Singapore Healthcare - Maybank Kim Eng 2017-06-13: Hong Kong Marketing Feedback

Singapore Healthcare - Maybank Kim Eng 2017-06-13: Hong Kong Marketing Feedback Singapore Healthcare Sector Healthcare Stocks Picks IHH HEALTHCARE BERHAD Q0F.SI SINGAPORE MEDICAL GROUP LTD 5OT.SI RAFFLES MEDICAL GROUP LTD BSL.SI HEALTH MANAGEMENT INTL LTD 588.SI

Singapore Healthcare - Hong Kong Marketing Feedback

Singapore healthcare still an under-discovered space 

  • We just concluded two days of analyst marketing in Hong Kong. Our 3 key takeaways are: 
    1. Despite decent YTD sector performance for the smaller counters, the sector is still under the radar due to size and liquidity factors; 
    2. Many investors were impressed with the expansion track record and growth plans of the smaller companies; and 
    3. Despite being more capital intensive with a longer gestation period for expansion, most investors favoured hospital groups, due to more resilient earnings and lower execution risks. 
  • The concerns over most asset-light-players are higher execution and revenue concentration risks, as well as high P/E valuations. Maintain HMI and SMG as our top sector picks.

Established hospital groups preferred 

  • Investors preferred hospital groups with established track records, strong asset bases and resilient earnings due to the high barriers of entry. However, the key concerns are: 
    1. execution risks for new market expansion; 
    2. high valuation, in terms of P/E multiple; and 
    3. rising competition. 
  • Several investors concur that DCF valuation and EV/EBITDA are more suitable to value hospital groups, given high upfront capex and long gestation period for the opening of new hospitals.

Asset-light-model still a new concept 

  • Specialist clinic chains that depend highly on the number of doctors for growth, is still a relatively new concept. Investors find the business more risky, due to: 
    1. revenue concentration risks from a few doctors, especially for smaller groups; 
    2. high dependency on M&A for growth, which could pose higher execution and integration risks; and 
    3. dependency on share price for cheap financing of M&A. 
  • However, investors note that these players could deliver quicker growth and are trading at lower P/E multiples.

Maintain positive sector view, top picks: SMG & HMI 

  • Maintain POSITIVE rating on Healthcare Sector based on three investment themes: 
    1. asset-light players are better able to consolidate the industry and capture higher rates of growth; 
    2. established players who can replicate success overseas will tap into new growth opportunities; 
    3. positive structural trends from an ageing population, rising affluence, and increasing prevalence of chronic diseases. 
  • Top healthcare sector picks are SMG and HMI due to their rapid growth and better prospect overseas. However, we are mindful of the risks from: increasing regulations; slowing medical tourism; and intensifying competition.
  • We think good execution, improved track record and market discovery could lead to a rerating of the small cap stocks under our coverage. 

Key discussions for stocks 

Health Management International HMI 

  • Growth drivers beyond hospital consolidation, including organic growth from two existing hospitals and the potential of further expansion.
  • Key criteria for the acquisition of a third hospital, including the bed size, geographical considerations and potential synergies with its existing two hospitals.
  • Medical tourism, including the key drivers for attracting patients, potential markets, and differentiating factors.

Singapore Medical Group SMG 

  • Main growth and share price drivers for the company, which included discussions of potential M&A, existing market share in terms of doctors, and key specialties that the company focuses on.
  • Organic expansion strategy, including the growth rate of the Singapore healthcare industry, targeted hiring of new doctors each year, and specialties that require more new hiring.
  • Execution risks for M&A, which include management of senior doctors, the negative impact of weak share price performance for using shares as M&A currency, and the potential departure of key contributing doctors.

Raffles Medical Group RMG

  • Growth potential from local and overseas expansion. Update on the capacity increase from the Raffles Hospital expansion in Singapore. Also, the bed capacity and estimated contributions from upcoming China hospitals.
  • Execution risks for new hospitals in China, which include recruitment of doctors, attracting local patients, and potential competition from more private hospitals.
  • Potential slowdown in medical tourism, as the neighbouring countries around Singapore, such as Malaysia and Thailand improve their healthcare standards.

IHH Healthcare

  • Newly-opened Gleneagles HK hospital, including start-up costs, gestation period, progress in securing new doctors and potential profitability.
  • Growth drivers for key markets, including Singapore, Malaysia and Turkey.
  • Singapore has seen a recovery in medical tourists and continues to focus on complex procedures, while Malaysia continues to grow via organic expansion of more advanced hospitals.
  • Execution risks for newer markets, including China and India. Key risks discussed included recruitment of doctors, attracting patients from government hospitals and regulatory issues.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-06-13
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 6.17 Same 6.17
BUY Maintain BUY 0.780 Same 0.780
BUY Maintain BUY 1.540 Same 1.540
BUY Maintain BUY 0.840 Same 0.840