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 Encouraged by a relaxation of foreign ownership rules last year and
a rapidly ageing population, private equity firms such as TPG
Capital [TPG.UL] and industry players including Malaysia's IHH
Healthcare Bhd are investing in Chinese hospitals, pharmaceutical
companies and device makers.
The prospect of 223 million people aged 65 or older predicted to
live in China by 2030 is just too enticing for these companies,
despite significant risks such as weak hospital infrastructure,
rising valuations and a dearth of doctors.
The companies have begun leveraging connections of local partners to
hire doctors, and to help expedite local licenses and permits to
start work on planned projects.
China has forecast healthcare spending by the private sector,
state-owned enterprises and consumers to treble to 8 trillion yuan
($1.3 trillion) over the next five years, as it tries to cope with
the boom in its ageing population, a result of the country's
decades-long one-child policy and current low fertility rate.
"I spend 70 percent of my time looking for healthcare deals in
China," said Steve Wang, co-founder of Hong Kong-based private
equity firm Pine Field Capital. "It's a really hot sector in China,
as hot as mobile Internet."
After years of steady growth, China healthcare mergers and
acquisitions more than doubled to a record $18.5 billion in 2014,
Thomson Reuters data showed. This January alone, deals totaled $6.9
billion, an acceleration in activity that points to another
blockbuster year.
Deals involving China's ecommerce, Internet software, services and
infrastructure also reached a record in 2014, but with $17.9 billion
they trailed healthcare.
China started to liberalize its healthcare sector in 2009 but it was
only in 2014 that it allowed full foreign ownership of hospitals,
further deregulated drug prices and implemented rules to fast-track
the approval of medical devices.
That optimism has pushed valuations for some firms steadily higher.
Phoenix Healthcare Group Co. Ltd, China's No.1 private hospital
group, listed in Hong Kong in December 2013 at 25.1 times its
expected earnings. It now trades around 35 times.
Other risks for prospective investors in China, where government
policies are often unpredictable, include lack of doctors and the
lengthy approval process for hospital licenses.
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The country had 14.6 physicians per 10,000 people in 2012 compared
with 38.5 in Australia, 24.2 in the United States and 17.6 in
Brazil, according to World Health Organization data.
"When you look at the hospital and provision sector in particular,
the point around doctor availability is an important one," said
Vikram Kapur, a partner at consulting firm Bain & Co. "So the risk
to be managed is around making sure that you can attract enough
physicians to private institutions."
APPEALING INVESTMENT
TPG, Blackstone Group LP and Chinese drugmaker Shanghai Fosun
Pharmaceutical Group Co Ltd are among investors that have already
bought into hospitals, medical device makers and service providers
in China.
"We are very positive on the New China, especially the healthcare
sector," said Kinger Lau, chief China strategist at Goldman Sachs.
"The concept of reform in the healthcare sector is very appealing
from an investment point of view as living standards improve and the
population ages."
IHH Healthcare, Asia's largest hospital operator, already has a
hospital in Shanghai and smaller clinics in the country and is in
talks to expand further in China, Chairman Abu Bakar Suleiman told
Reuters.
"China is big, so it's not just about going into Beijing and
Shanghai," Suleiman said. "For the private sector, these are very
early days. We feel it's a good thing for us to come in now."
($1 = 6.2521 Chinese yuan renminbi)
(Additional reporting by Saikat Chatterjee; Editing by Lisa Jucca
and Muralikumar Anantharaman)
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