Looking For Healthcare Growth in China (CHDX)
I was recently asked by a reader about which opportunities exist to play a “steady growth sector” in healthcare, biohealth, biotech, or medical equipment player in China. There are some obvious issues when evaluating Chinese stocks, and these are nothing short of the financials, where the businesses are based, who manages the companies and on and on. In fact, we more frequently than not avoid some of the high-volatility stocks in this group that have no earnings and where Wall Street is expecting 200% revenue growth or something that is unsustainable.
But one stock that has stood out for a while and is looking actually more like a value stock than a Chinese exponential growth stock. Chindex International Inc. (NASDAQ: CHDX) is one of these companies and its shares have been under pressure of late. This seems to be more of a steady earnings/revenue growth company, although its history of having solid large and manageable sales growth is still somewhat young and still somewhat under question by some.
This has two operations which could make for an interesting special situation down the road. The company operates a Western-style hospital network, United Family Healthcare, with operations in Beijing, Shanghai, and one under development in Guangzhou. Think “private healthcare for the well to do Chinese. The Company recently received over $100 million in combined debt and equity investment from JPMorganChase, the International Finance Corporation, and DEG Bank to fund its network expansion. On top of this, it sells medical equipment and hospital equipment all over mainland China and Hong Kong.
The company has a market cap of roughly $213 million, and this number looks like it is within a fair range for deriving forward valuations now that it has seen its shares trade down to under $15.00.
Of the analysts that cover it, the estimates for next quarter are $0.12 EPS on $33.74 million in revenues, and for the coming quarter ahead $0.16 EPS on $39.1 million in revenues. For fiscal March 2009 estimates are $0.75 EPS on $162.3 million in revenues. For the following year of March 2010 estimates are $1.08 EPS on $200 million. The problem with all of these First Call estimates is that the sample is literally from less than a handful of analysts.
As the stock has recently been cut in half, we wanted to back over the company history and see how this pairs off since the stock used to be under $5.00 back in 2005. We have gone in and applied a 25% discount to current estimates to see what a base-value would look like if the company’s growth plans begin stalling out. Based upon the historic growth of revenues being close to 20%, we insisted on a discount and took projections down to $157 million for fiscal March 2009 and $190 million for fiscal March 2010.
This stock was recently hit hard because of charges creating a net loss fo the quarter and we have seen a more than 40% drop in less than two months. Before the recent drop, this one always seemed to expensive or just hadn’t seen one of its “major Chinese stock corrections” which so many stocks over there have witnessed.
The company is not without problems and we don’t want to throw caution to the wind when evaluating more slow steady growth opportunities in healthcare in China. The company has a solid cash base as it is in the middle of an expansion project in China, but we do not believe it will have to raise much more in capital for basic operations. If it wasn’t for that recent scalping that the stock took, we might be much more cautious in covering this stock.
Jon Ogg
June 30, 2008