Midas: Chi-Med - profit on Chinese healthcare

By Joanne Hart for The Mail on Sunday
Updated: 08:01 EDT, 5 June 2011

Midas tips Chi-Med, a firm whose shares will benefit from rising Chinese health spending, and updates on Diploma - a tip that has doubled in value

Healthy prospects: Chi-Med is a play on China's growing healthcare bills

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Chi-Med: A play on China's healthcare spending

The Chinese Communist Party took over China in 1949, a year after the National Health Service was founded in Britain.

For several decades, however, Chinese communism did not involve any state healthcare. If people fell ill, they paid for treatment or went without.

Now the situation is changing. Keen to retain goodwill among citizens, the authorities have increased healthcare spending from just over £3.5bn in 2000 to £35bn in 2009.

At the same time, the Communist Party is rolling out a nationwide insurance system, under which companies are forced to contribute to employees' healthcare cover.

Resistance has been considerable as the sums are high, but government pressure is delivering results. Five years ago only 12% of employees had cover. By 2009, it was 30% and there have been more gains since.

This increase in spending also benefits Hutchison China MediTech Ltd, known as Chi-Med, a company specialising in healthcare and consumer products in China.

It was founded in 2000 by Asian conglomerate Hutchison Whampoa, which has extensive connections in China. Six years on, Chi­Med joined the Alternative Investment Market, but Hutchison retained 70%, giving Chi­Med access to a wide range of contacts.

The firm has spent most of the past decade focused on prescription and over­the­counter drugs in three areas anti­viral, heart and infant nutrition. This business has done well, increasing operating profits from $5.4m (£3.3m) in 2006 to $16.8m last year.

Analysts expect the Chinese health market to grow by at least 20% a year for the next five to ten years and Chi­Med's healthcare arm should grow even faster. Recently too, the group's heart drug was designated an essential medicine by the authorities, meaning every health facility will have to use it by 2020.

Chi­Med has two other divisions, both of which are loss­making but have real potential. The first is a drugs research and development arm run by a group of Chinese bio­ tech specialists trained in the US. The division has several drugs in the pipeline, including a treatment for Crohn's disease and ulcerative colitis, both of which affect the gut. There are no entirely satisfactory cures for these unpleasant, lifelong illnesses, but Chi­Med is at an advanced stage with its drug and could announce a licensing deal with a big pharmaceutical company in the next few months.

Chief executive Christian Hogg, formerly at Procter & Gamble, is keen to float this biotech business at some stage in the next year or so and brokers estimate it could be worth about £100m.

Chi­Med has also just moved into organic food and personal care, via a partnership with one of America's biggest organic wholesale groups, Hain Celestial. A selection of products has been launched in Hong Kong and the plan is to move slowly into China, adapting packaging and taste to suit the local market.

Hogg has already started selling one product in China though organic infant formula milk. Initial sales are encouraging and there are high hopes for the future. China's one­child policy makes parents particularly worried about their off­ spring and recent scandals around infant milk have encouraged people to seek out quality offers.

Midas verdict: Overall, Chi-Med is loss-making, reflecting heavy investment, but it should move into profit next year and the long-term outlook is very healthy. The shares are 4471/2p and many brokers believe they should rise to at least 550p this year. The company is well run and there should be some encouraging news over the summer. Buy.