The Next Area of Investment

With Chinese government loosening restrictions in opening independent imaging diagnostic centers in the first half of 2015, many investors are foreseeing the growth of this niche industry. We spoke with Mr. Lu Bei Hong, Business Development Manager from Zhuhai Honkai Medical Instrument Co. Ltd. to get his opinion on the future development of imaging diagnostic centers in China.

PULSE: How regulated was the imaging diagnostic center industry in China historically, and what changes did the government implement in 2015?

LU BEI HONG: As you may be aware, Ministry of Health (MoH) in China restricts the number of large imaging equipment purchases that can be purchased by hospitals under its management. This policy was designed to limit corruption in the transactions. However, limiting the number of equipment purchases has peaked the utilization ratio of imaging equipment in the top hospitals in China. Noticing this imbalance in supply and demand, MoH has loosen the tightly controlled policy regarding establishment of imaging diagnostic centers.

PULSE: I see, what are the measures taken? Could you please share examples?

LU BEI HONG: Sure, the first province to open up is Jiangxi province. Jiangxi MoH has approved the establishment of three diagnostic centers in the first half of 2015. Of course, the government has set the detailed requirement as to the minimum number of each modalities and the number of imaging specialists to operate the machines. I personally expect this trend will be replicated in other provinces once central MoH sees the successful operation in Jiangxi.

PULSE: How big is China’s imaging diagnostic market and how big can it grow further?

LU BEI HONG: Before I talk about China, let me first talk a little bit about the U.S. market, which is considered the most developed market in the world for imaging diagnostic sector. According to Frost & Sullivan, imaging diagnostic market in the U.S. has reached $100BN as of 2015. 40% of the diagnostics are conducted in independent diagnostic center and the rest of 60% conducted in the hospital. Independent centers have good reputation on good quality of service with relatively low price.

There are two leading firms in the U.S.: RadNet and Alliance Health Services. RadNet owns 297 imaging centers across the U.S. and has generated US$670mn. RadNet covers full range of diagnostic services including X-ray, ultrasound, MRI and CT. The low priced services such as X-Ray and Ultrasound takes up to 50% of diagnostic volume but only contribute to 20% of the revenue. High-price services such as MR and CT contributes to only 20% of the volume but more than half of the revenue thanks to high scanning price. What’s interesting about the growth trajectory of U.S. companies is that they have grown inorganically by acquiring smaller independent diagnostic centers. Every year they acquire new centers equivalent to 10% of the number of existing centers.

Switching gears to China, China’s imaging diagnostic market has achieved rapid growth in the past decade, reaching 20% CAGR and currently valued at RMB 200BN (US$ 30BN). However, I’ll remind you that this figure does not include the service and maintenance part of the business, so the market size should actually be bigger.

You can also derive the market size by estimating from economics of hospitals. Different from U.S. hospital’s revenue stream, main stream of Chinese hospitals’ revenue is derived from sales of medicines and only 10% from diagnostic services. The total hospital market in China is about 2 Trillion RMB, and 10% of this market comes to RMB 200BN.

PULSE: In what aspects can independent imaging diagnostic centers operate successfully and differentiate from competitors?

LU BEI HONG: Imaging centers in different locations need to apply very different strategies in order to be successful. Strategies to be applied in the first tier cities are totally different from that of third or fourth tier cities.

The main reason for this different arises from the base of the competitors. For example, in the first tier cities, imaging diagnostic centers face competition from the top A-graded hospitals in China. They are formidable competitors in terms of service quality and reputation, so imaging centers need to offer competitive pricing in order to stay in the market. For the ones in the 3rd or 4th tier cities, the imaging centers are more playing a role in filling the unmet demand gap. Thus they can position differently from the ones in 1st tier cities.

PULSE: Do you foresee any new development in the business models?

LU BEI HONG: For long term, yes. As seen from the development history of the U.S. market, imaging centers have extended their businesses to radiation treatments. A good example of this would be Alliance Healthcare Services started radiation treatment services in 2008, and now the treatment business takes up to 21% of the total revenue.

PULSE: What are some of the publicly listed companies on your radar to expand to independent imaging diagnostic center businesses?

LU BEI HONG: I would pay attention to the companies that have already been quite successful in imaging diagnostic sectors, like Huarun Wandong listed in A-share. It previously has been a state-owned enterprise, as you may know, and through past 50 years of development, it has become the leading imaging equipment manufacturer in China. With the restructuring in 2015, its ownership was privatized and with investment by another leading healthcare company, Yuyue Medical, Huarun Wandong is well positioned to capture the growth of this industry. As far as I know, management is planning to establish imaging centers as a form of joint ventures with leading hospitals in China.