Investors urged to think health

For the hospital groups segment, still in the burgeoning stage in China, in addition to the comprehensive capability requirements for general hospitals, the ability to realize scale and synergy will be crucial to success, the report said.

Market entry

Investors in the hospital market have four typical modes of entry, involving greenfield or organic growth, acquisition of private hospitals, privatization of public hospitals and the establishment of trusteeships of public hospitals.

To private, especially overseas, investors, some China-specific valuation challenges must be addressed, including opaque hospital financial systems, endemic unethical practices and uncertainty owing to regulatory and human resources risks.

Concerning the management of invested assets, investors typically need to pull four levers for good returns. They are hospital governance, operational quality and efficiency, product portfolio and expansion opportunities.

Foreign investors can be divided into two groups - financial investors such as private equity and venture capital businesses and strategic medical investors, such as United Family Health, which has hospitals in the three cities of Beijing, Shanghai and Tianjin so far, according to Yu Tian, co-author of the report.

"Overseas financial investors can enjoy similar profits to local investors as the market opens up because neither actually plays much of a role in the day-to-day running of hospitals," said Wu. "For strategic investors, things are more complicated."

The greatest challenge for private investors might be talent. Taking United Family Health as an example, today overseas physicians still account for a significant portion and local doctors receive training in the United States regularly. So far, human resources costs take up more than half of the company's revenues, far higher than the industry average.

The company is expanding its patients from expatriates in Shanghai and Beijing to the top 3 to 5 percent of all high earners in the top 10 cities in China.

"That needs more local doctors with high skills and good reputations because foreign physicians usually have language barriers with local patients and may not be able to fully understand local people's physical, social and psychological conditions," said Wu.

However, employing more good Chinese doctors is not easy because the big public hospitals in China can provide technical titles for their medical practitioners that are closely linked with welfare benefits such as pensions after retirement. The private hospitals cannot offer such kinds of packages.

The report also provides tips for potential investors in China's hospital market. They are selecting the right segment and target, making an early entry to lock up high-quality targets, choosing the appropriate investment entry mode and adopting advanced management of invested assets to improve target value.

In addition, investors are advised to have strong finances, expertise and experience in hospital management and a good relationship with the local government. Strategic partnerships can be leveraged to strengthen the required capabilities and form strong alliances, said the report.