Aier Eye Hospital announced on Nov 30, 2023 that it plans to acquire stakes (51%-74%) in seven hospitals, including Tangshan Aier Eye Hospital, Hengdong Aier Eye Hospital, Xianyang Aier Eye Hospital, Taishan Aier New Hope Hospital, Suining Aier Eye Hospital, Enshi Aier Eye Hospital and Beiliu Aier Eye Hospital, held by Nanjing Aier Anxing Ophthalmic Medical Industry Investment Center and Hunan Liangshi Chenxing Medical Industry Management Partnership Enterprise. Once completed, the deals will likely help increase the Company's earnings. As its medical network continually expands, Aier's tiered chain advantage and scale effect will become further evident. Given that Aier is the world's largest chain ophthalmic medical group with prudent endogenous growth and will likely maintain high earnings growth following its acquisition of more hospitals on the back of a sound incentive system, we assign 56x 2023E PE to the Company, corresponding to a target price of Rmb22, and reiterate our "BUY" rating on the Company.
Aier plans to purchase equity in seven hospitals, and its earnings will likely further increase upon consolidation of these hospitals.
Aier announced on Nov 30, 2023 that it plans to acquire stakes (51%-74%) in seven hospitals, including Tangshan Aier, Hengdong Aier, Xianyang Aier, Taishan Aier New Hope, Suining Aier, Enshi Aier and Beiliu Aier, from Nanjing Aier Anxing and Hunan Liangshi Chenxing in deals worth a combined Rmb299mn. According to the announcement, the aforementioned seven hospitals had a combined revenue of Rmb187mn with a combined loss of Rmb6.7025mn in 2022. In Jan-Sep 2023, they generated a combined revenue of Rmb179mn and made a combined profit of Rmb10.475mn, pointing to rapid earnings growth of these hospitals. We estimate that the latest acquisition consideration corresponds to an overall valuation of 35x 2023E PE, which is quite reasonable. We expect the Company's earnings to increase further after consolidation of these seven hospitals.
Aier expands business in lower-tier markets and continues to develop tiered chain across China.
According to its 2023 interim report, as of the end of 1H23, Aier ran 229 hospitals and 168 clinics on the mainland. In 1H23, the revenue share and attributable net profit share of the Company’s 10 core hospitals fell by 1.8ppts/4.7ppts to 18.2%/28.4%, respectively, pointing to promising development potential of the third- and fourth-tier markets. As its medical network continually expands, Aier's tiered chain advantage and scale effect will become further evident. We believe that the Company's endogenous growth will continue to contribute to its earnings over the longer term.
Additional share repurchases highlight its strong confidence about future development.
Aier started to implement share repurchase program in Jun 2023. According to its 3Q23 earnings conference call, Aier had bought back more than Rmb366mn of shares as of Sep 30. Based on recognition of its intrinsic value and confidence about its future development, Aier intends to buy back more shares in a bid to push forward with its new 10-year development strategy, implement the “1+8+N” strategic layout, further attract and increase incentives for leading domestic and international talents, effectively safeguard shareholder interest and strengthen investor confidence. On Oct 25, 2023, the Company said that it plans to use Rmb200mn-300mn of its own money to buy back shares through concentrated bidding transactions, which will be used for implementing equity incentive schemes or employee shareholding plans. The share repurchase program highlights the Company’s strong confidence about its future long-term development. In addition, in order to further enhance market confidence, Aier's controlling shareholder voluntarily pledged on Aug 23 that it will not reduce holdings of the Company's shares in the next six months.
Potential risks: Changes in industry policies exceed expectations; medical disputes; growing competition leads to falling gross margin; the Company's M&A consolidation results miss expectations.
Earnings forecast, valuation and rating: Given that it is the world’s largest chain ophthalmic medical group, we maintain our 2023/24/25E EPS forecast for the Company at Rmb0.39/0.49/0.63. By referring to the average valuation of 47x 2023E PE (Wind consensus expectations) for comparable eyecare companies in the medical service sector Bright Eye Hospital (301239.SZ) and Huaxia Eye Hospital (301267.SZ), considering that Aier enjoys prudent endogenous growth and will likely maintain high earnings growth upon consolidation of more hospitals on the back of a sound incentive system, we assign 56x 2023E PE to derive a target price of Rmb22, and reiterate our "BUY" rating on the Company.
