Navigating Singapore ~ Healthcare - CIMB Research 2016-12-05: Neutral

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Singapore Strategy Healthcare Sector

Navigating Singapore ~ Healthcare - Neutral

Trend #1: Domestic patient growth will drive volumes; medical tourism remains weak but is perhaps not as bad 

• On patient volumes, we see growth coming mostly from domestic patients.
• Weak medical tourism numbers into Singapore are well known and the entire industry was impacted. However, the silver lining is that we do not see a broad-based decline in medical tourism numbers. 
• A fairer picture is that we are not seeing growth in foreign patients. We attribute this to the fact Singapore healthcare has built up its expertise in centres of excellence and higher intensity non-elective procedures, for which demand is relatively more resilient compared to elective procedures.
• Key differentiators in the ASEAN medical tourism industry include: 
  1. type of surgery: Thai hospitals are more renowned for elective surgeries vs. nonelective surgeries in Singapore, 
  2. price: treatment costs in Malaysia and Thailand are c.50% lower than Singapore, and 
  3. country of origin: Singapore is heavily dependent on Indonesia as a source of medical tourists whereas Thailand sees more Middle Eastern patients.

Trend #2: Increased domestic volumes in part driven by higher insurance coverage 

• Integrated Shield Plan (IP) coverage has increased significantly and now covers c.2/3 of the Singapore resident population (2010: 55%). This is on the back of a 6% CAGR in the number of policyholders with IPs. 
• It is not unexpected that this also 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%). In fact, growth in private hospital admissions has doubled public hospital admissions in recent years, growing at 5% CAGR vs. the public sector’s 2.5% CAGR. We therefore see a continued trend in favour of private healthcare consumption, helped by increased insurance penetration.
• Key beneficiaries are RFMD and IHH.

Share price performance less driven by underlying earnings 

• We do not doubt that the structural themes of an ageing population, increased affluence and deeper insurance penetration will ultimately drive the longer-term demand for healthcare consumption. We think it is also in part due to these themes that we are seeing an unprecedented pace of capacity expansion by ASEAN hospital players. 
• While the aggressive expansion plans of private healthcare players also translated to an inevitable drag on margins and profitability, we note that share price performance appears to be insular to underlying earnings and very resilient to earnings cuts. Instead, we see absolute stock price performance being more driven by events (e.g. announcing new expansion plans) and M&A. This is especially true for small/mid-cap healthcare players (SMG SP, SOG SP, HMI SP), who all did very well on the back of a slew of M&As or corporate restructuring. 
• We expect to see more healthcare groups attempt to come to market in the year ahead and replicate the classic M&A strategy made famous by Q&M.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2016-12-05