KINGMED DIAGNOSTICS(603882)：CONTINUED IMPROVEMENT IN PROFITABILITY ON THE BACK OF HIGH REVENUE & PROFIT GROWTH

　　Kingmed’s earnings met expectation; both of its revenue & profits grew at high rates. The Company’s revenue from testing business grew rapidly, and its Covid-19 testing business boosted short-term earnings. Moreover, the industry concentration may improve. Kingmed’s regular businesses grew steadily; its proportion of special testing gradually increased; and its customer structure optimized further. Apart from steady profit levels, Kingmed well controlled its period expenses, and maintained its accounts receivable stable.
　　 Kingmed’s earnings met expectation; both of its revenue & profits grew at high rates.
　　In 1-3Q22, the Company achieved operating revenue/ANP/recurring ANP of Rmb12,208mn （+41.67% YoY）/Rmb2,448mn （+46.41% YoY）/Rmb2,414mn （+46.43% YoY）， respectively. In 3Q22, its operating revenue/ANP/recurring ANP came in at Rmb3,895mn （+23.20% YoY）/Rmb805mn （+31.38% YoY）/Rmb809mn （+30.69% YoY）， all maintaining relatively high growth rates.
Kingmed’s revenue from testing business grew rapidly, and its Covid-19 testing business increased short-term earnings. Moreover, the industry concentration may improve.
　　The surging testing business was the main driver for Kingmed’s earnings growth. In 1-3Q22, the Company’s operating revenue from third-party medical diagnostic services （ICL） reached Rmb11.55bn （+41.27% YoY）。 In 3Q22, the Company’s revenue from ICL enterprises totaled about Rmb3.68bn （c. +23.6% YoY）。 We estimate that Kingmed’s 1-3Q22 revenue from Covid-19 testing business was about Rmb6.1bn. Of which, its 3Q22 revenue from Covid-19 testing business was about Rmb1.7bn （vs c. Rmb2.4bn/2bn in 1Q22/2Q22）， accounting for about 46% of its 3Q22 revenue from ICL enterprises, and significantly increasing short-term earnings. After several rounds of price reductions, the profit margin of Covid-19 testing business has been obviously lowered, which puts forward higher requirements for ICL enterprises in cost control. We judge that the profitability of small and medium-sized ICL enterprises in Covid-19 testing business may have dropped significantly, and top-tier ICL enterprises may gain more market shares by virtue of their scale and technological advantages. In this context, the industry concentration will improve further. Since nucleic acid testing for Covid-19 has become an important means to prevent and control the pandemic, we expect that the Covid-19 testing business may bring continuous profit increments to the Company in the short to medium term.
Kingmed’s regular businesses grew steadily; its proportion of special testing gradually increased; and its customer structure optimized further.
　　We estimate that the Company’s 1-3Q22 revenue from regular businesses （excl. Covid-19 testing business） was about Rmb6.1bn （up by 16%-17% YoY）， including 3Q22 revenue of about Rmb2.2bn （incl. Rmb2bn from ICL enterprises）， up by about 16% YoY （1Q22/2Q22 revenue growth rates were c. +19%/+17%）。 Kingmed’s operating revenue maintained a steady growth　　amid severe Covid-19 resurgences in China. The Company’s revenues from diagnosis business in the four key fields of solid tumor/neurological and clinical immunity/infectious diseases （excl. Covid-19）/hematological diseases grew by 28.19%/17.50%/15.77%/14.73% YoY, all in a period of rapid growth.
　　Kingmed’s special testing business accounted for 51.50% of its revenue （excl. that from Covid-19 testing） in 1-3Q22, maintaining an upward trend.
　　High-end examination business has become the core driver for the Company’s earnings growth. Driven by high-end platform projects, Kingmed kept expanding its businesses. Its per-customer revenue grew by 40.68% YoY in 1-3Q22; its proportion of revenue from Grade-III hospitals （excl.
　　Covid-19 testing business） has increased to 36.78% （+1.79ppts YoY）， effectively promoting the rapid growth of high-margin high-end businesses.
Apart from steady profit levels, Kingmed well controlled its period expenses, and maintained its accounts receivable stable.
　　In 1-3Q22, the Company’s GPM/NPM came in at 44.82% （-1.81ppts YoY）/20.77% （+0.51ppts YoY）。 In 3Q22, the Company’s GPM/NPM stood at 45.13% （-1.96ppts YoY, +2.15ppts QoQ）/20.67% （+1.29ppts YoY, +1.15ppts QoQ）。 Kingmed’s profit levels remained steady regardless of declining Covid- 19 testing prices and obviously contracted Covid-19 testing business profit margin. We judged that the main reasons are as follows. ① The Company’s proportion of high-end business continued to increase, and its customer structure continued to optimize, driving its GPM of regular businesses to grow rapidly; the Company’s 1-3Q22 GPM of regular businesses reached 48.61% （+4.65ppts YoY）。 ② The Company continuously improved its operating efficiency, and well controlled its period expenses. In 1-3Q22, the Company’s selling/administrative/financial expense ratios came in at 9.26% （-2.18ppts YoY）/6.19% （-0.81ppts YoY）/-0.01% （-0.10ppts YoY）， showing a downward trend. As of 3Q22, the Company’s accounts receivable amounted to Rmb7,433mn （vs Rmb7,099mn in the 2022 interim report）， which remained at a stable level despite large increment in Covid-19 testing business, indicating sound risk control capability.
Potential risks: Policy changes; intensifying market competition; improper control over test samples; declining testing prices; significant decline in Covid-19 testing business volume; a sharp rise in the payment cycle; etc.
Earnings forecast, valuation and rating: Covid-19 testing business will drive rapid growth in Kingmed’s diagnostic service business in the short term, while high-end testing business will promote its earnings to rise steadily in the medium and long term. Based on its 3Q22 earnings, we upgrade our 2022E/23E/24E EPS forecasts to Rmb6.58/5.63/5.98 （from Rmb5.60/5.11/6.03） for the Company. With reference to the valuations of comparable companies （Wind consensus forecasts show 7x PE for Dian Diagnostics Group （300244.SZ）， 14x PE for YHLO Biotech （688575.SH）， with an average of 11x PE for 2022E）， and considering that Kingmed is a leader in the ICL segment and boasts obvious scale advantages, we assign 14x 2022E PE to derive a target price of Rmb92, and reiterate the “BUY” rating.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。