Focusing on Private Hospitals, JD Capital Supports “Healthy China 2030”
Abstract: From a shareholder to a controller of substantive medical institutions, JD Capital’s medical health investment team makes its bit to the course of “Healthy China 2030” in a standard, procedural and systematic way.
Recently, big deals emerged again in the field of non-public medical care. With CR Healthcare formally taking over Phoenix Healthcare Group, the two giants formed into the CR Phoenix Healthcare, China’s largest industrial platform of medical services, with over 100 medical institutions and 11,900 available sickbeds.
Distinct from the “winter of capital” proliferating in the profession, investment in the field of medical service formed a special scene. In particular, private medical care enterprises become the apple in the eyes of many PE funds and listed companies. Apart from CR Healthcare, gold diggers also include such listed companies in the medical industry as Hengkang Medical Group and Xinbang Pharmaceutical, who purchase or manage public hospitals in trust; and such industrial investor as CITIC Medical & Health Group, Fosun Pharma and JD Capital, who conduct equity investment in hospitals; as well as those who cooperate with the government to invest in newly-built hospitals under the PPP mode.
“Due to its long development period and strict restrictions, the field of medical care had long been undervalued by mainstream businesses. However, there are never a shortage of forerunners,” remarked by JD Capital in an interview. From a shareholder to a controller of substantive medical institutions, JD Capital’s medical health investment team makes its bit to the course of “Healthy China 2030” in a standard, procedural and systematic way.
According to statistics, JD Capital has invested in a total of more than 50 enterprises in the field of healthcare, including chemical pharmacy, Chinese patent medicine, medical apparatus, medical service (hospitals), biological pharmacy and other segments. Specifically, JD Capital has invested in 17 second-class hospitals or above from 8 private hospital groups engaged in medical services, which signifies that JD Capital has fundamentally finished its deployment in China’s non-public medical industry.
Commencement of a trillion-size industrial gala
In October, the CPC Central Committee and State Council issued the “Healthy China 2030” blueprint. The blueprint specifically mentioned that, to deepen opening up of health industry, it is necessary to formulate favorable policies for the development of the industry, guide financial institutions to enhance financial support with credit and bonds, and develop the health industry into the mainstay of the national economy.
From the viewpoint of JD Capital, as the action plan for promoting the construction of a healthy nation in the coming 15 years, “Healthy China 2030” is no more merely an initiative of the National Health and Family Planning Commission (NHFPC), but an important strategy of the nation. “For the capital market, this signifies the commencement of a trillion-size gala for industrial investment.”
With favorable policies issued under the initiative of “Healthy China”, quite a number of listed companies have already started their business layout. According to incomplete statistics, there have been more than a hundred listed companies that have set foot in the field of medicine and healthcare, each with different purposes: while some look for complete transformation and improvement of profitability, some aim to increase company value through transition.
Under this background, over its years of investment in private hospitals, JD Capital has come up with its own “methodology” for hospital investment, one that different from internet companies who more on “track” than on “players” in their investment.
Selecting “regional bellwethers” in the field of medical service
Over the past four years, JD Capital has studied and contacted a large number of domestic and overseas private medical institutions. In the process of judging and calculating the investment bets, JD Capital believes that the most remarkable difference between medical investment and pharmaceutical investment is that the latter produces standardized drugs sold country-wide or even worldwide, with no regional restrictions; whereas the product of medical institutions are human-oriented services restricted by region and other factors.
Therefore, in China, to invest in private hospitals, the first thing for social capital is to find industrial “bellwethers” in the “region”.
“Restricted by timing, cost and medical insurance reimbursement policies, the ways patients seek medical advice are highly regional. Competitions among hospitals are mainly restricted within the region. Simply put, leading hospitals, as bellwether in the region (or in a specific field), are people’s first choice, thus can hardly be defeated,” explained by JD Capital’s medical health investment team.
Moreover, JD Capital believes that due to the complexity of causes of diseases, variety of diagnosis and treatment approaches, patients’ fear of diseases, and high risk of medical technologies, patients tend to choose the best brand in the first place. Unless major changes take place, systematic changes of public and private enterprises, or significant capital increase, it will not be easy for the hospitals’ competition pattern to change. Different from the case of other industries, competitive hospitals will long retain its advantages.
Second, from a systematic view, for public hospitals are all non-profit ones, to introduce social capital, they must reorganize into for-profit hospitals in the first place; and for private hospitals that are mostly for-profit ones, the reorganization process is both easier and shorter. “A for-profit hospital is an independent business entity qualified for investment and capital operation (listing, going public, etc.). With a flexible system and mechanism, private enterprises find it easier to conduct subsequent capital operations,” summarized by JD Capital.
In 2016, JD Capital provided additional investment for Pizhou Dongda Hospital, its former investee, and turned from its shareholder into controller. Founded in 2012, the hospital is situated in Xuzhou, Jiangsu Province. Judged according to JD Capital’s criteria for “regional bellwethers”, it is a private hospital up to the standard of a tertiary hospital, and is by now the largest comprehensive private hospital in Xuzhou.
“We’ve invested in Dongda Hospital by holding shares in 2014 and assisted in its Phase I construction. By 2015, the number of outpatients and discharged patients of the hospital reached 200,000 and 18,000 respectively,” according to JD Capital. With the improvement of its professionalism, there has been a growing need in high-level talents and equipment. With the support of JD Capital, Dongda Hospital plans to launch its Phase II construction. “It is not only part of our strategic deployment in the field of healthcare, but also the starting of our transition from share participation to holding investment.”
Besides controlling Pizhou Dongda Hospital, in 2016, JD Capital followed up its investment in Zhengzhou Daqiao Hospital, and takes it as the basis for industrial integration of private hospitals in Henan Province. So far, acquisitions have been completed for a number of proper objects.
Growth decides future, and specialty equals advantage
“It is our firm belief that investment is all about the future.”
For JD Capital, the essence of a “promising” “regional bellwether” lies in its “high growth potential”.
The medical health investment team of JD Capital proposes the following criteria for the growth potential of an enterprise.
First, market space. “The service industry depends on population. The region should be competitively populated. For example, a county with over 1 million people would be a good market, and a prefecture-level city with over 5 million residents in total or over 1 million in the urban area would also be nice,” said the medical health investment team leader.
Second, competition pattern. According to JD Capital, “For a private leading hospital, it needs constant improvement in hardware environment, medical equipment, professional personnel and medical service, so as to keep its position as a bellwether and excel among local public general hospitals. Its future lies in the ability to attract patients with first-class environment, equipment, medical technologies and services.”
Third, external expansion ability. It is inevitable that a hospital hits a growth bottleneck. But a good management team must have accumulated rich experiences and resources along the way. Therefore, they should be able to expand the hospital at a certain point. The JD Capital medical health investment team believes that “such a hospital would be able to set up chains or branches in various regions, thus opening the gateway to high growth.”
Jiuqiao Medical Investment Co., Ltd. (Jiuqiao Medical) is a typical example of high-growth “regional bellwether” discovered and invested by JD Capital.
In 2014, Jiuqiao Medical was established jointly by JD Capital and the former shareholders of Zhengzhou Daqiao Hospital. The latter then became a wholly-owned subsidiary of Jiuqiao.
Located in the old town of Zhengzhou, Daqiao Hospital is a general hospital specialized in gynaecology and obstetrics. With an annual amount of 14,000-15,000 newborns, second only to Henan Maternal and Child Care Hospital, it is a leading obstetrical service provider. According to JD Capital, “The hospital has a rather capable management team. However, due to space limits, it’s hard for its headquarters to add new buildings. This constrains its growth.”
Having become a shareholder of Jiuqiao Medical, JD Capital used the hospital as a platform and purchased several quality private hospitals within as short as two years, including Zhenyuan Hospital in Luyi, Changcheng Hospital in Chongqing, and No. 9 Hospital in Luoyang, thus expanding Jiuqiao into a large-scale private hospital group.
Given that public hospitals still remain dominant in China, besides “high growth”, JD Capital also emphasized on the importance of the “advantage of specialty” to social capital accumulation.
Recently, JD Capital-invested Lunan Ophthalmic Hospital, the largest of its kind in Linyi, Shandong Province and the most specialized private hospital in the region, was granted as a Grade 3 Class A specialized hospital. “Compared with public hospitals, private ones in the region, after years of growth, could become bellwethers in a specialized area, or turn into general hospitals with one or several strong specialties,” according to JD Capital medical health investment team.
Post-investment management: one hospital, one strategy – await the blossom
Concerning health and safety, medical service exists as a rigid demand. As a typical anti-cyclical industry, it is subject to strict state regulation. Medical costs are under tight control of health insurance. Therefore, making high profit within a short term is out of the question.
According to JD Capital, upon the completion of the investment, the team will help improve the hospital’s overall value through four channels, namely the introduction of capital (increase investment), the introduction of mechanism (modern corporate governance mechanism), the introduction of knowledge (advanced medical resources) and capital operation (e.g. integrate peripheral hospitals and finance from the stock market).
“‘One hospital, one strategy’, or adjusting measures to local conditions, is our core post-investment management idea concluded from our investment practices, and also our strategy to increase the value of hospitals,” according to JD Capital medical health investment team. “Instead of seeking short-term profits and economic benefits, we will focus on long-term value investment. Just wait in patience for the flowers to blossom.”
To solve the problem of messy and nonstandard management in China’s private hospitals, JD Capital on one hand puts professional financial managers in place to standardize the operation of the hospital’s revenue and expenditures, and allows the market to determine negotiated prices and price raise of medicines; on the other, hire general hospital managers to eradicate such practices as irresponsible prescriptions and medical examinations, fake hospitalization and insurance fraud under the “negative list” principle.
Medical investment is an integral part of JD Capital’s investment strategy. For now, the company has established a niche fund for medical health. By investing in leading regional hospitals and integrating peripheral hospitals’ assets, JD Capital has been able to pour its quality medical resources, in an effort to build leading regional hospital groups.
“In the future, we will gather all resources and build a complete industry chain covering insurance, medical care and old-age care, in a way to improve people’s health in an all-round and full-cycle manner, and thus contribute to the course of ‘Healthy China 2030’.”