iKang Healthcare: The Latest IPO to Watch


iKang Healthcare could find the going tough in New York with its newly announced plan for a Nasdaq IPO, at least based on the lackluster record for others from China's medical sector. iKang has become the latest in a growing list of Chinese firms lining up for New York listings this year, following its first public filing for a plan to raise up to $150 million. But while most Chinese IPO candidates so far have come from the Internet space, iKang comes from a Chinese health care sector that has failed to generate much interest from US investors despite its huge growth potential.

iKang's arrival to the market comes as a number of other Chinese health care firms are moving in the opposite direction, with at least 2 major companies in the process of privatizing and a third just announcing a major share repurchase to boost its sagging stock. But, all that said, I do still think the right kind of health care company could generate some excitement in the market, and iKang could fit that bill.

iKang has certainly found at least one strong backer in investment banking giant Goldman Sachs, which was an early investor in the company. BofA Merrill Lynch and UBS are underwriting the deal, which is also a good sign as both are top-tier investment banks.

Figures in 2 reports I read differed slightly, but the more detailed report stated that iKang posted revenue of $173 million for the 9 months through December last year, up 50 percent from 2012. . Its profit grew at a similar but slightly slower 42% to $27 million over the same period. The company is in the business of operating clinics, which is a fast-growing sector as China overhauls its health care system to reduce the current reliance on hospitals for most medical care. iKang currently operates a chain of 42 of its own clinics, and another 300 through contracts with third parties, making it one of China's top operators.

Now that we've gotten in all the background, let's look at why this IPO could face some strong resistance but also why it could perform better than some of its peers. The past year has seen 2 firms from China's medical sector launch privatization plans, after their shares languished for years due to lack of investor interest. Drug maker Simcere Pharmaceutical launched its bid a year ago, and clinic operator Chindex last month announced its own similar plan. Similarly, medical device maker Mindray Medical has just announced it is boosting its previous share buyback plan by an additional $100 million, after its original $200 million repurchase program failed to provide much support for its stock.

Despite all that negative sentiment toward the Chinese medical sector, I do think that iKang's IPO could do well for a number of reasons. Its biggest attraction is its leading position in the clinic-operating space, which has plenty of room for profitable growth. By comparison, Simcere operates in the drug development sector, where most purchasing is done by big state-run companies that can command big discounts. The company posted a 17% revenue decline in its latest quarter, as its continuing operations swung to a loss due to stiff competition that sharply squeezed its margins. Mindray's growth is also relatively slow due to its strong dependence on exports for its medical devices, though it's trying to sell more into its faster-growing home market. It also reported an unimpressive 17% growth on the top line in its latest reporting quarter, though its profits grew at a faster 25% clip. But the company acknowledged that even its profit growth would have been half that rate excluding a special tax benefit.

Chindex also operates clinics in China, though its foreign ownership puts it at a distinct disadvantage in the nation's highly protected health care market. The company's struggles showed up in both the top and bottom lines of its latest earnings report, with revenue up a modest 16% while the company reported a nearly 6-fold jump in its net loss to $3.8 million from the year-ago period. At the end of the day, I still think iKang could be a difficult sell due to a relative indifference to the China health care story by western investors. But I do think the company's IPO could enjoy some modest success due to its position as a leader in the high-growth clinic operating sector.

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