Chinese cancer treatment company aims for US listing

Concord Medical Services, the operator of China's largest network of cancer treatment centres, has started to accept orders for an initial public offering that aims to raise between $114 million and $138 million. The Beijing-based company is expected to start trading on the New York Stock Exchange towards the end of next week.

Concord will provide an opportunity for international investors to get exposure to a Chinese healthcare company that operates at the patient level. So far, investors have been able to invest in companies involved in pharmaceuticals or the provision of medical equipment, but not the actual treatment of patients. The last Chinese company in the healthcare sector to go public was Sinopharm, a distributor of pharmaceutical products, which listed in Hong Kong in September.

However, a company called China Medstar was listed on the Alternative Investment Market in London for a while before it was acquired by Concord in July 2008. At the time of the acquisition, China Medstar jointly managed 23 cancer centres with its hospital partners across 14 cities in China.

Concord, too, partners with hospitals around the country in setting up radiotherapy and diagnostic imaging centres, and receives a contracted percentage of each centre's revenue net of specified operating expenses. The hospitals provide doctors and the physical facilities, while Concord is responsible for the non-clinical aspects of the day-to-day operations, including machinery, administrative personnel, marketing and training.

As of the end of September, the company operated 83 centres based in 55 hospitals -- most of which are top-ranked in terms of quality and size according to the Ministry of Health (MOH) standards -- spanning 36 cities across 21 provinces and administrative regions in China.  

According to the MOH, cancer was the leading cause of death in China in 2008 and the country also has a "relatively low penetration" of radiotherapy and diagnostic imaging equipment compared to developed countries. This, and the fact that Concord is the largest provider of these services, translates into strong growth prospects for the company, sources say.

In early 2010, the company plans to open its first specialty cancer hospital, to be located in the city of Xi'an in Shaanxi Province. A second hospital, in Beijing, is expected to commence operation in 2012.

A report by Frost & Sullivan projects that the radiotherapy and diagnostic imaging market will grow at a compound annual growth rate (CAGR) of 22.4% between 2008 and 2015, due to the increasing incidence rate of cancer in China, the adoption of advanced radiotherapy and diagnostic imaging technologies, and rising household disposable income and government healthcare expenditures that will increase the affordability of cancer treatment and diagnosis technologies.

Concord, which kicked off its IPO roadshow in Hong Kong on Monday, is offering 12 million American depositary shares, which correspond to 36 million common shares and 24.4% of the enlarged share capital. They are marketed at a price of $9.50 to $11.50 per ADS, which, according to a source, translates into a 2010 price-to-earnings multiple in the high teens.

The net profit is expected to increase significantly this year partly thanks to acquisitions such as China Medstar. In 2008 it made a net profit of Rmb71.9 million ($11.5 million), although after taking into account the accretion of redeemable, convertible preference shares, the company was left with a loss of $72.7 million. In the first nine months this year, that had reversed into a net profit of $3.9 million after the accretion of the convertible preference shares.

Given that the healthcare industry is very country specific - due, among other things, to regulations and the level of government subsidies - Concord cannot really be compared to similar companies in the US. Because of the mature nature of the US healthcare industry, the Chinese company is also expected to show significantly higher earnings growth than its US peers. The same was true for Sinopharm, and while that company isn't in the exact same business as Concord, it is still a healthcare play and potential investors may take some comfort in how that stock has performed since listing. Yesterday, Sinopharm closed at HK$26.85, representing a 68% gain versus the IPO price of HK$16, and a 2010 price to earnings multiple of 42.8.

Concord is being brought to market by China International Capital Corp, J.P. Morgan and Morgan Stanley.