Aier Eye Hospital:Strong quarter driven by both organic growth and acquired assets

Growth acceleration continued in 3Q

    Aier reported revenue/core profit of RMB1.8bn/292m in 3Q17, representing YoYgrowth of 54%/45% respectively, vs. 35%/34% in 1H17, and vs. 26%/19% forrevenue/core profit in 2016. The company commented that organic growth ofrevenue and core profit was 28%/38% in 3Q17, vs. 31%/ 27% in 2Q17, andvs. 24%/ 22% in 1Q17. Management attributes the robust revenue growthto consolidation of newly-acquired subsidiaries (including Clinica Baviera) andorganic growth of existing hospitals. We expect further growth acceleration,driven by contribution from new assets and solid existing business. We reiterateBuy on high earnings sustainability and visibility.

    Strong growth momentum for the three major segments

    Sales growth of excimer surgery, cataract surgery, and optometry was estimatedto be 50%, 57%, and 37% in 3Q17, vs. 42%, 33%, and 30% in 1H17, and vs. 36%,22%, and 37% in 2016, respectively. We believe the strong results were owing tothe growing need for ophthalmic services in China. On M&A, the Clinica Bavieradeal closed in August 2017and is expected to add another leg of growth in 4Q17.

    Margin improved in 3Q17

    GM/OPM registered 50.6% and 25.4%, respectively, in 3Q17, vs. 48.5% and22.1% in 3Q16. We attribute the margin expansion to the ramp-up of newhospitals, economies of scale, and lower admin costs. We also highlight thatfinance costs advanced 1324% YoY in 3Q17, resulting from a large amountof borrowings for acquisitions. We believe the momentum in operating marginimprovement will continue with the contribution from new assets.

    Increasing price target to RMB32.4from RMB28.7; risks

    Our target price is based on 26x EV/EBITDA of 2018E EBITDA, vs. the 25x weused previously, due to sector re-rating. We believe 26x is justified, as its Asialistedpeers are trading at 19x with 6% EBITDA growth in 2019E (vs. the 25% wemodel for Aier). Key risks include delays in geographical expansion, execution riskrelated to newly-acquired business, and slower ASP/ volume growth.