Dynacq Healthcare: Helping Thwart China's Obesity 'Crisis'

| About: Dynacq Healthcare, (DYII)

Cut costs and trim waistlines. That is what Dynacq Healthcare, Inc. (NASDAQ: DYII), a company that operates acute care hospitals in Louisiana and Texas, hopes to do in China, where obesity among men and women ages 18-44 grew by a whopping 146.2 percent from 1992 to 2002, according to data collected from the China National Nutrition and Health Survey.

In its 10-K filing for fiscal year 2007, Dynacq noted that, by implementing new bariatric procedures focused more on in-house support, the company was "able to reduce costs associated with outside vendor programs," while at the same time increase its number of bariatric surgeries by better than 60 percent over FY 2006.

Through its DeAn Joint Venture with the People's Republic of China, DYII aspires to do even more weight control surgeries in years to come — by designing, constructing and owning Shanghai DeAn Hospital in Shanghai, China.

Dynacq plans on financing the "China Project" by forming a new company. Shares of the Surgery Specialty Hospitals of America, Inc. [SSHA] will "be distributed to the current shareholders of Dynacq as a dividend," while DYII will continue to control the China Project, as well as "receive $5.5 million from SSHA over a five-year term to fund its operations."

To help raise additional money for the venture, Dynacq recently reached an agreement to sell its Baton Rogue Facility for roughly $20 million, subject to certain closing conditions.

Dynacq showed an operating profit for the first time in four years in '07, primarily due to the growing contribution from its Garland, Texas facility that garnered $11.3 million in net patient service revenue (up 74 percent from 2006). DYII also benefited from a continuing upward trend in higher margin commercial insurance payments as a percentage of revenue.

Conversely, workers' compensation accounted for just 47 percent of the company's gross patient service revenue this year, down from 60 percent in 2005.

In addition to their bariatric services, Dynacq hospitals also offer orthopedic and neuro-spine surgical procedures, as well as sleep laboratory, pain management and minor emergency treatments.

In China, DYII intends to build a hospital with up to 150 beds and eight surgical suites designed to attract not only bariatric surgeons, but cancer, cardiac catheterization, organ transplant, obstetrics and gynecology specialists as well.

The company would also like to partner with other businesses to build "hotels, convention facilities and living quarters to accommodate the needs of physicians, surgeons, scholars, patients and their families in the medical center campus."

Unfortunately, obesity tends to follow prosperity in most countries. Dynacq is an interesting play to look into that may benefit from this trend.

Disclosure: none

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