings Limited

-

Director, Corporate Advisory Group, Deutsche Bank AG Hong Kong (2009 to 2014)

-

Analyst, Investment banking department, UBS AG Hong Kong (2008)

Source: Company, DBS Vickers

ASIAN INSIGHTS Page 46

VICKERS SECURITIES

Company Focus Phoenix Healthcare

Sensitivity Analysis

Key Assumptions FY Dec General hospitals services - revenue growth % Hospital management services - revenue growth % Supply chain business revenue growth % SG&A % in total sales

2013A

2014A

2015A

2016F

2017F

2018F

16.7

14.8

6.6

10.0

10.0

10.0

1.2

47.5

19.9

30.0

138.4

20.0

19.5

61.1

19.6

22.0

115.1

28.7

11.1

7.2

11.1

7.5

7.0

6.5

2017F Supply chain business gross margin +/- 1ppt

Net Profit -/+ 2.7%

Segmental Breakdown (RMB m) FY Dec Revenues (RMB m) General hospital services Hospital management services Supply chain business Total Gross profit (RMB m) General hospital services Hospital management services Supply chain business Total Gross margin (%) General hospital services Hospital management services Supply chain business Total

2013A

2014A

2015A

2016F

2017F

2018F

470

540

576

633

697

766

41

60

72

94

223

268

376

606

725

884

1,901

2,447

887

1,206

1,372

1,611

2,821

3,481

86

86

91

100

110

121

27

46

55

71

170

203

100

166

184

234

542

710

213

298

330

405

821

1,034

18.2

16.0

15.7

15.7

15.7

15.7

65.5

75.7

75.9

75.9

75.9

75.9

26.7

27.3

25.4

26.5

28.5

29.0

24.0

24.7

24.0

25.1

29.1

29.7

Source: Company, DBS Vickers

ASIAN INSIGHTS Page 47

VICKERS SECURITIES

Company Focus Phoenix Healthcare Margins Trend

Income Statement (RMB m) FY Dec Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Dividend Income Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

2013A 887 (675) 213 (45) 168 0 0 (25) 0 0 143 (47) (6) 0 90 90 204

2014A 1,206 (909) 298 (30) 268 0 0 49 0 0 317 (77) (9) 0 230 230 307

2015A 1,372 (1,043) 330 (101) 229 0 (2) 21 0 0 248 (76) (5) 0 167 167 271

2016F 1,611 (1,206) 405 (69) 336 0 0 51 0 0 387 (112) (9) 0 267 267 380

2017F 2,821 (2,000) 821 (146) 675 0 0 51 0 0 727 (211) (16) 0 500 500 721

2018F 3,481 (2,448) 1,034 (174) 859 0 0 53 1 0 913 (265) (20) 0 628 629 908

17.1 2.1 2.3 (11.0)

35.9 50.3 59.7 155.6

13.8 (11.5) (14.6) (27.4)

17.4 40.0 47.0 59.5

75.1 89.9 101.0 87.6

23.4 25.9 27.2 25.5

24.0 18.9 10.1 8.6 5.7 8.2 49.4 6.8

24.7 22.2 19.1 14.2 11.1 11.1 14.1 NM

24.0 16.7 12.2 9.9 7.8 8.8 49.4 NM

25.1 20.9 16.5 14.5 11.2 12.2 50.0 NM

29.1 23.9 17.7 23.6 18.0 21.3 50.0 NM

29.7 24.7 18.0 25.2 19.0 23.1 50.0 NM

25.0% 23.0% 21.0% 19.0% 17.0% 15.0% 13.0% 11.0% 2014A

2015A

Operating Margin %

2016F

2017F

2018F

Net Income Margin %

Source: Company, DBS Vickers

ASIAN INSIGHTS Page 48

VICKERS SECURITIES

Company Focus Phoenix Healthcare Margins Trend

Growth Revenue Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)

1H2016

468 (342) 125 (35) 90 0 0 (17) 0 73 (29) (4) 40 40

507 (388) 119 (18) 101 0 0 14 0 115 (30) (3) 82 82

699 (521) 178 (12) 167 0 0 35 0 201 (47) (7) 148 148

602 (461) 142 (27) 114 0 0 24 0 138 (34) (3) 102 102

770 (582) 188 (74) 114 0 (2) (3) 0 110 (42) (3) 65 65

705 (523) 182 (41) 141 0 (3) 17 0 154 (20) (5) 130 130

N/A N/A N/A

20.8 30.2 63.6

49.5 85.3 272.5

18.8 13.0 23.4

10.1 (31.4) (55.7)

17.1 23.2 28.2

26.8 19.2 8.5

23.5 19.9 16.3

25.5 23.8 21.1

23.5 19.0 16.9

24.4 14.8 8.5

25.8 20.0 18.5

30% 25% 20% 15% 10% 5% 0% Operating Margin %

Net Income Margin %

1H16

2H2015

2H15

1H2015

1H15

2H2014

2H14

1H2014

1H14

Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except.

2H2013

2H13

FY Dec

1H13

Interim Income Statement (RMB m)

Source: Company, DBS Vickers

ASIAN INSIGHTS Page 49

VICKERS SECURITIES

Company Focus Phoenix Healthcare Asset Breakdown

Balance Sheet (RMB m) FY Dec

2013A

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt

123 0 527 1,106 31 84 252 2,124

2014A 138 0 581 996 34 94 170 2,012

2015A 145 155 661 939 42 138 175 2,255

2016F 155 155 643 1,151 56 161 175 2,496

2017F 163 155 623 1,546 99 282 175 3,044

2018F 170 155 604 2,002 122 348 175 3,576

200

0

0

0

0

0

Creditors Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests

124 79 0 5 1,617 99

172 102 0 3 1,627 108

210 180 0 3 1,748 115

258 180 0 3 1,932 123

423 180 0 3 2,299 139

557 180 0 3 2,676 159

Total Cap. & Liab.

2,124

2,012

2,255

2,496

3,044

3,576

Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

164 906 34.3 70.4 18.9 0.6 3.7 3.0 CASH CASH 10.6 NA

24 996 26.9 62.1 13.6 0.6 4.7 4.0 CASH CASH N/A NA

(34) 939 30.8 69.7 13.9 0.6 3.3 2.8 CASH CASH N/A NA

(45) 1,151 33.8 73.4 15.5 0.7 3.5 3.0 CASH CASH N/A NA

(47) 1,546 28.7 63.6 14.5 1.0 3.5 3.0 CASH CASH N/A NA

(92) 2,002 33.0 74.5 16.8 1.1 3.6 3.2 CASH CASH N/A NA

Debtors 10.3%

Net Fixed Assets 9.9%

Assocs'/JVs 9.9%

Inventory 3.6% Bank, Cash and Liquid Assets 66.2%

Source: Company, DBS Vickers

ASIAN INSIGHTS Page 50

VICKERS SECURITIES

Company Focus Phoenix Healthcare Capital Expenditure

Cash Flow Statement (RMB m) FY Dec Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) (Pft)/ Loss on disposal of FAs Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (RMB) Free CFPS (RMB)

2013A

2014A

2015A

2016F

2017F

2018F

143 37 (41) 0 0 0 32 170 (21) (820) 0 0 (1) (842) 0 (33) 1,392 (388) 971 (11) 289 0.30 0.26

317 39 (59) 0 0 25 (47) 274 (36) 419 0 0 (22) 361 (44) (200) 0 (177) (422) (4) 210 0.30 0.29

248 45 (81) 2 0 (6) 24 232 (32) 269 0 0 (208) 30 (33) 0 0 (16) (49) (2) 210 0.29 0.24

387 44 (112) 0 0 11 (51) 278 (35) 0 0 0 51 16 (83) 0 0 0 (83) 0 212 0.29 0.27

727 46 (211) 0 0 2 (51) 513 (35) 0 0 0 51 16 (133) 0 0 0 (133) 0 396 0.39 0.37

912 49 (265) 0 0 45 (53) 688 (35) 0 0 0 53 18 (250) 0 0 0 (250) 0 456 0.50 0.50

RMBm 37.0 36.0 35.0 34.0 33.0 32.0 31.0 30.0 2014A

2015A

2016F

2017F

2018F

Capital Expenditure (-)

Source: Company, DBS Vickers

ASIAN INSIGHTS Page 51

VICKERS SECURITIES

China / Hong Kong Company Guide

Wenzhou Kangning Hospital Version 3 | Bloomberg: 2120 HK Equity

Refer to important disclosures at the end of this report

| Reuters: 2120.HK

DBS Group Research . Equity

20 Oct 2016

BUY

Paving way for stronger long term earnings growth

Last Traded Price: HK$39.20 (HSI : 23,305) Price Target 12-mth: HK$50.00 (28% upside) Potential Catalyst: Turnaround at new hospitals Where we differ: Earnings are more conservative due to higher cost estimates Analyst Mark Kong CFA, +852 2820 4619 [email protected] Price Relative

Forecasts and Valuation FY Dec (RMB m) Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex) Net Profit Gth (Pre-ex) (%) EPS (RMB) EPS (HK$) EPS Gth (%) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) P/Cash Flow (X) P/Free CF (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)

2015A 344 84 70 56 56 8.8 1.03 1.18 0.3 1.18 0.29 15.15 33.1 nm nm 15.3 0.7 2.6 CASH 9.1

2016F 417 111 83 67 67 19.5 0.91 1.05 (11.2) 1.05 0.32 15.92 37.3 24.2 nm 19.1 0.8 2.5 CASH 6.8

2017F 540 156 104 82 82 23.8 1.13 1.30 23.8 1.30 0.39 16.90 30.1 41.2 nm 14.5 1.0 2.3 CASH 7.9

2018F 643 205 139 109 109 32.1 1.49 1.72 32.1 1.72 0.52 18.23 22.8 13.8 nm 11.3 1.3 2.2 CASH 9.8

Nil 1.06 B: 4

Nil 1.48 S: 1

Nil 1.98 H: 0

Earnings Rev (%): Consensus EPS (RMB) Other Broker Recs:

Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX

ASIAN INSIGHTS ed- JS / sa- DL

Second largest psychiatric healthcare hospital group in China. With 0.99% market share based on 2014 revenue, Wenzhou Kangning is the 2nd largest player in the China psychiatric healthcare industry. The group has been operating since 1996 and is the only private hospital designated as “Key National Hospital for Specialized Clinical Psychiatry” by National Health & Family Planning Commission. This is a recognition of its psychiatric healthcare service capabilities from the Central government. Supply shortage of psychiatric healthcare services in China. There are c.20m patients suffering from serious psychiatric disorders in China but there are only 300k beds available for psychiatric healthcare as at end-2014. Moreover, bed utilisation at psychiatric healthcare hospitals in 2014 was already close to 100%, leaving hardly any room to take care of more patients. The reason for the shortage is insufficient supply of psychiatric doctors as their income is typically lower than other kinds of doctors. The lower income stems from lower operations and drugs sales in psychiatric hospitals compared to general hospitals. Rapidly expanding team of doctors and hospital network to capture unmet demand. The group is able to expand its team of doctors at a faster pace than the industry (2012-14 CAGR: 10% vs 5%) by attracting talents from public players. This is thanks to its reputation and higher remuneration package than public players (20-30% higher). The group plans to increase the number of doctors from 175 (Jun 2015) to 240 (Dec 2016). Meanwhile, it will expand its number of beds from 2380 (2015) to 4505 (2018). The increase of doctors and beds should drive its earnings CAGR to be 28% during 2016F-18F. Valuation: BUY, TP: HK$50.00. Based on Bloomberg, the healthcare services providers listed in Asia Pacific emerging stock markets are trading at c.45x 12-month forward PE, on a market cap weighted average basis. We believe the group should trade at a 15% discount relative to the average forward PE due to its short listing history of less than 1 year and concentration risk as one of its hospitals generating >50% of revenue. We maintain our target multiple of 38x (rolling over to FY17F) and factor in reduced earnings. Our new lowered TP is HK$50ps. Key Risks to Our View: Losses incurred by newly opened hospitals create uncertainty on future earnings. Possibility of medical accidents may tarnish the group’s reputation and income. At A Glance Issued Capital - H shares (m shs) 20 - Non H shares (m shs) 53 H shs as a % of Total 28 Total Mkt. Cap (HK$m/US$m) 2,863 / 369 Major Shareholders Weili Guan (%) 32.3 Defu Fund (%) 21.1 Wang Hongyue (%) 9.4 Major H Shareholders (%) Baring Asset Management Limited (%) 15.1 Citigroup Inc. (%) 13.9 Prime Capital Management Company Limited (%) 13.9 H Shares-Free Float (%) 57.1 3m Avg. Daily Val. (US$m) 0.1 ICB Industry : Health Care / Health Care Equipment & Services

VICKERS SECURITIES

Company Guide Wenzhou Kangning Hospital

CRITICAL DATA POINTS TO WATCH Earnings Drivers: Expanding teams of doctors and hospital network to capture unmet demand. Despite insufficient supply of psychiatric healthcare doctors, we believe the group is able to expand its team of doctors by attracting talents from competitors, particularly public players, thanks to:

Total number of beds

1) Better remuneration packages offered to doctors (monthly income 20-30% higher than public hospitals); 2) Reputation in psychiatric healthcare industry. In 2014, there were 831 psychiatric healthcare hospitals in China (public: 620, private: 211). The group is the only private player designated as a Key National Hospital for Specialised Clinical Psychiatry by the National Health & Family Planning Commission (NHFPC). This qualification implies recognition of its psychiatric healthcare services by the Central government. The number of doctors within the group has increased from 124 (Dec 2012) to 150 (Dec 2014), up 21%, which is 10ppts above the increase in the psychiatric healthcare service industry during the same period based on data from the NHFPC. The group targets to raise the number of doctors to 240 by the end of 2016. Apart from expanding the team of doctors, the group is also expanding its scale and network to capture unmet demand.

  Wenzhou Kanning - spending per inpatient bed-day (Rmb)

  Wenzhou Kanning - spending per outpatient visit (Rmb)

Expanding hospital network. Most of the group’s hospitals are based in Zhejiang province where the group founded its business in 1996 and it is well established there. Other than Zhejiang province, the group is expanding its reach into two regions: Guangdong province (Shenzhen in this stage) and Beijing. Shenzhen: This is a city with a population close to 11m. There is a shortage of psychiatric healthcare services in this city. According to NHFPC and Shenzhen government, in terms of average bed numbers for psychiatric healthcare / 10000 population in 2013, China as a whole was 1.9, Zhejiang province was 2.4, but Shenzhen was only 0.5. As the population grows in Shenzhen, the shortage could become more severe. Leveraging on its reputation, we believe the group’s expansion in this city will enable it to effectively capture the huge unmet demand. Beijing: There is also a shortage of psychiatric healthcare services in Beijing. According to estimations from the Beijing Municipal Health Bureau, there were 15,000 psychiatric patients that required psychiatric inpatient beds in 2013 but there were less than 9000 beds in the city. The shortage was over 6000 beds. In 2014, the number of beds increased by only 1% or 83 y-o-y, according to NHFPC. Thus, we believe the supply shortage is still there. Hence, the group’s expansion can also capture the huge unmet demand.

ASIAN INSIGHTS Page 53

  SG&A % in total sales

  Source: Company, DBS Vickers

VICKERS SECURITIES

Company Guide Wenzhou Kangning Hospital

Leverage & Asset Turnover (x)

Balance Sheet: The capital expenditure in14A/15A/16F/17F/18F is Rmb61m / Rmb114m / Rmb280m / Rmb200m / Rmb199m. The capital expenditure in 15A-18F is mainly used for 1) set-up of three new hospitals, namely, Linhai Kangning, Hangzhou Yining, Shenzhen Yining, Pingyang Kangning, Quzhou Yining, Zhaoqing hospital; 2) scale expansion of four current hospitals, namely, Wenzhou Kangning, Qingtian Kangning, Cangnan Kangning, Yueqing Kangning, Yanjiao Furen. After the expansion mentioned above, the total number of beds is expected to increase from 1900 in 2014 to 4375 in 2018.

Capital Expenditure

Share Price Drivers: 1. The hospitals in Beijing and Shenzhen turn profitable. 2. M&A Key Risks: Losses incurred by newly opened hospitals. In the first year of operations, the newly opened hospitals may not generate sufficient revenue to cover their rental and staff costs. The losses create uncertainty to the group’s future earnings.

ROE

Price cuts on drugs. The segment of pharmaceutical sales made up 26% of the group’s revenue in 2014. The continuous price pressure on drugs exerted by the government may squeeze the gross margin of this segment. Possibility of medical accidents may tarnish the group’s reputation. In 2012/13/14, there were 7/8/6 material medical incidents for the group. Medical accidents could happen in the future which may hurt the group’s reputation and income.

Forward PE Band

Concentration risk. Wenzhou Kangning hospital is expected to make up 56-59% of the group’s revenue. Any setbacks faced by this hospital could impact the group’s financial performance significantly.

Company Background: The 2nd largest psychiatric healthcare hospital group in China (in terms of 2014 revenue) with close to 20 years history in the field. It is the only private hospital designated as a “Key National Hospital for Specialised Clinical Psychiatry” by National Health & Family Planning Commission (as of Nov 2015). This is a recognition of its psychiatric healthcare services by the Central government.

PB Band

Source: Company, DBS Vickers

ASIAN INSIGHTS

VICKERS SECURITIES Page 54

Company Guide Wenzhou Kangning Hospital

Key Assumptions FY Dec Total number of beds Wenzhou Kanning spending per inpatient bed-day (Rmb) Wenzhou Kanning spending per outpatient visit (Rmb) SG&A % in total sales

Source: Company, DBS Vickers

2014A

2015A

2016F

2017F

2018F

1,900.0

2,380.0

2,990.0

3,790.0

4,505.0

383.0

406.0

426.3

447.6

470.0

143.3

131.7

138.3

145.2

152.5

16.1

18.8

19.5

19.0

17.5

Segmental Breakdown (RMB m) FY Dec Revenues (RMB m) Treantment & general healthcare services Pharmaceutical sales Ancillary hospital services Management service fees Total Gross margin (RMB m) Treantment & general healthcare services Pharmaceutical sales Ancillary hospital services Management service fees Total Gross margin Margins (%) Treantment & general healthcare services Pharmaceutical sales Ancillary hospital services Management service fees Total

2014A

2015A

2016F

2017F

2018F

207 77 2 10 296

240

296

391

469

88 2 14 344

103 5 14 417

128 6 16 540

150 6 18 643

93

106

127

168

206

13 1 8 115

17 1 7 130

18 2 8 155

23 2 9 202

27 3 10 246

45.0

44.2

43.0

43.0

44.0

17.1 54.5 75.3 38.8

19.1 40.4 48.3 37.9

18.0 40.4 55.0 37.2

18.0 40.4 55.0 37.4

18.0 40.4 55.0 38.2

Source: Company, DBS Vickers

ASIAN INSIGHTS Page 55

VICKERS SECURITIES

Company Guide Wenzhou Kangning Hospital

Income Statement (RMB m) FY Dec Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Dividend Income Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

2014A 296 (181) 115 (47) 68 0 0 1 0 0 69 (17) 0 0 51 51 82

2015A 344 (213) 130 (62) 69 0 (6) 8 0 0 70 (19) 4 0 56 56 84

2016F 417 (262) 155 (69) 86 0 (4) 1 0 0 83 (21) 4 0 67 67 111

2017F 540 (338) 202 (100) 102 0 1 1 0 0 104 (25) 4 0 82 82 156

2018F 643 (397) 246 (110) 136 0 2 1 0 0 139 (34) 4 0 109 109 205

30.9 28.7 30.3 41.5

16.0 2.2 1.5 8.8

21.4 31.7 25.6 19.5

29.4 40.7 18.4 23.8

19.1 31.5 33.1 32.1

38.8 22.9 17.3 21.8 15.1 19.3 36.1 NM

37.9 20.0 16.2 9.1 7.0 7.2 32.8 NM

37.2 20.7 16.0 6.8 5.3 5.6 30.0 NM

37.4 18.9 15.3 7.9 6.3 6.4 30.0 NM

38.2 21.2 16.9 9.8 7.8 8.0 30.0 NM

1H2014

2H2014

1H2015

2H2015

1H2016

Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except.

138 (83) 54 (23) 32 0 0 0 0 32 (8) 0 24 24

159 (98) 61 (25) 36 0 0 0 0 37 (9) 0 27 27

161 (96) 65 (27) 38 0 0 (1) 0 37 (10) 2 29 29

183 (118) 65 (34) 31 0 (6) 9 0 33 (9) 2 27 27

189 (120) 69 (29) 41 0 (2) (2) 0 37 (11) 2 28 28

Growth Revenue Gth (%) Opg Profit Gth (%) Net Profit Gth (%)

N/A N/A N/A

N/A N/A N/A

16.8 20.5 22.1

15.3 (15.1) (2.8)

17.6 7.3 (3.2)

39.4 23.0 17.3

38.3 22.8 17.2

40.6 23.7 18.1

35.6 16.8 14.5

36.7 21.6 14.9

Source: Company, DBS Vickers

Interim Income Statement (RMB m) FY Dec

Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)

Source: Company, DBS Vickers

ASIAN INSIGHTS

VICKERS SECURITIES Page 56

Company Guide Wenzhou Kangning Hospital

Balance Sheet (RMB m) FY Dec

2014A

2015A

2016F

2017F

2018F

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets

182 0 20 37 8 85 41 372

254 8 149 610 8 123 73 1,224

510 8 145 420 10 121 73 1,287

661 8 140 266 11 189 74 1,350

798 8 136 228 16 187 75 1,448

ST Debt Creditors Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.

0 24 61 0 27 261 0 372

50 20 79 0 113 960 3 1,224

55 33 79 0 113 1,008 (1) 1,287

60 32 79 0 113 1,070 (5) 1,350

65 45 79 0 113 1,155 (9) 1,448

49 37 91.0 53.7 16.7 0.9 2.0 1.4 CASH CASH N/A NA

104 560 110.2 41.7 14.7 0.4 5.5 4.9 CASH CASH 227.1 NA

92 365 106.7 41.7 14.0 0.3 3.7 3.2 CASH CASH 509.1 NA

162 206 104.8 42.1 13.6 0.4 3.1 2.7 CASH CASH 333.3 NA

153 163 106.6 42.8 14.9 0.5 2.7 2.2 CASH CASH 307.7 NA

Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

Source: Company, DBS Vickers

Cash Flow Statement (RMB m) FY Dec Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) (Pft)/ Loss on disposal of FAs Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (RMB) Free CFPS (RMB)

2014A

2015A

2016F

2017F

2018F

69 15 (18) 0 0 (32) 0 33 (61) 0 0 0 0 (61) 0 0 0 (3) (3) 0 (30) 1.31 (0.55)

70 22 (26) 6 0 (66) (11) (5) (114) 0 (8) 0 (260) (382) (18) 50 591 87 709 0 321 1.13 (2.19)

83 29 (21) 4 0 13 (5) 103 (280) 0 0 0 5 (275) (18) 5 0 (4) (17) 0 (190) 1.23 (2.43)

104 53 (25) (1) 0 (69) (1) 60 (200) 100 0 0 5 (95) (20) 5 0 (4) (19) 0 (54) 1.78 (1.91)

139 67 (34) (2) 0 10 0 180 (200) 51 0 0 6 (143) (25) 5 0 (5) (25) 0 13 2.33 (0.27)

Source: Company, DBS Vickers

ASIAN INSIGHTS Page 57

VICKERS SECURITIES

Company Guide Wenzhou Kangning Hospital

Target Price & Ratings History S.No. Dat e

HK$ 51.0

34

49.0

7

5&6

1: 2: 3: 4: 5: 6: 7:

1

47.0 45.0 43.0 41.0

29-F eb-16 29-F eb-16 31-Mar-16 8-Apr-16 4-J ul-16 4-J ul-16 1-Sep-16

Closing Pric e HK$40.70 HK$40.70 HK$41.90 HK$40.85 HK$41.00 HK$41.00 HK$43.15

12- mt h T arget Pric e HK$50.00 HK$50.00 HK$50.00 HK$50.00 HK$54.00 HK$54.00 HK$50.00

Rat ing

Buy Buy Buy Buy Buy Buy Buy

Sep-16

Aug-16

Jul-16

Jun-16

May-16

Apr-16

Mar-16

Feb-16

Jan-16

Nov-15

37.0

Dec-15

39.0

Source: DBS Vickers

Analyst: Mark Kong CFA,

ASIAN INSIGHTS

VICKERS SECURITIES Page 58

China Hospital Sector

Harmonicare Medical Holdings Refer to important disclosures at the end of this report

Bloomberg: 1509 HK Equity | Reuters: 1509.HK

NOT RATED

Industry overcapacity is a concern

Last Traded Price (19 Oct 2016):HK$4.66 (HSI : 23,305) Analyst Mark Kong CFA, +852 2820 4619 [email protected] Price Relative

•

The company is the largest private operator of obstetrics & gynaecology hospitals with around 5% market share

•

Intensifying competition due to idle industry capacities creates uncertainty for its earnings growth

•

Loss incurred by new hospitals may drag down earnings performance

The largest private obstetrics & gynaecology hospital operator with national network. The company is the largest private operator of obstetrics & gynaecology hospitals with c.5% market share in China. It owns 11 hospitals with around 842 beds. They are located in Beijing, Shenzhen (Guangdong province), Guangzhou (Guangdong province), Chongqing, Fuzhou (Fujian province), Guiyang (Guizhou province), Wuhan (Hubei province). Forecasts and Valuation

F Y Dec (RM B m) Turnov er EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (RMB) EPS (HK$) EPS Gth (%) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) P/Cash F low (X) P/F ree CF (x) EV /EBITDA (X) Net Div Yield (%) P/Book V alue (X) Net Debt/Equity (X) ROAE (%)

2012A 2013A 2014A 2015A 750 833 936 909 71 128 177 147 139 142 36 87 31 67 103 106 31 67 103 106 n.a. n.a. n.a. 0.16 n.a. n.a. n.a. 0.18 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.16 n.a. n.a. 0.06 n.a. n.a. n.a. n.a. 2.11 n.a. n.a. n.a. 25.5 n.a. n.a. n.a. 21.5 n.a. n.a. n.a. 42.5 n.a. n.a. n.a. 10.1 n.a. n.a. n.a. 1.4 n.a. n.a. n.a. 2.2 Cash Cash Cash Cash n.a. (233.3) (130.2) 16.2

ICB Industry: Health Care ICB Sector: Health Care Equipment & Services Principal Business: Hospital operation

Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX

Obstetrics & gynaecology hospital business faces intense competition. As an operator of obstetrics & gynaecology hospitals, the group might be facing industry overcapacity. According to National Health & Family Planning Commission, the bed utilisation of obstetrics & gynaecology hospitals were below 67% in 2012-14 (specialty hospitals’ average in the period: 88-90%). That implies there are many idle capacities in this segment which intensify competition and impact the prices of services. In 1H16, the spending per patient visit was Rmb1,374, representing a 2.1% h-o-h drop and 1.3% y-o-y drop. Total patient visits dropped 1%. Excluding all other incomes, core earnings dropped by 45% y-o-y. We see this as the result of competition due to industry overcapacity. This creates uncertainty for the company’s long-term growth. Given this uncertainty, current valuation of 27x 16F PE (based on Bloomberg consensus) looks demanding. Loss incurred by new hospital may drag down earnings performance. The group targets to increase its number of hospitals from 11 currently to 20 in three years. We estimate that new hospitals may take 1-3 years to break even operationally. The possible loss incurred by the new hospitals creates uncertainty for the company. At A Glance Issued Capital - H shares (m shs) Total Mkt Cap (HK$m/US$m) 3,534 Major Shareholders (%) Zhang Qing Hua Lin Yuming Honey care International Inv estment Wu Shangzhi Harmony Care International Inv estment 3m A v g. Daily V al. (US$m)

758 / 455 28.33 28.07 16.96 10.25 7.58 0.9

Page 59 ed-TH / sa- DL DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect additional reports relating to this issuer, unless so decided by DBSV

China Hospital Sector Harmonicare Medical Holdings Income Statement (RMBm) F Y D ec

Balance Sheet (RMBm)

2012A

2013A

2014A

2015A

750 (403) 347 (312) 35 (0) 1

833 (450) 383 (295) 88 (0) (0)

936 (463) 472 (332) 140 (0) (0)

909 (449) 461 (353) 108 23

36 (15) 10 31 31 71 41.5

87 (22) 1 67 67 128 11.1 81.2 150.7 24.9

139 (34) (2) 103 103 177 12.3 38.1 59.1 24.5

Rev enue Cost of Goods Sold G ro s s Pro f it Other Opg (Exp)/Inc O p erat in g Pro f it Other Non Opg (Exp)/Inc A ssociates & J V Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre- t ax Pro f it Tax M inority Interest Preference Div idend N et Pro f it Net Profit before Except. EBITDA Rev enue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Effectiv e Tax Rate (%)

11 142 (32) (4) 106 106 147 (2.8) (17) (22.9) 22.2

Cash Flow Statement (RMBm) F Y D ec

Rev enue Cost of Goods Sold G ro s s Pro f it Other Oper. (Exp)/Inc O p erat in g Pro f it Other Non Opg (Exp)/Inc A ssociates & J V Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre- t ax Pro f it Tax M inority Interest N et Pro f it Net profit bef Except. Source: Bloomberg Finance L.P.

2013A

2014A

2015A

Net F ixed A ssets Inv ts in A ssocs & J V s Other LT A ssets Cash & ST Inv ts Inv entory Debtors Other Current A ssets T o t al A ss et s

270 9 56 14 23 12 100 485

255 8 54 11 22 15 92 457

203

229

45 72 20 14 30 385

73 1,223 22 38 42 1,628

ST Debt Creditors Other Current Liab LT Debt Other LT Liabilities Shareholder's Equity Minority Interests T o t al Cap . & L iab .

22 433 33 4 (7) 485

22 469

16 434

28 156

34 (61) (6) 457

33 (97) (2) 385

Non-Cash Wkg. Cap Net Cash/(Debt)

(320) 14

(361) 11

(387) 72

(82) 1,223

2012A

2013A

2014A

2015A

36 36 (16) (1) 0 35 2 91 (74) (10) (84) (63) 11 55 3 10

87 40 (18) 0 0 14 1 125 (26) 17 (8) (53) (66) (120) (3)

139 37 (17) 0 0 29 1 189 (20) 40 21 (72) 269 (346) (149) 61

46.3 4.7 4.1 n.a. 6.3 n.a. 206.8 n.a. 1.5 5.7 20.1 21.1 0.3 0.3 Cash n.m. n.a. n.a. n.a.

46.0 10.6 8.0 (233.3) 14.2 1361.5 79.9 n.a. 1.8 5.8 17.8 18.5 0.3 0.2 Cash n.m. n.a. n.a. n.a.

50.5 15.0 11.0 (130.2) 24.5 (232.3) 69.3 n.a. 2.2 5.6 15.0 16.6 0.3 0.3 Cash n.m. n.a. n.a. n.a.

50.7 11.9 11.7 16.2 10.5 12.2 0.4 n.a. 0.9 10.4 18.3 17.1 7.2 7.1 Cash n.m. 1.59 0.19 0.10

2015A

F Y D ec

142 39 (25) 0 (11) (19) 126 (62) (346) (408) (0) 1,376 (264) 1,112 830

Gross Margin (%) Opg Profit Margin (%) Net Profit Margin (%) ROA E (%) ROA (%) ROCE (%) Div Pay out Ratio (%) Interest Cov er (x) A sset Turnov er (x) Debtors Turn (day s) Creditors Turn (day s) Inv entory Turn (day s) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Capex to Debt (%) N. Cash/(Debt)PS (RMB) Opg CF PS (RMB) F ree CF PS (RMB)

Interim Income Statement (RMBm) F Y D ec

2012A

33 1,409 2 1,628

Rates & Ratio

2012A 2013A 2014A

Pre-Tax Profit Dep. & A mort. Tax Paid A ssoc. & J V Inc/(loss) (Pft)/ Loss on disposal of F A s Non-Cash Wkg. Cap. Other Operating CF N et O p erat in g CF Capital Exp. (net) Other Inv ts. (net) Inv ts. in A ssoc. & J V Div from A ssoc. & J V Other Inv esting CF N et In v es t in g CF Div Paid Chg in Gross Debt Capital Issues Other F inancing CF N et F in an c in g CF Chg in Cash

F Y D ec

Segmental Breakdown (RMBm)

1H15

2H15

1H16

445 (220) 225 (170) 55 -

465 (229) 236 (183) 53 -

430 (223) 206 (154) 52 -

55 (15) (2) 38 38

87 (17) (2) 68 68

52 (11) (1) 40 40

ASIAN INSIGHTS

F Y D ec R ev en u es Specialized Hospital Serv ice Supply of Pharmaceuticals and Medical Dev ices T o t al

2012A 2013A 2014A 2015A

705 45

787 46

898 37

874 35

750

833

936

909

VICKERS SECURITIES Page 60

China Hospital Sector

Rici Healthcare Refer to important disclosures at the end of this report

Bloomberg: 1526 HK Equity | Reuters: 1526.HK

Clouded by intense competition and potential drop of drugs sales

NOT RATED Last Traded Price (19 Oct 2016): HK$2.23 (HSI : 23,305) Analyst Mark KONG, CFA +852 2820 4619 [email protected]

Price Relative

Rici is an operator of body check centres and one hospital with >85% revenue from Shanghai and Jiangsu province

•

Body check centres facing intense competition

•

Hospital business faces potential drop from drugs sales

An operator of body check centers & hospital focusing on Shanghai & Jiangsu province. It is running 21 body check centers, one general hospital and one clinic. Body check centers and hospital contributed 63% and 37% of sales in 1H16 respectively. In terms of geographical sales breakdown, Shanghai and Jiangsu province made up 55% & 32% in 1H16.

Forecasts and Valuation

F Y Dec (RM B m) Turnov er EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (RMB) EPS (HK$) EPS Gth (%) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) P/Cash F low (X) P/F ree CF (x) EV /EBITDA (X) Net Div Yield (%) P/Book V alue (X) Net Debt/Equity (X) ROAE (%)

•

2013A 2014A 2015A 489 598 803 118 87 153 6 50 49 37 8 29 37 8 29 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.8 n.a.

n.a. n.a. n.a. n.a. n.a. n.a. 0.0 2.0

n.a. n.a. n.a. n.a. n.a. n.a. 0.2 7.6

ICB Industry: Healthcare ICB Sector: Healthcare Equipment & Services Principal Business: Operation of body check center and hospital

Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX

Body check centers business facing intense competition.The group is the fourth largest player in body check centres industry, but its market share was just 0.6% based on 2015 sales. There is intense competition from: 1) Public medical institutes (82% market share). Their prices are very competitive relative to private players; 2) Private hospitals (7% market share). They can provide many other medical services. Customers who are interested in other services besides body check services may go here; 3) Private body check centres group with nationwide network (6% market share). Their network is large enough to support employees of large corporates in different regions. Relative to them, Rici’s network is much smaller. Rici is more expensive than public hospitals, offers less comprehensive services than private hospitals and has a limited geographic presense. All of which points to a challenging outlook. Hospital business faces potential drop of drugs sales in future. Drugs sales made up 55% of the segmental sales in 1H16. One of the reasons that the hospital can generate earnings is that it can put a mark up over procurement cost when selling drugs. The government has been requiring more and more hospitals to remove the mark-up since 2014. Rici’s hospital will be impacted by this policy in future, which would affect its profitability in the future. Demanding valuation given the risks it faces. Our preliminary estimates suggests the group’s normalized earnings will grow by 134% in 2016 to Rmb107m. Based on our earnings estimates, it is trading at 29x 16F PE. Given the risks mentioned above, the valuation is unattractive. At A Glance Issued Capital (m shs) Total Mkt Cap (HK$m/US$m) Major Shareholders (%) Mei Hong Renaissance Healthcare F ree F loat 3m A v g. Daily V al. (US$m)

3,546

1,590 / 457 56.83 16.87 26.30 0.3

Page 61 ed- JS / sa- DL DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect additional reports relating to this issuer, unless so decided by DBSV

China Hospital Sector Rici Healthcare Income Statement (RMBm) F Y D ec

Balance Sheet (RMBm) 2013A

2014A

2015A

489 (324) 165 (94) 71 0

598 (409) 189 (153) 36 (4)

803 (523) 280 (196) 84 (13)

(23) 49 (9) (3) 37 37 118 18.4

(26) 6 (0) 3 8 8 87 22.3 (26.6) (49.7) 4.5

(22) 50 (20) (0) 29 29 153 34.3 76 134.4 41.3

Rev enue Cost of Goods Sold G ro s s Pro f it Other Opg (Exp)/Inc O p erat in g Pro f it Other Non Opg (Exp)/Inc A ssociates & J V Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre- t ax Pro f it Tax M inority Interest Preference Div idend N et Pro f it Net Profit before Except. EBITDA Rev enue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Effectiv e Tax Rate (%)

Cash Flow Statement (RMBm) F Y D ec Pre-Tax Profit Dep. & A mort. Tax Paid A ssoc. & J V Inc/(loss) (Pft)/ Loss on disposal of F A s Non-Cash Wkg. Cap. Other Operating CF N et O p erat in g CF Capital Exp. (net) Other Inv ts. (net) Inv ts. in A ssoc. & J V Div from A ssoc. & J V Other Inv esting CF N et In v es t in g CF Div Paid Chg in Gross Debt Capital Issues Other F inancing CF N et F in an c in g CF Chg in Cash

Rev enue Cost of Goods Sold G ro s s Pro f it Other Oper. (Exp)/Inc O p erat in g Pro f it Other Non Opg (Exp)/Inc A ssociates & J V Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre- t ax Pro f it Tax M inority Interest N et Pro f it Net profit bef Except. Source: Bloomberg Finance L.P.

2013A

2014A

2015A

Net F ixed A ssets Inv ts in A ssocs & J V s Other LT A ssets Cash & ST Inv ts Inv entory Debtors Other Current A ssets T o t al A s s et s

329 6 33 89 15 90 332 894

376 4 64 346 21 87 477 1,375

388 2 73 234 20 121 54 891

ST Debt Creditors Other Current Liab LT Debt Other LT Liabilities Shareholder's Equity M inority Interests T o t al Cap . & L iab .

295 60 165 17 10 267 82 894

335 72 343 38 18 557 11 1,375

251 92 279 33 29 207 1 891

Non-Cash Wkg. Cap Net Cash/(Debt)

212 (222)

170 (27)

(176) (50)

Rates & Ratio 2013A

2014A

2015A

49 47 (14) 9 7 97 (74) (87) (6) (166) 11 53 64 (5)

6 51 (16) 0 13 10 64 (100) (131) (231) 62 278 84 424 257

50 69 (24) 0 42 23 160 (110) 188 78 (440) (27) 297 (180) (350) (113)

Interim Income Statement (RMBm) F Y D ec

F Y D ec

Gross Margin (%) Opg Profit Margin (%) Net Profit Margin (%) ROA E (%) ROA (%) ROCE (%) Div Pay out Ratio (%) Interest Cov er (x) A sset Turnov er (x) Debtors Turn (day s) Creditors Turn (day s) Inv entory Turn (day s) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Capex to Debt (%) N. Cash/(Debt)PS (RMB) Opg CF PS (RMB) F ree CF PS (RMB)

2013A

2014A

2015A

33.7 14.6 7.5 n.a. 4.1 n.a. n.m. 3.1 0.5 66.9 67.4 16.7 1.0 1.0 0.8 23.7 n.a. n.a. n.a.

31.6 6.0 1.4 2.0 0.7 4.5 n.m. 1.4 0.5 53.8 59.0 16.1 1.2 1.2 0.0 26.7 n.a. n.a. n.a.

34.9 10.5 3.6 7.6 2.6 6.7 1518.6 3.8 0.7 47.3 57.2 14.3 0.7 0.7 0.2 38.7 n.a. n.a. n.a.

2013A

2014A

2015A

262 227 (0) 489

339 259 598

525 298 (20) 803

Segmental Breakdown (RMBm)

1H15

2H15

1H16

301 (240) 62 (98) (36) (7)

501 (283) 218 (98) 120 (6)

390 (279) 112 (87) 24 (17)

(13) (56) 8 1 (47) (47)

(9) 106 (29) (1) 76 76

(10) (2) (10) 1 (11) (11)

ASIAN INSIGHTS

F Y D ec

F Y D ec R ev en u es Medical Examination Centers Hospital Elimination T o t al

VICKERS SECURITIES Page 62

China Hospital Sector

Universal Medical Refer to important disclosures at the end of this report

Bloomberg: 1509 HK Equity | Reuters: 1509.HK

NOT RATED

Re-rating triggered by new business

Last Traded Price (19 Oct 2016): HK$6.5 (HSI : 23,305)

•

Analyst Mark Kong CFA, +852 2820 4619 [email protected]

Largest medical equipment leasing company in China with a central state-owned enterprise parent company, 32-year history and 20.9% market share (based on 2014 revenue)

•

Current valuation of 10x PE for FY16F is attractive in view of projected earnings CAGR of 36% (2015-18) driven by penetration into mid-west regions

•

Co-developing a top tier hospital with a hospital group in Xian would be a re-rating catalyst

Price Relative

Forecasts and Valuation

F Y Dec (RM B m) Turnov er EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (RMB) EPS (HK$) EPS Gth (%) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) P/Cash F low (X) P/F ree CF (x) EV /EBITDA (X) Net Div Yield (%) P/Book V alue (X) Net Debt/Equity (X) ROAE (%)

2012A 2013A 2014A 2015A 593 981 1,553 2,193 250 389 640 862 418 611 900 239 178 313 457 659 178 313 457 659 n.a. n.a. n.a. 0.44 n.a. n.a. n.a. 0.51 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.44 0.13 n.a. n.a. n.a. 3.95 n.a. n.a. n.a. 12.8 n.a. n.a. n.a. n.m. n.a. n.a. n.a. n.m. n.a. n.a. n.a. 25.5 1.9 n.a. n.a. n.a. 1.6 4.3 6.5 4.5 2.3 n.a. 30.9 25.4 15.9

ICB Industry: Financials ICB Sector: Financial Services Principal Business: Medical equipment leasing, advisory services provided to hospitals

Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX

Largest medical equipment leasing company in China. Founded in 1984, the group’s parent company is China General Technology, which is a state-owned enterprise under the Central government. The group borrows capital from banks and other financial institutions, and procures medical equipment to lease to hospitals. The interest charged to hospitals contributed 58% to revenue in 1H16, and advisory & clinical department upgrade services made up 27%. Bloomberg consensus projects Universal Medical’s earnings to grow at a CAGR of 36% (2015-18). We believe the growth is mainly driven by an increase in hospital customers in mid-west regions. Attractive valuation. The counter is trading at 10x FY16F PE. Relative to its consensus projected earnings CAGR of 36% in 2015-18, we think the current valuation is attractive. New business to trigger re-rating. The group announced its plans to construct and operate a top tier grade A hospital for the First Affiliated hospital of Xian Jiaotong University (a top tier grade A hospital under the central government). We estimate it takes c.3 years to complete construction at a cost of >Rmb1.2bn. As part of the co-operation agreement, starting from 1Q17, the group will procure drugs & medical consumables for the hospital, which we estimate could generate annual earnings of Rmb160m (equal to 24% of 2015 earnings). We believe the consensus estimates has not factored in this. The earnings scale should increase as we believe the hospital will assign the group to offer procurement services to its associated hospitals nearby (at least 3). This could accelerate earnings growth and the move has already triggered a share price surge of 22% in last two months. The group has also signed framework agreements with Handan First Hospital and the Second Affiliated Hospital of Zhengzhou University this year, pursuing further co-operation opportunities. Materialisation of the deals could be a share price catalyst in future At A Glance Issued Capital (m shs) Total Mkt Cap (HK$m/US$m) Major Shareholders (%) China General Technology Holding CCP II GP Ltd. Central Huijin Inv estment Ltd. 3m A v g. Daily V al. (US$m)

11,156

1,716 / 1,438 37.73 14.43 7.93 3.5

Page 63 ed-TH / sa- DL DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect additional reports relating to this issuer, unless so decided by DBSV

China Hospital Sector Universal Medical Income Statement (RMBm) F Y Dec Rev enue Cost of Goods Sold G ro ss Prof it Other Opg (Exp)/Inc O perat ing Pro f it Other Non Opg (Exp)/Inc Associates & J V Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre- t ax Prof it Tax Minority Interest Preference Div idend Net Prof it Net Profit before Except. EBITDA Rev enue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Effectiv e Tax Rate (%)

Balance Sheet (RMBm)

20 12 A

201 3A

2 014 A

201 5A

F Y Dec

593 (205) 38 9 (147) 24 1 (5) 3 23 9 (61)

981 (349) 633 (261) 372 44 2 418 (106)

1,553 (620) 93 3 (308) 62 5 (16) 2 61 1 (154)

2,193 (885) 1,309 (462) 847 909 (855) 900 (242)

Net F ixed Assets Inv ts in Assocs & J V s Other LT Assets Cash & ST Inv ts Inv entory Debtors Other Current Assets T o t al A sset s

17 8 178 250 25.7

313 313 389 65.4 55.6 54.4 25.2

45 7 457 640 58.2 64.7 67.8 25.3

659 659 862 41.3 35 35.6 26.9

2013A

20 14A

2015 A

60

104

90

90

3,856 7,178 11,535 15,605 308 319 454 1,866 4 3 3 3 23 0 9 5 1,633 2,848 4,295 6,090 5,8 83 1 0,452 16,385 23,65 8

ST Debt Creditors Other Current Liab LT Debt Other LT Liabilities Shareholder's Equity Minority Interests T o t al Cap. & L iab.

5,8 83

Non-Cash Wkg. Cap Net Cash/(Debt)

1,080 (3,723)

Cash Flow Statement (RMBm)

Rates & Ratio

F Y Dec

F Y Dec

201 2A 2 013A 201 4A 20 15A

201 2A

2,307 305 275 1,724 417 856

3,358 235 399 4,547 744 1,169

Interim Income Statement (RMBm)

Segmental Breakdown (RMBm)

1 H1 5

2 H1 5

1 H1 6

982 (441) 541 (174) 366 (2) 3 368 (98) 270 270

1,211 (444) 768 (283) 484 479 (425) 538 (144) 394 394

1,251 (465) 786 (241) 545 547 (157) 390 390

ASIAN INSIGHTS

F Y Dec Rev enues F inance Lease Income Serv ice F ee Income Operating Lease Income Sale of Goods Others T ot al

2,217 3,012 5,581 (7,587) (10,955) (13,593)

2012A 2013A 2014A 2015A

Gross Margin (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Pay out Ratio (%) Interest Cov er (x) Asset Turnov er (x) Debtors Turn (day s) Creditors Turn (day s) Inv entory Turn (day s) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Capex to Debt (%) N. Cash/(Debt)PS (RMB) Opg CF PS (RMB) F ree CF PS (RMB)

Rev enue Cost of Goods Sold G ro ss Pro f it Other Oper. (Exp)/Inc O p erat in g Pro f it Other Non Opg (Exp)/Inc Associates & J V Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre- t ax Pro f it Tax Minority Interest Net Pro f it Net profit bef Except. Source: Bloomberg Finance L.P.

7,635 95 422 7,824 1,802 5,881

1 0,452 16,385 23,65 8

Pre-Tax Profit 239 418 611 900 Dep. & Amort. 9 16 15 15 Tax Paid (59) (109) (167) (188) Assoc. & J V Inc/(loss) (Pft)/ Loss on disposal of F As Non-Cash Wkg. Cap. (1,861) (4,475) (4,471) (6,088) Other Operating CF 79 30 (99) 41 Net O p erat in g CF (1,593) (4,11 9) (4,1 11) (5,320 ) Capital Exp. (net) (60) (1) (1) (29) Other Inv ts. (net) (28) (60) 24 (44) Inv ts. in Assoc. & J V Div from Assoc. & J V Other Inv esting CF Net Inv est ing CF (88) (6 1) 23 (73 ) Div Paid (78) (8) Chg in Gross Debt 1,377 4,201 4,130 4,483 Capital Issues 381 805 2,776 Other F inancing CF (51) (10) (635) (445) Net F in anc in g CF 1,707 4,19 1 4,2 22 6,805 Chg in Cash 26 11 135 1,412 F Y Dec

4,118 848 446 7,290 1,255 2,427

65.5 40.6 29.9 n.m. 3.0 n.m. n.m. n.a. 0.1 14.2 542.9 6.7 0.7 0.7 4.3 1.5 n.a. n.a. n.a.

64.5 37.9 31.9 30.9 3.8 3.7 n.m. n.a. 0.1 4.3 282.3 3.7 0.8 0.8 6.5 0.0 n.a. n.a. n.a.

60.1 40.2 29.4 25.4 3.4 3.7 17.1 n.a. 0.1 1.0 318.9 1.9 0.9 0.9 4.5 0.0 n.a. n.a. n.a.

59.7 38.6 30.0 15.9 3.3 3.2 1.3 1.0 0.1 1.1 194.4 1.2 1.0 1.0 2.3 0.2 (7.92) (3.58) (3.61)

2012A 2013A 2014A 2015A

333 249 17 12 (18) 593

588 1,044 1,476 371 488 703 20 17 18 15 18 12 (12) (14) (16) 981 1,553 2,193

VICKERS SECURITIES Page 64

Asian Insights SparX China Hospital Sector

Appendix 1: Comparison of hospital industry in Mainland China & Hong Kong Public hospitals play an important role in the hospital industry of Mainland China and Hong Kong. In Mainland China, according to NHFPC, the total hospital industry revenue was Rmb2,046bn in 2014, out of which, public hospitals contributed 92%. In Hong Kong, based on Hong Kong Hospital Authority and Euromonitor, we estimate the total hospital industry revenue to be HK$74bn in 2014 and public hospitals contributed 75% of it. Revenue mix. The following charts show the revenue breakdown of public hospitals in Mainland China and Hong Kong in 2014. For the Mainland China hospitals, sales of drugs was the largest revenue item (38% in 2014). For the hospitals in Hong Kong, recurrent government subvention or government subsidy was the largest revenue item in FY3/2015.

Hong Kong: public hospitals revenue breakdown (FY3/2015)

Capital Government subvention for building projects 2%

Hospital/clinic fees and charges Donations 6% 0% Transfers from designated donation fund 0% Transfers from minor Works Projects Fund 2% Transfers from capital subventions 1%

Recurrent Government subvention 87%

Transfers from capital donations 0% Transfers from investment income 1% Others 1%

Mainland China: Public hospitals' revenue breakdown (2014) Science & education project income 0.4% Financial subsidy 7.7%

Others 1.9%

Registration 0.3%

Source: Hong Kong Hospital Authority

Body check 10.7% Treatment 10.8% Operation 4.1%

Sales of drugs 38.0%

Other medical services 12.9%

Source: NHFPC

ASIAN INSIGHTS Page 65

Sales of medical consumables 9.6% Nursing 1.3%

Beds 2.3%

Trend of revenue mix. For public hospitals in Mainland China, we expect two trends in the future: 1) The contribution from sales of drugs will drop from 38% in 2014 to c.30% in three years. For decades, public hospitals have been relying on drug sales to generate income as they are allowed to mark up by 15% over procurement cost. The government is now gradually removing the mark-up, which will lower the prices of drugs that hospitals sell to their patients. Meanwhile, due to removal of the mark-up, hospitals cannot profit by selling drugs in the long run. Their incentives to boost sales volume will decline which will in turn impact sales volume in the long run. As a result, revenue contribution from drug sales will decrease significantly in three years.

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector 2) The contribution from medical services directly related to treatment of patients will increase. Those services include treatment, operation, nursing and other medical services. They collectively made up 29.1% of the revenue in 2014. To compensate for the decline in revenue resulting from decrease in drug sales, the government will increase the prices of those medical services, according to “Opinion on promoting the price reform of medical” issued in July 2016 (“推進醫療服務價格改革的意見”). Thus, we believe their contribution will increase gradually in the future.

The public hospitals in Hong Kong are relying heavily on government grants. There is no major change of government subsidy policy to public hospitals, so we expect the revenue mix to remain stable in future. Cost mix. The following charts show the cost breakdown of public hospitals in Mainland China and Hong Kong in 2014. For the Mainland China hospitals, “drug cost” and “staff cost” are the largest contributors which accounted for 34.9% and 22.2% of total cost in 2014 respectively. For the hospitals in Hong Kong, staff cost was the largest cost item in FY3/2015. Mainland China: Public hospitals' cost breakdown (2014) Drug cost 34.9% Others 27.7% Science & education project payment 0.3% Financial subsidy payment 3.4%

Administrat ive cost 11.6%

Staff cost 22.2%

Hong Kong: Public hospitals' cost breakdown (FY3/2015) Medical supplies and equipmen Utilities 4% charges 2% Repairs and maintenance 3%

Drugs 10%

Others 6%

Staff costs 69%

Building projects funded by the Government 4% Operating lease expenses 0% Depreciation & amortisation 2%

Source: Hong Kong Hospital Authority

Trend of cost mix. For the public hospitals in Mainland China, we believe there will also be two trends here in the future: 1) The proportion of drug cost will decrease. There are two reasons for that. Firstly, as discussed above, the revenue contribution from drug sales will decrease, so will its contribution to cost. Secondly, following the removal of drug price mark-ups, drugs will become a cost item rather than a profit generator for hospitals. To control cost, we believe the hospitals will exert more price pressure on drug distributors and manufacturers than before. This will help to lower the proportion of drugs to total cost; 2) Staff cost will increase. It is well known that the official income of doctors in China is significantly lower than in other regions. According to a survey conducted by Medlive.cn in 2015 (6,204 doctors participated), the average annual income for a doctor in China was Rmb71,400, or only 1/14 of a doctor in the US. China's government is aware of this and is gradually raising the remuneration. Hence, we believe the staff cost of a hospital will increase in the long run.

Source: NHFPC

For public hospitals in Hong Kong, we believe staff cost will remain the largest cost item in the future.

ASIAN INSIGHTS Page 66

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

Appendix 2: Comparison of listed hospital companies Peers valuation

Co mp an y Name Ho n g K o n g Phoenix Healthcare Group* Rici Healthcare Hdg. Wenzhou Kangning 'H'* Harmonicare Medical Hdg. Univ ersal Medical A v erag e Ch in a Aier Ey e Hospital Gp.'A' Hengkang Medical Gp.'A' Topchoice Medical Inv . 'A' J inling Pharm. 'A'

Cu rren c y Pric e Co d e L o c al$

Mkt Cap US$ m

PE 16F x

P/B k 17F x

EV /EB IT DA 16F 17F x x

ROE 16F %

ROE 17F %

HKD HKD HKD HKD HKD

13.1 2.23 39.2 4.66 6.5

1,409 457 369 455 1,438

38.8 n.a. 37.3 27.3 10.5 28.5

29.5 n.a. 30.1 23.1 7.5 22.5

0.9 n.a. 0.8 1.3 2.6 1.4

1.7 n.a. 1.0 1.8 3.4 2.0

7.6 n.a. 2.5 2.0 1.4 3 .4

6.4 24.5 18.5 14.5 23.6 n.a. n.a. n.a. n.a. n.a. 2.3 19.1 14.5 6.8 7.9 1.9 8.1 8.6 7.5 8.3 1.2 n.a. n.a. 15.2 18.9 3 .0 1 7 . 2 1 3 . 9 1 1 . 0 1 4 . 7

300015 CH 002219 CH 600763 CH 000919 CH

CNY CNY CNY CNY

34.74 13.35 34.84 14.48

5,234 3,777 1,671 1,092

59.3 40.2 59.7 29.5

44.0 32.4 46.4 23.5

0.6 0.3 0.1 1.6

0.8 0.4 0.1 1.9

12.4 5.5 11.1 2.6

10.2 4.8 9.1 2.4

35.6 42.6 37.1 15.2

47.2 36.6

0.7

0.8

7 .9

6 .6

32.6

42.2 34.1 30.1 33.0 24.5 39.0 52.9 32.1 20.6 87.9 26.5

0.5 1.3 0.0 1.5 0.0 0.5 0.8 0.2 2.1 0.0 1.7

0.6 1.5 1.8 1.6 2.8 0.6 1.0 0.1 2.2 0.1 1.9

49.1 38.4

0.8

1.3

11.7 15.4 14.9 10.3 5.5

0.0 0.3 0.0 0.0 0.0

0.0 0.3 0.0 0.0 0.0

14.0 11.6

0.1

0.1

IHH MK BDMS TB RHC AU BH TB HSO AU APHS IN MIKA IJ F ORH IN DALLAH AB SILO IJ KPJ MK

MYR 6.45 12,796 52.0 THB 21.5 9,573 38.5 AUD 78.54 21,010 n.a. THB 170 3,567 36.0 AUD 2.96 9,662 28.5 INR 1376.1 2,874 52.4 IDR 2870 3,203 59.5 INR 184.65 1,284 54.8 SAR 80 1,258 22.0 IDR 10725 951 117.7 MYR 4.22 1,080 29.9

A v erag e US Hca Holdings Univ ersal Health Sv s.'B' Lifepoint Health Tenet Healthcare Community Health Sy stems

P/ B k 16F x

1515 HK 1526 HK 2120 HK 1509 HK 2666 HK

A v erag e Emerg in g M ark et Ihh Healthcare Bangkok Dusit Med.Sv s. Ramsay Health Care Bumrungrad Hospital Healthscope Apollo Hosps.Enterprise# Mitra Keluarga Ky st. F ortis Healthcare# Dallah Healthcare Siloam Intl.Hosps. Kpj Healthcare

PE Y ield Y ield 17F 16F 17F x % %

HCA N UHS N LPNT US THC N CYH N

USD 82.02 31,057 USD 125.85 12,256 USD 61.65 2,631 USD 23.68 2,357 USD 10.53 1,197

12.5 16.8 17.6 15.4 8.0

2.3 2.2 5.9 5.4 n.a. 7.1 8.6 7.6 2.2 2.1 5.2 4.7 11.8 10.7 2.0 2.0 3.1 2.9 6.2 5.4 2.9 2.7 5 .0

n.a. 2.6 1.1 2.2 0.4 1 .6

4 .8

n.a. 2.3 1.1 1.7 0.3 1 .3

24.3 23.7 n.a. 23.2 17.0 23.3 0.0 21.7 23.7 0.0 14.3 17.1

8.2 9.3 7.0 9.3 6.3 8.0

27.2 23.6 30.1 12.3

21.3 14.6 20.9 9.6

23.9 15.8 22.8 11.2

23.3 16.6 18.4

19.3 23.2 13.8 20.9 14.8 19.0 38.0 15.7 17.4 15.3 11.6

4.6 16.0 0.0 25.9 7.7 9.7 20.4 3.1 14.0 5.6 9.9

5.5 16.6 25.4 24.6 8.7 12.2 21.5 5.3 14.2 6.3 10.7

19.0 10.6 13.7

7.1 (35.4) (41.5) 8.3 15.6 15.6 6.1 6.8 7.3 6.3 12.5 16.1 6.7 4.9 7.7 6.9

0.9

1.1

# FY17: FY18; FY18: FY19 Source: Thomson Reuters, *DBS Vickers

ASIAN INSIGHTS Page 67

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

This page has been left blank intentionally

ASIAN INSIGHTS Page 68

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends Completed Date: 20 Oct 2016 16:28:30 Dissemination Date: 20 Oct 2016 17:21:49 GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited (“DBSVHK”). This report is solely intended for the clients of DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”) and DBSVHK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVHK. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBSVS and DBSVHK, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b)there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.

ASIAN INSIGHTS Page 69

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. As of 20 October 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. COMPANY-SPECIFIC / REGULATORY DISCLOSURES DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended/mentioned in this report as of 19 Oct 1. 2016. Compensation for investment banking services: DBS Bank Ltd., DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA, within the next 3 months, will receive or intend to seek compensation for investment banking services from China Resources Land Limited (1109 HK) as of 30 Sep 2016.

2.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

RESTRICTIONS ON DISTRIBUTION General

This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia

This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”) or DBS Vickers (Hong Kong) Limited (“DBSVHK”), which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSVHK is regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong

This report is being distributed in Hong Kong by DBSVHK which is licensed and regulated by the Hong Kong Securities and Futures Commission.

Indonesia

This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

Malaysia

This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR Singapore

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand

This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

ASIAN INSIGHTS Page 70

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

United Kingdom

This report is produced by DBSVHK which is regulated by the Securities and Futures Commission of Hong Kong. This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd (“DBSVUK”). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC rd Branch) having its office at PO Box 506538, 3 Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States

This report was prepared by DBSVHK. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. DBS Vickers (Hong Kong) Limited th

18 Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2868-1523 Company Regn. No. 31758

ASIAN INSIGHTS Page 71

VICKERS SECURITIES

Asian Insights SparX China Hospital Sector

As i a n E q u i t i e s S a l e s , S a l e s Tr a d i n g a n d R e s e a r c h Co n t a c t s Singa pore Hong Kong London Ne w York Tha ila nd Indone sia

Sa le s He a ds Ke nne th Ta ng Andre w Au Gra ha m Booth Ela ine Yu Na risa ra Vise skosin Ric a rdo Sila e n, CFA

65-6398 852-2820 44-20-7618 1-212-826 662-657 6221 3003

Te l : 6951 4992 1881 3553 7759 4911

E ma i l : ke nne thta ng@ dbsvicke rs.com a ndre w_a u@ hk.dbsvicke rs.com gra ha [email protected] e la ine yu@ us.dbsvicke rs.com Na risa ra V@ th.dbsvicke rs.com rica rdo.sila e n@ id.dbsvicke rs.com

Singa pore Hong Kong London Ne w York

S a l e s Tr a d i n g Co n t a c t s Vivia n Goh Fra nco La w Cha rle s Da vie s Bre nda Wong

65-6398 852-2971 44-20-7618 1-212-826

Te l : 6927 1828 1883 3558

E ma i l : vivia ngohkb@ dbsvicke rs.com fra nco_la w@ hk.dbsvicke rs.com cha rle sda vie [email protected] bre nda wong@ us.dbsvicke rs.com

Re giona l Singa pore Hong Kong M a la ysia Tha ila nd Indone sia

R e s e a r c h Co n t a c t s Timothy Wong Ja nice Chua Ca rol Wu Wong M ing Te k Cha npe n Siritha na ra tta na kul M a yna rd Pria ja ya Arif

65-6682 65-6682 852-2863 603-2604 662-657 6221 3003

Te l : 3691 3692 8841 3970 7824 4930

E ma i l : [email protected] ja nice chua [email protected] ca [email protected] rs.com mingte k@ a llia nce dbs.c om cha npe n@ th.dbsvicke rs.com ma yna rd.a rif@ id.dbsvicke rs.com

D B S V ic k ers Sec u rit ies - R eg io n al O f f ic es HO NG K O NG DBS V ickers (Hong Kong) Ltd 18th F loor Man Yee Building 68 Des V oeux Road Central Central, Hong Kong Tel: 852-2820 4888 F ax: 852-2868 1523 Participant of The Stock Exchange of Hong Kong Limited

M A L A Y SIA A llianceDBS Research Sdn Bhd 19th F loor, Menara Multi-Purpose Capital Square, 8 J alan Munshi A bdullah 50100 Kuala Lumpur Tel: 603 2604 3333 F ax: 603 2604 3921

SIN G A PO R E DBS Bank Ltd 12 Marina Boulev ard Lev el 40 Marina Bay F inancial Centre Tow er 3, Singapore 018982 Tel: 65-6878 8888

IN D O N ESIA PT DBS V ickers Securities (Indonesia) DBS Bank Tow er Ciputra World 1, 32/F J l. Prof. Dr. Satrio Kav . 3-5 J akarta 12940, Indonesia Tel: 62-21- 3003 4900 F ax: 62-21- 3003 4943

U N IT ED ST A T ES DBS V ickers Securities (USA ) Inc 777 Third A v enue Suite 26A New York, New York 10017 Tel: 1-212-826 1888 F ax: 1-212-826 8704 Member of F INRA and SIPC

U N IT ED K IN G D O M DBS V ickers Securities (UK) Ltd 4th F loor Paternoster House 65 St Paul's Churchy ard London EC4M 8A B Tel: 44-20-7618 1888 F ax: 44-20-7618 1900 Regulated by The F inancial Serv ices A uthority

T H A IL A N D DBS V ickers Securities (Thailand) Co, Ltd 989 Siam Piwat Tow er Building, 9th, 14th-15th F loor, Rama 1 Road, Pathumwan, Bangkok Thailand 10330 Tel. 66 2 657 7831 F ax: 66 2 658 1269

ASIAN INSIGHTS Page 72

VICKERS SECURITIES