High pricing leads to weak subscription and a sharp drop in the dark market, can "Mechanism B" also not save Mindray Medical (02581)?

Bearing the halo of being ranked first among all private and profitable comprehensive hospital groups in mainland China by 2024, Primebase Hospital (02581) ventured into the Hong Kong market and finally knocked on the door of the Hong Kong Stock Exchange at the end of this year. After completing the IPO from December 12 to December 17, it is expected to start trading on December 22. Looking back at Primebase Hospital's journey to Hong Kong, it first submitted its IPO prospectus to the Hong Kong Stock Exchange in April of last year. Due to incomplete application materials, compliance risks, and business model deficiencies, it did not pass the listing hearing within six months, resulting in the prospectus being invalidated. Subsequently, Primebase Hospital restarted the IPO process in October last year and April this year, and even passed the listing hearing in the third IPO attempt, but eventually the prospectus became invalid again in October this year due to the company's failure to initiate follow-up processes in a timely manner. Therefore, this is Primebase Hospital's fourth attempt to launch its IPO on the Hong Kong Stock Exchange, and judging by the current progress, it is also the closest to being listed. Wearing the "halo," urgently needing to break through the growth bottleneck Primebase Hospital is positioned as a private and profitable comprehensive hospital group in mainland China, currently operating two comprehensive hospitals, Nanjing Primebase Hospital and Suzhou Primebase Hospital. The prospectus shows that after the last round of equity transactions, Primebase Hospital was valued at 375 million US dollars. In terms of total revenue in 2024, Primebase Hospital is the largest private and profitable comprehensive hospital group in the East China region, ranking seventh among all private and profitable comprehensive hospital groups in the country, with a market share of 0.4%; based on average bed income in 2024, Primebase Hospital ranks first among all private and profitable comprehensive hospital groups in mainland China. From a financial perspective, the prospectus shows that from 2022 to 2024, the company's revenues were 2.336 billion yuan, 2.688 billion yuan, and 2.659 billion yuan respectively; corresponding annual profits increased significantly from 89.55 million yuan in 2022 to 168 million yuan in 2023, but dropped to 109 million yuan in 2024. Overall, in 2024, Primebase Hospital's revenue growth stagnated, and there were some fluctuations in profitability. In the first half of this year, Primebase Hospital's revenue was 1.312 billion yuan, but net profit was only 49 million yuan, a decrease of over 23% year-on-year; net cash generated from operating activities was 80.129 million yuan, a decrease of 52.05% year-on-year. Regarding the decline in revenue, the company stated in the prospectus that it was mainly due to a more severe infectious disease epidemic at the beginning of 2024 compared to the same period in 2025, leading to a reduction in outpatient visits, resulting in decreased revenue from outpatient medical services in the first half of 2025, offsetting the increase in revenue from inpatient medical services during the same period. From a deeper perspective, Primebase Hospital's fluctuating net profit is also related to the current medical insurance payment policy. Under the DRG payment system, the total amount of medical insurance payments decreases, which will have a negative impact on hospital profits to a certain extent. This is reflected in the prospectus that after the implementation of the DRG payment system in Nanjing and Suzhou, the average expenditure per hospital stay of patients decreased. Data shows that in 2024, Primebase Hospital's overall bed utilization rate has reached 97.1%, with the Nanjing campus even exceeding the limit, reaching 102.8%. In order to break through the growth bottleneck, Primebase Hospital's strategy is to further increase operational scale. According to the plan, by 2027, Nanjing Primebase will focus on building a special needs center, while Suzhou Primebase will also establish a new maternity and child care center and rehabilitation and long-term care center. Rough calculations show that the two hospitals under Primebase Hospital will add a minimum of about 1,800 beds over the next six years. In the prospectus, Primebase Hospital also explicitly stated that about 74.3% of the proceeds will be used to expand and upgrade existing hospitals. Considering the issuance ratio, based on the median issue price, the issuance ratio is 21.47%, and for a company with a market value of less than 10 billion Hong Kong dollars, this issuance ratio reflects a significant financing need for the company. When the "clever strategy" meets cold subscription Since the new IPO rules were introduced in August this year, "Mechanism B" has been mentioned repeatedly. Since August 4th this year, HKEX has officially implemented new IPO allocation mechanism rules. Companies planning to go public can choose between "Mechanism A" and "Mechanism B," giving them more control over the issuance structure. Unlike the traditional clawback mechanism, Mechanism B requires the issuer to pre-select a proportion to be allocated to the public offering, with a minimum of 10% of the shares for public sale and a maximum of 60%, and once the proportion is determined, there is no clawback mechanism. Although the core goal of the new IPO rules introduced this time is to improve the pricing efficiency of new stocks, enhance market stability, and give issuers and institutional investors greater say, if the introduction of Mechanism B allows companies to have more control over the issuance structure, directly choosing Mechanism B, and pushing the public offering to the lower limit of 10%, thus "artificially" creating an extremely small float, and forming an issuance pattern dominated by institutions, cornerstone investors, and anchor shares, in order to "protect the price" for the company's listing. A month after the implementation of the new rules, the impact of the choice of mechanism on the investor structure, market performance, and liquidity after listing quickly became apparent. For example, targets that implemented "Mechanism B" IPOs, including Jinfang Medicine and Jiaxin International Resources, all saw first-day gains of over 100%, significantly outperforming the targets that implemented "Mechanism A" IPOs during the same period. However, Mechanism B is not a "panacea," but a "double-edged sword." For a company, if it is reasonably valued and has sufficient institutional orders, it can further expand the market's positive sentiment, attracting attention from the market; but if the company has issues such as overpricing and the need to improve long-term value, it may lead to weak institutional subscription, and without a clawback mechanism, it is also difficult for the company to have retail investors step in. Returning to Primebase Hospital, this time it chose to issue through Mechanism B. According to the issuance plan, Primebase Hospital plans to issue 67 million shares in Hong Kong, with 670,000 shares for public offering in Hong Kong, accounting for about 10%; and 60.3 million shares for international offering, accounting for about 90%, with an additional 15% green shoe option, and the offering price ranging from 9.34 Hong Kong dollars to 11.68 Hong Kong dollars, raising up to 782 million Hong Kong dollars. According to the median issue price, the issuance ratio is 21.47%, with cornerstone investors locking up 44.1%, leaving only 394 million Hong Kong dollars in the float. As of December 17th, the IPO of Primebase Hospital has ended. Data shows that as of Wednesday morning (December 17th), securities firms had lent out 368 million Hong Kong dollars to Primebase Hospital, based on the public offering fund of 78.26 million Hong Kong dollars, oversubscribed by 3.7 times. It was observed that on December 19th, Primebase Hospital opened at 9.00 Hong Kong dollars in the Futo dark pool trading platform, a 3.64% decrease from the IPO price of 9.34 Hong Kong dollars. Within the first hour of trading, Primebase Hospital's share price fell to a low of 7.15 Hong Kong dollars, a 23.45% drop from the IPO price. From the above, it can be seen that Primebase Hospital's fundamentals still need improvement and there is a significant financing need, but the tepid market subscription and the reason for the listing price breaking below may be related to its relatively high pricing. Based on its IPO price range, its market value range is from 2.913 billion Hong Kong dollars to 3.643 billion Hong Kong dollars. The corresponding PE valuation median is 29.8 times. In comparison, the PE valuation of HYGEIA HEALTH, a concept of private hospitals also listed on the Hong Kong Stock Exchange, is only 15.67 times, with an average PE of 16.72 times in the same sector. Therefore, the higher pricing of Primebase Hospital may be one of the important reasons for the lukewarm subscription during the IPO stage.