The rising price of land in China is prompting foreign private equity firms to cast an eye at the nation's funeral industry.

The global private equity firm, Carlyle Group, has been investing in Shanghai Fushouyuan Group, one of the major funeral companies in China.

Meanwhile on Dec 30, the Hong Kong-listed medical service provider China HealthCare Holding Ltd announced it had issued convertible notes worth HK$778 million ($99.87 million) to two affiliates of Carlyle Group - Carlyle Asia Growth Partners IV LP and CAGP IV Co-Investment LP.

The initial conversion price for each share is HK$0.48, a 58.62 percent discount on its closing price of HK$1.16 on the day before the notes were issued.

According to the statement, China HealthCare will use the net proceeds from the issue, amounting to approximately $99 million, to develop its funeral business.

In August last year, China HealthCare announced it would purchase a target company, whose assets include Shanghai Fushouyuan Group, for HK$3.36 billion. Among the total purchasing price, HK$44 million will be paid in cash and the remaining HK$3.32 billion will be paid by issuing 10-year zero coupon convertible notes, the initial conversion price of which is HK$0.4 for each share, representing a 52.94 percent discount to China Healthcare's closing price of HK$0.85 before trading in its shares was suspended

China HealthCare's interim report showed that the company suffered an after-tax loss of HK$89.29 million from April to September 2010.

Shanghai Fushouyuan Group, which has five branches across the country, owns five cemeteries with an area of around 2.35 million square meters in Shanghai and the provinces of Shandong, Anhui and Henan. The company's major business includes cemetery sales, tombstone design and the operation of funeral homes.

In Shanghai, an ordinary tomb for two people costs between 40,000 ($6,085) and 80,000 yuan, including a maintenance fee for at least 10 years and the cost of the trees planted around the tombs. While the price of a deluxe tomb can exceed 300,000 yuan, according to a salesman from Fushouyuan cemetery in Shanghai, quoted by China Business News.

"The profit of the funeral business is huge, usually from 200 to 300 percent within three years," said an insider at a Shanghai-based private equity firm, which has also considered investing in a funeral company.

He said that the funeral company can purchase land, usually wasteland in remote areas, at a very low cost and then sell it on to customers at much higher prices after improvement.

"However, funeral companies are not allowed to go public directly, as they belong to the civil affairs authorities and should not be profit-making institutions. That's why some other private equity firms have hesitated in making such investment," said the insider.