Bought a new stock today called Union Medical Healthcare (UMH) listed on the Hong Kong main board under ticker 2138. The company operates 54 medical clinics in Hong Kong (45), China (7) and Macau (2) as of January 2019. The group is the no.1 private healthcare provider in Hong Kong. UMH has several business segments (numbers are from last interim report ending September 2018):
Here is a list of brands owned by UMH. Their focus is on aesthetic services, orthopaedic, eye and dental clinics. Also they have several diagnostics centers that provide health management services, radiology and MRI scans.
- Medical services (55%) - aesthetic surgical procedures, minimally invasive procedures, eye treatments, orthopaedic and chiropractic treatments
- Quasi-medical services (8%) - energy-based procedures
- Health management services (8%)
- Traditional beauty services (16%) - facials, massages and other non-invasive procedures
- Sale of beauty and skin-care products (5%) - they sell private label products like PRODERMA LAB and Suissebeaute
- Other (8%)
Here is a list of brands owned by UMH. Their focus is on aesthetic services, orthopaedic, eye and dental clinics. Also they have several diagnostics centers that provide health management services, radiology and MRI scans.
Revenue, operating income and net income
Union Medical financials
The company is growing at a brisk pace. Revenues have grown at a CAGR of 30% over the past 5 years and were actually up by 40% in the year ended March 2019, while net income increased by 30%. Net profit margin reached a peak of 28% after which it declined to 20% currently. According to morningstar, UMH had HK$ 967 million in cash and marketable securities, HK$498 million in short-term debt and zero long-term debt, thus having a HK$467 millon net debt position. Their ROE has averaged 29% over the past 4 years.
UMH has financed their expansion mainly by internal cash flow and their IPO proceeds. EPS has increased from 0.24 in 2015 to 0.36 in March 2019, a CAGR of 11% mainly due to dilution of shares in IPO. The company has c. 1 billion shares outstanding at a price of HK$6.7 , giving us a market cap of HK$6.7 billion (US$858 million). According to morningstar.com, the stock is selling for a P/E of 19, forward P/E of 13.6 and P/S of 3.6 which is pretty cheap if we look at their historical growth and future potential.
The business was started by Eddy Tang in 2005 with one clinic and one practicing doctor, the founder still owns 73% of shares and remains at the helm of the company. Here is a short interview with Tang from 2016. He drives the entire company towards excellent customer service and high quality medical care, which results in high patient satisfaction scores, with customer retention of 89% (not sure how this is measured). Also the company has introduced a 14-day cooling-off period, during which customers can request a refund without giving a reason. This helps cement their loyalty and trust in the brand.
The second largest shareholder is a US healthcare investment fund called Orbimed advisors with a 6.5% stake.
UMH has financed their expansion mainly by internal cash flow and their IPO proceeds. EPS has increased from 0.24 in 2015 to 0.36 in March 2019, a CAGR of 11% mainly due to dilution of shares in IPO. The company has c. 1 billion shares outstanding at a price of HK$6.7 , giving us a market cap of HK$6.7 billion (US$858 million). According to morningstar.com, the stock is selling for a P/E of 19, forward P/E of 13.6 and P/S of 3.6 which is pretty cheap if we look at their historical growth and future potential.
The business was started by Eddy Tang in 2005 with one clinic and one practicing doctor, the founder still owns 73% of shares and remains at the helm of the company. Here is a short interview with Tang from 2016. He drives the entire company towards excellent customer service and high quality medical care, which results in high patient satisfaction scores, with customer retention of 89% (not sure how this is measured). Also the company has introduced a 14-day cooling-off period, during which customers can request a refund without giving a reason. This helps cement their loyalty and trust in the brand.
The second largest shareholder is a US healthcare investment fund called Orbimed advisors with a 6.5% stake.
Business outlook and growth potential
The public system in Hong Kong has 43 hospitals and treats around 90% of inpatients, there is a chronic shortage of qualified doctors (around 350) and patients sometimes wait for more than 150 weeks for certain procedures (scmp.com). As a result, people who can afford it rather go to private healthcare institutions. The vast majority of UMH revenue is funded by out of pocket expenditures from patients, and not through insurance reimbursement, which makes them less susceptible to regulation and state intervention.
UMH focuses mainly on aesthetic services (plastic operations, botox treatments, facial and skin-care) through their brand Dr. Reborn which has won several awards in Hong Kong.
2019 has been a fruitful year for the group, as they increased the number of specialty clinics, oncology centres, day surgery
centres, and diagnostic and imaging centres. UMH increased their presence in radiology, cardiothoracic surgery, treatment of disorders of the ear, nose and throat (ENT), plastic surgery, neurosurgery, orthopaedics and urology.
Around 84% of their customers are women, and the company treated 81,000 patients in the year ended March 2018. In 2015, the vast majority of revenue came from Hong Kong and only 9% was from mainland Chinese patients, who travelled to Hong Kong for treatment. UMH opened their first clinic in China (Guangzhou) in June 2015 with a capex of HK$3.1 million. The clinic achieved HK$8.9 million in revenue in first 9 months of its operation, suggesting the payback period can be pretty short and that opening new ones is a very lucrative business. 6 more clinics in China followed. In February 2019 the company bought a clinic in Beijing that holds a medical license and practices aesthetic services.
UMH focuses mainly on aesthetic services (plastic operations, botox treatments, facial and skin-care) through their brand Dr. Reborn which has won several awards in Hong Kong.
2019 has been a fruitful year for the group, as they increased the number of specialty clinics, oncology centres, day surgery
centres, and diagnostic and imaging centres. UMH increased their presence in radiology, cardiothoracic surgery, treatment of disorders of the ear, nose and throat (ENT), plastic surgery, neurosurgery, orthopaedics and urology.
Around 84% of their customers are women, and the company treated 81,000 patients in the year ended March 2018. In 2015, the vast majority of revenue came from Hong Kong and only 9% was from mainland Chinese patients, who travelled to Hong Kong for treatment. UMH opened their first clinic in China (Guangzhou) in June 2015 with a capex of HK$3.1 million. The clinic achieved HK$8.9 million in revenue in first 9 months of its operation, suggesting the payback period can be pretty short and that opening new ones is a very lucrative business. 6 more clinics in China followed. In February 2019 the company bought a clinic in Beijing that holds a medical license and practices aesthetic services.
Union Medical Healthcare mainland customer revenue
Pearl River Delta
The company wants to focus their expansion plans mainly on the Pearl River Delta (PRD) region and Tier 1 Chinese cities. They have stated, that instead of pursuing aggressive expansion, they will target selective locations high GDP per capita areas. The Pearl River Delta is comprised of 9 large cities and 2 administrative regions, with a population of c. 70 million people. PRD economic growth has been 3% above national average for the past 30 years, mainly due to the fact that 30% of foreign direct investment in China flows right here (wiki).
The Chinese government recently opened a new rail link between Hong Kong and mainland China, as well as the Hong Kong- Zhuhai-Macau Bridge, which connects the island with the continent. This has caused a large increase in the number of tourists from China, many of them seeking quality healthcare. As a result, I think the number of patients visiting their facilities can grow organically for the next several years, and the share of revenue from mainland Chinese will rise as well.
Tencent collaboration
UMH has opened two clinics in Hong Kong as a JV with Tencent (chinadailyhk), and plans to open 18 more within 2-3 years. Tencent will provide their IT systems, artifical intelligence expertise in diagnostics and advertising on WeChat app, which has over 1 billion users in China. This is a big boost for UMH and the stock initially jumped 61% when the deal was announced. Theoretically, Tencent could help the company expand on the mainland as well. But that's just my theory.
Hong Kong private healthcare market
According to their latest press release the private HC market in Hong Kong is expected to grow to HK$100 billion by 2024/2025 which is a 6% CAGR from HK$68 billion in 2017 (Dh.gov). Out of total healthcare expenditures in HK, 49% are funded through public insurance schemes, 34% are through out of pocket payments by patients and only 16% are paid for through private insurance (fhb.gov.hk). In addition, the government has launched a new private insurance scheme with extra incentives, to drive an estimated 1.5 million people towards private healthcare institutions, to reduce the burden on strained public healthcare system (scmp). This will benefit UMH, as the company can get approvals for reimbursements from insurance companies, which should increase the number of patients being treated at their clinics.
Healthcare in China
The Chinese market is very fragmented with over 31,000 hospitals with various levels of services and prices. According to ResearchandMarkets, the most profitable segments are ophthalmology, dental care and plastic surgery clinics with margins above 10%. Which is basically the majority of UMH business. There is plenty of room for industry consolidation to achieve economies of scale. Through acquisitions or developing their own clinics, UMH can achieve scale especially in purchasing (medical materials and equipment), IT systems and marketing. Large hospital chains like Aier Eye Clinic have around 200 units in the country, which is still less than 1% of the total market (although a higher % of private healthcare market).
The company wants to focus their expansion plans mainly on the Pearl River Delta (PRD) region and Tier 1 Chinese cities. They have stated, that instead of pursuing aggressive expansion, they will target selective locations high GDP per capita areas. The Pearl River Delta is comprised of 9 large cities and 2 administrative regions, with a population of c. 70 million people. PRD economic growth has been 3% above national average for the past 30 years, mainly due to the fact that 30% of foreign direct investment in China flows right here (wiki).
The Chinese government recently opened a new rail link between Hong Kong and mainland China, as well as the Hong Kong- Zhuhai-Macau Bridge, which connects the island with the continent. This has caused a large increase in the number of tourists from China, many of them seeking quality healthcare. As a result, I think the number of patients visiting their facilities can grow organically for the next several years, and the share of revenue from mainland Chinese will rise as well.
Tencent collaboration
UMH has opened two clinics in Hong Kong as a JV with Tencent (chinadailyhk), and plans to open 18 more within 2-3 years. Tencent will provide their IT systems, artifical intelligence expertise in diagnostics and advertising on WeChat app, which has over 1 billion users in China. This is a big boost for UMH and the stock initially jumped 61% when the deal was announced. Theoretically, Tencent could help the company expand on the mainland as well. But that's just my theory.
Hong Kong private healthcare market
According to their latest press release the private HC market in Hong Kong is expected to grow to HK$100 billion by 2024/2025 which is a 6% CAGR from HK$68 billion in 2017 (Dh.gov). Out of total healthcare expenditures in HK, 49% are funded through public insurance schemes, 34% are through out of pocket payments by patients and only 16% are paid for through private insurance (fhb.gov.hk). In addition, the government has launched a new private insurance scheme with extra incentives, to drive an estimated 1.5 million people towards private healthcare institutions, to reduce the burden on strained public healthcare system (scmp). This will benefit UMH, as the company can get approvals for reimbursements from insurance companies, which should increase the number of patients being treated at their clinics.
Healthcare in China
The Chinese market is very fragmented with over 31,000 hospitals with various levels of services and prices. According to ResearchandMarkets, the most profitable segments are ophthalmology, dental care and plastic surgery clinics with margins above 10%. Which is basically the majority of UMH business. There is plenty of room for industry consolidation to achieve economies of scale. Through acquisitions or developing their own clinics, UMH can achieve scale especially in purchasing (medical materials and equipment), IT systems and marketing. Large hospital chains like Aier Eye Clinic have around 200 units in the country, which is still less than 1% of the total market (although a higher % of private healthcare market).
Summary
I really like the business and its potential for future growth. The company will most likely expand its collaboration with Tencent, can open or acquire more clinics in PRC and their existing clinics will likely get more traffic thanks to the new bridge and railway terminal. GDP growth rate in China has slowed, but it's still several times higher than in many developed markets. The demand for quality healthcare will likely only increase, and UMH will be one of the beneficiaries of this trend. Union Medical can be one of those rare 10x stocks in the next few years.
I have put 7% of my portfolio in Union Medical stock, and I'm using a stop loss as always, in case something goes wrong.
I have put 7% of my portfolio in Union Medical stock, and I'm using a stop loss as always, in case something goes wrong.
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