Chaoju Eye Care Sees Strong Growth In Acquisitions

Key Takeaways:

• Chaoju Eye Care has announced its purchase of a Beijing Hospital as part of its strategy of growth through acquisitions
• The eye care provider’s revenue and profit rose 30% and 44.3% in the first six months of last year, respectively, producing plenty of cash to fund its buying spree

By Edith Terry

Chaoju Eye Care Holdings Ltd. (2219.HK) is setting its sights on China’s lucrative private hospital business, catering to a growing middle class with money to spend outside the national healthcare system that covers basic needs. Working from its base in China’s less-affluent Inner Mongolia region, the company began the year by announcing its purchase of the Beijing Mingyue Ophthalmic Clinic Co. in China’s far more affluent capital for 36.8 million yuan ($5.2 million).

That was after the company added eight ophthalmic hospitals and two optical centers to its network between June 2022 and June 2023, six of those through acquisitions, giving it 26 hospitals and 27 optical centers. The hospitals provide comprehensive eye care services, while the optical centers offer more basic services, such as eyeglass fitting and simple eye tests. In March last year, the company also bought its own eyeglass factory in the Ningxia region.

Despite its rapid expansion, Chaoju’s share price is less than a third of its IPO price from July 2021, when it raised HK$1.5 billion ($192 million). The company is relatively small compared to majors like Fosun Pharmaceutical (2196.HK), which operates hospitals in addition to its core drug business. Fosun Pharma’s hospital arm, which is reportedly being considered for a spinoff, posted revenue of 3.1 billion yuan ($434 million) in the first half of 2023, or more than four times the 693 million yuan for Chaoju.

But investors see both companies as relative equals in terms of their stocks, with each currently trading at a price-to-earnings (P/E) ratio of about 11. That could owe partly to the fact that Fosun Pharma’s hospital business, with 20 medical facilities and over 6,000 beds, mostly in wealthy coastal areas, is currently losing money. By comparison, Chaoju, with 1,112 beds, is finding healthy profits in China’s less affluent Northwest. Its net profit grew 44% year-on-year to 146.9 million yuan in the first half of last year, while its 693 million yuan in revenue was up 30% from a year earlier.

Like all hospital systems in China, Chaoju was hit hard by the pandemic, which forced most out-patient service facilities to close at various times over the three-year period. But Chaoju has bounced back nicely from that downturn, as reflected by its strong profit growth in the first half of last year after China ended its tough pandemic controls.

Growth by building and buying new facilities can help to boost revenue, but, of course, it also comes at a cost. While the company’s net cash flow from operating activities has been increasing as its revenue grows, up about 10% year-on-year to 273.4 million yuan in 2022, and rising 24% to 194.7 million yuan in the first half of 2023, it has also been burning cash. Its cash dropped sharply from 1.2 billion at the end of 2021 to 944.7 million a year later. It fell further to 413.9 million yuan by midway through last year, though much of the decline was due to moving the cash into investments.

Hospital Bubble

Fast growth is not necessarily a good thing in China’s private hospital sector, which was approaching bubble status prior to Covid-19. The number of private hospitals in China surpassed public facilities by 2015, and by 2021 there were twice as many private hospitals as public ones – 24,766 vs 11,804, according to the medical journal Lancet. But Chaoju has been tightly focused not only on a high-demand sector, eye care, but also on its relatively underserved North China base.

Founded in 1988, Chaoju is a family company with deep roots in Baotou, the largest city in Inner Mongolia. Its chairman is Zhang Bozhou, and its main shareholders are children of founder Zhang Chaoju, and grandchildren of Zhang Xinghuan, a traditional Chinese medical practitioner who opened his own clinic called Zhonghetang in 1921.

While it may be relatively poor compared to China’s coastal regions, Inner Mongolia is still ranked eighth nationally with a GDP per capita of 102,558 yuan in 2022, behind Shanghai’s 179,907. Despite that, Chaoju is probably finding strong profits through its regional focus in a market where it has relatively little competition. The latest Beijing hospital purchase is still relatively close to its Inner Mongolia home, but shows the company is trying to move beyond its traditional base into areas that are more lucrative, though also more competitive.

Eye care is also in growing demand, fueled partly by eye problems related to high internet use caused by excessive time looking at computer and smartphone screens. More than 50% of Chinese teenagers suffer from myopia, the highest percentage in the world, with netizens spending an average of 29.5 hours per week online. The market for eyecare products is also expanding rapidly, with products such as steam eye masks, eye massagers and warm eye masks growing by 501%, 111% and 109%, respectively, in 2022, according to Daxue Consulting.

The larger of Chaoju’s two main business segments, “consumer services,” recorded revenue of 361.1 million yuan in the first half of last year, while “basic services” wasn’t far behind with 331.5 million yuan. “Basic services” grew from 45.5% of total revenue in the first six months of 2022 to 47.9% in the same period of 2023, while “consumer services” fell from 54.6% of revenue to 52.1% over the period.

Chaoju isn’t on most investor radar screens, but five analysts canvassed by Yahoo Finance have set an average price target for the company of HK$7.68, or about 80% above its current levels. Yonghe Medical (2279.HK), a hair restoration clinic operator that has also gone through a phase of rapid expansion, trades at a price-to-sales (P/S) ratio of 0.69, much lower than Chaoju’s 2.26, probably because Yonghe is losing money. That just goes to show that there’s nothing investors like better than profits, not to mention a good growth story.

This article is from an external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.