(Chinese Version)

On the evening of August, it was widely reported that Wanda Big Health Business Group was established.

This was actually another business group inside Wanda Group, along with Wanda Culture Business Group, Wanda Network Business Group, Wanda Finance Business Group, etc. This new move not only marks that Wanda has set a clear goal in the big health industry and light asset operation in the strategic level, but also shed light on Wanda’s frustration in overseas M&A and frequent asset transfer.

According to incomplete statistics, there are around thirty real estate companies that transitioned to the big health industry in China, including Wanda, Vanke, Poly and Evergrande. As the leader in the Chinese real estate industry, Wanda’s transition not marks a turning point for the industry but also proves that the Chinese real estate industry has gone through the bonus period. In comparison, however, there’s still huge room for possibility and imagination.

ASKCI Consulting estimates that with the loosening of one-child policy and the implementation of the Health China 2030 Strategy, medical and health service expenditure in China is expected to reach RMB 8.8368 trillion by 2021.

Faced with so huge a market, how shall Wanda grab share of this trillion yuan market with the new business group? How can light asset strategy be applied in the big health industry? How shall Wanda break the barrier in the Chinese medical industry? How did other real estate companies transition to the big health industry? What lesson can be learned from Wanda’s model? Is there anything to learn from overseas real estate companies?

Transfering asset-heavy projects to third parties

In 2015, Wanda Group already came up with the idea to go beyond a real estate developer and reform itself. In a public speech, Wang Jianlin, chairman of Wanda Group, pointed out that he wished to rid Wanda of “real estate” within three to five years.

To reform Wanda Group, Wang came up with the “2211 strategy” and set the goal of improving both its asset and valuation to $200 billion, its revenue to $100 billion, its profit to $10 billion and reducing the proportion of its revenue from real estate to lower 30 per cent within five years.

Besides, Wang made two decisions: on the one hand, Wanda began to transfer asset-heavy projects to third parties, even projects in which land-use right had already been secured. As a result, Wanda were able to go into the battle with a light pack.

Although Wang claimed in the CCTV program “Dialogue” that Wanda’s direct competitor was Disney and that Wanda’s culture & entertainment projects would make Disney unprofitable in mainland China for two decades. However, only 14 months after the interview, Wang decided to sell Wanda’s culture & entertainment projects.

On July 10th, Wanda Commerce and SUNAC co-announced that the former had transferred 91 per cent debt and equity of its culture & entertainment projects to the latter at a price of RMB 29.575 billion. At the same time, 76 hotels under Wanda Group were also transferred at a price of RMB 33.595 billion.

Although this is actually the biggest M&A in the history of the Chinese real estate industry. Wanda Group didn’t take much effort in interpreting it. As a matter of fact, Wang made the decision as early as two years ago.

Besides, Wanda has been increasingly leaning towards light asset projects. In other words, Wanda has begun to invest in projects with others’ money (via direct investment or crowd-financing). For example, Wanda once launched a RMB 5 billion crowd-financing project and soon raised the expected money. This proved that there remains enough residual assets in the Chinese society.

According to Wanda Group’s performance report for the first half of 2017 (released on July 6th), its revenue reached RMB 134.85 billion (16.2 per cent higher than expected, accounting for 51.1 per cent of the yearly plan), an increase of 12.4 per cent year-on-year. If taken into consideration that Wanda’s tourism business was transferred to Tongcheng.com at the beginning of 2017, then Wanda’s half-year revenue increased by 17.9 per cent year-on-year.

From the aspect of revenue contribution, Wanda Culture earned RMB 64.1 billion in 2016, an increase of 25 per cent year-on-year. Wanda Film earned RMB 39.199 billion, an increase of 31.4 per cent compared with the same period last year. Wanda Tourism earned RMB 17.43 billion, an increase of 37.1 per cent. Wanda Child & Entertainment earned RMB 520 million, an increase of 137.8 per cent year-on-year.

In 2016, service business surpassed real estate business (the first time in Wanda’s history) and accounted for 55 per cent of Wanda’s revenue, over 60 per cent of Wanda’s net profit. Besides, Wanda teamed up with hedge funds to export its branding and management experience and transition into light-asset projects. Among 50 new Wanda Plazas opened in 2016, 21 were light-asset projects.

In 2017, Wanda Real Estate and Wanda Service went through major changes. At present, they accounted for 42.1 per cent and 57.9 per cent, respectively.

However, real estate business remains of vital importance, undoubtedly, as it helped Wanda earn RMB 5.63 billion in the first half of 2017, an increase of 11.3 per cent year-on-year. At the same time, Wanda earned RMB 11.69 billion from related rental income. In comparison, the contribution of Wanda Culture (RMB 30.8 billion), Wanda Finance (RMB 20.6 billion), and Wanda Network (RMB 25.6 billion), remains quite limited.

From the medical and health department to the big health group 

Although Wanda Group hasn’t completely rid itself of real estate business, it’s already busy getting prepared for the big health industry.

In other words, besides real estate, big health business is rapidly rising into another symbol of Wanda Group.

The other days, Wang Jianlin said at World Economic Forum Annual Meeting 2017 that the Chinese health sector has been open to private companies. Besides, while foreign doctors are now allowed to practice medicine in China, Chinese doctors are also allowed to answer private calls and increase their income. These loose policies provide favorable development environment for private hospitals. With a couple hundred business centers and construction team across China, Wanda Group are capable and competent enough to turn to the big health sector.

At the beginning of 2016, Wanda Group signed an agreement with International Hospitals Group Limited and agreed that Wanda would adopt IHG’s brand and invest RMB 15 billion to establish three comprehensive international hospitals run by IHG, in three cities, including Shanghai, Chengdu and Qingdao. Founded in 1978, UK, IHG is a global leading medical group and has already been running around 450 medical projects in 50 countries around the world.

It is learned that Wanda invested RMB 8 billion in the 1,000-bed Shanghai Wanda Yingci International Hospital, RMB 5 billion 500-bed Chengdu Wanda Yingci International Hospital, and RMB 2 billion in the 200-bed Qingdao Wanda Yingci International Hospital.

All these three hospitals were to be built based on leading international design standards to ensure that they could pass medical certification by international healthcare and medical institutions, such as JCI by Joint Commission on Accreditation of Healthcare Organizations.

Introducing international hospital brands to China can not only meet the medical and healthcare needs of high-end groups, but also raise the medical treatment level in these cities to world-class standards and drive the development of high-end medical service, Wang explained.

On April 6th, Wanda Group signed a memorandum of strategic cooperation with Chengdu municipal government and agreed that they would together invest RMB 70 billion to build a world-class healthcare and medical industry center. The center would be divided into two areas, while Area A would include two international comprehensive hospitals and eight world-class specialized hospitals, Area B would become a medical industry park for over thirty medical-related companies.

Besides, Wanda Group signed a strategic cooperation agreement with West China Hospital of Stomatology of Sichuan University and planned to invest RMB 9 billion to build 300 dental clinics in Wanda Plazas across China.

On July 3rd, Wanda Group signed three investment projects in Kunming. Among them, Wanda planned to invest RMB 50 billion and build a world-class comprehensive healthcare and medical industry park centered around health and medical service, but also covering other functions such as sports, health preservation, holiday commerce, business, residence, etc.

Up till now, Wanda has invested RMB 144 billion in total in the health and medical industry. At the same time, other leading Chinese real estate companies, such as Evergrande Group and Ivgem Group, Shirong Zhaoye, etc., have all entered the healthcare and medical industry.

But why? Well, the main reason might be that the real estate industry can be seamlessly integrated with the health and medical industry. While real estate projects need medical projects for diversification, the public, faced with limited public hospital resources, are in dire need of alternative medical resources. In this sense, real estate companies have a natural advantage in establishing hospitals.

Other positive factors for the medical and healthcare industry include: the new medical reform, the aging population, and the national two-child policy.

Wang once explained that the reason why Wanda decided to enter the healthcare and medical industry include: China has a huge market for medical services, Wanda has real estate projects across China to rely on, and the Chinese government is gradually loosening control over the industry. He even predicted that medical and healthcare industry might rise into a new pillar industry at Wanda within five years.

To achieve this goal, Wang merged the Healthcare Business Group into Big Health Group, appointed Wang Shunas vice president of Wanda Group Co., Ltd and president of Wanda Big Health Industry Group, and appointed Liu Wei as vice president of Wanda Big Health Industry Group.

Light-asset strategy also applies to the big health industry

Basically, three different ways are adopted by real estate companies in their transitioning, including merger, cooperation and self-build. However, which way did Wanda adopt? Which way suits Wanda better?

Take merger for an example, money is of course not the problem for real estate companies. The challenge, however, is whether they can merge potent health and medical organizations, such as Peking Union Medical College Hospital. While well-known medical organizations are often negative about merger, organizations that are willing to be merged are often less-known to the public.

Therefore, Wanda first adopted light-asset strategy and teamed up with professional medical teams. It continued its operation mechanism over business real estate and built a giant big health platform by collecting rent. Some day in the future, as you walk into one of Wanda Plazas, you might not only be looking at restaurants and entertainment projects, but also all kinds of medical institutions and outlets.

Currently, Wanda’s partners include government, hospitals and enterprises. For example, in the cooperation with IHG, Wanda was in charge of business and project development, while IHG was responsible for the management of the hospital. As a result, each of them could perform its own functions and run the hospital in a cooperative manner.

A case in point is Qingdao Wanda Yingci International Hospital, which was located inside Qingdao East Film Park. Wanda won the bid for the land (for medical and health purposes) in August 2014 at a price of RMB 150 per square meter.

It is known that land usage right of medical and health lands are often transferred at a lower price in China. Therefore, Wanda could also enter the big health industry by building hospitals by itself.

Wang believed that the medical and health industry featured rapid growth, huge demand and high profit margin, whether Wanda built hospitals by itself or together with partners. According to public data, the profit margin and net profit rate of a high-efficiency hospital could reach 30 to 40 per cent and 15 to 20 per cent, respectively.

This is true even for private hospitals, let alone Wanda’s high-end international hospitals. The only challenge, however, is that Wanda has to compete with established hospitals which are already well-recognized by the public. Worse still, since doctors are still forbidden to practice medicine in multiple hospitals in China, Wanda might find it hard to achieve what it had expected.

According to statistics from National Health and Family Planning Commission, there are 27,000 hospitals across China as of August 2015.

As a matter of fact, besides IHG, other international hospitals, including Mayo Clinic, Massachusetts General Hospital, etc. have already been looking for opportunities to establish private hospitals in China. The problem, however, is that most of these high-end joint venture hospitals suffered from extreme loss and often were closed down within three years.

Learning from Parkway Health (Singapore) and HCN (US)

From a larger picture, Wanda actually adopted a transitioning path similar to Parkway Health (Singapore) and HCN (US).

Parkway's model features the combination of “private clinic and hotel management”. Within three decades, Parkway managed to rise into the Top 1 hospital in Asia and the second biggest medical group around the world in terms of market valuation.

On the one hand, Wanda also has rich experience in hotel management; on the other hand, as restrictions over doctors are gradually loosened, more doctors will be willing to quit their job and open their own clinics. Since entrepreneurs in the internet medicine circle are optimistic about co-working, Wanda could also make full use of its advantage and seize the trend.

In the case of Wanda, it didn’t invite individual doctors or small-sized clinics, but rather world-class organizations such as IHG. “All the seven business sectors won’t fight alone, since we are all inter-connected”, a manager from Wanda explained

While traffic could circulate in comprehensive hospitals, our different business sectors will constitute a close-loop industry ecosystem for every member of the ecosystem and bring considerable benefit.

Different from Chinese real estate companies, American real estate giants prefer the “REITs” model, that is, they shall possess and run any real estate projects that could bring profit. In other words, their projects vary a great deal and the medical and health industry only accounts for a small part.

More specifically, these projects cover the following aspects:

1. Elderly-care. Including mutual-helping and independent elderly-care projects that provide medical services.
2. Hospital. The majority are long-term nursery and medical service hospitals.
3. High-end nursery. Projects that provide long-term nursery services instead of emergency treatment for the elderly patients.
4. Medical office building. Including medical clinics and operation centers.
5. Bio-tech park. Including a few bio-tech parks and lab projects, though not the mainstream.

It adopts either rent or commission to run its real estate. Through rent, its profit margin/net profit rate could reach over 80 per cent. By renting elderly-care or medical real estate to third parties, REITs companies could collect rent lease annually, while the renters have to bear all kinds of maintenance, tax and insurance fee.

Through commissioning, REITs companies could commission their real estate to third parties. While third parties could earn a management fee equivalent of the 5 to 6 per cent of annual revenue but bears no extra risk and wins no extra benefit, all the rest revenue belong to the REITs companies. At the same time, REITs companies have to bear all the operation cost and risk.

Since it’s a lot more stable and less risky through renting real estate to third parties, traditional REITs companies prefer this model in most cases and only turn to commissioning model occasionally.

With 1,328 real estate properties in hand and a valuation of $ 27.3 billion, the 46-year-old American REITs company HCN is the most representative one among them. In fact, 87 per cent of its revenue comes from third-party medical organizations. Therefore, no matter how the medical and insurance system changed, its dominance maintained intact.

In terms of operation, HCN seldom gets involved in the development and re-development of elderly-care projects. Only when pre-rent rate reach over 50 per cent in medical real estate projects will it partially get involved. Generally speaking, total value of its land reserve and real estate projects under construction accounts for no more than 5 per cent.

In terms of debt, HCN took hold of bond of some elderly-care and medical real estate companies during the 2008 financial tsunami. As the main creditor, HCN got the opportunity to acquire these companies at a lower price. For example, it took advantage of its position as the main creditor and acquired HCR MonorCare in 2010.

As of the end of 2010, its $ 2 billion bond contributed to an interest of $160 million annually. In 2015, HCN’s investment volume into the real estate industry reached $ 30 billion in total.

When we look back on Wanda, we may find that it has already been testing the waters with the commissioning model.

According to Wanda’s 2016 annual report, Wanda signed seven investment and cooperation agreements. Among them, two agreements were signed with CITIC Trust one agreement was signed with Minsheng Trust. Since each agreement dealt with an asset package of four to five Wanda Plaza projects, so 29 projects in second and thid-tier cities were involved in total. Against the background of Wanda’s light-asset strategy, Wanda might as well learn something from the transitioning path of its American counterparts.

For sure, this is only the very start of Wanda’s transitioning, as the curtain has just been drawn in the Chinese real estate industry. What we know for sure is that it might take a long period of trial and error before Chinese real estate giants find an appropriate path.

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[The article is published and edited with authorization from the author @vcbeat. Please note the source and hyperlink when reproduce.]        

Translated by Levin Feng (Senior Translator at PAGE TO PAGE), working for TMTpost.