Developing World Healthcare Blog

The China/US Healthcare Services Link Continues to Grow

We wrote about Shanda Group’s heightened interest in NYSE-listed Community Health Systems (CYH) in March (link: http://www.cherrystonehillcapmgt.com/blog2.asp?id=106). More recently, we have read articles about Shenzhen-listed Aier Eye Hospital’s (300015: Shenzhen) plans for the US market which build on the theme of growing China/US healthcare services ties. 

Aier Eye Hospital is the leading ophthalmology chain in China. The company operates 154 eye hospitals in China, performing 500,000 eye surgeries annually and controlling about 10% of the eye care market. The company is building 20 hospitals a month in China (mainly off-balance sheet) with a goal of having 1,000 eye hospitals in the next few years.

Expect More Headlines Starting Next Year 

The company entered US earlier this year through the acquisition of an eye surgery center in Nashville (headquarters to many healthcare services companies) operated by a US-trained physician who has advised and supported Aier for 15 years. The US management team is focused internally for now and plans to start expanding in 2018, most likely in small cities in Tennessee and surrounding states. The strategy involves growing primarily through acquisitions because the market is well developed. The company has a goal of operating 50 centers within five years.

 

Of particular interest to us is the sensible and realistic thinking behind the company’s expansion strategy as illustrated by the following quotes from the CEO of the US business: 

 

  •  “We don’t expect the U.S. operations to be as scalable as in China.” 
  •  “So far, Americans have mixed feelings about Chinese companies…………….” (Note: We hear similar comments from BD people for Chinese pharma companies based here). 
  • “… we need to do things the American way here in the U.S.” 

The mindset is encouraging because many companies expand internationally without appreciating differences in cultures and business practices. The US healthcare services market is particularly complex because of multiple reimbursement systems; differences in state regulations; and wide variations in competitive dynamics by local market. In addition, managing physicians requires a unique skill set. 

American Medical Expertise: An Export/Transfer Opportunity

Part of Aier’s strategy is to transfer clinical best practices back to China, also an encouraging sign. They are not alone in this aspiration. Fuzhou-based Tahoe Investment Group Co., Ltd. agreed in April to take NASDAQ-listed Alliance HealthCare Services (AIQ) private. Alliance provides outsourced radiology, oncology and interventional services. One of Tahoe’s top priorities is to expand healthcare services in mainland China. Change may not come quickly, but the direction of change should generate benefits in both countries.  

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So, What About the Stock?

We do not make investment recommendations on this blog, but can share some statistics. Aier Eye Hospital’s shares are listed on the Shenzhen Exchange (price 22.70RMB). The market cap is US$5 billion. The shares had a nice run from 6 RMB to 26 RMB during 2012-2015, and have been range-bound from there.  The trailing P/E ratio is 57x (not a typo).

Links to articles here:

Caixin: http://www.caixinglobal.com/2017-06-17/101102595.html

The Tennessean: http://www.tennessean.com/story/money/2017/02/10/dr-ming-wang-lead-chinese-eye-hospital-chains-us-expansion/96784074/