Brief Healthcare: So-Young (新氧) Pre-IPO Review – Au Naturel and more

In this briefing:

1. So-Young (新氧) Pre-IPO Review – Au Naturel
2. CHG: Short-Term Cost Pressures Create an Opportunity to Invest
3. Keytruda Approved for Lung Cancer Treatment in China – A Review of PD-1 Battle Field
4. Shanghai/Shenzhen Connect – Inflow Turned Cautious in March but MSCI Adjustment Ahead
5. RHT Health Trust – 40.7% Net Returns Since Jan. Is There Any Upside Left?

1. So-Young (新氧) Pre-IPO Review – Au Naturel

So-Young (SY US) is looking to raise US$150m in its upcoming IPO. The company filed its prospectus with the SEC on Monday.

The company operates online platforms (mobile, website, and WeChat mini program) for discovering, evaluating, and reserving medical aesthetic services in China. It helps medical aesthetic service providers acquire customers through user generated content and other creative content format.

In this insight, we will look at the company’s business model, analyze its financial and operating performance, review the competitive landscape and point out some questions for management.

2. CHG: Short-Term Cost Pressures Create an Opportunity to Invest

We initiate coverage of CHG with a BUY rating and a 2019E target price of Bt2.53, derived from a discounted cash flow valuation (WACC of 6.2% and terminal growth of 2.0%). This is equivalent to 44.5 PE’19E, which is near its five-year trading average of 43.7x.

The story:

• Competitive player in a key strategic location
• Pressures from launch of new greenfield hospitals should be short term
• Recent share price retreat opens an investment opportunity
• Expected flat earnings in 2019E and growth at a 19% CAGR in 2020-21E

Risks:     Medical personnel shortage

                Litigation for medical services

                Change in social security policy

3. Keytruda Approved for Lung Cancer Treatment in China – A Review of PD-1 Battle Field

Anti-PD-1 monoclonal antibody (mAb) is a hotly contested immunotherapy area in China, with seven companies working on clinical trials covering various lines of treatment for more than a dozen indications. Out of these indications, we have highlighted in our previous coverage on Chinese biotech companies that the most critical indication is the first line treatment of lung cancer, particularly non-small cell lung cancer (NSCLC). Valuation of PD-1 related drugs anchors many of the Hong Kong-listed biotech companies, such as Innovent Biologics Inc (1801 HK), Shanghai Junshi Bioscience Co. Ltd. (1877 HK), BeiGene Ltd (6160 HK), CStone Pharma (2616 HK)  and China A-share listed Jiangsu Hengrui Medicine Co., (600276 CH). 

In March, Merck’s Keytruda (generic name pembrolizumab) was approved by NMPA for the first line treatment of EGFR and ALK-negative non-squamous NSCLC. This marks Keytruda the first approved PD-1 drugs for the first line treatment of NSCLC in China.

In this insight, we will review the status and targeted indications of clinical trials of PD-1 candidates by domestic players. 

4. Shanghai/Shenzhen Connect – Inflow Turned Cautious in March but MSCI Adjustment Ahead

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that in March, northbound inflows turned more cautious vs strong inflows in February (link to our Feb note) and January (link to our Jan note). Nevertheless we see strong inflows into Healthcare sector, led by Jiangsu Hengrui Medicine Co., (600276 CH). We also highlight Universal Scientific Industrial Shanghai (601231 CH 环旭电子) in the mid cap space that attracted strong northbound inflows.

5. RHT Health Trust – 40.7% Net Returns Since Jan. Is There Any Upside Left?

Since my last insight on RHT Health Trust (RHT SP) on 29^th Jan 2019 – RHT Health Trust – Cash on Sale , investors who bought into RHT Health Trust at S$0.029 per unit would have netted a return on investment of 40.7% if they sell out today, including the cash distribution that they have received in 1^st March.

Since last insight in January, RHT reported major changes to its Board of Directors and Management. The strong background of the new BOD and CEO in investment banking and REIT management will be valuable to RHT as it progresses to transform itself and acquire new business/assets to inject into the Trust.

Key investment thesis remains unchanged. RHT Health Trust is an event-driven play and the catalyst will be the announcement of an RTO deal to inject new assets/business into the Trust. This will be the key driver to further upside in RHT. 

Proposed investment strategy at this stage is to hold on to the investment in RHT and look for opportunities to add if RHT trades lower. Target entry price is S$0.016 per unit, which translates to a NAV discount of 27.3%.