iKang Healthcare Group, Inc. KANG $12.00-$14.00 10.9 million ADSs Underwriters: BofA Merrill Lynch, UBS Investment Bank Co-Managers: Oppenheimer & Co. Proposed trade date of 4/9 They are the largest provider in China’s fast growing private preventive healthcare services market, accounting for approximately 12.3% of market share in terms of revenue in 2013.

iKang Healthcare Group, Inc. KANG

10,904,846 American Depositary Shares to be offered between $12.00 and $14.00 per ADS
Underwriters: BofA Merrill Lynch, UBS Investment Bank Co-Managers: Oppenheimer & Co.
Proposed trade date of 4/9
Rating = 4

Click here to view the prospectus.

http://www.sec.gov/Archives/edgar/data/1524190/000119312514118050/d195054df1a.htm

Company Overview

They are the largest provider in China’s fast growing private preventive healthcare services market, accounting for approximately 12.3% of market share in terms of revenue in 2013, according to Frost & Sullivan. Through their integrated service platform and established nationwide network of medical centers and third-party service provider facilities, they provide comprehensive and high quality preventive healthcare solutions including a wide range of medical examinations services and value-added services including disease screening and other services. Their customers are primarily corporate customers who contract them to provide medical examination services to their employees and clients and pay for these services at pre-negotiated prices. They also directly market their services to individual customers. In fiscal 2012, they delivered their services to approximately 1.9 million individuals in total, including the employees and clients of their corporate customers.

Chronic diseases are becoming more prevalent in China. According to Frost & Sullivan, the number of people with hypertension, diabetes and hyperlipidemia increased 89%, 97% and 71%, respectively, from 2001 to 2012. With the rising incidence of chronic diseases, more and more people are realizing the importance and benefits of preventive healthcare services. Currently, medical examinations are not typically covered by health insurance policies in China. Although the majority of medical examinations are still performed in public hospitals, an increasing number of customers are choosing private providers who offer quality services at affordable prices.

As of December 31, 2013, their nationwide network consisted of 42 self-owned medical centers, which contributed the majority of their revenue and their self-owned medical center network covered 13 of the most affluent cities in China, namely Beijing, Shanghai, Guangzhou, Shenzhen, Chongqing, Tianjin, Nanjing, Suzhou, Hangzhou, Chengdu, Fuzhou, Changchun and Jiangyin. They have also supplemented their self-owned medical center network by contracting with approximately 300 third-party service provider facilities which include selected independent medical examination centers and hospitals across all of China’s provinces, creating a nationwide network that allows them to serve their customers in markets where they do not have self-owned medical centers.

Their nationwide network offers a wide range of medical examination services and provides a “one-stop” solution to their corporate customers which have a broad geographic footprint in China. As a single point of contact for their corporate customers, they provide consistent and high quality services to their employees and clients in different locations and reduce their administrative burden. They also provide their customers with professional consultation and medical referrals for additional as-needed diagnosis or treatment. Their centers are independent of hospitals and located in prime urban locations with an average size of 2,500 square meters. Equipped with advanced equipment and staffed with experienced medical professionals, each center provides a comfortable and friendly environment to their customers.

In fiscal 2012 and for the nine months ended December 31, 2013, they generated 83.2% and 79.2% of their net revenues from corporate customers, respectively, and the remainder from individual customers. In fiscal 2012, they served approximately 1.7 million individuals from approximately 11,200 corporate customers in various industries including financial services, telecommunications, retail, consumer goods and information technology, as well as approximately 206,000 individual customers. They served 71 of the 100 largest Chinese companies in 2012 as ranked by Forbes, including the ten largest commercial banks, as well as many other blue-chip Chinese companies. They also serve many large multinational companies in China, including 189 of the companies ranked in the 2013 Fortune Global 500. Among their top 50 customers in fiscal 2012, 90% have been their customers for more than four years. In addition, to cater to the increasing demand for even more extensive and higher quality medical services from China’s growing population of high-net-worth individuals, they opened two high-end medical examination centers under their iKang Evergreen brand in Nanjing and Beijing in September and December 2013, respectively.

They believe that they are at the forefront of the industry with their proprietary centralized information technology platform. They operate an online and telephonic health management and consultation system which provides their customers with convenient and hassle-free access to their nationwide network. They integrate third-party service providers into their network through customer scheduling and payment systems. Their information technology systems (i) allow individuals online and mobile access to their medical examination results and analytical tools that help them better understand their health conditions, (ii) enable corporate customers to monitor and analyze aggregated anonymous health data with respect to their employees, and (iii) enable them to track their operations and internal performance metrics which help them prioritize their marketing and sales efforts.

IPO Detail

This is the initial public offering of iKang Healthcare Group, Inc. and no public market currently exists for its common stock. iKang Healthcare Group is offering 10,904,846 American Depositary Shares as described in the prospectus. The company expects the initial public offering price of its common stock to be between $12.00 and $14.00 per ADS. The company has applied to list its ADSs on the NASDAQ Global Market under the symbol “KANG.”

Total ADSs offered by the company

7,574,446 ADSs

Total ADSs offered by the selling shareholder

3,330,400 ADSs

ADSs to be outstanding immediately after this offering

64,553,746 ADSs

Common shares to be outstanding immediately 31,488,031 Class A common shares and 788,842 Class after this offering C Common shares

Following this offering, they will have two classes of authorized ordinary shares, Class A common shares and Class C common shares. The rights of the holders of Class A and Class C common shares are identical, except with respect to voting and conversion rights. Each Class A common share will be entitled to one vote per share. Each Class C common share will be entitled to 15 votes per share and is convertible at any time into one Class A common share. Mr. Ligang Zhang will beneficially own all of their Class C common shares. Upon the completion of this offering and their sale of Class A common shares in connection with the concurrent private placement by Best Investment Corporation, Mr. Ligang Zhang will own an amount of Class C common shares, which taken together with the Class A common shares beneficially owned by Mr. Ligang Zhang, shall allow him to control the exercise of 36% of their voting power.

Use of Proceeds

They estimate that they will receive net proceeds from this offering of approximately US$88.1 million. They intend to use the net proceeds they receive from this offering primarily for the following purposes:

70%, or approximately US$61.7 million to finance potential strategic acquisitions and construction of new medical centers in China;
15%, or approximately US$13.2 million to finance potential strategic acquisitions and construction of dental clinics in China;
5%, or approximately US$4.4 million to upgrade their information technology systems; and
10%, or approximately US$8.8 million to fund working capital as well as for other general corporate purposes.

In using the proceeds of this offering, as an offshore holding company, under PRC laws and regulations, they are permitted to provide funding to their PRC subsidiaries only through loans or capital contributions. Subject to satisfaction of applicable government registration and approval requirements, they may extend inter-company loans to their PRC subsidiaries or make additional capital contributions to their PRC subsidiaries to fund their capital expenditures or working capital. They intend to invest the proceeds of this offering into their PRC subsidiaries and thereafter convert such proceeds into Renminbi promptly upon completion of relevant PRC government registration or receipt of the relevant approval. If they provide funding to their PRC subsidiaries through capital contributions or loans, they will need to increase their PRC subsidiaries’ approved registered capital and total investment amount, which requires approval from the MOFCOM or its local branches. This approval process typically takes 30 to 90 days, and sometimes longer, from the time the MOFCOM or its local branches receive all the required application documents. If they provide funding to a PRC subsidiary through loans, they will also need to register such loans with SAFE or its local branches, which usually requires no more than 20 working days from the date of receipt of all the required application documents by SAFE or its local branches. They cannot assure you that they will be able to complete these government registrations or obtain the relevant approvals on a timely basis, if at all. They will not receive any of the proceeds from the sale of ADSs by the selling shareholders.

Competition

They also compete with numerous local independent medical examination centers located in nearly every city in China.

Market Opportunity

Preventive healthcare services seek to detect and prevent diseases or injuries, improve the overall health condition and quality of life while lowering potential future healthcare costs. According to Frost & Sullivan, preventive healthcare services in China primarily consist of medical examinations, vaccination programs, women and children care and other services. These services have historically been offered by various state-owned or controlled medical institutions that are closely regulated by the PRC government. In April 2009, the PRC government issued Opinions on Deepening the Healthcare System Reform, which encouraged private investment in the healthcare system and relaxed restrictions on medical professionals practicing in multiple locations. As a result, an increasing number of private service providers have entered into the market and started offering medical examination services.

The private preventive healthcare services market in China, which primarily focuses on medical examination services, is an emerging market and has experienced rapid growth in the past decade. According to Frost & Sullivan, the total market grew from RMB3.1 billion (US$0.5 billion) in 2009 to RMB9.5 billion (US$1.5 billion) in 2013, representing a CAGR of 32.0% and is expected to continue to grow from 2013 at a CAGR of 31.0% and reach RMB36.7 billion (US$5.9 billion) by the end of 2018. According to Frost & Sullivan, recent trends have shown that private service providers have begun to increase their share of medical examination service market due to their customer-centric services, customized offerings, nationwide access, and other information technology-enabled features that are not often provided by public hospitals. According to Frost & Sullivan, in the next three to five years, the private medical examination market is expected to grow faster than the public medical examination market and gain more market shares. This market is relatively fragmented with hundreds of private service providers. The major players in the market with relatively significant market shares are companies with multiple locations, either across China or regionally. According to Frost & Sullivan, the top five companies in terms of revenues in 2013 were all domestic companies. Private preventive healthcare services providers primarily target corporate customers and individual customers with medium to high income. Although individual customers are providing increased revenue contribution, according to Frost & Sullivan, corporate customers accounted for approximately 80% of the medical examinations performed by private healthcare service providers in recent years.

In the United States and other developed countries, medical examination services are primarily provided by family practice physicians and are typically covered by medical insurance. Insurance companies in these countries designate the tests and procedures included in medical examination packages based on their risk analysis for certain diseases taking into account various factors such as age, gender and medical history of the entire insured group. Although medical examinations are not typically covered by medical insurance in China, the medical examination industry including privately owned and operated medical examination centers has been growing fast in China. This is largely driven by a rising population of middle-class and wealthy individuals who pay more attention to disease prevention and improved benefits provided by large corporations for their employees. According to Frost & Sullivan, the number of individuals with annual disposable incomes from US$3,500 to US$21,000 was approximately 213.2 million in 2011 and will grow to 355.5 million in 2015. Individuals seek comprehensive medical examinations and other targeted disease screenings at these medical examination centers. With rising health awareness in China, they believe the preventive healthcare market including the private preventive healthcare market will continue to grow substantially in the future.

Summary Consolidated Statement of Operations Data:


	For the Year Ended March 31,								For the Nine Months Ended December 31,
	2011		2012			2013			2012			2013
	US$		US$			US$			US$			US$
	(in thousands, except per share data)
Net revenues		68,231		93,713			133,871			115,511			172,762
Cost of revenues		39,795		49,506			71,079			56,366			82,735

Gross profit		28,436		44,207			62,792			59,145			90,027

Operating expenses:
Selling and marketing		9,970		14,005			18,486			13,186			23,046
General and administrative		11,172		14,756			23,447			16,495			25,015
Research and development		733		748			1,270			970			1,295
Impairment of goodwill		70		—			—			—			—
Write-off of leasehold improvement		486		309			—			—			—

Total operating expenses		22,431		29,818			43,203			30,651			49,356

Income from operations		6,005		14,389			19,589			28,494			40,671
Interest expense		—		(159	)		(1,106	)		(749	)		(1,038	)
Gain from forward contracts		—		—			—			—			230
Interest Income		62		101			100			69			54

Income before provision for income taxes		6,067		14,331			18,583			27,814			39,917
Income tax expenses		1,952		3,939			6,134			8,075			12,021

Net income		4,115		10,392			12,449			19,739			27,896
Less: Net income attributable to non-controlling interest		541		690			338			504			633

Net income attributable to iKang Guobin Healthcare Group, Inc.		3,574		9,702			12,111			19,235			27,263

Deemed dividend to preferred shareholders		—		2,312			84,306			5,110			20,436
Undistributed earnings allocated to preferred shareholders		2,770		2,770			2,818			2,087			5,291

Net income (loss) attributable to common and preferred shareholders of iKang Guobin Healthcare Group, Inc.		804		4,620			(75,013	)		12,038			1,536

Net income (loss) per share attributable to common shareholders of iKang Guobin Healthcare Group, Inc.
Basic		0.04		0.22			(11.22	)		0.56			0.06
Diluted		0.04		0.21			(11.22	)		0.54			0.06
Pro forma net income per common share
Basic							0.56						1.05
Diluted							0.55						1.04
Summary Non-GAAP Financial Data:
Adjusted Net Income		3,663		9,918			14,384			19,235			27,263
Adjusted EBITDA		11,849		21,199			29,572			34,023			47,930

Summary Consolidated Balance Sheet Data:


	As of March 31,									As of December 31,
	2011			2012			2013			2013			2013 (unaudited pro forma)
	US$			US$			US$			US$			US$
	(in thousands)
Total current assets		31,887			37,299			104,478			152,311			152,311
Total assets		69,244			87,316			165,361			269,829			269,829
Total current liabilities		33,041			42,095			73,924			118,092			118,092
Total liabilities		33,468			54,056			74,548			123,136			123,136
Convertible redeemable preferred shares		82,452			84,764			213,978			264,517			—
Total iKang Guobin Healthcare Group, Inc. Shareholders’ equity (deficit)		(48,245	)		(52,212	)		(124,195	)		(119,596	)		114,921
Non-controlling interests		1,569			708			1,030			1,772			1,772
Total liabilities, mezzanine equity and shareholders’ equity (deficit)		69,244			87,316			165,361			269,829			269,829

Target Markets

Their goal is to further strengthen their leading position in the private preventive healthcare services market in China and to continue to gain market share from the public sector by differentiating their preventive healthcare services from those provided by public hospitals. In the long run, by leveraging their growing network of medical centers, large and loyal customer base, established demographic and disease information database together with their sophisticated proprietary information systems, they plan to expand the scope of their service offerings to include other healthcare services and ultimately establish their company as a leading health management service provider in China. They intend to achieve their goal by implementing the following strategies:

· Expand the breadth and depth of their services platform;

· Continue to expand their nationwide network coverage;

· Expand their existing customer base and attract new customers;

· Further upgrade their service standards to enhance customer experience; and

· Continue to develop technology-enabled health management solutions and improve operational efficiency.

Company's Unique Strengths

Unique business model addressing the increasing demand for preventive healthcare in China. Their unique business model addresses the increasing demand for high quality services and a satisfactory customer experience in the preventive healthcare industry in China. With environmental and lifestyle changes in China, an increasing number of people are suffering from chronic diseases such as cancer and more and more people are recognizing the benefits of preventive healthcare programs. In addition, favorable government policies, including the Master Plans on Promoting the Development of the Healthcare Services Industry announced in October 2013 which recommends that employees be given annual medical examinations, have also encouraged corporations to provide greater healthcare benefits to employees.

Leading position in a fast growing market. They were one of the earliest entrants into China’s private preventive healthcare services market. They opened through acquisition their first self-owned medical center in 2006 and in 2007, they acquired the first privately owned medical examination center in China. Their self-owned medical centers are complemented by their cooperative relationships with third-party service providers across China, which enable them to provide their customers with cost-efficient access to consistent and quality services across a wide geographic area.

Successful track record of acquisition integration and new center development. They have grown their business through strategic acquisitions of businesses and assets and through the development of new centers. There were approximately 500 private preventive healthcare service providers in the market in China in 2013, which provides ample acquisition opportunities for them to expand their network.

Large and loyal customer base built on their recognized brand name and supported by their multiple sales channels. They maintain a large and loyal customer base comprised of corporate and individual customers. In fiscal 2010, 2011 and 2012, they had approximately 5,200, 7,100 and 11,200 corporate customers, covering approximately 936,000, 1,243,000 and 1,725,000 individuals, respectively, and approximately 131,000, 138,000 and 206,000 individual customers, respectively. Among their top 50 customers in fiscal 2012, 90% have had business relationships with them for more than four years.

Sophisticated proprietary information technology systems. They believe that they are at the forefront of the industry with their proprietary centralized information technology platform. They maintain electronic medical records for their customers to provide them with easy access to their health information. Their electronic customer health records serve as the foundation of their healthcare management services and include interactive analytical tools that promote the cross-selling of their services.

Company's Unique Risks

They rely on corporate customers for a significant portion of their net revenues. A reduction in demand from these corporate accounts could materially and adversely affect their business, financial condition, results of operations and prospects. They derive a significant portion of their net revenues from their services to corporate accounts, which accounted for 80.3%, 84.4%, 83.2% and 79.2% of their net revenues in fiscal 2010, 2011, 2012 and for the nine months ended December 31, 2013, respectively.

If they fail to manage their growth and their growth strategies effectively, their business, financial condition, results of operations and prospects may suffer.

Their expansion into the high-end preventive healthcare services market, including the significant capital expenditure expenses involved, may present increased risks. They rely on corporate customers for a significant portion of their net revenues. A reduction in demand from these corporate accounts could materially and adversely affect their business, financial condition, results of operations and prospects.

Their business is heavily regulated. Failure to comply with applicable regulations and any changes in government policies or regulations could result in penalties, loss of licenses, additional compliance costs or other adverse consequences.

If the PRC government finds that the agreements that establish the structure for operating their business in China do not comply with its restrictions on foreign investment in healthcare and Internet-related businesses, or if these regulations or the interpretation of existing regulations change in the future, they could be subject to severe penalties or be forced to relinquish their economic benefits in the assets and operations of their affiliated PRC entities.

Expansion of their healthcare services could be affected by the expansion of government-sponsored social medical insurance available to the Chinese population that is not available now. Most government-sponsored social medical insurance in China does not cover medical examinations. In certain locations where government-sponsored social medical insurance covers medical examinations, they have become a qualified institution under such insurance coverage. Currently, most of their corporate customers pay for medical examinations for their employees, and individual customers pay directly for medical examinations. If government-sponsored social medical insurance is further expanded to cover medical examinations in more geographical locations, and iKang does not become a qualified institution for such coverage, certain of their corporate customers may discontinue or terminate their relationship with them, and certain individual customers may opt to use other medical institutions covered by such medical insurance rather than pay for their services

They rely on contractual arrangements with their affiliated PRC entities and their respective shareholders for the operation of their business, which may not be as effective as direct ownership. If their affiliated PRC entities and their shareholders fail to perform their obligations under these contractual arrangements, they may have to resort to litigation to enforce their rights, which may be time-consuming, unpredictable, expensive and damaging to their operations and reputation.

Shareholders of iKang Holding, Yuanhua Information or Beijing Jiandatong, their affiliated PRC entities, may have a potential conflict of interest with them, and they may breach their contracts with them or cause such contracts to be amended in a manner contrary to the interest of their company.

Their holding company structure may restrict their ability to receive dividends or other payments from their PRC subsidiaries and their affiliated PRC entities, which could restrict their ability to act in response to changing market conditions and to satisfy their liquidity requirements.

Their dual class share structure with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of their Class A common shares and ADSs may view as beneficial. Upon the completion of this offering, Mr. Ligang Zhang will own an amount of Class C common shares, which taken together with the Class A common shares beneficially owned by Mr. Ligang Zhang, shall allow him to control the exercise of 36% of their voting power.

Bottom Line

They have grown rapidly since their inception through both organic growth and strategic acquisitions. The number of their self-owned medical centers has grown from one in 2006 to 42 as of December 31, 2013. They have expanded their customer base from approximately 5,200 corporate customers in fiscal 2010 to approximately 11,200 corporate customers in fiscal 2012 and further to approximately 16,900 corporate customers in the nine months ended December 31, 2013. Total customer visits increased from approximately 1,067,000 in fiscal 2010 to approximately 1,381,000 in fiscal 2011 and to approximately 1,931,000 in fiscal 2012, representing a CAGR of 34.5%, and the number of total customer visits was approximately 2,306,000 for the nine months ended December 31, 2013. From fiscal 2010 to fiscal 2012, their net revenues grew from US$68.2 million to US$133.9 million, representing a CAGR of 40.1%. Their net revenues reached US$172.8 million for the nine months ended December 31, 2013.

They provide comprehensive and high quality preventive healthcare solutions including a wide range of medical examinations services and value-added services including disease screening and other services. Their customers are primarily corporate customers who contract them to provide medical examination services to their employees and clients and pay for these services at pre-negotiated prices. In fiscal 2012 and for the nine months ended December 31, 2013, they generated 83.2% and 79.2% of their net revenues from corporate customers, respectively, and the remainder from individual customers.

Chronic diseases are becoming more prevalent in China, with the number of people with hypertension, diabetes and hyperlipidemia increasing 89%, 97% and 71%, respectively, from 2001 to 2012. Currently, medical examinations are not typically covered by health insurance policies in China. Although the majority of medical examinations are still performed in public hospitals, an increasing number of customers are choosing private providers who offer quality services at affordable prices. They have also supplemented their self-owned medical center network by contracting with approximately 300 third-party service provider facilities which include selected independent medical examination centers and hospitals across all of China’s provinces. As a single point of contact for their corporate customers, they provide consistent and high quality services to their employees and clients in different locations and reduce their administrative burden. In addition, to cater to the increasing demand for even more extensive and higher quality medical services from China’s growing population of high-net-worth individuals, they opened two high-end medical examination centers under their iKang Evergreen brand in Nanjing and Beijing in 2013.

In April 2009, the PRC government issued Opinions on Deepening the Healthcare System Reform, which encouraged private investment in the healthcare system and relaxed restrictions on medical professionals practicing in multiple locations. The total market grew from RMB3.1 billion (US$0.5 billion) in 2009 to RMB9.5 billion (US$1.5 billion) in 2013, representing a CAGR of 32.0% and is expected to continue to grow from 2013 at a CAGR of 31.0% and reach RMB36.7 billion (US$5.9 billion) by the end of 2018. In the next three to five years, the private medical examination market is expected to grow faster than the public medical examination market and gain more market shares. With rising health awareness in China, they believe the preventive healthcare market including the private preventive healthcare market will continue to grow substantially in the future.

They plan to expand their services platform and their nationwide network coverage. They also plant to expand their existing customer base, further upgrade their service standards to enhance customer experience and continue to develop technology-enabled health management solutions and improve operational efficiency.

Their unique business model addresses the increasing demand for high quality services and a satisfactory customer experience in the preventive healthcare industry in China. Additionally, government policies have encouraged corporations to provide greater healthcare benefits to employees. They were one of the earliest entrants into China’s private preventive healthcare services market. Their self-owned medical centers are complemented by their cooperative relationships with third-party service providers across China, which enable them to provide their customers with cost-efficient access to consistent and quality services across a wide geographic area. There were approximately 500 private preventive healthcare service providers in the market in China in 2013, which provides ample acquisition opportunities for them to expand their network. They maintain a large and loyal customer base comprised of corporate and individual customers. They believe that they are at the forefront of the industry with their proprietary centralized information technology platform.

They rely on corporate customers for a significant portion of their net revenues. Their expansion into the high-end preventive healthcare services market, including the significant capital expenditure expenses involved, may present increased risks. Their business is heavily regulated and regulations could change in the future. If government-sponsored social medical insurance is further expanded to cover medical examinations in more geographical locations, and iKang does not become a qualified institution for such coverage, certain of their corporate customers may discontinue or terminate their relationship with them. Shareholders of iKang Holding, Yuanhua Information or Beijing Jiandatong, their affiliated PRC entities, may have a potential conflict of interest with them. Rating = 4

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