Zhongmei could be Hong Kong's fourth hospital IPO

The Carlyle- and RRJ-backed Chinese hospital operator is looking to list later this year, underscoring Hong Kong’s increasingly sophisticated healthcare sector.

Senior managers at Zhongmei Healthcare Group will doubtless be hoping that the Chinese private hospital operator gets the same fabulous reception as its predecessors when it starts marketing its Hong Kong initial public offering later this year.

Two banking sources familiar with the company said private equity-backed Zhongmei, which filed a listing application with the Hong Kong stock exchange on Monday, could try to raise as much as $100 million.

Based on the $64 million paid by Carlyle Group in January for a 15.7% stake, the company is currently valued at $407 million.

The deal reflects strong interest in China's healthcare sector.

RRJ Capital, a private equity firm run by former Goldman Sachs partner Richard Ong, is also a pre-IPO investor having subscribed $250 million worth of convertible notes in 2014 and 2015.
It is not immediately known whether Carlyle and RRJ will dispose their interest in the company as part of the IPO.

Bank of America Merrill Lynch and Morgan Stanley have been appointed joint sponsors of the IPO. 

Should Zhongmei be able to float its shares it will be the fourth hospital operator ever listed in Hong Kong. Phoenix Healthcare was the first hospital operator to go public in Hong Kong in 2013, followed by Harmonicare Medical and Wenzhou Kangning last year.

All three hospital operators were extremely well-received, enabling them to price their shares at the top of their respective price ranges. Phoenix Healthcare, for instance, attracted more than $5 billion of demand for the $191 million offering, making it one of the hottest IPOs of 2013.

The strength of investor interest reflects the relative scarcity of hospital-related stocks in the broader healthcare sector. Before the listing of Phoenix, most of the Hong Kong-listed companies were either drug suppliers or medical equipment manufacturers.

Healthcare analysts said hospital stocks appeal to investors seeking steady, if slower, growth because their occupancy rate tends to be fairly stable. Their earnings growth, which mainly depends on price hikes and opening new hospitals, is also more predictable.

Drug company revenues, in contrast, hinge on sales and the success of marketing campaigns and tend to fluctuate more. Their growth is also less predictable because it relies on the development and introduction of new products.

The business

Zhongmei specialises in running hospitals that treat kidney-related diseases. It operates three of these specialty hospitals, known as renal specialty hospitals, as well as two general hospitals and one cosmetic surgery hospital.

Its specialty distinguishes Zhongmei from general hospital operator Phoenix as well as Harmonicare and Wenzhou Kangning, which run obstetrics/gynaecology and psychiatric hospitals, respectively.

Zhongmei's revenues grew by 65% to Rmb368 million ($57 million) between 2013 and 2015, while bottom-line earnings leapt by 171% to Rmb98 million. This improvement is partially attributable to the management fees received from two newly-managed hospitals since 2014, which accounted for approximately one-fifth of total revenue in the three-year period.

Compared with general hospitals, private speciality hospitals face less competition from government-owned ones because they are able to provide long-term treatment and medication services.

However, they could face increased competition from new entrants as Beijing fosters the establishment of more private hospitals as part of its healthcare reforms. The market share of private renal specialty hospitals is expected to grow to 13.5% in 2019 from 7.8% in 2014, according to China Insights Consultancy.

So to improve its competitiveness and product mix, Zhongmei entered into an agreement in December with the government of Zhuzhou in south-central China to start a new general hospital. It is also exploring the possibility of opening another one in Zhengzhou, further north in the country.

¬ Haymarket Media Limited. All rights reserved.
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