Sanity check

Chinese investors embrace the first psychiatric healthcare provider

Patient w

A patient in a Kangning hospital

Traditionally mental illness has been a taboo subject in China. In ancient times it was linked with demonic possession and in the 1960s mental disorder was reclassified as a faulty appreciation of the class struggle. Western models of treatment were only gradually introduced in the 1980s.

These days Chinese society has become more open-minded on the issue. Movie producers have used mental illness as a dramatic device (see WiC276). And beginning this week, investors can even make bets on a company that treats it.

Wenzhou Kangning Hospital, the largest private sector provider of psychiatric healthcare by revenue, began trading on Friday in Hong Kong after raising HK$680 million ($87 million) in an initial public offering. In the morning trading session, its stock was up more than 20% from its offering price.

Ownership of Kangning doesn’t come cheap. Its shares were priced at more than 20 times projected earnings for 2016, although the retail portion of Kangning’s offering was more than 125 times covered, making it one of the most popular deals in Hong Kong’s primary market in recent months.

The warm reception was partly down to Kangning being the first of its kind to go public in Hong Kong. Gross profit margins for the group, which runs five hospitals directly and manages the psychiatric departments of three other institutions, exceeded 40% in 2014.

Investors also seem to think that mental illness is set to become a growing problem in China. “Driven by the economic boom over the last few decades, China has rapidly modernised, resulting in tremendous growth in per capita disposable income and prosperity, but also greater social pressure and competition among individuals, leading to increased risk and prevalence of psychiatric disorders,” says Kangning’s prospectus, a document offering one of the first comprehensive overviews of China’s psychiatric healthcare industry.

“So it is true. Money drives people crazy,” a netizen wrote in a Hong Kong discussion forum where Kangning’s IPO had become a hot topic.

“I don’t know whether we should take pride in whether China has indeed grown into the world’s biggest market for insanity. But I have invested in the IPO,” another added.

Citing data from consultancy firm Frost & Sullivan, Kangning says China has more than 180 million people with various types of mental disorders (the most common are those relating to anxiety) and many do not have access to proper treatment yet.

The number of in-patients (those staying overnight in hospitals or clinics) was 2.07 million in 2014, but it is expected to grow to 4.5 million by 2019.

Other data suggests a shortage of practitioners capable of treating patients: the number of psychiatrists per 10,000 citizens in China was 0.15 in 2011, which compares with 29.38 in Japan. Almost all of them work in public hospitals, rather than private institutions similar to those that Kangning operates.

Because public hospitals generally do not prioritise psychiatric healthcare and often cannot meet demand, Kangning says the government is now encouraging more private sector investment in care facilities.

But the IPO points to a broader trend too – China’s State Council has identified healthcare as one of the future growth engines of the domestic economy.

At least eight healthcare firms from China have gone public in Hong Kong this year, the Wall Street Journal notes, and five more IPOs are in the pipeline.

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