Lu DaoPei Medical Seeks IPO Cash for Pricey Hospital Plans

Lu DaoPei Medical, named after an expert in stem cell transplants who founded the company, has filed to list on the Hong Kong Stock Exchange  

Key Takeaways:

  • The group’s three hospitals in the state medical insurance program have seen a steady rise in revenue and patient numbers in recent years, but have still accumulated more than 1 billion yuan in losses
  • The company faces hefty costs from plans to open a new hospital in Shanghai and to relocate its flagship hospital in Hebei province, hence the need for IPO funds

By Emily Chan

A chain of hospitals specializing in stem cell transplants has filed the first IPO application of the year on the Hong Kong Stock Exchange, banking on the clinical credentials of its founder Lu Daopei to attract funds for expansion.

The brains behind Lu DaoPei Medical Group Holding Ltd. has been active in hematology research since 1957. Lu helped to pioneer bone marrow transplants in China and developed treatments for types of blood cancer using traditional Chinese medicine. He was the first researcher to prove that arsenic sulfide, a compound extracted from the Chinese herbal medicine Xiong Huang, could treat certain forms of leukemia. He was also instrumental in setting up China’s first public stem cell bank in Beijing in 1996 using umbilical cord blood.

The hematologist, who holds the prestigious title of academician from the Chinese Academy of Engineering, founded Lu DaoPei Medical as a private firm in 2012. The first flagship facility, Hebei Yanda LDP Hospital, opened in Hebei province in 2015, followed by a further two hospitals, Beijing Yizhuang LDP Hospital and Beijing Shunyi LDP Hospital, designed to compete mainly with large public general hospitals.

The medical group is a leading Chinese provider of hematopoietic stem cell transplants, using tissue from bone marrow or blood to treat cancers or immune disorders.

A preliminary prospectus uploaded on Jan. 3 shows that as of September last year, Lu DaoPei Medical had carried out 7,489 hematopoietic stem cell transplants, of which 99% involved donor stem cells and 71% were from semi-compatible cells, typically from a close family member.

The company ranks second in the number of transplants out of 1,040 hematopoietic stem cell surgeries in China in 2021, according to data in a Frost & Sullivan report cited in the prospectus. In financial terms Lu DaoPei Medical was China’s market leader in hematology healthcare, with 1.37 billion yuan ($201 million) in revenue in 2021.

Lu DaoPei Medical divides its business into general hospital services, including inpatient and outpatient care, and hematology testing for hospitals and laboratories. Between 2020 and 2021, the number of hematopoietic stem cell transplant cases rose by 19.9%, while inpatient bed days increased 18.5% and outpatient visits were up 11.1%. The figures continued to climb in the first nine months of 2022, when transplants jumped 29.3%, inpatient bed days rose 21.7% and outpatient visits were 42.9% higher than the same period a year earlier.

Huge losses

Revenue has also grown as the hospital network expanded and the two Beijing hospitals gained entry to the subsidized state medical insurance program. Revenue rose 18% to 1.37 billion yuan in 2021, year on year, and jumped 25.5% to 1.24 billion yuan in the first nine months of last year.

But net losses widened over the same period, more than tripling from 122 million yuan in 2020 to 408 million yuan in 2021, and increasing 52% to 512 million yuan in the first nine months of last year. The cumulative loss has exceeded 1 billion yuan in less than three years, which the company attributed to book-value losses on financial instruments issued to investors.

The prospectus says Lu DaoPei Medical incurred a book loss of 910 million yuan from the issuance of financial instruments to investors. But that aside, the group was still in the red on an operating basis, with losses of 100 million yuan in 2021 and 4.02 million yuan in the first nine months of 2022, after a profit of 61.87 million yuan in 2020.

So, what is causing the flow of red ink? The gross margin figures can provide a clue.

The group’s gross profit in 2020 was 240 million yuan, dipping to 167 million yuan in 2021 and coming in at 188 million yuan in the first nine months of 2022. That translates to gross margins of 20.7%, 12.2% and 15.1%.

When analyzed by business segment, the gross margin of hematology testing services, which have contributed about 17% of revenues in recent years, was around 50%. But the gross margin of general hospital services, accounting for more than 82% of revenue, has dropped sharply from 14% in 2020 to 4.6% in 2021, although it recovered somewhat to 8.1% in the first three quarters of last year.

Over the past three years, only the flagship hospital in Hebei registered a bed occupancy rate above 100% and maintained a gross margin of more than 20%, contributing 66.7% of total revenue in the first nine months of 2022. By contrast, the two Beijing hospitals have been mostly mired in gross losses, ascribed by the company to the time needed for new hospitals to build up their utilization rates.

But is that the full picture? Although the two hospitals have only been operating for a short period, patient visits have been climbing since the facilities qualified for medical insurance coverage. Yet their bed occupancy rate is still relatively low, leaving the hospitals with gross losses.

Collaboration with public hospitals

Being a designated medical insurance hospital can be a mixed blessing. Business may grow quickly as a result, but the hospital must stick to strict pricing guidelines for services, drugs and other medical products, limiting profitability.

Lu DaoPei Medical certainly has no problem with demand. As of 2021, around 21.7 million patients in China were diagnosed with hematologic disorders. But of about 20,350 Chinese hospitals that can provide hematologic treatment only 21 are specialized hospitals. In addition, the medical group’s revenue prospects look quite promising, as it partners with other hospitals to boost efficiency.

Since 2021, the company’s Beijing Shunyi LDP Hospital has been cooperating on ward use with the hematology department of Peking University People’s Hospital, to compete with large public hospitals that are seeking out collaboration opportunities. Under the arrangement, 327 hematopoietic stem cell transplants were performed through September 2022.

However, it is worth noting that two giant and costly projects are underway. One is the company’s new hospital in Shanghai, which is expected to come on stream this year, requiring a significant investment. Another is the expansion and relocation of the flagship hospital in Hebei, which is targeted for completion by 2025 at a cost of at least 1.54 billion yuan. Undoubtedly, the plans will put pressure on liquidity and profitability, which explains the company’s decision to seek IPO funds.

Lu DaoPei Medical has conducted three rounds of equity financing since 2014, bumping up its valuation from 259 million yuan in 2014 to 4.95 billion yuan in 2020. In the absence of recent profits, investors can use the price-to-sales (P/S) ratios of peer companies as a valuation benchmark. Honliv Healthcare (9906.HK) has a P/S ratio of 1.9 times while Chimin Health Management (603222.SH) comes in at 5.2 times. Combining the average ratio of 3.55 times with annualized revenue of about 1.65 billion yuan, extrapolated from nine-month data, the resulting valuation is 5.9 billion yuan, about 20% higher than three years ago.

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