Policy impacts lead to a double decline in revenue; BenQ Hospital's selling points are lackluster

Last year, after multiple unsuccessful attempts, the private general hospital operator BenQ Hospital has once again submitted a listing application to the Hong Kong Stock Exchange, but its latest financial performance remains lackluster.

Key Points:

• Last year, BenQ Hospital applied for a listing in Hong Kong and has recently restarted its listing plan.
• Although China's private healthcare still has considerable growth potential, the company's revenue and profits have both declined, with policy shifts and intense competition becoming major constraints.

Liang Wuren

China's private healthcare appears to have enormous potential, as the rise of the middle class leads more people to seek options beyond public hospitals. However, this narrative does not seem to fully apply to BenQ Medical Group Co., Ltd. This private general hospital has repeatedly failed in its attempts to list in Hong Kong, and the financial performance presented in its latest application is also not impressive. For investors, while there are some highlights worth noting, there are also numerous unfavorable factors.

The private hospital operator submitted its listing application to Hong Kong again last week, marking its third attempt since April of last year, with the previous two attempts failing to complete. The company is majority-owned by the Taiwanese listed company Qisda Corporation (2352.TW), a significant supplier in the global LCD and projector sectors. Now, BenQ Medical Group hopes that its third attempt will successfully lead to a listing in Hong Kong, bringing a turnaround to its fundraising process.

On the surface, private hospitals seem to be an attractive story for investors. China's population is rapidly aging, and the demand for high-quality medical services continues to rise. At the same time, the expanding middle class means more patients wish to receive more comfortable, private, and higher-quality service experiences in private hospitals, avoiding the crowded and long-waiting environments typical of large public hospitals.

However, the industry also faces a series of challenges. First, due to its involvement in public health, private healthcare is subject to strict regulation, which is reasonable from a policy perspective. Additionally, private hospitals are increasingly struggling to compete with government-supported public medical institutions, making it difficult to gain an advantage in recruiting medical talent. There is also a general public skepticism that private hospitals prioritize profit over health value, coupled with the fact that their medical fees are usually higher than those of public hospitals, creating a disadvantage in patient choices.

BenQ Hospital's financial performance reflects these difficulties, with the company's revenue declining by 1% to CNY 2.7 billion last year compared to 2023, and revenue again showing a year-on-year decline in the first half of this year. More concerning is the weakening of the company's profitability, with the net profit margin dropping from 6.2% in 2023 to 4.1% last year, and further declining to 3.7% in the first half of this year, below the 4.8% of the same period last year.

Limited Reception Capacity

On the revenue side, a core limitation lies in the capacity constraints of medical resources. The group currently operates two hospitals: Nanjing BenQ Hospital, which opened in 2008 and is a tertiary general hospital; and Suzhou BenQ Hospital, which began operations in 2013 as a tertiary general hospital. As of the end of June this year, the two hospitals combined provided 1,850 beds, and after adding 150 beds at the Nanjing facility in 2023, the number of beds has not grown further. The bed occupancy rate at Nanjing BenQ Hospital currently exceeds 100%, relying on temporary beds to meet inpatient demand, indicating that the hospital's inpatient service capacity is extremely strained At Mingji Hospital in Suzhou, the bed occupancy rate is also close to 90%, and there is limited room for revenue growth from inpatient services, making it difficult to drive medical revenue growth through an increase in inpatient volume.

The new medical payment system introduced a few years ago has also posed more challenges to the operations of Mingji Hospital Group. The two hospitals under Mingji Hospital Group, located in Jiangsu Province, officially adopted the Diagnosis-Related Group (DRG) payment system starting in 2022. Under this system, public health insurance funds no longer reimburse based on actual treatment costs but settle according to standardized inpatient treatment payment amounts under the diagnosis group, with any excess costs borne by the hospital.

As a result of this mechanism, the average inpatient costs at Nanjing Mingji Hospital and Suzhou Mingji Hospital have significantly decreased. Inpatient medical services account for over half of Mingji Hospital Group's revenue, becoming an important source of revenue pressure.

Although the government's expansion of centralized drug procurement has led to a decrease in drug prices and an increase in outpatient visits, the average outpatient costs have also declined accordingly. Additionally, the government has adjusted the reimbursement rules for certain medical treatment items, resulting in reduced reimbursement amounts for medical institutions, further compressing the outpatient revenue of hospitals.

While the centralized procurement policy has helped Mingji Hospital reduce drug costs, the revenue pressure brought about by regulatory systems highlights that the operational fate of Mingji Hospital largely depends on government policy directions in the highly regulated healthcare industry.

Intense market competition has also increased the operational difficulties for Mingji Hospital. According to its application documents, based on revenue, the company's market share in China's private general hospital market is only about 0.4%; although Nanjing Mingji Hospital is the largest private hospital in Jiangsu Province, its market share in the province is only about 2%.

When public hospitals are included in the overall market, Mingji Hospital's presence in the industry is even lower. The total revenue of private hospitals in China is 944.7 billion yuan, which is less than a quarter of the total revenue of public medical institutions.

Hiring high-quality doctors is crucial for Mingji Hospital to maintain competitiveness, but it also brings cost pressure. Due to the increase in new hires, especially high-qualified medical professionals including chief physicians, the company's labor costs have risen significantly, further compressing profit margins. Its gross profit margin has decreased from the same period last year to 15.9% in the first half of this year.

Ultimately, to increase revenue and improve profitability, expanding operational scale seems to be a key direction for Mingji Hospital. If the company successfully goes public in Hong Kong this time, it plans to use the funds raised for the expansion and upgrading of existing hospitals and seek acquisition opportunities to further enhance its medical service capabilities.

Last year, private hospital operator United Family Healthcare (2453.HK), which focuses on cancer treatment, went public in Hong Kong, which may have provided some reference for Mingji Hospital Group, but the stock has fallen more than 80% since its listing. Nevertheless, recent market sentiment towards Chinese stocks has generally been positive, which may become one of the favorable factors for Mingji Hospital's third attempt at an IPO in the Hong Kong stock market