Investment Summary

The company realized revenue 22%/28% YoY growth in FY17/18Q1, slightly beyond our expectation. We see TCM decoction pieces benefiting from omni-channel advantage, while medicine and medical instrument distribution business grow dramatically. We are positive on Kangmei`s integrated healthcare industry chain which is of great synergies and expected to consolidate its leading position. Given 18E/19E EPS estimation of RMB0.98/1.21 and target PE of 31x (roughly par to market consensus 26.69x + 15% premium), we increase target price to RMB30.5. (Closing price at 31 May 2018)

Business Overview

Financial updates. In FY17/18Q1, the company achieved revenue of RMB2.5bn/9.1bn (+22.3%/27.7% YoY) beyond our expectation, and NP attributable to shareholders of RMB4.1bn/1.4bn (+22.8%/33.3% YoY). In terms of profit margin, GPM was up by 0.4pp, more specifically, GPM of TCM decoction pieces up by 1.37pp, self-produced medicine up by 3.32pp and medical instrument up by 5.8pp. By region, East China is still main market taking up 57% in topline and growing by 20% last year, while sales in North China and Southwest China also developed quickly with sales up by 55%/21% YoY.