We initiate coverage on Jinxin Fertility (Jinxin) at BUY with TP of HK$15.0, given its leading position in assisted reproductive services (ARS) industry in China and the US, and promising growth outlook thanks to strong organic growth momentum and abundant acquisition opportunities. In 2018, Jinxin ranked the first among non-state-owned assisted reproductive technology (ART) medical institutions in China and ranked the first in the western US ARS market.
- Well-positioned in fast-growing ARS market. Infertility is becoming increasingly prevalent globally and global infertility rate has increased from 11.0% in 1997 to 15.4% in 2018, due to increasing average age of first birth, unhealthy lifestyle and environmental pollution. According to F&S, ARS penetration rate in China will increase from 7.1% in 2018 (vs. 30.2% in the US) to 9.2% in 2023E. Considering an increasing prevalence of infertility, the Two-child Policy, low ARS penetration, improving affordability, and evolving ARS technology, China ARS market is estimated to reach RMB49.6bn by 2023E, representing 14.5% CAGR in 2018-23E, based on F&S estimates.
- Further strengthen its leading position through acquisitions. ARS medical licenses in China are highly regulated with only 498 ARS certificates granted to medical institutions by end-2018 and 50 were owned by private hospitals. Jinxin had RMB3.1bn cash on hand as at 30 Jun 2019 which provides sufficient funding for acquisitions. We think Jinxin may acquire private ARS hospitals in tier 1/2 cities in China while the Company will prudently screen the acquisition targets based on valuation, management team, location of the targets and synergies with existing business.
- Overseas expansion to bring synergies with domestic business. Through the wholly-owned HRC Management located in the US, Jinxin provides diversified services for China and US patients, such as gender test, selling and purchasing gamete and surrogacy. We think Jinxin will further acquire surrogacy and egg donor agencies, or embryology laboratories in the US to extend services along the ARS value chain. Southeast Asia region is also the top destination for fertility tourism due to the relatively low service cost and loose regulatory environment. We believe Jinxin will acquire ARS institutions in Southeast Asia to meet the sophisticated demand for Chinese patients.
- Initiate BUY with TP of HK$15.0. We expect ARS/ management fees/ ancillary medical services to grow at 18%/119%/27% CAGR in FY18-21E, driven by strong medical demand and capacity expansion in China and US. We expect Jinxin to deliver 36% CAGR in revenue and 54% CAGR in adjusted attributable net profit in FY18-21E. We derive TP of HK$15.0 based on 8-year DCF model (WACC:9.5%, terminal growth rate: 4%).
- Catalysts: Acquisitions of quality assets; Risks: weak organic growth.
