Healthy growth

A stellar IPO from Chinese hospital group


The well-being of doctors rarely gets more mention than that of their patients. Except, it seems, in China where joining the medical profession might be seen as entering a life-threatening occupation.

In September and October there were at least six serious incidents in which medical staff were attacked, including a case in Guangdong when one doctor was left with a ruptured spleen, after he refused to allow relatives to see a family member in an intensive care unit.

A few days later in Zhejiang another doctor was stabbed to death by a patient unhappy with his treatment.

In response, the central government pledged once again to increase the numbers of public security staff in hospitals.

WiC has reported on a number of similar incidents in the past as doctors wrestle with a groundswell of public anger, some of it justifiable.

The sources of fury are many. For example, some medical staff supplement their incomes with kickbacks from drugs firms, prescribing unnecessary treatments. Other times patients are charged queue-jumping fees for standardised examinations or procedures. Much of the problem can be reduced to one word: funding. In 2011, China spent $357 billion on its healthcare system, compared with $857 billion in the US, according to McKinsey.

Recognising that more investment is required, the central government has been trying to attract more private investment into the healthcare sector, and McKinsey cites a target from the Ministry of Health that private (for-profit) hospitals should treat 20% of all patients by 2015.

Small wonder, then, that when Phoenix Healthcare, one of China’s largest private hospital operators, went public in Hong Kong last week, it attracted about $5 billion of orders for just $200 million of stock.

Demand was so strong that Phoenix’s shares have gone up 53% since debuting last Friday.

The company owns one hospital in Beijing and operates 40 other hospitals and clinics around the country (equating to 3,000 beds for patients). Last year revenues reached Rmb758 million ($124.5 million) and they have grown by more than a third over each of the last three years.

Founded in 2007, Phoenix makes money through management fees and supplying medical and medical consumables to the hospitals and clinics within its network. The fulfillment business, called ‘supply chain operations’ in its prospectus, is the biggest contribution to Phoenix’s revenues. And as of this year, about 77% of profit was derived from distributing supplies to its hospital network.

Investors are reasonably optimistic that it will do better in the years ahead.

Private healthcare still has a low penetration rate in China. More than 60% of Hong Kong’s residents go to private clinics, for instance, while as many as half of them also use private hospitals for surgery and operations. Similarly, 30% of the US population use private medical services.

By comparison, the number of private hospital admissions in China is just 4%, says Tencent Finance.

Lured by the market’s potential, other private operators are emerging too. Beijing-based Concord Medical says it intends to set up eight private hospitals in the next decade, starting in Beijing, Shanghai, and Guangzhou.

Kuala Lumpur-based IHH Healthcare, Asia’s largest hospital operator, also plans to build a hospital in Shanghai, adding to seven clinics it already owns in the city, as well as one in Chengdu.

One problem is that the market is very fragmented across more than 23,000 hospitals in China and none of the private operators have managed to establish effective scale. Some have been struggling to win ‘customers’ from state infirmaries in spite of better service.

In fact, Nanfang Daily reported that only a third of the private hospitals in Shenzhen are profitable. An operator told the newspaper that it was difficult to find suitable land and that a lack of government subsidies and the weight of heavy taxes has restricted growth in the sector.

“There is a lot of excitement about China because foreign investors see it as the largest market in the world,” David Wood, a healthcare consultant, told the China Post. “But it requires a patient investor. This is not the place if you’re expecting to make huge money on a short-term basis.”

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