Cancer treatment private hospital operator Concord Healthcare thought it had just the right medicine for investors when it listed in Hong Kong early this year, boasting an A-list of backers including CICC, CITIC and CSPC Pharmaceutical Group ( CHJTF ) (OTC:CSPCY). That optimism was shattered when its shares tumbled over 30% on their debut day. But investors quickly changed their minds and began bidding up the stock, which is now 60% above its listing price.

That ebb and flow reflects both the fears and high hopes for private hospital and clinic operators in a huge Chinese healthcare market where such facilities are still relatively rare, though regulatory oversight is also very strict. 

With outlook for private hospital stocks now on the mend, Taiwan-invested BenQ BM Holding Cayman Corp. is looking to follow Concord Healthcare to the Hong Kong Stock Exchange with its listing application filed earlier this month. A successful IPO would make it the first comprehensive private hospital to list in Hong Kong.

Two Grade-A Hospitals

BenQ has two hospitals, Nanjing BenQ Hospital, a Grade-A Class 3 facility that opened in 2008; and Suzhou BenQ Hospital, a Class 3 general hospital that opened in 2013. The two facilities currently have 1,850 beds in a total operating area of about 380,000 square meters, with a team of more than 900 doctors. Last year they recorded more than 2 million outpatient visits and more than 20,000 inpatient operations.

BenQ's majority shareholder is Taiwan-listed Qisda, which was founded in 1984 and is a global leader in liquid crystal displays and projectors. Integrated medical services provider Sharehope Medicine also holds a small stake in the company.

BenQ's revenue has risen steadily over the last three years, from 2.22 billion yuan ($307 million) in 2021 to 2.69 billion yuan last year. Its profit has grown even quicker, rising from 69.1 million yuan to 167 million yuan over the same period.

Its relatively long tenure in a Chinese market dominated by state-owned hospitals has earned it a strong reputation in East China. According to third-party data in the listing document, it was the biggest private for-profit general hospital group in East China in 2022 by medical service revenue and was ranked fifth nationwide. It also ranked first in terms of average revenue per registered bed.

Growing Healthcare Market 

The landscape for private hospitals in China is steadily improving in tandem with the healthcare market's steady expansion. Total healthcare expenditure in China is expected to reach 12 trillion yuan in 2026, growing 9.1% annually from 2022 to 2026, according to third-party data in the listing document. The market is expected to grow further still to 16.2 trillion yuan in 2030.

Private hospitals are still relatively small players but are growing faster than the overall market. Their revenue grew from 319.1 billion yuan in 2017 to 607.4 billion yuan in 2022, representing annual growth of 13.7%. The group's growth rate is expected to further accelerate to 15.9% between 2022 and 2026 and will reach an estimated value of 1.09 trillion yuan in 2026.

With the fast-growing Chinese healthcare market as its base, including its home in the Yangtze Delta area that includes Shanghai, BenQ has laid a solid foothold for its future in East China. But it lacks a major growth story beyond its two main hospitals to win over Hong Kong investors amid a general slump in the local stock market.

While cutting-edge drug stocks offer infinite room for investor imagination due to the big potential of China's vast market of 1.4 billion people, private healthcare institutions lack such magnitude due to their geographic constraints. Even the stronger Hygeia Healthcare (2453.HK) has a market value of just HK$17.9 billion ($2.28 billion) and a price-to-earnings (P/E) ratio of 23 times.

No Expansion Plans

BenQ's revenue comes mainly from inpatient and outpatient services. Average spending per visit for the former dropped from 19,142 yuan in 2021 to 17,042 yuan last year, while the latter was more stable, rising from 571 yuan in 2021 to 599 yuan in 2022, before falling to 584 yuan last year. With revenue per patient mostly flat or falling, the company's overall revenue growth last year came from increasing patient visits. 

But the company already operates close to its existing capacity, meaning its business is unlikely to expand much further without building new hospitals. In has steadily added beds over the last three years, taking the total from 1,600 in 2021 to the latest 1,850, though that venue for growth is limited by a shrinking amount of space still available in its two hospitals. Average bed turnover days dropped from 9.4 days in 2021 to 8.2 days last year, as hospitals tried to see more patients by discharging them more quickly.

The company's gross margin isn't so attractive, although it increased from 15.3% in 2021 to 18.9% last year on efforts to operate more efficiently. It remains to be seen whether there's room for further improvement. But BenQ's figure now is well below the 25.8% gross margin for Kangning Hospital (2120.HK) and even further behind the 31.6% for Hygeia Healthcare.

BenQ said it would use funds from the IPO to expand its existing hospitals, or consider using some for investing in or acquiring other hospitals, as well as for upgrading existing "smart hospitals". That appears to show the company is mostly focused on its existing facilities, without plans to build any new hospital.

Of course, we're well aware of the difficulties involved in building new hospitals, especially in the complex China market. In addition to securing funds, hiring medical professionals is also quite challenging. And operators need to comply with a wide range of rules and requirements in different parts of China. But BenQ's stock may fail to generate much investor excitement unless it can find a more visionary plan, especially in the current sluggish Hong Kong stock market.