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

Healthcare Sector - DBS Vickers 2016-10-12: Healthcare opportunities in Asia IHH HEALTHCARE BERHAD Q0F.SI

Healthcare Sector - Healthcare opportunities in Asia

Part 2 of 2

Riverstone Holdings Ltd (“Riverstone”)

Optimistic of a better 2H2016, led by stabilised ASPs and higher orders. 

  • Management is optimistic of a better 2H2016, led by stabilised ASPs and higher demand. ASPs appear to have stabilised after the significant reduction in prices observed across the industry between Jan and May this year. 
  • Following from a pick-up in demand led by higher order flows in both the healthcare and cleanroom segment, Riverstone has had to speed up on the commissioning of new lines (which will lift capacity by 19% to 6.2bn gloves p.a. by end-FY16F, from 5.2bn a year ago).

Cost-management in focus. 

  • Given the competitive landscape and potential headwinds, glove manufacturers are paying greater attention to efficiency and cost controls. 
  • Following the two gas hikes in 2016, Riverstone plans to diversify its sources at Taiping to include biomas – which upon completion, could reduce the plant’s cost per thousand gloves by approximately 1%.

Possible acceleration of expansion plans. 

  • With its new capacity of 1bn p.a. for FY16F already fully committed, we believe that the company could accelerate its expansion plans of 1bn p.a. to a minimum of 8.2bn p.a. by end-FY18F. 
  • In addition, Riverstone can tap on the recently acquired 9.364 acres of adjoining land to further grow capacity, if required.
HOLD, Price Target 12-mth: S$0.96 (6% upside) 

Q&M Dental (“Q&M”)

Growing its dental clinic network in Singapore both organically and via acquisitions. 

  • Q&M will continue to widen its network of dental clinics in its countries of operations, both organically and through acquisitions. 
  • In Singapore, acquisition targets include family-run clinics that have no successors or clinics preferring to be part of a larger group in order to reap economies of scale.

Aims to be the largest player in the cities of China with existing operations via acquisition of dental hospitals. 

  • In China, Q&M aims to become the largest player in the various cities that it has a foothold (e.g. GaiZhou, Shenyang and Panjin). Target acquisitions will be large, established dental hospitals that are on the national health insurance scheme (Yibao) instead of clinics.

Spin-offs in China on track. 

  • After receiving shareholders’ approval in Aug 2016, management believes it is on track with its plans to spin-off the group’s China manufacturing operations under Q & M Dental Holdings (China) and Q & M Aidite International (a leading manufacturer of dental zirconium blocks for use in dental Computer-Aided Design/Computer-Aided Manufacturing (CAD CAM) machines).

Exploring opportunities to expand its value chain within the dental service. 

  • Management is exploring opportunities to expand its value chain within the dental service, thus, expanding its outreach within this specialisation.
NOT RATED, Price Target 12-mth: S$0.80 (5% upside) 

Health Management International (“HMI”)

Operator of two private hospitals in Malaysia with c.20% foreign patients mainly from Indonesia. 

  • HMI owns two private hospitals in Malaysia, Mahkota Medical Centre (MMC) in Melaka (288 licensed beds) and Regency Specialist Hospital (Regency) in Johor (218 licensed beds).
  • HMI was one of the first movers to target medical tourism from Indonesia, focusing on the segment of Indonesians who find Singapore’s medical treatment expensive. HMI has a 10% market share of Malaysia’s medical tourists and c.20% of its patient load is foreign patients.

Improve MMC’s facilities to improve ancillary income.

  • MMC is an established tertiary hospital with a comprehensive range of medical and surgical specialties and sub-specialties. Management is improving MMC’s facilities including nuclear medicine (PET scan – first PET scan in Melaka) and diabetes centre to improve ancillary services.

Regency turned profitable in 2015; planned new hospital extension. 

  • Regency has turned profitable in 2015, six years after it was established in 2009. Management is upbeat on the prospects of Regency, targeting Indonesians specifically from south Sumatra or West Java and leveraging on the availability of the Senai International Airport, despite rising competition from new private hospitals in Johor. 
  • Management plans to build a new hospital extension block with target completion by 2019/2020. While the plans have not been finalised, management highlights that the new hospital block would include, additional inpatient beds, clinical service areas, operating theatres and medical suites.

ISEC Healthcare (“ISEC”)

Eye specialist clinics in Malaysia and Singapore. 

  • ISEC is a comprehensive medical eye care service provider with 85% of its revenue contribution from its Malaysia clinics located in KL, Penang and newly acquired clinic in Melaka. 
  • In Singapore, ISEC operates at the Lee Hung Ming Eye Centre in Gleneagles Hospital. ISEC specialises in fields including cataract and refractive surgery (including LASIK), vitreoretinal diseases, corneal and external eye diseases, and glaucoma. 
  • Currently, ISEC has a strong team of 19 full-time specialist doctors.

Acquisition of four GP clinics in Singapore. 

  • As part of its expansion strategy in Singapore, ISEC proposed an acquisition of four GP clinics located in the suburban areas of Singapore in May 2016 with a purchase consideration of S$14m. While this may not seem coherent to the existing business, management said this is to acquire well located clinics in the suburban area and potentially to employ an eye specialist to operate at those clinics. 
  • The purchase consideration is 50:50 cash and shares, at 12x FY15 PE and 13x PE on minimum net profit guarantee from the clinics for five years. 
  • Dr Lee Yeng Fen, the owner of two of the four GP clinics and major shareholder of the other two GP clinics is the wife of The Executive Vice Chairman and major shareholder of ISEC, Dr Lee Hung Ming. 
  • The proposed acquisition was passed in EGM held on 22 Sept 2016.

Expansion into South East Asia via acquisitions.

  • Management is exploring overseas expansion opportunities via acquisitions especially in South East Asia. Management believes countries with potential include Sri Lanka, Vietnam and China.

Singapore Medical Group (“SMG”)

Specialist clinics plus corporate health screening. 

  • SMG is a chain of specialist clinics plus corporate health screening with 23 clinics in Singapore and three diagnostic centres. SMG has manpower strength of 28 specialist doctors and 35 associated specialist doctors.
  • SMG provides various medical specialisation including oncology, ophthalmology, obstetrics & gynaecology, executive & corporate health screening, general medicine, dermatology, general surgery, orthopaedics, otorhinolaryngology (ENT), dentistry and urology.

Building a platform of seven specialisation pillars via organic and inorganic growth. 

  • Management plans to build a platform of seven specialisation pillars; namely oncology, ophthalmology, obstetrics & gynaecology, aesthetics, sports medicine, dental and corporate / executive health screening. Management aims to achieve top three in each of its seven pillars in Singapore.
  • Currently, three out of seven specialisations (oncology, ophthalmology and obstetrics & gynaecology) contribute 63% of group revenue while aesthetics contributes 20%.
  • In 1H16, revenue grew 34% y-o-y largely led by its health segment (specialist clinics).

Expansion into overseas market. 

  • In the medium term, SMG plans to bring its platform to overseas market. Countries of interest include Vietnam, Indonesia and Malaysia. 
  • Currently, SMG has a strong franchise in drawing patients from Vietnam, especially for the oncology and orthopaedic segment. 
  • In Indonesia, SMG partners PT Ciputra (40:60 JV) to operate an eye clinic at Lotte Shopping Mall, Kuningan, Jakarta which is currently still loss-making.

Rachel Lih Rui Tan DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-10-12
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.96 Same 0.960
NOT RATED Maintain NOT RATED 0.80 Same 0.80
NOT RATED Maintain NOT RATED 99998 Same 99998
NOT RATED Maintain NOT RATED 99998 Same 99998
NOT RATED Maintain NOT RATED 99998 Same 99998