Tapping growth in China has been a big theme for the past few years. iKang (KANG) is one of the first chances to get in on a basic consumer service like healthcare. iKang provides a broad range of services from routine exams, disease screening, dental care, and both outpatient and clinic-based services.
iKang priced nearly 11M shares at the $14/share which is the high end of the filing range. Using a total of 66M shares outstanding post-IPO that starts the company out with a $924M market capitalization. We were surprised to see just two big banks on the cover, BofA and UBS. The company missed an opportunity to include two or three smaller, more research-focused firms as co-manangers and coverage providers. Perhaps they will consider this if they are lucky enough to do an organized follow-on offering.
Revenue is over $200M now and growing at 40% clip. Gross margins are 52% with “adjusted net income” already in the mid-teens. iKang is the largest single player in China and should continue to grow at least in line with market growth which should be 30% per year. Penetration of healthcare services in China has been improving but is still only a fraction of what is typical in developed economies like the U.S. and Europe.
The management team tells an impressive story in terms of the execution so far by expanding centers, going after corporate accounts and weaving technology into the fabric of their business. Most of the money raised in the IPO will be going to build out more centers to continue the growth trajectory.
With economic growth and more prosperity the Chinese population is suffering from rising rates of cancer, hypertension and diabetes. Education is also increasing awareness concerning preventative healthcare and the need for testing and early treatments. The size of the private market in China is only $1.5B today so it has a long way to grow given the size of the country and current penetration rates.
Demand for the deal is high so we’d expect the stock to trade up from $14. This seems like a name that will need some time to “settle out” as we’ve seen lately with other IPO transactions experiencing an initial jump in price. Investors will like the growth and seemingly high profit margins.
Like other China-based companies we are reminded that the shareholding structure is complicated and equity investors would be wise to consider their “ownership” of this company but we know that these types of concerns about foreign issuers tend to ebb and flow with market conditions. We don’t expect the structure to be an issue with the KANG IPO.
Here is a link to the iKang (KANG) IPO Roadshow Slides.
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