Fu Yuning's Two-Year Tenure: China Resources Medical Achieves Backdoor Listing, Seeking Breakthrough in Business Model

If hospitals under China Resources Medical, a subsidiary of the central state-owned enterprise China Resources, were to pursue independent listings, the process would be excessively time-consuming; thus, reverse mergers represent one of the optimal strategies. Meanwhile, private enterprise Phoenix Medical has faced slow and challenging progress in hospital acquisitions. From the perspective of capital operations, the combination of the two entities constitutes a successful case. However, there appears to be no significant improvement in the management performance of China Resources’ hospitals, and Phoenix Medical’s supply chain model may prove unsustainable in the long run. Furthermore, the integration of both parties requires time, and the anticipated synergies remain to be realized.

Two years after Fu Yuning took the helm, China Resources Medical achieved a back-door listing.

On April 8, Phoenix Healthcare (01515.HK) announced that it would acquire a subsidiary of China Resources Medical Holdings Company Limited (the subsidiary holds certain assets and equity interests of China Resources Medical), with the acquisition consideration to be settled through the issuance of new shares to China Resources Medical. Upon completion of the transaction, China Resources Medical will become the single largest shareholder of Phoenix Healthcare, holding no less than 35.7% of the shares, and Phoenix Healthcare will be renamed China Resources Phoenix Healthcare Group Company Limited (“CR Phoenix”).

It has been learned that China Resources Medical’s backdoor listing was, in fact, fully facilitated after Fu Yuning took over as Chairman of China Resources Group on April 23, 2014.

According to insiders close to the core management of China Resources Medical, China Resources Group has been unable to effectively integrate its pharmaceutical and healthcare businesses. Many public hospitals acquired by China Resources Medical have not achieved successful business model development. In contrast, Phoenix Medical’s PPP (Public-Private Partnership) operations at several hospitals in Mentougou, along with its supply chain model, have gained industry recognition and generated substantial profits.

From the perspective of industry insiders, China Resources Medical’s backdoor listing via Phoenix Healthcare is a mutually beneficial deal, but full integration between the two parties will take time. The aforementioned informed source pointed out to reporters that issues such as high-level decision-making, the retention or departure of executives from both sides, and the operational management of non-profit hospitals remain to be addressed.

“China Resources Medical’s backdoor listing aims not only to enhance the liquidity of public hospital assets but also to draw on Phoenix Healthcare’s management expertise. Previously, after acquiring nearly RMB 10 billion worth of public hospitals, China Resources Medical failed to establish a scientific management system. In fact, judging from financial statements and various publicly available information, Phoenix Healthcare, like China Resources Medical, does not excel in healthcare management. After years of operations, Phoenix Healthcare’s controlling shareholder has shown signs of fatigue and even considered exiting, gradually reducing its stake since last October,” said an informed source to the reporter.

On April 8, senior executives of Phoenix Healthcare stated during a conference call that the cooperation model with the 47 medical institutions mentioned in the announcement remains undetermined, and their contribution to profitability in the coming years is still unclear.

In response to the aforementioned issues, China Resources Group officially stated to reporters on April 14 that, apart from the content mentioned in the announcements and press releases, there is no further information available for disclosure at this time. However, it was noted that China Resources Group has been maintaining contact and communication with Phoenix Medical Healthcare Group. The recent achievement of cooperation represents a win-win outcome, and the group looks forward to a successful partnership between both parties.

Two Years of Negotiations: A Rocky Ride

As stated in the term sheet signed by both parties on April 8, Phoenix Healthcare intends to pay the acquisition consideration to China Resources Medical Holdings Company Limited by issuing listed company shares at a price of HK$8.04 per share, with a total issuance of 463 million shares, resulting in a transaction amount of approximately HK$3.72 billion.

Upon completion of this acquisition, China Resources Medical will become the single largest shareholder of Phoenix Healthcare, and the company will be renamed China Resources Phoenix Healthcare Group Co., Ltd. The newly formed entity will operate 107 medical institutions and three elderly care facilities, with an actual number of open beds reaching 11,780. The board of directors of China Resources Phoenix will maintain 11 members, including three independent non-executive directors, and China Resources Medical will have the right to appoint four directors.

However, according to Zhang Hong (a pseudonym), an industry insider specializing in hospital acquisitions and trusteeships who has business ties with both China Resources Medical and Phoenix Healthcare, China Resources Medical had already begun engaging with Phoenix Healthcare shortly after Fu Yuning took the helm. Zhang told reporters, “After Fu Yuning succeeded Song Lin as Chairman of China Resources Group, he conducted reviews of various business segments and placed significant emphasis on the healthcare sector.”

For example, on July 28, 2015, Fu Yuning visited the headquarters of China Resources Medical in Beijing to conduct research, focusing on understanding the company’s strategic development goals, acquisition of medical resources, operational performance in the first half of the year, and the operational status of its member hospitals, as well as areas such as operational management improvement, supply chain management, and financial and funding issues.

According to Zhang Hong, China Resources Medical also attempted to replicate the model of Phoenix Healthcare. The latter’s approach can be succinctly described as a “supply chain” model, characterized by securing hospital operational management rights and controlling procurement authority, with primary profits derived from the procurement process. However, this initiative ultimately failed to materialize due to multiple factors, leading China Resources Medical to instead inject capital into Phoenix Healthcare. Negotiations between the two parties were fraught with twists and turns, with the most contentious issue being which side would take the leading role. To date, it remains undecided which party’s executive will assume the position of Chairman.

In response, Zhang Ke (a pseudonym), a director specializing in research on government-affiliated medical institutions, pointed out to reporters that, unlike in the past, China Resources Group is placing significant emphasis on maintaining control over China Resources Phoenix. “China Resources built its foundation through mergers and acquisitions, historically focusing more on asset management via ‘valuation adjustment mechanisms’ (VAMs). In previous acquisitions—such as those in the beer and cement sectors—it typically did not dispatch personnel to directly manage the acquired companies.”

On the other hand, it remains unclear which assets will be injected into the listed company, based on the announcement by Phoenix Healthcare and the press release provided to reporters by China Resources Medical. At noon on April 14, an official representative of China Resources Group also stated in response to reporters’ inquiries that no further information could be disclosed beyond what was already contained in the current announcements and press releases.

In fact, it is still difficult to gain a comprehensive understanding based solely on the information disclosed in the announcement.

Xing Yusheng, Chief Counsel of New Journey Hospital Group, stated that based on publicly available information, it remains unclear how far China Resources Medical has progressed in its prior acquisition of RMB 10 billion worth of public hospital assets, and which assets have not yet been injected into Phoenix Healthcare. Furthermore, most hospitals previously acquired by China Resources were public or state-owned enterprise (SOE) hospitals. After Phoenix Healthcare, as a red-chip listed company, became the shareholder of these assets, it remains to be seen whether the hospitals can maintain their status as public institutions, and whether any legacy issues regarding employee status will need to be resolved.

However, it is widely speculated within the industry that China Resources Medical (CR Medical) and Phoenix Healthcare may face personnel changes. A former insider at CR Medical, who recently left the company, revealed that China Resources Group plans to spin off its current medical assets, with a portion being merged into China Resources Phoenix, excluding entities such as Kunming Children’s Hospital and JCI joint ventures. The two healthcare groups, CR Medical and Phoenix Healthcare, are expected to undergo integration within the next 4–6 months, and some staff members from CR Medical may face reassignment or need to make new career choices.

Zhang Hong revealed to reporters that previously acquired assets of China Resources Medical, such as Sanjiu Brain Hospital and Wugang General Hospital, may be injected into the joint venture. It is understood that Sanjiu Brain Hospital is one of its highest-quality assets, currently generating annual profits between RMB 260 million and RMB 290 million; meanwhile, Wugang General Hospital, in which China Resources Medical holds a 51% stake, has moderate profitability. In the future, China Resources Medical may acquire the remaining 49% stake and inject it into the listed company.

Interested in the Phoenix Supply Chain Model?

On the same day the acquisition announcement was released, reporters learned that Phoenix Healthcare also held a conference call, attended by Chairman Liang Hongze and Chief Financial Officer Jiang Tianfan. During the call, management stated that Phoenix Healthcare would become the sole hospital management platform for China Resources Medical Holdings Company Limited, adding that the transaction is expected to be completed within four months. However, the cooperation model between Phoenix Healthcare and the aforementioned 47 medical institutions remains unclear. Consequently, future profit contributions remain uncertain.

Regarding this acquisition, multiple institutions, including BOCOM International and CLSA, expressed optimism. In BOCOM International’s view, Phoenix Healthcare will gain a state-owned enterprise background and become one of the largest hospital management companies in Asia. These two factors will help Phoenix Healthcare manage local government relations and assist the company in securing more resources under its existing business model. China Resources Medical will gradually bring additional hospital resources to Phoenix Healthcare, including hospital assets, supply chain businesses, and management opportunities. This cooperation will expand Phoenix Healthcare’s business scope across China, and the partnership is also expected to generate synergies.

Nevertheless, BOCOM International remains cautious. The profit contribution from the new medical institutions depends on the future cooperation structure, which is currently undetermined; therefore, potential profits cannot be ascertained. The transaction will be completed through the issuance of 462.9 million new shares, representing a 55.5% increase in the total number of shares. In other words, if profit growth in 2016 falls below 55.5%, earnings per share (EPS) will be diluted. Furthermore, China Resources Medical has not yet determined the timeline for injecting additional new assets.

Some argue that during the tenure of Zhang Haipeng, former CEO of China Resources Medical Holdings Company Limited, although multiple hospitals were acquired, critical issues such as post-acquisition management and the establishment of a scientific operational system remained unresolved.

Zhang Ke stated that hospital operations were not Zhang Haipeng’s strong suit. Following his aggressive acquisition spree, the management and performance of many public hospitals failed to improve. This demonstrated that China Resources Medical’s business model at the time was unviable. Indeed, several employees had already resigned from China Resources Medical prior to the personnel turmoil involving Zhang Haipeng.

Some industry insiders have also pointed out that Zhang Haipeng’s acquisitions of public hospitals were primarily driven by equity considerations and strategic shareholding structures, with insufficient attention paid to hospital operations. Geographically, the hospitals he acquired are scattered across various provinces and cities throughout China.

In contrast to China Resources Medical, Phoenix Healthcare’s hospital portfolio is concentrated in the Beijing-Tianjin-Hebei region, particularly in Beijing. This includes Beijing Yanhua Hospital (its main campus and affiliated institutions), Beijing Mentougou District Hospital, Beijing Mentougou District Hospital of Traditional Chinese Medicine, and Beijing Mentougou District Maternal and Child Health Hospital. Due to this geographic concentration, Phoenix Healthcare can readily implement its existing supply chain model, enabling centralized tendering to eliminate inflated drug prices and thereby enhance profitability.

From the perspective of industry insiders, China Resources Medical’s capital injection into Phoenix Healthcare is valued not only for facilitating a backdoor listing and enhancing liquidity by injecting previously acquired public hospitals into the listed entity, but more importantly for Phoenix Healthcare’s supply chain model. During the aforementioned research visit, Fu Yuning specifically highlighted the importance of supply chain management, urging China Resources Medical to regard “the establishment of a supply chain management platform as a beneficial exploration and to prioritize strengthening collaboration with China Resources Pharmaceutical.”

Years of practice have demonstrated that the supply chain management platforms established by China Resources Pharmaceutical and China Resources Medical were not successful, due to their differing operating environments and interests. Furthermore, the hospitals acquired by China Resources Medical are geographically dispersed, making supply chain management particularly challenging.

Nevertheless, although Phoenix Healthcare has managed its supply chain with remarkable success—as evidenced by its 2015 semi-annual report, which recorded total interim revenue of RMB 602.3 million, of which RMB 401.1 million came from supply chain operations—the industry has consistently viewed Phoenix Healthcare as carrying significant risk. This is because supply chain profits are largely derived from the inflated margins prevalent in current pharmaceutical procurement. As healthcare reforms deepen and these inflated margins shrink, revenue from supply chain operations is expected to decline accordingly.

Can We Grasp the Core of Healthcare?

From the perspective of industry insiders, whether it is China Resources Medical, Phoenix Healthcare, or CR Phoenix, they ultimately cannot bypass the core of medical services. However, at present, China Resources Medical’s management capabilities are weak, while Phoenix Healthcare, which excels in supply chain management, also has limited capabilities in this area.

Among China’s existing private medical institutions, Phoenix Medical possesses relatively strong management and operational capabilities; however, it remains questionable whether these capabilities have gained market recognition. Judging by Phoenix Medical’s historical performance in the healthcare services sector, the extent to which its management and operational prowess has been acknowledged by the market is not high.

“In the field of hospital investment, investee hospitals typically prioritize investors’ medical resources over their financial strength. After all, the ability to provide capital is common among many players, whereas the capacity to integrate medical resources—particularly high-end ones—is what truly matters,” analyzed an industry insider.

Phoenix Healthcare’s financial report shows that in the first half of 2015, its comprehensive hospital revenue amounted to RMB 258.6 million, management fee income reached RMB 29 million (primarily from Yanhua Hospital, Jingmei Hospital, and Mentougou Traditional Chinese Medicine Hospital), and supply chain revenue totaled RMB 401.1 million. Clearly, Phoenix Healthcare has not yet broken away from its business model dominated by supply chain revenue. It has yet to demonstrate sufficient strength or results in areas reflecting hospital management capabilities, such as medical services, medical technology, and healthcare talent.

Regarding China Resources Medical’s backdoor listing, Shi Lichen, head of the Beijing Dingchen Pharmaceutical Consulting Management Center, expressed optimism but noted that both parties still face numerous challenges. “Phoenix Healthcare is privately owned capital, with its core focus on the combination of profitability and efficiency. In contrast, as a state-owned enterprise, China Resources Medical places greater emphasis on scale. Following the formation of China Resources Phoenix, the integration of internal management mechanisms has become its primary challenge. Additionally, brand building represents another significant challenge for China Resources Phoenix.”

Cao Jian, a researcher at the Medical Management Research Center of Tsinghua University and the China Economic Development Research Center of the University of International Business and Economics, pointed out that although China Resources Phoenix has achieved a nationwide layout and holds certain advantages in terms of bed count, it has relatively few high-quality hospitals. Furthermore, it is worth noting that its total medical revenue does not align with its scale. According to published data, China Resources Medical’s 6,000 beds generated a total medical revenue of RMB 2.41 billion in 2015, resulting in an average annual revenue of only RMB 400,000 per bed. This level is equivalent to the national average across more than 20,000 medical institutions in 2014. Therefore, the development of China Resources Phoenix still faces challenges following its establishment.

Amid intensifying market competition, if medical services fail to become a profit center, they risk losing competitiveness in the future. Cao Jian pointed out that according to the National Outline for the Development of the Medical and Health Service System (2015–2020), the government aimed for privately run medical institutions to account for 25% of the market share by 2020, signaling even fiercer competition in the healthcare sector going forward. A growing number of high-caliber, well-established, and high-quality private medical institutions are emerging, with frequent appearances of privately operated healthcare ventures jointly established by major capital investors and top-tier domestic and international hospitals. For hospital groups that have taken an early lead, ensuring sustained competitive advantage and maintaining institutional growth are critical.

Source: 21st Century Business Herald