Healthcare Sector - DBS Research 2016-10-12: Healthcare opportunities in Asia (Part 1 of 2)

Healthcare Sector - DBS Vickers 2016-10-12: Healthcare opportunities in Asia Singapore Healthcare Sector IHH HEALTHCARE BERHAD Q0F.SI RAFFLES MEDICAL GROUP LTD BSL.SI SINGAPORE O&G LTD 41X.SI RHT HEALTH TRUST RF1U.SI

Healthcare Sector - Healthcare opportunities in Asia

  • Asia Pacific’s healthcare estimated to grow at 3- year CAGR of 12.8%.
  • Opportunities in underdeveloped / developing markets such as China, Indonesia and Myanmar.
  • Singapore healthcare ‘corporatisation’ and expanding to overseas.
  • Sentiment remains positive as sector is relatively resilient. 
  • Our top picks are IHH, SOG and PLife REIT for growth prospects and earnings visibility.


Asia Pacific’s healthcare estimated to grow at 12.8% 3- year CAGR; opportunities in under-developed / developing markets. 

  • The healthcare sector in Asia Pacific is estimated to grow at a 3-year CAGR of 12.8%. 
  • The growth in healthcare spending is largely driven by a few key factors including ageing, increase in chronic illnesses, urbanisation and growing affluence in Asia. 
  • Among the countries in Asia, Dr Loo, Executive Chairman and Co-Founder of Raffles Medical Group sees opportunities in China, Indonesia and Myanmar where the healthcare sector is still under-developed / developing. 
  • With the uprising of medical hubs in countries within the region, Singapore could still stay ahead of competition by ensuring high standards of medical practices and supplies and continuous improvement in medical research.


Singapore healthcare ‘corporatisation’ and expanding to overseas. 

  • Singapore’s healthcare sector is broadly going through two stages, 
    1. large healthcare corporate with stable / mature operations in their home market are looking to expand overseas, and 
    2. healthcare service providers are corporatizing their practices into chain of medical practices to leverage on size and growth. 
  • While most were familiar with the large-cap hospital players (IHH and Raffles), there was strong interest in the smaller-cap healthcare service providers (largely specialty clinic groups) partially led by the potential IPO of Fullerton.


Sentiment remains positive as the sector is relatively resilient; top picks are IHH, SOG and PLife REIT. 

  • Overall, sentiment remains positive on the sector as it is relatively resilient despite some corporate experiencing slower growth in medical tourism and some markets. 
  • The sector continues to trade at a premium to the market (30x vs market’s 14x FY17E PE; 17x vs market’s 12x FY17E EV/EBITDA). 
  • Our top picks are IHH and SOG for near to medium term growth and PLife REIT for its strong earnings visibility.


IHH Healthcare (“IHH”)


Gleneagles HK / new hospitals target to open in 2017 is on track. 

  • Management remains upbeat on the opening of Gleneagles HK and believes that the pent-up demand in HK for healthcare services, coupled with the opening during the peak season (winter season) in HK, would drive the demand for hospital services. It has received strong interests and has recruited more than half of the targeted number of doctors and nurses. However, management expects pre-operating costs to increase in 2H2016, leading to the opening of Gleneagles HK. New hospitals including ParkwayHealth Chengdu Hospital and Acibadem Hospital, Turkey, slated to open by 2017, are on track.

Turkey operations have stabilised. 

  • Following the coup attempt and subsequent declaration of state of emergency, management confirms that the situation has stabilised.

Adding beds at Mt E Novena. 

  • Back in Singapore, Mount Elizabeth Novena Hospital is ramping up with plans to add an additional 100 beds in 1H2017, increasing to a total of 320 beds by 2017 (almost maximum capacity) in segments including neurosurgery and cardiology. In Singapore, management saw growth in the local patients compensating for the slower growth in medical tourism.

Weakness in Malaysia but recovering. 

  • In 2Q2016 results, IHH experienced weaker sentiment in Malaysia, impacted by the higher prices (implementation of GST in 2015) which led to patients moving to public hospitals.
  • Following from an increase in patient volumes in the public hospitals, management expects some may return to the private hospitals and has seen some recovery in 2H2016.
BUY, Price Target 12-mth: RM7.60 


Raffles Medical Group (“Raffles”)


Raffles Holland V has achieved 93% to 94% committed leases. 

  • Management has confirmed that Raffles Holland V has achieved 93% to 94% committed leases vs 60% as at 25 July 2016. Management remains selective in the tenant mix to ensure that the tenants are complementary to its medical centre. Management hopes that the hospital could be fully occupied soon.

Raffles Hospital Extension is on track and on budget.

  • Management targets to complete Raffles Hospital Extension by 3Q2017. Management plans to move some of their facilities, clinics and office to the new wing when complete, thus, freeing some space in the existing block to add new beds. Management believes that the opening of new beds will be done progressively in tandem with the demand. While plans for the remaining space in the hospital extension remains fluid, management may consider utilising some rooms (potentially wards that have yet to open) for patients’ family to provide some convenience for their patients’ family.

Construction of Raffles Shanghai should begin by Oct 2016, on track to complete by 2018. 

  • After overcoming operational challenges such as obtaining construction approvals for its Raffles Shanghai, management believes that piling should begin in Oct 2016. Management remains committed to its timeline, targeting the completion of Raffles Shanghai by 2018. 
  • On the hiring of doctors, Raffles will look to relocate some of their existing doctors to China for a start by offering fellowship programmes. Subsequently, Raffles will look to hire local doctors from China. 
  • Apart from Raffles Shanghai, management continues to look for new opportunities in China, potentially in tier 1 cities such as Beijing.
HOLD, Price Target 12-mth: S$1.43 (6% downside) 


Singapore O&G (“SOG”)


ZIKA should not impact 2H2016 deliveries; patients may turn to private hospitals. 

  • While some are concerned about the impact of ZIKA that could potentially impact the number of baby deliveries, SOG believes that the impact of ZIKA should be minimal on 2H2016 deliveries.
  • If any (if ZIKA were to turn increasingly serious), thus, delaying potential women from getting pregnant, management believes that the impact can only be seen starting from Nov 2016 which may potentially impact the number of deliveries in 2017.

Targets to start paediatrics segment in 2H2017.

  • Management believes that its obstetrician and gynaecology (“O&G”) segment has built a sizeable base (> 1.6k babies delivered in 2015) to start its paediatrics segment. Management aims to begin in 2H2017 with at least two paediatricians. Although paediatrics may have a lower margin (potentially c.20%) compared to its O&G margins of c.40%, management believes its paediatrics business has the potential to retain its customers for the longer term and potentially provide healthcare services support and needs in different stages in a women’s life through cross-referrals.

Expanding into new business segments such as IVF and pregnancy scans. 

  • In addition, management mentions potential expansion into new business segments such as IVF and pregnancy scans to provide a more complete spectrum of women’s healthcare services.
BUY, Price Target 12-mth : S$1.50 (20% upside) 


RHT Health Trust (“RHT”)


Expect DPU to fall post disposal of 51% economic interests in two largest contributing hospitals to Fortis and lower dividend policy. 

  • In July 2016, RHT has obtained shareholder approval on the proposed disposal of 51% economic interest in its two largest contributing hospitals (Gurgaon and Shalimar Bagh which contribute 39% to RHT’s revenue) to Fortis Healthcare.
  • Management expects to complete the disposal by Oct 2016. A special dividend of S$0.254 will be paid. Based on the pro-forma numbers, management expects DPU to fall by 27% and NAV by 10% post the disposal. In addition, management has revised down its dividend policy to 95% from 100%.

Plans to add 571 beds by FY18. 

  • Management has plans to add 571 beds, making a total of 3.2k beds by FY18 largely from BG Road (200 beds) by Mar 2017 and Amritsar (102 beds) by Jan 2018. The estimated capex on its development pipeline for the next few years is c.s$60m. This will be partially funded by the retention of 5% from DPU.

Expects DPU growth rates to remain at single digit.

  • Management expects DPU growth rates to remain at single digit (excluding the impact from the proposed disposal).
HOLD, Price Target 12-mth: S$0.95 (10% downside) 




Rachel Lih Rui Tan DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-10-12
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 7.600 Same 7.600
HOLD Maintain HOLD 1.43 Same 1.430
BUY Maintain BUY 1.50 Same 1.50
HOLD Maintain HOLD 0.95 Same 0.95



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