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Urbanization unleashes grassroots demand, presenting opportunities for the medical device sector.
Although the “strong start” that many investors had been anticipating for the Year of the Snake did not materialize, the market’s pullback couldn’t stem the remarkable surge in the pharmaceutical sector.
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Although the “strong start” that many investors had been anticipating for the Year of the Snake did not materialize, the market’s pullback couldn’t stem the remarkable surge in the pharmaceutical sector. Last week, pharmaceutical stocks stood out on their own, with many companies within the sector even hitting all-time highs.
It is worth noting that, driven by the needs of urbanization and its supporting infrastructure, the demand for medical devices in grassroots markets and county-level hospitals will see a substantial increase. This trend is reflected in the secondary market, where individual stocks in the medical device sector have recently attracted unprecedented attention. Last week, the State Council issued the "Opinions on Improving the Essential Drug System and Establishing New Mechanisms for Grassroots Operations." Industry analysts believe that this could represent a major opportunity for the medical device sector to achieve growth beyond expectations.
Urbanization drives demand for medical devices.
At noon on February 22, Sanlejin, a company engaged in the production and sale of home sauna equipment, announced that it had obtained the "Medical Device Manufacturing Enterprise License." Following this announcement, Sanlejin was immediately locked at the daily upper limit due to large-scale buying orders. This clearly highlights the market’s heightened attention toward medical device stocks.
The medical device sector has attracted considerable attention precisely because it is closely linked to the development of a new type of urbanization. This new type of urbanization is not simply about concentrating rural populations in towns and cities, nor is it merely about building infrastructure. Rather, it involves aligning various aspects—such as healthcare, education, elderly care, social security, and lifestyle—with urban standards.
The construction of county-level hospitals will create broad growth opportunities for the medical device industry. According to a research report prepared by Li Qiushi, an analyst at Guotai Junan, in terms of healthcare expenditure, rural residents’ healthcare spending totaled 289.7 billion yuan in 2011. Assuming a normal pace of urbanization, by 2020, the additional healthcare consumption generated by rural residents transitioning into urban residents will amount to 236.3 billion yuan. Adding this to the 392.4 billion yuan increase already driven by rural residents’ own healthcare expenditures, the total additional spending will reach 628.7 billion yuan. At that time, overall rural healthcare consumption will more than double compared to current levels.
With policy support, the performance of listed companies in the medical device sector has generally improved. For example, Hejia Shares saw its net profit grow by 51.8% to 70.8% year-on-year in 2012; David Medical’s 2012 performance increased by 35% to 50% year-on-year; Kailite’s net profit rose by 45% to 55%; and Dian Diagnostics’ performance grew by 35% to 45% year-on-year.
According to the “2012 Medical Device Industry Analysis Report” released by the Medical Device Professional Committee, last year the dependence of certain segments of China’s high-end medical equipment market on imported products began to decline slowly, and domestic medical device companies are steadily enhancing their competitiveness in the high-end product segment. In the first half of 2012, China’s medical device industry achieved total sales revenue of 68.7 billion yuan, representing a year-on-year increase of 20.27%. Driven by multiple factors—including policy support, demographic shifts, and upgrading consumer spending—forecasts indicate that China’s medical device industry will continue to maintain rapid growth over the next 5 to 10 years, with the industry as a whole expected to sustain an annual growth rate of over 20%.
Several listed companies are expected to benefit.
Jiang Guangce, Chairman of Dechuan Capital, told reporters that China's medical industry as a whole remains relatively low-end, and there are not many attractive investment targets in the medical device sector. However, from the perspective of county-level hospital construction, domestic companies—especially those already listed in the medical device industry—have clear advantages, since equipment purchased by county-level hospitals tends to be mid- to low-end. Such companies include David Medical, Biotec, and Hejia Shares.
Hejia Shares is one of the listed companies that has benefited most from the construction of county-level hospitals. Among Hejia Shares’ three major product lines, tumor treatment equipment aligns with the direction of critical illness medical insurance (among the 20 covered diseases, 9 are malignant tumors); imaging systems can strengthen the connectivity between county-level hospitals and township health centers, thereby improving the quality of primary-level healthcare services; and the oxygen concentrator business meets the demand of county-level hospitals for upgrading and replacing their existing bottled oxygen supplies.
Since the beginning of this year, Hejia Shares has repeatedly secured large contracts. The company has successively won bids for comprehensive renovation projects at the Jing County People’s Hospital in Hebei Province and the Zhongyi Hospital in Hezhou District, Chongqing. On February 21, Hejia Shares released a preliminary earnings report, forecasting a net profit for 2012 between 120 million and 135 million yuan, representing a year-on-year increase of 51.8% to 70.8%. According to industry insiders familiar with Hejia Shares, the company has been actively involved in the expansion and renovation of grassroots hospitals, and its integrated solutions have been highly favored by county-level hospitals. However, the same insider also noted that the recent sharp rise in Hejia Shares’ stock price has made its valuation no longer inexpensive, so it’s important to pay close attention to whether the company’s future market development efforts will meet expectations.
Tongce Medical, whose core business is oral healthcare, is also a key focus of market attention. Hangzhou Dental Hospital is Tongce Medical’s primary source of revenue; currently, this hospital has entered a mature stage of development. Ningbo Dental Hospital is the company’s second-largest profit-generating unit. The Kunming market represents a major growth driver for the future. The company has already taken controlling stakes in Kunming Municipal Dental Hospital and is poised to replicate the Hangzhou model in Kunming, thereby achieving high growth. Tongce Medical is also actively expanding into the assisted reproductive technology market. It has partnered with Kunming Municipal Maternal and Child Health Hospital to establish a reproductive center and has brought in the internationally renowned brand Bourn to engage in technological collaboration. The company plans to be the first in China to set up two IVF centers and intends to manage other IVF centers through a franchise model. Both of Tongce Medical’s core businesses are expected to achieve significant growth amid the wave of medical urbanization.
In addition, medical device stocks that are benefiting from healthcare urbanization include Dian Diagnostics, Xinhua Medical, Sanovo Biotech, and Aier Eye Hospital, among others.
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