(Yicai Global) Oct. 26 -- Private specialized medical institutions have continued to speed up their development in China this year, with the main driving force of profit growth coming from significant expansion in second- and third-tier cities.

The most important source of growth for private eye hospitals is now through expansion, said Shi Chengping, a pharmaceutical industry analyst at Haitong Securities. "Aier Eye Hospital Group Co.'s [SHE:300015] locations in second- and third-tier cities have produced rapid profit growth of almost 100 percent," he said.

Aier Eye reported an operating revenue of CNY4.382 billion (USD659.5 million) in the first nine months of this year, an annual increase of 42.16 percent. Net profit was CNY657 million, up 38.86 percent. Both operating revenue and net profit excluding non-recurring income exceeded those achieved for the whole year 2016.

The company's main profit growth drivers include the balanced development of business segments, an upward trend in the average unit price for surgery, and business growth at new and old hospitals, it said.

Aier Eye increased its efforts to acquire domestic and foreign companies this year. The firm's financial report included 130 hospitals that were acquired through buyout funds, of which nine were newly included this year and have already stopped making losses, Sinolink Securities said in a research report.    

Expansion based on mergers and acquisitions has become a common choice for private medical institutions such as Aier Eye.

Meinian Onehealth Healthcare Holdings Co. [SHE:002044] bought stakes in seven companies in September this year, including Xichang Meinian Onehealth Healthcare Management Co. with an investment of up to CNY150 million. In July, Topchoice Medical Corp. [SHA:600763] invested CNY100 million to set up a Zhejiang-based big health industry equity investment fund with Zhejiang Dian Diagnostics Co. [SHE:300244], focused on mergers and acquisitions in medical services and other fields.

The expansion of existing locations has also been a key profit maker for private hospitals. "Take Aier Eye for instance, business growth of older hospitals may only be around 10 percent to 15 percent. To ensure rapid growth, they must keep expanding," Shi said.

It is worth noting that expansion in the domestic market made by most private medical institutions is taking place in second- and lower-tier cities, and this trend will continue in the future. The grassroots medical market has become a key focus of private institutions.

Aier Eye's main focus is on second and lower-tier cities, especially prefecture-level cities, said Ai Xiaoping, a chief investment officer of the firm's northeast China business. Second- and lower-tier cities make up 70 percent of the country's total population, and medical services should go to where the population is more concentrated," he said.

Private specialized institutions regard costs, competitiveness and government support as the three most important aspects when planning for second- and third-tier cities, Shi added.

Labor costs and rents in first-tier cities are high, while surgery pricing is generally unified across the country. In comparison, hospital operating costs in the second- and third-tier cities are much lower, he said.

Private specialized hospitals in such cities have no strong competitors, and can quickly establish a brand and academic status there by bringing in partners. Local governments also welcome private sector investment, he said.

"In the future, private specialized medical institutions will continue to expand their outlets in lower-tier cities," Shi predicts.