Cash-Strapped Concord Healthcare Plans to Raise Money Through HK Listing

Trapped by losses and insufficient cash flow, the China-based private medical oncology service provider applies to list on the Hong Kong stock exchange

Key Takeaways:

  • Concord has accumulated losses of 1.7 billion yuan in the past three years as its focus has been on expanding in tier-1 cities
  • With under 140 million yuan in cash and little hope of getting money from its parent, the company is eager to go public

By Molly Wen

Concord Healthcare Group Co. Ltd., the second largest player in the private hospital market in China, finally applied for a listing on the Hong Kong stock exchange on the last day of May. The loss making, cash-strapped company wants to raise money at a time when the reputation of private hospitals is growing in China and peers that have gone public in recent years have seen their share prices soar.

Private medical groups, such as as Jinxin Fertility (1951.HK), Topchoice Medical (600763.SH) and Aier Eye Hospital (300015.SZ), have benefited in recent years from the rising status of private hospitals, which were once considered unreliable in China because of instances of unauthorized fees and faulty prescriptions.

Concord Healthcare said CICC and Haitong would be joint sponsors of the offering but offered no further details. Concord offers oncology solutions through its own medical institutions and cloud platform solutions. It also offers network services to hospitals. The company currently owns two oncology hospitals, four clinics, an imaging diagnosis center and an internet hospital in Shanghai, Guangzhou and Datong in North China respectively.

Its plans to raise money seem to come at an opportune time. The market value of Aier Eye is approaching 200 billion yuan, and Hygeia Group (6078.HK), which listed in Hong Kong in 2020, saw its shares soar four times in value in a year.

While revenue more than tripled to 470.5 million yuan at the end of 2021, from 126.6 million yuan in 2019, losses have ballooned too. Net losses for 2021 were nearly 831.8 million yuan, up from 594.3 million yuan in 2020. Concord Healthcare recorded 50,622 outpatient visits and 778 inpatient visits last year.

Online medical services are showing better performance at Concord Healthcare, with more than 60% of total revenue coming from online services in 2019 and 2020. In 2021, online services brought in nearly 66% of total revenue. A surge in clients seeking medical care – from seven in 2020 to 44 in 2021 – has helped the revenue boom at Concord Healthcare. In addition, revenue from in-person care at hospitals is also increasing – rising 93% to 160 million yuan in 2021 – thanks to the opening of its Guangzhou hospital, a Shanghai general practice clinic and other facilities.

1.7-billion-yuan loss in three years

As a private medical company, Concord Healthcare put in a large initial investment to expand with no clear prospects of profit. From 2019 to 2021, net losses accumulated to 1.7 billion yuan.

Concord Healthcare was established in 2008, but its operations started in 2017 when it opened its first oncology hospital. Since then, Concord Healthcare has grown through acquisitions and the construction of medical facilities.

According to its filing, the company traded on China’s National Equities Exchange and Quotation (NEEQ) board in early 2016 after it was renamed Beijing Meizhong Jiahe Medical Hospital Management Co. Ltd. in 2015. It delisted in 2018.  In its filing, Concord Healthcare said that Shanghai Medstar is its largest owner with a 29.6% stake, followed by CICC Jiatai, with an 18.5% stake.

Managing hospitals that are cost-intensive has driven down gross margins at Concord Healthcare, from 25.8% in 2019 to negative 10% last year. Medical facilities have had the worst performance, with the gross margin falling from negative 47.5% in 2020 to negative 71.4% last year.

In its filing, the company said the main culprit for the gross operating loss was the opening of three medical facilities in 2021 with huge costs, such as employee welfare expenses, pharmaceutical supplies and other inventories, and leasing and maintenance.

According to the market research quoted in the prospectus, Concord Healthcare said it ranked No. 2 in China. At the same time, however, public medical facilities still make up 90% of China’s medical oncology market. Private facilities hold only 6.1% market share, making it hard to achieve scale effect in the private medical oncology sector.

Hygeia is one of few that has turned the tide through centralized and standardized management systems and strong operations, garnering a net profit of 453 million yuan last year, with a gross margin of 32.7%. Hygeia’s hospitals started operations within 17 months after construction and began making profits within three to nine months. In addition, most of Hygeia’s hospitals are in much smaller cities with lower operation costs. And that is not the case for Concord Healthcare.

By comparison, Concord Healthcare started construction on its hospital in Shanghai in 2017 and the facility will not be operational until 2024. This gap in tier-1 cities like Shanghai and Guangzhou, where most new players in the private healthcare industry are setting up operations, leads to mounting costs.

Little hope of support from parent

Concord Healthcare has attracted investors in the past, thanks to medical oncology’s growing popularity in the country. Before applying for its listing, it obtained 1.5 billion yuan in series A financing in 2018, 700 million yuan in series B funding in 2020 and 400 million yuan in series C financing in 2021, from investors such as CICC capital, CITIC Industrial Investment and Gopher Asset Management. Its valuation reached 6.9 billion yuan after the latest round of financing.

But there is no hope for Concord Healthcare becoming profitable in the short term. Most of the money from the last round of financing is spent. The company’s cash and cash equivalents totaled 136.1 million yuan at the end of 2021, a significant reduction from the 424.8 million yuan at the end of 2020. And it is unlikely to get financial support from New York-listed Concord Medical Services (CCM.US), its parent company, which is also struggling with falling stock prices after years of losses. The latest market cap of U.S. parent CCM was around $75 million.

Due to the overall sluggish performance of the pharmaceutical sector, current valuations of private oncology groups are not high. Hygeia and Inkon Life Technology (300143.SZ), a comprehensive tumor treatment solution service provider, have a price-to-sales (P/S) ratios of 10 times and 5 times respectively, averaging 7.5 times. Based on that, Concord Healthcare is valued about 3.5 billion yuan, half its valuation after its last round of financing.

It still remains to be seen whether Concord Healthcare will replicate the success of Hygeia or follow in the footsteps of its parent company, which has ended up disappointing investors.

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