The good news continues to roll in for shareholders in the $13 billion private hospital owner and operator Ramsay Health Care Limited (ASX: RHC), with Ramsay announcing that a joint venture (JV) agreement has been signed with Chinese healthcare company Chengdu Jinxin Healthcare Investment Management Group Ltd (Jinxin).
According to the release, Jinxin "operates a number of hospitals, and is in the process of developing a new hospital, in the city of Chengdu." To put the scale of this opportunity into context, Ramsay noted that Chengdu alone has a population of over 14 million people, while the wider Sichuan Province where Chengdu is located has a population of around 85 million!
Ramsay will hold a 25% stake in the JV which will initially involve five of Jinxin's hospitals (inclusive of one hospital scheduled to open later this year).
This is not the first time that Ramsay has ventured beyond Australian shores, with the group already operating hospitals and health services in France, the UK, Malaysia, Indonesia and Malaysia.
It's no secret that China offers a wealth of opportunity for businesses thanks to its huge, increasingly prosperous population. Perhaps what isn't so readily understood however is that China, like many other nations, has an aging population as well.
While it's prudent for investors to be cautious about companies with offshore growth ambitions there are at least three reasons to be positive in this instance.
- Firstly, Ramsay has a proven track record of successful overseas expansion.
- Secondly, the use of a local JV partner is a smart move and hopefully limits the country risks.
- Thirdly, this move into China will only risk around $85.5 million of the group's capital. This level of investment is containable considering the overall size of Ramsay.
The solid results and positive news flow from Ramsay have helped the share price gain over 42% in the past year and thereby outperform the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) by around 40%. The rally has also taken the price-to-earnings (PE) multiple to levels which could be considered excessive. According to Morningstar, the stock is trading on a financial year 2016 PE of nearly 28. Understandably, some investors will choose to avoid the stock at these levels, however, if the group can turn this opportunity in China into solid earnings growth then the high multiple could be justified.
