The rural areas surrounding the city, the dominant tumor hospital HYGEIA HEALTH (06078) is also deeply trapped in the dilemma of expansion.

Four years ago, HYGEIA HEALTH (06078) was listed on the Hong Kong Stock Exchange. Taking advantage of the trend in the medical industry and the scarcity of tumor hospitals, HYGEIA's stock price continued to rise, reaching a market capitalization of nearly HK$70 billion at its peak, enjoying a moment of great success. However, this good time did not last, as after reaching a high, HYGEIA's stock price declined continuously, and recently it has fallen below its IPO price, with its market value evaporating by over 80% within two years. Despite the continuous decline in its stock price, HYGEIA's performance in recent years has been quite impressive. Data shows that in the past seven years, HYGEIA's revenue growth CAGR reached 37.8%, and the adjusted net profit CAGR reached an impressive 56.2% over the same period. The rapid growth in performance over the years was mainly due to HYGEIA's focus on market trends and its ability to integrate resources. Riding the industry trend and targeting third-tier and lower-tier cities to become the dominant force in tumor hospitals It is understood that tumor hospitals, as a type of specialized hospital, mainly focus on the prevention and treatment of tumor diseases. Specialized hospitals are different from general hospitals, as they are built around the service characteristics of a specific department based on the classification of clinical departments in general hospitals, characterized by small scale, specialized functions, and precise techniques. Looking at the development history, China established tumor specialized hospitals as early as the 1950s, making significant progress in the specialized treatment of tumors. With the professionalization of tumor treatment, China's level of tumor treatment has gradually improved, presenting a good development opportunity for tumor hospitals. From an industry chain perspective, the upstream of tumor hospitals includes industries such as medical equipment and pharmaceuticals. While hospitals have a huge demand for medical and consumable supplies, equipment, drugs, office supplies, etc., the market still has an oversupply. Hospitals have bargaining power with various manufacturers and suppliers in terms of profit margins, product allocation, and additional technical support. Therefore, when dealing with upstream suppliers, tumor specialized hospitals have strong bargaining power. The downstream mainly refers to tumor patients. Looking at the outpatient visits to tumor hospitals in China, data shows that in 2022, there were about 26.6032 million visits, with approximately 4.0404 million admissions and 4.0312 million discharges. With the increasing trend of aging, the number of cancer patients in China is increasing each year, resulting in a growing demand for tumor hospitals. According to Frost & Sullivan's data, it is estimated that by 2025, the number of cancer patients in China will reach 5.11 million, with the majority of patients coming from third-tier cities. The demand for tumor medical services in China is increasing year by year, and the total market revenue is continuously rising, reaching a market size of 373.7 billion RMB in 2019, and is expected to continue to expand in the future. Due to the higher number of patients, third-tier cities have become the regions with the highest demand for tumor medical services. However, their medical resources are relatively scarce, and most of the demand is difficult to meet. This area has a vast market space for tumor medical services waiting to be developed. As for the current situation of tumor hospitals in China, statistics show that as of 2022, the number of tumor hospitals in China is approximately 162, with about 82 public tumor hospitals and 80 non-public tumor hospitals. In recent years, the development of the domestic private medical market has been driven by policies, accelerating the construction of private tumor hospitals. In 2022, the proportion of non-public tumor hospitals further increased to 49.38%. In terms of revenue, China's total revenue in tumor hospitals has continued to grow. Data shows that China's tumor hospital revenue increased from 18.9 billion yuan in 2016 to 49.9 billion yuan in 2021, with a compound annual growth rate of 21.4%. It is expected to reach 106.7 billion yuan by 2025, with a compound annual growth rate of 20.9% from 2021 to 2025. Since acquiring 95% of GammaStar Technology (manufacturer and seller of radiotherapy equipment) in 2009 and entering the tumor medical industry, HYGEIA HEALTH has focused on third-tier cities or even more underdeveloped counties and cities. The expansion route of "rural surrounding cities" has enabled HYGEIA HEALTH to achieve rapid expansion. As of the first half of 2024, HYGEIA manages or operates 16 hospitals with tumor departments as their core, including 4 tertiary hospitals, 12 secondary hospitals, and 2 tertiary scale hospitals under construction, covering 13 cities in 8 provinces in China, with the coverage gradually improving. Furthermore, it is worth noting that, apart from its fast expansion speed, HYGEIA HEALTH's integration speed and operational efficiency in hospitals are also significantly higher than the industry average. This is mainly due to the centralized management structure, the "Dual-Hospital-Chief System," and the micro-module organizational management structure established by HYGEIA, which standardizes the management system, enables the quick enhancement of newly established hospitals, successful integration of acquired hospitals, and rapid growth within a short period. According to Frost & Sullivan's data, it usually takes 36 to 48 months for a comprehensive hospital with an area of 25,000 to 80,000 square meters to start operation after construction, and it generally takes about 3 years for it to become profitable. In comparison, HYGEIA's self-built hospitals can start operation as early as 17 months after construction begins and can be profitable within 3 to 9 months after opening, far exceeding the industry average. Based on these advantages, HYGEIA HEALTH has established a dominant position in the domestic tumor medical service industry. Achieving stable performance growth through mergers and acquisitions, but accumulating a large amount of goodwill has become a hidden danger However, after large-scale expansion, HYGEIA, like many private medical institutions, is also facing the challenges of expansion. In its just-released interim report, in the first half of 2024, HYGEIA achieved operating income of 2.38 billion yuan, a year-on-year increase of 37.6%; gross profit of 770 million yuan, a year-on-year increase of 32.5%; EBITDA of 650 million yuan, a year-on-year increase of 28.7%; and adjusted net profit of 400 million yuan, a year-on-year increase of 15.5%. Specifically, in the first half of the year, HYGEIA's hospitals performed 46,095 surgeries, with surgical income increasing by 38.6% year-on-year. As a result, HYGEIA's hospital business income in the first half of the year was 2.31 billion yuan, accounting for 96.9%, with a year-on-year increase of 37.2%.Revenue from outpatient services increased by 49.63% year-on-year to 8.1 billion yuan, while revenue from inpatient services increased by 31.3% to 14.9 billion yuan. In terms of disciplines, revenue from oncology services increased by 31% year-on-year, accounting for 43.9% of total revenue. Obviously, the year-on-year increase in the number of patients and revenue represents an improvement in the hospital's operational and expansion capabilities.In terms of expansion strategy, Hygeia mainly adopts acquisition with self-build as a supplement. In terms of the progress of hospital construction, according to the company's financial report, the company's fifth self-built hospital, Dezhou Hygeia, passed the acceptance of a tertiary hospital in March 2024, and officially put into operation in July 2024, with plans to set up 1000 beds. The construction projects of Wuxi and Changshu Hygeia are progressing in an orderly manner, both of which are planned to be tertiary hospitals with 800-1000 beds and 800-1200 beds respectively. In addition, several expansion projects such as the third phase of Chang'an Hospital, the second phase of Hezhou Guangji Hospital, the second phase of Suzhou Yongding Hospital, and the second phase of Kaiyuan Jiehua Hospital are progressing in an orderly manner. After all the self-built projects are put into operation, the total number of beds will exceed 16,000. The integration of merger projects is progressing orderly, with Chang'an Hospital introducing 7 senior title discipline leaders and 22 senior title experts, and Yixing Hygeia Hospital continuously improving its discipline development, successfully establishing a municipal "Chest Pain Treatment Unit". However, this expansion strategy has led to a significant feature in its financial report: a large amount of goodwill. The financial report shows that as of June 30, 2024, Hygeia's intangible assets amounted to 3.944 billion yuan, accounting for 36.74% of total assets, becoming the second largest asset after fixed assets. Many private hospitals have fallen into a dilemma due to excessive goodwill. For example, Yihua Health (*ST Yikang), which has been delisted from the capital market. Starting from 2014, Yihua Real Estate successively incorporated hospital operations, medical equipment, and elderly care businesses into the listed system, with a total investment exceeding 3 billion yuan. However, Yihua Health is obviously inexperienced in the field of medical services, and the development of hospitals has stagnated. After years of accumulation, Yihua had to make large goodwill impairment, and the profit for that year was even worse. Such dilemmas are not uncommon in the wave of privately-run hospitals. Aier Eye Hospital Group incurred over 1 billion yuan of goodwill impairment from 2017 to 2022, while still having 6.533 billion yuan of goodwill on the books (2023 annual report). INKON Life Technology made a goodwill impairment provision of 1.195 billion yuan for Sichuan Friendship Hospital and Maxwell Medical College, which was the direct cause of losses in the past three years. Therefore, high goodwill is also a time bomb for Hygeia. In addition, there is a scarce resource that cannot be solved by penetrating the market, which is physician resources and is currently one of the biggest problems facing private hospitals in China. The National Health Commission has issued the "14th Five-Year Plan for the Development of Health and Health Talents." The plan proposes that by 2025, the national health and health personnel team will be further expanded, with a total of 16 million personnel. The plan clearly states that the focus in the next five years will be on scarce specialties, clinical key specialties, and will focus on strengthening the training and development of clinical specialties in critical care, oncology, cardiovascular and cerebrovascular diseases. Taking radiotherapy as an example, the National Health Commission commissioned the China Medical Equipment Association to conduct a nationwide survey on the radiotherapy specialty. The results show that there is a gap of nearly 11,000 radiotherapy specialists, including over 4,800 specialized radiotherapists, over 2,000 radiotherapy physicists, and nearly 4,000 therapists. The existence of these gaps is due to the fact that the training speed of radiotherapy talents is not keeping up with the growth in clinical demand, and is also affected by factors such as unclear career advancement paths and low salaries. Radiotherapy physicists face the embarrassment of "no promotion possible" in public hospitals, and their corresponding salary and benefits are directly affected, which hinders the development of radiotherapy talent. At the same time, the shortage of radiotherapy talent is considered a key issue restricting the development of the radiotherapy industry in China. As of June 30, 2024, Hygeia has a total of 7,587 medical professionals, with an increase of 104 people in the first half of 2024 compared to the same period in 2023. Among them, there are 1,220 senior professional and technical personnel, including 74 experts who enjoy special government allowances from the State Council and chief and deputy chief of various expert societies. The company continues to strengthen internal medical training, with 422 medical professionals promoted to higher-level positions as of June 30, 2024. Currently, Hygeia's expansion has not been affected by the shortage of doctors, but in the long run, Hygeia's expansion will be limited by the availability of physician resources. In addition, in the first half of the year, Hygeia's sales costs increased by 36.7% to 1.625 billion yuan, with employee welfare expenses reaching 760 million yuan, an increase of approximately 29.03% year-on-year, accounting for 46.77% of total sales costs. It is evident that in order to maintain a stable retention rate of core doctors, the growth rate of doctors' salaries has exceeded the revenue growth rate for the current period. As private hospitals are the most attractive factor for doctors compared to public hospitals. Therefore, in the future, as Hygeia continues to expand, the cost pressure of doctor salaries may further manifest, posing a stumbling block to the valuation growth process of Hygeia HEALTH. In addition, according to Hygeia's financial report, the proportion of bad debts in medical insurance to income was 1% in the first half of 2023, 2.4% for the whole year of 2023, and 2.7% in the first half of 2024. The increasing proportion of bad debts in medical insurance indicates that although Hygeia's drug business accounts for a small proportion, it is still significantly affected by the DRGs policy.