Union Medical Healthcare took advantage of the improvement so far this week in market sentiment to kick off pre-marketing on Tuesday for an initial public offering in Hong Kong that could raise as much as $150 million for the aesthetic medical service provider.
The investor education exercise follows Monday's strong rally in global stock markets, led by Tokyo, where shares surged by 7% on expectations of extra stimulus measures. The gains continued into Tuesday, with Hong Kong’s Hang Seng Index adding another 1.08% after posting its biggest daily surge in five months on Monday.
The market bounce has given market participants a sigh of relief after a dismal start to the year following China’s controversial introduction (and subsequent suspension) of a circuit-breaker mechanism that inadvertently helped to aggravate rather than calm market volatility. The mood in the run-up to the Chinese New Year holiday had been downbeat after data showed the Chinese economy grew in 2015 at its slowest rate in 25 years and as deflation worries diffused globally after crude oil prices hit a 13-year low in late January.
Against that market backdrop there have not been any sizeable listings in Hong Kong, the world's biggest IPO hub last year, so far in 2016. Goodbaby China, which sells baby and children’s products, attempted to build books for a HK$1.25 billion ($161 million) IPO in late January but pulled the deal earlier this month citing the volatile market conditions.
Premarketing of IPOs typically takes around a week but Union Medical Healthcare was advised by sole sponsor Credit Suisse to conduct two weeks of premarketing to better gauge market sentiment before officially launching the trade, a source familiar with the situation told FinanceAsia.
That means the Hong Kong-based medical beauty group will not decide on the launch until early March and any listing will not materialise until late March.
Business
Union Medical Healthcare claims to be the largest aesthetic medical service provider in Hong Kong in terms of revenue in 2014. It offers plastic surgery as well as traditional beauty services under the Dr Reborn brand.
Over the last two years the company has recorded stellar earnings growth. In 2014 it booked HK$81 million ($10.4 million) in net profit, reversing a HK$33 million loss a year earlier. That was followed by another 115% improvement last year when Union Medical Healthcare made a net profit of HK$174 million.
The strong growth in earnings was largely driven by the provision of aesthetic surgical medications, including breast augmentation, liposuction, and double eyelid surgery procedures. Over the past three years, sales from this division grew at a compound annual growth rate of 26% to HK$281 million and accounted for about 45% of the firm’s total revenue last year, according to the company’s preliminary prospectus.
By comparison traditional beauty services such as facials and massages grew at a CAGR of 19% during the same three-year period. So their contribution to the company’s total revenue dropped to 16% last year from 26% in 2013.
In recent years Union Medical Healthcare managed to improve its cash positions significantly due to the increase of prepayments from clients. Pre-sales of medical packages accounted for 38.7% of total revenue last year, up from 13.3% two years earlier.
Similar to other aesthetic medical service providers, Union Medical Healthcare operates a light-asset model and leases all its 23 service centres and clinics in Hong Kong, Macau, and Guangzhou.
It also has 22 full-time registered doctors and hires several other doctors on a part-time basis or through subcontractors.
Such a business model allows the company to expand rapidly but also makes it more vulnerable to rental adjustments. In 2015 rental and related expenses amounted to HK$65.8 million, a 92% increase from two years ago.
Another concern investors might have is the relatively short history of the company, particularly in the riskier medical surgery segment. Union Medical Healthcare was founded in 2005 but it was not until 2011 when it began offering aesthetic surgical procedures.
Valuation and comps
Sources familiar with the matter said Union Medical Healthcare plans to issue 25% of its enlarged share capital before greenshoe, equating to a valuation of around $600 million and a fair valuation range of 18 times to 24 times forecast earnings for the 2016 financial year.
Syndicate analysts have taken the likes of Bloomage Biotech and Shanghai Haohai Biological Technology as Union Medical Healthcare’s closest comparables in the domestic market although their businesses are different in nature.
Bloomage Biotech and Shanghai Haohai, which manufacture biomedical materials for medical and cosmetics purposes, are in the upstream of the healthcare industry while Union Medical Healthcare is largely a medical services provider in the latter stages of the value chain.
Shares of Bloomage are down 12.5% in price year-to-date and trade at 23.8 times earnings on a rolling 12-month basis, while Shanghai Haohai's are down 12.9% and trade at 22.15 times earnings.
The choice of peers by syndicate bankers reflects the absence of a sizeable Hong Kong-based medical services provider, which makes benchmarking fairly difficult. Modern Beauty Salon Holdings, which operates beauty centres in Hong Kong, is a direct competitor to Union Medical Healthcare but the shares are highly illiquid and its market capitalisation is expected to be just one-tenth of its rival.
Medy-Tox, a Korean supplier of botulinum, toxin, therapeutics, and Korean biomedicine manufacturer Alteogen are taken as global comparables. Medy-Tox is trading at a hefty 57 times forecast earnings this year, while Alteogen is expected to remain in the red this year.
Hong Kong’s aesthetic medical services market is highly fragmented. Union Medical Healthcare was the largest provider by revenue last year but only commanded a 6.84% market share. That leaves a lot of room for expansion, potentially through mergers and acquisitions.
The market is also expected to get bigger in Hong Kong due to the rising acceptance and growing affordability of aesthetic medical services, with total revenue expected to nearly double to HK$6.95 billion by 2019 from HK$3.52 billion in 2014, according to Frost & Sullivan.
Still, how investors value the company may depend on its perceived ability to expand in China in the long term, given the lower penetration rate of aesthetic medical services there. At present, the company operates one clinic in Guangzhou versus 20 in Hong Kong but it is planning to open a second mainland clinic in Shanghai in the near future, according to the preliminary IPO prospectus.
But there are also inherent risks associated with these expansion plans, particularly in terms of regulations and new competition.
"Our expansion plans, particularly our plans to expand our business in various locations of the PRC, Macau and Taiwan, are subject to uncertainties and risks and we may not be able to replicate the success we have [achieved] in Hong Kong or successfully manage our expanded operations,” the company said in the prospectus.
