Healthcare Sector - UOB Kay Hian 2017-06-19: Medical Tourism ~ Singapore Slows, Malaysia Grows

Healthcare – Singapore - UOB Kay Hian 2017-06-19: Medical Tourism ~ Singapore Slows, Malaysia Grows Singapore Healthcare Sector Medical Tourism SINGAPORE O&G LTD. 1D8.SI HEALTH MANAGEMENT INTL LTD 588.SI RAFFLES MEDICAL GROUP LTD BSL.SI IHH HEALTHCARE BERHAD Q0F.SI

Healthcare – Singapore - Medical Tourism ~ Singapore Slows, Malaysia Grows

  • We expect medical tourism growth in Singapore to decelerate going forward, as competitive pressure from neighbouring ASEAN countries such as Malaysia intensifies. 
  • Our top pick is Malaysia-based hospital operator HMI, which is gaining grounds in terms of quality and service offerings, but still at a fraction of the bill sizes in Singapore. 
  • While we remain positive on the long-term growth strategy of RMG and IHH, we believe mid- to near-term growth outlook will be hampered by elevated expansion cost. 
  • Maintain MARKET WEIGHT.


Singapore medical tourism may be shifting to lower gear. 

  • While Singapore still remains a compelling medical tourist destination in terms of service quality and clinical outcomes, we believe foreign patient growth may decelerate gradually as competitive pressures from neighbouring ASEAN countries grow. For instance, IHH has seen a shift in patient mix over the past years. In 2013, local: foreign patient mix stood at 60:40 but has since shifted to 70:30. 
  • Separately, we observed RMG has seen a slowdown in medical tourism in the past years, with the group estimated to record a low single-digit drop (in %) in foreign patient inflow in its latest 1Q17 results.

Patient volume growth to be supported organically. 

  • Going forward, we expect patient growth to stem largely from local patients, underpinned by favourable demographic trends such as ageing demographics as well as rising income levels. 
  • Moreover, we continue to expect spillover effects from public hospital, taking into consideration that bed occupancy rate in public hospitals still remained very elevated (82%-97% based on latest data v 60- 70% at private hospitals), even exceeding the standard levels (82-85%) by Australian Medical Association and Australasian College of Emergency Medicine.

Decelerating revenue intensity growth in Singapore. 

  • Given that the number of lower margin local patient growth is expected to outpace that of higher-margin international patients, we expect revenue intensity growth to soften in Singapore. 
  • Using IHH’s Singapore operations as a benchmark, we note that despite relatively strong growth in patient load, quarterly revenue intensity growth has been on a decline since 2013. While quarterly growth used to track an average of 5% yoy between 2013-14, it has declined to the level of 1-2% yoy between 2015-16, which we estimate to be the normalised level going forward.

Exporting service overseas for long-term growth but at near-term cost. 

  • Besides diversifying the concentration of medical patients to include Middle East as well as the Indochina regions, Singapore hospital operators have embarked on more aggressive expansion strategies, prominently in Greater China. For instance, RMG has two China hospital projects in the pipeline, Raffles Shanghai and Raffles Chongqing, which will both complete in 2018. IHH has three China greenfield projects underway, in Chengdu (targeted completion 2018), Nanjing (2019) and Shanghai (2020). 
  • While we view these expansions positively, we expect start-up costs to crimp earnings growth in the near to mid term. Typically, we estimate new hospitals to take an average of 18-24 months’ runway before reaching EBITDA-breakeven level.

We find Malaysia medical tourism attractive. 

  • We like Malaysia medical tourism for its stronger growth outlook, which is bolstered by favourable government initiatives, geographical proximity and cultural affinity to its largest market Indonesia.
  • According to Malaysia Health Travel Council, Malaysia has seen the number of healthcare travellers grow by more than 40% since 2011 (2011: 643,000 vs 2016: 921,000), where medical tourism is anticipated to achieve target revenue of RM1.3b in 2017 from RM1.15b in 2016. 
  • Separately, a report by Transparency Market Research projects the medical tourism market to grow at a 30% CAGR to US$3.5b between 2016 and 2024.

Malaysia playing catch-up, upscaling quality…. 

  • Malaysia private hospitals are gaining ground in terms of service quality and infrastructure. For instance, HMI has been stepping up efforts to develop Centres of Excellence by hiring more sub-specialties as well as expanding the comprehensiveness of services. 
  • Furthermore, increased accreditation of healthcare facilities by internationally-recognised programme MSQH has also helped to raise confidence in hospital standards. HMI’s Mahkota has been MSQH accredited since 2014, with Regency in the process of getting accredited.

…at a fraction of Singapore bill sizes. 

  • Notably, despite the improving quality of its services, hospital bill sizes still constitute a fraction of Singapore private healthcare costs. Comparing private hospitals under our coverage, we note average bill sizes at HMI’s hospitals are approximately 15-30% that of Singapore’s. 
  • Furthermore, a weak ringgit may also be a silver lining that can help Malaysia gain price advantage over its regional peers for medical tourism purposes.

Revenue intensity rose in tandem as the number of medical tourists climbed. 

  • We observe that revenue intensity at Malaysia’s private hospitals has been on the rise, which we reckon could be due to the increased complexity of procedures on the back of foreign patient inflow. 
  • IHH Malaysia was able to record double-digit growth in foreign patient inflow in its most recent 1Q17 results, with revenue intensity growing 11% yoy.
  • Meanwhile, HMI has managed to maintain a consistent foreign patient load of 20-22% for the past two years. Commendably, even with just a 1.4% growth in total patient load in 3Q17, the group managed to increase inpatient and outpatient bill size by 6-7% yoy, which we believe is driven by higher-margin foreign patients.

Maintain MARKET WEIGHT, prefer HMI and SOG. 

  • With private hospital operators embarking on aggressive overseas expansions, we believe near-term earnings will be hampered by expansion costs. We prefer companies that offer near-term earnings growth outlook. 
  • Our top picks are HMI and SOG, while we maintain HOLD for RMG and IHH on near- to mid-term margin pressure on expansion plans.

HMI is our top pick, with BUY and DCF-based target price of S$0.83. 

  • We are upbeat on the group’s growth prospects, driven by its focus on high-revenue intensity cases and positive medical tourism outlook in Malaysia. 
  • HMI is trading at a FY18F PE of 29x, a 31% discount to peers (42x), which we do not think is justified given the strong EPS growth forecast of HMI (3-year FY17-19F EPS CAGR of 32% vs peers of 18%).

BUY for SOG with PE-based target price of S$0.74. 

  • SOG remains a compelling mid-cap healthcare stock, with an attractive dividend yield of 3-4% and strong EPS growth (3- year EPS CAGR of 20%). 
  • With paediatrics service commencing in 2H17, this will help to complement the group’s existing offerings in women’s health.

IHH: Resilient operations with long-term growth runway, but priced in. 

  • We like IHH for its resilient operations in key home markets across Singapore, Malaysia and Turkey, while new ventures in growth markets such as Hong Kong, China and India will provide growth impetus for the next 5-10 years. That said, we believe at current trading levels of 53.2x FY17F PE vs peers of 42x, the stock is fairly valued.

RMG: Margin pressure and lacking near-term catalysts. 

  • We maintain HOLD with DCF-based target price of S$1.52, given near-term revenue headwinds and upfront costs.
  • Nevertheless, we believe the group’s runway for long-term growth will be significantly enhanced for the next 10 years. This will be from end-18 when its new hospitals in Shanghai and Chongqing are completed.

Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-06-19
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.74 Same 0.74
BUY Maintain BUY 0.830 Same 0.830
HOLD Maintain HOLD 1.520 Same 1.520
HOLD Maintain HOLD 1.800 Same 1.800