Kaisa:Our prelim thoughts on its latest investment in healthcare business

Investing in another healthcare company

    This morning, Kaisa announced its wholly-owned subsidiary Shenzhen Shipping Health Technology Co. Ltd has entered into an agreement topurchase 50.6mn shares (or 18.57% stake) in Zhenxing Biopharmaceutical &Chemical Co., Ltd (000403.CH) for RMB2.19bn (including repayment of a loan).While we see this news as mildly credit-negative, the total consideration is notbig and it generally fits Kaisa’s existing strategy of investing in the big healthindustry and sports, in addition to its core property business. As we know,Kaisa already owns a stake in Mega Medical (876.HK) which has proposed tochange its company name to Kaisa Health Group Holdings Limited. IncludingMega Medical’s rights issue in which Kaisa participated as well as theproposed RMB2.19bn price tag for the stake in Zhenxing Biopharmaceutical,we estimate Kaisa’s YTD investment in the health-related and mobile internetmarketing industries (the latter via its announced 21.3% stake in GuangdongMingjia Lianhe Mobile Technology, 300242CH) to be about RMB4.4bn.

    Putting a foot in the blood products industry

    Zhenxing Biopharmaceutical is listed in Shenzhen Stock Exchange and itsheadquarters is in Taiyuan, Shanxi. It is principally involved in producing andselling of blood products, including human immunoglobulin, Hepatitis Bimmunoglobulin, pH4and other blood products. We believe one of the mainhurdles for new entrants into the China blood products market is gettingapproval of licenses from the government. Zhenxing Biopharmaceutical’s9M17reported revenue was RMB514mn, up 21% YoY and our calculated

    EBITDA in 9M17was RMB158mn. As of end-Sep, 2017, Zhenxing

    Biopharmaceutical had total cash of RMB112mn, and total debt of aboutRMB214mn. In 2016, it sold its loss-making electric-related businesses to itslargest shareholder Zhenxing Group. Zhenxing Group held 22.6% stake in thelist co as of end-Sep. We notice that Zhenxing Biopharmaceutical has someoutstanding lawsuits per its 1H17results filing.

    Contract sales and landbanking updates

    Kaisa has spent about RMB11bn YTD in attributable landbanking (excludingredevelopment projects). We continue to expect this year’s net operatingcashflow to be negative. We believe Kaisa is on track to achieve its 2017contract sales target of RMB40bn, with various launches in Shenzhen,Guangzhou, Chongqing and Huizhou in Nov and Dec. Its Nanjing project haslaunched but there were fewer saleable resources that received presale permitthan our prior expectations. For next year, we preliminarily expect Kaisa toachieve 25-30% YoY growth in contract sales.

    We maintain Buy on KAISAG 8.5% 2022s (ask price: 98.625, YTW: 8.9%,Z+679bp as we write) and Hold on the rest of the curve. We reckon thatvaluations of KAISAG 9.375% 2024s (ask price: 98.6, YTW: 9.7%, Z+750bp)look constructive, but we are mindful of supply risks.