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Asia Pacific Equity Research07 September 2016

Phoenix Healthcare Group

Initiation

Overweight1515.HK, 1515 HK

Merger will transform China’s largest hospital services provider, Initiate with OW

Price: HK$13.88

Price Target: HK$16.00

Hong Kong

Healthcare

Isabella Y. Zhao, CFA AC

(852) 2800-8534

[email protected]

Joanne Cheung

(852) 2800-8596

[email protected]

J.P. Morgan Securities (Asia Pacific) Limited

p YTD 1m 3m 12mAbs 63.3% 21.5% 27.3% 22.0%Rel 52.4% 14.7% 14.8% 7.1%

Phoenix Healthcare Group (Reuters: 1515.HK, Bloomberg: 1515 HK)

Rmb in mn, year-end Dec FY14A FY15A FY16E FY17E FY18ERevenue (Rmb mn) 1,206 1,372 1,630 1,945 2,276Net Profit (Rmb mn) 230 167 263 339 408EPS (Rmb) 0.28 0.20 0.32 0.38 0.46DPS (Rmb) 0.05 0.14 0.06 0.05 0.06Revenue growth (%) 35.9% 13.8% 18.8% 19.3% 17.1%Fully Diluted EPS growth 77.2% (26.4%) 59.3% 16.1% 21.2%ROCE 13.5% 11.5% 14.4% 16.5% 17.4%ROE 14.2% 9.9% 15.2% 23.4% 24.8%P/E (x) 43.2 58.6 36.8 31.7 26.2P/BV (x) 6.1 5.6 5.0 4.4 3.8EV/EBITDA (x) 24.3 26.2 22.4 17.1 13.8Dividend Yield 0.4% 1.2% 0.5% 0.5% 0.5%Source: Company data, Bloomberg, J.P. Morgan estimates.

Company DataShares O/S (mn) 818Market Cap (Rmb mn) 9,775Market Cap ($ mn) 1,463Price (HK$) 13.88Date Of Price 05 Sep 16Free Float(%) -3M - Avg daily vol (mn) 3.203M - Avg daily val (HK$ mn) 37.533M - Avg daily val ($ mn) 4.8HSI 23,266.70Exchange Rate 7.76Price Target End Date 31-Dec-17

See page 41 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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Sep-15 Dec-15 Mar-16 Jun-16 Sep-16

Price Performance

1515.HK share price (HK$)

HSI (rebased)

We initiate coverage of Phoenix Healthcare (PHG) with an Overweightrating and a Dec-17 PT of HK$16.00. As China’s only publicly listed hospital management group, PHG offers distinctive exposure to an asset-light leader in healthcare reform and the privatization of hospital services. Now with support from a major SOE, China Resources Group (CR), we see significant growth potential from both organic expansion and M&A. Our PT of HK$16.0 implies 20x 2017E EV/EBITDA, or 19% potential upside.

Leader in China’s private hospital services market: PHG is the largest hospital services group in China managing 101 facilities and 11,900 beds. Phoenix continues to build an integrated healthcare service platform with a forecast 18%/20% revenue/EBITDA CAGR in 2016-2018E on: 1) rising patient volumes; 2) improving margins; and 3) network expansion with synergies from CR & CITIC Medical & Healthcare.

Limited EPS dilution from CR merger: New share issuance represents 35% of equity, but our conservative estimated net profit contributions of Rmb135mn/185mn in 2017/2018E amount to pro-forma EPS dilution of 7% in both years, or Rmb0.32/Rmb0.38 (vs consensus of Rmb0.33/0.39 in 2017/2018E). Phoenix will become CR's sole healthcare platform, offering potential upside from additional public hospital contracts. Management aspire to double beds under contract by 2018 from ~11,900 as of now, which is not in our model.

Valuations suggest further potential upside: PHG has risen by over 20% (vs HSI 3%) following the announcement on Aug 30 relating to merger integration, putting the shares at 17x 2017E EV/EBITDA, (vs an historical range of 12x-33x). Our 20x FY17E EV/EBITDA target is based on PHG’s premium EBITDA growth outlook of 20% in 2016-2018E.

Key risks to our estimates and views lie in the integration of public hospitals into PHG’s private network (see inside for merger financial metrics), along with: 1) stricter government regulations on hospital investment; 2) lack of ownership and control of IOT hospitals; and 3) headwinds from drug tenders and resulting margin squeeze.

Completed 06 Sep 2016 02:22 PM HKTDisseminated 07 Sep 2016 09:27 PM HKT

http://www.hibor.com.cn/

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Isabella Y. Zhao, CFA(852) [email protected]

Key catalysts for the stock price: Upside risks to our view: Downside risks to our view:

• Steady growth from outpatient and inpatient visits• Expanding hospital network coverage and totalnumber of beds;• Rising revenue intensity and average spending

• Faster-than-expected ramp-up of new hospitals;• Higher ASP for hospital service;• Announcement of M&A or collaborations

• Lower-than-expected capacity expansion;• Failures in implementing M&A plans;• Increasing competition in China Healthcare service sector

Key financial metrics FY15 FY16E FY17E FY18E Valuation and price target basis

Revenues (LC mn) 1,372 1,630 1,945 2,276 Our price target of HK$16.00 is based upon DCF methodology. The nature of the industry leads us to apply a terminal growth of 5.0%Revenue growth (%) 13.8% 18.8% 19.3% 17.1%

EBITDA (LC) 323 369 465 554 EBITDA margin (%) 23.6% 22.6% 23.9% 24.3%

Tax rate (%) 30.5% 18.0% 18.0% 18.0%Net profit (LC mn) 167 263 339 408

EPS (LC) 0.204 0.325 0.377 0.457

EPS growth (%) -26.4% 59.3% 16.1% 21.2% Revenue Breakdown 2016E

DPS (LC) 0.14 0.06 0.05 0.06 BVPS (HKD) 2.13 2.26 1.72 1.97

Operating cash flow (LC mn) 232 294 423 446 Free cash flow (LC mn) 200 262 384 401

Interest cover (X) 11.8 - - -Net margin (%) 12% 16% 17% 18%

Sales/assets (X) 0.61 0.65 0.68 0.71

Net debt (cash)/equity (%) -57.8% -62.3% -68.8% -72.5%

ROE (%) 9.3% 13.4% 15.3% 16.1%

Key model assumptions FY15 FY16E FY17E

GM 24% 26% 26%

NM 12.2% 16.2% 17.4%

Effective tax rate 30.5% 18.0% 18.0%

Source: Company and J.P. Morgan estimates. Source: Bloomberg, Company and J.P. Morgan estimates.

Sensitivity analysis EBITDA EPS JPMe vs. consensus, change in estimatesSensitivity to FY16E FY17E FY18E FY19E EPS (LC) FY16E FY17E

1% chg in supply chain sales 0.3% 0.3% 0.3% 0.3% JPMe old NA NA1% chg in GPM 4.4% 4.3% 4.6% 4.5% JPMe new 0.32 0.38

1% inc in SG&A 0.5% 0.5% 0.5% 0.5% % chg NA NAConsensus 0.33 0.39

Source: J.P. Morgan estimates. Source: Bloomberg, J.P. Morgan estimates.

Comparative metrics

CMP Mkt Cap P/E (x) EV/EBITDA (x) P/BV (x) YTD%

LC $Mn FY16E FY17E FY16E FY17E FY16E FY17E Stock perf.

FOSUN PHARMA-H 23.70 7,978 17.5 15.0 25.4 21.3 2.3 2.0 7.4

HARMONICARE MEDI 4.67 457 27.2 23.3 10.7 8.7 2.0 1.9 (31.4)

TOWN HEALTH 1.37 1,371 (13.7)

HUA XIA HEALTHCA 0.33 87 (66.3)WENZHOU KANGNI-H 42.00 396 37.7 28.2 22.0 15.1 2.6 2.5 (8.5)

AIER EYE HSPTL-A 35.06 5,279 59.1 43.8 36.8 27.9 - - 11.9

TOPCHOICE MEDI-A 32.35 1,551 56.0 43.7 34.9 27.2 10.0 8.1 (34.0)

Source: Company data, JP Morgan estimate, Bloomberg, Price as September 4, 2016

General hospital

39%

Hospital management services

7%

Supply chain54%

Others0%


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Table of ContentsInvestment Summary ...............................................................4

Valuation ...................................................................................7

Investment Positives................................................................8

Investment Risks ....................................................................15

DCF is our primary methodology..........................................17

Financial Analysis ..................................................................20

Company Analysis .................................................................29

Key Hospital Profiles..............................................................32

Company History....................................................................36

Shareholders and Management ............................................36

SWOT Analysis .......................................................................38

Investment Thesis, Valuation and Risks ..............................39


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Investment Summary

As the largest private hospital management group in China, we believe PHG is well positioned to accomplish growth as the government is gradually removing restrictions for private capital to participate in public hospital reform. Including the hospitals under management from CR Healthcare, PHG now has a portfolio of 101 hospitals with 11,900 beds in operation. Revenues are generated from in-network hospitals through: 1) Jian Gong hospital’s general healthcare service (segment margin of 7.1% in 1H16), 2) management fees from IOT (invest-operate-transfer) hospitals and clinics (segment margin of 64.2% in 1H16) and 3) supply chain business providing pharmaceuticals, medical equipment and other supplies to in-network hospital (segment margin of 24.7% in 1H16).

All the hospitals and clinics currently in operation are located in Beijing, but the company announced in May 2016 plans to acquire 47 hospitals and three elderly care institutions, and two hospitals from CR Healthcare and CITIC Medical & Health,respectively. The deal is expected to close by October, 2016 and we believe it will enable PHG to be the largest hospital group in Asia with a total number of 12,480 beds, covering Beijing as well as Eastern and Southern cities in China. In the long term, PHG intends to build a multi-tiered hospital group, with scaled-up general hospitals treating severe diseases surrounded by community clinics. It will collaborate with insurance companies we believe to provide commercial insurance service to patients.

The 1H16 result was strong with revenue growing 17% y/y, mainly driven by 21% and 9% y/y increases in general hospital services and hospital management revenue, respectively. Total patient visits rose 28% y/y to 2.91mn and the total number of operating beds rose 1.8% y/y to 5,867 in 1H16.

PHG offers exposure to the growing private hospital market in China, thanks to its distinctive business model and rich pipeline project with sustainable growth. Trading at 17x our 2017 EV/EBITDA, a 15%/30% discounts to its emerging market and A-share peers, we believe the stock is undervalued.

Figure 1: PHG – Revenue and growth rate 2012-2018ERmb mn

Source: J.P. Morgan estimates for FY16E to FY18E, Company data for FY12-FY15

Figure 2: PHG – EBIT over revenue 2012-2018ERmb mn

Source: J.P. Morgan estimates for FY16E to FY18E, Company data for FY12-FY15

Phoenix Hospital Group (PHG) is the largest private hospital management group in China, measured by number of beds and patient visits. Its headquarters are in Beijing and it has a network of 104 hospitals and over 12,000 beds under service agreements. Besides generating hospital management fees, it also derives drug supply chain revenues from running a centralized procurement system for its hospitals under management.

Revenue breakdown by business segment (2015)

Source: Company data

General

hospital

42%

Hospital

management servic

es5%

Supply chain52%

Others1%


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1H16 key takeaways

1H16 operational and financial results overview

Revenue increased by 17.1% to RMB705m from RMB602m in 1H2015

Gross profit increased by 28.6% to RMB182m from RMB142m in 1H2015

Total bed in operation increased by 1.8% y/y to 5,867

Total patient visits increased by 28.4% y/y to 2.91m

Average in-patient spending per visit was RMB16,713 vs RMB16,834 in 1H2015

Average out-patient spending per visit was RMB400 vs RMB411 in 1H2015

Introducing China Resources Healthcare Group and CITIC Medical & Health Group as major strategic shareholders. Phoenix plans to issue HK$3.7bn and HK$1.24bn equity to acquire the core assets of CR Healthcare and CITIC Medical, respectively. After the transaction, CR Healthcare and CITIC Medical will hold 32.4% and 9.15% of Phoenix. Based on company data, the transaction of CR Healthcare was priced at 32.5x 2016 P/E vs Phoenix’s 35x 2016 P/E at the time of announcement. The transaction marks a key transition forPhoenix as the Group will become one of the largest medical and healthcare groups in Asia, with 12,600 operating beds and 10mn annual patient visits in total. Management believes the company's existing assets together with CR and CITIC's assets will create synergies through sharing of corporate resources, which will lower operating costs and enhance hospital management efficiency. For example, CR Healthcare will provide the Group with more opportunities in Guangdong province. The transaction is on track as all parties have already got several approvals, although some anti-trust procedures are still processing.

Outlook for China public healthcare sector reform. Management highlighted six key issues in the current China healthcare sector: 1) increasing demand for medical service driven by an aging population, 2) inefficient operation of public hospitals, 3) unevenly distributed medical resources, 4) immature commercial medical insurance system, 5) increasing claims on public medical insurance and 6) unregulated sales of drugs. These issues are to be addressed in the ongoing medical reform supported by the government. According to management, the reforms focus on reducing hospitals’ reliance on pharmacy by lowering drug prices. In order to allocate more medical resources from Class I public hospitals to lower class medical institutions, the reform also aim to establish a regional integrated delivery system (RIDS), in which patients are diverted based on severity within a network of medical institutions of a different class. For example, patients with stable chronic disease will be diverted to class II or community hospitals. As a result, we should see more communication between general practitioners in community hospitals and specialist doctors in Class I hospitals. Specialist doctors will instruct general practitioners with shared patient profiles.

Lower drug prices are beneficial to healthcare service providers. Management mentioned that many public hospitals have seen increases in profitability alongside lower drug prices. The reason is: 1) healthcare service providers are the least affected compared to manufacturers and distributors and 2) lower drug prices come with higher flexibility in pricing of medical services.


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Enhancing collaboration between the Group’s existing different class of medical institutions to align with regional integrated delivery systems(RIDS) aiming to become a large healthcare group in the BTH region. The Groups will inject more capital to Phoenix to expand its hospital management network within the Beijing-Tianjin-Hebei (BTH) region, using it existing successful business model. Looking ahead, the Group will lengthen its reach in elderly care and the insurance segment, and collaborate with local governments, insurance companies and different classes of medical institutions (including those within the Group) to establish a RIDS.

Completing the supply chain for Shunyi and Baoding hospitals will be a key focus in 2H16 & 1H17; growth in patient numbers and stronger ASPs shouldcontinue. Supply chain business slowed down in 1H16 due to the supply chains for Shunyi and Baoding hospitals being still under construction. Given that these supply chains will be the key focus in 2H16 and 1H17, more revenue should be generated from the supply chain segment. In addition, management believes the strong growth of ASP and patient numbers will continue as Shunyi Airport Hospital is still under construction. Historically, hospitals following the Group's IOT trend will see not much revenue as construction is still in progress; afterwards, we believe revenue will see growth of c30% in the second/third year and c20% going forward.


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Valuation

Figure 3: MSCI China Healthcare Index vs Phoenix's forward EV/EBITDA

Source: Bloomberg

Figure 4: Phoenix's EV/EBITDA valuation is still below average, further potential upside possible

Source: Bloomberg

Mean, 22.37

+1 STD, 27.86

-1 STD, 16.89

+2 STD, 33.34

-2 STD, 11.40

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EV/EBITDA (1515.HK) Mean +1 STD -1 STD +2 STD -2 STD


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Investment Positives

Early-mover advantage riding public hospital reform

Different from developed countries, such as the US, the healthcare service delivery system in China is largely dominated by public hospitals (see our healthcare service report for more details), serving more than 90% of patient visits due to various strictregulations and limited commercial insurance coverage. However, the State Council issued “Guidance to Accelerate Private Capital Investment in Healthcare Service" in 2010, followed up by the Ministry of Health with detailed policies on implementation. As a result, private capital can access the formerly highly regulated healthcare service sector. In 2015, the number of beds per thousand people was 4.9, of which, only 0.5 were from private hospitals, accounting for only 10% of the total. The government aims to increase the number of beds per thousand people to 6.0 by 2020, of which, 1.5 beds are expected to be from private hospitals, or 25% of the total by 2020, implying significant growth potential for leading companies such as Phoenix.

As a pioneer participating in public hospital reform, PHG has expanded quickly by acquiring and/or managing public hospitals in Beijing, which is attributed to its competitive edges including:

Distinctive business model with operation efficiency;

Financial independence from the government and market incentives.

Proven track record of privatization of public hospitals; e.g. it successfully completed the privatization of Jian Gong Hospital in 2000 (the first privatization of a public hospital in Beijing) and the outsourced management of Mengtougou Hospital in 2010 (the first public –private partnership with a public hospital);

Standardized operational procedures to improve efficiency and profitability.Phoenix can improve the profitability after it retains the management of the public hospitals

We believe public hospital reform will continue to benefit private hospital management companies, especially Phoenix with extensive experience and incentives to further expand market share in the healthcare service market in China.

Largest hospital group upon the transaction of CR Healthcare & CITIC Medical and Healthcare

In May, PHG announced two major transactions, with CR Healthcare (CRH) and CITIC Medical & Healthcare, to acquire equity interest of 49 hospitals and threeelderly care institutions. PHG will issue 463mn and 131mn new shares for considerations of HK$3.72bn and HK$1.24bn to CRH and CITIC M&H, respectively. After the two transactions, the top-three shareholders of PHG will be CRH (with 32.4% ownership), the management team (with 18% ownership) and CITIC M&H (with 9.15% ownership). The transaction now is pending board approval, which management expects to be closed in October, 2016. Once these two transactions are completed, PHG will have nine Class III hospitals, 12 Class II hospitals, 34 Class I hospitals and 54 community clinics, with 12,600 beds, becoming the largest hospital group in Asia.


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Figure 5: Shareholding of Phoenix post-transactions

Source: Company data.

Figure 6: Major Hospitals under 3 hospital groups

Source:

Company data.

Hospital name Operating beds Class Location

CITIC Medical & Health

CITIC Huizhou Hospital 560 Class 3 Guangdong

CITIC Hangzhou Cosmetic Hospital 136 Class 3 Zhejiang

CITIC Xiangya Reproductive & Genetic Special Hospital Class 3 Hunan

CITIC Yuncheng Hospital 600 Class 3 Shanxi

Shanwei No. 1 People's Hospital 500 Class 2 Guangdong

Shanwei Women and Children's Hospital 90 Class 1 Guangdong

Shanwei No. 3 People's Hospital (Psychiatric) Planned Guangdong

CITIC Medical & Health Total beds 6000

CR Healthcare

Guangdong 999 Brain Hospital 600 Class 3 Guangdong

Kunming Children's Hospital 900 Class 3 Yunan

West Branch of China Resources & WISCO General Hospital 1080 Class 3 Hubei

East Branch of China Resources & WISCO General Hospital 850 Class 3 Hubei

HBMG General Hospital 1770 Class 3 Anhui

The Mine Hospital of Xuzhou 500 Class 3 Jiangsu

Others 300

CR Healthcare total beds 6000

Phoenix Healthcare

Jian Gong Hospital (owned) 407 Beijing

Under Management

Yan Hua Hospital 663 Class 3 Beijing

Jing mei Hospital 1742 Class 3 Beijing

Mentougou Hospital 466 Class 2 Beijing

Mentougou TCM Hospital 120 Class 2 Beijing

Mentougou Women and Children's Hospital 27 Class 2 Beijing

Shunyi Airport Hospital 149 Class 2 Beijing

Shunyi No. 2 Hospital 100 Class 1 Beijing

Boading No. 1 Central hospital 1882 Class 3 Hebei

Boading No. 3 Central hospital 224 Class 2 Hebei

PHG total beds 5780

PHG total operating beds, post merger 12600


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Limited dilution from CR Healthcare transaction with potential upside to outlook

On August 30, 2016, Phoenix announced that it has officially entered into a purchase agreement with China Resource Healthcare to acquire 100% of Ample Mighty Ltd(AML), a wholly owned subsidiary of CRH, for a consideration of HK$3.7bn.

Upon closing of the deal, Phoenix Healthcare Group will change its name to China Resource Phoenix Healthcare Group (CRPH), and according to the original plan, gain control of four Class III hospitals: 1) Xukuang Hospital, 2) Huakuang Hospital Group, 3) Brian Hospital 999 Clinic and 4) Wugang Hospital Group; and one Class II hospital: Xukuang Hospital. They represent a total of 5,809 operating beds.

Figure 7: CR healthcare transaction summary

Key point Description

Objective - Transaction of asset and equity and/or operating rights of CRH's wholly-owned subsidiary, Ample Mighty Ltd.- Ample Mighty Ltd's assets include 44 medical institutions (including 3 elderly care centers) with 5,800 beds (including 300 bed in elderly care centers). - The 44 medical institutions comprise 4 Class III hospitals, 6 Class II hospitals, 23 Class I hospitals and 11 community clinics. They are all socialmedical insured.

Financials - Ample Mighty Ltd's net profit was Rmb80.6m in 2015 and Rmb46.4m in 5M16. - Its hospitals' revenue and net profit was Rmb2.43b and Rmb182mn in 2015.

Consideration - Consideration of HKD3.72b in form of share allotment and issue at the issue price of HKD8.04/shr.- CR Healthcare will become the largest shareholder of PHG, accounting for 35.7% of the enlarged share capital.

Others - The company will be renamed "China Resources Phoenix Healthcare Holdings Company Limited" (CRPH).- After the transaction, CRPH will operate 101 medical institution and 3 elderly care centers of which include 7 Class III hospitals, 12 Class II hospitals, 32 Class I hospitals and 50 community clinics, representing 11,900 beds. CRPH will then become the largest medical service providers by no. of bed.- The no. of board directors will remain 11 including 4 INEDs. CR Healthcare has the right to assign 4 directors to the board.

Source: Company reports

According to the company, the acquired hospitals recorded revenue of Rmb2.43bn and net profit of Rmb182mn in 2015 and Rmb46.4mn in the first 5 months of 2016, representing 39.8x 2015 P/E or 32.5x 2016 P/E

Figure 8: Financial/P/E Summary for CR Healthcare

2016 Financials PHG Pre-merger CR Healthcare After Merger

Revenue 1629.9 2430.0 4059.9

Profits (Rmb mn) 263.3 111.4 374.7

# of hospital 57 44 101

# of beds 6100 5800 11900

Revenue/bed 0.27 0.42 0.34

Profit/bed 0.04 0.02 0.03

Market Cap/Price paid (HK$mn) 10,815 3,720

Price (HK$) 12.90 8.04

P/E 35.0x 32.5x

Price/Hospital (Rmb mn) 164 73

Price/Bed (Rmb mn) 1.53 0.55

Source: Company reports, JP Morgan estimate, Bloomberg .


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Figure 9: Hospitals involved in the deal


Figure 10: Operation data of hospitals included in the deal


CR Healthcare (CRH) was established in 2011 in Hong Kong. It is a wholly owned subsidiary of CR Group. As one of the major profit centers of CR group, CRH will continue to focus on hospital investments and management as its core business.

CRPH's strategy

Under the environment of medical reform in China, CRPH will enhance sharing of resources and expertise in asset management and hospital operations between PHG and CRH, in order to enlarge its medical institution network.

To align with the medical reform by focusing on developing regional integrated delivery system (RIDS) of which regional hospital networks will be divided basing on treatment level of patient i.e. 1) basic, 2) critical and 3) recovery.

Through corporate collaboration and standardized operation value chain, to improve service quality and clinical treatment standard, and to increase capacity while effectively controlling operating costs.

Striving to provide high quality medical services and taking into account social responsibility to maintain sustainable growth of CRPH.

Focusing on business expansion of medical insurance and elderly care services.

Total Chief Asso-chief Attending Resident

Xukuang Hospital 100% 400 Not-for-profit Class II 18 568 145 4 31 58 52

Huaikuang Hospital Group 100% 2,765 2,593 858 33 90 453 282

Huaibei Miner General Hospital Not-for-profit Class III 2914 branch hospitals, 9

community healthcare centres

and 1 elderly care institution

Guangdong 999 Brain Hospital 100% 776 Not-for-profit Class III 15 1,051 236 31 32 62 111

999 Medical Clinic 100% For profit 7 47 36 1 2 26 7

Wuguang Hospital Group 51% 1,868 45 2,715 646 41 262 192 151

Wugang General Hospital Not-for-profit Class III

Wugang No.2 Hospital Not-for-profit Class III

Total 5,809 6,974 1,921 110 417 791 603

Interest

Doctors

Employee no.DepartmentClassCategoryNo. of bed

Number Avgr spending Number Avgr spending Number Avgr spending Number Avgr spending

Xukuang Hospital 95,575 359 15,767 8,183 163 47,423 250 7,354 8,961 82

Huaikuang Hospital Group 1,115,127 209 57,848 7,783 683 504,455 189 26,206 7,196 284

Guangdong 999 Brain Hospital 175,797 776 25,427 24,032 747 70,934 851 10,196 26,134 327

999 Medical Clinic 22,300 183 na na 4 9,065 182 na na 2

Wuguang Hospital Group 976,338 295 54,831 7,989 726 386,396 281 21,326 8,961 300

Total 2,324 995

Outpatient Inpatient Outpatient Inpatient

For the year ended 31 Dec 2015 For the five months ended 31 May 2016

Revenue

(Rmb mn)

Revenue

(Rmb mn)


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Except the 999 clinic, the acquired hospitals under this deal are non-profit hospitals, thus CR PHG has signed 20-year consultancy service contracts with Huaikuang and 999 Brain since May 2016, Xukuang since December 2015 and the two Wugang hospitals are under negotiation. PHG will retain all net profit through management fees.

More importantly, we expect PHG to improve the operating efficiency after taking over the management rights from CR Healthcare, and also see potential upside from the supply chain business. Management expects the deal with CITIC M&H to close soon.

We view this transaction as a strategic move for PHG with substantial synergies from: 1) positive revenue and cost synergies from scale over 11,900 beds, the largest in Asia; For example, PHG has historically improved operating efficiency and turnedunprofitable public hospitals under its management within 1-2 years; 2) further

resource sharing – we believe PHG’s expertise in hospital operations will turn around underperforming assets. 3) Geographic expansion –- build up network in Eastern and Southern regions; and 4) support from SOEs – partnering with CRH and CITIC M&H, PHG will be better positioned in public hospital reforms and have access to loans provided by the two SOE groups. More importantly, according to management, the transaction with CRH is likely to be just a beginning of the collaboration between two sides as PHG is likely to be the only platform of CR’s healthcare service business in the long term. PHG will change its name to CR PHG which it will use to acquire and manage more public hospitals much more rapidly with the support of CR and CITIC. Management expects to double the beds in operation by 2018, from 12,480 beds after the merger, implying significant potential upside, in our view.

We assume the profit contribution from CR Healthcare starts and new share insurance in November, 2016 after the board approves the deal. Our pro-forma analysis shows 7%/7% EPS dilution in 2017 and 2018 post the deal. Notably, we have not included any contribution from CITIC Medical & Health as the deal is still pending regulatory approval.

Figure 11: Pro-forma analysis post CR Healthcare transaction

Net Profit Contribution (Rmb mn) 2016E 2017E 2018E

Phoenix 263.3 338.9 407.7

YoY % 29% 20%

CR Healthcare hospitals 18.5 135.0 185.0

Total net profit 281.8 474.2 592.9

YoY % 68% 25%

Shares Outstanding (mn) 2016E 2017E 2018E

Phoenix 833.8 833.8 833.8

New Share Issuance 33.8 463.0 463.0

Total shares 867.6 1296.8 1296.8

EPS (Rmb) 2016E 2017E 2018E

Phoenix 0.32 0.41 0.49

YoY% 29% 20%

CR Phoenix 0.32 0.38 0.46

YoY% 16% 21%

EPS Dilution 3% -7% -7%

Source: Source: J.P. Morgan estimates Company data.


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A closer look at China Resource Healthcare & CITIC M&H

China Resources Healthcare Group is a wholly owned subsidiary of China Resources (Holdings) Co., Ltd, specializing in hospital investment and management. Its network includes 48 medical institutions and three elderly care institutions, with a total number of beds in operation of around 7,300. The merger with PHG would include 47 hospitals with more than 6,000 beds.

Figure 12: China Resource Healthcare's hospital Profile

Hospital name No. of beds Class Ownership Therapeutic areas

Guangdong 999 Brain Hospital 600 IIIA 100% Neurology and neurosurgery

China Resources and WISCO General Hospital

1,930 IIIB 51% Oncology, infectious diseases, psychiatry, rehabilitation and dermatology

Huaibei Miners’ General Hospital Group 3,000 IIIA 100% Traumatology

Mine Hospital of Xuzhou 500 IIA 100% Nuclear medicine, neuromedicine, neurosurgery

China Resources and WISCO No.2 Hospital

850 IIIB 51% Oncology, infectious diseases, psychiatry, and tuberculosis

Kunming Children's Hospital 900 IIIA 66% Pediatrics, anesthesiology, and rehabilitation

Yuxi Children's Hospital 500 III 60% Pediatrics and rehabilitation

Source: Company data, J.P. Morgan estimates

CITIC Medical & Health Group is a wholly owned subsidiary of CITIC Group, which is one of the first SOEs under the administration of the State Council. CITIC Medical & Health holds equity interest in several hospitals, including two general hospitals and three specialty hospitals with ~6,000 beds. It has also cooperated with Shanwei City government to operate three hospitals under a PPP (private-public partnership) framework. According to management, the initial merger with CITIC Medical & Health Group will include two class-three hospitals with 700 beds and will include more in the future.

Figure 13: CITIC M&H’s hospital Profile


Integrated business model with increasing synergies & efficiency

PHG has a distinctive business model, operating hospitals through both self-owned (Jian Gong Hospital with 80% ownership interest) and IOT (invest-operate-transfer) models. Under the IOT model, PHG agrees to make a certain amount of investment to improve hospital facilities, and generates management fees based on hospital performance, which allows more flexibility in adding pipeline hospitals, and allows it to expand more rapidly without too much burden on its balance sheet, in our view. Beside hospital management, PHG also develops supply chain business which implements centralized procurement of drugs & consumables for the hospitals in the network.

Hospital name No. of beds Class Ownership Therapeutic areas

CITIC Huizhou Hospital 500 III 60% Ophthalmology, neurosurgery, ICU

Hangzhou Plastic Surgery Hospital

(Hangzhou Hand Surgery Hospital) 136 IIIB 100%

Plastic surgery

CITIC Xiangya Reproductive and

Genetic Hospital 58% Reproductive and genetic

541 General Hospital (CITIC Yuncheng

Hospital) 500 IIIB 100%

Orthopedics, pediatrics, gynecology and

Obstetrics, neurology


14



With such an integrated business model, PHG is able to capture various opportunities in the value chain and improve efficiency through resource sharing and standardized practices. Furthermore, efficiency improvements are likely to be achieved by knowledge and facilities sharing among in-network hospitals and clinics, as well as the adoption of group-wide standard practices. E.g., there is an experienced physicians’ rotation program to enhance the group’s overall reputation. Additionally, PHG is actively involved in quality improvement of in-network hospitals. Jian Gong Hospital and Yan Hua Hospital both have received JCI (Joint Commission International) accreditation – two of only 22 hospitals with the status in China. The public hospitals under the IOT model were poorly managed and operated before PHG’s management, according to the company, but with PHG’s experience and expertise in hospital management, it typically takes one year or so to turn the hospital around and to be profitable. Based on its past track record, the profitability and efficiency of hospitals Phoenix manages improve significantly when it assumes management duties. We believe synergies across the integrated platform and efficiency will continue to increase as PHG expands its network, thus implying significant bottom-line growth potential.

Stable organic growth on increasing patient volume & ASP

Over 2011-15, PHG aggressively expanded its revenue through increasing patient visitsand raising average spending per patient. For example, total patient visits increased by a CAGR of 27.6% to 5,577,000 in 2015, up from 3,424, 000 in 2013, while the ASP for inpatient/out-patient grew by 7.3% YoY and 5.5% YoY in 2015 on better service mix with higher APS for procedures, respectively. In 1H16, total patient visitsincreased by 14% y/y to 2,908,000, while the ASP for inpatient/out-patients fell 1.5% YoY and grew 1.4% YoY, respectively.

We expect continuous volume and ASP growth driven by: 1) increasing bed utilization rate & intensity; 2) lowering average length of stay (ALOS) on improving efficiency; and 3) higher service fees on more high value added services, including dental, oncology treatment etc. Notably, we did not include the patient visit and ASP contribution from CR Healthcare as PHG generated profit from service agreements in our model

Figure 14: Total Visits in Phoenix owned or operated hospitals, 2013-2018E

2013 2014 2015 1H16 2016E 2017E 2018E

Total visits (000') 3,424 5,247 5,577 2,908 6,272 6,785 7,270

YoY% 12% 53% 6% 14% 12% 8% 7%

In-patient visits (000') 54 121 132 74 154 169 181

YoY% 6.3% 122.5% 8.6% 17.6% 16.8% 10.1% 7.2%

ASP -Inpatient (Rmb) 15,414 14,601 15,661 15,955 15,939 16,258 17,154

YoY% 4.1% -5.3% 7.3% 0.1% 1.8% 2.0% 5.5%

Out-patient visits (000') 3,369 5,126 5,445 2,835 6,119 6,616 7,089

YoY% 12.3% 52.1% 6.2% 13.4% 12.4% 8.1% 7.1%

ASP -Outpatient (Rmb) 399 363 383 385 390 396 406

YoY% 10.6% -9.1% 5.5% 2.2% 1.8% 1.8% 2.3%

Source: Source: Company data, J.P. Morgan estimates


15



Investment Risks

Highly regulated with ongoing compliance cost

The hospital industry in China is highly regulated by the government, and key policies may change. Phoenix's business operations are significantly affected by various government policies, such as the encouragement of foreign investment in healthcare services, reimbursement ratios at hospitals for patients covered by public insurance schemes, price controls on retail drug prices at public hospitals and the treatment fees permitted to be charged, and so on. Any major changes in these policies could affect the company's business.

Lack of control under the invest-operate-transfer model (IOT)

Except Jian Gong Hospital, Phoenix operates 17 hospitals and 39 clinics under an IOT model. It does not own most hospitals it manages, and it does not have ultimate control of them; PHG may face the risks that the IOT management contracts with these hospitals could be terminated or not renewed after they expire. Hence, this poses risks to future management fees and the supply chain business and thus overallfinancial performance. However, for all the hospital under the IOT model, Phoenix has signed more than 10-20 year management contracts.

Potential slowdown/margin supply chain business due to headwinds caused by drug tender

The supply chain business accounted for more than 50% of total revenue in 2015; we expect levels to remain high. While more provinces are starting to conduct drug tenders, manufacturers are facing rising pricing pressure. Meanwhile, more cities are starting to pilot post-tender price negotiations between hospitals and suppliers, adding more pressure to drug suppliers. We think the drug tenders and post tender price negotiations might have a negative impact on Phoenix's supply chain growth and potentially pressurize margins of PHG’s supply chain business.

Government's control on healthcare service fees

At public hospitals in China, service prices such as nursing fees, operation fees, wards fees, etc are regulated by the government. Thus, Phoenix cannot raise prices without government approval. In Beijing, healthcare service prices have not been adjusted for 16 years since 1999, which is unsustainable. For example, the registration fee for a general outpatient at Class III (tier 1) public hospitals is only Rmb4.5 (US$70 cents), while the operation fee for an appendectomy is Rmb234 (US$36). This is the reason why most hospitals rely heavily on revenue from drug sales, as hospitals incur significant losses from services.

As a result, at most public Hospitals, revenue from services contributes less than 20% of the total. Although we expect the service revenue at Phoenix's hospitals to increase gradually if the Beijing government raises price caps for hospital services, we do not expect it to happen in the near term, therefore, it is not yet not built intoour model, given that the timeline is still unclear.


16



Reliance on doctors

Phoenix's business is highly dependent on retaining leading doctors, but the recruitment of doctors especially for specialists is very competitive, as the supply of specialists is limited by their often lengthy training periods, and the pool of experienced medical professionals is limited. They could choose to leave the hospitals and refer patients to competitors’ hospitals if they leave..

Similarly, the recruitment of nurses, radiographers and physiotherapists is also important for hospitals. The cost of recruiting and retaining medical professionals increases over time. In addition, given the IOT model, it is crucial for Phoenix to retain and attract experienced hospital managers. If the company expands its network rapidly without sufficient managers, it may suffer obstructions.

Uncertainties in M&A and integration of formerly public sector entities

M&A could become increasingly difficult as competition for assets increases. PHG also faces uncertainties in terms of public hospital management contract, since the Chinese regulatory entities can be concerned about the volume of sales of state-owned assets. Given their previous SOE background, PHG’s newly added hospitals may lack the incentives to improve efficiency, reflected by a slower ramp-up process.However, Phoenix has track record of acquiring hospitals under management and improving their profitability.


17



Valuation

DCF is our primary methodology

Our Dec-17 price target of HK$16.00 is based on a DCF valuation, which assumes a market premium of 6.0% and a risk free rate of 4.2%. We assume a beta of 1.14 (from Bloomberg) and WACC of 9.9%. We estimate free cash flow until 2020 and assume a terminal growth rate of 5%. Our price target implies 20x our 2017 EV/EBITDA estimate, implying 19% upside potential.

Figure 15: PHG-Base Case DCF Analysis

Source: J.P. Morgan estimates

Figure 16: Sensitivity Analysis


2015 2016E 2017E 2018E 2019E Terminal

1,372 1,630 1,945 2,276 2,648 3,016

279 326 421 508 566 643

194 285 345 416 464 527

(32) (33) (39) (46) (53) (60)

24 25 26 29 31 35

(326) 20 (30) 20 (26) 22

0 (140) 297 303 419 417 524

0% 5.0%

9.9% 4.0%

5.2%

10,462 1.14

1,211

(137)

0 15x

11,535

834

16.0= Equity value per share (HK$)

WACC Risk-free rate

Market risk

Enterprise NPV Beta

+ Net cash (debt), current Cost of debt

- Minorities (Market v alue)

+/- Other items Implied ex it EV/EBITDA multiple (x )

= Equity value

/ Number of shares

Liabilities as a % of EV Terminal grow th

Cash flow estimates

Sales

EBIT

NOPAT

Capex , net

Depreciation

Change in w orking capital

Free Cash Flow

WACC calculation DCF Assumptions:

Terminal growth rate

16.0 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%

7.5% 19.4 21.7 25.1 29.6 35.3 46.7 69.5

8.0% 17.1 19.4 21.7 25.1 29.6 35.3 46.7

8.5% 16.0 17.1 19.4 21.7 25.1 28.5 35.3

WACC 9.0% 14.8 16.0 17.1 19.4 21.7 23.9 28.5

9.9% 12.5 13.7 14.8 16.0 17.1 19.4 21.7

10.4% 11.4 12.5 13.7 14.8 16.0 17.1 19.4

10.9% 11.4 11.4 12.5 13.7 14.8 16.0 17.1


18



Peer comparison

We also use EV/EBITDA to cross-check our DCF-implied EV/EBITDA.

PHG is a distinctive China healthcare name with general hospital operations and an IOT management model. Other offshore listed Healthcare service stocks such as Hua Xia Healthcare are much smaller size. There are two hospital stocks listed on the A-share market, but they are only involved in specialty hospital chain business: Aier Eye Hospitals and Top Choice (Dental) Hospital. Therefore, there is no direct peer company for PHG, which we believe deserves a valuation premium for its advanced business model.

Currently trading at 17x 2017 EV/EBITDA, we believe PHG is undervalued compared to an average 24x of FY17 EV/EBITDA for A-share peers and 19x for its emerging market peers. We also believe PHG is justified to be trading at premium to H-share peers, as it will have better growth prospects after the aforementioned two transactions with CRH and CITIC M&H, in our view.


19



Figure 17: Peers Comp

Source: J.P. Morgan estimates, Bloomberg. Priced at September 2 2016.

HKD HKD PEG

Ticker Ticker Name Price (LC)

Mkt Cap

(USD mn)

EV (USD

mn) 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E Dividend YTD(%)

EBITDA

CAGR P/Sales (2015)

1515 HK Equity 1515 HK PHOENIX HEALTHCARE GROUP CO13.4 1,471 1,369 6.2x 5.5x 4.4x 27.8x 22.1x 16.5x 2.1x 1.8x 1.6x 49.2x 35.3x 30.8x 0.88 53.5 % 22.0 % 7.1x

HK listed Hospital Company

2196 HK Equity 2196 HK FOSUN PHARMA-H 23.7 7,978 9,559 4.7x 4.3x 3.7x 25.9x 25.4x 21.3x 1.4x 1.1x 1.0x 17.9x 17.5x 15.0x 1.59 7.4 % 11.2 % 4.2x

1509 HK Equity 1509 HK HARMONICARE MEDI 4.67 457 269 2.0x 2.0x 1.8x 12.5x 10.7x 8.7x 2.3x 2.4x 2.1x 25.4x 27.2x 23.3x 1.39 -31.4 % 3.3x

3886 HK Equity 3886 HK * TOWN HEALTH 1.37 1,371 1,143 7.6x 507.6x 0.72 -13.7 %

8143 HK Equity 8143 HK * HUA XIA HEALTHCA 0.33 87 109 0.5x -66.3 %

2120 HK Equity 2120 HK * WENZHOU KANGNI-H 42 396 347 6.8x 5.4x 4.0x 25.7x 22.0x 15.1x 1.7x 1.3x 1.0x 35.1x 37.7x 28.2x 0.70 -8.5 % 7.7x

Average of HK Listed Hospital Company 4.3x 3.9x 3.2x 21.4x 19.4x 15.0x 1.8x 1.6x 1.3x 146.5x 27.5x 22.2x -22.5 % 11.2 % 5.1 %

A Share Hospital Company

600196 CH Equity 600196 CH SHANGHAI FOSUN-A 23.6 7,973 9,559 4.7x 4.3x 3.7x 25.9x 25.5x 22.0x 1.4x 1.1x 1.0x 20.7x 18.2x 16.1x 1.36 2.2 % 11.2 % 4.2x

300015 CH Equity 300015 CH AIER EYE HSPTL-A 35.06 5,279 5,201 9.6x 8.4x 6.5x 42.9x 36.8x 27.9x 68.9x 59.1x 43.8x 0.84 11.9 % 11.5x

002219 CH Equity 002219 CH * HENGKANG MEDIC-A 13.58 3,840 3,742 16.4x 54.6x 66.5x

000516 CH Equity 000516 CH * XIAN INTERNA-A 6.73 1,983 1,771 3.1x 2.9x 2.8x 29.6x 60.9x 51.8x 44.9x 0.30 -23.3 % 53.3 %

600763 CH Equity 600763 CH * TOPCHOICE MEDI-A 32.35 1,551 1,568 13.2x 10.5x 8.1x 47.0x 34.9x 27.2x 52.3x 56.0x 43.7x -34.0 % 31.3 % 13.5x

600993 CH Equity 600993 CH * MAYINGLONG PHA-A 20.88 1,346 1,285 4.6x 4.2x 3.7x 34.1x 37.4x 34.8x 29.8x 0.96 -4.3 % 9.1 %

000919 CH Equity 000919 CH * JINLING PHARM-A 14.17 1,068 1,052 2.0x 1.9x 1.6x 19.7x 14.4x 35.4x 27.3x 22.0x 1.20 -16.7 % 13.5 % 2.3x

000999 CH Equity 000999 CH * CHINA RESOURCE-A 26.1 3,820 3,768 3.0x 2.8x 2.5x 16.5x 13.9x 20.2x 19.7x 17.6x 0.57 -3.8 % 7.7 % 3.1x

002004 CH Equity 002004 CH * HUAPONT LIFE S-A 9.48 2,884 3,590 3.9x 3.4x 3.1x 21.7x 18.7x 29.3x 23.1x 19.0x 2.11 -31.5 % 11.2 %

000788 CH Equity 000788 CH * PKU HEALTHCARE-A 14.83 1,321 1,310 4.5x 56.7x 114.1x 74.2x -1.6 %

600594 CH Equity 600594 CH * GUIZHOU YIBAI-A 17.33 2,053 2,119 4.2x 3.6x 3.1x 28.0x 21.6x 17.9x 45.5x 29.6x 23.9x 0.12 -18.2 % -10.0 % 3.7x

Average of A Share Hospital Company 6.3x 4.7x 3.9x 32.0x 23.7x 23.8x 1.4x 1.1x 1.0x 44.9x 43.4x 33.5x -11.9 % 15.9 % 6.4x

Emerging Market Hospitals

IHH MK Equity IHH MK IHH HEALTHCARE B 6.59 13,310 14,980 6.5x 6.2x 5.3x 28.5x 24.5x 21.3x 4.0x 3.7x 3.0x 53.4x 53.1x 43.9x 0.46 0.6 % 4.9 % 6.4x

BDMS TB Equity BDMS TB * BANGKOK DUSIT MD 22.6 10,111 10,953 5.8x 5.6x 5.1x 26.0x 25.4x 22.5x 2.5x 2.2x 1.9x 42.6x 40.6x 35.0x 1.15 2.5 % 1.5 % 5.7x

RHC AU Equity RHC AU RAMSAY HEALTH 80.895 12,396 14,922 2.3x 2.2x 2.0x 16.3x 14.4x 13.3x 2.1x 1.6x 1.5x 37.2x 30.9x 27.5x 1.33 19.9 % 20.5 % 2.2x

BH TB Equity BH TB * BUMRUNGRAD HOSPI 169 3,556 3,495 6.8x 6.4x 5.9x 22.3x 21.2x 19.2x 2.4x 2.3x 2.1x 35.7x 34.6x 31.0x 1.42 -18.9 % 10.9 % 6.9x

HSO AU Equity HSO AU HEALTHSCOPE LTD 2.98 3,921 4,935 2.9x 2.6x 2.4x 16.6x 14.4x 13.0x 2.7x 2.1x 1.9x 28.3x 24.6x 22.2x 2.42 13.6 % 2.1x

APHS IN Equity APHS IN * APOLLO HOSPITALS 1374.25 2,872 3,228 3.5x 3.0x 2.6x 24.9x 22.9x 18.9x 1.9x 1.7x 1.3x 57.8x 0.44 -5.9 % 2.9 % 3.7x

MIKA IJ Equity MIKA IJ * MITRA KELUARGA K 2950 3,255 3,084 17.7x 16.4x 13.9x 53.4x 47.5x 40.1x 63.7x 54.7x 0.85 24.1 % 19.9x

RFMD SP Equity RFMD SP * RAFFLES MEDICAL 1.545 1,986 1,929 5.8x 5.5x 4.9x 27.6x 25.7x 22.5x 2.8x 2.6x 2.3x 37.8x 36.8x 32.2x 1.29 12.8 % 8.4 % 6.6x

FORH IN Equity FORH IN * FORTIS HEALTHCAR 176.65 1,229 1,445 2.3x 2.0x 1.7x 43.8x 20.6x 15.0x 54.3x 31.9x -1.9 % 2.0x

DALLAH AB Equity DALLAH AB * DALLAH HEALTHCAR 86.45 1,360 1,423 5.0x 4.7x 4.1x 20.2x 18.6x 16.5x 2.0x 1.6x 1.5x 25.0x 22.5x 1.72 25.4 % -1.8 % 5.1x

SILO IJ EQUITY SILO IJ * SILOAM INTERNATI 10600 929 918 2.7x 2.3x 1.9x 23.7x 18.3x 14.6x 125.4x 90.0x 8.2 % 3.0x

KPJ MK equity KPJ MK KPJ HEALTHCARE 4.25 1,091 1,433 2.0x 1.8x 1.6x 16.8x 15.0x 13.0x 35.2x 30.4x 26.4x 1.66 1.6 % 2.9 % 1.5x

Average of Emerging Market Hospitals 5.3x 4.9x 4.3x 26.7x 22.4x 19.2x 2.5x 2.2x 1.9x 41.0x 47.2x 37.9x 6.8 % 6.3 % 5.4x

US Hospitals

HCA N equity HCA N HCA HOLDINGS INC 76.51 28,970 61,340 1.5x 1.5x 1.4x 7.7x 7.5x 7.1x 1.2x 1.0x 0.9x 12.5x 11.6x 10.8x 13.1 % 13.3 % 0.7x

UHS N equity UHS N UNIVERSAL HLTH-B 120.7 11,754 15,365 1.6x 1.6x 1.5x 9.1x 8.8x 8.3x 1.9x 1.7x 1.6x 17.2x 16.1x 14.7x 0.33 1.3 % 14.5 % 1.3x

LPNT US equity LPNT US LIFEPOINT HEALTH 57.72 2,463 5,257 0.9x 0.8x 0.8x 8.0x 7.0x 6.5x 1.9x 2.2x 1.9x 16.0x 16.5x 13.9x -21.4 % 10.9 % 0.5x

THC N equity THC N TENET HEALTHCARE 24.2 2,408 19,157 1.0x 1.0x 0.9x 9.4x 7.8x 7.4x 0.7x 0.9x 0.7x 106.5x 15.3x 10.7x -20.1 % 0.1x

CYH N equity CYH N COMMUNITY HEALTH 10.79 1,226 16,781 0.9x 0.9x 1.0x 29.1x 7.0x 7.0x 0.6x 1.5x 1.1x 16.3x 8.0x 5.6x -50.6 % -9.2 % 0.1x

Average of US Hospitals 9,364 23,580 1.2x 1.2x 1.1x 12.7x 7.6x 7.3x 1.3x 1.5x 1.2x 33.7x 13.5x 11.1x -15.5 % 7.4 % 0.5x

Labs and Clinics

AMSG US equity AMSG US AMSURG CORP 67.29 3,688 7,049 2.5x 2.3x 2.0x 9.1x 11.8x 10.4x 1.9x 1.6x 1.5x 22.2x 15.5x 13.8x -11.5 % 41.5 % 1.4x

DVA N equity DVA N DAVITA INC 64.78 13,403 21,976 1.5x 1.5x 1.4x 10.3x 8.7x 8.2x 1.8x 1.8x 1.6x 16.3x 17.2x 15.6x -7.1 % -13.9 % 1.0x

FME EU equity FME EU FRESENIUS MEDICA 80.2 27,479 37,105 1.8x 1.7x 9.6x 8.9x 2.3x 2.0x 1.7x 24.7x 22.1x 19.7x 1.00 4.3 % -4.4 % 1.6x

MD N equity MD N MEDNAX INC 66.57 6,229 7,786 2.6x 2.4x 2.2x 12.0x 11.4x 10.3x 1.2x 1.2x 1.1x 18.6x 16.1x 14.6x -7.1 % 13.9 % 2.2x

Average of Labs and Clinics 12,700 18,479 2.2x 2.0x 1.8x 10.5x 10.4x 9.4x 1.8x 1.6x 1.5x 20.4x 17.7x 15.9x -5.3 % 9.3 % 1.6 %

Average of all above 5,466 8,275 4.5x 3.8x 3.3x 24.2x 29.3x 15.9x 1.9x 1.8x 1.6x 51.9x 35.5x 28.4x -4.8 % 10.2 % 4.1x

EV/Sales EV/EBITDA P/E


20



Financial Analysis

Strong top-line growth to continue

Phoenix's revenue is mainly generated by three business segments: 1) general hospital service, 2) hospital management services, and 3) supply chain business. We expect the hospital management business to outgrow other segments on its new hospitals under IOT model such as Baoding. In 1H16, its revenue grew 17% y/y to Rmb705mn. We project total revenue to post a 18% 2015-18 CAGR reaching Rmb1,630 mn in 2016, Rmb 1,945 mn in 2017 and Rmb 2,276 mn in 2018.

Figure 18: Revenue Breakdown by Business Segments, 2013-2018EFigure

2013A 2014A 2015A 1H16 2016E 2017E 2018EGeneral hospital services 470,435 540,192 575,634 282,883 636,740 705,786 792,643

YoY% 16.7% 14.8% 6.6% 9.4% 10.6% 10.8% 12.3%% of Total 53.0% 44.8% 41.9% 40.1% 39.1% 36.3% 34.8%

Hospital management services 40,765 60,138 72,112 43,142 112,745 138,323 182,247YoY% 1.2% 47.5% 19.9% 47.7% 56.3% 22.7% 31.8%% of Total 4.6% 5.0% 5.3% 6.1% 6.9% 7.1% 8.0%

Supply chain business 376,154 605,935 724,521 379,175 880,397 1,100,530 1,301,491YoY% 19.5% 61.1% 19.6% 20.6% 21.5% 25.0% 18.3%% of Total 42.4% 50.2% 52.8% 53.8% 54.0% 56.6% 57.2%

Total company revenue 887,354 1,206,265 1,372,267 705,200 1,629,883 1,944,639 2,276,380

Source: Company reports and J.P. Morgan estimates.

General Hospital Service

General hospital service accounted for 41.9% of total revenue in 2015, which was purely from Jian Gong Hospital. For Jian Gong Hospital, we expect in-patient visitsgrowth to remain at 8.1% in 2016-2018E, while outpatient growth of 8.5%. We forecast average spending per visit to increase to RMB21,049 and RMB486 for in-patient visit and out-patient visits respectively. Thus, we expect the revenue to grow by a CAGR of 11.6% during 2016-2018E to RMB792.6 mn in 2018. In 1H16, revenue from general hospital service grew 9% y/y to Rmb283mn.

Figure 19: Jian Gong Hospital Revenue, 2013-2018E

Jiangong hospital 2013 2014 2015 2016E 2017E 2018E

Hospital service revenue (Rmb 000) 470,435 540,192 575,634 636,740 705,786 792,643YoY% 16.7% 14.8% 6.6% 10.6% 10.8% 12.3%In-patient revenue (Rmb 000) 168,571 204,831 224,160 247,163 272,527 310,805In-patient visits (000) 11 12 12 13 14 15YoY% -5.6% 7.0% 0.8% 8.1% 8.1% 8.1%Average in-patient spend per visit (RMB) 15,558 17,667 19,177 19,561 19,952 21,049YoY% 18.5% 13.6% 8.5% 2.0% 2.0% 5.5%Out-patient revenue (Rmb 000) 300,668 335,430 350,300 389,577 433,259 481,838Out-patient visits 685 747 777 843 914 992YoY% 14.2% 9.1% 4.0% 8.5% 8.5% 8.5%Average out-patient spend per visit (RMB) 439 449 451 462 474 486YoY% 5.3% 2.3% 0.4% 2.5% 2.5% 2.5%



21



Hospital management services

Revenue from hospital management services is mainly management fees Phoenix collects from its IOT hospitals and clinics, including Yan Hua Hospital, Mengtougou Hospital, Jing Mei Hospital, Mengtougou TCM Hospital etc. We calculate a profit margin as the management fee is calculated based on the percentage of revenue, which in turn is driven from the forecast of volume growth and average spending for in-patient and out-patient visits. We expect gradual improvement of profit margin at each hospital as Phoenix can usually improve profitability and operating efficiency at IOT hospitals after it assumes management responsibilities. In 1H16, revenue from hospital management services grew 48% y/y to Rmb43mn.We project hospital management service revenue to post a CAGR of 27.1% in 2016-2018E, mainly due to: 1) the contribution from new hospitals such as Baoding & Shunyi and 2) the increasing profit margin at each hospital.

Figure 20: Yan Hua Hospital Management Fee Revenue, 2013-2018E

2013A 2014A 2015A 2016E 2017E 2018EYan Hua Hospital GroupHospital mgmt fee revenue (RMB '000) 21,248 30,067 31,767 36,850 41,827 47,483

YoY% -6.1% 41.5% 5.7% 16.0% 13.5% 13.5%In-patient Revenue (RMB '000) 210,936 252,566 270,804 312,400 360,384 415,739

In-patient visits 14,193 16,039 16,103 18,035 20,200 22,624 YoY% 5.1% 13.0% 0.4% 12.0% 12.0% 12.0%

Average in-patient spend per visit (RMB) 14,862 15,747 16,817 17,322 17,841 18,376 YoY% 4.4% 6.0% 6.8% 3.0% 3.0% 3.0%

Out-patient 387,464 413,591 450,782 506,498 569,101 639,442 Out-patient visits 844,149 931,512 937,176 993,407 1,053,011 1,116,192

YoY% 8.5% 10.3% 0.6% 6.0% 6.0% 6.0%Average out-patient spend per visit (RMB) 459 444 481 510 540 573

YoY% 8.5% -3.3% 8.3% 6.0% 6.0% 6.0%Profit margin (%) 3.6% 4.5% 4.4% 4.5% 4.5% 4.5%

Source: Source: Source: Company data, J.P. Morgan estimates

Figure 21: Mengtougou Hospital Management Fee Revenue, 2013-2018E

2013A 2014A 2015A 2016E 2017E 2018EMentougou HospitalHospital mgmt fee revenue (RMB '000) 3,445 3,723 5,701 6,970 7,968 9,064

YoY% -36.6% 8.1% 53.1% 22.3% 14.3% 13.8%In-patient Revenue (RMB '000) 127,113 147,327 172,689 215,568 264,373 318,437


Average in-patient spend per visit (RMB) 13,947 14,715 17,207 19,616 21,970 24,167 YoY% 6.4% 5.5% 16.9% 14.0% 12.0% 10.0%

Out-patient 190,979 218,355 232,558 249,116 266,853 285,853 Out-patient visits 551,963 618,570 644,205 669,973 696,772 724,643


YoY% 10.9% 2.0% 2.3% 3.0% 3.0% 3.0%Profit margin (%) 1.1% 1.0% 1.4% 1.5% 1.5% 1.5%

Source: Source: Source: Company data, J.P. Morgan estimates


22



Figure 22: Mengtougou TCM Hospital Management Fee Revenue, 2013-2018E

2013A 2014A 2015A 2016E 2017E 2018EMentougou TCM HospitalHospital mgmt fee revenue (RMB '000) 3,767 5,468 8,244 3,457 5,243 8,797

YoY% 45.2% 50.8% -58.1% 51.7% 67.8%In-patient Revenue (RMB '000) 12,760 15,244 16,549 25,386 32,697 40,283


Average in-patient spend per visit (RMB) 10,589 10,758 10,441 12,320 13,799 15,455 YoY% 19.7% 1.6% -2.9% 18.0% 12.0% 12.0%

Out-patient 117,182 151,122 179,948 205,069 229,447 252,943 Out-patient visits 395,884 466,425 518,582 570,440 616,075 653,040


YoY% 14.3% 9.5% 7.1% 3.6% 3.6% 4.0%Profit margin (%) 2.9% 3.3% 4.2% 1.5% 2.0% 3.0%


Figure 23: Jing Mei Hospital Management Fee Revenue, 2013-2018E

2013A 2014A 2015A 2016E 2017E 2018EJing Mei Hospital GroupHospital mgmt fee revenue (RMB '000) 12,305 20,880 26,400 40,947 43,799 53,009

YoY% 0.8% 69.7% 26.4% 55.1% 7.0% 21.0%In-patient Revenue (RMB '000) 319,765 330,269 382,499 458,998 504,898 572,555


Average in-patient spend per visit (RMB) 16,746 16,910 17,956 17,956 17,956 18,854 YoY% -6.0% 1.0% 6.2% 0.0% 0.0% 5.0%

Out-patient 347,989 407,120 475,515 564,674 590,084 605,426 Out-patient visits 892,279 981,013 1,098,186 1,372,733 1,510,006 1,630,806


YoY% 17.5% 6.4% 4.3% -5.0% -5.0% -5.0%Profit margin (%) 1.8% 2.8% 3.1% 4.0% 4.0% 4.5%


Figure 24: Mengtougou Women and Child Hospital Management Fee Revenue, 2013-2018E

2013A 2014A 2015A 2016E 2017E 2018EMentougou Women and Child hospitalHospital mgmt fee revenue (RMB '000) - - - 1,317 1,779 2,226

YoY% - - - - 35.1% 25.1%In-patient Revenue (RMB '000) - 3,855 2,731 3,867 4,934 5,862

In-patient visits - 730 687 824 907 979YoY% - 0.0% -6.3% 20.0% 10.0% 8.0%

Average in-patient spend per visit (RMB) - 5,279 3,975 4,691 5,441 5,985YoY% - 0.0% -32.8% 18.0% 16.0% 10.0%

Out-patient - 32,480 30,190 34,869 39,541 43,594Out-patient visits - 130,208 122,722 134,994 145,794 153,083

YoY% - 0.0% -6.1% 10.0% 8.0% 5.0%Average out-patient spend per visit (RMB) - 249 246 258 271 285

YoY% - 0.0% -1.4% 5.0% 5.0% 5.0%Profit margin (%) - 0.0% 0.0% 3.4% 4.0% 4.5%



23



Figure 25: Baoding No. 1 Hospital Management Fee Revenue, 2013-2018E

2013A 2014A 2015A 2016E 2017E 2018EBaoding No.1 HospitalHospital mgmt fee revenue (RMB '000) - - - 20,462 30,253 41,922

YoY% - - - - 47.8% 38.6%In-patient Revenue (RMB '000) - 747,395 914,956 1,103,437 1,219,850 1,344,884

In-patient visits - 55,752 63,760 76,512 84,163 88,371YoY% - 0.0% 12.6% 20.0% 10.0% 5.0%

Average in-patient spend per visit (RMB) - 13,406 14,350 14,422 14,494 15,219YoY% - 0.0% 6.6% 0.5% 0.5% 5.0%

Out-patient - 183,768 222,025 260,691 292,782 332,015Out-patient visits - 689,969 768,254 883,492 971,841 1,049,589

YoY% - 0.0% 10.2% 15.0% 10.0% 8.0%Average out-patient spend per visit (RMB) - 266 289 295 301 316

YoY% - 0.0% 7.8% 2.1% 2.1% 5.0%Profit margin (%) - 0.0% 0.0% 1.5% 2.0% 2.5%


Figure 26: Baoding No. 3 Hospital Management Fee Revenue, 2013-2018E

2013A 2014A 2015A 2016E 2017E 2018EBaoding No.3 HospitalHospital mgmt fee revenue (RMB '000) - - - 566 1,193 2,558


In-patient visits - 3,894 3,417 3,246 3,246 3,311YoY% - 0.0% -14.0% -5.0% 0.0% 2.0%




YoY% - 0.0% -3.0% 20.0% 10.0% 8.0%Profit margin (%) - 0.0% 0.0% 1.0% 2.0% 4.0%


Figure 27: Shunyi Airport Hospital Management Fee Revenue, 2013-2018E

2013A 2014A 2015A 2016E 2017E 2018EShunyi Airport HospitalHospital mgmt fee revenue (RMB '000) - - - 1,565 2,774 4,380


In-patient visits - 1,800 2,695 3,369 4,043 4,649YoY% - 0.0% 33.2% 25.0% 20.0% 15.0%







24



Figure 28: Shunyi No.2 Hospital Management Fee Revenue, 2013-2018E

2013A 2014A 2015A 2016E 2017E 2018EShunyi No.2 HospitalHospital mgmt fee revenue (RMB '000) - - - 210 486 808


In-patient visits - 357 304 395 474 545YoY% - 0.0% -17.4% 30.0% 20.0% 15.0%

Average in-patient spend per visit (RMB) - 4,542 4,997 4,497 4,497 4,722YoY% - 0.0% 9.1% -10.0% 0.0% 5.0%


YoY% - 0.0% -0.8% 5.0% 5.0% 5.0%Average out-patient spend per visit (RMB) - 169 245 282 310 325



Supply Chain Business

Phoenix's supply chain business conducts centralized procurement of drugs, medical devices and consumables at all in-network hospitals and clinics. The company generates revenue and profit by negotiating better discounts with suppliers and selling drugs and devices to its hospitals under the tender prices set by local government. In addition, sometimes Phoenix also arranges for its hospitals to purchase directly from suppliers. We expect revenue growth for the supply chain business to post a CAGR of 21.6% during 2016-18E to Rmb 880 mn in 2016E,Rmb 1,101 mn in 2017E and Rmb 1,301 mn in 2018E respectively. In 1H16, revenue from supply chain business grew 21% y/y to Rmb379mn.

To calculate the supply chain business revenue for each hospital, we assume a coverage ratio (the percentage of procurement conducted through Phoenix), and total procurement as a percentage of hospital revenue. We assume procurement as a percentage of hospital revenue to be 40-60% in 2016-18E in our model, which varies for each hospital. Yan Hua Hospital, Mentougou Hospital and Mentougou hospital are three hospitals which have highest coverage ratio of 63%, 63.5% and 55% respectively and by 2018 we expect this ratio to increase to 80%, 76% and 75%, respectively.

Figure 29: Supply chain business revenue, 2013-2018E

2013A 2014A 2015A 2016E 2017E 2018EYan Hua Hospital Group 145,166 230,000 249,000 291,200 362,499 422,073YoY % -14.9% 58.4% 8.3% 16.9% 24.5% 16.4%Mentougou Hospital 75,623 114,000 134,000 161,013 200,803 241,112YoY % 137.8% 50.7% 17.5% 20.2% 24.7% 20.1%Mentougou TCM Hospital 19,887 41,000 60,000 63,156 79,823 95,665YoY % 806.4% 106.2% 46.3% 5.3% 26.4% 19.8%Jing Mei Hospital Group 134,727 215,000 275,000 347,230 406,238 468,247YoY % 22.4% 59.6% 27.9% 26.3% 17.0% 15.3%Mentougou Women and Child Hospital - - 1,646 2,905 4,448 6,182YoY % 76.5% 53.1% 39.0%Shunyi Airport Hospital - - 4,155 11,740 36,989 54,747YoY % 182.6% 215.1% 48.0%Shunyi No.2 Hospital - - 720 3,154 9,730 13,465YoY % 337.9% 208.5% 38.4%Supply chain business 376,154 605,935 724,521 880,397 1,100,530 1,301,491YoY % 19.5% 61.1% 19.6% 21.5% 25.0% 18.3%

Source: Company data, JP Morgan estimate


25



Improving gross margin on better efficiency

PHG's gross margin comprise of gross margin of three business segments, of which hospital management fee business is the one with highest gross margin of above 70% as its charges the management fee. The overall gross margin was gradually improved to 26.7% in 2014 up from 24.0% in 2013 on higher gross margin of hospital management fee business from new hospitals, yet dropped to 24.0% in 2015, largely due to decreasing gross margin for supply chain business of 19.9% in 2015 (vs 21.2% in 2014 on lower drug prices. We expect the overall gross margin to improve gradually to 25.5% in 2018E as the higher gross margin of general hospital services and hospital management services more than offset the lower gross margin of supply chain business.

Figure 30: Gross Margin, 2013-2018E


Declining Operating Expenses

Operating margin dropped to 20.3% in 2015, down from 25.4% on higher general and administration expense, which include one-time recognition of stock option expense of Rmb41.76 million. We expect operating margin to improve to 22.3% in 2018, up from 20.3% in 2015 on lower operating expense & improving operational efficiency. We forecast the decline in distribution and selling expense and general and administrative expense as a % of revenue from 0.8% and 10.2% in 2015 to 1% and 6% in 2018E respectively. All these factors lead to better operational efficiency. All this we expect will lead to a better net margin also, increasing from current 12.2% to 17.9% in 2018E.

18.2% 16.0% 15.7% 15.5% 16.0% 15.5%

65.5%

75.7% 75.9% 77.0% 78.5% 79.0%

20.9% 21.2% 19.9% 21.5% 20.0% 19.0%

24.0% 24.7% 24.0% 26.2% 25.7% 25.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2013A 2014A 2015A 2016E 2017E 2018E

General hospital services Hospital management services

Supply chain business Total Gross Margin


26



Figure 31: Gross Margin, Operating Margin and Net Margin Trend, 2012-2018E


Robust EPS and EBITDA growth

In 2015, both EPS and EBITDA growth of PHG tumbled. EPS declined by 26% YoY and EBITDA by 6% YoY. The primary reason for the decline in EPS was the 27% decrease in net income which was due to a one time share based compensation of RMB42mn and RMB30mn on the termination of a syndicated loan. In the coming years, we expect the number to improve, with EBITDA growth of 14%, 26% and 19% respectively for 2016E, 2017E and 2018E respectively and EPS growth of 59%, 16% and 21% for 2016E, 2017E and 2018E respectively.

Figure 32: EPS and EPS Growth, 2013-2018E


24.4% 24.4% 24.7% 24.0%26.2% 25.7% 25.5%

13.3% 13.3%

19.1%

12.2%

16.2%17.4% 17.9%

22.8% 22.8%

25.4%

20.3% 20.0%21.7% 22.3%

0%

5%

10%

15%

20%

25%

30%

2012 2013 2014 2015 2016E 2017E 2018E

Gross Margin Net Margin Operating Margin

0.16

0.28

0.20

0.32 0.38

0.46

-18.9%

77.2%

-26.4%

59.3% 16.1% 21.2%

-40%

-20%

0%

20%

40%

60%

80%

100%

0.00

0.10

0.20

0.30

0.40

0.50

2013 2014 2015 2016E 2017E 2018E

EPS EPS Growth


27



Figure 33: EBITDA and EBITDA Growth, 2012-2018E


Cash flow and Balance Sheet Analysis

The company has a strong cash flow with RMB821mn in cash. Also it does not hold any debt which makes for a zero gearing ratio. Its operating cash flow and free cash flow are also increasing. The company did capex worth RMB32mn in 2015 and invested RMB100mn in Airport Hospital of Shunyi District and Shunyi District No. 2 Hospital. The current ratio, quick ratio and cash ratio all declined for the year 2015, primarily due to more growth in current liabilities as compared to current assets. This increase was attributable to dividends payable worth RMB80mn.

Increasing ROE

Return on Equity for PHG decreased a little from 13.3% in 2014 to 13.6% in 2015 due to a decrease in net income. We expect ROE to increase to 13.4%, 15.3% and 16.1% in 2016, 2017 and 2018 respectively. Return on Assets is also expected to improve from 7.8% in 2015 to 12.9% in 2018, again due to improvement in net margin.

Figure 34: Increasing ROE


246

346 323 369

465

554

18.0%

40.4%

-6.4%

14.0%

26.1%19.1%

-10%

0%

10%

20%

30%

40%

50%

0

100

200

300

400

500

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2013 2014 2015 2016E 2017E 2018E

EBITDA YoY%

2013 2014 2015 2016E 2017E 2018E

EBIT margin 23.6% 25.4% 20.3% 20.0% 21.7% 22.3%

Asset turnover 56.4% 58.3% 64.3% 68.6% 72.9% 75.4%

Asset / Equity 149.6% 127.5% 126.4% 128.2% 127.5% 126.5%

Tax rate 32.8% 24.4% 30.5% 18.0% 18.0% 18.0%

ROE 7.8% 13.3% 9.3% 13.4% 15.3% 16.1%


28



Figure 35: Phoenix Income Statement

Year to Dec (Rmb mn) FY13 FY14 FY15 FY16E FY17E FY18ERevenue 887 1,206 1,372 1,630 1,945 2,276 % change Y/Y 17.1% 35.9% 13.8% 18.8% 19.3% 17.1%Gross margin (%) 24.0% 24.7% 24.0% 26.2% 25.7% 25.5%EBITDA 246 346 323 369 465 554 % change Y/Y 18.0% 40.4% -6.4% 14.0% 26.1% 19.1%EBITDA margin (%) 27.7% 28.6% 23.6% 22.6% 23.9% 24.3%EBIT 210 306 279 326 421 508 % change Y/Y 21.6% 46.1% -9.0% 17.0% 29.1% 20.6%EBIT margin (%) 23.6% 25.4% 20.3% 20.0% 21.7% 22.3%Net interest (35) (1) (27) - - -Earnings before tax 143 317 248 331 426 513 % change Y/Y -2.9% 121.5% -21.7% 33.5% 28.7% 20.3%Tax (47) (77) (76) (60) (77) (92)as % of EBT 32.8% 24.4% 30.5% 18.0% 18.0% 18.0%Net income (reported) 90 230 167 263 339 408 % change Y/Y -11.0% 155.6% -27.4% 57.6% 28.7% 20.3%Shares O/S (MM) 834 834 818 818 818 818 EPS (reported) (Rmb$) 0.16 0.28 0.20 0.32 0.38 0.46

Source: Company data, J.P. Morgan estimate.

Figure 36: Phoenix Balance Sheet

Year to Dec (Rmb mn) FY13 FY14 FY15 FY16E FY17E FY18ECash and cash equivalents 402 612 822 1,029 1,344 1,660 Accounts receivable 84 94 138 175 198 239 Inventories 31 34 42 46 60 64 Others 957 554 292 292 292 292 Current assets 1,473 1,293 1,294 1,542 1,894 2,255 Net fixed assets 123 138 145 153 165 182 Total assets 2,124 2,012 2,255 2,494 2,841 3,201 Liabilities 408 277 393 414 481 506 ST loans 200 - - - - -Payables 124 172 210 231 298 322 Others 79 102 180 180 180 180 Total current liabilities 403 273 390 411 478 503 Other liabilities 5 3 3 3 3 3 Total non-current liabilities 5 3 3 3 3 3 Shareholders’ equity 1,617 1,627 1,748 1,957 2,226 2,550 BVPS (HK$) 2.81 1.96 2.13 2.26 1.72 1.97


Figure 37: Cash Flow Statement

Year to Dec (Rmb mn) FY13 FY14 FY15 FY16E FY17E FY18EEBIT 210 306 279 326 421 508 Depreciation & amortization 33 36 41 42 44 46 Change in working capital 364 - (316) 10 (30) 20 Taxes (41) (59) (81) (60) (77) (92)Cash flow from operations 170 274 232 294 423 446 Capex (21) (36) (32) (33) (39) (46)Net interest (35) (1) (27) - - -Free cash flow 148 238 200 262 384 401 Dividends 44 44 115 54 70 84 Beginning cash 113 402 612 822 1,029 1,344 Ending cash 402 612 822 1,029 1,344 1,660 DPS (HK$) 0.08 0.05 0.14 0.06 0.05 0.06



29



Company Analysis

Business Overview

PHG is China’s largest hospital management group in terms of patient visits and beds in operation in 2015. Its healthcare offerings include acute care, post-operative rehabilitation and other general hospital services.

Since its inception in 2007, PHG has been expanding its hospital and clinic network under an IOT framework, and was recently involved in transactions to acquire equity interest directly from SOEs. As of 2015, PHG has 16 general hospitals, two specialty hospitals and 42 clinics under its network across Beijing and its surrounding areas, most of the hospitals are operated under an invest-operate-transfer model (IOT) modelexcept Jiangong hospital which is owned by PHG. The number of beds increased to 5,780, up 70.9% YoY with total patients served up by 41.7% to 5.6 mn as of the end of 2015. In 1H16, the number of beds grew 1.8% YoY to 5,867 with total patients served reaching 2.4 mn, up 28.4% YoY.

With the rapid growth trend, PHG’s revenue increased from Rmb 887mn to Rmb 1,372mn from 2012 to 2015, representing a 24.4% CAGR. Non-GAAP net income also increased from Rmb 90mn to Rmb 167mn during same period, representing a 36.2% CAGR.

Figure 38: Revenue and Net Income of PHG, 2012-2015 (RMB mn)


758 887

1,206

1,372

101 90

230 167

-

200

400

600

800

1,000

1,200

1,400

1,600

2012 2013 2014 2015

Revenue Net incomeCAGRRevenue: 21.8%Net Income: 18.2%


30



Business Segments

PHG generates revenue through three business segments:

General hospital business generates sales from general healthcare services such as medical diagnosis and treatment, preventive cares and VIP services through the hospitals which PHG has equity interest ownership: Jiangong Hospital (80%). The general hospital business realized revenues of Rmb324mn in 2011, to Rmb576mn in 2015 respectively, achieving a five-year CAGR of 15.5%.

Hospital management business: PHG generated revenue through collecting the management and performance fees from IOT hospitals. Currently, PHG manages and operates 17 hospitals and 42 clinics under IOT model. Under the IOT model, PHG is responsible for investing and managing the hospital, and has the right to receive a performance based fee from hospitals and clinics. Some hospitals are obliged to repay the investment during the IOT tenure, which usually ranges from 19 to 48 years. The hospital management business realized revenues of Rmb19.4mn, Rmb40.3mn, Rmb 41mn, Rmb 60mn and Rmb 72mn in 2011, 2012, 2013, 2014 and 2015 respectively, achieving a five-year CAGR of 38.8%.

Supply chain business: PHG operates supply chain business by obtaining pharmaceuticals and consumables at volume discounts from suppliers due to the high purchasing volume for all hospitals and clinic in the network, and then selling at wholesale prices no more than bidding price or other ceilings set by local authorities. PHG makes profit from the difference between negotiated purchase price and sales price. Notably, Baoding hospitals are not included in calculating supply chain business revenue. The local government distinctively allows post-tender price negotiation so the company is likely to leave the discount at hospital level. The supply chain business realized revenues of Rmb925 in 2015, up from Rmb 375mn, Rmb 600mn and Rmb 718mn in 2013, 2014 and 2015 respectively, representing a five-year CAGR of 34.7%.


31



Figure 39: Phoenix business segment’s working


Figure 40: Revenue breakdown by business segments, 2011-2015 (RMB ‘000)


400,760 469,239 540,262 574,460 636,600 705,473 781,811 40,277 40,765

60,138 72,112 130,850

193,334 255,536

314,646 375,403

600,000 718,000

922,871

1,066,608

1,241,902

2,349 1,947

5,865

7,695

7,695

7,695

7,695

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2012 2013 2014 2015 2016E 2017E 2018E

General hospital Hospital management services Supply chain OthersRmb '000


32



Key Hospital Profiles

Jian Gong Hospital (80% of equity ownership)

Jian Gong Hospital was established in 1953 and was previously known as Beijing Construction Workers’ Hospital. Located in the busy Xuanwumen District in Beijing, it operates 396 beds and ALOS is around 9.5 days as of 1H16.

Jian Gong Hospital is a Grade II general hospital with 34 clinical departments and centers, including cardiovascular, respiratory medicine, gastroenterology, endocrinology, neurology, orthopedic, general surgery, cardiac surgery, thoracic surgery, gynecology and obstetrics, ICU and rehabilitation medicine. Jian Gong Hospital was certified as a JCI hospital in 2010. It is one of the 19 Class A Medical Insurance Designated Medical Institutions in Beijing, which allows patients to obtainmedical treatment under public medical insurance programs without pre-approval from medical insurers. In addition to normal healthcare services, Jian Gong Hospital also offers Phoenix VIP services through ‘Phoenix Easylife Club’ to patients who are willing to pay a higher price for premium healthcare services.

Figure 41: Jian Gong Hospital


Figure 42: Jian Gong Hospital Operational metrics (2010-2015)

2010 2011 2012 2013 2014 2015 1H16In-patient In-patient visits (‘000’) 8.4 9.6 11.5 10.8 11.6 11.689 6.1YoY 14.3% 19.6% -5.6% 7.0% 0.8% 8.1%Average in-patient spend per visit (RMB) 12,961 12,382 13,127 15,558 17,667 19,177 17,905

YoY -4.5% 6.0% 18.5% 13.6% 8.5% 0.1%Out-patientOut-patient visits (‘000’) 385 463 600 685 747 777 386 YoY 20.3% 29.6% 14.2% 9.1% 4.0% 8.4%Average out-patient spend per visit (RMB) 432 415 417 439 449 451 451

YoY -3.9% 0.5% 5.3% 2.3% 0.4% 2.5%ALOS (days) 12.5 11.4 10.5 10.0 9.8 9.5 9.5

YoY -8.8% -7.9% -4.8% -2.0% -3.1% 2.0%Number of beds 382 382 399 398 403 407 396

YoY 0.0% 4.5% -0.3% 1.3% 1.0% -2.2%



33



Jing Mei Hospital Group (80% of equity ownership)

Jing Mei Group General Hospital was established in 1956. The hospital was previously known as Beijing Mining Bureau General Hospital and adopted its present name in 2003. Located at Mentougou District, Beijing. It operates 1,789 beds and ALOS is around 24.9 days as of 1H16.

Jing Mei Hospital is a Grade III general hospital with 32 clinical departments including Cardiovascular, neurology, respiratory medicine, gastroenterology, endocrinology, renal medicine, orthopedics, general surgery, urology, neurosurgery, gynecology and obstetrics, pediatrics, dentistry, ophthalmology, ENT, dermatology, hemodialysis and is well-known for its occupational therapy practice. Phoenix began to manage Jing Mei Hospital in May, 2011; it invested Rmb150mn for the renovation of hospital infrastructure, and the purchase and upgrade of medical equipment. The Jing Mei Hospital IOT agreement expires on December 31, 2030. On December 30, 2014, Phoenix signed a framework agreement with Beijing Jing Mei Group to establish a JV Jing Mei Group General Hospital, of which 70% will be owned by Phoenix. After the transaction is completed, Jing Mei Hospital will become Phoenix's direct owned hospital.

Figure 43: JingMei Hospital


Figure 44: Jing Mei Hospital Operational Metrics

2010 2011 2012 2013 2014 2015 1H16In-patient In-patient visits (‘000’) 12.2 14.8 16.3 19.1 19.5 21.3 12.1YoY 21.3% 10.1% 17.2% 2.1% 9.2% 18.9%Average in-patient spend per visit (RMB) 18,998 17,396 17,823 16,746 16,910 17,956 17,355

YoY -8.4% 2.5% -6.0% 1.0% 6.2% -3.5%Out-patientOut-patient visits (‘000’) 519 675 791 892 981 1,098 563 YoY 30.1% 17.2% 12.8% 10.0% 11.9% 23.8%Average out-patient spend per visit (RMB) 312 313 332 390 415 433 439

YoY 0.3% 6.1% 17.5% 6.4% 4.3% -4.8%ALOS (days) 52.1 45.3 41.5 36.6 29.8 31.1 24.9

YoY -13.1% -8.4% -11.8% -18.6% 4.4% -18.1%Number of beds 1,446 1,500 1,618 1,738 1,738 1,742 1,789

YoY 3.7% 7.9% 7.4% 0.0% 0.2% 2.7%



34



Hospitals under IOT model

Yan Hua Hospital was established in 1973 and was previously the staff hospital of Sinopec Beijing Yanshan Company. Located at Tangshan District. It operates 663 beds and ALOS is around 14.2 days as of 1H16.

Yan Hua Hospital is a Grade III not-for-profit general hospital, with 42 clinical departments and centers, incl cardiovascular, respiratory medicine, gastroenterology, neurology, endocrinology, oncology, orthopedics, general surgery, thoracic surgery, urology, gynecology and obstetrics, pediatrics, ophthalmology, ENT, dentistry, intensive care unit (ICU) etc. Yan Hua Hospital was certified as a JCI hospital in 2010.

Phoenix began to manage Yan Hua Hospital under an IOT model with an initial investment of Rmb72mn in February, 2008, in exchange for the right to manage and receive a management fee until July 17, 2015. In addition, it is committed to making an additional capital investment of not less than Rmb150mn to support its long-term development. So far, Phoenix has invested an additional Rmb87mn , with the remainder of Rmb63mn expected to be invested later. Phoenix receives an annual management fee, including: 1) the base management fee of a fixed percentage of the first Rmb150mn of annual revenue, which will be paid in one lump sum at the end of each year, and 2) the incentive fee of a higher fixed percentage of the annual revenue exceeding Rmb150mn, which is estimated and prepaid every quarter. In any given year, the management fee must not exceed the Yan Hua Hospital's net income before tax after its annual repayment of investment.

Figure 45: Yan Hua Hospital


Figure 46: Yan Hua Hospital-Operational Metrics

2010 2011 2012 2013 2014 2015 1H16In-patient In-patient visits (‘000’) 12.4 12.5 13.5 14.2 16.0 16.1 9.0YoY 0.8% 8.0% 5.2% 12.7% 0.6% 12.4%Average in-patient spend per visit (RMB) 12,448 12,925 14,230 14,860 15,747 16,817 17,037

YoY 3.8% 10.1% 4.4% 6.0% 6.8% 2.9%Out-patientOut-patient visits (‘000’) 615 702 778 844 932 937 469 YoY 14.1% 10.8% 8.5% 10.4% 0.5% 5.7%Average out-patient spend per visit (RMB) 386 398 423 459 444 481 483

YoY 3.1% 6.3% 8.5% -3.3% 8.3% 6.4%ALOS (days) 16.8 16.0 15.4 15.8 15.0 15.1 14.2

YoY -4.8% -3.8% 2.6% -5.1% 0.7% -7.4%Number of beds 663 663 663 663 663 663 663

YoY 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%



35



Mentougou Hospital

Established in 1951, Mentougou Hospital is located at Mentougou District, Beijing. It operates 466 beds and ALOS is around 12.1 days as of 1H16. Mentougou Hospital is a Grade II-A general hospital with 28 clinical departments and centers, including cardiovascular, neurology, stomatology, and dermatology. Phoenix began to manage the hospital in August, 2010 with the IOT agreement expiring on December 31, 2030. So far, Phoenix has invested Rmb75mn (repayable) in it. Management fees are based on the weighted average assessment by the government, the board of supervisors of the hospital and an independent appraisal agency, with their rating weighting 30%, 30%, and 40%, respectively. Phoenix has exceeded the minimum performance requirement since it started to manage the hospital, thus receiving management fees based on the minimum required performance rating results.

Figure 47: Mentougou Hospital-Operational Metrics

2010 2011 2012 2013 2014 2015 1H16In-patient In-patient visits (‘000’) 4.6 5.5 8.8 9.1 10.0 10 5.5YoY 19.6% 60.0% 3.4% 9.9% 0.0% 9.3%Average in-patient spend per visit (RMB) 13,079 12,109 13,110 13,947 14,715 17,207 17,768

YoY -7.4% 8.3% 6.4% 5.5% 16.9% 14.1%Out-patientOut-patient visits (‘000’) 342 375 482 552 619 644 330 YoY 9.6% 28.5% 14.5% 12.1% 4.0% 11.8%Average out-patient spend per visit (RMB) 245 276 312 346 353 361 360

YoY 12.7% 13.0% 10.9% 2.0% 2.3% 9.1%ALOS (days) 15.5 13.4 12.1 12.0 11.8 12.1 12.1

YoY -13.5% -9.7% -0.8% -1.7% 2.5% 2.5%Number of beds 300 2,521 414 421 459 466 466

YoY 740.3% -83.6% 1.7% 9.0% 1.5% 2.9%


Mentougou Traditional Chinese Medicine Hospital

Established in 1956 and being the first district traditional Chinese medicine hospital in Beijing, Mentougou Traditional Chinese Medicine Hospital is located at Mentougou District, Beijing. It operates 120 beds and ALOS is around 14.3 days as of 1H16. Mentougou Traditional Chinese Medicine Hospital is a Grade II-A traditional Chinese medicine hospital, with 15 clinical departments and centers including physical therapy, dermatology and pediatrics. Phoenix began to manage the hospital with an initial repayable investment of Rmb25mn in June 2012, with the IOT agreement expiring in 2030. The formula for Phoenix's management fees, repayment of its initial investment and the termination provision is similar to that of the Mentougou Hospital.

Figure 48: Mentougou TCM Hospital-Operational Metrics

2010 2011 2012 2013 2014 2015 1H16In-patient In-patient visits (‘000’) 1.8 1.7 1.2 1.2 1.4 1.4 0.9YoY -5.6% -29.4% 0.0% 16.7% 0.0% 31.9%Average in-patient spend per visit (RMB) 9,934 9,705 8,843 10,589 10,758 10,441 11,837

YoY -2.3% -8.9% 19.7% 1.6% -2.9% 16.6%Out-patientOut-patient visits (‘000’) 272 320 349 396 466 519 260 YoY 17.6% 9.1% 13.5% 17.7% 11.4% 10.7%Average out-patient spend per visit (RMB) 260 258 259 296 324 347 347

YoY -0.8% 0.4% 14.3% 9.5% 7.1% 3.6%ALOS (days) 17.1 18.3 15.8 16.4 15.5 14.0 14.3

YoY 7.0% -13.7% 3.8% -5.5% -9.7% 1.9%Number of beds 100 100 100 100 100 120 120

YoY 0.0% 0.0% 0.0% 0.0% 20.0% 0.0%



36



Company History

Established in Beijing, China in 2007, Beijing Phoenix was established as a joint-stock company through Beijing Wantong and Beijing Weike with initial registered capital of Rmb 45mn. In November 2013, Phoenix Hospital Group was listed on the Main Board of Hong Kong Stock Exchange. Since its inception, Phoenix Healthcare Group (PHG) has been expanding its hospital management and operation business.

Figure 49: Company milestonesDec. 2007 Beijing Phoenix acquired 66.00% equity interests of Jian Gong Hospital, the first privatized public hospital in BeijingDec. 2007 Beijing Phoenix acquired Beijing Jiayi to operate supply chain businessFeb. 2008 Beijing Phoenix obtained the rights to manage and operate Yan Hua Hospital Group under an IOT agreementApr. 2008 Beijing Phoenix acquired Beijing Wanrong to operate supply chain businessApr. 2008 Beijing Phoenix acquired Beijing Easylife to provide premium medical services at Jian Gong HospitalJul. 2010 Beijing Phoenix began to manage and operate Mentougou Hospital under IOT agreement. Mentougou Hospital is the first

government-owned hospital in Beijing managed by a private hospital operatorApr. 2011 Beijing Phoenix began to manage and operate Jing Mei Hospital Group under an IOT agreementJun. 2012 Beijing Phoenix began to manage and operate Mentougou Traditional Chinese Medicine Hospital under an IOT agreementNov. 2013 Phoenix Healthcare Group listed in the main board of Hong Kong Stock ExchangeNov. 2013 Jian Gong Hospital and Yan Hua Hospital achieved renewal of JCI accreditationSept. 2014 Obtained the rights to manage and operate Mentougou Women and Children Hospital under an IOT agreementMay. 2015 Entered into an agreement in respect of the joint development of the healthcare system in modern community in Shunyi District,

Beijing


Shareholders and Management

As of 31 December 2015, the following entities are disclosed to hold directly or indirectly more than 5% of PHG:

Figure 50: Major Shareholders of PHG

Source: Bloomberg, Company Data

Speed Key Limited is wholly owned by Mr. Xu Baorui, the father of Ms. Xu Jie, PHG’s founder and executive director.

Name Nature No. of shares Share%Speed KeyLimited

Beneficial owner 181,401,360 21.76%

Xu Baorui Interest in Controlled Corporation

181,401,360 21.76%

JPMorgan Chase & Co.

Interest in Controlled Corporation

61,227,606 7.34%


37



Figure 51: Key management profileName Age Position held Appointed date Work experience Education background

Mr. Liang Hongze

44Chairman, Executive Director, CEO

Feb. 2013

·Joined Phoenix Healthcare Group in March 2004

·Investment director at Shanghai Chunda Group from 2002 to 2004

·Senior manager with the investment banking division of Industrial Securities

Co., Ltd. from 2000 to 2002

·Master’s degree in economics from the Graduate School of PBOC

·Bachelor’s degree in economics from Dongbei University of Finance and

Economics

Mr. Cheng Libing

51Executive Director, Vice Chairman

Mar. 2013

·Vice general manager at Intech Medical Chain from 2006 to 2010

·General manager assistant at Beijing Kangchen Pharmaceutical Co., Ltd. from

1999 to 2002

·Bachelor’s degree in Traditional Chinese Medicine from Beijing

University of Traditional Chinese Medicine

Mr. Zhang Xiaodan

40Executive Director, Executive General Manager

Mar. 2013

·CITIC Trust Co. Ltd. from 2008 to 2010·Pharmaceutical Certification Management

Center of the State Food and Drug Administration from 2006 to 2008

·Bachelor’s degree in Microbiology from Shandong University

Mr. Xu Zechang

53Executive Director, Deputy General Manager

Jul. 2012

·Acting director of Cardiology Department at the General Hospital of China PLA

Beijing Military Region·Resident doctor at the General Hospital of

the People’s Liberation Army of China

·Doctor's degree from the Postgraduate Medical School of PLA

of China·Master's degree from the

Postgraduate Medical School of PLA of China

·Bachelor's degree from First Military Medical University

Mr. Jiang Tianfan

35Executive Director, CFO

Nov. 2011·New Oriental Education & Technology

(Group) Co., Ltd. from 2002 to 2007

·MBA degree from Olin Business School at Washington University in

St. Louis·Bachelor's degree of Law from Shanghai International Studies

University

Mr. Shan Baojie

44Executive Director, Deputy General Manager

Mar.2013

·Vice director of Pharmaceutical Safety Evaluation Centre of the State Food and

Drug Administration·Vice director of Northeast Pharmaceutical

Group Co., Ltd. from 1992 to 1998

·MBA degree from Renmin University of China

·Bachelor‘s degree in Chemistry from Wuhan University



38



SWOT Analysis

Source: J.P. Morgan research

Strengths Weaknessess

·First mov er adv antage in participating in public

hospital reform

·Resource sharing and standard practice of

hospital and clinic netw ork

·Promising grow th prospect backed by bed

capacity and ALOS

·Expertise in running priv ate hospitals

·Cooperation w ith gov ernment and education

instituions

·Potentially partnering w ith SOEs to ex pand its

franchise

·Headw inds caused by drug tender and margin

squeeze

·Uncertainties in its M&A and integration strategy

·Risks in running IOT model

Opportunities Threats

·Reform of public hospitals in China

·M&A opportunities in the sector

·Gov ernment's plans in building a tiered healthcare

sy stem in China

·Competition from new entrants

·Lack of incentiv e to reform from the public side


39



Investment Thesis, Valuation and Risks

Phoenix Healthcare Group (Overweight; Price Target: HK$16.00)

Investment Thesis

Phoenix Healthcare Group (PHG) is the largest hospital management group in China It operates more than 16 general hospitals, two specialist hospitals and 42 clinics with more than 5,780 beds in Beijing. PHG generates revenue from service revenue from self-owned hospitals and management fees from IOT hospitals, and also generates supply chain revenue from the central procurement of drugs and consumables for its hospitals under the network. Yet, the recent transaction of CR Health and CITIC M&H will create the largest hospital group with over 12,600 beds in China. We believe PHG will continue its sustainable growth as it builds an integrated healthcare platform with further expansion of its footprint, benefiting from the public hospital reform.

Valuation

Our Dec-17 price target of HK$16.00 is based on a DCF valuation, which assumes a market premium of 6.0% and a risk free rate of 4.2%. We assume a beta of 1.14 (from Bloomberg) and WACC of 9.9%. We estimate free cash flow until 2020 and assume a terminal growth rate of 5%.

Risks to Rating and Price Target

Downside risks to our rating and price target include: 1) strict government regulations on hospital investment; 2) no control of IOT hospitals; 3) headwinds from drug tender and margin squeeze; 4) uncertainties in M&A and integration, and 5) changes in favourable policies.


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Phoenix Healthcare Group: Summary of FinancialsIncome Statement Cash flow statement

Rmb in millions, year end Dec FY14 FY15 FY16E FY17E FY18E Rmb in millions, year end Dec FY14 FY15 FY16E FY17E FY18E

Revenues 1,206 1,372 1,630 1,945 2,276 EBIT 306 279 326 421 508

% change Y/Y 35.9% 13.8% 18.8% 19.3% 17.1% Depr. & amortization 39 45 42 44 46Gross Profit 298 330 427 499 580 Change in working capital 25 (6) (20) 30 (20)

% change Y/Y 40.0% 10.7% 29.4% 17.1% 16.1% Taxes (59) (81) (60) (77) (92)

EBITDA 346 323 369 465 554 Cash flow from operations 274 232 294 423 446% change Y/Y 40.4% (6.4%) 14.0% 26.1% 19.1%

EBIT 306 279 326 421 508 Capex (36) (32) (33) (39) (46)% change Y/Y 46.1% (9.0%) 17.0% 29.1% 20.6% Net Interest (1) (27) 0 0 0

EBIT Margin 25.4% 20.3% 20.0% 21.7% 22.3% Other 397 62 0 0 0

Net Interest (1) (27) 0 0 0 Free cash flow 239 219 262 384 401Earnings before tax 317 248 331 426 513

% change Y/Y 121.5% (21.7%) 33.5% 28.7% 20.3% Equity raised/(repaid) 0 0 0 0 0

Tax (77) (76) (60) (77) (92) Debt raised/(repaid) (200) 0 0 0 0as % of EBT 24.4% 30.5% 18.0% 18.0% 18.0% Other (222) (49) 0 0 0

Net income (reported) 230 167 282 489 593 Dividends paid 0 0 (54) (70) (84)% change Y/Y 155.6% (27.4%) 68.7% 73.5% 21.2% Beginning cash 402 612 822 1,029 1,344

Shares outstanding 834 818 818 818 818 Ending cash 612 822 1,029 1,344 1,660

EPS (reported) 0.28 0.20 0.32 0.38 0.46 DPS 0.05 0.14 0.06 0.05 0.06% change Y/Y 77.2% (26.4%) 59.3% 16.1% 21.2%

Balance sheet Ratio AnalysisRmb in millions, year end Dec FY14 FY15 FY16E FY17E FY18E Rmb in millions, year end Dec FY14 FY15 FY16E FY17E FY18E

Cash and cash equivalents 612 822 1,029 1,344 1,660 Gross margin 24.7% 24.0% 26.2% 25.7% 25.5%

Accounts receivable 94 138 175 198 239 EBITDA margin 28.6% 23.6% 22.6% 23.9% 24.3%Inventories 34 42 46 60 64 Operating margin 25.4% 20.3% 20.0% 21.7% 22.3%

Others 476 217 217 217 217 Net margin 19.1% 12.2% 17.3% 25.1% 26.0%Current assets 1,293 1,294 1,542 1,894 2,255

Sales per share growth (5.8%) 15.4% 18.9% 19.3% 17.1%

LT investments - - - - - Sales growth 35.9% 13.8% 18.8% 19.3% 17.1%Net fixed assets 138 145 153 165 182 Net profit growth 155.6% (27.4%) 68.7% 73.5% 21.2%Total Assets 2,012 2,255 2,494 2,841 3,201 EPS growth 77.2% (26.4%) 59.3% 16.1% 21.2%

Liabilities Interest coverage (x) 366.1 11.8 - - -Short-term loans 0 0 0 0 0

Payables 172 210 231 298 322Others 102 180 180 180 180 Net debt to equity (61.6%) (54.3%) (58.6%) (65.0%) (68.6%)Total current liabilities 273 390 411 478 503 Working Capital to Sales 0.8 0.7 0.7 0.7 0.8

Long-term debt 0 0 0 0 0 Sales/assets 0.6 0.6 0.7 0.7 0.8Other liabilities - - - - - Assets/equity 1.3 1.3 1.3 1.3 1.3Total Liabilities 277 393 414 481 506 ROE 14.2% 9.9% 15.2% 23.4% 24.8%

Shareholders' equity 1,627 1,748 1,957 2,226 2,550 ROCE 13.5% 11.5% 14.4% 16.5% 17.4%BVPS 1.95 2.14 2.39 2.72 3.12



41



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Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the

0

7

14

21

28

Price(HK$)

Nov13

Feb14

May14

Aug14

Nov14

Feb15

May15

Aug15

Nov15

Feb16

May16

Aug16

Phoenix Healthcare Group (1515.HK, 1515 HK) Price Chart

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

mailto:[email protected]


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JPMS Equity Research Coverage 42% 50% 8%IB clients* 68% 65% 51%

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The updated list of structured warrants for which JPMSS acts as designated market maker may be found on the website of the Singapore Exchange Limited: http://www.sgx.com.sg. In addition, JPMSS and/or its affiliates may also have an interest or holding in any of the securities discussed in this report – please see the Important Disclosures section above. For securities where the holding is 1% or greater, the holding may be found in the Important Disclosures section above. For all other securities mentioned in this report, JPMSS and/or its affiliates may have a holding of less than 1% in such securities and may trade them in ways different from those discussed in this report. Employees of JPMSS and/or its affiliates not involved in the preparation of this report may have investments in the securities (or derivatives of such securities) mentioned in this report and may trade them in ways different from those discussed in this report. 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General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

"Other Disclosures" last revised July 9, 2016.

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