iKang prices Nasdaq IPO at top end

The Chinese healthcare group benefits from renewed buying interest in mainland stocks.

iKang Healthcare Group has raised $153 million after pricing its US IPO at the top end of its $12 to $14 indicative price range. A 10.9 million ADR offering was priced at $14 per unit just after the New York close on Tuesday by joint leads Bank of America Merrill Lynch and UBS.

Two ADS units equal one share and there is also a 15% overallotment option. The institutional book is said to have been multiple times oversubscribed, with bankers close to the deal noting there were hundreds in the book early Wednesday morning Hong Kong time. The deal had a 70%/30% split between primary and secondary shares.

An exact percentage geographic split was not immediately available, although the majority of the book is made up of long-only institutions and hedge funds in the US. But bankers said it was very much a global book, with Asian and European managers clamouring to get a piece of iKang.

The biggest investor was China's $575 billion sovereign wealth fund, China Investment Corp, which has purchased $40 million of the deal, giving it a 4.6% stake. Existing investors also include Singapore’s sovereign wealth fund, which together with Goldman Sachs, took a $100 million stake in the company one year ago.

Sources attributed strong IPO demand to two factors. Firstly, for the past couple of weeks Chinese stocks have been on a tear after investors decided that fears of a Chinese credit crunch have been overblown. The Hang Seng China Enterprises Index has risen 10.6% since March 20.

Pricing comparables

Secondly, there is strong interest in the Chinese healthcare sector particularly among Asian investors who still do not have that many stocks to choose from in the region. Healthcare stocks account for just 2% of the Hong Kong stock market capitalization compared to 13% in the US.

And Beijing-based medical examination services group iKang has priced at a considerable discount to Phoenix Healthcare Group, which listed on the Hong Kong Stock Exchange last November. The private hospital operator has performed spectacularly and consistently well since its trading debut and is currently up 65%, closing Tuesday at HK$12.120 per share.

At this level, it is now trading at a lofty 42 times 2014 earnings, compared to 27.9 times for iKang. This suggests there will be plenty of upside for iKang if strong primary market interest carries through into the secondary market.

Two other China-listed healthcare stocks, Topchoice Medical and Aier Hospital are trading respectively at 64.8 times and 48.57 times 2014 earnings according to Bloomberg. In the US, the number of listed Chinese healthcare stocks has been dwindling thanks to the going-private trend, which followed a series of accounting fraud investigations in 2011 that hit investor sentiment towards Chinese stocks.

For example, Simcere Pharmaceutical Group, a Chinese manufacturer and distributor of branded generic pharmaceuticals de-listed in December via a private-equity backed management buy-out. Chindex, an American company providing health care services in China is also going private after Shanghai Fosun Pharmaceutical and US private equity firm TPG made an offer to take it over.

Chindex, in expansion mode, likely could not resist partnering with two deep-pocketed investors – the company noted at the time of the acquisition that relying on capital markets for raising money is often difficult.

iKang’s selling points Investors have been keen to take advantage of an estimated tripling in healthcare spending in China through to 2020, with iKang enjoying an early mover advantage in the medical examinations space.

As a leading clinic provider in China, the company operates a chain of 42 of its own clinics and another 300 through contracts with third parties. iKang notes in its prospectus that chronic diseases are becoming increasingly prevalent – the number of people with hypertension, diabetes and hyperlipidemia increased by 89%, 97% and 71%, respectively, from 2001 to 2012, according to Frost & Sullivan.

And while the majority of medical examinations are still performed in public hospitals, a swelling number of customers are choosing private providers, which are perceived to offer better service. Indeed, operators like iKang hope to expand market share by running public hospital services. As such, the private preventative healthcare services market in China is forecast to experience rapid growth.

The total market grew from Rmb3.1 billion ($500.2 million) in 2009 to Rmb9.5 billion ($1.53 billion) in 2013, and is forecast to hit Rmb36.7 billion ($5.92 billion) by year-end 2018, according to Frost & Sullivan. These numbers contributed to solid earnings for iKang last year. For the nine months ending December 2013, it reported net revenues of $172.8 million, a 50% increase from the same prior year period of $115.5 million.

Proceeds from the IPO will be used to acquire and construct new medical and dental centres in China, as well as upgrading its technology systems. iKang’s network covers 13 cities in China – Beijing, Shanghai, Guangzhou, Shenzhen, Chongqing, Tianjin, Nanjing, Suzhou, Hangzhou, Chengdu, Fuzhou, Changchun and Jiangyin, with a significant chunk of the company’s revenues sourced from corporate clients.

Of the largest 100 companies in China, iKang currently serves 71, including the ten largest commercial banks. In fiscal 2012 and for the nine months ending December 31, 2013, some 83.2% and 79.2% of its net revenues were derived from corporate customers.

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