Check on China: Chindex International, Inc.
Health is a major issue in China. Cancer has become the nation’s leading killer, causing 1.5 million deaths annually. About one-third of the world's 400 million people infected with the hepatitis-B virus are in China. By 2025, it is estimated that two million Chinese will die from lung cancer and illnesses related to smoking and indoor air pollution. By the same year, China will also have some 38 million diabetes patients, says PricewaterhouseCoopers.
As the Chinese grow more prosperous and succumb to the influence of Western lifestyles, the incidence of cardiovascular diseases, cancer, diabetes and infectious diseases will rise. No wonder that in recent years, American and European drugmakers and medical device companies have put down stakes and gained a foothold in the country.
The fast-growing demand for premium medical services in China has translated into success for Chindex International, Inc. (Nasdaq: CHDX), a U.S.-based company that provides health-care services and supplies medical equipment, instruments and products to the Chinese market.
Chindex is divided into two segments: health-care services and medical products. The health-care services division consists of the company's United Family Healthcare network that operates two private 50-bed hospitals and satellite clinics in Beijing and Shanghai. The medical products side of the business markets, distributes and sells diagnostic imaging devices, robotic surgical systems, chemical analyzers, sterilization systems, lasers for cosmetic surgery and cancer diagnostic devices to hospitals in the mainland and Hong Kong.
While the vast majority of hospitals in China remain state-owned, in 2000, amid a massive health-care system overhaul, the government began restructuring and selling off hospitals to individual investors, which sparked the birth of a private hospital industry in China. Chindex is one of only a few foreign entities that own private hospitals in the country (only 0.15% of all registered medical facilities have any foreign investors, according to some statistics).
Premium products and services, solid relationships and strategic marketing have helped the much smaller Chindex stand strong against behemoth competitors like General Electric Company (NYSE: GE), Koninklijke Philips Electronics NV (NYSE: PHG) and Toshiba Corporation (OTC: TOSBF), all of which have a strong presence in China's health-care sector.
In the third quarter ended Sept. 30, 2007, the company sprung an earnings surprise when net income jumped over 45% to $1.6 million and sales rose 23% percent to $32.7 million, both ahead of Wall Street estimates. In another unexpected move, JPMorgan Chase & Co.'s (NYSE: JPM) Principal Investment Management announced it would plunk down a $50 million investment—$10 million in cash and $40 million in convertible notes—in Chindex to finance the expansion of its Chinese health-care network in China.
The good news hasn't gone unnoticed. On Nov. 8, analysts at BWS Financial reaffirmed their "buy" rating on Chindex, raising the target price to $40 from $30. The next day, Julie Chen, an analyst with Brean Murray, published a research note maintaining her "buy" rating, while raising estimates to $45 from $38. The analyst mentioned that the company has posted robust quarterly revenues, EPS ahead of estimates and noted the JPMorgan Chase capital would likely act as a positive catalyst for share prices.
"The upward revision in the estimates reflects the sustained momentum at the health-care services business, a tax rate decline from 40% to 35%, a rise in share count and stabilization in the company’s operating expenses," she said.
China is becoming more important to health-care companies as the government is making earnest efforts to transform the country from a low-cost manufacturing base into a global hub of innovation, increasingly allocating funds to the medical, biotech and life-sciences industries. Chindex is betting that Beijing's enthusiasm, coupled with seemingly unstoppable growth and ever-rising incomes, will boost demand for its services—especially given China's reputation for having a largely over-regulated, overburdened and inefficient public health-care system.
But even with its future potential and its past successes, Chindex still faces several hurdles in China, including restrictions on foreign investment in the health-care sector, a lack of regulatory transparency, and the Chinese people's inherent skepticism of private health-care services—a recent survey found that 66% of the population would not trust a private hospital.
Executives are anything but worried. Chindex president Roberta Lipson expects company revenues to continue to grow more than 20% a year due to an ever-increasing demand for higher quality medical care in China. She has also said the company plans to open two additional hospitals in China. With plans to enter Guangzhou, China's third most populous city, the company is starting construction on an outpatient facility, which will ultimately become inpatient. And, in preparation for the 2008 Olympic Games, which will draw swarms of visitors and athletes from around the world, the company is in the planning phase of building yet another medical facility in Beijing.
Shares, which closed at $31.44 on Wednesday, have traded between $14.54 and $37 over the past 52 weeks. Analysts' median one-year target is $42.50.
While investors looking to cash in on Chindex (CHDX) should carefully weigh the associated risks, if the company's recent performance and growth prospects are any indication, the stock could provide your portfolio with a healthy shot in the arm.
