On August 15 this year, Hygeia Health (06078) issued a profit warning, forecasting a year-on-year decline in revenue of approximately 15% to 17% for the first half of the year, and a net profit drop of about 34% to 39%. Following the announcement, on August 18, the stock opened lower and closed down 3.42% at HK$15.55. The decline did not stop there; by October 14, the stock price slid to an intra-day low of HK$13.12. Although this represents a drop of only around 15% in the past month, it is just a small segment of Hygeia's long-term downtrend that began in 2021, when the stock peaked at HK$109.43 and has since plummeted to around HK$13, a staggering decline of 87.95%, corresponding to a static PE ratio of 13.03. One key reason for this downturn mentioned in Hygeia's interim report this year is the "DRG payment reform".

The DRG payment reform is seen as a significant driver behind the dramatic stock price decline of nearly 90%. According to Zhitong Finance APP, with the national healthcare insurance bureau's "Three-Year Action Plan for DRG/DIP Payment Reform" fully implemented, healthcare institutions are undergoing a fundamental shift from expansion to internal development. Essentially, DRG reallocates insurance funds from hospitals to specific diseases or groups of diseases. Patients within the same diagnosis-related group receive the same payment standard, leading hospitals to either absorb or retain any spending surplus, thereby creating internal incentives for cost control. In other words, the DRG (Diagnosis-Related Group) payment method transitions from fee-for-service to bundled prepayment based on diseases, forcing hospitals to shift their focus from maximizing revenue to optimizing costs. For private hospitals, this translates into a direct squeeze on profit margins.

According to Hygeia's disclosed interim results for 2025, the company generated revenues of CNY 1.99 billion, a year-on-year decrease of 16.47%; net profit fell 36.18% to CNY 246 million; while adjusted net profit also dropped 34.47% to CNY 263 million. Despite the overall decline in revenue and profit, the performance of different segments showed variance. The financial report indicated that the company’s two primary business segments, inpatient and outpatient services, recorded revenues of CNY 1.22 billion (a year-on-year decrease of 18.4%, but up 2.1% quarter-on-quarter) and CNY 722 million (a year-on-year decrease of 11.2%, and down 12.2% quarter-on-quarter), respectively. This suggests that excluding seasonal fluctuations, outpatient services remained relatively stable year-on-year, while inpatient services showed signs of stabilization after fluctuations in the latter half of last year. Furthermore, during the first half of the year, the number of hospital visits reached 2.2 million, consistent with last year, indicating that Hygeia's hospital usage remains stable. This is crucial as it reflects that demand for Hygeia's hospital services has not been adversely affected, with the real impact of the DRG reform resulting only in a decline in revenue per patient across its facilities.

Such a situation does not constitute a "fatal blow" for a company focused on network expansion in underserved areas, cost control, and supply chain integration. Additionally, the report highlighted Hygeia's efforts to optimize capital allocation. The company noted that newly built facilities, including the Wuxi Hygeia Hospital and the second phase of Kaiyuan Hospital, as well as a new campus in Qufu, are expected to commence operations this year. By the end of 2025, only the Changshu Hygeia Hospital remains under construction, with plans for a 2026 opening. This information supports Hygeia’s statement that the company has "passed the peak of capital expenditure," as capital spending has dropped to CNY 242 million, a 28.5% year-on-year decline. During the interim earnings call, management indicated that there are no immediate plans for building new hospitals but will prioritize mergers and acquisitions. Therefore, expectations of controlled future capital expenditures for Hygeia exist.

In summary, while revenue and profits have seen a downturn due to the implementation of DRG policies over the past two years, the company’s fundamentals related to hospital operations and patient visits remain stable. As the company moves past its peak capital expenditure phase, net profit may approach a cyclical low, potentially rebounding in revenue and profit when new capacities hit the market and market concentration increases, offsetting the negative impacts from the DRG payment reform.

When might a rebound occur? The projection that Hygeia Health will achieve a reversal following the introduction of new capacities and an increase in market concentration is supported by the previously mentioned stability in patient numbers. From a market perspective, by last year, the population aged over 60 in China reached 310 million, with forecasts suggesting growth to over 400 million by 2035. In this context, the domestic oncology market is expected to see a compound annual growth rate of 9% from 2026 to 2030, with private cancer institutions experiencing an even higher rate of 17%. Coupled with favorable policies for establishing a catalogue of innovative commercial insurance drugs, the oncology specialty hospital sector presents a high-certainty market opportunity. The aforementioned stability in Hygeia’s patient visits serves as a significant testament to this market certainty.

Looking at the secondary market, although Hygeia Health's stock price has posted positive growth in only four quarters since Q3 2021, the downward trend has noticeably slowed in 2025, coinciding with the full execution of the domestic DRG model. Moreover, trading volumes have gradually increased since last year’s Q3, resulting in a "price stability with increasing volume" phenomenon at the quarterly level. Recently, from a technical standpoint, following the disclosure of the interim profit warning, the stock's price fell below the lower Bollinger Band but has subsequently remained along this lower boundary with minimal fluctuations. During this time, trading volume for Hygeia remained persistently low, with an average daily trading volume below 10 million shares from August 19 to September 15, indicating a bearish market sentiment. Although there was a slight rebound from late September to early October, it was marked by a noticeable lack of trading volume; ultimately, the stock price rapidly fell after reaching the upper Bollinger Band, touching a temporary low again.

Analyzing the current distribution of shares, Hygeia's stock price has entered a clearly oversold territory due to the recent prolonged decline, as prices have fallen significantly below the average cost of HK$15.16, leading to significant shareholder losses. On October 14, the overall profit-taking ratio for shareholders was only 0.63%, with over 70% of shares overlapping within the low price range. With respect to trading volumes, Hygeia is currently in a scenario of falling prices with decreasing volumes; existing shareholders continue to offload their shares while potential buyers opt to observe, displaying a lack of buying interest and a dominant bearish sentiment. Furthermore, on October 15, Hygeia Health's trading volume fell to 3.0456 million shares, yet the stock price increased by 1.82% to HK$13.41, nearing the previous day's opening price, suggesting both bulls and bears are in a state of observation, indicating a potential for forthcoming shifts in the market.

However, even if a slight rebound occurs shortly, it is unlikely to exhaust the negative sentiment surrounding Hygeia Health's stock price to achieve a valuation reversal. Given the current market sentiment, it may be until crucial positive information regarding capacity releases is disclosed by the company that presents a key opportunity for investors looking to bottom-fish.