Investors are rushing into China's booming healthcare business, helping M&A deal values surpass those of the hot Internet sector, as the country prepares to cater to hundreds of millions of elderly patients.
Encouraged by a relaxation of foreign ownership rules last year and a rapidly aging population, private equity firms such as TPG Capital and industry players including Malaysia's IHH Healthcare are investing in Chinese hospitals, pharmaceutical companies and device makers.
The prospect of 223 million people aged 65 or older predicted to live in China by 2030 is just too enticing for these companies, despite significant risks such as weak hospital infrastructure, rising valuations and a dearth of doctors.
The companies have begun leveraging connections of local partners to hire doctors, and to help expedite local licenses and permits to start work on planned projects.
China has forecast healthcare spending by the private sector, state-owned enterprises and consumers to treble to 8 trillion yuan ($1.3 trillion) over the next five years, as it tries to cope with the boom in its aging population, a result of the country's decades-long one-child policy and current low fertility rate.
"I spend 70 percent of my time looking for healthcare deals in China," said Steve Wang, co-founder of Hong Kong-based private equity firm Pine Field Capital. "It's a really hot sector in China, as hot as mobile Internet."
After years of steady growth, China healthcare mergers and acquisitions more than doubled to a record $18.5 billion in 2014, Thomson Reuters data showed. This January alone, deals totaled $6.9 billion, an acceleration in activity that points to another blockbuster year.
Deals involving China's ecommerce, Internet software, services and infrastructure also reached a record in 2014, but with $17.9 billion they trailed healthcare.
China started to liberalize its healthcare sector in 2009 but it was only in 2014 that it allowed full foreign ownership of hospitals, further deregulated drug prices and implemented rules to fast-track the approval of medical devices.
That optimism has pushed valuations for some firms steadily higher. Phoenix Healthcare Group, China's No.1 private hospital group, listed in Hong Kong in December 2013 at 25.1 times its expected earnings. It now trades around 35 times.
Other risks for prospective investors in China, where government policies are often unpredictable, include lack of doctors and the lengthy approval process for hospital licenses.
The country had 14.6 physicians per 10,000 people in 2012 compared with 38.5 in Australia, 24.2 in the United States and 17.6 in Brazil, according to World Health Organization data.
"When you look at the hospital and provision sector in particular, the point around doctor availability is an important one," said Vikram Kapur, a partner at consulting firm Bain & Co. "So the risk to be managed is around making sure that you can attract enough physicians to private institutions."
"We are very positive on the New China, especially the healthcare sector," said Kinger Lau, chief China strategist at Goldman Sachs. "The concept of reform in the healthcare sector is very appealing from an investment point of view as living standards improve and the population ages."
IHH Healthcare, Asia's largest hospital operator, already has a hospital in Shanghai and smaller clinics in the country and is in talks to expand further in China, Chairman Abu Bakar Suleiman told Reuters.
"China is big, so it's not just about going into Beijing and Shanghai," Suleiman said. "For the private sector, these are very early days. We feel it's a good thing for us to come in now."