Singapore Healthcare - Maybank Kim Eng 2017-01-11: Tapping the silver dollar

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Healthcare Sector Outlook IHH HEALTHCARE BERHAD Q0F.SI RAFFLES MEDICAL GROUP LTD BSL.SI Q & M DENTAL GROUP (S) LIMITED QC7.SI ISEC HEALTHCARE LTD. 40T.SI

Singapore Healthcare - Tapping the silver dollar

Positive structural growth drivers; Top Pick Raffles 

• Singapore’s healthcare sector has been harnessing structural growth drivers like: 
  1. rising affluence; 
  2. an ageing population; and 
  3. growing medical tourism. 
• These key drivers will remain relevant and continue to support the industry’s growth. 
• Raffles Medical (RFMD SP, SGD1.47, BUY, TP SGD1.85) is our Top Pick in the sector. Its market leadership and integrated structure put it in a good position to take advantage of the structural domestic demand. Its overseas expansion is a plus point. 
• Raffles Medical is expected to perform better in 2017 from the ramp up of Orchard Medical Centre, rental income from Holland Village and better integration of newly acquired MCH.

Rising affluence 

• With GDP growth averaging c.5% in the past decade, median income in the country has been climbing in tandem. Rising affluence is typically accompanied by demand for better-quality services and shorter waiting and treatment times. As a result, healthcare spending in the private sector has been rising.

Ageing population 

• In the past decade, the population has aged. The number of citizens aged 65 years and above went from one in 11 in 2005 to one in eight in 2015. Based on the government’s 2013 Population White Paper, this is expected to increase further to one in six by 2020. 
• In addition, hospital admission rate increases with age.

Premium medical tourist destination 

• Singapore’s reputed high-end medical infrastructure and expertise in complex procedures have been drawing in medical tourists. With high price points, the bulk of the patients belong to the premium segment and are more inelastic to pricing and currency fluctuations. 
• Medical tourism revenue grew at a 10% CAGR in the last decade, to around SGD1b currently.

What to look out for in 2017: 

Raffles Medical Group

• Ramp up of Orchard Medical Centre. Started in Jun 2015, the project is improving and is expected to turn profitable within the next two quarters. Also, adjustments of various specialties should improve results.
• Rental income from new Holland Village Mall. Completed in Mar 2016, tenant demand for the project has been encouraging. 95% of the space has been committed as of Oct 2016. We expect rental revenue of SGD5.6m in 2017.
• Lower earnings drag from MCH as restructuring has been completed and operations start to ramp up. The multi-clinic group was acquired in Oct 2015 to enhance its overseas presence. Rebranding and restructuring exercises dragged earnings by around SGD2m in 2016.
• Completion of Raffles Hospital extension in late-2017, could enable scaling up of operations and rental income from unutilised space.
• What could change our view: 
  1. ramp up of Orchard Medical Centre delayed; 
  2. restructuring results and ramp up of MCH slower than anticipated; 
  3. progress of Raffles Hospital extension and China expansion slower than expected.

Q&M Dental Group

• Spinoffs of two Chinese subsidiaries are expected to be completed by 1H17, which would provide capital for its subsidiaries to execute more expansion projects.
• Ramp up of Aidite, Q&M’s manufacturing arm. It moved to a new factory in early 2016, which has nearly double its production capacity.
• During the move, production was temporarily disrupted. Sales picked up gradually in 2Q16 and 3Q16.
• Better integration of newly acquired entities and keeping costs in check. Q&M acquired four dental groups in 2016 and it’s looking for more expansion opportunities.
• What could change our view: 
  1. delay of spinoffs and expansion of subsidiaries; 
  2. ramp up of Aidite slowed; 
  3. poor cost management in integrating and expanding newly acquired entities.

IHH Healthcare

• Three new hospitals opening in 2017 in: 1) Hong Kong; 2) China; and 3) Turkey could contribute to better growth.
• Ramp up of loss-making India operation, acquired in 2015. The entity has achieved EBITDA positive since 2Q16, but it’s still loss-making.
• Continued ramp up of newer hospitals (Gleneagles Kota Kinabalu Hospital - May 2015, Acibadem Taksim Hospital - Oct 2015 and Gleneagles Medini Hospital - Nov 2015. They could lead to growing patient volume.
• What could change our view: 
  1. Delay in opening and ramp up of new hospitals; 
  2. major disruption of Turkey operations from geopolitical events; and 
  3. start-up costs in new hospitals.

ISEC Healthcare

• Earnings contribution from JL Medical group, acquired in Dec 2016.
• The group is expected to contribute around SGD1m in earnings, based on the minimum profit guarantee.
• Absence of earnings drag from closure of the Mount Elizabeth Novena Specialist Centre, in Oct 2016. It incurred an operating loss of more than SGD1m for FY15.
• What could change our view: 
  1. underperformance of newly acquired JL Medical Group; and 
  2. weaker-than-expected MYR against SGD, as Malaysia contributes around 50% of ISEC’s earnings.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-01-11

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