opportunities in china’s elderly care facilities market

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Opportunities in China’sElderly Care Facilities MarketApril 17th, 2014

http://www.smithstreetchina.com/

About SmithStreet Healthcare

SmithStreet’s Healthcare practice provides

companies who want to enter China or who are

already operating in China with relevant regulatory,

commercialization, financing and physician / patient

behavior insights to effectively design and implement

strategies – be it market entry, expansion,

commercialization, price optimization, distribution or

others.

Healthcare in China is one of the biggest and fastest

growing in the world, largely driven by growth in

government expenditures and increasing purchasing

power of consumers for private healthcare

consumption. The market has become lucrative for

local and foreign corporations alike. It has

encouraged foreign companies who have already

penetrated to continuously expand to cover other

developing regions and has invited other

multinational firms to consider designing an entry

strategy to capitalize on this growth.

In this dynamic and complex environment, our

investigative, bottom-up approach to primary

research is highly effective in helping our clients

develop a suitable market entry or growth strategy for

their business.

We have worked with various healthcare companies

and have developed particular expertise in the

following categories:

Consumer health

Prescription and other specialty pharmaceutical

drugs

Medical devices and consumables

Professional medical services

Health insurance

Jules FalzadoEngagement Manager

+86 139 1618 2351

[email protected]

@SmithStreetCN

SmithStreetSmithStreet

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2

Today’s Discussion on China’s Elderly Care Facilities

China Situationer Market Dynamics Q&A

3

1980 2010 2040E

Pop’n 0.98Bn 1.36Bn 1.44Bn

65+ y.o. 5.1% 8.5% 22.1%

Life Exp 67 years 75 years 77 years

China is aging – by year 2040, 22% of the population are 65+ y.o. and average life expectancy would have gone up to 77 years

Sources: UN Department of Economic and Social Affairs, Population Division; The World Bank Database

% Population Distribution by Age

-8 -6 -4 -2 0 2 4 6 8

100+

95-99

90-94

85-89

80-84

75-79

70-74

65-69

60-64

55-59

50-54

45-49

40-44

35-39

30-34

25-29

20-24

15-19

10-14

5-9

0-4

-8 -6 -4 -2 0 2 4 6 8

100+

95-99

90-94

85-89

80-84

75-79

70-74

65-69

60-64

55-59

50-54

45-49

40-44

35-39

30-34

25-29

20-24

15-19

10-14

5-9

0-4

-8 -6 -4 -2 0 2 4 6 8

100+

95-99

90-94

85-89

80-84

75-79

70-74

65-69

60-64

55-59

50-54

45-49

40-44

35-39

30-34

25-29

20-24

15-19

10-14

5-9

0-4

Male Female

% of Total Population, 1980 vs. 2010 vs. 2040E

4

Access to quality healthcare facilities and services is still confined within certain groups of the population

Sources: SmithStreet Analysis; Country Statistical Yearbook (2012); The World Bank Statistical Databases; OECD Health Statistics

3.13.3

13.44.3

US

Canada

Japan

China

2.72.0

2.31.9

US

Canada

Japan

China

$926$558

$472$33

US

Canada

Japan

China

85%100%100%

96%

US

Canada

Japan

China

Hospital Beds per 1k Population, 2012

Doctors per 1k Population, 2012

Gov’t Health Expenditure per 1k Population, USD MM, 2012

Public Health Insurance Coverage, %, 2012

Note: Number of nurses for per 1,000 is 1.85 in 2012 with historical CAGR of 7.8%; urban has more than 3x nurses than rural

China’s urban locations have twice

the no. beds per 1,000 than rural

3% growth in the number of

doctors; 2.3x more doctors per

1,000 in urban locations

12th Five-Year Plan to allocate at

least USD 1.5Bn on elderly care

Varying coverage across city tiers;

Basic Medical Insurance does not

cover elderly care services

5

Economic development resulted to massive urban migration and by 2035, 70% of the population will be residing in cities

Sources: SmithStreet Analysis; China National Bureau of Statistics; “Census: Population hits 1.37b” (China Daily Europe, 4th April 2011)

BEIJING (Tier 1 City) SHANGHAI (Tier 1 City)

GUANGZHOU (Tier 1 City) CHENGDU (Tier 2 City)

11 13

3

7

2000 2010

1%

4%

10%14

20

14 14

3

9

2000 2010

<1%

3%

11%17

23

7 8

35

2000 2010

2%

3%

4%10

13

10 11

13

2000 2010

1%

2%

9%1114

City Population: Locals vs. Migrants

Population in Millions, CAGR %, 2000 vs. 2010 Locals Migrants

National Urban vs. Rural Population

%, 2000 vs. 2010 vs. 2035E

36%

50%

70%

64%

50%

30%

2000 2010 2035E

Urban Rural

6

Exposure to new formats and

concepts, especially premium

and luxury

Evolution of consumer

preferences and decision-making

considerations

Penetration of Western

influences in more urbanized

cities and commercial locations

Impact of social media on

increasing awareness and

coverage

Increasing demand for quality

and better service levels

The establishment of super cities has exposed the population to new concepts, particularly those from Western cultures

Source: SmithStreet Analysis

SmithStreet Case Study: Luxury Experience Curve

Leather Accessories and Sunglasses are typical entry points

Consumers quickly move into

Handbags, Shoes and Bridal Jewelry

Luxury RTW, Fashion Jewelry and Luxury

Watches are purchased at much higher levels of

luxury experience

Fine Jewelry is the last category

to develop

Co

nsu

me

r S

op

his

tication

Consumer Exposure to Luxury MoreLess

Less

More

Illustrative

7



8

Only 2% of China’s 65+ y.o. are enrolled in nursing homes, much lower than the 5-7% level in the developing countries

Sources: SmithStreet Analysis; China National Bureau of Statistics; Statistical Report of the People’s Republic of China on the Development

of Social Services (2008-2012); UN Department of Economic and Social Affairs, Population Division

Elderly Population (65+ y.o.) vs. Nursing Home Enrollment

Millions

110 113 119 123 127

~168

~235

~317

2008 2009 2010 2011 2012 2020E 2030E 2040E

Population of disabled and

partially disabled elderly will

reach 45MM by 2020

Reasons for Current

Low Enrollment Rate

Strong filial piety, especially

in rural areas

Shortage in the number of

beds in quality and

affordable facilities

“The old are not wealthy

enough and the wealthy are

not yet old”

Nursing Home Enrollment#

22

2

33

~3

~5

~6

9

The elders’ realization that they, too, need care and the improvement in pension coverage will drive future demand

Sources: SmithStreet Analysis; Realwise Report on Elderly Residential Model for China (2012)

Demand Drivers

Paradigm Shifts

Their children are already

burdened

Children are not technically skilled

to provide elderly care

Family members are not always

around to look after them

Financially

Prepared Future

Elders

Pension benefits are projected to

grow from USD 140Bn in 2010 to

USD 1.2Tn by 2030

Introduction of

New Concepts

Innovative nursing home models

as influenced by foreign players

Premium nursing homes

becoming a social status symbol

CLIENT

REQUIREMENTS

Physically “liveable”

Better life / recreational

and social activities

Medical services for

device- and nurse-aided

elderly

10

China has ~43k nursing homes with total capacity of 4.8MM beds

Sources: SmithStreet Analysis; China National Bureau of Statistics

Guangxi

Henan

Shanxi

Hunan

Guangdong

JiangxiZhejiang

Shandong

Jiangsu

Hebei

Jilin

Liaoning

Shanghai

Beijing

Tianjin

Xinjiang

Qinghai

Tibet

Yunnan

Guizhou

Sichuan and

Chongqing

Hubei

Anhui

Fujian

Inner

Mongolia

Heilongjiang

Shaanxi

Hainan

Gansu

Ningxia

Elderly Care Institution Beds by Province

Number of Beds per Thousand Elders, 2012

> 30 21-30 11-20 < 11

Nationwide: 21.5 beds per 1,000

4 fast-aging Mainland China provinces have

bed-to-elderly ratios below national average

Province% of 65+ y.o.

Population

Beds per

1,000 Elders

Shandong 8% 28.4

Sichuan 8% 29.5

Jiangsu 7% 36.7

Henan 7% 20.6

Guangdong 6% 9.7

Hunan 6% 17.3

Hebei 5% 18.8

Hubei 5% 28.6

Anhui 5% 30.7

Zhejiang 4% 33.1

21 Others 40% -

Total 100% -

11

The imbalance in regional demand and supply results to the shortage of beds in key cities and longer waiting times

Sources: SmithStreet Analysis; China National Bureau of Statistics

Why is there shortage if the

available beds (~4.8MM) exceed the

actual enrollees (2.9MM)?

74% of total facilities are in rural areas,

mostly low-end public nursing homes

Lack of beds in premium government

facilities with better quality and lower

price

Mid-range private nursing homes provide

for the shortage in beds; market is limited

due significant price difference

Beijing No 1

Social Welfare

House

10k still queuing;

only100 elders

leave annually

At a government-run

nursing home in

Guangzhou, beds are fully

occupied and more than

100 people are queuing

Shanghai Yangpu

District Social

Welfare Home

Only beds for males

are available; female

elders need to wait for

6-12 months

12

There is also a significant shortage in caregivers, which often results to utilization of underqualified manpower

Sources: SmithStreet Analysis; Huan Zhang’s (VP for the China Academy of Social Management, Beijing Normal University) Speech at the

National Elderly Care Human Resources Development Forum (May 2013)

National Target:

6MM Caregivers by 2020

220k caregivers

9% certified and

qualified

14% certified but

underqualified

77% NOT certified

Low-paying job

(USD 240-400 per month)

Social stigma – not regarded

as an important medical

professional

Very demanding job

requirements

Reasons for Shortage

40-50% churn; need

to develop 2MM new

caregivers per year

13

Operating nursing home facilities in China involves management of multiple stakeholders


Government

Land Lease, Tax Shield,

Overhead Subsidy

Management

(Public),

Subsidy

Real Estate HospitalServices

Sub-Contract

Services

Project

Funding,

Elderly

Financing

Caregivers,

Household

Service

Medical

Services

Insurance

Nursing Homes

Infrastructure

14

Government subsidy enables public nursing homes to offer complete package at less expensive prices


OwnershipNo. of

BedsMedical Nursing

Accept

DisabledLocation Price Occupancy

Private 300+ Suburb Very High High

Private 300 Urban High High

Private 200 Urban Medium Medium

Private 50 Urban Low Low

Government 500+ Urban Medium Very High

Government 300 Urban Low High

Government 30 Rural Very Low Low

Government vs. Private Nursing HomesHigh Low

15

Shanghai Yangpu District Social Welfare Home

1,000 beds

95% occupied

Typical Charges

Public nursing homes are owned by the government and are accessible at lower prices

Sources: SmithStreet Analysis; Yangpu District Social Welfare Home Official Website

Item Fees / Month

Rent USD 100-300

Meals USD 90

Personal

CareUSD 240

Medical

Services

Depends on

services

Others Up to USD 40

Government

Nursing Homes

Business Model

Government-owned

(province, city, county)

Financing from government

budget, fee collections and

donations

Operations are currently

managed by the government;

gradually sub-contracted to

third-party partners

Ningbo Shiqi

Street Nursing

Home

200 beds

90% occupied

No resident

doctor

Max of USD

200 per month

16

Private nursing homes implement different revenue generation models depending on developers and service formats

ProjectForeign

PartnershipsTarget Clients

Services &

Facilities

Star Castle

(Fosun Group)

Fortress

Investment

Group

Retirees from

state-owned

companies

Professors

Executives

High-Income

Groups

7/24 Care

Personal

Doctor

Entertainment

Education

Shuttle Bus

Tide Healthland

Campus

(Tide Holdings)

Aveo Group

(Australian

service and

ops company)Tide Healthland Campus

(Qingpu, Shanghai)

Star Castle (Baoshan, Shanghai)

Sources: SmithStreet Analysis; Miscellaneous Official Company Websites

Revenue

Generation

Models

Rent: Monthly or yearly charges

(e.g., Star Castle)

Property Sales (e.g., Tide

Healthland Campus)

VIP: Charge a huge amount for VIP

membership at the beginning,

followed by periodic smaller fees

17

Jiangsu

Hebei

Beijing

GuangdongGuangxi

Hubei

Liaoning

Shandong

Shanghai

Zhejiang

Hainan

Harbin

Shaanxi

Current private nursing home development is concentrated in the Bohai Sea Ring Area, Yangtze River Delta and Pearl River Delta

Sources: SmithStreet Analysis; Miscellaneous Official Company Websites; Guosen Securities Report on Pension Estate Industry (Feb 2014)

Guangzhou

, Nanning,

Sanya

Shanghai, Jiaxing,

Nanjing, Hefei

Beijing,

Langfang,

Shenyang

Xi'an,

Wuhan

Real Estate

Services

Insurance

Foreign

Players

Private Players in China Locations of Current Development

18

While the market is largely driven by local private companies, foreign investments and JVs have also started to come in

Sources: SmithStreet Analysis; Miscellaneous Official Company Websites

1,600

160

97

48

32

Membership

community

Senior care facilities +

residential areas

Multi-purpose

functioning service

centers

Short-term residence

(migrants)

Continuing Care

Retirement

Communities

Private Investments on Elderly Care Facilities

USD Millions

Typical entry models for foreign players:

Joint-venture with local company

Strategic cooperation or alliance

Foreign Direct Investments (FDIs) have

not been successful due to lack of

supporting government policies

19

Elderly care facilities is still at its infancy stage but offers high long-term growth opportunities

Changing lifestyles resulting to improvement

in the adoption of elderly care concepts

More financially prepared future elderly

population (income, financial investments)

Exposure to new concepts (luxury / premium);

increasing expectations on service quality

Regulatory improvements: land acquisition,

corporate registration, implementation rules

Operations of public nursing homes gradually

outsourced to private companies

The Chinese

consumers are

evolving

Industry infrastructure is not yet fully

integrated; shortage in manpower

Further cooperation between local and

foreign companies

Increasing

engagement of

private players

GR

OW

ING

DE

MA

ND

ON

NU

RS

ING

HO

ME

S INC

RE

AS

ING

PR

IVA

TE

PA

RT

ICIP

AT

ION

20

New market entrants must be ready to address strategic and operational challenges to maximize opportunities

Localization of service proposition

Regulatory and government requirements

Financing / revenue generation model

“Shelf-life” of foreign entities

Profitability of business model / capacity management

Shortage in manpower (qualified caregivers)

Strategic partnerships with local entities?

21

