GS China Hospitals Jan2014

January 3, 2014
January 3, 2014
China: Healthcare
China: Healthcare
Equity Research
Hospital primer: An introduction to China hospitals

Primer for hospital investors
In this document, we highlight basic facts, historical trends, market
dynamics, opportunities and challenges in the China hospital sector.
Hospital reform taking center stage

The Third Plenum has laid out a more market-based healthcare reform
blueprint. We believe drug price cuts were the first phase, and China is
now in the midst of the second phase: hospital reform. We see significant
changes and investment opportunities in Chinas healthcare service
industry, driven by favorable government policy, demographic trend, rising
demand for high quality services, and ample liquidity.
Private hospitals still at nascent stage, but growing the fastest

Sector revenue for China hospitals grew 20% CAGR in 2005-11. Frost &
Sullivan expects total healthcare expenditure to grow at 13.2% CAGR in
2012-17, driven by universal insurance coverage, increased private hospitals
and significant private investment. Revenue for private hospitals grew at
22.6% CAGR in 2008-12, likely outpacing that of total hospitals. Yet private
hospitals revenue and beds hover around 10% in 2012 of the total due to
reimbursement constraint, smaller scale, and the shortage of experienced
physicians. We see more relaxed government policy and rising demand for
affordable high-quality services further boosting private hospital growth.
From small-scale specialty clinics to large-scale general hospitals

Chinas private hospital investment has largely focused on smaller-scale
specialty clinics, led by oncology and ob-gyn. We believe lower barriers-toentry in terms of capital requirement and physician availability is the main
reason for the current industry structure. We see increasing investor
interest and opportunities in large-scale general hospitals (more than 500
beds) in tier II and tier III cities, driven by favorable local government policy
and unmet demand as a result of insurance coverage expansion.
Investing in China healthcare service sector

We conduct a brief analysis on capital requirement, accessibility, and risks
and returns for investing in China hospitals. We conclude a hospital
management company is likely to generate the highest return in the near to
medium term due to lower capex and higher leverage. We see a proper
managerial structure, and a fair and balanced incentive scheme as key to
attract qualified physicians, the core factor in the hospital business.
Wei Du, Ph.D
+86(21)2401-8928 wei.du@ghsl.cn Beijing Gao Hua Securities Company Limited
Li Yu
+86(21)2401-8932 li.yu@ghsl.cn Beijing Gao Hua Securities Company Limited
The Goldman Sachs Group, Inc.
Goldman Sachs Global Investment Research
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Global Investment Research
January 3, 2014
China: Healthcare
Table of Contents
Hospital reform taking center stage driven by unmet demand
Private hospitals saw strong growth and market share gain
Current industry statistics for China hospitals
10
Service quality and efficiency to drive performance
16
Key areas of hospital reform
16
Investing in Chinas healthcare service sector
17
Key challenges in investing in Chinas hospital service sector
19
Appendix I: China healthcare insurance funding
20
Appendix II: Listcos with investments in hospitals
23
Disclosure Appendix
29
January 3, 2014
China: Healthcare
Hospital reform taking center stage driven by unmet demand

The Third Plenum from the Chinese Communist Party has laid out a more market-based
healthcare reform blueprint. We expect hospital reform to take center stage now and
believe de-administration in public hospitals, and increasing private investment in
private hospitals to be the dominant theme, coupled with centralized control of urban/rural
medical insurance and gradual extension to private hospital coverage.
Three stages of Chinas healthcare reform

We divide Chinas healthcare reform plan and progress into three stages. We think drug
price control was the first phase of the reform, including revision of national drug
reimbursement lists (NDRL), NDRC cost investigation, and expansion of essential drug lists
(EDLs). We are now in the midst of the second phase of the reform, targeting Chinas
largest healthcare service providers, the public hospitals. We expect to see deadministration of Chinas public hospital system, notably leaning more towards a marketbased strategy by shifting focus to service quality and efficiency. We also expect private
hospitals to take larger role, fueled by governments supportive policy and a centralized
control of insurance management programs.
Exhibit 1: Hospital reform take center stage in the near to medium term
Key targets and milestones for the three stages for Chinas healthcare reform
Universal insurance coverage, affordable healthcare
Drug price
control
Hospital
reform
Insurance
reform
2009-2012
2013-2015
2015-2020
Make drugs affordable

Re-adjust EDL/RDL price
ceiling
Expansion of EDL (2013)/RDL
(2014)
NDRC cost investigation
More competition: differs from
region to region
Focus on healthcare service

Lower entry barrier for private
capital to invest
De-administration in Chinas
public hospitals
Changing revenue mix:
drug/service trade-off
Incentive scheme: improved
efficiency
Public/private service
Efficient payment system

Centralized control of three
major healthcare insurance
Expansion of insurance
coverage to major illness and
increasing use of private
hospitals
Payment shift from fee-forservice to measures based on
performance and patient
outcomes
Source: Gao Hua Securities Research, National Health and Family Planning Commission (NHFPC).
Demand for quality medical services fuels hospital growth

For the past three decades (1982-2012), Chinas total healthcare expenditure jumped to
Rmb2,891 bn in 2012, 163X of Rmb17.8 bn in 1982, growing at 18.5% CAGR, according to
National Health and Family Planning Commission (NHFPC). In the meantime, healthcare
spending per person jumped 122X, far outstripping per capita GDPs 73X).
January 3, 2014
China: Healthcare
However, the growth of medical resources fell significantly short of expenditure growth.
Overall healthcare institutions grew 1.19X, of which the total number of hospitals grew
only 2.21X. The number of private healthcare institutions is on the rise while the number of
public hospitals is declining as a result of the change in ownership structure (see page 16),
in our view. The number of medical practitioners grew 1.31X (doctors: 2.00X and nurses:
4.43X), suggesting a resource shortage in healthcare institutions. Medical beds grew 2.51X,
with beds in hospitals growing 3.24X. Given the unmet demand, we see significant growth
and investment opportunities in Chinas healthcare service industry.
Exhibit 2: Healthcare spending grew 163X in the last
three decades with
Exhibit 3: per capital growth at 122X outpacing GDP

per capital growth of 73X
China annual healthcare expenditure (1982-2012)
Growth of Chinas per capita healthcare expenditure vs. GDP

(1982 index to 1)
(Rmb bn)
Per capital healthcare expenditure

Per capita GDP
China annual healthcare expenditure

2891.4
3,000
120
2,500
+122X
100
2,000
80
1,500
60
1,000
40
+73X
20
500
17.8
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: Wind, National Health and Family Planning Commission (NHFPC).
Source: Wind, NHFPC.
Exhibit 4: Growth of total healthcare expenditure jumped 163X, while healthcare services
resources growth lagged
Total healthcare expenditure and healthcare resources (1982 vs. 2012)
Total healthcare expenditure

(Rmb bn)
3,500
3,000
+163X
2,891
950,000
2,500
900,000
2,000
850,000
1,500
500
25,000
15,000
801,869
+2.00X
0
1982
2.5
3.0
+4.43X
2.5
2.0
1.0
0.5
0.5
0.0
2.50
0.56
0.0
2012
1982
2012
Total beds in hospitals (mn)
1.5
1.0
1982
1982
2012
2.0
1.31
10,473
10,000
Total nurses (mn)

2.62
23,170
5,000
2012
Total doctors (mn)
+2.21X
20,000
700,000
1982
1.5
950,297
750,000
18
3.0
+1.19X
800,000
1,000
Total hospitals #
Total healthcare institutions #

1,000,000
2012
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
+3.24X
4.16
1.29
1982
2012
January 3, 2014
China: Healthcare
Exhibit 5: The number of public hospitals is trending down while the number of private
hospitals is on the rise (at 45% of total hospitals by end of September 2013)
Number of public and private hospitals (2003 -9M2013)
# of public hospitals
18,000
15,727
15,726
16,000
15,483
15,141
# of private hospitals
14,900
14,309
14,051
13,850
14,000
13,539
13,427
13,427
12,000
10,000
10,795
8,000
8,440
6,000
4,000
2,000
0
2,037
2003
2,667
2004
3,220
2005
4,105
2006
4,952
5,403
2007
2008
6,240
2009
9,295
7,068
2010
2011
9M12
9M13
Source: National Health and Family Planning Commission (NHFPC)
Private hospitals saw strong growth and market share gain

Rising share of private hospitals
Increasing government funding and insurance expansion are leading to rising demand for
service efficiency and quality. A regulatory constraint on public hospital expansion offers
significant opportunities for private hospitals.
The number of private hospitals has been growing at 18% CAGR in 2003-12, reaching
10,795 by the end of September 2013, accounting for 45% of the total 24,222 hospitals in
China. However, the number of beds in private hospitals accounts for 10.2% of the
total hospital beds, at 0.58 mn vs. 5.14mn beds in public hospitals in 2012. Exhibit 6
summarizes key differences between public and private hospitals.
Despite the higher number of private hospitals vs. public hospitals, total revenue
contribution from private hospitals remains small (7% as of 2012). However, growth in the
number of private hospitals was maintained at high teens vs. single digit for public
hospitals. Specialty clinics dominate the private healthcare service sector, with oncology
leading the growth.
January 3, 2014
China: Healthcare
Exhibit 6: Comparison between a typical public vs. private hospital in terms of ownership,
payer, payment and patient structures
Public
Private
Not-for-profit
Not-for-profit
For profit
Government
Private
enterprise
Private
enterprise
National medical
insurance
National medical
insurance, commercial
insurance, out-ofpocket
Out-of-pocket,
commercial
insurance
Set by government
Items within
reimbursement list set
by government.
Others proprietary
Mostly proprietary
pricing
Mostly covered by
national medical
insurance
Both national
insurance and
commercial
insurance
Mostly self-pay
patients, and
commercial
insurance
Government
Shareholder
Not market oriented
Market oriented
No private claim
Proprietary
None
Provision of social
welfare
Not specified
Source: Gao Hua Securities Research.
Exhibit 7: Private hospitals account for 44.6% of total

hospitals
Exhibit 8: However, beds in private hospitals account for

10.2% of the total in 2012
Number of total private and public hospitals (Mar 2011- Sep

2013)
Number of beds in private and public hospitals in 2012
Private hospital as % of total hospitals
14,000
13,427
44.6% 50%
45%
12,000
10,795 40%
10,000
35%
8,000
30%
25%
6,000
20%
4,000
15%
10%
2,000
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
5%
Source: NHFPC, Wind.
0%
# of beds in private hospitals

# of beds in public hospitals
Beds in private hospital as % of total hospitals
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
10.2% 12%
10%
8%
6%
4%
2%
0%
2005
2006
2007
2008
2009
2010
2011
2012
Source: NHFPC, Wind.
January 3, 2014
China: Healthcare
Public hospitals dominate Chinas healthcare service industry, with about 86% of total
hospital beds in operation and more than 90% of total hospital revenue in China in 2012.
Around 73% of public hospitals are owned by the central and local governments, 25% are
owned by SOEs (state-owned enterprises), and 2% are owned by the military. Compared
with the public hospitals, the average scale of private hospitals is small and many are
specialty hospitals. The following chart sets forth a comparison of key metrics of public and
private hospitals in China in 2012.
Exhibit 9: Private hospitals are still a fraction of the overall hospital sector in terms of total beds in operation,
in/outpatient visits, and total revenue in 2012
Public vs. private hospitals in China (2009-2012 CAGR)
Public
hospital
Public
hospital
CAGR
Private
hospital
Private
hospital
CAGR
Total
Private
hospital as
% of total
2009
2012
2009-2012
2009
2012
2009-2012
2012
2012
Number of hospitals
14,051
13,384
-2%
6,240
9,786
16%
23,170
42.2%
Total beds in operation (mn)
3.01
3.58
6%
0.37
0.58
16%
4.16
14.0%
Employees (mn)
3.96
4.28
3%
0.41
0.66
17%
4.94
13.3%
Practitioners (mn)
2.89
3.56
7%
0.31
0.50
18%
4.06
12.4%
Inpatient visits (mn)
78.1
113.3
13%
6.8
14.0
27%
127
11.0%
Outpatient visits (bn)
1.77
2.29
9%
0.15
0.25
19%
2.54
9.8%
Bed utilization rate (%)
87.7%
94.3%
58.2%
63.2%
ALOS
10.7
11.4
8.7
12.0
Total revenue (Rmb bn)
1,391.3
102.9
1,494.2
6.9%
Note: ALOS = Average Length of Stay (days)

Source: Frost & Sullivan.
Exhibit 10: The proportion of private hospitals is on the

rise, growing 38% in 2011...
Exhibit 11: ...similarly for-profit hospitals, at 26% yoy in

2011
Number of public and private hospitals (2003-2011)
Number of not-for-profit and for-profit hospitals (2003-2011)
Private hopsital as % of total
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
38%
21%
11%
15%
25%
27%
31%
34%
17%
2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Wind.
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
# of not-for-profit hospitals
For-profit hopsitals as % of total
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
19%
11%
14%
# of for-profit hospitals
20% 20%
22%
24%
26%
16%
30%
25%
20%
15%
10%
5%
0%
2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Wind.
January 3, 2014
China: Healthcare
Exhibit 12: Less than 10% of hospitals with more than 200 beds in operation were private
hospitals in 2011
Hospital number by number of beds in operation (2011)
Beds in public hospitals
% of beds in private hospital in total
6,000
Beds in private hospitals

70%
5,485
60.2%
60%
5,000
4,000
50%
47.1%
3,624
40%
2,703
3,000
30%
2,129
1,899
2,000
21.1%
9.8%
722
1,000
1,581
171
1,100
919
6.4%
63
Beds <49
Beds 50-99
Beds 100199
Beds 200299
Beds 300399
642
3.9%
26
Beds 400499
5.0%
58
20%
841
1.9%
10%
16
0%
Beds 500- Beds >=800

799
Source: Wind.
Exhibit 13: Specialty hospital revenue growth was

consistently more than 20% for 2006-11
Exhibit 14: Top five types of specialty hospitals

accounted for 64% of the total specialty hospital market
in 2011
Top five types of specialty hospitals revenue (2011)
Specialty hospitals revenue (2005-2011)
Revenue from total specialty hospitals

yoy %
(Rmb bn)
160
24.7%
140
24.6%
23.4%
100
22.4%
75
42
48
0.3
0.25
0.15
60
0.1
0.05
20
0
0
2005
2006
Psychiatry
21
15%
0.2
93
15.8%
80
40
22.9%
114
120
60
139
Oncology
28
20%
(Rmb bn) Others

50
36%
2007
2008
2009
Source: Wind.
2010
2011
Ob-gyn
11
8%
Epidemic
12
9%
Paedeatric
17
12%
Source: Wind.
January 3, 2014
China: Healthcare
Exhibit 15: Oncology hospitals led specialty hospitals in terms of annual revenue in 2011
Revenue of specialty hospitals by types (2011)
Revenue (2011)
(Rmb bn)
30
28.0
25
20.8
17.2
20
15
12.0 10.7
10.4
10
6.5
6.1
5.9
5.2
4.1
3.1
3.0
1.4
1.3
1.1
0.8
0.7
0.6
0.1
Source: Wind.
Exhibit 16: Most specialty hospital revenue was maintained above 20% CAGR in 2008-11
Revenue growth of specialty hospitals by types, 2008-2011
Revenue CAGR (2008-2011)
70%
60%
50%
40%
30%
20%
10%
0%
64.5%
29.1%
26.2% 25.8% 25.2% 24.4% 23.9% 23.5%

23.4% 23.3% 22.2% 22.0% 21.6% 21.5% 21.0%
19.9% 19.8% 18.3%
14.6%
5.1%
Source: Wind.
Below are the top five private hospital groups in terms of beds in operation and number of
patient visits, respectively, in China as of December 31, 2012.
Exhibit 17: Phoenix Healthcare Group (PHG) is currently
the largest private hospital management group with
3,194 beds under its management
Exhibit 18: ...and 3.05 mn patient visits in 2012

Number of patient visits in 2012 (millions)
Number of beds in operation as of December 31, 2012

Number of beds in operations as of December 31, 2012
3,500
Number of patient visits in 2012 (mn)

3.5
3,194
3,000
3.0
2,500
2,500
2,000
2.5
1,800
1.5
1,000
1.0
600
500
0
Dongguan
Kanghua
Dongguan
Donghua
Jinling
Pharmaceutical
2.22
2.0
1,700
1,500
PHG
3.05
Nanjing
Tongren
1.62
1.54
1.30
0.5
0.0
PHG
Dongguan
Kanghua
Jinling
Pharmaceutical
Dongguan
Donghua
Nanjing Tongren
January 3, 2014
China: Healthcare
Current industry statisttics for China hospitals

Revenue
e: Hospitals make up bulk of healthcare in
nstitution revenue
Exhibit 19: Revenue from all healthcare in
nstitutions
reached Rmb1,647 bn in 2011
Exhibit 20: ...of which hospital revenue accounted for

75.6% of the total
Revenue from total healthcare institutions (2

2005-2011)
Revenue from total hospitals (200

05-2011)
Revenue from total healthcare ins

stitutions
Revenue from total healthcare ins
stitutions yoy%
(Rmb bn)
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
1,647
1,373
49%
1,186
897
538
60%
1,400
50%
1,200
40%
960
30%
601
24%
16%
12%
20%20%
10%
7%
Revenue from total hospitals

Revenue from total hospitals yoy%
(Rmb bn)
0%
2
2011
2005 2006 2007 2008 2009 2010
Source: Wind.
24%
1,245
1,02820%
20%
1,000
25%
21%
20%
860
800
600
23%
15%
700
424
471 11%
566
10%
400
5%
200
0
0%
8 2009 2010 2011
2005 2006 2007 2008
Source: Wind.
Close to 40% of hospital revenue were from drugs, and 49% from services.
Exhibit 21: C
Subsidy acccounted for less than 10%
Hospital reve
enue breakdown (2011)
(Rmb bn))
Drug reven
nue,
472, 40%
%
Other business
revenue, 18,
2%
Fiscal subs
sidy,
101, 9%
%
Other subsidy,
6, 0%
Service
revenue, 567,
49%
Source: NHFPC
C.
10
January 3, 2014
China: Healthcare
Exhibit 22: Currently, hospital revenue relies heavily on drug revenue

Estimated current hospital revenue breakdown
Grade III
Grade II
Grade I
Out/inpatient
ratio
3:7 to 4:6
5:5
9:1 to 7:3
Drug revenue
as % of total
40%-50%
60%-80%
50%-60%
Cost structure: Private hospitals are more efficient

Exhibit 23: Private hospitals can have higher efficiency in terms of consumables, total
labor cost savings
Estimated current hospital cost structure breakdown: public vs. private
Public hospital
Private hospital
Drugs
35%-45%
25%-40%
Consumables
8%-15%
5%-10%
Labor
30%-45%
20%-30%
Depreciation
2%-10%
5%-15%
Financial
3%-10%
5%-10%
Management
15%-25%
10%-20%
11
January 3, 2014
China: Healthcare
Patient spending: Grew at single digit to low teens
Exhibit 24: Average spending per in/outpatient visit grew at low teens/single digit
Average spending per in/outpatient visit
Outpatient (avg)
(Rmb)
6,000
Inpatient (avg)
Outpatient: 2008-2012 CAGR=7.8%

Inpatient: 2008-2012 CAGR=11.3%
5,000
4,778
4,232
3,842
4,000
5,896
5,280
3,000
2,000
1,000
143
134
124
115
106
0
2008
2009
2010
2011
2012
Exhibit 25: Average spending per outpatient visit grew at

7.8% CAGR, reaching Rmb143 in 2012
Exhibit 26: Average spending per inpatient visit grew at

11.3% CAGR, reaching Rmb5,896 in 2012
Average spending per outpatient visit (2008-2012)
Average spending per inpatient visit (2008-2012)
Hospitals
Urban primary healthcare clinics
Rural primary healthcare clinics
Average
(Rmb)
250
200
Hospitals
Urban primary healthcare clinics
Rural primary healthcare clinics
Average
(Rmb)
8,000
7,000
6,000
150
106.1
114.7
124.1
134.0
143.1
5,000
4,000
100
3,841.5
4,231.7
4,778.4
5,279.8
5,896.4
3,000
2,000
50
1,000
0
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
12
January 3, 2014
China: Healthcare
Exhibit 27: Annual outpatients for all institutions grew at

CAGR of 7.7% in 2005-12
Exhibit 28: Annual outpatients for hospitals grew at

CAGR of 9.0% in 2005-12
Annual outpatients for all medical institutions (2005-2012)
Annual outpatients for hospitals (2005-2012)
(bn)
8
7
6
5
4.10
Total outpatients (all medical institutions)

yoy%
14%
6.89
6.27
12%
12%
5.84
5.49
10%10%
4.90
4.469%4.72
8%
7%
6%
6%
6%
4%
4%
2
1
0
(bn)
Outpatients(hospitals)
yoy%
3
3
11%
2
1.39
1.47
1.64
1.78
9%
2.26
2.04
1.92
14%
2.5412%
12%
11%
10%
8%
8%
6%
6%
6%
2%
0%
4%
2%
0%
2005 2006 2007 2008 2009 2010 2011 2012
2005 2006 2007 2008 2009 2010 2011 2012

Source: Wind.
Source: Wind.
Exhibit 29: Annual inpatients for all institutions grew at

CAGR of 13.9% in 2005-12, reaching 178 mn in 2012
Exhibit 30: Annual inpatients for hospitals grew at CAGR

of 13.9% in 2005-12, reaching 127 mn in 2012
Annual inpatients for all medical institutions (2005-2012)
Annual inpatients for hospitals (2005-2012)
(mn)
200
150
100
72
Total inpatients (all medical institutions)

yoy%
178 30%
153
25%
24%
142
133
20%
115
98
17%
16%
15%
15%
79
10%
50
7%
8%
0
2005 2006 2007 2008 2009 2010 2011 2012
Source: Wind.
10%
(mn)
140
Inpatients(hospitals)
120
17%
100
80
60
51
56 9%
65
74
14%85
15%95
yoy%
127
108
20%
18%
15%
12%
13%
40
5%
20
0%
10%
5%
0%
2005 2006 2007 2008 2009 2010 2011 2012

Source: Wind.
13
January 3, 2014
China: Healthcare
Exhibit 31: Monthly outpatients for private hospitals

were c.11% of that for public hospitals in September,
2013
Exhibit 32: Monthly inpatients for private hospitals were

for c.13% of that for public hospitals in September, 2013
Monthly inpatients of private vs. public hospitals (March 2011
to September 2013)
Monthly outpatients of private vs. public hospitals (March

2011 to September 2013)
Monthly outpatients (private hospital)
Monthly outpatients (public hospital)
(mn)
(mn)
11.0
250
196
200
7.0
100
5.0
3.0
1.3
1.0
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
22
9.7
9.0
150
50
Monthly inpatients (private hospital)

Monthly inpatients (public hospital)
Source: Wind.
-1.0
Source: Wind.
Hospital breakdown: Most patients treated at Grade III hospitals
Exhibit 33: Hospitals account for only 3% of total medical

institutions in China...
Breakdown of medical institutions in China (2012)
Special public
medical
institutions
12,083
1%
Others
2,424
0%
Hospital
23,170
3%
Exhibit 34: ...but 73% of total beds in China

Breakdown of total beds by medical institution in China (mn
beds) (2012)
Special public
medical
institutions
0.20
Grassroot
3%
medical
institutions
1.32
23%
Others
0.04
1%
Hospital
4.16
73%
Grassroot
medical
institutions
912,620
96%
Source: NHFPC.
Source: NHFPC.
14
January 3, 2014
China: Healthcare
Exhibit 35: Grade III hospitals account for 7% of all

hospitals...
Exhibit 36: ...and 35% of total beds in hospitals

Breakdown of bed numbers in hospitals by grade in China
(mn beds) (2012)
Breakdown of hospitals by grade in China (2012)

Grade III
1,624
7%
Other
9,018
39%
Grade III
1.47
35%
Other
0.55
13%
Grade II
6,566
28%
Grade I
0.31
8%
Grade II
1.83
44%
Grade I
5,962
26%
Note: According to the NHFPC hospital classification system, Grade I hospitals

typically have less than 100 beds and primarily providing more basic healthcare
services limited to the surrounding community; Grade II hospitals are regional
hospitals with 100-500 beds, , providing multiple communities with integrated
healthcare services and undertaking certain academic and scientific research
missions; and Grade III hospitals are the largest and best regional hospitals in
China, typically with more than 500 beds, providing high-quality professional
healthcare services covering a wide geographic area and undertaking higher
academic and scientific research initiatives.
Source: NHFPC.
Source: NHFPC.
Exhibit 37: Close to 50% of patients were treated by

Grade III hospitals in September 2013
Exhibit 38: Patients treated by private hospitals

accounted for c.10% of total patients in September 2013
Patients treated by Grade III/II/I hospitals
Patients treated by private/public hospitals
24,000
Patients treated by Grade I hospitals

Patients treated by Grade II hospitals
Patients treated by Grade III hospitals
20,000
Patients treated by public hospitals

Patients treated by private hospitals
% of patients treated by private hospitals
25,000
10.2% 12%
20,000
10%
16,000
12,000
8,000
15,000
8%
6%
10,000
4%
4,000
5,000
2%
0%
Source: Wind.
Source: Wind.
15
January 3, 2014
China: Healthcare
Service quality and efficiency to drive performance

Key areas of hospital reform
De-administration: Separate hospital administrative/supervisory function from

operational management, shifting to a more market-based system.
Incentive scheme: Tie employee/physicians compensation to key performance

measures related to overall service quality and efficiency of the hospitals.
Change in ownership structure: Allow key management/physicians to take

ownership of the hospitals, notably, management buyout, transfer of SOE stake to
employees or other related private parties.
Major public hospital reform policy

In 2010, the government selected 17 cities as pilot cities for public hospital reform, and
these cities have then undertaken different measures and implemented various trial
policies. For example, Beijing issued the Certain Policies on Further Encouraging and
Guiding Private Capital to Invest in Medical Institutions (Beijing 18 items) in 2012,
encouraging private capital to participate in the public hospital reform through co-investing,
acquisitions among others. The Beijing government has also exhibited a preference for
private enterprises with good reputation, extensive hospital operational experience, and
successful track record to participate in public hospital reform.
We see Private Public Partnership (PPP) as the main strategy to gain access to Chinas
public hospitals. The Chinese government strives to reform public hospitals, yet still
preserving the nature of public welfare and the value of state-owned assets. Hence, PPP
appears to be more effective approach in the near to medium term as it does not change
the ownership of the hospital assets or the not-for-profit nature of the public hospitals,
while generating return by leveraging the public service platform and delivering improved
operational efficiency with minimum capital requirement.
In Chinas 12th Five-Year Plan (FYP) published in 2012 by the State Council, the Chinese
government reiterated its decision to support private investment in the healthcare service
industry, aiming to increase the number of beds in operation in private hospitals to c.20%
of the total by 2015.
In 2013, the State Council issued Certain Opinions on Promoting the Development of
Healthcare Services on October 14 to further promote hospital reform as part of overall
healthcare reform. The circular encompasses the optimization of healthcare service
resources and the acceleration of public hospital reform, which encourages the local
government to seek various approaches in meeting its public health service provider
function, including establishing new hospitals, privatizing public hospitals and outsourcing
the management of public hospitals to private hospital management companies. On the
other hand, for for-profit hospitals, the circular further lowered the threshold for access and
relaxed restrictions on the requirement on the number, scale, and location of these private
hospitals.
16
January 3, 2014
China: Healthcare
Investing in Chinas healthcare service sector

We see increasing interest in Chinas healthcare service sector driven by favorable policy
tailwind and demographic trends. Although hospital reform/hospital privatization remains
at its infancy, we highlight a few key areas:
Barriers-to-entry is a major constraint: Regulatory approval and extensive

capital requirement will limit the number of entrants.
Public hospitals offer better patient access: It is easier to invest and gain access
to private hospitals than public hospitals. However, public hospitals offer better
access to patients and a bigger addressable market. Major tradeoffs in investing in
Chinas public hospitals are the challenges of managing employees in stateowned enterprises, and changing the corporate structure, incentive scheme and
performance measures. More importantly, the not-for-profit and social function
served by the public hospitals may also limit the return of private investment.
Balance between for-profit vs. not-for-profit: Although both types of hospitals

are able to generate profit, the key difference is that not-for-profit hospitals in
general are not allowed to distribute profits back to shareholders, meaning notfor-profit hospital either leave retained earnings on their balance sheets or reinvest back into the business. This is a major issue for investing in Chinas not-forprofit hospitals, unless the local governments are willing to subsidize returns in
other forms to compensate the private investor. In the case of public not-for-profit
hospitals, they are often required to return the profit to the state. We believe this
is the main cause of high spending and high cost structure in large public
hospitals in China.
Tug of war between payback period and long-term returns: Building a private
hospital from scratch offer better visibility and long-term growth prospects. It may
also allow investor to enjoy asset appreciation in the long run. However, higher
cost and longer payback period due to heavy capital investment may lead to lower
return in the short to medium term.
Hospital management tends to generate the highest return: Our analysis of

capital requirement, accessibility, risk and returns, and other aspects related to
hospital investment (see Exhibit 39) suggests that hospital management offers the
best return in the near to medium term, helped by light capex, high leverage and
economy of scale.
17
January 3, 2014
China: Healthcare
Exhibit 39: Private investment in hospitals in China face trade-offs between profitability, accessibility, initial investment,
ownership strength
Four possible routes for private investment in hospitals in China
Public
Ownership
structure
reform
Investment
route
Private
InvestOperateTransfer (IOT)
Build from
scratch
All not-for-profit
Not-for-profit
encouraged. Forprofit has less
accessibility to
reimbursement fund
Not-for-profit
encouraged. Forprofit has less
accessibility to
reimbursement fund
Long approval
process and initial
construction periods
Fast access, not-forprofit is easier to

establish than forprofit
Invest in
existing hospital
Nature
All not-for-profit
Accessibility
Fast, yet high policy

uncertainty
Capex
Light
Somewhat Light
Extremely intensive
Somewhat intensive
Ownership
Equity ownership,
inherent policy risk
No ownership, only
management right
Equity ownership
Equity ownership
Payback
period
Short
Very short
Very long
Long
Risk/Return
Medium risk,
medium return
Low risk,
low return
Medium risk,
medium return
Examples
PHGs investment in
Jiangong Hospital
Chindexs United
Family Healthcare
(UFH)
Fosun Pharmas
acquisition of
Chancheng Hospital
Fast and lower

policy uncertainty
High risk,
high return
PHGs investment in
Beijing Mentougou
Hospital
18
January 3, 2014
China: Healthcare
Key challenges in investing in Chinas hospital service sector

Resources constraint: Shortage of medical professionals
We think the key challenge of operating a hospital is the shortage of medical professionals.
According to World Health Organization (WHO), China has a physician density of 1.456
physicians/1,000 population in 2010, which is a rather low level compared with 2.14 for
Japan, 2.42 for US, and 3.689 for Germany. There are more than 1 million medical school
graduates per year in China, but only one in six will become a doctor as a result of the
shortage of medical institutions, limited new position openings, and low compensation
level compared to other more market-based professions, e.g., a pharmaceutical sales
representative etc.
Employees benefit structure: SOE vs. private

Doctors prefer to work for large-scale public hospitals, as these hospitals often provide
more advanced academic training programs, better platforms and facilities/equipment for
more complex surgeries/treatments. Moreover, the physicians certification and insurance
provided by employers are also important factors for a doctor to take into consideration
when choosing between public and private hospitals.
Hospital ownership vs. investment: Not-for-profit vs. for-profit

As for investing in Chinas private hospital market, private equity investors often would
look for a balance between not-for-profit and for-profit hospitals.
Not-for-profit hospitals are often able to receive other benefits from the government to
support their commitment to serve public needs and enjoy the advantage of expanded
government insurance funds. However, not-for-profit hospitals have to comply with
government pricing measures, and shareholders are not allowed to share in the retained
profits.
For-profit hospitals, on the other hand, often have a flexible pricing strategy and can return
profits to shareholders. However, the tradeoff is a smaller addressable market and limited
state insurance coverage.
Limited access to capital

Last but not least, limited access to capital hinders private investment in hospital business,
in our view. Building a hospital generally costs a few hundred millions or more with five to
eight years to break even. The strict bank lending policy in China does not allow a hospital
owner to borrow money using the hospital as collateral which also makes this type of
investment less attractive.
In summary, we see challenges as well as opportunities in Chinas private hospital market.
We think the hospital management model offers the best return given low capital
requirement in the near to medium term. We believe targeting retired medical
professionals and offering partnerships may help to solve the talent shortage in operating
private hospitals.
19
January 3, 2014
China: Healthcare
Appendix I: China healthcare insurance funding
Exhibit 40: Government spending accounts for 30% of the

total vs. 34.9% for out-of-pocket expenditure
Exhibit 41: Healthcare subsidy per capita for UBMI and

NRCMS continues to rise
Breakdown of healthcare expenditure: government, social

(e.g. company co-payment), individual
Healthcare subsidy per capita from government
Individual
Social
Government
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Healthcare subsidy per capita from government
(Rmb)
400
360
350
280
300
240
250
30.4%
200
200
120
150
80
100
50
20
20
40
80
40
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2015
Source: Ministry of Human Resources and Social Security (MOHRSS).
Exhibit 42: Insurance coverage exceeded 97% in 2011.
Exhibit 43: but the reimbursement ratio remained

steady at c.80%, leading to c.20% annual surplus
Annual NRCMS expenditure and coverage ratio (2004-2011)
In-flow and out-flow of total insurance fund
Annual NRCMS expenditure

Coverage ratio
(Rmb bn)
180
160
140
120
75.2% 75.7%
80.7%
86.2%
(Rmb bn)
171
96.0% 97.5%
91.5% 94.2%
119
100%
80
66
60%
2004
2005
20%
16
0%
2006
2007
2008
2009
2010
2011
694
554
600
400
35
40
UBMI payout
Payout yoy %
700
500
40%
60
800
80%
92
100
20
120%
UBMI revenue
Revenue yoy %
300
200
367
289
221
155
202
2007
2008
431
354
443
2010
2011
554
280
100
0
2009
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
2012
20
January 3, 2014
China: Healthcare
Exhibit 44: UBMI has a balance of Rmb764.4 bn at the end of 2012

Urban Basic Medical Insurance (UBMI): Revenue, payout, number of enrollees
Indicator
2007
2008
2009
2010
2011
2012
Fund revenue (Rmb bn)
221.4
288.6
367.2
430.9
553.9
693.9
554.3
Fund payout (Rmb bn)
155.2
202.0
279.7
353.9
443.1
UBMI - Number of Enrollees (mn)
223.1
318.2
401.5
432.6
473.4
536.4
61.9%
42.6%
26.2%
7.8%
9.4%
13.3%
UEBMI - Number of Enrollees (mn)
180.2
200.0
219.4
237.3
252.3
264.9
URBMI - Number of Enrollees (mn)
42.9
118.3
182.1
195.3
220.7
271.6
288.2
331.3
401.5
494.7
22.1
30.6
49.7
76.0
139.4
173.4
216.5
269.7
427.6
474.1
568.3
688.4
427.6
504.7
17.9%
618.0
20.5%
764.4
21.1%
yoy (%)
UBMI balance
- Balance of public part
URBMI balance at year-end (Rmb bn)
- Balance of individual part
UEBMI balance at year-end (Rmb bn)
244.1
343.2
UBMI balance at year-end (Rmb bn)

Annual balance as % of revenue
Unlike the Urban Employee Basic Medical Insurance Program (UEBMI), for which urban
workers and their employers are required to make contributions, the Urban Resident Basic
Medical Insurance Program (URBMI), and New Rural Cooperative Medical Scheme
(NRCMS) rely on government subsidies and personal contributions. The following table
sets forth certain information regarding each insurance program. We expect rising
government subsidies will add to higher balances for the three funds for the next few years.
Exhibit 45: Rising government subsidies to add to higher fund balances
Comparison between UEBMI, URBMI and NRCMS and their funding sources
Program
Funding source
Per Capita funding

in 2012 (Rmb)
UEBMI
Employers and
employees
2,619
URBMI
Urban residents
and governments
320
NRCMS
Rural residents and

governments
308
Funding
An employee and his or her employer shall pay 2% and 6%,
respectively, of such employees monthly salary into the
insurance fund every month.
Varies among cities; the urban resident pays approximately
20% to 40% of the funding while the government pays the
balance.
Varies among rural areas; the rural resident often pays
approximately 20% to 40% of the funding while the government
pays the balance.
Source: MOHRSS, NHFPC.
Chinese government has been striving to establish a universal medical insurance system
since 2009. In China, government insurance programs mainly consist of the UEBMI, URBMI,
and NRCMS. By the end of 2012, 99% of the total registered population in China were
covered by one of three governmental insurance programs, compared to 85.3% at the end
of 2008 (Exhibit 46).
Total funding of three medical insurance programs (UEBMI, URBMI, NRCMS) reached
Rmb795.2 bn in 2012, and Frost & Sullivan expects it to reach Rmb2,692 bn in 2017 (Exhibit
48).
21
January 3, 2014
China: Healthcare
Exhibit 46: Chinas medical insurance system reached

coverage of 99% in 2012
Exhibit 47: Total payment by the three medical insurance

programs (UEBMI, URBMI, NRCMS) reached Rmb795.2
bn in 2012
Population covered by one of the three medical insurance

programs in China
Population covered by 3 programs

Overall population in China
Coverage rate
99.0%
(bn)
1.40
1.35
1.30
1.25
1.20
1.15
1.10
1.05
1.00
96.8%
Total payment by these three medical insurance programs

for the years presented
100%
94.6%
95%
92.5%
90%
85.3%
85%
80%
75%
2008
2009
2010
2011
NRCMSP
(Rmb bn)
900
800
700
600
500
400
300
200
100
0
2012
URBMIP
UEBMIP
240.8
171.0
92.3
16.7
66.2
0.0
118.8
26.7
202.0
263.0
327.2
2008
2009
2010
63.8
41.3
490.6
401.8
2011
2012
Exhibit 48: Total funding of three medical insurance programs (UEBMI, URBMI, NRCMS) is
expected to reach Rmb2,692 bn in 2017
Total funding of three medical insurance programs (UEBMI, URBMI, NRCMS) (2008-2012)
Total funding
(Rmb bn)
3,000
2008-2012 CAGR=26.6%
2012-2017 CAGR=23.4%
2,500
2,000
1,500
2,691.6
1,000
367.0
461.6
561.8
758.8
942.3 1,128.8
2008
2009
2010
2011
2012
500
0
2013
1,445.1
2014
1,796.9
2015
2,182.3
2016
2017
22
January 3, 2014
China: Healthcare
Appendix II: Listcos with investments in hospitals

Exhibit 49: Phoenix Healthcare Group (PHG, 1515.HK), a newly listed hospital management group, operates 12 hospitals
and 28 community clinics in five major hospital groups
PHGs key operating hospitals/medical institutions
Hospital
group
Jian Gong
# of beds in
# of
# of patient
operation as
community
visits ('000)
of June 30,
clinics
2012
2013
JCI
accredited
hospital?
Type of
hospital
Initial date
609.3
Yes
General
2007
324.8
554
791.6
Yes
General
2008/02
72/150 **
7/17/2055
421
490.9
General
2010/07
75
12/31/2030
1 Grade III
7 Grade I
11
1,738
807.6
General
2011/05
150
12/31/2030
IOT
1 Grade II
100
350.2
Specialty
2012/06
25
12/31/2030
12
28
3,213
3,049.7
Model
# of
hospitals
80% equity
*
1 Grade II
400
Yan Hua
IOT
1 Grade III
17
Mentougou
IOT
1 Grade II
Jing Mei
IOT
Mentougou
TCM
Total
Investment Agreement
(Rmb mn) expiry date
733.8
Notes: *PHG and Beijing Construction Engineering Group holds 80%/20% equity interests in Jian Gong Hospital. **PHG has made an initial investment of
Rmb72mn in Yan Hua and committed to make a further investment of Rmb150mn of which PHG has paid Rmb87mn by July 2013. JCI stands for
accreditation from Joint Commission on Accreditation of Healthcare Organizations (JCAHO).
Source: Company data.
23
January 3, 2014
Exhibit 50: Detailed list of listcos with investments in hospitals (1)
General healthcare groups

Fosun Pharma
1
2
3
4
5
6
CR Sanjiu
1
2
3
4
5
6
Specialty hospital
Ai'er Eyes
1
Topchoice
1
2
600196.SS/2196.HK
United Family Healthcare (UFH)
3
Chindex
1
2
3
4
5
G3
G2
G1
Yueyang Guangji Hospital

Anhui Jimin Oncology Hospital
Suqian Zhongwu Hospital
GZ Nanyang Oncology Hosp.
Foshan Chancheng Hospital
000999.SZ
Mine Hospital of Xuzhou
Kunming Children's Hospital
Wuhan Steel General Hospital
Gaozhou People's Hospital
Sanjiu Hospital Co. Ltd.
Sanjiu Brain Hospital
Hunan
Anhui
Jiangsu
Guangdong
Guangdong
Province
Jiangsu
Yunnan
Hubei
Guangdong
Guangdong
Guangdong
Y
G3
Y
G1
-
Y
Y
Y
Y
A
Y
Y
Y
Y
Y
Y
B
-
Y
Y
Y
Y
G2
Y
Y
Y
-
300015.SZ
40+ ophthalmology hospitals
600763.SS
13 dental hospitals/clinics
CQ Bo'En Reproduction Hosp.
Province
Hunan (HQ)
Province
Chongqing
G3
G3
-
G2
G2
-
G1
G1
-
Province
G3
G2
Xi'an
Guangzhou
Medical device company

Concord
CCM
Chang'an CMS International
1
Cancer Center (CCICC)
2
Province
Guangzhou Taihe Hospital

Beijing Proton Medical Center
CHDX
Beijing UFH
Shanghai UFH
New Hope Oncology Center
Tianjing UFH
United Family Home Health
UFH BJU United Family Hospital
7
8
Qingdao UFH
Guangzhou UFH
Gen. Spe. SOE
Start time
Comments
11.8%
2010/06
55%
70%
55%
50%
60%
Equity
100%
66%
51%
49%
-
2H2011
2011/05
2012/12
9/3/2013
2013/10
Start time
2011/07
2012/04
2013/02
2013/09
-
A
A
-
B
B
-
Gen. Spe. SOE

Y
Gen. Spe. SOE
Y
Y
-
NIC
NIC
-
Consideration
Equity
Equity
51%
Start time
2009/10
Start time
2006
6/17/2013
Comments
21 provinces
Comments
G1
Gen. Spe. SOE
NIC
Consideration
Equity
Start time
Comments
US$39.4 mn
52%
2011
Province
Beijing
Shanghai
Beijing
Tianjin
Beijing
G3
-
G2
-
G1
-
A
-
B
-
Equity
NIC
-
Consideration
Y
Y
Y
Y
Y
Gen. Spe. SOE
Y
Y
Y
Y
Y
Y
Y
Beijing
NIC
Gen. Spe. SOE

-
c.Rmb693 mn
Consideration
Consideration
70%
NIC
-
Consideration
500 beds
700+500 beds
500 beds
900 beds
1,900 beds
Failed
In cooperation with SYS Oncology Hospital
In cooperation with China-Japan Friendship

51.2% Open in 2012/2014
Hospital
Equity
Start time
Comments
90%
2002
70%
2002
2010/05
2011/12
2013/01
Beijing
2013/06
Shandong
Guangdong
2014
1H2015
Note: NIC = National Insurance Covered, SOE = State-owned enterprise, A/B stands for Class A/B, Gen = General. Spe = Specialty; G1-3 = Grade 1-3
24
China: Healthcare
Pharmaceutical companies
Jinling Pharma 000919.SZ
Province
G3
G2
G1
B Gen. Spe. SOE
NIC
Consideration
Equity
Suqian People's Hospital
Jiangsu
Drum Tower Yizheng Hospital
Jiangsu
Rmb132 mn
68.33%
2012/07
002219.SZ
Province
G3
G2
G1
B Gen. Spe. SOE
NIC
Consideration
Equity
Start time
Chengdu Ping'an Hospital
Sichuan
Rmb120 mn
85%
2013/01
Deyang Better Tomorrow Hosp.
Sichuan
Rmb15 mn
100%
2013/06
2012 NPAT: Rmb3.04 mn
Sichuan
Rmb25 mn
100%
2013/06
Sichuan
Rmb80 mn
100%
2013/06
5
Kangmei
Ziyang Jianshunwang Hospital

Pengxi Jianshunwang TCM
(Ortho) Hosp.
Qionglai Welfare Hospital
600518.SS
Sichuan
Province
G3
G2
G1
Y
B Gen. Spe. SOE
NIC
Consideration
100%
Equity
10/28/2013
Start time
Puning Kangmei TCM Hospital
Guangdong
Rmb300 mn
100%
2007
2012 NPAT: Rmb15 mn

Switched to for-profit status on 2013/06/17
2012 NPAT: Rmb3 mn
Comments
Total investment scale upped to Rmb830 mn
in 5 years
1,000 beds
Not-for-profit hospital, expect annual sales of
Rmb300 mn, NPAT of Rmb123 mn
Meihekou Women & Children

Hospital
Jilin
11/5/2013
No change to public hospital status
Meihekou Friendship Hospital
Jilin
11/5/2013
Meihekou TCM Hospital
Jilin
11/5/2013
>Rmb500 mn
investment
>Rmb500 mn
investment
>Rmb500 mn
investment
2003/07
Comments
SPH booked earnings of Rmb76.57 mn in
2011.
Changed to for-profit status in 2003, paying
income tax since 2010/07
410 beds (520 beds with new building in use),
2011 NPAT: Rmb11.1 mn
2012/06/12 turned to for-profit hospital
Comments
350 beds
Oncology hospital
Gansu Duyiwei
Rmb70.126 in 2013 70%
Start time
January 3, 2014
China: Healthcare
25
Pharmaceutical companies
Guizhou Bailing 002424.SZ
1
Mayinglong
Tasly
1
Shuanglu
Province
G3
G2
G1
Guizhou Tianyuan Hospital
Guizhou
600993.SS
Province
G3
G2
G1
Intestine Hospitals (Wuhan,

Beijing, Shenyang, Xi'an, Nanjing,
Datong)
600535.SS
Pu'er Central Hospital
002038.SZ
Xinxiang Central Hospital (East)
Hubei (HQ)
Province
Yunnan
Province
G3
Y
G3
G2
G2
G1
G1
A
Y
A
B
B
Henan
Jointown
1
2
Furui Medical
600998.SS
Wuhan Jointown Hospital
Beijing Renhe Hospital
300049.SZ
Province
Hubei
Beijing
Province
G3
G3
G2
G2
G1
G1
A
A
B
B
Ulaan Chab Furui Hospital
Inner Mongolia
Province
G3
G2
G1
Hubei
Province
G3
G2
G1
Jiangsu
Wuhan Jianmin
1
Guizhou Yibai
1
Harbin Sanjing
1
2
600976.SS
Wuhan Jianmin Disgestive
Disease Hospital
600594.SS
Guannan County People's
Hosptial
600829.SS
Harbin Sanjing Women's
Specialty Hospital
Harbin Sanjing Renal Disease
Specialty Hospital
Huabang Pharma 002004.SZ

1
Xin Hua Li Kang
Gen. Spe. SOE

Y
Gen. Spe. SOE
Gen. Spe. SOE

Gen. Spe. SOE
Gen. Spe. SOE

Gen. Spe. SOE
-
Gen. Spe. SOE

-
Gen. Spe. SOE

Y
Gen. Spe. SOE
NIC
Consideration
Equity
Start time
Rmb1.48
100%
10/16/2013
NIC
Consideration
Equity
Start time
Comments
Another Rmb25 mn for further investment
2012 NPAT: (Rmb1.50 mn)
Specifically for diabetes treatment
Comments
2008
First intestinal disease opened in Wuhan in

2008
6 hospital in 4 years
Wuhan, Beijing, Xi'an profitable since 2012
NIC
NIC
Consideration
Consideration
Equity
Equity
Start time
2011/07
Start time
Comments
200 beds (to be expanded to 500 beds)
Comments
Rmb160 mn
80%
2011/06
Shuanglu will invest no less than Rmb500 mn

in the following 3 years from 2011
Focus on drug supply
NIC
Y
NIC
Consideration
Consideration
Equity
Equity
Start time
2011
Start time
Rmb300 mn
2010/10
NIC
Consideration
Equity
Start time
Comments
Comments
Non-for-profit
At construction phase
Comments
Rmb130 mn
65%
2012/10
In cooperation with Wuhan No.8 Hospital
NIC
Consideration
Equity
Start time
Comments
90%
2005
500 beds
Comments
First women's specialty hospital in Helongjiang
Province
Province
G3
G2
G1
NIC
Consideration
Equity
Start time
Heilongjiang
Rmb30 mn
100%
2005/10
Heilongjiang
2008/08
150 beds
Province
G3
G2
G1
NIC
Consideration
Equity
Start time
Comments
Guizhou
Rmb60 mn
2010/09
Total investment from all parties: Rmb170 mn
Gen. Spe. SOE

-
January 3, 2014
China: Healthcare
26
General groups
Founder
Technology
600601.SS
Province
G3
G2
G1
Gen. Spe. SOE
NIC
Consideration Equity
Start time
Comments
Wu Jieping Medical Foundation
Beijing
2013/03
Focus on urology, in
association with PKU
Healthcare Industry
Group
Hunan Kaide Hospital
Hunan
2013/09
Focus on CCV disease
Peking University International

Hospital
Beijing
Rmb1 bn
70%
2014/04
2400 beds, Phase I

functional in 2008
Province
G3
G2
G1
Start time
Comments
Hunan
2002
Zhejiang
100%
6/6/2005
Guangdong
2012/04
Guangdong
2012/10
Beijing
2012/08
In cooperation with
Yuquan Hospital
Province
G3
G2
G1
Start time
Comments
Dandong No.1 Hospital

Beijing Chengzhi Ruihua Hospital
Management Co., Ltd
Beijing Chengzhi Outpatient Co.,
Ltd
Liaoning
60%
2005/09
Beijing
2001
1,015 beds
Backed by Tsinghua
Univeristy
Beijing
2013/09
600500.SS
Province
G3
G2
G1
CITIC Medical &

Health Group Co., Ltd
Reproductive & Genetic Hospital
1
of Citic-Xiangya
2
CITIC Hangzhou Plastic Surgery

Hospital
CITIC Huizhou Hospital
4
5
CITIC Nanshan Health Screening

Center
CITIC Yuquan Women and
Children's Hospital
Chengzhi Co., Ltd. 000990.SZ

1
2
3
Sinochem
International
Gen. Spe. SOE
Gen. Spe. SOE
Gen. Spe. SOE
NIC
NIC
NIC
January 3, 2014
In cooperation with
Zhongnan University
Including CITIC
Hangzhou Hand
Surgery Hospital,
divested in 2012
500 beds (with
designed capacity of
2,000 beds)
Start time
Comments
Shanghai Hongxin Hospital

Management Co., Ltd
Shanghai
2012
In cooperation with
Taiwan Zhanghua
Christianity Hospital
Shanghai Hongxin Healthcare

Investment Co., Ltd
Shanghai
2013
27
China: Healthcare
Source: Company data
Insurance company
China Ping An
601318.SS
Shenzhen Longgang TCM
1
Hospital
Province
G3
G2
G1
Guangdong
Province
G3
G2
G1
Zhejiang
Gen. Spe. SOE

-
NIC
Consideration
Equity
Start time
2011/04
Comments
Exit in 2012/12, local government insists on
"not-for-profit" status
January 3, 2014
Real estate company

Zhejiang Guangsha 600052.SS
1
Zhejiang Jinhua Guangfu (former

No.3 People's) Hospital
Lushang Property 600223.SS

1
Province
G3
G2
G1
Shandong Zibo Wanjie Oncology

Hospital
Shandong
000516.SZ
Province
G3
G2
G1
Gen. Spe. SOE

Y
Gen. Spe. SOE

-
NIC
Consideration
Equity
Start time
Comments
NIC
Consideration
Equity
Start time
Comments
Focus on oncology
NIC
Consideration
Equity
Start time
Others
Xi'an Kaiyuan
Gen. Spe. SOE
Comments
- First private Grade IIIA hospital on August
17, 2009
- 760 beds
- Switched to for-profit status in July 2011
- Located in Xi'an Hi-tech Industries
Development Zone
- 1H13 healthcare service revenue: Rmb207
mn, NPAT: Rmb27 mn
- Founded by Mr. Liu Jianshen in 2000
Xi'an Gaoxin Hospital
Shaanxi
Rmb297 mn (for
100% equity share
on Nov 12, 2011)
XI'an Sheng'an Hospital
Shaanxi
Rmb330 mn (build
from scratch)
Province
Hainan
G3
-
G2
-
G1
-
A
-
B
-
Gen. Spe. SOE

-
NIC
-
Consideration
-
Equity
-
Start time
2012-2013
Comments
-
Province
G3
G2
G1
Gen. Spe. SOE
NIC
Consideration
Equity
Start time
Comments
Hainan Airline
600221.SS
1
Haikou Guoxingcheng Hospital
Changchun High &
000661.SZ
New Tech
Changsha Nuobei'er Children's
1
Hospital
Jiangsu Etern
600105.SS
1
Suzhou Etern Hospital
Hunan
Province
Jiangsu
G3
-
G2
-
G1
-
A
-
B
-
Gen. Spe. SOE

-
2011/11
- Announced in July 2012

2012/07
(announcement of - Located in Xi'an Hi-tech Industries
construction plan) Development Zone
Rmb5.4 mn
NIC
-
Consideration
Rmb300 mn
Equity
88%
Start time
-
Comments
-
Source: Company data
China: Healthcare
28
January 3, 2014
China: Healthcare
Disclosure Appendix
Reg AC
We, Wei Du, Ph.D and Li Yu, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject
company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to
the specific recommendations or views expressed in this report.
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Disclosures
Coverage group(s) of stocks by primary analyst(s)
Wei Du, Ph.D: China Healthcare. Li Yu: China Healthcare.
China Healthcare: Baiyunshan (H), Biosensors International Group, CSPC Pharmaceutical Group, China Medical System Holdings, China Shineway
Pharmaceutical Group, Jiangsu NHWA Pharmaceutical Co., Jiangsu Yuyue Medical Equipment & Supply, Mindray Medical International, Phoenix
Healthcare Group Co Ltd., Shandong Weigao Group, Shanghai Fosun Pharmaceutical (Group) Co Ltd, Shanghai Pharmaceuticals Holding (H), Sihuan
Pharmaceutical Holdings Group, Sino Biopharmaceutical, Sinopharm Group Co., The United Laboratories International Holdings, Tianjin Tasly
Pharmaceutical Co., WuXi PharmaTech Cayman, Wuhan Humanwell Healthcare (Group) Co., Zhejiang Huahai Pharmaceutical Co..
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42%
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China: Healthcare
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China: Healthcare
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Hospital primer: An introduction to China hospitals

Hospital reform taking center stage

Private hospitals still at nascent stage, but growing the fastest

From small-scale specialty clinics to large-scale general hospitals

Investing in China healthcare service sector

The Goldman Sachs Group, Inc.

Goldman Sachs Global Investment Research

Goldman Sachs does and seeks to do business with

Private hospitals saw strong growth and market share gain

Current industry statistics for China hospitals

Service quality and efficiency to drive performance

Key areas of hospital reform

Investing in Chinas healthcare service sector

Key challenges in investing in Chinas hospital service sector

Appendix I: China healthcare insurance funding

Appendix II: Listcos with investments in hospitals

Goldman Sachs Global Investment Research

Hospital reform taking center stage driven by unmet demand

Three stages of Chinas healthcare reform

Universal insurance coverage, affordable healthcare

Make drugs affordable

Focus on healthcare service

Efficient payment system

Demand for quality medical services fuels hospital growth

Exhibit 3: per capital growth at 122X outpacing GDP

China annual healthcare expenditure (1982-2012)

Growth of Chinas per capita healthcare expenditure vs. GDP

Per capital healthcare expenditure

China annual healthcare expenditure

Source: Wind, National Health and Family Planning Commission (NHFPC).

Source: Wind, NHFPC.

Total healthcare expenditure

Total beds in hospitals (mn)

Total nurses (mn)

Total doctors (mn)

Total healthcare institutions #

Source: Wind, NHFPC.

Goldman Sachs Global Investment Research

Source: National Health and Family Planning Commission (NHFPC)

Private hospitals saw strong growth and market share gain

Goldman Sachs Global Investment Research

Not market oriented

Source: Gao Hua Securities Research.

Exhibit 7: Private hospitals account for 44.6% of total

Exhibit 8: However, beds in private hospitals account for

Number of total private and public hospitals (Mar 2011- Sep

Number of beds in private and public hospitals in 2012

Source: NHFPC, Wind.

Goldman Sachs Global Investment Research

# of beds in private hospitals

Source: NHFPC, Wind.

Total beds in operation (mn)

Inpatient visits (mn)

Outpatient visits (bn)

Bed utilization rate (%)

Total revenue (Rmb bn)

Note: ALOS = Average Length of Stay (days)

Exhibit 10: The proportion of private hospitals is on the

Exhibit 11: ...similarly for-profit hospitals, at 26% yoy in

Number of public and private hospitals (2003-2011)

Number of not-for-profit and for-profit hospitals (2003-2011)

2003 2004 2005 2006 2007 2008 2009 2010 2011

Goldman Sachs Global Investment Research