GS China Hospitals Jan2014

8/16/2019 GS China Hospitals Jan2014

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January 3, 2014 China: Healthcare

Goldman Sachs Global Investment Research 1

January 3, 2014

China: Healthcare

Equity Research

Hospital primer: An introduction to China hospitals

Primer for hospital investors

In this document, we highlight basic facts, historical trends, market

dynamics, opportunities and challenges in the China hospital sector.

Hospital reform taking center stage

The Third Plenum has laid out a more market-based healthcare reform

blueprint. We believe drug price cuts were the first phase, and China is

now in the midst of the second phase: hospital reform. We see significant

changes and investment opportunities in China’s healthcare service

industry, driven by favorable government policy, demographic trend, rising

demand for high quality services, and ample liquidity.

Private hospitals still at nascent stage, but growing the fastest

Sector revenue for China hospitals grew 20% CAGR in 2005-11. Frost &

Sullivan expects total healthcare expenditure to grow at 13.2% CAGR in

2012-17, driven by universal insurance coverage, increased private hospitals

and significant private investment. Revenue for private hospitals grew at

22.6% CAGR in 2008-12, likely outpacing that of total hospitals. Yet private

hospitals’ revenue and beds hover around 10% in 2012 of the total due to

reimbursement constraint, smaller scale, and the shortage of experienced

physicians. We see more relaxed government policy and rising demand for

affordable high-quality services further boosting private hospital growth.

From small-scale specialty clinics to large-scale general hospitalsChina’s private hospital investment has largely focused on smaller-scale

specialty clinics, led by oncology and ob-gyn. We believe lower barriers-to-

entry in terms of capital requirement and physician availability is the main

reason for the current industry structure. We see increasing investor

interest and opportunities in large-scale general hospitals (more than 500

beds) in tier II and tier III cities, driven by favorable local government policy

and unmet demand as a result of insurance coverage expansion.

Investing in China healthcare service sector

We conduct a brief analysis on capital requirement, accessibility, and risks

and returns for investing in China hospitals. We conclude a hospital

management company is likely to generate the highest return in the near to

medium term due to lower capex and higher leverage. We see a proper

managerial structure, and a fair and balanced incentive scheme as key to

attract qualified physicians, the core factor in the hospital business.

Wei Du, Ph.D+86(21)2401-8928 [email protected] Beijing Gao Hua Securities Company Limited

Goldman Sachs does and seeks to do business withcompanies covered in its research reports. As a result,investors should be aware that the firm may have a conflict ofinterest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in makingtheir investment decision. For Reg AC certification and otherimportant disclosures, see the Disclosure Appendix, or go towww.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analystswith FINRA in the U.S.

Li Yu+86(21)2401-8932 [email protected] Beijing Gao Hua Securities Company Limited

The Goldman Sachs Group, Inc. Global Investment Research


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Table of Contents

Hospital reform taking center stage driven by unmet demand 3

Private hospitals saw strong growth and market share gain 5

Current industry statistics for China hospitals 10 Service quality and efficiency to drive performance 16

Key areas of hospital reform 16

Investing in China’s healthcare service sector 17

Key challenges in investing in China’s hospital service sector 19

Appendix I: China healthcare insurance funding 20

Appendix II: Listcos with investments in hospitals 23

Disclosure Appendix 29


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Hospital reform taking center stage driven by unmet demand

The Third Plenum from the Chinese Communist Party has laid out a more market-based

healthcare reform blueprint. We expect hospital reform to take center stage now and

believe “de-administration” in public hospitals, and increasing private investment in

private hospitals to be the dominant theme, coupled with centralized control of urban/ruralmedical insurance and gradual extension to private hospital coverage.

Three stages of China’s healthcare reform

We divide China’s healthcare reform plan and progress into three stages. We think drug

price control was the first phase of the reform, including revision of national drug

reimbursement lists (NDRL), NDRC cost investigation, and expansion of essential drug lists

(EDLs). We are now in the midst of the second phase of the reform, targeting China’s

largest healthcare service providers, the public hospitals. We expect to see “de-

administration” of China’s public hospital system, notably leaning more towards a market-

based strategy by shifting focus to service quality and efficiency. We also expect private

hospitals to take larger role, fueled by government’s supportive policy and a centralizedcontrol of insurance management programs.

Exhibit 1: Hospital reform take center stage in the near to medium termKey targets and milestones for the three stages for China’s healthcare reform

Source: Gao Hua Securities Research, National Health and Family Planning Commission (NHFPC).

Demand for quality medical services fuels hospital growth

For the past three decades (1982-2012), China’s total healthcare expenditure jumped to

Rmb2,891 bn in 2012, 163X of Rmb17.8 bn in 1982, growing at 18.5% CAGR, according to

National Health and Family Planning Commission (NHFPC). In the meantime, healthcare

spending per person jumped 122X, far outstripping per capita GDP’s 73X).

2009-2012

Make drugs affordable

• Re-adjust EDL/RDL priceceiling

• Expansion of EDL (2013)/RDL

(2014)

• NDRC cost investigation

• More competition: differs from

region to region

Drug price

control

Hospital

reformInsurance

reform

2013-2015

Focus on healthcare service

• Lower entry barrier for private

capital to invest

• “De-administration” in China’s

public hospitals

• Changing revenue mix:drug/service trade-off

• Incentive scheme: improved

efficiency

• Public/private service

2015-2020

Efficient payment system

• Centralized control of three

major healthcare insurance

• Expansion of insurance

coverage to major illness and

increasing use of private

hospitals

• Payment shift from fee-for-

service to measures based on

performance and patient

outcomes

Universal insurance coverage affordable healthcare


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However, the growth of medical resources fell significantly short of expenditure growth.

Overall healthcare institutions grew 1.19X, of which the total number of hospitals grew

only 2.21X. The number of private healthcare institutions is on the rise while the number of

public hospitals is declining as a result of the change in ownership structure (see page 16),

in our view. The number of medical practitioners grew 1.31X (doctors: 2.00X and nurses:

4.43X), suggesting a resource shortage in healthcare institutions. Medical beds grew 2.51X,

with beds in hospitals growing 3.24X. Given the unmet demand, we see significant growthand investment opportunities in China’s healthcare service industry.

Exhibit 2: Healthcare spending grew 163X in the lastthree decades with…China annual healthcare expenditure (1982-2012)

Exhibit 3: …per capital growth at 122X outpacing GDPper capital growth of 73XGrowth of China’s per capita healthcare expenditure vs. GDP

(1982 index to 1)

Source: Wind, National Health and Family Planning Commission (NHFPC). Source: Wind, NHFPC.

Exhibit 4: Growth of total healthcare expenditure jumped 163X, while healthcare services

resources growth laggedTotal healthcare expenditure and healthcare resources (1982 vs. 2012)

Source: Wind, NHFPC.

17.8

2891.4

0

500

1,000

1,500

2,000

2,500

3,000

1 9 8 2

1 9 8 3

1 9 8 4

1 9 8 5

1 9 8 6

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

China annual healthcare expenditure(Rmb bn)

0

20

40

60

80

100

120

Per capital healthcare expenditurePer capita GDP +122X

+73X

801,869

950,297

700,000

750,000

800,000

850,000

900,000

950,000

1,000,000

1982 2012

Total healthcare institutions #

+1.19X

10,473

23,170

0

5,000

10,000

15,000

20,000

25,000

1982 2012

Total hospitals #

+2.21X

18

2,891

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1982 2012

Total healthcare expenditure(Rmb bn)

+163X

1.31

2.62

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1982 2012

Total doctors (mn)

+2.00X

0.56

2.50

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1982 2012

Total nurses (mn)

+4.43X

1.29

4.16

0.00.51.01.52.02.53.03.54.04.5

1982 2012

Total beds in hospitals (mn)

+3.24X


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Exhibit 5: The number of public hospitals is trending down while the number of privatehospitals is on the rise (at 45% of total hospitals by end of September 2013)Number of public and private hospitals (2003 -9M2013)

Source: National Health and Family Planning Commission (NHFPC)

Private hospitals saw strong growth and market share gain

Rising share of private hospitals

Increasing government funding and insurance expansion are leading to rising demand for

service efficiency and quality. A regulatory constraint on public hospital expansion offers

significant opportunities for private hospitals.

The number of private hospitals has been growing at 18% CAGR in 2003-12, reaching

10,795 by the end of September 2013, accounting for 45% of the total 24,222 hospitals in

China. However, the number of beds in private hospitals accounts for 10.2% of the

total hospital beds, at 0.58 mn vs. 5.14mn beds in public hospitals in 2012. Exhibit 6summarizes key differences between public and private hospitals.

Despite the higher number of private hospitals vs. public hospitals, total revenue

contribution from private hospitals remains small (7% as of 2012). However, growth in the

number of private hospitals was maintained at high teens vs. single digit for public

hospitals. Specialty clinics dominate the private healthcare service sector, with oncology

leading the growth.

15,727 15,726 15,483 15,141 14,90014,309 14,051 13,850 13,539 13,427 13,427

2,0372,667

3,2204,105

4,952 5,4036,240

7,068

8,4409,295

10,795

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 9M12 9M13

# of public hospitals # of private hospitals


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Exhibit 6: Comparison between a typical public vs. private hospital in terms of ownership,payer, payment and patient structures

Source: Gao Hua Securities Research.

Exhibit 7: Private hospitals account for 44.6% of totalhospitalsNumber of total private and public hospitals (Mar 2011- Sep

2013)

Exhibit 8: However, beds in private hospitals account for10.2% of the total in 2012Number of beds in private and public hospitals in 2012

Source: NHFPC, Wind. Source: NHFPC, Wind.

Not-for-profit Not-for-profit For profit

Public Private

GovernmentPrivate

enterprise

Private

enterprise

National medical

insurance

National medicalinsurance, commercial

insurance, out-of-

pocket

Out-of-pocket,

commercialinsurance

Mostly covered by

national medicalinsurance

Both national

insurance and

commercial

insurance

Mostly self-pay

patients, and

commercial

insurance

Set by government

Items withinreimbursement list set

by government.

Others proprietary

Mostly proprietary

pricing

Government

Not market oriented

No private claim

Provision of social

welfare

Shareholder

Market oriented

Not specified

None Proprietary

10,795

13,427

44.6%

0%

5%

10%

15%

20%

25%

30%

35%

40%45%

50%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

M a r - 1 1

A p r - 1 1

M a y - 1 1

J u n - 1 1

J u l - 1 1

A u g - 1 1

S e p - 1 1

O c t - 1 1

N o v - 1 1

F e b - 1 2

M a r - 1 2

A p r - 1 2

M a y - 1 2

J u n - 1 2

J u l - 1 2

A u g - 1 2

S e p - 1 2

O c t - 1 2

N o v - 1 2

F e b - 1 3

M a r - 1 3

A p r - 1 3

M a y - 1 3

J u n - 1 3

J u l - 1 3

A u g - 1 3

S e p - 1 3

# of private hospitals# of public hospitalsPrivate hospital as % of total hospitals

10.2%

0%

2%

4%

6%

8%

10%

12%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.55.0

2005 2006 2007 2008 2009 2010 2011 2012

# of beds in private hospitals# of beds in public hospitalsBeds in private hospital as % of total hospitals


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Public hospitals dominate China’s healthcare service industry, with about 86% of total

hospital beds in operation and more than 90% of total hospital revenue in China in 2012.

Around 73% of public hospitals are owned by the central and local governments, 25% are

owned by SOEs (state-owned enterprises), and 2% are owned by the military. Compared

with the public hospitals, the average scale of private hospitals is small and many are

specialty hospitals. The following chart sets forth a comparison of key metrics of public and

private hospitals in China in 2012.

Exhibit 9: Private hospitals are still a fraction of the overall hospital sector in terms of total beds in operation,in/outpatient visits, and total revenue in 2012Public vs. private hospitals in China (2009-2012 CAGR)

Note: ALOS = Average Length of Stay (days)

Source: Frost & Sullivan.

Exhibit 10: The proportion of private hospitals is on therise, growing 38% in 2011...Number of public and private hospitals (2003-2011)

Exhibit 11: ...similarly for-profit hospitals, at 26% yoy in2011Number of not-for-profit and for-profit hospitals (2003-2011)

Source: Wind. Source: Wind.

Public

hospital

Public

hospital CAGR

Private

hospital

Private

hospital CAGR Total

Private

hospital as

% of total

2009 2012 2009-2012 2009 2012 2009-2012 2012 2012

Number of hospitals 14,051 13,384 -2% 6,240 9,786 16% 23,170 42.2%

Total beds in operation (mn) 3.01 3.58 6% 0.37 0.58 16% 4.16 14.0%

Employees (mn) 3.96 4.28 3% 0.41 0.66 17% 4.94 13.3%

Practitioners (mn) 2.89 3.56 7% 0.31 0.50 18% 4.06 12.4%

Inpatient visits (mn) 78.1 113.3 13% 6.8 14.0 27% 127 11.0%

Outpatient visits (bn) 1.77 2.29 9% 0.15 0.25 19% 2.54 9.8%

Bed utilization rate (%) 87.7% 94.3% - 58.2% 63.2% - - -

ALOS 10.7 11.4 - 8.7 12.0 - - -

Total revenue (Rmb bn) - 1,391.3 - - 102.9 - 1,494.2 6.9%

11%15%

17%21%

25%27%

31%34%

38%

0%

5%

10%

15%

20%

25%30%

35%

40%

45%

0

2,000

4,000

6,000

8,000

10,00012,000

14,000

16,000

18,000

2003 2004 2005 2006 2007 20082009 2010 2011

# of public hospitals # of private hospitals

Private hopsital as % of total

11%14%

16%19%

20% 20%22%

24%26%

0%

5%

10%

15%

20%

25%

30%

0

2,000

4,000

6,000

8,000

10,00012,000

14,000

16,000

18,000

2003 2004 2005 2006 20072008 20092010 2011

# of not-for-profit hospitals # of for-profit hospitals

For-profit hopsitals as % of total


8/31



Exhibit 12: Less than 10% of hospitals with more than 200 beds in operation were privatehospitals in 2011Hospital number by number of beds in operation (2011)

Source: Wind.

Exhibit 13: Specialty hospital revenue growth wasconsistently more than 20% for 2006-11Specialty hospitals revenue (2005-2011)

Exhibit 14: Top five types of specialty hospitalsaccounted for 64% of the total specialty hospital marketin 2011Top five types of specialty hospitals revenue (2011)


3,624

2,129

2,703

1,581

919642

1,100841

5,485

1,899

722

171 63 26 58 16

60.2%

47.1%

21.1%

9.8%

6.4%

3.9% 5.0%

1.9%

0%

10%

20%

30%

40%

50%

60%

70%

0

1,000

2,000

3,000

4,000

5,000

6,000

Beds =800

Beds in public hospitals Beds in private hospitals

% of beds in private hospital in total

4248

60

75

93

114

139

15.8%

24.7% 24.6% 23.4% 22.9% 22.4%

0

0.05

0.1

0.15

0.2

0.25

0.3

0

20

40

60

80

100

120

140

160

2005 2006 2007 2008 2009 2010 2011

Revenue from total specialty hospitals

yoy %(Rmb bn) Oncology

2820%

Psychiatry21

15%

Paedeatric17

12%

Epidemic129%

Ob-gyn118%

Others50

36%

(Rmb bn)


9/31



Exhibit 15: Oncology hospitals led specialty hospitals in terms of annual revenue in 2011Revenue of specialty hospitals by types (2011)

Source: Wind.

Exhibit 16: Most specialty hospital revenue was maintained above 20% CAGR in 2008-11Revenue growth of specialty hospitals by types, 2008-2011

Source: Wind.

Below are the top five private hospital groups in terms of beds in operation and number of

patient visits, respectively, in China as of December 31, 2012.

Exhibit 17: Phoenix Healthcare Group (PHG) is currentlythe largest private hospital management group with3,194 beds under its management…Number of beds in operation as of December 31, 2012

Exhibit 18: ...and 3.05 mn patient visits in 2012Number of patient visits in 2012 (millions)

Source: Frost & Sullivan. Source: Frost & Sullivan.

28.0

20.8

17.2

12.0 10.7 10.4

6.5 6.1 5.9 5.2 4.1 3.1 3.01.4 1.3 1.1 0.8 0.7 0.6 0.1

0

5

10

15

20

25

30

Revenue (2011)(Rmb bn)

64.5%

29.1%26.2% 25.8% 25.2% 24.4% 23.9% 23.5% 23.4% 23.3% 22.2% 22.0% 21.6% 21.5% 21.0% 19.9% 19.8% 18.3%

14.6%

5.1%

0%

10%

20%

30%

40%

50%

60%

70%

Revenue CAGR (2008-2011)

3,194

2,500

1,800 1,700

600

0

500

1,000

1,500

2,000

2,500

3,000

3,500

PHG DongguanKanghua

DongguanDonghua

JinlingPharmaceutical

NanjingTongren

Number of beds in operations as of December 31, 2012

3.05

2.22

1.62 1.541.30

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

PHG DongguanKanghua

JinlingPharmaceutical

DongguanDonghua

Nanjing Tongren

Number of patient visits in 2012 (mn)


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January 3, 2014

Goldman Sachs Global Investment Research

Current industry statis

Revenue

Exhibit 19: Revenue from all healthcare ireached Rmb1,647 bn in 2011…Revenue from total healthcare institutions (

Source: Wind.

Exhibit 21: Subsidy acHospital rev

Source: NHFPC

538601

897960

1,186

1

12%

49%

7%

24%

0

200400

600

800

1,000

1,200

1,400

1,600

1,800

2005 2006 2007 2008 2009 2

Revenue from total healthcare inRevenue from total healthcare in

(Rmb bn)

Drug reve472, 40

(Rmb bn

ics for China hospitals

: Hospitals make up bulk of healthcare i

stitutions

2005-2011)

Exhibit 20: ...of which hospital75.6% of the totalRevenue from total hospitals (20

Source: Wind.

lose to 40% of hospital revenue were from drugs, anounted for less than 10%

enue breakdown (2011)

.

,373

1,647

16%20%

0%

10%

20%

30%

40%

50%

60%

010 2011

titutionstitutions yoy%

424471

566

700

11%

20%

0

200

400

600

800

1,000

1,200

1,400

2005 2006 2007 200

Revenue fromRevenue from

(Rmb bn)

Fiscal sub

101, 9

ue,

Other business

revenue, 18,2%

China: Healthcare

10

stitution revenue

revenue accounted for

5-2011)

d 49% from services.

860

1,028

1,24524%23%

20%21%

0%

5%

10%

15%

20%

25%

2009 2010 2011

total hospitals total hospitals yoy%

idy,

Other subsidy,6, 0%

Servicerevenue, 567,

49%


11/31



Exhibit 22: Currently, hospital revenue relies heavily on drug revenueEstimated current hospital revenue breakdown


Cost structure: Private hospitals are more efficient

Exhibit 23: Private hospitals can have higher efficiency in terms of consumables, totallabor cost savingsEstimated current hospital cost structure breakdown: public vs. private


Grade III Grade II

3:7 to 4:6

40%-50%

5:5

50%-60%

Out/inpatientratio

Drug revenue

as % of total

Grade I

9:1 to 7:3

60%-80%

Public hospital Private hospital

35%-45% 25%-40%Drugs

8%-15% 5%-10%Consumables

30%-45% 20%-30%Labor

2%-10% 5%-15%Depreciation

3%-10% 5%-10%Financial

15%-25% 10%-20%Management


12/31


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Exhibit 27: Annual outpatients for all institutions grew atCAGR of 7.7% in 2005-12Annual outpatients for all medical institutions (2005-2012)

Exhibit 28: Annual outpatients for hospitals grew atCAGR of 9.0% in 2005-12Annual outpatients for hospitals (2005-2012)


Exhibit 29: Annual inpatients for all institutions grew atCAGR of 13.9% in 2005-12, reaching 178 mn in 2012Annual inpatients for all medical institutions (2005-2012)

Exhibit 30: Annual inpatients for hospitals grew at CAGRof 13.9% in 2005-12, reaching 127 mn in 2012Annual inpatients for hospitals (2005-2012)


4.104.46 4.72

4.905.49

5.846.27

6.89

9%

6%

4%

12%

6%

7%

10%

0%

2%

4%

6%

8%

10%

12%

14%

0

1

2

3

4

5

6

7

8

2005 2006 2007 2008 2009 2010 2011 2012

Total outpatients (all medical institutions)yoy%

(bn)

1.39 1.471.64

1.781.92

2.042.26

2.54

6%

11%

9%

8%

6%

11%

12%

0%

2%

4%

6%

8%

10%

12%

14%

0

1

1

2

2

3

3

2005 2006 2007 2008 2009 2010 2011 2012

Outpatients(hospitals) yoy%(bn)

72 7998

115133

142153

178

10%

24%

17%15%

7% 8%

16%

0%

5%

10%

15%

20%

25%

30%

0

50

100

150

200

2005 2006 2007 2008 2009 2010 2011 2012

Total inpatients (all medical institutions)yoy%

(mn)

51 5665

7485

95108

127

9%

17%

14% 15%

12% 13%

18%

0%

5%

10%

15%

20%

0

2040

60

80

100

120

140

2005 2006 2007 2008 2009 2010 2011 2012

Inpatients(hospitals) yoy%(mn)


14/31



Exhibit 31: Monthly outpatients for private hospitalswere c.11% of that for public hospitals in September,2013Monthly outpatients of private vs. public hospitals (March

2011 to September 2013)

Exhibit 32: Monthly inpatients for private hospitals werefor c.13% of that for public hospitals in September, 2013Monthly inpatients of private vs. public hospitals (March 2011

to September 2013)


Hospital breakdown: Most patients treated at Grade III hospitals

Exhibit 33: Hospitals account for only 3% of total medicalinstitutions in China...Breakdown of medical institutions in China (2012)

Exhibit 34: ...but 73% of total beds in ChinaBreakdown of total beds by medical institution in China (mn

beds) (2012)

Source: NHFPC. Source: NHFPC.

22

196

0

50

100

150

200

250

M a r - 1 1

A p r - 1 1

M a y - 1 1

J u n - 1 1

J u l - 1 1

A u g - 1 1

S e p - 1 1

O c t - 1 1

N o v - 1 1

J a n - 1 2

F e b - 1 2

M a r - 1 2

A p r - 1 2

M a y - 1 2

J u n - 1 2

J u l - 1 2

A u g - 1 2

S e p - 1 2

O c t - 1 2

N o v - 1 2

J a n - 1 3

F e b - 1 3

M a r - 1 3

A p r - 1 3

M a y - 1 3

J u n - 1 3

J u l - 1 3

A u g - 1 3

S e p - 1 3

Monthly outpatients (private hospital)Monthly outpatients (public hospital)(mn)

1.3

9.7

-1.0

1.0

3.0

5.0

7.0

9.0

11.0

Monthly inpatients (private hospital)Monthly inpatients (public hospital)(mn)

Hospital23,170

3%

Grassrootmedical

institutions912,620

96%

Special publicmedical

institutions12,0831%

Others2,4240%

Hospital4.16

73%Grassrootmedical

institutions1.3223%

Special publicmedical

institutions0.203%

Others0.041%


15/31



Exhibit 35: Grade III hospitals account for 7% of allhospitals...Breakdown of hospitals by grade in China (2012)

Exhibit 36: ...and 35% of total beds in hospitalsBreakdown of bed numbers in hospitals by grade in China

(mn beds) (2012)

Note: According to the NHFPC hospital classification system, Grade I hospitals

typically have less than 100 beds and p rimarily providing more basic healthcare

services limited to the surrounding community; Grade II hospitals are regional

hospitals with 100-500 beds, , providing multiple communities with integratedhealthcare services and undertaking certain academic and scientific research

missions; and Grade III hospitals are the largest and best regional hospitals in

China, typically with more than 500 beds, providing high-quality professional

healthcare services covering a wide geographic area and undertaking higher

academic and scientific research initiatives.

Source: NHFPC. Source: NHFPC.

Exhibit 37: Close to 50% of patients were treated byGrade III hospitals in September 2013Patients treated by Grade III/II/I hospitals

Exhibit 38: Patients treated by private hospitalsaccounted for c.10% of total patients in September 2013Patients treated by private/public hospitals


Grade III1,6247%

Grade II6,56628%

Grade I5,96226%

Other

9,01839%

Grade III1.4735%

Grade II1.8344%

Grade I0.318%

Other 0.5513%

0

4,000

8,000

12,000

16,000

20,000

24,000

Patients treated by Grade I hospitals

Patients treated by Grade II hospitalsPatients treated by Grade III hospitals

10.2%

0%

2%

4%

6%

8%

10%

12%

0

5,000

10,000

15,000

20,000

25,000

Patients treated by public hospitals

Patients treated by private hospitals

% of patients treated by private hospitals


16/31



Service quality and efficiency to drive performance

Key areas of hospital reform

De-administration: Separate hospital administrative/supervisory function fromoperational management, shifting to a more market-based system.

Incentive scheme: Tie employee/physician’s compensation to key performance

measures related to overall service quality and efficiency of the hospitals.

Change in ownership structure: Allow key management/physicians to take

ownership of the hospitals, notably, management buyout, transfer of SOE stake to

employees or other related private parties.

Major public hospital reform policy

In 2010, the government selected 17 cities as pilot cities for public hospital reform, and

these cities have then undertaken different measures and implemented various trial

policies. For example, Beijing issued the “Certain Policies on Further Encouraging and

Guiding Private Capital to Invest in Medical Institutions” (Beijing 18 items) in 2012,

encouraging private capital to participate in the public hospital reform through co-investing,

acquisitions among others. The Beijing government has also exhibited a preference for

private enterprises with good reputation, extensive hospital operational experience, and

successful track record to participate in public hospital reform.

We see Private Public Partnership (PPP) as the main strategy to gain access to China’s

public hospitals. The Chinese government strives to reform public hospitals, yet still

preserving the nature of public welfare and the value of state-owned assets. Hence, PPP

appears to be more effective approach in the near to medium term as it does not change

the ownership of the hospital assets or the not-for-profit nature of the public hospitals,

while generating return by leveraging the public service platform and delivering improved

operational efficiency with minimum capital requirement.

In China’s 12th Five-Year Plan (FYP) published in 2012 by the State Council, the Chinese

government reiterated its decision to support private investment in the healthcare service

industry, aiming to increase the number of beds in operation in private hospitals to c.20%

of the total by 2015.

In 2013, the State Council issued “Certain Opinions on Promoting the Development of

Healthcare Services” on October 14 to further promote hospital reform as part of overall

healthcare reform. The circular encompasses the optimization of healthcare service

resources and the acceleration of public hospital reform, which encourages the local

government to seek various approaches in meeting its public health service provider

function, including establishing new hospitals, privatizing public hospitals and outsourcing

the management of public hospitals to private hospital management companies. On the

other hand, for for-profit hospitals, the circular further lowered the threshold for access and

relaxed restrictions on the requirement on the number, scale, and location of these private

hospitals.


17/31



Investing in China’s healthcare service sector

We see increasing interest in China’s healthcare service sector driven by favorable policy

tailwind and demographic trends. Although hospital reform/hospital privatization remains

at its infancy, we highlight a few key areas:

Barriers-to-entry is a major constraint: Regulatory approval and extensivecapital requirement will limit the number of entrants.

Public hospitals offer better patient access: It is easier to invest and gain access

to private hospitals than public hospitals. However, public hospitals offer better

access to patients and a bigger addressable market. Major tradeoffs in investing in

China’s public hospitals are the challenges of managing employees in state-

owned enterprises, and changing the corporate structure, incentive scheme and

performance measures. More importantly, the not-for-profit and social function

served by the public hospitals may also limit the return of private investment.

Balance between for-profit vs. not-for-profit: Although both types of hospitals

are able to generate profit, the key difference is that not-for-profit hospitals in

general are not allowed to distribute profits back to shareholders, meaning not-for-profit hospital either leave retained earnings on their balance sheets or re-

invest back into the business. This is a major issue for investing in China’s not-for-

profit hospitals, unless the local governments are willing to subsidize returns in

other forms to compensate the private investor. In the case of public not-for-profit

hospitals, they are often required to return the profit to the state. We believe this

is the main cause of high spending and high cost structure in large public

hospitals in China.

Tug of war between payback period and long-term returns: Building a private

hospital from scratch offer better visibility and long-term growth prospects. It may

also allow investor to enjoy asset appreciation in the long run. However, higher

cost and longer payback period due to heavy capital investment may lead to lower

return in the short to medium term.

Hospital management tends to generate the highest return: Our analysis of

capital requirement, accessibility, risk and returns, and other aspects related to

hospital investment (see Exhibit 39) suggests that hospital management offers the

best return in the near to medium term, helped by light capex, high leverage and

economy of scale.


18/31



Exhibit 39: Private investment in hospitals in China face trade-offs between profitability, accessibility, initial investment,ownership strengthFour possible routes for private investment in hospitals in China


Public Private

Ownership

structure

reform

Investment

route

“Invest-

Operate-

Transfer” (IOT)

Build from

scratch

Invest in

existing hospital

Nature All not-for-profit All not-for-profit

Not-for-profit

encouraged. For-

profit has less

accessibility to

reimbursement fund

Not-for-profit

encouraged. For-

profit has less

accessibility to

reimbursement fund

Accessibility

Capex

Ownership

Examples

Fast, yet high policyuncertainty

Long approval

process and initial

construction periods

Fast access, not-for-

profit is easier toestablish than for-

profit

Fast and lowerpolicy uncertainty

Light Extremely intensive Somewhat intensiveSomewhat Light

Equity ownership,

inherent policy riskEquity ownership Equity ownership

No ownership, only

management right

PHG’s investment in

Jiangong Hospital

Chindex’s United

Family Healthcare

(UFH)

Fosun Pharma’s

acquisition of

Chancheng Hospital

PHG’s investment in

Beijing Mentougou

Hospital

Payback

periodShort Very short

Risk/Return

Very long Long

Low risk,

low return

Medium risk,

medium returnHigh risk,

high returnMedium risk,

medium return


19/31



Key challenges in investing in China’s hospital service sector

Resources constraint: Shortage of medical professionals

We think the key challenge of operating a hospital is the shortage of medical professionals.

According to World Health Organization (WHO), China has a physician density of 1.456

physicians/1,000 population in 2010, which is a rather low level compared with 2.14 for

Japan, 2.42 for US, and 3.689 for Germany. There are more than 1 million medical schoolgraduates per year in China, but only one in six will become a doctor as a result of the

shortage of medical institutions, limited new position openings, and low compensation

level compared to other more market-based professions, e.g., a pharmaceutical sales

representative etc.

Employee’s benefit structure: SOE vs. private

Doctors prefer to work for large-scale public hospitals, as these hospitals often provide

more advanced academic training programs, better platforms and facilities/equipment for

more complex surgeries/treatments. Moreover, the physician’s certification and insurance

provided by employers are also important factors for a doctor to take into consideration

when choosing between public and private hospitals.

Hospital ownership vs. investment: Not-for-profit vs. for-profit

As for investing in China’s private hospital market, private equity investors often would

look for a balance between not-for-profit and for-profit hospitals.

Not-for-profit hospitals are often able to receive other benefits from the government to

support their commitment to serve public needs and enjoy the advantage of expanded

government insurance funds. However, not-for-profit hospitals have to comply with

government pricing measures, and shareholders are not allowed to share in the retained

profits.

For-profit hospitals, on the other hand, often have a flexible pricing strategy and can return

profits to shareholders. However, the tradeoff is a smaller addressable market and limited

state insurance coverage.

Limited access to capital

Last but not least, limited access to capital hinders private investment in hospital business,

in our view. Building a hospital generally costs a few hundred millions or more with five to

eight years to break even. The strict bank lending policy in China does not allow a hospital

owner to borrow money using the hospital as collateral which also makes this type of

investment less attractive.

In summary, we see challenges as well as opportunities in China’s private hospital market.

We think the hospital management model offers the best return given low capital

requirement in the near to medium term. We believe targeting retired medical

professionals and offering partnerships may help to solve the talent shortage in operating

private hospitals.


20/31



Appendix I: China healthcare insurance funding

Exhibit 40: Government spending accounts for 30% of the

total vs. 34.9% for out-of-pocket expenditureBreakdown of healthcare expenditure: government, social(e.g. company co-payment), individual

Exhibit 41: Healthcare subsidy per capita for UBMI and

NRCMS continues to riseHealthcare subsidy per capita from government

Source: Wind, NHFPC. Source: Ministry of Human Resources and Social Security (MOHRSS).

Exhibit 42: Insurance coverage exceeded 97% in 2011….Annual NRCMS expenditure and coverage ratio (2004-2011)

Exhibit 43: …but the reimbursement ratio remainedsteady at c.80%, leading to c.20% annual surplusIn-flow and out-flow of total insurance fund

Source: Ministry of Human Resources and Social Security (MOHRSS). Source: Ministry of Human Resources and Social Security (MOHRSS).

30.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Individual Social Government

20 2040 40

80 80

120

200

240

280

360

050

100

150

200

250

300

350

400

20042005200620072008200920102011201220132015

Healthcare subsidy per capita from government(Rmb)

3 616

35

66

92

119

171

75.2% 75.7%80.7%

86.2%91.5% 94.2%

96.0% 97.5%

0%

20%

40%

60%

80%

100%

120%

0

20

40

60

80

100

120

140

160

180

2004 2005 2006 2007 2008 2009 2010 2011

Annual NRCMS expenditureCoverage ratio

(Rmb bn)

221

289

367431

554

694

155202

280

354

443

554

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

100

200

300

400

500

600

700

800

2007 2008 2009 2010 2011 2012

UBMI revenue UBMI payout

Revenue yoy % Payout yoy %(Rmb bn)


21/31



Exhibit 44: UBMI has a balance of Rmb764.4 bn at the end of 2012Urban Basic Medical Insurance (UBMI): Revenue, payout, number of enrollees

Source: Ministry of Human Resources and Social Security (MOHRSS).

Unlike the Urban Employee Basic Medical Insurance Program (UEBMI), for which urban

workers and their employers are required to make contributions, the Urban Resident Basic

Medical Insurance Program (URBMI), and New Rural Cooperative Medical Scheme

(NRCMS) rely on government subsidies and personal contributions. The following table

sets forth certain information regarding each insurance program. We expect rising

government subsidies will add to higher balances for the three funds for the next few years.

Exhibit 45: Rising government subsidies to add to higher fund balancesComparison between UEBMI, URBMI and NRCMS and their funding sources

Source: MOHRSS, NHFPC.

Chinese government has been striving to establish a universal medical insurance system

since 2009. In China, government insurance programs mainly consist of the UEBMI, URBMI,

and NRCMS. By the end of 2012, 99% of the total registered population in China were

covered by one of three governmental insurance programs, compared to 85.3% at the end

of 2008 (Exhibit 46).

Total funding of three medical insurance programs (UEBMI, URBMI, NRCMS) reached

Rmb795.2 bn in 2012, and Frost & Sullivan expects it to reach Rmb2,692 bn in 2017 (Exhibit

48).

Indicator 2007 2008 2009 2010 2011 2012

Fund revenue (Rmb bn) 221.4 288.6 367.2 430.9 553.9 693.9

Fund payout (Rmb bn) 155.2 202.0 279.7 353.9 443.1 554.3

UBMI - Number of Enrollees (mn) 223.1 318.2 401.5 432.6 473.4 536.4

yoy (%) 61.9% 42.6% 26.2% 7.8% 9.4% 13.3%

UEBMI - Number of Enrollees (mn) 180.2 200.0 219.4 237.3 252.3 264.9

URBMI - Number of Enrollees (mn) 42.9 118.3 182.1 195.3 220.7 271.6

UBMI balance

- Balance of public part 288.2 331.3 401.5 494.7

URBMI balance at year-end (Rmb bn) 22.1 30.6 49.7 76.0

- Balance of individual part 139.4 173.4 216.5 269.7

UEBMI balance at year-end (Rmb bn) 244.1 343.2 427.6 474.1 568.3 688.4

UBMI balance at year-end (Rmb bn) 427.6 504.7 618.0 764.4

Annual balance as % of revenue 17.9% 20.5% 21.1%

Program Funding sourcePer Capita funding

in 2012 (Rmb)Funding

UEBMIEmployers and

employees2,619

An employee and his or her employer shall pay 2% and 6%,

respectively, of such employee’s monthly salary into the

insurance fund every month.

URBMIUrban residents

and governments320

Varies among cities; the urban resident pays approximately

20% to 40% of the funding while the government pays the

balance.

NRCMSRural residents and

governments308

Varies among rural areas; the rural resident often pays

approximately 20% to 40% of the funding while the government

pays the balance.


22/31



Exhibit 46: China’s medical insurance system reachedcoverage of 99% in 2012Population covered by one of the three medical insurance

programs in China

Exhibit 47: Total payment by the three medical insuranceprograms (UEBMI, URBMI, NRCMS) reached Rmb795.2bn in 2012Total payment by these three medical insurance programs

for the years presented

Source: Frost & Sullivan. Source: Frost & Sullivan.

Exhibit 48: Total funding of three medical insurance programs (UEBMI, URBMI, NRCMS) isexpected to reach Rmb2,692 bn in 2017Total funding of three medical insurance programs (UEBMI, URBMI, NRCMS) (2008-2012)

Source: Frost & Sullivan.

85.3%

92.5%

94.6%

96.8%

99.0%

75%

80%

85%

90%

95%

100%

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

2008 2009 2010 2011 2012

Population covered by 3 programsOverall population in China

Coverage rate

(bn)

202.0 263.0327.2

401.8490.6

0.016.7

26.7

41.3

63.8

66.2

92.3

118.8

171.0

240.8

0

100

200

300

400

500

600

700

800

900

2008 2009 2010 2011 2012

NRCMSP URBMIP UEBMIP(Rmb bn)

367.0 461.6561.8

758.8 942.31,128.8

1,445.11,796.9

2,182.3

2,691.6

0

500

1,000

1,500

2,000

2,500

3,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Total funding(Rmb bn)

2008-2012 CAGR=26.6%2012-2017 CAGR=23.4%


23/31



Appendix II: Listcos with investments in hospitals

Exhibit 49: Phoenix Healthcare Group (PHG, 1515.HK), a newly listed hospital management group, operates 12 hospitalsand 28 community clinics in five major hospital groupsPHG’s key operating hospitals/medical institutions

Notes: *PHG and Beijing Construction Engineering Group holds 80%/20% equity interests in Jian Gong Hospital. **PHG has made an initial investment of

Rmb72mn in Yan Hua and committed to make a further investment of Rmb150mn of which PHG has paid Rmb87mn by July 2013. JCI stands for

accreditation from Joint Commission on Accreditation of Healthcare Organizations (JCAHO).

Source: Company data.

# Hospital

group Model

# of

hospitals

# of

community

clinics

# of beds in

operation as

of June 30,

2013

# of patient

visits ('000)

2012

JCI

accredited

hospital?

Type of

hospital Initial date

Investment

(Rmb mn)

Agreement

expiry date

1 Jian Gong80% equity

*1 Grade II - 400 609.3 Yes General 2007 324.8 -

2 Yan Hua IOT 1 Grade III 17 554 791.6 Yes General 2008/02 72/150 ** 7/17/2055

3 Mentougou IOT 1 Grade II - 421 490.9 - General 2010/07 75 12/31/2030

4 Jing Mei IOT1 Grade III7 Grade I

11 1,738 807.6 - General 2011/05 150 12/31/2030

5 Mentougou

TCMIOT 1 Grade II - 100 350.2 - Specialty 2012/06 25 12/31/2030

Total - 12 28 3,213 3,049.7 - - 733.8


24/31

G ol d ma nS a c h s G l ob a l I nves t ment R es ea rc h

2 4

Exhibit 50: Detailed list of listcos with investments in hospitals (1)

Note: NIC = National Insurance Covered, SOE = State-owned enterprise, A/B stands for Class A/B, Gen = General. Spe = Specialty; G1-3 = Grade 1-3


General healthcare groups

Fosun Pharma 6 00196.SS/2196.HK Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start t

1 United Family Healthcare (UFH) - - - - - - - - - - 11.8% 2010/

2 Yueyang Guangji Hospital Hunan - Y - Y - Y - - - 55% 2H20

3 Anhui Jimin Oncology Hospital Anhui - Y - Y - - Y - - 70% 2011/

4 Suqian Zhongwu Hospital Jiangsu - Y - Y - Y - - - 55% 2012/5 GZ Nanyang Oncology Hosp. Guangdong - Y - - Y - Y - - 50% 9/3/20

6 Foshan Chancheng Hospital Guangdong Y - - Y - Y - - - c.Rmb693 mn 60% 2013/

CR Sanjiu 000999.SZ Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start t

1 Mine Hospital of Xuzhou Jiangsu - Y - Y - Y - - - 100% 2011/

2 Kunming Children's Hospital Yunnan - Y - Y - Y - - - 66% 2012/

3 Wuhan Steel General Hospital Hubei Y - - Y - Y - - - 51% 2013/

4 Gaozhou People's Hospital Guangdong Y Y Y Y - 49% 2013/

5 Sanjiu Hospital Co. Ltd. Guangdong - - - - - - - - - - -

6 Sanjiu Brain Hospital Guangdong Y - - Y - - Y Y - - -

Specialty hospital

Ai'er Eyes 300015.SZ Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start t

1 40+ ophthalmology hospitals Hunan (HQ) - - - - - Y - - - 2009/

Topchoice 600763.SS Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start t

1 13 dental hospitals/clinics - - - - - - - Y - - - 200

2 CQ Bo'En Reproduction Hosp. Chongqing - - - - - - Y - - 51% 6/17/2

Medical device company

Concord CCM Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start t

1Chang'an CMS InternationalCancer Center (CCICC)

Xi'an Y - - Y - - Y - Y US$39.4 mn 52% 201

2 Guangzhou Taihe Hospital Guangzhou - - - - - - Y - - 70%

3 Beijing Proton Medical Center Beijing - - - - - - Y - - 51.2% Open in 20

Chindex CHDX Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start t

1 Beijing UFH Beijing - - - - - - - - - 90% 200

2 Shanghai UFH Shanghai - - - - - - - - - 70% 200

3 New Hope Oncology Center Beijing - - - - - - - - - - 2010/

4 Tianjing UFH Tianjin - - - - - - - - - - 2011/

5 United Family Home Health Beijing - - - - - - - - - - 2013/

6 UFH BJU United Family Hospital Beijing - - - - - - - - - - 2013/

7 Qingdao UFH Shandong - - - - - - - - - - 201

8 Guangzhou UFH Guangdong - - - - - - - - - - 1H20


25/31


2 5




-

Pharmaceutical companies

Jinling Pharma 000919.SZ Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start ti

1 Suqian People's Hospital Jiangsu Y - - - Y Y - - - Rmb70.126 in 2013 70% 2003/0

2 Drum Tower Yizheng Hospital Jiangsu - Y - - Y Y - - - Rmb132 mn 68.33% 2012/0

Gansu Duyiwei 002219.SZ Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start ti

1 Chengdu Ping'an Hospital Sichuan - Y - Y - Y - - Y Rmb120 mn 85% 2013/0

2 Deyang Better Tomorrow Hosp. Sichuan - Y - - - Y - - - Rmb15 mn 100% 2013/0

3 Ziyang Jianshunwang Hospital Sichuan - - - - - Y - - - Rmb25 mn 100% 2013/0

4Pengxi Jianshunwang TCM

(Ortho) Hosp.Sichuan - - - - - Y - - - Rmb80 mn 100% 2013/0

5 Qionglai Welfare Hospital Sichuan - - Y - - - - 100% 10/28/2

Kangmei 600518.SS Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start ti

1 Puning Kangmei TCM Hospital Guangdong Y - - Y - Y - - - Rmb300 mn 100% 2007

2Meihekou Women & Children

HospitalJilin - - - - - - - - -

>Rmb500 mn

investment- 11/5/20

3 Meihekou Friendship Hospital Jilin - Y - - Y Y - - ->Rmb500 mn

investment- 11/5/20

4 Meihekou TCM Hospital Jilin - - - - - - - - ->Rmb500 mn

investment- 11/5/20


26/31


2 6




Pharmaceutical companies

Guizhou Bailing 002424.SZ Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start time

1 Guizhou Tianyuan Hospital Guizhou - - - - - Y - - - Rmb1.48 100% 10/16/201

Mayinglong 600993.SS Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start time

1

Intestine Hospitals (Wuhan,

Beijing, Shenyang, Xi'an, Nanjing,Datong)

Hubei (HQ) - - - - - - Y - - - - 2008

Tasly 600535.SS Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start time

1 Pu'er Central Hospital Yunnan Y - - Y - - - - - - - 2011/07

Shuanglu 002038.SZ Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start time

1 Xinxiang Central Hospital (East) Henan Y - - Y - Y - - - Rmb160 mn 80% 2011/06

Jointown 600998.SS Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start time

1 Wuhan Jointown Hospital Hubei - - - - - - - - Y - - 2011

2 Beijing Renhe Hospital Beijing - - - - - - - - - - - -

Furui Medical 300049.SZ Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start time

1 Ulaan Chab Furui Hospital Inner Mongolia - - - - - - - - - Rmb300 mn - 2010/10

Wuhan Jianmin 600976.SS Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start time

1Wuhan Jianmin Disgestive

Disease HospitalHubei - - - - - - Y - - Rmb130 mn 65% 2012/10

Guizhou Yibai 600594.SS Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start time

1Guannan County People's

HosptialJiangsu - Y - Y - Y - - - - 90% 2005

Harbin Sanjing 600829.SS Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start time

1Harbin Sanjing Women's

Specialty HospitalHeilongjiang - - - - - - Y - - Rmb30 mn 100% 2005/10

2Harbin Sanjing Renal Disease

Specialty HospitalHeilongjiang - - - - - - Y - Y - - 2008/08

Huabang Pharma 002004.SZ Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration E quity Start time

1 Xin Hua Li Kang Guizhou - - - - - - Y - - Rmb60 mn - 2010/09


27/31


2 7



Source: Company data

General groups

Founder

Technology 600601.SS Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity

1 Wu Jieping Medical Foundation Beijing - - - - - - - - - - -

2 Hunan Kaide Hospital Hunan Y - - - - - Y - - - -

3Peking University International

HospitalBeijing - - - - - - - - - Rmb1 bn 70%

CITIC Medical &

Health Group Co.,

Ltd

- Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity

1Reproductive & Genetic Hospital

of Citic-XiangyaHunan - - - - - - Y - - - -

2CITIC Hangzhou Plastic Surgery

HospitalZhejiang - - - - - - Y - - - 100%

3 CITIC Huizhou Hospital Guangdong Y - - Y - Y - - Y - -

4CITIC Nanshan Health ScreeningCenter

Guangdong - - - - - - Y - - - -

5CITIC Yuquan Women and

Children's HospitalBeijing - - - - - - Y - - - -

Chengzhi Co., Ltd. 000990.SZ Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity

1 Dandong No.1 Hospital Liaoning Y - - Y - Y - - - - 60%

2Beijing Chengzhi Ruihua Hospital

Management Co., LtdBeijing - - - - - - - - - - -

3Beijing Chengzhi Outpatient Co.,

LtdBeijing - - - - - - - - - - -

Sinochem

International 600500.SS Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity

1Shanghai Hongxin Hospital

Management Co., LtdShanghai - - - - - - - - - - -

2Shanghai Hongxin Healthcare

Investment Co., LtdShanghai - - - - - - - - - - -


28/31


2 8



Source: Company data

Insurance company

China Ping An 601318.SS Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start t

1Shenzhen Longgang TCMHospital

Guangdong Y - - Y - - - - - - 2011

Real estate company

Zhejiang Guangsha 600052.SS Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start t

1 Zhejiang Jinhua Guangfu (formerNo.3 People's) Hospital Zhejiang Y - - - Y Y - - Y - - -

Lushang Property 600223.SS Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start t

1Shandong Zibo Wanjie OncologyHospital

Shandong - - - - - - Y - - - - -

Others

Xi'an Kaiyuan 000516.SZ Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start t

1 Xi'an Gaoxin Hospital Shaanxi Y - - Y - Y - - YRmb297 mn (for

100% equity shareon Nov 12, 2011)

- 2011

2 XI'an Sheng'an Hospital Shaanxi - - - - - - - - -Rmb330 mn (build

from scratch)-

2012(announceconstructio

Hainan Airline 600221.SS Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start t

1 Haikou Guoxingcheng Hospital Hainan - - - - - - - - - - - 2012-2Changchun High &

New Tech 000661.SZ Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start t

1Changsha Nuobei'er Children'sHospital

Hunan - - - - - - Y - - Rmb5.4 mn - -

Jiangsu Etern 600105.SS Province G3 G2 G1 A B Gen. Spe. SOE NIC Consideration Equity Start t

1 Suzhou Etern Hospital Jiangsu - - - - - - - - - Rmb300 mn 88% -


29/31



Disclosure Appendix

Reg ACWe, Wei Du, Ph.D and Li Yu, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subjectcompany or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related tothe specific recommendations or views expressed in this report.

Investment ProfileThe Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group andmarket. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on compositesof several methodologies to determine the stocks percentile ranking within the region's coverage universe.

The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:

Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregateof various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividendyield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.

QuantumQuantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used forin-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.

GS SUSTAINGS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list

includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage andsuperior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporateperformance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of theenvironmental, social and governance issues facing their industry).

Disclosures

Coverage group(s) of stocks by primary analyst(s)

Wei Du, Ph.D: China Healthcare. Li Yu: China Healthcare.

China Healthcare: Baiyunshan (H), Biosensors International Group, CSPC Pharmaceutical Group, China Medical System Holdings, China ShinewayPharmaceutical Group, Jiangsu NHWA Pharmaceutical Co., Jiangsu Yuyue Medical Equipment & Supply, Mindray Medical International, PhoenixHealthcare Group Co Ltd., Shandong Weigao Group, Shanghai Fosun Pharmaceutical (Group) Co Ltd, Shanghai Pharmaceuticals Holding (H), SihuanPharmaceutical Holdings Group, Sino Biopharmaceutical, Sinopharm Group Co., The United Laboratories International Holdings, Tianjin TaslyPharmaceutical Co., WuXi PharmaTech Cayman, Wuhan Humanwell Healthcare (Group) Co., Zhejiang Huahai Pharmaceutical Co..

Company-specific regulatory disclosures

Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in thiscompendium can be found in the latest relevant published research

Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universe

Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 31% 54% 15% 50% 42% 37%

As of October 1, 2013, Goldman Sachs Global Investment Research had investment ratings on 3,570 equity securities. Goldman Sachs assigns stocksas Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sellfor the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.

Price target and rating history chart(s)

Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this

compendium can be found in the latest relevant published research

Regulatory disclosures

Disclosures required by United States laws and regulations

See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manageror co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs usually makes amarket in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities.

The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts,professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area ofcoverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment bankingrevenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of theirhouseholds from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S.Analysts: Non-U.S. analysts may not be associated persons of Goldman, Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSERules 472 restrictions on communications with subject company, public appearances and trading securities held by the analysts.


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Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets inprior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachswebsite at http://www.gs.com/research/hedge.html.

Additional disclosures required under the laws and regulations of jurisdictions other than the United States

The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States lawsand regulations. Australia: Goldman Sachs Australia Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined inthe Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking business, in Australia. This research, and any

access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act, unless otherwise agreed by GoldmanSachs. Brazil: Disclosure information in relation to CVM Instruction 483 is available at http://www.gs.com/worldwide/brazil/area/gir/index.html.Where applicable, the Brazil-registered analyst primarily responsible for the content of this research report, as defined in Article 16 of CVM Instruction483, is the first author named at the beginning of this report, unless indicated otherwise at the end of the text. Canada: Goldman, Sachs & Co. hasapproved of, and agreed to take responsibility for, this research in Canada if and to the extent it relates to equity securities of Canadian issuers.Analysts may conduct site visits but are prohibited from accepting payment or reimbursement by the company of travel expenses for suchvisits. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request fromGoldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained fromGoldman Sachs (India) Securities Private Limited; Japan: See below. Korea: Further information on the subject company or companies referred toin this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. New Zealand: Goldman Sachs New Zealand Limited and itsaffiliates are neither "registered banks" nor "deposit takers" (as defined in the Reserve Bank of New Zealand Act 1989) in New Zealand. This research,and any access to it, is intended for "wholesale clients" (as defined in the Financial Advisers Act 2008) unless otherwise agreed by GoldmanSachs. Russia: Research reports distributed in the Russian Federation are not advertising as defined in the Russian legislation, but are informationand analysis not having product promotion as their main purpose and do not provide appraisal within the meaning of the Russian legislation onappraisal activity. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs(Singapore) Pte. (Company Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted without permission.Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. United

Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial ConductAuthority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should referto the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financialterms used in this report, are available from Goldman Sachs International on request.

European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is availableat http://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection withInvestment Research.

Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan and Type II Financial Instruments FirmsAssociation. Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specificdisclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the JapaneseSecurities Finance Company.

Ratings, coverage groups and views and related definitions

Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buyor Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as

a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to aglobal guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coveragegroup may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investmentrecommendations focused on either the size of the potential return or the likelihood of the realization of the return.

Return potential represents the price differential between the current share price and the price target expected during the time horizon associatedwith the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in eachreport adding or reiterating an Investment List membership.

Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group athttp://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlookon the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over thefollowing 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook overthe following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.

Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in anadvisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). GoldmanSachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for

determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating andprice target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspendedcoverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). Theinformation is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

Global product; distributing entities

The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a globalbasis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research onmacroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd(ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; in Canada by Goldman, Sachs & Co.regarding Canadian equities and by Goldman, Sachs & Co. (all other research); in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by GoldmanSachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., SeoulBranch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore)Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved thisresearch in connection with its distribution in the United Kingdom and European Union.


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European Union: Goldman Sachs International authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authorityand the Prudential Regulation Authority, has approved this research in connection with its distribution in the European Union and United Kingdom;Goldman Sachs AG and Goldman Sachs International Zweigniederlassung Frankfurt, regulated by the Bundesanstalt fürFinanzdienstleistungsaufsicht, may also distribute research in Germany.

General disclosures

This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that weconsider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as

appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the largemajority of reports are published at irregular intervals as appropriate in the analyst's judgment.

Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We haveinvestment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment ResearchDivision. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org).

Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and ourproprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, ourproprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or viewsexpressed in this research.

The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or maydiscuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equitysecurities discussed in this report, which impact may be directionally counter to the analyst's published price target expectations for such stocks. Anysuch trading strategies are distinct from and do not affect the analyst's fundamental equity rating for such stocks, which rating reflects a stock'sreturn potential relative to its coverage group as described herein.

We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in,act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research.

This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would beillegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs ofindividual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, ifappropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from themmay fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.

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