[JD Says] Choosing Regional Leaders: JD Wisdom for Investment in Private Medical Institutions
2016-07-27
[JD Says] Focusing on industrial investment, witnessing market development. With the power of capital, JD shares the insights and experiences with Chinese enterprises on the way.
[Sharer] JD Capital investment team for health industry funds: The team includes 3 medical doctors and over ten professional masters in finance, economics, Chinese medicine and pharmacy. Deeply engaged in medicine and medical care, the team is highly experienced in private hospital investment, strategic planning, operational management and capital operation of medical institutions, with a focus on industrial asset securitization and investment opportunities in quality private medical institutions.
During the past 30 years, China’s medical industry has been dominated by public hospitals and measured by sickbed numbers. However, changes in the population structure have driven the increase in the endogenous demand for medical services. The upgrading of consumption structure led to the growth in midrange and high-end medical demands and improvement in the medical insurance system, thus triggering the surge in requirement for basic medical services.
Hospitals, as the most important entity providing medical services, became the focus of capital. Be it in developed markets or in emerging ones, investors are more than interested in the medical care industry.
The 1980s first witnessed the participation of social capital in the field of medical care in China. Since the new medical reform in 2009, social capital entered such field at a faster pace, which tremendously changed the situation of medical institutions. According to the National Health and Family Planning Commission, by the end of 2015, there had been 14,500 private hospitals in China, representing half of Chinese hospitals.
From JD Capital’s view, the medical service industry is weakly periodic and less affected by the macro economy, with relatively stable development. Once capital is invested into quality institutions and faces relatively favorable competitive environment, the asset shall also stand stronger against periodicity.
So far, China’s total medical care and health expenditure has exceeded RMB 4 trillion; in contrast, the overall market value of domestic listed medical companies and medical sector of listed companies is only about RMB 100 billion. On this account, the industry has a huge prospect of securitization.
Finding industrial leaders based on regions
JD Capital has always believed that investments stake on the future.
By JD Capital’s definition, the prospect of a medical institution is first demonstrated by its size. For instance, if a medical institution reaches an income of RMB 100 million, cures 10,000 patients, provides outpatient service for 100,000 people, with a high-growth and tremendous market space and excellent teams, then it deserves a “promising” medical institution.
From 2012 to 2015, JD Capital studied and contacted large amounts of domestic and overseas private medical institutions. Besides, over the past year, the JD Capital investment team for the health industry fund visited and studied hundreds of domestic and overseas private hospitals. While successfully investing in many quality medical institutions, JD Capital also found its way for the investment of private hospitals.
In terms of making judgement and calculations for the investment target, JD Capital believes that the prominent difference between medical investment and pharmaceutical investment lies in that pharmaceutical enterprises produce medicine, which is standardized and free from regional restrictions; whereas medical institutions provide service, which is human-oriented and constrained by region and other factors.
Therefore, investment shall first be based on “regions”, so as to find industrial “leaders”.
[Key words] Regional leaders: the most preferred medical institution in a certain region.
Regional operation: Due to restrictions in time, cost and medical insurance policies, the patients’ medical needs are distinctively regional. A clear division of administrative regions and the reasonable accessibility have set the number of potential clients. The competition amongst hospitals is largely regional.
Brand priority: Due to the complexity of disease development, variety of treatment and diagnostic methods, patients’ fear of disease and high risk of medical techniques, patients “prioritize” hospitals with the best brand reputation.
Pattern stability: Except for major alterations (e.g. systematic transition from public to private, or remarkable increase in capital strength), the competitive pattern within a region shall hardly change. Different from other industries, strength and weakness largely persist in the medical care industry.
At present, the JD Capital investment team for the health industry fund visits three to four first-class private medical institutions on average. First, a reasonable service radius is determined according to the administrative region and geographic position, and then an advisable investment cost shall be worked out based on calculations of its population coverage and market potential.
Estimating market potential with “per bed investment”
A quality medical institution shall also be judged by the local GDP and payment capacity in the market. For instance, in a county-level city with per capita GDP of RMB 60,000 to 70,000, the investment team shall be able to work out the “per bed investment” based on per capita expenditure and data from the medical market.
[Key word] Per bed investment: average investment of a hospital for every single sickbed.
For instance, for a hospital with 500 sickbeds, if its per bed investment exceeds RMB 300,000, then its per bed income also has to reach such a level. From the perspective of JD Capital, if the profit margin of per bed income reaches 10%, then it is well worth its investment. Besides, the local GDP and payment capacity also have to be taken into consideration, as a county-level city with per capita GDP below RMB 50,000 is unable to sustain such a level of “per bed investment”.
Neither shall a hospital be worth the investment if its expenditure on construction, land and apparatus is disproportionate to its population coverage and payment capacity.
With estimates on administrative and geographic factors, local GDP, per capita payment capacity and “per bed investment”, JD Capital has built up a complete analytical model that determines whether a medical institution is worth investing from both macroscopic and microscopic views, as well as the relevant cost.
Currently, JD Capital selects leading private hospitals in the region and takes their flexibility to introduce experts and advanced apparatus, transforms the hard environment, improves the soft environment, and nurtures regional leaders.
Recognizing and preventing risks using the “negative list”
In the last 5 to 10 years, there has been an industry reshuffle among private medical institutions in China. JD Capital believes that with the deepening market reform, the positive competition will become increasingly fierce, and quality private hospitals shall stand a better chance of development.
In the investment process, apart from profit, a more important consideration is the level of standardization and risk control of the medical institution. JD Capital prevents industrial risks by formulating a strict “negative list”:
1. Based on its own independent due diligence team, JD Capital implements strict financial and business due diligence, and conducts capital verification from both perspectives. For hospitals with dishonest behaviors (defrauding medical insurance funds by fake hospitalization), the investment manager shall be authorized to directly close the due diligence and terminate the project.
2. JD Capital makes judgements for the causes of every single medical dispute in its history by means of consulting legal documents. In light of medical disputes apparently caused by misdiagnosis and irrationality treatment, the medical technique shall be considered uncompetitive, hence the hospital lacks investment worth.
3. JD Capital basically invests in “regionally-leading enterprises”. Normally, leading hospitals in a region are also ones with significant advantages in medical techniques. The “JD criteria” for leading hospitals include their size, apparatus, talents, and more importantly, high-standard and normalized operations. Therefore, the process of judging and selecting leading hospitals is also one to prevent risks.
Booster for “regional leaders”
Medical care and health is a crucial part in JD Capital’s strategic planning. With profound understanding and abundant investment experience in the health industry, JD Capital set up specialized funds in the field to massively engage in medical care asset securitization and contribute to the development of China’s medical care market.
By now, JD Capital has invested in nearly 50 medical care and health enterprises in China, covering fields such as chemical pharmacy, Chinese patent medicine, medical apparatus, medical service (hospitals) and biological pharmacy. Among these, hospitals have been a key orientation, where the number of sickbeds in JD Capital-invested hospitals has exceeded 5,000. JD Capital takes regionally-leading hospitals that it invested as platforms to integrate peripheral assets and access its quality medical care resources, with an aim to gradually build regionally-leading hospital groups.
With its resources in the field of hospital investment, JD Capital also introduced advanced administrative ideas and quality resources to help invested hospitals improve their service standard.
Introduction of capital: JD Capital conducts capital increase and share expansion by cash, and the invested capital shall be used to introduce new apparatus and construct new patient buildings that contribute to business development.
Introduction of wisdom: Based on agreements with top domestic and overseas hospitals and medical schools, JD Capital provides service output for invested hospitals in terms of brand building and hospital administration. Meanwhile, JD Capital shall also host senior training classes in hospital administration for hospital administrators with its partners.
Introduction of system: Following its investment in a hospital, JD Capital shall improve the corporate governance structure and implement the president responsibility system. JD Capital promotes administrative and service innovation towards establishing a modernized hospital. By means of normalizing financial management in line with accounting standard for listed companies and promoting professionalism of the leadership, the hospital shall be administrated in a more elaborated, professionalized and scientific manner.
Capital operation and industrial integration: Following its investment, JD Capital shall assist the enterprise to access specialized resources in its listing process, and provide consulting services in the restructuring, normalization, registration and examination processes. With respect to industrial integration and business development, JD Capital provide support through searching for M&A targets and partners along the industry chain, helping with due diligence and checking on the M&A plan.