Singapore Healthcare - Maybank Kim Eng 2017-06-05: Healthy Trends


Singapore Healthcare - Healthy Trends 

Reiterate Positive sector view; Initiate HMI w/BUY 

  • Maintain POSITIVE sector rating based on three investment themes: 
    1. asset-light players who are able to consolidate the industry will capture better 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 sector picks are SMG, HMI and Raffles Medical due to their rapid growth, better prospect overseas, and established bases.
  • However, we are mindful of the risks from: 
    1. increasing regulations; 
    2. slowing medical tourism; and 
    3. intensifying competition. 
  • We also initiate BUY call on Health Management Intl (HMI SP; Target Price SGD0.84).

1. Better growth for asset-light aggregators 

1.1 Positive on asset-light players 

  • We are more positive on the asset-light players who can accelerate growth by attracting good talents. Our top-pick in this sector is SMG. Under the stewardship of a new management, SMG has shown good progress in turning around loss-making acquisitions and it successfully acquired a large specialist group.
  • We should see more consolidation by the asset-light specialist groups, in order to gain market share and drive growth. A new trend in Singapore is the emergence of more specialist healthcare groups, which run on an asset-light model and rely heavily on growing the number of doctors and key specialties. Most groups grow organically by hiring new doctors and acquiring the businesses of established practices.
  • The specialist group has ample room to scale up given the fragmented private healthcare industry. Even the largest integrated player, Raffles Medical, commands only c.8% market share, with 121 medical specialists under its employment vs 1,470 medical specialists in the private sector.
  • The market could be much bigger as we have yet to account for the 3,052 medical specialists in the public sector, which could switch to the private sector.
  • Companies that fall into this category include: 
    1. Q&M Dental, a dental specialist group, which was the first-mover in implementing the M&A model and reinforces it with profit-guarantee and service agreements.
    2. Singapore Obstetrician Group (SOG), a specialist group focusing on the women health segment.
    3. Talkmed, a specialist group focusing on the oncology segment.
    4. ISEC, a specialist group focusing on the ophthalmology segment.
    5. SMG, a multi-specialist group focusing on women health, ophthalmology and oncology. Targets to grow other specialties including health screening, aesthetics, sports medicine and dental.
    6. HC Surgical, a specialist group focusing on the endoscopic segment.
  • Revenue growth for the industry leaders, Raffles Medical and IHH slowed down in 2016, due to softer medical tourism and lower price hikes given the weaker economy. However, this could be a temporary cyclical downturn.
  • On the other hand, for the asset-light players who took more aggressive initiative to consolidate the industry, they continued to show revenue acceleration and moved up from a lower base. In this category, the only exception is Talkmed, which has not started any M&A activities. Most of the acquisitions done are within the same specialties of the asset-light players: 
    1. Q&M’s acquisitions of dental-related players; 
    2. SMG’s acquisitions of women’s health and health screening players; and 
    3. Singapore O&G’s acquisition of a dermatology specialist. 
  • These groups aim to create synergies via: 
    1. expanding the number of specialist doctors to leverage on economies of scale; 
    2. enhance cross-selling opportunities within the group; and 
    3. mentoring opportunities and access to an established patient pool for younger doctors via acquisition of senior specialist groups.
  • Key factors that can persuade senior doctors into joining include: 
    • Share issuance to align interests and provide future upside, especially for senior doctors who are willing to accept shares as M&A currency.
    • Marketing efforts that can raise doctors’ profiles to local and overseas patients.
    • Flexible compensation package catered to doctors’ aspiration, high-performing doctors who could opt for higher variable fees, while other doctors could opt for higher fixed fees.
    • Cross-referrals within a wide and rapidly growing multi-disciplinary network.
    • Economies of scale from pooling of resources, including nurses and back office functions.
  • So far, most of the acquisitions have delivered good performance and synergies, except for: 
    1. Q&M’s acquisition of TP Dental, as issues include major write-off after the acquired failed in a new clinic opening; and 
    2. Raffles Medical’s acquisition of International SOS (MC) Holdings, the turnaround of this loss-making operation is taking longer than expected due to the high cost structure and as the existing doctors are used to serving a small group of expat patients.

1.2 Overview of healthcare players 

  • Singapore has a wide variety of listed healthcare players, in the service, manufacturing and property-related segments. 
  • Most service-related players provide specialised services and few players are fully integrated with hospitals and a large network of clinics. Non-service players include healthcare asset owners, manufacturers of healthcare-related items and pharmaceutical companies.

2. Overseas expansion for new growth engine 

2.1 Tapping growth abroad 

  • Most Singapore healthcare players have started more aggressive overseas expansion since 2014. Key drivers include healthy cash flows by established local operations, greater opportunities abroad as the frontier markets progress and slower medical tourist from traditional markets, Indonesia and Malaysia.
  • Notable overseas projects include: 
    1. Raffles Medical’s first hospital in Shanghai (2014) and acquisition of MCH (2015), with 10 clinics in Vietnam, Cambodia and China. It has also announced the second hospital in Chongqing (2017).
    2. Q&M’s two major acquisitions of dental-related businesses in China in 2014 and smaller acquisitions in 2016.
    3. IHH’s confirmation of Gleneagles the HK hospital (2013), acquisitions of two hospital groups in India (2015) and confirmation of two hospital projects in China (2016).
    4. HMI started its first Malaysia hospital, Mahkota (2000) in Malacca and second hospital, Regency (2007) in Johor. It fully acquired the stake in both hospitals in 2017. The main reason for moving overseas is the lacklustre operation of its Singapore-based Balestier Hospital, which started in 1998, due to the small scale of the hospital.
    5. SMG’s ophthalmology centre in Indonesia (2014) and clinic in Vietnam (2016).

2.2 Exporting reputable brand and unique operating model 

  • Aside from capital contributions, Singapore healthcare players have added value in overseas markets by exporting their reputable brand name and unique operating model. Most Singapore players have built a widely recognised brand name among the locals and medical tourists, from many years of delivering good quality healthcare.
  • Values added for overseas expansion: 
    1. Raffles Medical – exported its well-known “Raffles Medical” brand and high standard group practice model with regular auditing and internal referral practice.
    2. IHH – exported its well-known premium business model, along with four prestigious brands: 1) Gleneagles; 2) Mount Elizabeth; 3) Pantai; and 4) Parkway.
    3. Q&M – exported its leading dental “Q&M” brand and helped its Chinese partners to improve their operations by offering more specialists services and best practices.
    4. HMI – replicated Singapore’s independent practice model in Malaysia’s hospitals, and established the “Mahkota” and “Regency” brands in Malaysia.
    5. SMG – Started an ophthalmology centre in Indonesia and a clinic in Vietnam. Aims to export Singapore’s high-standard healthcare.
  • Historical share price performance of all players shows that profitable expansion has increased share prices.
  • Profitable overseas projects have proven to drive share price: 
    1. After Q&M acquired two profitable companies in China, Q&M's share price spiked.
    2. IHH has generated massive value from overseas expansion. It started as a Singapore centric group to become a global healthcare group. IHH's share price has more than tripled since its IPO in 2012.
    3. Raffles Medical’s share price has moved very little because its overseas ventures are not profitable yet and two hospitals are still under construction.
    4. HMI has generated good profitability from consistent growth of its two Malaysia hospitals. HMI's share price has also followed suit.
    5. SMG’s overseas operations have not started contributing. Its Indonesia and Vietnam ventures are not profitable yet.

3. Positive structural trends in the industry 

  • Demand for quality private healthcare and private healthcare expenditure are expected to continue rising due to various structural factors: 
    1. ageing population; 
    2. higher prevalence of chronic diseases; 
    3. rising affluence; and 
    4. other factors including population growth and healthcare inflation.
  • Private health expenditure per capita grew 3-14% YoY in the past five years; growth was 3% in 2015. The government has boosted spending significantly to cater to the rising demand. On the other hand, private health expenditure continued to increase. (Refer to section 3.3 for private and public health expenditure as a % of GDP.) Raffles Medical is the main beneficiary of these positive trends given its leading position in Singapore and integrated business model.

3.1 Ageing population 

  • Singapore’s aged population has increased at a faster pace than the rest. Singapore Population White Paper estimated that by 2030, the number of citizens aged 65 and above will double to 900,000 and they will make up 1-in-4 of total citizens, from 1-in-8 in 2015. 
  • Moreover, hospital admission rate and prevalence of chronic diseases for those aged above 65 yr-old has at least 19% chance of being admitted, while the population below 60 has less than 11% chance of being admitted.

3.2 Higher prevalence of chronic diseases 

  • In addition to the aging society, prevalence of chronic diseases such as cancer, heart attack and obesity has increased over the years. The reasons for the increase were due to longer lifespan and lifestyle changes including diet and exercise habits. This could lead to increase in demand for more complex specialist treatments such as oncology and cardiac treatment.

3.3 Rising affluence 

  • Rising affluence of Singaporeans has led to increased demand for better quality private healthcare and shorter waiting time. The median income has steadily increased in the past decade. As a result, the demand for private hospital beds has also followed suit, as reflected in rising: 
    1. private healthcare expenditure; 
    2. healthcare expenditure per capita; and 
    3. private healthcare expenditure as a % of GDP.
  • Private healthcare spending per capita has been rising steadily, at a 19- year CAGR of 8% to SGD1,604 in 2014, from SGD373 in 1995. The private healthcare expenditure made up c.60% of the total healthcare expenditure.
  • Private healthcare spend as % of GDP has not grown much since 2005 as GDP growth was much higher during the 2005 to 2010 period; the average growth rate for that six-year period was 7.0%.
  • From 2011-2016, the average growth rate was much lower, at 3.6%. The private health expenditure as a % of GDP continued to increase from 2011 to 2014. On the other hand, the public healthcare spend as % of GDP has been increasing quicker as the government has increased healthcare expenditure significantly to serve the rising demand from an aging population.
  • Public hospital beds and manpower have always been more dominant, for social reason, in providing affordable healthcare to Singapore citizens. However, the trend of rising affluent patients seeking better quality healthcare will continue. 
  • Singapore has implemented community hospitals for step-down care and geriatric. Also, good doctors, especially the specialists, will move to the private sector, for better pay and lighter workload. This trend should continue in the long term, the number of doctors in the private sector has recorded a 7-yr CAGR of 3.6%.
  • Furthermore, the number of specialists in the private sector has grown more quickly, at a 7-year CAGR of 5.0%.

3.4 Population growth and healthcare inflation 

  • Other structural growth factors include population growth and healthcare inflation; these should continue to support patient volume and pricing growth. To serve this rising demand, the government has increased healthcare expenditure significantly, which has resulted in increasing public contribution as a % of total healthcare expenditure.
  • As a result of the structural factors, healthcare spending is expected to continue to grow in Singapore. Other Asia Pacific countries are also expected to grow, particularly from rising affluence. Healthcare expenditure in Singapore is expected to increase at a 5-year CAGR of 12% from 2013-2018, based on Frost and Sullivan’s forecast.

4. Near-term outlook 

  • We expect the near-term performance of the private healthcare sector to improve, after a lacklustre year in 2016. Three growth drivers of the sector: 
    1. pick up of organic growth; 
    2. further improvement from M&As; and 
    3. recovery of medical tourism.

4.1 Organic growth to pick up 

  • The organic growth of the private healthcare sector should improve in 2017, after a lacklustre year in 2016, where the medical tourism industry had a flattish performance and weaker demand from the local patients.
  • This was mainly due to weaker macroeconomic performance, stemming from the contagion effect if the correction in commodity prices. In 2017, economic growth and outlook have started to pick up in many countries and this could restore demand for the pricier private healthcare services.
  • Already, IHH’s Singapore hospitals, which focus on premium services, saw a 12% YoY increase in Indonesian patients in 1Q17. However, Raffles Medical, which offers more affordable treatments, recorded a 2% decline in revenue, due to softer demand from foreign patients. We believe the demand could gradually flow through to the more affordable healthcare providers.

4.2 Acquisitions could further boost growth 

  • For 2017, most of the asset-light players have plans to pursue more M&A opportunities, to boost growth and penetrate new key specialties. Data from Bloomberg shows that there were 19 acquisitions of clinics by listed companies in the past 12 months, almost twice the amount in 2015. In addition, more deals could be further supported by the increased willingness of physicians to sell their practices to: 
    1. seek economies of scale and cross selling via a larger group; 
    2. partially realise and unlock the value of their practice, via cash and listco shares as acquisition proceeds; and 
    3. seek longevity to their business, in ensuring succession for their patients. 
  • We believe the market has yet to fully price in the potential for more M&A opportunities.

4.3 Medical tourism is showing signs of recovery 

  • Medical tourism is showing signs of recovery after a flattish year in 2016, as most overseas patients are still adjusting for the strong SGD and softer economy. In 1Q17, IHH, the largest hospital group with four hospitals in Singapore, saw a 12% increase in Indonesian patients. 
  • Also, visitor arrivals in Singapore resumed growth in 2016, after the unexciting 2015 and 2016. In addition, most currencies have stabilised against the SGD except for the MYR.
  • On the other hand, despite rising demand for medical tourism in Malaysia, local private hospitals continue to see demand from Indonesian patients, especially from the Java Island. Regional hospital operators shared that Malaysia is targeting medical tourists from different geographical locations in Indonesia, especially from the Northern Sumatera Island, due to convenience and price considerations.
  • Indonesians formed 64% of Singapore’s medical tourists as of 2014. The IDR has appreciated 1.9% on average against the SGD YTD, reversing the major depreciation from 2012-15. This could improve demand for medical tourism, we believe, as the SGD has weakened against other major currencies too, including the THB and INR, although it continues to strengthen against the MYR.

4.4 Public spending on healthcare to continue to increase 

  • The spending in the public sector is expected to continue to grow, to ensure affordable healthcare services for ageing citizens and ease congestions in the public hospitals. Easier and more convenient access to affordable public healthcare facilities could impact demand for private healthcare. 
  • The government targets to increase healthcare spending by 10%, according to its 2017 budget. Despite the improvement in the public healthcare system, the structural trend of rising affluence could continue to improve demand for better quality private healthcare. 
  • Also, we note that the market share of public hospitals has been stable, at around the 85% level since 2010 and both public and private hospitals grew at a historical six-yr CAGR of around 3%.

5. Singapore boasts quality healthcare 

5.1 Best in Asia 

  • Singapore provides the best quality healthcare within Asia. It is ranked 1st by Bloomberg Healthcare Efficiency Score, in its ability to maintain high healthcare standards without excessive spending. It has an enviable life expectancy of 82.1 years and low healthcare cost as a % of GDP of 4.5%.
  • Although spending less than 5% of GDP on healthcare, it is able to provide universal medical coverage for Singaporeans with multiple layers of care.
  • Globally, it has the: 
    1. 4th best healthcare infrastructure.
    2. 3rd lowest infant mortality.
    3. 7th highest in life expectancy.

5.2 Premium medical tourists destination 

  • Singapore markets itself as a centre for high-end medical procedures and bio-tech activities through a government-supported network of established organisations. It is the top quality and infrastructure healthcare provider, focusing on complex treatments in the fields of oncology, ophthalmology, organ transplants, stem cell treatments and neurological surgeries. 
  • With a high cost structure, there is limited room for Singapore to compete on prices. Singapore is currently the second most expensive medical tourism destination globally after Brazil and the most expensive country in Asia. 
    1. On the negative front, this has made it less competitive for medical tourism and it has been highlighted to be burdensome to the users of the medical service. In recent years, we have seen a decline in medical tourists due to higher costs and rising competition in the region. 
    2. However on the positive side, it is able to produce good quality doctors and attract the best talent in the region. For those who can’t afford private healthcare, the public segment is available at a subsidised rate.
  • Singapore has seen declining Indonesian patients due to strengthening SGD currency and higher competition in the region. However, the decline was compensated by increasing patients from IndoChina and China. In this shifting process, it is commendable that Singapore is still maintaining the revenue. 
  • Singapore will continue to appeal to the affluent segment and could benefit from the rising affluence in Asia. Frost & Sullivan expects the private hospital market of ASEAN to grow at a rate of 13% from 2015- 2020, driven by: 
    1. Overcrowded public hospitals 
    2. Urbanization 
    3. Disease and lifestyle trends 
    4. Increasing private health insurance coverage 
    5. Awareness on the importance of health management.

6. Valuation 

  • We differentiate the valuation method between hospitals and specialist groups, due to the different investment and earnings profile. 
  • Hospitals typically require high upfront capex and have a longer breakeven period due to higher depreciation and gestation period compared to asset-light specialist players. 
  • On the other hand, asset-light players could achieve quicker breakeven for their investments, as they typically involve acquisition of profitable specialist practices or hiring of new doctors.
  • In our view, valuation of healthcare companies depends mostly on growth potential and earnings stability. Specialist groups could deliver more superior growth in the short term, but hospitals could achieve more stable earnings due to higher entry barrier from asset-ownership. 
  • Valuation methodologies for stocks under our coverage:  
    • Raffles Medical: DCF - Captures steady state cash flow of Singapore’s operations and long-term potential of upcoming China hospital. 
    • IHH: SOTP - DCF of hospital operations formed bulk of our TP; this excludes the substantial depreciation of its younger hospitals, while capturing the cashflow of its operations. We used traded market value for minority stakes in other listed entities. 
    • HMI: DCF - Captures robust cash flow of existing hospitals and long-term potential of capacity expansion of hospital space in Johor. 
    • Q&M Dental: P/E (28x FY18E EPS, 1SD below LT fwd P/E mean) To price in rapid EPS contributions from: 1) quick turnaround of asset-light expansion model; and 2) M&A model, which generates immediate EPS contributions. 
    • SMG: P/E (27x FY18E EPS, avg of 2-yr fwd P/E mean of small-cap healthcare peers) 
    • ISEC Healthcare: P/E (23x FY18E EPS, LT fwd P/E mean)

7. Healthy financials on an aggregate basis 

  • The healthcare industry boasts resilient earnings, robust operating cash flows and healthy balance sheets with net-cash positions. This is attributable to the non-discretionary nature of demand for healthcare and various positive structural factors.
  • Listed companies included in our aggregated financials include: Raffles Medical, Q&M Dental, ISEC, HMI and SMG.

8. Key issues and risks 

  • Key issues facing Singapore’s private healthcare sector include: 
    1. increased regulations to prevent excessive medical bills; 
    2. slowdown in medical tourism due to the strong SGD and rising competition in the region; and 
    3. better alternatives for local patients as the public sector steps up. 
  • These could lead to increased regulations and lower demand for private healthcare services. Bearing in mind the risks, we remain optimistic on the industry, as the positive structural trends are intact and most players are already moving abroad to tap better growth opportunities.

8.1 Increased regulations 

  • To prevent excessive medical bills and maintain the high ethical standards in the private healthcare sector, The Singapore Medical Council (SMC), a governing body under the Singapore Ministry of Health, has implemented various measures. Two key measures with notable implications include: 
    1. the new regulation banning doctors from paying a variable fee to third - party administrators (TPA); and 
    2. prohibition of profit guarantees for M&A deals.
  • The new regulation from the SMC banning doctors from paying fees to third -party administrators — calculated as a percentage of fees the doctors charge their patients — could benefit the group practice model, at the expense of smaller practices and young doctors. 
  • Expected to start from Jul 2017, the rule could restrict young doctors’ ability to gain access to patients thus making it more difficult for them to build up their patient pools. TPAs in the past have been able to provide young doctors with good access to patients, and doctors were able to join TPA panel groups for a fee. With increased regulation on the fee structure, TPAs that do not hire their own doctors might see their earnings decline. 
  • In addition, new doctors would find it harder to build their patient base. On their own, most young doctors will lack the networking skills and scale to deal directly with medical insurance groups.
  • Summary of the ban on paying a % fee to TPAs: 
    1. The issue started when several unhappy doctors highlighted that fees to TPAs could be excessive and go up to c.30% of medical bills, which has inflated medical costs and eroded doctors’ profit margins. Several TPAs charge doctors based on a % of medical fees, for referring patients and placing doctors on their insurance panel group.
    2. SMC issued a new regulation banning doctors to pay a % of medical fees to TPAs and required that fees payable to TPAs to be justifiable by the amount of work done. TPAs mainly process claims and undertake administrative functions.
    3. Most of the large healthcare groups have their own corporate schemes and rely very little on TPAs. Smaller practices and young start -up doctors who rely more on TPAs for referrals and to stay on insurance panels could be impacted.
  • On the other hand, the prohibition of profit guarantee for future M&As could impact healthcare players which have been relying on acquisition strategy to expand, including SMG and Q&M. However, we note that the acquisition strategy could still continue in the absence of profit guarantee. Other safeguards for acquisition include: 
    1. issuing more shares as acquisition proceeds to ensure alignment of interest; 
    2. set financial KPIs to be met after acquisition and incentivise doctors via bonuses; 
    3. recruiting senior specialists under normal employment contract.

8.2 Slowdown in medical tourism 

  • Since 2016, the demand from medical tourists has declined, largely attributable to the strong SGD and the weaker global economy. The weakness is reflected in the revenue of large healthcare players that rely on organic growth, such as Raffles Medical and IHH. In addition, rising healthcare quality in the neighbouring countries could also create more competition for the patient pool. With its high cost structure, there is very limited room for Singapore’s hospitals to compete on prices. As such, its private hospitals should continue to target premium, price-inelastic customers. 
  • Private hospitals cater to most of the foreign patients in Singapore and 20% of the local market, owing to heavy government subsidies for citizens in public hospitals. Spending by medical tourists in Singapore grew at a 24-year CAGR of 11% over 1990-2014. Still, their 2014 spending of SGD1.0b was below their peak spending of SGD1.3b in 2007, suggesting that the industry is not immune to external shocks. These included the 2008-09 subprime mortgage crisis. From 2008-2014, the revenue from medical tourists has been fluctuating within a narrow range of SGD0.8-1.2b.
  • Indonesians formed 64% of Singapore’s medical tourists as of 2014. The IDR has appreciated 1.9% on average against the SGD YTD, reversing the major depreciation from 2012-15. This could improve demand for medical tourism, we believe, as the SGD has weakened against other major currencies, including the THB and INR, although it continues to strengthen against the MYR.

8.3 Increased spending on cheaper public healthcare system 

  • While private hospitals serve a different segment of the market, public hospitals are stepping up as government increases spending and subsidies to open more new public hospitals. Higher government healthcare subsidies and rising costs of living could encourage more Singaporeans to turn to public healthcare services, reducing their reliance on the private healthcare system. This forms a risk for the private hospitals, which are still heavily dependent on local patients.
  • However, we note that the market share of public hospitals has been stable, at around 85% level since 2010 and both public and private hospitals grew at a historical six-year CAGR of around 3%. 
  • In addition, the hospital admission rate in the private sector has kept up with the private sector and has been maintaining a stable market share of 23-24% of total admission.


John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-06-05
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.840 0.840
HOLD Maintain HOLD 0.600 Same 0.600
HOLD Maintain HOLD 6.520 Same 6.520
BUY Maintain BUY 1.540 Same 1.540
BUY Maintain BUY 0.400 Same 0.400
BUY Maintain BUY 0.780 Same 0.780