leasing business diversification - gfgroup.com.hk...2017/10/16 · leasing business diversification...

Leasing Business Diversification

Oct 16, 2017 Equity Research | Financials

Positive (maintained)

From leasing to hospital operation – an overview of leasing companies’ presence in the healthcare sector

Wang Wen SFC CE No. BGL298 [email protected] +86 755 8826 1286 GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong

Healthcare an attractive sector for financial leasing companies Leasing assets

allocated in the healthcare sector have grown rapidly with a CAGR of ~46%, significantly

higher than the overall leasing asset growth of 29% during 2014-2016. Growth

prospects are promising as medical equipment sales continue to increase in China and

with ongoing population ageing. Compared to leasing assets allocated to other sectors,

leasing assets in the healthcare sector tend to have higher yields and better asset

quality, making the business attractive to leasing companies.

From financial services to industrial operation On one hand, market competition has

intensified as new leasing companies join the scene. This has put pressure on the yield

on leasing assets allocated in the healthcare sector. On the other hand, leasing

companies with abundant experience in the healthcare industry have accumulated

resources related with medical equipment procurement, years of industry consulting

experience and a pool of professionals. Meanwhile, since 2010 the government has

issued multiple policy documents to support the participation of private capital in hospital

operation and hospital reform in China. The number of beds at private hospitals could

triple over the next three years according to the 13th five year plan for medical and

healthcare system reform, indicating large market space. In addition, we also see a

large number of business opportunities arising from public hospital reform, given that

government guidelines on the reform of SOE-affiliated hospitals have been issued and

those for the reform of military hospitals are likely on the way.

Hospital operation in China With rising medical expenses and a changing population

structure, the number of hospitals in China has continued to increase. For-profit and not-

for-profit hospitals accounted for 33% and 67% of all hospitals in China respectively as

of end-2015; on a different breakdown, public and private hospitals represented 44%

and 56% respectively as of end-2016. With regard to the distribution of hospital

resources, the current status of private hospitals in China can be summarized as a large

quantity, small business scale, less efficient operation and lower income. Public

hospitals still have advantages in terms of medical resources and operation scale, and

they are responsible for offering the majority of medical services available.

The five key business models for private capital to participate in hospital operation are

the building of a new hospital, the acquisition of private hospitals, the acquisition and

restructuring of public hospitals, participation in not-for-profit hospital management (e.g.

the IOT model), and the establishment of a joint venture (e.g. the BOT model). The last

two are essentially the operation of hospitals via the PPP model. Private capital with a

purely private-sector background has mostly followed the first two models to involve

themselves in hospital operation, resulting in a rapid increase in specialized hospitals. In

contrast, companies with an SOE background tend to cooperate with public hospitals

through the PPP model to generate revenue from management fees and supply chain

management business.

mailto:[email protected]

Oct 16, 2017

2

Sector report

Financial leasing companies seeing attractive business in

healthcare sector

Growing leasing business in healthcare sector

Market volume

Leasing assets allocated to the healthcare sector have grown rapidly, thanks to policy support,

increasing financing demand from hospitals and sound asset quality of the healthcare industry.

According to data from the MOC, leasing assets allocated to medical equipment increased from

Rmb36.5bn in 2014 to Rmb78.32bn in 2016, with a CAGR of ~46%, significantly higher than

overall leasing asset growth of 29%. As financial leasing companies regulated by the CBRC are

not covered in the data collected by the MOC, the actual amount of leasing assets allocated in the

healthcare industry should be even higher.

Figure 1: Leasing asset allocation in 2016 (Rmb bn)

Sources: MOC, GF Securities (Hong Kong)

Growth prospects

Based on industry research, sale-leaseback accounts for a majority of financial leasing business

in the healthcare sector, mainly due to the following reasons. 1) Sale-leaseback allows for more

flexible use of funds for hospital clients as they have diversified financing needs beyond

equipment purchases. 2) Medical equipment leasing usually has durations of 3-5 years, matching

the usable lives of equipment, while credit loans from commercial banks tend to have durations of

just 1-2 years. 3) The applicable tax rate for sale-leaseback has decreased to 6% after the VAT

reform, lower than the tax rate for direct leasing (usually at 17%).

In other words, the continued growth of leasing business in the healthcare industry is not only

driven by growing medical equipment sales but also reflects strengthening healthcare sector

investment.

Medical equipment sales increased from Rmb170bn in 2012 to Rmb370bn in 2016, with a CAGR

of 21%, of which medical equipment sales to hospitals accounted for ~70%. Due to the fast pace

of technological development, medical equipment is being upgraded rapidly, with a typical service

life of just 3-5 years, leading to steady demand of equipment replacement.

Long-term investment growth in the hospital sector in China is driven by population ageing, which

is progressing noticeably at present, with the population mix of those aged above 65 years old

rising from 7.9% in 2006 to 10.8% in 2016. This percentage is estimated to pick up further to 26%

0 50 100 150 200 250

Mining, metallurgical special equipment

Communication electronic equipment

Construction equipment

Medical pharmaceutical equipment

Industrial equipment

General machinery and equipment

Infrastructure and real estate

Transportation equipment

Energy equipment

Oct 16, 2017

3

Sector report

in 2050 according to the national population development plan (2016-2030) issued by the State

Council. Besides, chronic diseases are becoming increasingly common in China due to changes

in the population structure, lifestyle changes and environmental pollution. With 54% of those aged

above 60 suffering from chronic diseases, continued population ageing is driving sustained growth

in the demand of medical resources. According to the World Bank’s data in 2014, the number of

hospital beds per thousand people in developed countries is positively correlated with the

proportion of the population aged above 65. For example, in Japan, with 26% of the population

aged above 65, the number of hospital beds per thousand people has reached 13.4. Amid

ongoing population ageing in China, the number of beds at medical institutions per thousand

people also increased from 2.7 in 2006 to 5.4 in 2016, or from 1.9 in 2006 to 4.1 in 2016

specifically for hospital beds. These two figures are expected to grow further to 6 and 4.8 for

medical institutions and hospitals respectively in 2020 according to the national medical and

healthcare service system planning (2015-2020) issued by the State Council (《国务院关于全国医

疗卫生服务体系的规划纲要（2015-2020）》).

Figure 2: Continued growth in medical equipment sales Figure 3: Population ageing in China

Sources: Wind, GF Securities (Hong Kong) Sources: Wind, State Council, GF Securities (Hong Kong)

Figure 4: Population ageing and bed number Figure 5: Beds per 1,000 people continue to increase

Sources: World Bank, GF Securities (Hong Kong) Note: 2014 data.

Sources: Wind, GF Securities (Hong Kong)

16%

25%

21% 21% 20%

0%

5%

10%

15%

20%

25%

30%

0

50

100

150

200

250

300

350

400

2012 2013 2014 2015 2016

Rm

b b

n

Medical equipment sales

Medical equipment sales in hospital market

YoY

1.0 1.1 1.2 1.3 1.4 1.5 1.7

2.8

3.8 7.9% 8.3% 8.9% 9.4% 10.1% 10.8%

12%

19%

26%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2006 2008 2010 2012 2014 2016 2020E 2030E 2050E

Population aged over 65 (100m) As % of total population (RHS)

2.9 2.8

6.5

8.3

13.4

14%

17%19%

21%

26%

0%

5%

10%

15%

20%

25%

30%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

US UK France Germany Japan

No. of beds per 1,000 people

% of population aged above 65

1.9 2.22.5

3.13.6

4.1

4.8

2.7 3.0

3.6

4.2 4.8

5.4

6.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2006 2008 2010 2012 2014 2016 2020E

No. of hospital beds per 1,000 people

No. of beds per 1,000 people

Oct 16, 2017

4

Sector report

Key competitive strengths

The core ROE of financial leasing companies mainly hinges upon their interest spread, asset

quality and financial leverage. Leasing companies operating with different licenses are subject to

different regulatory requirements, with a leverage ceiling of 12.5x for financial leasing companies

under the CBRC and 10x for those under the MOC. Compared to leasing assets allocated to other

sectors, leasing assets in the healthcare sector tend to offer higher yields and better asset quality,

making it attractive for leasing companies.

Higher leasing asset yields

Many hospital clients, especially not-for-profit public hospitals with abundant cash flows, are not

highly sensitive to the interest rates offered by leasing companies. They also value professional

expertise, integrated medical service solutions and differentiated value-added services. We have

observed higher leasing asset yields from the healthcare sector for leasing companies with years

of experience operating in the healthcare industry and extensive medical resources. Universal

Medical (2666 HK) has maintained a high leasing yield above 8% since 2012, relying on its

extensive connections with world-leading medical institutions and internationally renowned

experts. Far East Horizon (3360 HK) has also recorder a higher leasing asset yield from the

healthcare sector over the last three years compared to its overall yield on assets allocated to

nine industries.

Better asset quality

The non-performing asset (NPA) ratio of leasing assets allocated in the healthcare sector is much

lower than those allocated to other industries. Take Far East Horizon as example, the NPA ratio of

its healthcare leasing assets was remained below 0.2% since 2012, much lower than its overall

NPA ratio (for assets allocated in nine industries, e.g. education, machinery, transportation,

electronics). Universal Medical has also maintained an NPA ratio at a low and safe level below 1%

with zero write-offs since 2012 (Due to their different accounting policies for NPA recovery, the

NPA ratios for Universal Medical and Far East Horizon are not comparable). Better asset quality

in the healthcare sector is mainly attributable to the fact that: 1) Healthcare is a less cyclical

industry and most hospitals have stable cash flows. 2) Not-for-profit hospitals usually have a good

repayment record. Overdue payments may occur because of leadership replacement, pending

arrival of medical insurance funds and delayed payments due to finance or bank settlement issues.

These may be recognized as NPAs in leasing companies’ financial reports, but most of them can

be recovered afterwards based on past experience. 3) The market size is large with a total of

more than 29,000 hospitals across China. Leasing companies can select hospital clients with

good operations and sound solvency.

Figure 6: Higher leasing yield of healthcare sector Figure 7: Lower NPA ratio of healthcare sector


4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

2012 2013 2014 2015 2016 1H17

Leasing yield-Univeral Medical Leasing yield-FEH(Overall)

Leasing yield-FEH(Healthcare)

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

2012 2013 2014 2015 2016 1H17

NPA ratio-Universal Medical NPA Ratio-FEH(Healthcare)

NPA Ratio-FEH(Overall)

Oct 16, 2017

5

Sector report

From financial service to industrial operation

Increased competition

Increased competition in leasing business

The number of leasing companies in China has continued to increase, from 643 as of end-2012 to

8,218 as of end-June 2017, with a CAGR of 76%. During the same period, the value of

outstanding leasing contracts increased from Rmb1,550bn in 2012 to Rmb5,600bn as of end-June

2017, with a CAGR of 33%. The growth in the number of industry participants has significantly

exceeded the pace of business growth in the industry, indicating intensified market competition as

more new entrants join the scene.

Amid intensified market competition, the yield on leases allocated in the healthcare sector has

also come under pressure, as newcomers offer cheaper prices to expand their market shares.

Besides, financial leasing companies under the CBRC’s supervision have competitive strengths in

terms of a lower borrowing cost and higher leverage ceiling. Take Universal Medical as example,

the company has maintained a high leasing yield above 8% since 2012, relying on its extensive

connections with world-leading medical institutions and internationally renowned experts.

However, its leasing asset yield (see Figure 6) remained relatively stable during 1H17 (slightly

higher in 2016 mainly due to the effect of the VAT reform), while its peers’ leasing asset yields

rebounded as market interest rates picked up, reflecting pressure from competition on the

company’s leasing assets. Given the pressure on leasing assets and continuously rising market

interest rates, we believe leasing companies’ NIS will narrow in the long term. In light of this,

leasing companies with years of experience in the healthcare industry have begun to actively

explore opportunities both upstream and downstream for the next profit driver.

Figure 8: No. of leasing companies in China Figure 9: Outstanding leasing contracts


Consulting experience and professionals along supply chain

Leasing companies with years of experience in the healthcare industry have accumulated

resources in the following three significant aspects.

Medical equipment purchasing

Far East Horizon and Universal Medical, the top two campiness by market share in medical

equipment leasing, have in-depth understanding of medical equipment and have accumulated rich

experience in negotiating with manufacturers. Far East Horizon established its medical business

-10%

0%

10%

20%

30%

40%

50%

60%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

201

2-1

2

201

3-0

3

201

3-0

6

201

3-0

9

201

3-1

2

201

4-0

3

201

4-0

6

201

4-0

9

201

4-1

2

201

5-0

6

201

5-0

9

201

5-1

2

201

6-0

3

201

6-0

6

201

6-0

9

201

6-1

2

201

7-0

3

201

7-0

6

CBRC regulated Domestic funded Foreign funded QoQ

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

1000

2000

3000

4000

5000

6000

201

2-1

2

201

3-0

3

201

3-0

6

201

3-0

9

201

3-1

2

201

4-0

3

201

4-0

6

201

4-0

9

201

4-1

2

201

5-0

6

201

5-0

9

201

5-1

2

201

6-0

3

201

6-0

6

201

6-0

9

201

6-1

2

201

7-0

3

201

7-0

6

Outstanding leasing contracts (Rmb bn) QoQ

Oct 16, 2017

6

Sector report

department in 2003. It has provided services for over 2,200 hospitals and has engaged in medical

equipment leasing for nearly 15 years. Far East Horizon has signed strategic group purchasing

contracts with world-leading medical equipment manufacturers, and completed over Rmb50m

worth of equipment purchasing in 7M17 at prices 5%-10% lower than individual private hospitals

or 50%-60% lower than public hospitals. The major shareholder of Universal Medical, China

General Technology Group, is the largest service provider in China for importing advanced

equipment and technology, and also the largest importer and exporter of medical and healthcare

products. Relying on China General Technology Group’s strength in trade and extensive overseas

resources, Universal Medical has gained immediate access to advanced medical technology and

equipment, and has a strong advantage in importing global medical equipment. So far the

company is the exclusive agent for 19 medical device categories in China, covering a total of over

200 medical products.

Consulting experience

Both Far East Horizon and Universal Medical provide consulting services for hospital clients,

which has in turn helped them gain experience in hospital operation and related fields. In addition

to consulting on financing, Far East Horizon is cooperating with Changhua Christian Hospital in

Tainwan to provide management consulting services including hospital review and evaluation

management, patient safety and medical quality promotion, performance management, hospital

image management, project management, and the organization of visiting and training services.

Meanwhile, with extensive connections with world-class hospitals, medical units and well-known

experts, Universal Medical has helped hospital clients with clinical department upgrades, the

introduction of advanced modern hospital management concepts, and leading clinical diagnostic

and treatment technology. By the end of 2016, the company had established strategic

partnerships with 68 leading international healthcare institutions and more than 200 experts in

various fields. The company also has a specialty in stroke unit upgrade services, which effectively

integrates financing, equipment and technical services together.

Professionals

Apart from their experience in the healthcare industry, these leasing companies have also

gathered a group of professionals well versed with hospital operation. For Far East Horizon, half

of its hospital investment team comes from the healthcare industry, while the other half has

finance expertise. In addition, one-third of its finance professionals have healthcare related

educational backgrounds or working experience. The company has also invited experienced

experts to join its hospitals. Its medical management team has Chen Xiuzhu, dean of Changhua

Christian Hospital in Taiwan, and other experienced deans from domestic public hospitals. Some

well-known professors have also been invited to join them as chief experts of key disciplines. With

professors Pei Guoxian and Zhang Chuncai as chief experts in orthopedics, the company has

established a physician team of over 250 doctors to serve 1,400 beds nationwide, covering over

95% of orthopedic techniques. For Universal Medical, it has focused on the healthcare industry

and provided comprehensive services for hospital clients since 2006. Half of its frontline business

staff has healthcare related educational backgrounds or working experience. Besides, the

company participates in hospital operation under the PPP model, meaning it mainly relies on

Grade III Class A public hospital resources and management capabilities.

Business opportunities arising from ongoing healthcare reform in China

Market space

The number of private hospitals in China has grown rapidly over the past few years and has

exceeded the number of public hospitals since 2015. However, the amount of investment, number

of operational beds and amount of technical personnel for each private hospital remain much

lower than the average levels for public hospitals. The government has been encouraging private

investment in hospitals. For example, public hospitals had 3.9 beds per thousand people in 2015,

Oct 16, 2017

7

Sector report

while private hospitals had just 0.52 beds. According to the medical and healthcare system reform

plan for the 13th Five Year Plan period, the number of beds per thousand people is targeted to

increase to 4.8 by 2020, of which 1.5 beds will be attributable to private hospitals. In other words,

the number of beds at private hospitals could triple over the next three years.

Policy support

Relevant policy changes have significantly influenced the scale and business model of private-

sector capital being involved in hospital operation, which started when the State Council first

allowed individuals to practice medicine in 1980 (《关于允许个体开业行医问题的请示报告》) and

when the Ministry of Health first allowed private-sector capital to provide healthcare services in

1992. However, up until 2010, despite the constantly growing number of private medical

institutions, the vast majority of private hospitals were for-profit hospitals subject to policy

restrictions.

The State Council issued “Several Opinions on Encouraging and Guiding the Healthy

Development of Private Investment” in 2010 to allow not-for-profit hospitals to be registered by

private-sector investors. Several other important documents have been issued since to support

private capital participating in hospital operation and hospital reform in China, which are briefly

summarized below in Figure 10.

Oct 16, 2017

8

Sector report

Figure 10: Supportive policies since 2010

Sources: GF Securities (Hong Kong)

Date Document Highlights

2010.5

Several Opinions of the State Council on

Encouraging and Guiding the Healthy

Development of Private Investment

Support private capital participation in public hospital restructuring.

Support private medical institutions to undertake public health services, basic medical services

and designated medical insurance services.

Implement tax policies for non-profit medical institutions.

2013.1

Decision of the Central Committee of the

Communist Party of China on Some

Major Issues about Deepening Reforms

Encourage private capital to construct medical institutions and give priority to non-profit medical

institutions.

Private-sector funds can participate in the restructuring of public hospitals.

Allowing physicians to work at multiple medical institutions and private medical institutions to be

included in medical insurance.

2015.6

Several policies and measures on

accelerating the development of private-

sector healthcare institutions

Implement government subsidies on private non-profit medical institutions.

Encourage local governments to cooperate with multi-layered capital markets and provide

financing assistance for private hospitals.

Accelerate and regulate the practice of physicians working at muti-locations.

Tax exemptions (business tax exemption for healthcare institutions; exemption from property tax,

urban land use tax for qualified non-profit healthcare institutions; exemption from property tax,

urban land use tax within three years for qualified for-profit healthcare institutions; exemption

from corporate income tax for eligible revenue from healthcare services of non-profit healthcare

orgnizations).

Incorporate private healthcare institutions into medical insurance.

2016.113th Five Year Plan for Deepening

Medical and Healthcare System Reform

During 13th FYP, a hierarchical medical system (分级诊疗), modern hospital management,

universal medical insurance, medicine supply guarantee and comprehensive supervision need to

achieve new breakthroughs.

Hierarchical medical system: A hierarchical medical system would be gradually improved and

pilots carried out in more than 85% of cities by 2017. By 2020, a hierarchical medical model will

have gradually been formed and a hierachical medical system in accordance with national

conditions will have been established.

Guide public hospitals to participate in the hierachical medical system. Further improve and

implement medical insurance payment and medical service pricing policies, promote the

construction of hospital all iances, explore referral machanisms by allowing physicians to work at

multi-locations, strengthen drug supply at local healthcare institutions.

Drug reform: Starting from 2017, the revenue contribution of drug sales at public hospitals in pilot

cities should be redcued to about 30% (excluding TCM decoction pieces). The growth of public

hospital costs should be controlled below 10%.

2017.4

Guiding Opinions of the General Office

of the State Council on Promoting the

Construction and Development of

Hospital All iances

Set up medical groups in cities and hospital all iances in counties. Form specialist all iances

across regions and develop telemedicine networks in remote and poor areas.

2017.5Opinons on supporting private capital to

provide diversified healthcare services

Encourage the development of general medical services, accelerate the development of specialized

services and comprehensively develop Chinese medicine services.

Orderly develop cutting-edge medical services, encourage strong private medical institutions to

focus on the forefront of medcine and promote the development of multi-sector integrated services.

Explore the development of distinctive healthcare service clusters to meet higher-end health

consumption demand and relax control over market entry.

2017.7Guiding Opinions on Deepening Reform

of SOE-Affil iated Medical Institutions

Encourage administration transfer to local governments.

Support SOEs or state-owned capital investment & operation companies focused on healthcare

sector to innovate and upgrade medical services to develop elderly healthcare, healthcare tourism

and other industries.

Give priority to the restructuring of non-profit medical institutions and screen for optimal

investors with transparency.

Encourage SOE-affil iated medical institutions to participate in government procurement of

medical and healthcare services. Implement supportive policies regarding taxation, land use,

investment and financing.

Oct 16, 2017

9

Sector report

Hospital operation in China

Public hospitals vs. private hospitals

Hospital classification in China

With increasing medical expenses and a changing population structure, the number of hospitals in

China increased from 18,703 in 2005 to 29,140 in 2016, with a CAGR of ~4%. There are many

classification methods of hospitals: for-profit and not-for-profit hospitals as an important one

according to administrative classification management, each representing 33% and 67%

respectively as of end-2015; public hospitals and private hospitals by registration type, with the

former including state-owned hospitals, military hospitals (under reform) and hospitals affiliated to

SOEs (under reform), and the latter including individuals’, associated, joint-stock and foreign joint-

venture hospitals (私营、联营、股份合作和外商合资医院), each representing 56% and 44%

respectively as of end-2016. There is also a classification by hospital rating: Grade III, Grade II,

Grade I and ungraded hospitals each representing 8%, 27%, 32% and 33% respectively in 2016,

among which Grade III Class A hospitals are the best in terms of service quality and medical

resources in China. Based on a hospital’s specialty composition, there are general hospitals,

specialized hospitals, TCM hospitals and other hospitals (integrative medicine hospitals and

national hospitals). General hospitals accounted for the largest share of 63% in 2015 while the

proportion of specialized hospitals (22%) has also increased rapidly with the development of

private hospitals. TCM hospitals and others accounted for 12% and 3% respectively.

Figure 11: No. of hospitals continues to increase Figure 12: Hospital classifications

Sources: Wind, GF Securities (Hong Kong) Sources: Wind, China Health Statistics Yearbook, GF Securities (Hong Kong) Note: For-profit and not-for-profit hospitals mix updated to 2015; mix of general hospitals, specialized hospitals, TCM hospitals and others updated to 2015; other data updated to 2016.

For-profit medical institutions refer to those whose profits from medical services are partly

returned to investors, while not-for-profit medical institutions refer to those established to serve

public interests whose revenue is used to cover the cost of medical services and improve their

service capacity rather than being distributed to shareholders or stakeholders. As all public

hospitals are not-for-profit hospitals, we can further divide Chinese hospitals into three categories:

public hospitals, non-profit private hospitals and for-profit private hospitals. A comparison is given

below:

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

No. of private hospitals No. of public hospitals

YoY

For-profit Hospital

67% Public Hospital

44%

Grade ⅢHospital 8%

General Hospital

63%

Not-for-profit

Hospital33%

Private Hospital

56%

Grade ⅡHospital

27%

Specialized Hospital

22%

Grade ⅠHospital

32%

Hospital of TCM 12%Ungraded

Hospital33%

Others 3%

Oct 16, 2017

10

Sector report

Figure 13: Hospital comparison

Sources: GF Securities (Hong Kong)

Distribution of medical resources

1) The number of private hospitals in China increased rapidly from just 3,220 in 2005 (17% of total)

to 16,432 in 2016 to account for 56% of all hospitals, representing a CAGR of 16%.

2) That said, public hospitals still have advantages in terms of medical resources and operation

scale. While the number of private hospitals in 2016 was 1.29 times that of public hospitals, the

number of beds offered by private hospitals represented just 28% of those offered by public

hospitals. In addition, the number of technical personnel (including physicians, nurses,

pharmacists and technicians) at private hospital was equivalent to just 21% of that at public

hospitals. On average, each public hospital has 351 beds and 353 technical staff, compared with

75 and 56 for private hospitals.

3) As a result of their extensive medical resources and patients’ preferences, public hospitals are

responsible for the bulk of medical services, while total patient and inpatient numbers at private

hospitals are equal to just 15% and 19% of the numbers at public hospitals. The bed utilization

rate for private hospitals is just 63%, significantly lower than the 91% for public hospitals.

4) Private hospitals have much lower income than public hospitals, with their total income equal to

just 10% of that for public hospitals in 2015 (total private hospital number was 1.1 times that of

public hospitals at the time). On a per-hospital basis, the average income for a private hospital

was just Rmb19m, equal to 9% of the income for a public hospital (Rmb205m).

5) Fiscal subsidies: Private hospitals can get much less financial support from the government

(equivalent to 1% received by public hospitals in 2015)

In conclusion, the current status of private hospitals in China can be summarized as a large

quantity, small business scale, less efficient operation and lower income. The distinction between

private and public hospitals can also be seen from their respective hospital ratings: public

hospitals are mostly Grade III and Grade II hospitals – accounting for 93% and 82% of hospitals in

Public not-for-profit hospitals Private not-for-hospitals For-profit hospitals

FundingGovernment, military (under reform),

SOEs (under reform)Enterprises, individuals Enterprises, individuals

Tax policiesIncome tax exempted, value-added tax

exempted for medical services

Income tax exempted, value-added tax

exempted for medical services

Income tax, value-added tax of

medical servicies exempted for 3

years

Drug mark-upsAll drug mark-ups have been

prohibitedVoluntary abolishment Voluntary abolishment

Employee

management

Government employment

(事业编制, under reform)Corporate employment Corporate employment

Accounting

methodHospital accounting Hospital accounting Corporate accounting

Subsidies

Free land use

rights（无偿划拨用地）, government

subsidies accounted for 9% of total

revenue (2015)

Limited subsidies Hardly any subsidies

Reimbursement

Most are qualified for basic medical

insurance reimbursement

(医保定点医疗机构）

Most are qualified for basic medical

insurance reimbursement

Many are not qualified for basic

medical insurance reimbursement

Price

ManagementControled by the government

Voluntary participation (but subject

to government guildlines required by

basic medical insurance

reimbursement)

Voluntary participation (but subject

to government guildlines required by

basic medical insurance

reimbursement)

Dividend policy

No dividends; net profit can only be re-

invested in equipment purchasing,

technology introduction and new

medical services

No dividends; net profit can only be re-

invested in equipment purchasing,

technology introduction and new

medical services

Dividend payouts allowed

Oct 16, 2017

11

Sector report

the two grades. In contrast, private hospitals are mostly Grade I and ungraded hospitals,

accounting for 63% and 81% of hospitals in the two grades. In fact, the rating of hospitals already

considers the function, facilities, technical strength and other qualifications as the criteria for

assessment. Hospitals with higher ratings are deemed more trustworthy among patients, given

that bed utilization rates for Grade III, Grade II and Grade I hospitals were 99%, 87% and 62%

respectively in 2016.

Figure 14: Hospital ratings Figure 15: Performance of private vs. public hospitals


Acquisition vs. PPP

There are mainly five business models for private capital to participate in hospital operation: the

building of a new hospital, the acquisition of private hospitals, the acquisition and restructuring of

public hospitals, not-for-profit hospital management (e.g. the IOT model), and a joint venture (e.g.

the BOT model). The last two are the operation of hospitals via the PPP model.

1) Building a new hospital Building new hospitals requires a long process of application,

approval and construction with relatively high upfront investment and a long payback period. As

private hospitals are less attractive for medical professionals as well as patients, there is

considerable operational risk. However, investors have absolute control over the hospitals under

this model. Guangdong Kanghua Hospital is the first and the largest Grade III Class A private

hospital in China which was established by Dongguan Kanghua Group with an investment of

Rmb2.6bn. The bed utilization rate at Kanghua Hospital was 83.2% in 2016, significantly lower

than the average for of Grade III Class A hospitals (99%).

2) Acquisition of private hospitals Through the acquisition of private hospitals, the original

medical personnel and medical equipment can be retained; therefore it is possible to improve

operational efficiency within a short period of time through equipment upgrade, medical unit

upgrades and management enhancement. However, there might be issues carried over from the

acquired hospital such as existing debt or legal disputes. Furthermore, it also requires the original

medical team to accept the new operating model to ensure better operating results. A number of

hospitals acquired by Far East Horizon are regional top three private hospitals.

3) Acquisition and restructuring of public hospitals The acquisition and restructuring of public

hospitals require a complex application and approval process and strong support from the local

government, all of which involves considerable uncertainty. In addition, the restructured hospital

has to undertake the debt of the original hospital, replace retired and redundant staff, handle the

employee status transition from government- to corporate-employed (事业编制转公司聘用), deal

with asset assessment as well as moral hazards and accept pressure from the public. That said,

0 2000 4000 6000 8000 10000

Grade Ⅲ

Grade Ⅱ

Grade Ⅰ

Ungraded

Private hospitals Public hospitals

(2016 figures)Public

hospitals

Private

hospitals

Private as %

of public

No. of hospitals 12708 16432 129%

Beds (m) 4.46 1.23 28%

Medical technicians (m) 4.491 0.924 21%

Patients (100m) 28.50 4.20 15%

Inpatients (m) 148 28 19%

Daily visits per doctor 7.60 5.50 72%

Daily inpatients per doctor 2.6 2.2 85%

Bed utilization rate 91% 63% 69%

Average length of stay (days) 9.6 8.6 90%

Revenue (Rmb bn, 2015) 2679 275 10%

Revenue per hospital (Rmb m, 2015) 205 19 9%

Financial subsidies (Rmb bn, 2015) 430 2.22 1%

Oct 16, 2017

12

Sector report

mature public hospitals’ solid medical resources and reputations should reduce operational

difficulties after restructuring. The larger a hospital, the more difficult restructuring can be. As a

result, county hospitals with operational issues are the most desirable targets for private capital

investment. For instance, CR Phoenix successfully participated in the restructuring of Jiangong

Hospital and became the latter’s controlling shareholder. At present, there are more than 3,000

SOE-affiliated hospitals under reform, providing a large amount of opportunities for public hospital

acquisition and restructuring which is supported by government policies.

4) Not-for-profit hospital management (PPP) Not-for-profit hospital management through the

PPP model typically meets with fewer difficulties from the government and the public as the

ownership of the hospital still lies in the public sector, meaning the not-for-profit nature remains

unchanged. The public hospital's medical personnel and reputation can be retained, which

guarantees the smooth running of the hospital. However, investors’ control over business

operation and management is weakened. In addition, not-for-profit hospitals cannot pay dividends,

which means investors can only share returns from management fees and supply chain

businesses. CR Phoenix has several hospitals which have adopted the IOT model (investment,

operation, transfer). At the end of the operation period, the operator needs to return the hospital

operation right to the public sector.

5) A joint venture (PPP) Many Grade III Class A public hospitals need to expand under the

current operating environment, but have limited financial support from local governments.

Therefore, the PPP model is brought into the picture under which joint ventures are formed to

construct new hospitals using private capital. The co-establishment of the International Land Port

Hospital by Universal Medical and the First Affiliated Hospital of Xi’an Jiaotong University servers

as an example. Private capital can obtain the operation right and generate management fees

through this model and can also participate in the supply chain management for both the old and

new hospitals. Both the public ownership and not-for-profit nature of the old and new hospitals

remain unchanged, but Grade III Class A public hospitals typically have dominance in

management while private-sector investors have relatively weak control over hospital operation.

Oct 16, 2017

13

Sector report

Figure 16: Comparison of different models of private capital participating in hospital operation


Hospital operation: listed companies’ choices

Which model to follow when participating in hospital operation depends on a company’s

shareholder background, specialties and overall strategy. We have looked at several

representative HK-listed companies with different hospital asset allocations, presenting a

comparison below.

Basic information about their hospitals

1) Guangdong Kanghua Healthcare (3689 HK)

The first and largest Grade III Class A private hospital in China: Kanghua Hospital.

Depends on major shareholder’s solid government relationships in Dongguan.

Stable and mature business model but with limited expansion potential.

2) Harmonicare Medical (1509 HK)

Large-scale operator of private for-profit hospitals specialized in maternity.

Invested by private capital but with insurance company participation.

Compared with general hospitals, it is easier for specialized hospitals to establish new branches

and replicate their business models.

3) Far East Horizon (3360.hk)

All hospitals are private for-profit hospitals.

Has expanded rapidly through hospital acquisition.

While other large-scale hospital operators in China typically focus on densely populated first- to

third-tier cities, most of Far East Horizon’s acquired hospitals are located in county-level cities.

Given that most of the company’s hospitals are general hospitals, per-hospital investment is

relatively small.

New hospital Acquisition of private

hospital

Acquisition and

restructring of public

hospital

Not-for-profit hospital

management (PPP)Joint venture (PPP)

Obstables

Relatively long

application and approval

process

Depends on the will of

aquired hospital;

relatively easy

Long negotiation period,

strong support from local

government, difficult

Need to maintain a good

relationship with local

government

Need to maintain good

relationships with local

government and

partnering hospital

Upfront

investmentRelatively high Relatively high Medium Medium Relatively high

Medical and

personnel

resources

Private hospitals are less

attractive to doctors

Original stuff, less

attractive to doctors

Original stuff, possible

objections from

employees

Original stuffSupport from partnering

hospital

Developmental

period

Relatively long

construction period; time

required for building

reputation

Reputation depends on

original hospital; private

hospitals have weaker

reputation

Relatively short Relatively shortRequires time for

construction

Investors' controlInvestors have absolute

control

Investors have absolute

control

Investors have absolute

control

Investors have certain

controlRelatively weak control

Difficulty of

operation

Relatively easy, but

private hospitals are less

attractive to patients

Relatively easy, but

private hospitals are less

attractive to patients

Need to deal with issues of

acquired hospital (e.g.

placement of retired and

redundant staff)

Need to deal with issues of

acquired hospital (e.g.

placement of retired and

redundant staff)

Easy

Example Kanghua Healthcare Far East HorizonFar East Horizon/ CR

PhoenixCR Phoenix Universal Medical

Income source Profit sharing Profit sharing Profit sharing Revenue from operation

and supply chain

Revenue from operation

and supply chain

Oct 16, 2017

14

Sector report

4) CR Phoenix (1515 HK)

Relies on its major shareholder’s background: central SOE with healthcare as core business.

Rapid expansion through M&A (Phoenix Medical and CR Healthcare merged in 2016).

Mainly involved in public hospital management and supply chain business, with general

management services (Jiagong Hospital consolidation), management fees and revenue from

supply chain business as main sources of income.

5) Universal Medical (2666 HK)

Hospital operation business just started but shows strong expansion momentum.

Similar major shareholder background to CR Phoenix’s.

Participating in hospital operation through PPP with cooperation with strong Grade III Class A

public hospitals and actively looking for opportunities in the reform of SOE-affiliated hospitals.

Figure 17: Guangdong Kanghua Healthcare Figure 18: Harmonicare Medical

Sources: Company data, GF Securities (Hong Kong)

Major shareholders

Dongguan Kanghua Investment Group (59.06%): company owned

by individual(s)

No. of hospitals under management

2 hospitals

Nature of hospitals under management

private for-profit general hospitals

Ratings of hospitals under management

1 Grade III Class A hospital: Kanghua Hospital

1 ungraded hospital: Renkang Hospital (may apply for Grade II

hospital rating by end-2017)

Geographical distribution

All located in Dongguan, Guangdong province

How has company become involved in hospital operation?

All invested by shareholders and self-built

Major shareholders

Homecare International Investment Limited (28.78%): company

owned by individual(s)

Taikang Group (16.07%): insurance company


12 hospitals as of end-1H17


Private for-profit specialized hospitals

Specialized in maternity


4 Grade II hospitals and others ungraded


Tier 1-3 cities with large popultaion

Top 5 hospitals located in Beijing, Fuzhou, Chongqing, Shenzhen

and Guangzhou


2 hospitals through acquisition

The others invested by the company and self-built

Oct 16, 2017

15

Sector report

Figure 19: Far East Horizon Figure 20: CR Phoenix


Figure 21: Universal Medical


Operational data of key hospitals

The revenue of a hospital is affected by a number of factors including its technology, hospital

rating, location and whether it is a public or private hospital. Below are some of the key facts we

have observed about the operational data of the key hospitals listed above:

In terms of spending per visit (calculated as revenue / [inpatient visits + outpatient visits]), the

First Affiliated Hospital, which is cooperating with Universal Medical and which has strong

medical resources in western China, ranks at the top with a spending of Rmb1,570/visit;

Harmonicare Medical which specializes in maternity also performs well with Rmb1,360/visit.

Following these two are Kanghua Healthcare with Rmb815/visit, CR Phoenix with Rmb 807/visit

and Far East Horizon with Rmb 428/visit.

In terms of average revenue per thousand beds (calculated as revenue*1,000/beds in

operation), the First Affiliated Hospital also comes first with Rmb1,570/thousand beds, followed

Major shareholders

Sinochem (23.29%): central SOE but does not focus on healthcare

as core business


26 as of end-1H17


Private for-profit hospitals; general hospitals for majority


3 Grade Ⅲ hospitals

13 Grade Ⅱhospitals

10 Grade Ⅰand ungraded hospitals


Four major areas + most in county-level cities


1 through public hospital acqsuition and restructuring;

25 through priviate hospital acquisition

Major shareholders

China Recource Group (36%): central SOE with healtthcare as core

business


108 hospitals as of end-1H17 (under investment, management

and

contractual arrangement)


3 private for-profit hospitals

105 not-for-profit hospiptals


7 Grade Ⅲ hospitals

14 Grade Ⅱhospitals

29 Grade Ⅰ hospitals

58 community clinics


First- and second-tier cities + prefecture-level cities

Beijing, Shenzhen, Wuhan, Kunming, Baoding, Xuzhou, Huaibei

etc.


1 through public hospital acqsuition and restructuring (Jiangong

Hospital);

57 through IOT of PPP model

48 hospitals with sponsorship rights

Major shareholders

China General Technology (37.73%): central SOE with healtthcare

as core business


1 under construction as of end 1H17


Public hospital


Grade Ⅲ Class A hospital


Xi'an, and a similar project in negotiation located in Handan


Through PPP model

Oct 16, 2017

16

Sector report

by Harmonicare Medical with Rmb627/thousand beds, Kanghua Healthcare with

Rmb423/thousand beds, CR Phoenix with Rmb360/thousand beds, and Far East Horizon with

Rmb165/thousand beds.

The location of a hospital has a significant impact on its revenue, based on the performance of

hospitals operated by Harmonicare Medical.

Figure 22: Guangdong Kanghua Healthcare


Figure 23: Harmonicare Medical (top 5 and overall)


Figure 24: CR Phoenix


Figure 25: Far East Horizon (acquired hospitals) Figure 26: Universal Medical


Kanghua Hospital Renkang Hospital Overall (1H17)

Registered beds 2,006 480 2,460

Operational beds 1076 424 1438

Outpatient visits 544,169 174,583 718,752

Average spending per

visit (outpatients)351 230 321

Inpatients 21,703 6,505 28,208

Average spending per

visit (inpatients)14,761 8,904 13,410

Average length of stay 7.9 7.4 7.80

Overall bed util ization 84.00%

Beijing HarMoniCare

Hospital

Fuzhou Modern

Woman Hospital

Chongqing Modern

Woman Hospital

Shenzhen

HarMoniCare Hospital

Guangzhou Woman

HospitalOverall

Beds 72 60 120 90 50942

(649 in operation)

Revenue (Rmb m) 93 45 45 39 38 407

Gross profit (Rmb m) 44 23 22 16 18 183

Outpatient visits 37,630 44,812 33,364 14,481 36,453 288,205

Inpatient visits 1,264 1,495 1,391 523 1,584 11,000

Average spending

per visit (Rmb)2,381 971 1,287 2,613 997 1,360

Hospitals in Beijing Hospitals outside Beijing

Beds in operation 3,895 6,102

Revenue (Rmb m) 1671 1386

Outpatient visits 2,327,797 1,338,082

Average spending per visit (outpatients) 422 285

Inpatients 37,583 85,197

Average spending per visit (inpatients) 17,208 11,290

Average length of stay 16.3 11.0

Overall bed util ization 87.80% 85.00%

Overall

Beds 10000

Beds in operation 5600

Hospital revenue (Rmb m) 925

Gross profit (Rmb m) 281

Net profit (Rmb m) 58

Annual outpatient visits 2,000,000+

Annual inpatient visits 160,000+

Annual surgeries 40,000+

Xi'an First Affliated Hospital

Beds 2531

Revenue (Rmb m) 4000

Outpatient visits 2,430,000

Inpatients 118,000

Annual surgeries 6500

Average length of stay 8.38

Oct 16, 2017

17

Sector report

Comparison of key financial data for hospital operators

Large-scale hospital operators (thanks to the economies of scale created the large number of

hospitals operated) have shown a strong ability to improve hospital gross profit margins through

group purchasing: Harmonicare Medical has a 45% gross profit margin and CR Phoenix a 37%

gross profit margin. Far East Horizon has also indicated that the gross profit margin of its hospitals

could improve to 40%-45% within one year of acquisition.

However, due to the need to make continued investment during expansion and business model

experiments, large-scale hospital operators also have low net profit margins at present. The

Rmb2m net profit for CR Phoenix as shown in the table below was non-recurring net profit in

1H17.

Figure 27: Key financial data comparison

Sources: Company data, GF Securities (Hong Kong) Notes: Market cap date updated to Oct 12, 2017. Financial data are as of end-1H17 except in the case of the First Affiliated Hospital (2016). The revenue, gross profit and net profit for Guangdong Kanghua and Harmonicare Medical are all generated from hospital operation. The revenue, gross profit and net profit for CR Phoenix represent data for the entire company. The financial data for Far East Horizon are for all hospitals acquired by the company without pro-rata calculations for financial book consolidation.

(Rmb m)Mkt cap

(HK$ 100m)

Revenue

(hospital)

Gross

profit

Gross

margin

Net

profit

Net

margin

3689 HK Guangdong Kanghua 36.0 635 161 25% 72 11%

1509 HK Harmonicare Medical 23.1 407 183 45% 11 3%

1515 HK CR Phoenix 129.7 863 323 37% 2 0%

3360 HK Far East Horizon 301.1 925 281 30% 58 6%

2666 HKFirst Affil iated Hospital

(Universal Medical)- 400 na na 42 12%

Oct 16, 2017

18

Sector report

Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months

Company ratings

Buy Stock expected to outperform benchmark by more than 15%

Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15%

Hold Expected stock relative performance ranges between -5% and 5%

Underperform Stock expected to underperform benchmark by more than 5%

Sector ratings

Positive Sector expected to outperform benchmark by more than 10%

Neutral Expected sector relative performance ranges between -10% and 10%

Cautious Sector expected to underperform benchmark by more than 10%

Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report.

Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited (“GF Securities (Hong Kong)”) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies do not have any investment banking relationship with the companies mentioned in this research report in the past 12 months. (3) Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold any shares of the securities mentioned in this report.

Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or recommendation for investment in, any securities. The research report is intended solely for use of the clients of GF Securities (Hong Kong). The securities mentioned in the research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of the research reports to any person in any jurisdiction that the circulation or distribution of such research report is unlawful. No representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness of the information contained in the research report. GF Securities (Hong Kong) accepts no liability for all loss arising from the use of the materials presented in the research report, unless is excluded by applicable laws or regulations. Please be aware of the fact that investments involve risks and the price of securities may be fluctuated and therefore return may be varied, past results do not guarantee future performance. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. The report is not to be taken in substitution for the exercise of judgment by respective recipients of the report, where necessary, recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in the research report. The points of view, opinions and analytical methods adopted in the research report are solely expressed by the analysts but not that of GF Securities (Hong Kong) or its affiliates. The information, opinions and forecasts presented in the research report are the current opinions of the analysts as of the date appearing on this material only which may subject to change at any time without notice. The salesperson, dealer or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentary or dealing strategy either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have different investment decision which may be contrary to the opinions expressed in the research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in securities mentioned in the research report. Recipients should be aware of relevant disclosure of interest (if any) when reading the report. Copyright © GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. © GF Securities (Hong Kong) Brokerage Limited. All rights reserved. 29-30/F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: +852 3719 1111 Fax: +852 2907 6176 Website: http://www.gfgroup.com.hk

http://www.gfgroup.com.hk/

leasing business diversification - gfgroup.com.hk...2017/10/16 · leasing business diversification...

Documents