chindex international investment thesis

7/28/2019 Chindex International investment thesis

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Chindex International Inc. (Nasdaq: CHDX)

February 2013


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Luzich Partners LLC February 2013/

Table of Contents

Executive Summary 1

China Healthcare: Industry Overview 4

Chindex: Healthcare Services Business Overview 8

Chindex Medical Limited: Medical Device Segment Overview 16

Historical Financials and Valuation 18

Potential Risks and Further Due Diligence Questions 31

Appendix

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Executive Summary

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Chindex International, Inc.

Ticker: CHDX

Recent stock price: $10.96 (1)

Chindex International, Inc. (Chindex, CHDX or the Company) isa developer and operator of premium high-end hospitals in ChinaFounded in 1981

Hospital is branded as United Family Healthcare

Company has a medical device distribution joint venture withFosun Pharmaceuticals

Prior to the formation of JV, Chindex had a medical devicedistribution segment

Equity market capitalization of ~$190 millionStock price has declined from its peak reached in 2007-2008

Enterprise valuation of ~$160 millionHospital segment enterprise valuation of ~$130 million

(1) Based on stock price as of February 21, 2012.

Overview

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Investment HighlightsSecular Winner Focused Management Team with Experience andRelationships in China

Healthcare industry is driven by three macro factors: aging

population, more insurance coverage, and increasingdisposable income

China is an inflection point that meets all three

Recent regulatory guidance encourages private capital inthe high-end services

Brand is recognized in China 1st mover advantage in acountry with tedious regulatory processes

Attractive Valuation Current valuation due to underperformance of Chinese

stocks and headline revenue decrease with CHDXs spin-off of the device distribution business into a JV

Long term upside potentialChindexs first mover advantage and established brand

creates a relatively stable economic return

Price setter unlikely to succumb to cost pressures

Clear path of growth and re-investment potential

Under-penetration of quality health services

Experience in working with local Chinese government

CEO has been in China since 1978 and is highly

familiar with the tedious regulatory process Company was founded in 1996, is solely focused on

China, but is governed in the U.S.

Clear and strong focus on United Family Hospitals

brand equity

Management and board own significant stake

Unusual Situation / Noise Small market cap stock with Chinese focus

Chinese reverse IPOs have scared investors awayfrom China stocks

Expectations of a blanket national China insurance

policy have not been met (not critical in ourviewpoint)

Source: S&P Healthcare Facilities industry report, Company website.

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China Healthcare: Industry Overview

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Growth of Chinas Healthcare Industry

Source: Mckinsey Healthcare in China: Entering Uncharted Waters. July 2 012.

Total Healthcare Expenditure Per Capita Healthcare Expenditure06-11 CAGR:

18.0%

Population With Health Insurance Medical Products Industry

($Billions) CAGR: 17.0%($)

CAGR: 17.2%

$119.0

$261.0

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

2006 2011

43%

95%

0%

25%

50%

75%

100%

2006 2011

$8.0

$20.0

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

2006 2011

CAGR: 20.1%($Billions)(%)

GDP / Capita $2,066.0 $4,393.0

$156.0

$357.0

$789.8

$0.0

$150.0

$300.0

$450.0

$600.0

$750.0

$900.0

2006 2011 2016

5



Impact of Economic and Demographic Development on Future of Healthcare in China

The urban, mass affluent middle classpopulation (defined by Mckinsey ashouseholds with annual disposable income$18,000 RMB and above) is projected toincrease significantly

Chindex CEO believes Chinese nationals(many of whom currently pay forhealthcare services via cash) will beginbuying private healthcare insurance

The population of those aged 65 and olderwill double from the current 122 million to223 million by 2030

Chronic conditions such as diabetes andhypertension are growing quickly

China already has 92 million diabeticpatients and 150 million prediabetics

The mature US market has 26 milliondiabetic patients

61% of Chinas total population will beurbanized by 2020, as 142 million peoplemove from the countryside to cities

Urbanization Increasing Income and DeeperInsurance Coverage Aging & Proliferation of ChronicConditions

122

223

0

50

100

150

200

250

2012 2030

52%

61%

44%

48%

52%

56%

60%

64%

2012 2020

% of AffluentUrban

Households

MillionPeople

Source: Mckinsey Healthcare in China: Entering Uncharted Waters. July 2012. Frost and Sullivan Report, dated July 2012.

16.0%

38.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%40.0%

2012 2020PopulationAbove 65 9% 25%

6



Develop primary healthcare service system and provide equal access to urban and ruralresidents

Currently, 1,350 Class 3 hospitals in big cities

Government wants to develop grassroots facilities like urban community health centers (CHC),community health stations (CHS), and township health centers (THC)

China Healthcare Reform Summary

Expand the depth of basic medical insurance programs

95% population covered by national coverage thats basic and limited

Shanghai: outpatients covered with 30-50% copayments and $240 deductible

Medical Insurance

Establish national essential drug system

Market-access (product registration, tendering, pricing, reimbursement and distribution) isbecoming more complex

Rules and policies vary by province or cities

Drug Supply Security

Medical-Service Provision

China wants to establish a basic universal healthcare system that provides safe, effective, convenient, and low -cost healthcare servicesby 2020 Li Keqiang

Overviewrea of Focus

Public Health Service

Operating Environment Accelerate public hospital reform

Increase subsidies

Establish clear payer-provider relationships with cost-control mechanisms

Track service quality and efficiencySource: Healthcare reform 12th Five-Year Plan; Mckinsey.

7



Chindex: Healthcare Services Business Overview

8



Healthcare Services OverviewUnited Family Healthcare

Chindex operates itshealthcare servicesunder the brand UnitedFamily Healthcare

(UFH)

What Is The Product Offering? Western healthcare service model and premium care provider in China

Three of the 21 Joint Commission International (JCI) accredited hospitals in China are part of United

Family's network

What is the Current Moat? 30 years of history, commitment to quality, and thoughtful & restrained expansion

Regulation, licensure, accreditation procedures create a high barrier to entry in terms of financial costsand length of time required

185 official and government stamps required for approval to open a foreign-invested hospital

Brand and quality recognition: default choice of US Embassy and other multinational companies

Price setter: As the highest-priced facility in China, its very hard for us to look at price increases

Quality of workforce and availability of talent

Nurses and physicians interested in leaving existing employers to join UFH due to track record

Potential future moat of economies of scale if expansion plan is executed as planned

2012 LTM Revenue Breakdown% of Gross Revenue Revenue by Service LineLTM 2012 Revenue:

$141 million

Source: Company filings and earning call transcripts.

Inpatient%

41%

Outpaitent%

59%

SurgicalServices

9% OB/GYN8%

Pediatrics4%

Laboratory/Radiology

16%

Other13%

50%

9



Target Customer Segment

Source: Company filings and earning call transcripts.

Geography and Income Nationality

Insurance Coverage Services

Focus on Chinese cities that are affluent and have amix of local and international populations

Top 5% of income earners within these target cities

Western standards appeal highly to foreign passportholders and Chinese with experience living abroad

Current ratio of patient mix is 65% expats and 35%local Chinese nationals

Expansion into other cities will increase proportion oflocal Chinese patients

Maintains direct billing arrangements with insuranceproviders as a preferred provider

Private pay for insured

CEO believes more and more Chinese patients (many

of whom currently pay cash) will buy private healthinsurance since the Chinese have just begin tounderstand the insurance product

Public insurance status: UFH working with Beijinggovernment to allow reimbursement for patients frompublic insurance benefit at basic public hospital levelwith co-pay for price premium (a small driver)

Increase breadth of services

Surgery (neurology and cardiology)

OB/GYN

Pediatrics

RadiologyRehabilitation

Radiation oncology

Bring Western know-how and technology into China

10



Package and Service Pricing at UFH

Service Pricing RMB / US$Cerebrovascular Disease (stroke) ScreeningPackage Original Value: RMB 5,600 / US$ 890

Package Price: RMB 2,800 / US$ 444

Postpartum Physiotherapy Package Original value: RMB 7,245 / US$ 1,150 Package Price: RMB 4,000 / US$ 635

Vaginal Delivery Package Original value: RMB 56,000 / US$ 8,890 New Year Package Price: RMB 48,800 / US$ 7,745

C-Section Delivery Package Original value: RMB 101,875 / US$ 16,170 New Year Package Price: RMB 88,800 / US$ 13,970

General Physicians Check Up RMB 700 1,000 / US$ 110160

UFH Membership(Members receive 20% discount on healthcareservices and 10% on dental services, and one

free health examination per year)

Initiation Fee: RMB 1,035 / US$ 165

Annual Renewal Fee: RMB 828 / US$ 130

Exchange rate: US$ 1 = RMB 6.3Source: Company brochures.

11



Current United Family Hospital Network

Note: More details found in the appendix.Source: Company filings and earning call transcripts.

Beijing Market Shanghai

Tianjin Guangzhou

Hospital opened in 1997

120 licensed beds in main hospital campus 70 beds currently available

4 affiliated satellite clinics

New Hope ambulatory care center (oncology focus)


50 licensed beds in SHU main hospital 30 beds currently available

2 affiliated satellite clinics

2 managed clinics


26 licensed beds in main hospital campus

25 beds currently available

1 affiliated clinic

12



Defined Growth Plans

Timeline City / Facility Description2013 Beijing / Rehabilitation

Center To be completed in 2013, planned opening over 2013 2014

First focused rehab center in Beijing and China

Capacity of 100-150 beds

2013 Shanghai / PudongHospital Expansion of Pudong hospital Capacity of 50-100 beds

2014-2015 Beijing / Haidian New clinic expansion in the north west part of Beijing, near ChinasSilicon Valley and Beijing University

2014 - 2015 Guangzhou / Hospital Construction of a flagship United Family Healthcare hospital Capacity of ~200 beds

Source: Company filings.

13



Potential Future Expansion PlansFocus on Urban Cities Aligns with the Predicted Urbanization of the Chinese Population

Source: Company presentation.

14



Key Determinants of Success in the Hospital Business

Patients and referrers seek out hospital with a reputation for procedural expertise, goodfacilities, and good patient outcomes

ood Reputation

Understanding of regulations can avoid distracting regulatory problemsnderstandingGovernment Policies

Larger hospitals can obtain cost savingsconomies of Scale

Higher occupancy rates can increase revenue and profitability, but it requires a balance aswait time should not be increased

Optimum CapacityUtilization

Location close to a highly populated area brings in traffic

roximity to KeyMarkets

Ability to attract and retain quality medical, nursing, and administrative staff is critical inmaintaining quality service and operations

Access to HighlySkilled Workforce

Source: IBIS Hospitals in the US industry report. December 2012.

Descriptionactors Chindex

In expansionphase

In expansionphase

15



Chindex Medical Limited: Medical Device Segment Overview

16



Chindex Medical Limited

Chindex Medical Limited is a

joint venture betweenChindex and FosunPharma

History On December 31, 2010, Chindex and Shanghai Fosun Pharmaceutical and its

subsidiaries (Fosun) formed a joint venture consolidated under an entity called

Chindex Medical Limited (CML) JV will combine Chindexs high-end medical equipment distribution business and

Fosuns manufacturing and distribution business

CML to be a one-stop distribution shop product registration, warehousing, clinicalsupport, local currency sales, installation, after-sales service, government-sponsoredfinancing packages

Fosun to contribute blood transfusion consumables, surgical consumables and dentalproducts

Accounting Treatment Chindexs 49% ownership of JV is considered a minority interest

Only Chindexs share of net income is reported in consolidated income statement

Initial investment cost of JV is reported on balance sheet as Investment in

unconsolidated affiliate

Source: Company filings and press releases.

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Historical Financials and Valuation

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Chindex Historical Balance Sheet


($Millions)

12/31/2010 12/31/2011 9/30/2012Assets

Cash & Investments 69.9$ 60.1$ 27.8$

Accounts Receivables 11.6 13.9 17.6

Receivable from Affiliates 9.3 11.0 11.7

Inventories of Supplies 1.4 2.3 2.3

Deferred Income Taxes 3.2 3.9 3.5

Other Current Assets 3.9 4.7 4.6

Total Current As s ets 99.4 95.9 67.4Restricted Cash & Investments 3.4 1.1 20.6

Investment in Unconsolidated affiliated 31.8 33.7 33.0

PP&E 37.1 65.5 85.9

Noncurrent Deferred Income Taxes 0.1 0.4 0.7

Other Assets 2.4 2.7 3.1

Total As s ets 174.2 199.4 210.7Liabilities

Accounts Payable 4.0$ 4.0$ 7.4$

Payable to Affiliates 0.0 9.4 11.7

Accrued Expenses 8.5 11.7 13.2

Other Current Liabilities 3.9 5.5 7.6

Income Taxes Payable 2.1 2.1 1.9

Total Current Liabilities 18.6 32.8 41.7Long Term Debt and Convertible Debt 23.1 23.8 23.9Long Term Deferred Tax Liabilities 0.4 0.3 0.3

Total Liabilities 42.1 56.9 66.0APIC 116.0 119.1 121.5

Accumulated Other Income 4.8 8.9 8.2

Retained Earnings 11.3 14.5 15.1

Total Equity 132.1$ 142.5$ 144.8$

Liability + Equity 174.2 199.4 210.7

19



Chindex Historical Income Statement

Source: Company filings and press releases. 2010 figures exclude product distribution business.

($Millions)

20

ChindexFYE M arc h 31, FYE De c 31, LTM a s o f FYE , De c 31,

($ millions) 2001 2002 2003 2010 2011 9/30/2012 12/31/2012

Net Sales 86 114 141 152Salaries Cost (49) (64) (78) (83)

Gross profit 37 50 63 69G&A / Other operating expenses (13) (18) (20) (22)

Supplies and Purchased Medical services (9) (13) (18) (19)

Bad Debt expenses (1) (2) (3) (3)

D&A (4) (5) (7) (7)

Lease and Rental expense (3) (6) (7) (8)

(30) (45) (55) (60)

EBIT 7 6 8 10Interest Income 1$ 1$ 1$ 1$

Interest Expense (1) (1) (1) (0)

Equity in Net Income 1 (1) 1

Other 1 0 0 0

Taxes (6) (4) (5) (7)

Net Income 2 3 2 4D&A 4 5 7 7EBITDA 11 11 14 17Capex (1.8) (1.8) (2.9) (7) (24) (36) (39)EBITDA - Capex 4 (13) (22) (22)



United Family Healthcare Revenue Build-UpAssumptions

Key Points Unit revenue metric

based on calculation

suggested bymanagement

Other operating data(# of admissions,revenue/patient) notdisclosed bycompany

Utilization ratesdisclosed by

management in earningcalls

Mature occupancyrates for hospitalslies between 50% -60%

Unit revenue (revenue /daily occupied bed) isan important variable

metric Management does

not believe foreigncompetitors likeParkway Pentai (IHHHealthcare) will hurtUFHs moat or

pricing power

Revenue Build Up Assumptions

Source: Company earning call transcripts, press releases and internal estimates.

FY LTM FYE Dec 31,2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Available Beds Breakdown

Beijing 50 70 70 95 130 150 160 170

Shanghai 20 30 30 41 56 66 76 86

Tianjin 25 25 25 25 25 30 35

Guangzhoug 0 10 50 85 120

New Beds in Other Cities 0 0 20 35 50

Available Beds 70 125 125 161 221 311 386 461

Annual Bed Supply (Days ) 25,550 45,625 45,625 58,765 80,665 113,515 140,890 168,265Utilization By City

Beijing 70% 45% 50% 45% 45% 45% 50% 55%

Shanghai 60% 70% 80% 65% 55% 55% 55% 55%

Tianjin 8% 10% 30% 30% 35% 40% 45%

Guangzhoug 10% 15% 20% 30%

New Beds in Other Cities 15% 20% 25%

Utilized Beds 17,155 19,893 22,448 28,069 35,697 44,913 57,597 74,843Avg Occupancy Rate 67% 44% 49% 48% 44% 40% 41% 44%

Rev enue / Daily Occupied Bed 2,000$ 2,358$ 2,573$ 2,500$ 2,525$ 2,550$ 2,576$ 2,602$

Inpatient Revenue 34$ 47$ 58$ 70$ 90$ 115$ 148$ 195$

Out patient % of Total Revenue 60% 59% 59% 59% 59% 59% 59% 59%Outpatient Revenue 51$ 67$ 83$ 101$ 130$ 165$ 213$ 280$

Chindex Rev enue 86 11 4 14 1 17 1 22 0 27 9 36 2 47 5Revenue Growth 33% 23% 22% 28% 27% 30% 31%

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Hospital Margin, Capex, and Working Capital AssumptionsMargin, Capex, and Working Capital Assumptions

Source: Company earning call transcripts, press releases and internal estimates.(1) See Appendix for detail on Chindexs historical capital expenditures.

% of Revenue

Salaries 57% 56% 55% 55% 55% 55% 55%

G&A / Other Operating Expenses 15% 16% 15% 15% 15% 14% 14%

Supplies 10% 12% 12% 12% 12% 11% 11%

Bad Debt Expense 1% 2% 2% 2% 2% 2% 2%

Lease Expense 4% 5% 5% 5% 5% 5% 5%

Account Receivable Days 80 76 75 75 75 75 75Inventory Days 64 47 45 45 45 45 45

Accounts Payable Days 130 155 150 150 150 150 150

Accrued Expenses days 67 61 60 60 60 60 60

Other CA % of Rev 4% 3% 3% 3% 3% 3% 3%

Other CL % of Rev 5% 5% 5% 5% 5% 5% 5%

FY LTM FYE Dec 31,2011 2012 2013E 2014E 2015E 2016E 2017E

Capex Build-Up

New Beds (2 Year Build Period) 96 150 165 150 120

Capex / Bed (1) 0.30$ 0.30$ 0.30$ 0.30$ 0.30$

New Clinics 1 1 1 1 1

Capex / Clinic 1.5$ 1.5$ 1.5$ 1.5$ 1.5$

Growth Capex 30$ 47$ 51$ 47$ 38$

Maintenance Capex 5 5 5 5 5

Total Capex 7$ 24$ 35$ 52$ 56$ 52$ 43$

Depreciation as % of Sales 4% 5% 5% 6% 6% 6% 6%

22



United Family Healthcare Projected Income StatementIncome Statement

($Millions)

Source: Company filings and internal estimates.

LTM FYE Dec 31,2011 2012 2013E 2014E 2015E 2016E 2017E

Revenue 114$ 141$ 171$ 220$ 279$ 362$ 475$

Salaries (64) (78) (94) (121) (154) (199) (261)

G&A / Other Operating Expenses (18) (20) (26) (33) (41) (52) (67)

Supplies (13) (18) (21) (25) (31) (38) (47)

Bad Debt Expense (2) (3) (3) (4) (6) (7) (9)

D&A (5) (7) (11) (16) (23) (29) (33)

Lease Expense (6) (7) (9) (11) (14) (18) (24)

EBIT 6 8 8 9 12 19 33EBIT Margin 5% 5% 5% 4% 4% 5% 7%

Interest Expense / Other Income 1 (0) (1) (1) (1) (1) (1)

Taxes (4) (5) (3) (3) (4) (6) (11)

Net Income 3 2 5 5 7 12 21EBITDA 11 14 19 26 35 47 66EBITDA Margin 9% 10% 11% 12% 12% 13% 14%

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United Family Healthcare Projected Cash FlowsCash Flows (Assuming Equity Raise)

($Millions)


See Appendix for debt issuance assumption.

FYE Dec 31,2013E 2014E 2015E 2016E 2017E TotalNet Income 5$ 5$ 7$ 12$ 21$

D&A 11 16 23 29 33

Change in Working Capital (0) 1 1 1 1

Cas h Flow from Operations 15$ 22$ 30$ 41$ 54$ 163Capex (47) (70) (77) (70) (58) (322)Cash from Operations Less Investing Use 0 (32) (48) (46) (30) (3) (159)BB Cash 48 16 10 10 10

EB Cash 48$ 16$ (32)$ (36)$ (20)$ 7$

Minumum Cash Balance Assumed 10 10 10 10 10

New Financing Needed 0 42 46 30 3

Financing (1 for debt, 2 for equity)Debt -$ -$ -$ -$ -$

Equity - 42 46 30 3

Cas h from Financ ing - 42 46 30 3 121Total Cas h Ba lance 16 10 10 10 10

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United Family Healthcare Projected Balance SheetBalance Sheet (Assuming Equity Raise)

($Millions)


See Appendix for debt issuance assumption.

Cash

AR

Inventories

Other Current Assets

PP&E

Other Ass ets

Investment in Uncons olidated affiliate

Net Deferred Income taxesT o t a l As s e t sAccounts Payable

Accrued Expenses

Other Current Liabilities

Debt

To ta l L i ab i l i ti e sEqu i t yL+E

F Y E D e c 3 1 ,2 0 1 3 E 2 0 1 4 E 2 0 1 5 E 2 0 1 6 E 2 0 1 7 E16 10 10 10 10

35 45 57 74 98

3 3 4 5 6

5 7 8 11 14

123 176 230 272 297

3 3 3 3 3

33 33 33 33 33

2 2 2 2 22 2 0 2 7 9 3 4 8 4 1 0 4 6 223 28 35 44 57

15 20 25 33 43

9 11 14 18 24

25 25 25 25 25

7 2 8 4 1 0 0 1 2 0 1 4 91 4 8 1 9 5 2 4 9 2 9 0 3 1 42 2 0 2 8 0 3 4 8 4 1 0 4 6 3

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United Family Healthcare Discounted Cash FlowDiscounted Cash Flow

($Millions)

Note: DCF assumes a mid-year discounting convention.

FYE Dec 31,2013E 2014E 2015E 2016E 2017E

Cash from Operations 15$ 22$ 30$ 41$ 54$

Capex (47) (70) (77) (70) (58)

Free Cash Flow Before Financing (32)$ (48)$ (46)$ (30)$ (3)$

PV of FCF @ 15.0% (30) (39) (33) (18) (2)EBITDA 19$ 26$ 35$ 47$ 66$

Terminal Value Multiple 8.0x

Terminal Value 524$

PV of Terminal Value 280Sum of PV of Cash Flows (121)DCF Intrins ic v alue 158

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Intrinsic DCF Valuation

Valuation of Chindex Hospital BusinessSummary of Valuation

Market Valuation

Sensitivity Table of Equity Upside / (Downside)

($Millions)

Key Points In spite of a high discount rate to match required IRR, Chindex is undervalued compared to its market valuation

Terminal EBITDA multiple within range of those of U.S. based hospital operators

Chindex Hos pital Mark et ValuationShare Price as of 2013/01/24 11.0$

Outstanding Shares (mm) 17

Market Cap 187+ Net Debt / (Net Cash) (23)

- Investment in CML (33)

Enterpris e Value 131

($ mm) %PV of Cash Flow (121)$ (76.6%)

PV of Terminal Value 280 176.6%

DCF Intrins ic Enterpris e Value 158+ Net Cash 23

+ Investment in CML 33

Implied Equity Va lue 214Equtiy Upside / (Downside) 15%

Target Share Price 12.6

Terminal Disc ount Rate / IRREBITDA Multiple 17.5% 15.0% 12.5%

7.5x (5%) 5% 17%

8.0x 4% 15% 28%

8.5x 12% 24% 38%

Termina l $ / Utilized BedEBITDA Multiple 2,250 2,500 2,750

7.5x (13%) 5% 24%

8.0x (5%) 15% 34%

8.5x 4% 24% 45%

Terminal Capex / Bed ($mm)EBITDA Multiple 0.40$ 0.43$ 0.45$

7.5x 11% 5% (1%)

8.0x 21% 15% 9%

8.5x 30% 24% 18%

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Hospital ComparablesHospital Comps(US$ Millions)

Source: Company filings and prospectus, market data, IBIS Report, December 2012. CapIQ

Market LTM EBITDA EV / Debt / LTM NetCompany Equity Debt EV Rev enue ($ mm) Margin EBITDA EBITDA Income P/E P/B P/TVB

US Hos pitalsHCA 16,075$ 26,933$ 42,536$ 33,013$ 6,434$ 19.5% 6.6x 4.2x 1,605$ 10.0x NM NM

Community Health Systems 3,881 9,572 13,213 13,029 1,916 14.7% 6.9x 5.0x 266 14.6x 1.4x NM

Tenet Healthcare 4,089 4,751 8,757 9,939 1,119 11.3% 7.8x 4.2x 33 NM 3.2x NM

Health Management Associates 2,807 3,569 6,195 5,878 608 10.3% 10.2x 5.9x 164 17.1x 2.9x NM

Lifepoint Hospital 2,214 1,664 3,780 3,392 432 12.7% 8.8x 3.9x 152 14.6x 1.0x 5.2x

Vanguard Health Systems 1,141 2,705 3,516 6,624 399 6.0% 8.8x 6.8x 89 12.8x 3.8x NM

Asia Hos pitalsIHH Healthcare 2,420$ 933 2,851 1,208$ 249$ 20.6% 11.4x 3.7x 198 12.2x 0.6x 9.8x

Median 12.7% 8.8x 4.2x 13.7x 2.2x 7.5xChindex 186.8 25.2 163.6 141 14 10.2% 11.4x 1.8x 2 NM 1.3x 1.3x

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Historical EBIT Margin

Valuation of Chindexs Stake in Chindex Medical Limited (CML)($Millions)

Key Points and Questions Chindexs product sales EBIT margins have

historically been negative

Can the CML JV improve margins? If so, JV represents an option value

Will Chindex continue to throw capital in JVif margins are negative?

If so, the JV is a negative value-add tothe Chindex

Historical Revenue(1)

$72.2$78.0

$54.3 $58.0$64.2

$92.1$85.4

$126.8$118.9

$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

$140.0

2004 2005 2006 2007 2008 2009 2010 2011 9/30/2012

0.3%

(1.1%)

(2.6%)(2.0%)

(4.1%)

0.6%

(4.3%)

3.9%

0.7%

(5.0%)

(4.0%)

(3.0%)

(2.0%)

(1.0%)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2004 2005 2006 2007 2008 2009 2010 2011 9/30/2012

(1) Historical revenue based off Chindexs Product Sales segment prior to formation of the CML JV.

Conservative ValuationIllustrativ e CML Valuation

2013E Revenue 140.0$

Illustrative EBIT Margin 2.5%

2013E EBIT 3.5$

EBIT Multiple 8.0x

CML Enterpris e Value 28.0+ Cash 23.0

- Debt (2.4)

CML Equity Value 48.6Chindex's 49% s take 23.8

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Chindex Medical Limited Balance Sheet


($Millions)

12/31/2011 9/30/2012Assets

Cash and Investments 26.6$ 25.6$

Accounts Receivable 34.6 32.6

Receivable from Affiliates 2.9 2.9

Inventories 33.2 33.2

Deferred Income Taxes 0.6 0.6

Other Current Assets 6.8 6.8

To ta l Curre nt Asse ts 104.7 101.7Investment in Unconsolidated Affiliate 0.3 0.2

PP&E 11.6 11.4

Trade Name 4.5 3.8

Prepaid Land Use Rights 1.8 1.8

To tal Assets 123.0 119.0Liabilities

ST Debt 2.4$ 2.1$

Accounts Payable 19.2 17.2

Payable to Affiliates 17.1 16.1

Accrued Expenses 17.2 16.2

Deferred Revenue 3.2 3.0

Income Taxes Payable 0.9 0.9

To ta l Curre nt L ia bilit ie s 59.9 55.5Long Term Deferred Revenue 0.8 0.8

Long Term tax Liabilities 0.7 0.9

To ta l Lia b ilitie s 61.5 57.2Total Equity 61.5$ 61.8$

Lia bility + Equity 123.0 119.0

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Potential Risks and Further Due Diligence Questions

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Potentials Risks

Dual Class Ownership (6 to 1 voting power) Managements has ~31% of Voting Power according to 10-K filings

Poison pill in place to impede a change of control

Excessive compensation to insiders and directors

UFH Brand Equity does not extend into other cities recognition is at a local level rather than national

Ability To Set Prices Compromised with More Competition

Local Partners Negotiate Better Terms from Chindex

Delays in Expansion Plans

Expansion Plans Distract Management from Current Operations

Regulatory Changes Restrict Private Investors or Restrict Ability of Doctors and Nurses to Work at Two Sites

Nationalization of Hospitals

Risks

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Factors to Think About

1. Inpatient occupancy rates and average length of stay for each admission

Requires four to six quarters to break even on cash flows

2. What are margins for a mature hospital? How much time does it require for a hospital or clinic to reach maturity? Whats the maturitybenchmark in terms of occupancy rate?

3. What are your plans for the future of the company? Will you be open to selling?

4. Please explain the policies regarding director compensation and management compensation (large amounts of restricted stock)

5. How does the local partners JV share show up in CHDXs financials?

6. Development costs / start up costs

7.

Revenue / inpatient admission8. Future mix of inpatient and outpatient in a mature state?

9. Revenue / outpatient admission?

10.Whats the competitive environment? Which competitor do you admire? How has this affected pricing?

11.Whats a metric to determine how much staff to hire per hospital? Is it employees / bed? Or employees / hospital? Grow w/ inflation?

12.Procurement ability to leverage scale to lower per unit expenses?

13.Length of lease terms?14.Capex requirement for future expansions?

15.How much time do you allocate between the hospital business and the medical device distribution JV?

16.20% IRR for new projects how does senior management measure this?

17.Capital structure unsecured debt?

18.Regulatory unknowns? (Chindex is not worried about regulatory unknowns, they view any regulatory development as a positive)

List of Important Factors / Questions

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Appendix

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Shareholders of ChindexChindex Shareholder Breakdown Common Held Class B Stock % Common % Class B % Economic % VotingHolder ( 000s) ( 000s) Stock Stock Interest PowerFOSUN Pharmaceutical Co., Ltd. 3,157.2 19.9% 18.5% 13.8%

JPMorgan Chase & Co 1,873.5 11.8% 11.0% 8.2%Roberta Lipson (CEO) 476.5 660.0 3.0% 56.8% 6.7% 19.4%

Archon Capital 790.7 5.0% 4.6% 3.5%

BlackRock 773.9 4.9% 4.5% 3.4%

Elyse Beth Silverberg (Co-founder) 459.8 390.8 2.9% 33.6% 5.0% 12.3%

China Asset Management 400.0 2.5% 2.3% 1.8%

The Vanguard Group, Inc. 352.4 2.2% 2.1% 1.5%

TB Alternative Assets Ltd. 331.4 2.1% 1.9% 1.4%First Wilshire Securities 320.5 2.0% 1.9% 1.4%

Edmond de Rothschild Management 280.0 1.8% 1.6% 1.2%

State Street Global Advisors, Inc. 231.1 1.5% 1.4% 1.0%

Federated Investors 230.0 1.4% 1.3% 1.0%

Lawrence Pemble (COO) 320.5 111.8 2.0% 9.6% 2.5% 4.3%

Source: 2011 DEP14A for Management's stake, CapIQ for public investors.

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Capital Raised by Chindex


Date Capita l Obtained Amount($ mm)

3/29/2004 Equity IPO 12.3$

6/2/2004 Loan with HSBC 4.0

10/1/2005 IFC (World Bank) Debt Financing 8.0

3/1/2007 German KfW Development Bank Bonds 1.0

11/7/2007 JPM Equity Sale (Tranche A), @ $18 / share 10.0

11/7/2007 JPM Convertible Notes (Tranche B) 25.0

11/7/2007 JPM Convertible Notes (Tranche C) 15.0

12/10/2007 IFC (World Bank) Equity Sale 10.0

12/10/2007 IFC Loan Facility 25.0

1/10/2008 DEG (Frankfurt) Loan Facility 20.0

6/14/2010 Fosun Industrial - Issuance of Common Stock ($15 / share) 13.8

144.1Revolvers

3/1/2006 M&T Bank Revolver 1.8

3/1/2005 Vendor Financing revolver 4.0

5. 8149.9

($Millions)

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Capital Invested by Chindex


Return on Capex

2010 EBITDA 11$2012 EBITDA 14

in EBITDA 4

2008 - 2010 Capex 16

in EBITDA / Capex 22.8%

($Millions)

Year Clinics ~ Amount($ mm)

2002 Beijing - Shunyi Clinic 1.8$

2005 Beijing - St. Regis Clinic 2.0

2008 Guangzhou Clinic 3.2

2010 Beijing - Landmark Clinic 1.8

2010 Beijing - Oncology Clinic 1.8

Year Hospitals ~ Amount Beds Capex /($ mm) Bed

2005 Shanghai Hospital 13.5$ 50 0.27$

2011 Tianjin Hospital 9.3 25 0.37

2012 BJU Expansion 15.0 50 0.30

2013E Beijing Rehab Hospital - Budget Maximum 67.8 150 0.45

2014E Guangzhou Hospital - Budget Maximum 61.9 125 0.50

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Beijing Hospital / Clinics

Facility DescriptionBeijing United Family Hospital(BJU) Opened in 1997

Located in eastern section of Beijing Original entity was a contractual JV between Chindex and the Chinese Academy of Medical

Sciences

Chindex entitled to 90% of net profits of the enterprise

Shunyi Family Clinic Opened in 2002 Located in high-rent residential Shunyi suburb, near International School of Beijing (ISB)

Jianguomen Family Clinic Opened in 2005 Located in downtown Beijing in a luxury hotel complex within the diplomatic district

Landmark Family Clinic Opened in 2010 Located in a high-rent diplomatic neighborhood

New Hope Oncology Center Opened in 2010 Located near BJU hospital campus


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Shanghai Hospital / Clinics

Facility DescriptionShanghai United FamilyHospital (SHU) Opened in 2005

Located in Changning district in Puxi, a center of the expat community and an affluentChinese residential district

Entity is a contractual JV between Chindex and Shanghai Changning District Central Hospital

Chindex entitled to 70% of net profits of the enterprise

Dental Clinic Opened in 2011 Located near the SHU campus and the Racquet Club Clinic

Huashang Pudong Hospital Opened in 2011 Partnered with an affiliated clinic in a strategic joint venture

Chindex/UFH provides management of service


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Other Hospital / Clinics

Facility DescriptionTianjin United Family Hospital(TJU) Opened in 2011

Located in Hexi district, 150 km southeast of Beijing

Guanzhou United Family Clinic Opened in 2008 Located in Yuexiu district, located in an affluent Chinese, international business, and

diplomatic community

Wuxi United FamilyInternational Healthcare Center UFH manages WuXi hospital under a Health Services agreement

Tianjin, Guangzhou and Wuxi


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5 Year CHDX Stock Price Chart

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

$0

$5

$10

$15

$20

$25

$30

$35

02/25/08 09/26/08 05/04/09 12/04/09 07/13/10 02/14/11 09/19/11 04/24/12 11/28/12

NasdaqGS:CHDX - Share Pricing -Volume NasdaqGS:CHDX - Share Pricing

Source: CapIQ.

Stock Price Volume(000s)

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Management Team

Prior to co-founding Chindex in 1981, Ms. Silverberg spent two years at the Beijing office of Sobin Chemicals

She serves as the Chief Operating Officer of Chindex Medical Limited and as a board director

Ms. Silverberg graduated Phi Beta Kappa and Summa Cum Laude from SUNY Albany and has studied at theBeijing Language Institute and Peking University

She has previously served as Chairman of the Board of the International School of Beijing and was a co-founderof the Board of the Kehilat Beijing and is a Director of the Sino-Judaic Society

Elyse Beth Silverberg

Ms. Lipson co-founded Chindex in 1981 and has 30 years of experience in the healthcare industry

Ms. Lipson serves as a board director of the company

She is an expert in many aspects of health care in China and has shared this expertise in many forums. She hasauthored articles and often speaks on issues related to the healthcare industry in China

Ms. Lipson has served on the Board of Governors of AmCham-China and on the Board of Directors of the U.S.-China Business Council, and Chairs the Board of the United Foundation for Childrens Health

She obtained an MBA from Columbia University and a BA in History from Brandeis University.

Roberta Lipson

Mr. Pemble joined the Company in 1984 and has served as Executive Vice President and Chief Financial Officersince January 1996 and is currently a board director

Prior to joining the Company, Mr. Pemble was employed by China Books and Periodicals, Inc. as Manager, EastCoast Center

Mr. Pemble graduated from the University of Phoenix and obtained a BA in Chinese Studies from the StateUniversity of New York at Albany and an MBA from the University of Michigan

Lawrence Pemble

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Convertible Debt Investors (Holder) Investor Right AgreementKey Terms

Investor Right Agreement between the Company and Magenta Magic LimitedFinancial Information Within 45 days of each quarter, (a) unaudited statement of cash flows and balance sheet, (b) project progress report on the JV hospitals will be delivered to the Holder

Use of Proceeds Company shall use the proceeds for (a) the new 125 bed hospital in Guangzhou and (b) 150 bed hospital in Beijing, or (c) proposed clinics in Beijing or Shanghai Budgeted amount shall not be in excess of RMB 402,230,000 for the Guangzhou hospital or RMB 440,612,000 for the Beijing hospital

New JV Hospitals Company shall own 60% or more of the New JV Hospitals Proposed capital budget, timeline of event will be available to the Holder

Pledge of CompanysShares Company shall provide the Holder 15 days notice prior to any transfer of shares by any major shareholder

New Issuance Company shall not issue any new equity unless the Holder agrees to the new equity issuance Company shall provide an Issuance Notice to the Holder not less than ten calendar days prior to the consummation of such issuance; such Notice will include the

identity of the proposed third party purchaser, a description of securities to be sold, the number of shares issued to the purchaser, and the proposed purchase price

Covenants As long as the Holder owns 7.5% or more of the Companys shares, the Company shall not maintain a leverage ratio not greater than 3.0x (Debt less Tranche B+Cnotes/ EBITDA); debt shall not include amounts of the Trance B and C notes

Additionally, the Company shall have an interest coverage ratio not less than 3.0x (EBITDA / Interest)

Rights of Transfer Holder shall be entitled to freely transfer the securities to any third party provided that the transferee shall be bound by all obligations, limitations, restrictions andqualifications (but not the rights)under the Investment Rights Agreement, provided that the Holder or its affiliates has no intention to operate a similar healthcareservice operation after the transfer

Amendments andWaiver

Any term of the Investor Rights Agreement may be amended with the written consent of the party against whom enforcement may be sought and the observance of any

term of this Agreement may be waived by the Company. No waivers of or exceptions to any term, condition or provision of this Investor Rights Agreement shall bedeemed to be a further or continuing waiver of any such term, condition, or provision

Specific Enforcement Upon a material breach by the warrantor, the Holder shall be entitled to injunctive relief against such warrantor if such relief is applicable and available. Nothing inthe Investor Rights Agreement shall be construed as limiting the Holders remedies in any way

Governing Law The Investor Rights Agreement shall be governed in accordance with the laws of the State of New York

Source: Company Filings 8K as of November 19, 2007.

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Glossary of Key Terms

Average number of inpatients, excluding newborns, receiving care each dayverage Daily Census

Average inpatient stay; (# of Inpatient days / # of admissions)verage Length ofStay

Insurance against the risk of financial damage due to professional misconductalpracticeInsurance

Gross patient revenue, less deductions for contractual adjustments, charity, bad debtset Patient Revenue

Visits by patients who are not lodged in a hospital while receiving medical services. Each appearance counts asone visit

utpatient Visits

Services related to an acute episode of illness, accident injuries or other traumacute Care

Health services provided without the patient being admitted to a healthcare facility; also called outpatient carembulatory Care

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United Family Healthcare Projected Income Statement


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Income Statement (Assuming Debt Raise)

($Millions)


LTM FYE Dec 31,2011 2012 2013E 2014E 2015E 2016E 2017E

Revenue 114$ 141$ 171$ 220$ 279$ 362$ 475$

Salaries (64) (78) (94) (121) (154) (199) (261)

G&A / Other Operating Expenses (18) (20) (26) (33) (41) (52) (67)

Supplies (13) (18) (21) (25) (31) (38) (47)

Bad Debt Expense (2) (3) (3) (4) (6) (7) (9)

D&A (5) (7) (11) (16) (23) (29) (33)

Lease Expense (6) (7) (9) (11) (14) (18) (24)

EBIT 6 8 8 9 12 19 33EBIT Margin 5% 5% 5% 4% 4% 5% 7%

Interest Expense / Other Income 1 (0) (1) (3) (5) (6) (6)

Taxes (4) (5) (3) (2) (3) (5) (9)

Net Income 3 2 5 4 5 8 17EBITDA 11 14 19 26 35 47 66

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United Family Healthcare Projected Cash Flows


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Cash Flows (Assuming Debt Raise)

($Millions)


FYE Dec 31,2013E 2014E 2015E 2016E 2017E TotalNet Income 5$ 4$ 5$ 8$ 17$

D&A 11 16 23 29 33

Change in Working Capital (0) 1 1 1 1

Cas h Flow from Operations 15$ 21$ 28$ 38$ 51$ 153Capex (47) (70) (77) (70) (58) (322)Cash from Operations Less Investing Use 0 (32) (49) (49) (33) (7) (169)BB Cash 48 16 10 10 10

EB Cash 48$ 16$ (33)$ (39)$ (23)$ 3$

Minumum Cash Balance Assumed 10 10 10 10 10

New Financing Needed 0 43 49 33 7

Financing (1 for debt, 2 for equity)Debt -$ 43$ 49$ 33$ 7$

Equity - - - - -

Cas h from Financ ing - 43 49 33 7 131Total Cas h Ba lance 16 10 10 10 10

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United Family Healthcare Projected Balance Sheet


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Balance Sheet (Assuming Debt Raise)

($Millions)


Cash

AR

Inventories

Other Current Assets

PP&E

Other Ass ets

Investment in Uncons olidated affiliate

Net Deferred Income taxesT o t a l As s e t sAccounts Payable

Accrued Expenses

Other Current Liabilities

Debt

To ta l L i ab i l i ti e s

Equ i t yL+E

F Y E D e c 3 1 ,2 0 1 3 E 2 0 1 4 E 2 0 1 5 E 2 0 1 6 E 2 0 1 7 E16 10 10 10 10

35 45 57 74 98

3 3 4 5 6

5 7 8 11 14

123 176 230 272 297

3 3 3 3 3

33 33 33 33 33

2 2 2 2 22 2 0 2 7 9 3 4 8 4 1 0 4 6 223 28 35 44 57

15 20 25 33 43

9 11 14 18 24

25 68 116 149 156

7 2 1 2 7 1 9 1 2 4 4 2 8 0

1 4 8 1 5 3 1 5 7 1 6 6 1 8 32 2 0 2 8 0 3 4 8 4 1 0 4 6 3

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United Family Healthcare Discounted Cash Flow


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Discounted Cash Flow

($Millions)

Note: DCF assumes a mid-year discounting convention.

FYE Dec 31,2013E 2014E 2015E 2016E 2017E

Cash from Operations 15$ 21$ 28$ 38$ 51$

Capex (47) (70) (77) (70) (58)

Free Cash Flow Before Financing (32)$ (49)$ (49)$ (33)$ (7)$

PV of FCF @ 15.0% (30) (40) (34) (20) (4)EBITDA 19$ 26$ 35$ 47$ 66$

Terminal Value Multiple 8.0x

Terminal Value 524$

PV of Terminal Value 280Sum of PV of Cash Flows (128)DCF Intrins ic v alue 152

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Valuation of Chindex Hospital Business


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Intrinsic DCF Valuation

Summary of Valuation

Market Valuation

Sensitivity Table of Equity Upside / (Downside)

($Millions)

Key Points In spite of a high discount rate to match required IRR, Chindex is undervalued compared to its market valuation

Terminal EBITDA multiple within range of those of U.S. based hospital operators

Chindex Hos pital Mark et ValuationShare Price as of 2013/01/24 11.0$

Outstanding Shares (mm) 17

Market Cap 187+ Net Debt / (Net Cash) (23)

- Investment in CML (33)Enterpris e Value 131

($ mm) %PV of Cash Flow (128)$ (84.0%)

PV of Terminal Value 280 184.0%

DCF Intrins ic Ente rpris e Va lue 152+ Net Cash 23

+ Investment in CML 33

Implied Equity Va lue 208Equtiy Upside / (Downside) 11%

Ta rge t Sha re Price 12.2

Termina l $ / Utilized BedEBITDA Multiple 2,250 2,500 2,750

7.5x (17%) 2% 21%8.0x (9%) 11% 31%

8.5x (0%) 21% 42%

Terminal Capex / Bed ($mm)EBITDA Multiple 0.40$ 0.43$ 0.45$

7.5x 8% 2% (4%)

8.0x 18% 11% 5%

Terminal Disc ount Rate / IRREBITDA Multiple 17.5% 15.0% 12.5%

7.5x (8%) 2% 14%8.0x 0% 11% 24%

8.5x 9% 21% 34%

chindex international investment thesis

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