Although the much-anticipated “strong start” to the Year of the Snake failed to materialize, the broader market’s pullback did not dampen the pharmaceutical sector’s remarkable surge. Last week, pharmaceutical stocks led the charge, with many companies in the sector posting all-time highs.

　　Notably, driven by the infrastructure needs of urbanization, demand for medical devices in grassroots markets and at the county‑level hospital tier is set to surge. On the secondary market, individual stocks within the medical device sector have recently attracted unprecedented attention. Last week, the State Council issued the “Opinions on Improving the Essential Medicines System and New Mechanisms for Grassroots Operations,” which industry analysts view as a major opportunity that could propel above‑expectation growth in the medical device sector.

　　Urbanization drives demand for medical devices.

　　At noon on February 22, Sanglejin, a company that manufactures and sells home-use sauna equipment, announced that it had obtained the “Medical Device Manufacturing Enterprise License,” after which its stock was immediately locked at the daily upper limit by large buy orders. This clearly underscores the market’s heightened interest in medical device stocks.

　　The medical devices sector has attracted significant attention because it is inextricably linked to the development of new‑type urbanization. This process does not simply involve relocating rural populations to urban areas or merely upgrading infrastructure; rather, it seeks to align urban standards across multiple dimensions—including healthcare, education, elderly care, social security, and lifestyle—with those of established cities.

　　The development of county-level hospitals will create substantial growth opportunities for the medical device industry. According to a research report by Guotai Junan analyst Li Qiushi, in 2011 rural residents’ healthcare spending totaled RMB 289.7 billion. Assuming a typical pace of urbanization, by 2020 the shift of rural residents into urban status is expected to generate an additional RMB 236.3 billion in healthcare consumption. Combined with the RMB 392.4 billion in incremental spending already attributable to rural residents themselves, the total incremental demand will reach RMB 628.7 billion. By that time, overall rural healthcare consumption is projected to more than double its current level.

　　With policy support, the financial performance of listed medical device companies has generally improved. For example, Hejia Shares reported a 51.8%–70.8% year-on-year increase in net profit in 2012, David Medical posted a 35%–50% year-on-year growth, Kailite saw its net profit rise by 45%–55%, and Dian Diagnostics recorded a 35%–45% year-on-year increase in earnings.

　　According to the “2012 Medical Device Industry Analysis Report” released by the Medical Device Professional Committee, last year saw a gradual decline in the domestic medical equipment market’s reliance on imported products, while the competitiveness of Chinese medical device companies in their respective product segments has been steadily strengthening. In the first half of 2012, China’s medical device industry recorded total sales revenue of RMB 68.7 billion, up 20.27% year over year. Supported by favorable policies, demographic shifts, and rising consumer spending, the industry is expected to maintain rapid growth over the next 5 to 10 years, with overall growth rates remaining above 20%.

　　Several listed companies are expected to benefit.

　　Jiang Guangce, Chairman of Dechuan Capital, told reporters that China’s medical industry as a whole remains relatively low‑end, and there are not many attractive investment targets in the medical device sector. However, from the perspective of county‑level hospital development, domestic companies—particularly those already listed—are at a distinct advantage, as the equipment procured by such hospitals tends to be mid‑ to low‑end. Examples include David Medical, Baolite, and Hejia Shares.

　　Hejia Co., Ltd. is one of the listed companies that has benefited most from the development of county-level hospitals. Among Hejia’s three major product lines, its oncology treatment equipment aligns with the national critical‑illness medical insurance program—nine of the 20 covered conditions are malignant tumors; its imaging systems help strengthen collaboration between county hospitals and township health centers, thereby elevating primary‑care service standards; and its oxygen‑concentrator business addresses the need of county hospitals to upgrade from traditional bottled oxygen.

　　Since the beginning of this year, Hejia Shares has repeatedly secured major contracts, winning bids for projects such as the comprehensive renovation of Jing County People’s Hospital in Hebei Province and the Chongqing Hezhou District Traditional Chinese Medicine Hospital. On February 21, Hejia Shares released a preliminary earnings report, projecting 2012 net profit of RMB 120 million to RMB 135 million, up 51.8% to 70.8% year over year. Industry insiders familiar with the company note that Hejia Shares has been actively involved in the expansion and upgrading of grassroots hospitals, with its integrated solutions proving highly popular among county-level hospitals. However, they also caution that the company’s stock price has surged sharply in the short term, leaving its valuation relatively expensive, and that investors should closely monitor whether its future market‑expansion efforts meet expectations.

　　Tongce Medical, whose core business is oral healthcare, is also a key focus of market attention. Hangzhou Stomatological Hospital is the company’s primary revenue driver and has now entered a mature stage of development, while Ningbo Stomatological Hospital is its second-largest profit center. The Kunming market represents a major growth opportunity going forward; Tongce has acquired a controlling stake in Kunming Municipal Stomatological Hospital and aims to replicate the Hangzhou model in Kunming, unlocking robust growth. In addition, Tongce is actively expanding into the assisted reproductive technology (ART) sector, partnering with Kunming Municipal Maternal and Child Health Hospital to establish an ART center, and collaborating with the international brand Bourn Hall to leverage cutting-edge expertise. The company plans to pioneer the establishment of two IVF centers in China and intends to operate additional IVF facilities through a franchise model. Both of Tongce’s core businesses are poised for significant expansion amid the broader trend of medical urbanization.

　　In addition, medical device stocks that stand to benefit from the urbanization of healthcare also include Dian Diagnostics, Xinhua Medical, Sanovo Biotech, and Aier Eye Hospital, among others.