Concord Medical prices IPO near top, but falls on debut

Concord Medical was able to price its US initial public offering in the upper half of the offering range, after sources said the deal was multiple times covered across the range, albeit with some price sensitivity. This allowed it to raise $132 million in a week when two other companies were forced to price below their initial price ranges and a fellow Chinese listing candidate pulled its US IPO altogether.

But Concord, which was brought to market by China International Capital Corp, J.P. Morgan and Morgan Stanley, wasn't able to escape the deteriorating sentiment for IPOs altogether. In its trading debut on Friday, the share price tumbled 13.6%, taking it below the initial offering range. The drop came even though the broader market headed slightly higher and suggests that, in spite of the support during the bookbuilding, investors are not particularly keen to add new risk to their portfolios this late in a year that has yielded sizeable positive returns.

The operator of China's largest network of cancer treatment centres, Concord offered the first chance to invest in a Chinese healthcare company that is active at the patient level, which makes it a more direct beneficiary of the expected growth both in the demand for healthcare in China and in healthcare spending. Other listed Chinese healthcare companies are primarily involved in the manufacturing and distribution of pharmaceuticals, or the provision of medical equipment.

However, that long-term positive was clearly not enough to convince investors to hang on to the stock once the share price started to fall -- however short-term that decline may turn out to be. Trading volumes were pretty heavy with 9.1 million American depositary receipts (ADRs) changing hands during the session, equal to about 75% of the ADRs sold in the IPO.

The appetite for the shares may have been negatively affected by the poor debut a day earlier of another China-based healthcare company, China Nuokang Bio Pharmaceutical, which fell 3.7%. The small-cap company focuses on the research, development, manufacturing and sales of hematological and cardiovascular products, including China's number one product to stop bleeding. China Nuokang raised $45 million with the help of Jefferies & Co after pricing its offering at $9 per share, below the targeted range between $10 and $12.

And on Wednesday last week, Trony Solar Holdings, which makes solar cell modules using thin-film technology, postponed its US IPO a day before it was due to start trading. The company, which was aiming to raise up to $214.5 million with the help of Credit Suisse and J.P. Morgan, offered no explanation for the decision.

Concord sold 12 million ADRs, each representing three common shares, at $11 apiece. The ADRs were initially offered in a range between $9.50 and $11.50. All the shares underlying the base deal were new, while the 1.8 million ADRs that make up the 15% greenshoe are all secondary and come from a number of pre-IPO investors. Carlyle, the company's largest third-party investor, will not be selling any of its shares, however, and will hold 17.7% of the company after the IPO.

Being a US deal, there was little information about the size or shape of the demand, but a source said at least a couple of hundred institutional investors submitted orders. As usual, the demand was skewed towards the US, but no exact breakdown was available.

The final price valued the company at about 19 times the projected earnings for next year. Given that no other Chinese healthcare providers are listed in the international markets, and that Concord is expected to show significantly higher earnings growth than its US peers which operate in a much more mature market, there are no good comparables. However, some investors were looking at the robust performance of Sinopharm, which has gained 65% since it listed in Hong Kong in September, to justify and get comfortable with the valuation. The distributor of pharmaceutical products is currently trading at a 2010 price-to-earnings multiple of 42.3.

Following the drop in the secondary market, Concord's valuation fell to a P/E ratio of about 16.4 times.

The company 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 the 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. 

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 of cancer in China, the adoption of advanced radiotherapy and diagnostic imaging technologies, as well as rising household incomes and government healthcare expenditure that will make cancer treatment more affordable.

Concord wasn't the only newcomer under pressure on Friday. KAR Auction Services, a US company that auctions used cars and trucks, was down as much as 7.6% at one point, but recovered to finish three cents above its $12 IPO price at $12.03. KAR had already been forced to price its offering well below the $15 to $17 range it initially targeted, which resulted in a deal size of about $300 million.