Health Management International - Phillip Securities 2017-05-17: A Visit To The Crown Jewel In Melaka

Health Management International - Phillip Securities 2017-05-17: A Visit To The Crown Jewel In Melaka HEALTH MANAGEMENT INTL LTD 588.SI

Health Management International - A Visit To The Crown Jewel In Melaka

  • Regency taps onto unmet local demand gap whilst Mahkota attracts foreign patients.
  • Investment thesis remains intact: Increasing capacity, stronger patient demand, and higher revenue intensity to boost revenue growth.
  • Unique ability to attract and retain specialist doctors.
  • Maintained “Buy” rating with a DCF derive TP of SGD0.83. 



What's New

  • We attended an analyst site visit to Regency Specialist Hospital (“Regency”) in Johor and Mahkota Medical Centre (“Mahkota”) in Melaka on 5th to 6th May 2017. The visit provided an opportunity for us to understand how Health Management International (“HMI”) position itself amidst competitive landscape, and how it structures its growth strategies around the diverse operating environment in Johor and Melaka. We also had a brief overview of the performances of new and maturing hospitals.
  • During the trip, the Group CEO, as well as CEOs, Directors and General Manager of the two hospitals, shared with us some of their market insights and technicalities of the hospital operations.


Site visit key takeaways 

  1. The newly launched PET-CT scan in Mahkota dominates diagnostic nuclear imaging service in Melaka. The imaging service is gaining traction, with a total of 54 cases in Apr 2017, i.e. an average if 6-8 patients/day (industry maximum of 10-12 patients/day). Management is optimistic of wider usage of PET-CT scan in Malaysia on the back of its growing prominence; and increasing incidence of cancer.
  2. Expansion pipeline on track
    • a new ward with c.30 operational beds to be added to each of Mahkota and Regency by 1H FY18; and 
    • Hospital Extension Block at Regency by FY2020. 
    Next prospective expansion in the medium to long term could be a multi-storey car park and a new hospital extension block for Mahkota. Two plots of car park space available for potential expansion. Currently there are still capacity at the Level 9 Administration Office. Mahkota could move its back office to another location, freeing some space in the existing block to add new beds before constructing a new hospital extension block.
  3. Investment thesis remains intact
    1. Growing patient demand supported by favourable macro backdrop; 
    2. Higher average bill size driven by its expanding range of specialist and sub-specialists, facilities and services; and 
    3. Expanding capacity. 
    The Group’s positioning and growth strategy for the two hospitals varies – Regency to focus on meeting local demand gap; while Mahkota to tap on foreign market demand amidst saturated local market. Higher foreign patient load will boost revenue intensity; higher utilization rate of its facilities and services will increase profitability.
  4. Unique partnership model to attract and retain specialist doctors. Malaysia is suffering from specialist shortage. There are There are only about 9,000 specialist doctors nationwide serving the 30.33 million population of Malaysia (equivalent to 0.3 specialist doctor per 1,000 people). The Group offers specialist doctors a chance to start their own medical practise while able to enjoy as the benefit of being part of a hospital ecosystem. The doctors under the Group earn procedure fees and drugs margins, which has a higher earning potential compared to other private hospitals in Malaysia.
    Management also shared that collaboration with Kaohsiung Medical University could help in terms of medical staff trainings and attracts Malaysian specialists graduated in Taiwan to return and practise in Malaysia.


Strategic Positioning and Growth Strategy 


RSH, a Regional Solution for Locals; MMC, a Magnet to Medical Tourists 

  • Recall that in our Initiation Report, we mentioned that, healthcare facilities in Johor is under-supplied with bed-to-population ratio* at 1.7, when compared to Malaysia’s at 1.9. On the other hand, Malacca has higher bed density at 2.5. Hence, the Group’s growth strategy for the two hospitals are very different, with Regency focusing on meeting local demand gap; and Mahkota to tap on foreign market demand amidst saturated scene in the local market. 
  • Regency’s next initiative would be collaboration with insurance and corporates to grow its corporate account Management noted that only 70% of Regency’s patients are insurance-covered.
  • Being the closest tertiary hospital and the only private hospital to have 24-hour A&E staffed by emergency specialists in Pasir Gudang industrial area and new Petronas oil refinery-petrochemicals complex area (i.e. RAPID), gives Regency an edge to attract corporate clients. (Note: Petronas is now a corporate client of Regency due to the reason mentioned) Nonetheless, management does not discount that there is room for Regency to attract foreign patients. It has recently started its marketing outreach to international patients, in particular from Indonesia and Singapore. Being one of the two hospitals in Johor, Malaysia, approved for Medisave use, offers a stronger value proposition for Singapore patients.
  • Meanwhile, the strategic location of Mahkota offers a full ecosystem for medical tourists, including food, accommodation, and transportation Mahkota is the only private healthcare provider in Melaka which provide transportation arrangement (via third party vendor) from Kuala Lumpur International Airport (“KLIA”) to facilitate foreign patients travelling by air. It also offers same-day repot for health screening and same-day surgeries, which help to save time and limit travel costs for foreign patients.
  • It is not surprising when Management shared that Mahkota has the highest foreign patient load in Malaysia. Its main competitor by states within Malaysia would be the private hospitals in Penang. Foreign patients in private hospitals in Kuala Lumpur are mainly expats, and note that the costs of living in Melaka is lower than Kuala Lumpur.
  • Within the state of Melaka, Mahkota being Indonesian’s top preferred private hospital, despite Pantai Medical Centre Ayer Keroh having an 8 years of head start before the establishment of Mahkota, is a testament of effective marketing of its 17 representative offices in Indonesia.


Investment Thesis Remains Intact 


Growing demand from local and overseas markets 

  1. Lack of healthcare facilities in Indonesia 
    • The Indonesian government targets to provide universal health care under the National Health Insurance Programme (JKN) to all Indonesians by the year 2019.
    • However, the number of facilities remains limited: undersupplied public hospitals coupled with handful of private hospitals that have opted to join the scheme as providers (due to unattractive scheme in terms of amount and time).
    • With a growing middle-income class, Indonesians seek medical treatment abroad for quality healthcare services. Malaysia, being a neighbouring country with similar culture and language, while offering a more competitive pricing (compared to the private healthcare providers in Singapore, and even in Indonesia), has been a popular destination for Indonesian patients.
    • Some potential initiatives the Group may implement to boost Indonesian patient load:
      1. engage Third Party Administrator Services, and
      2. (extending cashless admission to Indonesian patients.
  2. Macro tailwinds at play at local scene 
    • Increasing access to healthcare/medical insurance will propel patients transition from public to private healthcare services.
    • Both Melaka and Johor are undergoing major development:
      1. Melaka Gateway project and several Chinese investments in Melaka; and
      2. Pasir Gudang Industrial Area and new RM60 billion Petronas RAPID (Refinery and Petrochemical Integrated Development) project in Johor Bright prospects in property market, growing population and consumer affluence, improving standards of living as well as infrastructure upgrade in both states, will boost demand for quality healthcare.

Higher average bill size per patient 

  • Recall that Malaysia’s healthcare fees are regulated under the Private Healthcare Facilities and Services Act 1998 and Regulations 2006. The professional fees of doctors are controlled with a maximum ceiling. While the cost of hospital care, day surgeries, screening and diagnosis services, ambulance services, and clinical laboratories, are not covered under these Acts. Hence, the number of complex cases treated in the hospitals and the utilisation of its services and facilities are the main drivers for to average bill size per patient.
  • Management shared that services and facility fees are the main contributors to its bottom line, as compared to ward room fees. These higher margin items include charges from operating theatre (“OT”) usage, intensive care and monitoring costs, nursing care costs, etc. Mahkota has 12 OTs and 2 Day Surgery Units; while Regency has 6 OTs.

Factors which could increase utilization rate of Operating Theatre (“OT”) and Day Surgery facilities: 

  1. Deepening of insurance coverage on day surgery will increase day surgery load. Only some private insurance providers in Malaysia cover medical expenses for day surgery, and Malaysia is still in the midst of considering a national health insurance scheme. (Note: Singapore government has already included day surgery under Medisave)
  2. Higher patient volume, especially foreign patients who typically involve complex cases. Approximately 40-50% of outpatient revenue in Mahkota are contributed by day surgery). The increasing day surgery load would effectively also lift bed turnover ratio. Management shared that the fees for OT usage are charged based on a certain percentage of procedure fees. As most of the procedure fees are capped by the Private Healthcare Act, Mahkota’s model has a more competitive pricing, as compared to other hospitals which charge based on number of hours of usage.

Quality assurance builds and sustains brand equity 

  • HMI will renew its wards every six years to improve a patient’s experience during the hospital stay. Recently, Mahkota has went through a minor ward renovation (aesthetic); while Regency is still in the midst of refitting its six wards (four wards completed renovation, one undergoing, and one pending to be completed by end-2017).
  • We also noted that the two hospitals would be up for review for the Malaysian Society for Quality in Health (MSQH) Hospital Accreditation Standards in 15-17 May 2017. MSQH is a local system of accreditation, developed based on national standards and best practices in Malaysia’s healthcare industry. It gives hospitals a government certified standard of quality and cost much less than the internationally recognised Joint Commission International (“JCI”) accreditation.
  • Currently, none of the public hospital in Melaka is accredited and all three private hospitals in Melaka, including Mahkota, are accredited. On the other hand, only one public hospital and six private hospitals in Johor are accredited.
  • Management is open to undertake JCI accreditation in future. This would further improves its profile on the international platform, as well as attracts medical tourists from United States, Europe and Middle East.




Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2017-05-17
Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 0.830 Same 0.830



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