Healthcare Overall - CIMB Research 2016-11-02: Insurers are footing the bill

Healthcare Overall - CIMB Research 2016-11-02: Insurers are footing the bill RAFFLES MEDICAL GROUP LTD BSL.SI

Healthcare Overall - Insurers are footing the bill

  • Integrated Shield Plan penetration has increased significantly and now covers c.2/3 of the Singapore resident population, driving up the private sector’s market share.
  • A better insured population has a big impact on private hospitals. We estimate insurance payments make up more than 60% of revenue for both Raffles Medical Group (RFMD) and IHH Healthcare Bhd (IHH).
  • The industry is considering removing riders to prevent overconsumption, but we do not view this as a big threat to private patient volumes.
  • Improved public healthcare infrastructure potentially poses a bigger threat, especially in a weak macro climate where patients trade down.
  • We remain Neutral on large cap healthcare. Cost pressure is the key concern.

Integrated Shield Plan (IP) coverage has increased significantly 

  • IPs provide access to higher coverage in private hospitals which leads to increased private healthcare consumption, in our view. IP coverage has increased significantly and now stands at c.65% of the resident population (2010: 55%). This coincided with private inpatient admissions outpacing public admissions, with the private sector’s share of admissions increasing to 23.6% in 2015 (2010: 21.5%). 
  • Given the lagged effect between coverage and consumption, we see a continued trend in favour of private healthcare.

Insurance payouts form the majority of private hospitals’ revenue 

  • We believe a better insured resident population has a big impact on private hospitals.
  • First, domestic patients make up c.70% of both RFMD and IHH’s Singapore hospital revenue and have been a key driver in recent years due to the weakening medical tourism. 
  • Second, even though the cash/insurance revenue breakdown seems fairly high (RFMD: 80/20; IHH Sg: 50/50), insurance payments realistically make up the majority of revenue as patients would first pay cash and subsequently process insurance claims.

Inconclusive evidence whether riders drive private consumption 

  • On the debate whether IP riders further promote private healthcare consumption, industry sources report that policyholders with riders have 
    1. a higher propensity to consume private hospital services (46% vs. 21% without riders) and 
    2. higher overall average bill sizes (c.20% higher). 
  • However, there could be a sample selection bias as policyholders with riders would typically be on higher insured IPs that cover private hospitals and vice versa.

Improved public sector infrastructure could be a threat 

  • We think the bigger imminent threat could come from the improved public healthcare infrastructure. To some extent, capacity constraints and waiting times have pushed patient traffic to the private sector but we are already seeing signs of improvement. 
  • The public sector has vastly improved its manpower capabilities and on hardware, the government has announced plans to increase the public bed supply by c.30% by 2020.

IHH our preferred pick in the sector 

  • Overall, we think the prevalence of IPs has and will continue to drive long-term private healthcare consumption. Furthermore, while riders arguably promote private healthcare consumption, we believe the potential removal of such riders is a smaller negative than the improved public system. 
  • RFMD could see a greater impact given that its revenue exposure is still entirely domestic. 
  • IHH remains more diversified and has clear catalysts from Gleneagles HK. IHH remains our preferred pick.

Highlighted companies 

IHH Healthcare Bhd - ADD, TP RM7.30, RM6.40 close 

  • We like IHH for its diversified revenue streams. 
  • The group is also adding capacity in its existing key markets and new markets. 
  • Catalysts include Gleneagles HK (opening 1Q17). 

Raffles Medical Group - REDUCE, TP S$1.46, S$1.52 close 

  • RFMD’s exposure is still entirely domestic. 
  •  Valuations look rich at 26x CY17 EV/EBITDA for 6% 3-yr EPS CAGR. 
  • The company is still facing headwinds from cost pressures and slowing demand.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2016-11-02
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 1.46 Same 1.460
ADD Maintain ADD 7.30 Same 7.30