Singapore Healthcare Sector - CIMB Research 2018-01-07: Checking The Pulse For 2018

Singapore Healthcare Sector RAFFLES MEDICAL GROUP LTD BSL.SI IHH HEALTHCARE BERHAD Q0F.SI HEALTH MANAGEMENT INTL LTD 588.SI TALKMED GROUP LIMITED 5G3.SI Q & M DENTAL GROUP (S) LIMITED QC7.SI

Singapore Healthcare Sector - Checking The Pulse For 2018

Healthcare sector underperformed the STI in 2017, largely due to new hospitals.
We think such gestation costs are priced in, but expect sector sentiment to improve when these overseas hospitals stabilise, and stronger catalysts emerge.
Maintain Neutral; our top large and small cap picks are IHH and HMI, respectively.
Three main healthcare changes to watch for: opening of more public hospital beds, shift from hospital-centric model to primary care, and introduction of fees benchmark.
2018F key theme lies in overseas execution, with M&As as the secondary theme as rising competition could drive industry consolidation.

Transforming Singapore Healthcare

Structural trends in Singapore

The vital signs of the healthcare state point to a changing healthcare landscape. Singapore continues to face an ageing population, rising chronic disease prevalence, escalating healthcare costs and increasing complexity of care needs. These trends not only underscore the increasing importance of primary care sector, but have also ignited greater efforts by the Ministry of Health (MOH) to strengthen the nation’s overall healthcare ecosystem, as seen in its recently implemented Healthcare 2020 Masterplan and the study of Health Insurance Taskforce recommendations.
We outline the following initiatives that one should be aware of, and attempt to assess in our report the potential beneficiaries in Singapore’s healthcare sector:
1. increasing capacity of public hospitals,
2. shift from hospital-model to primary care, and
3. introducing new benchmarks for doctors’ fees.

#1 More public hospital beds in the pipeline, but unlikely to take market share from private hospitals

Hospital beds in Singapore, including both public and private hospitals, have registered 2.3% CAGR since 2006 to 13,931 beds at end-2016. Meanwhile, the proportion of beds per 1,000 people stayed largely within the range of 2.1 to 2.5, similar to UK’s 2.6 hospital beds per 1,000 population, and the US’s 2.8.
We expect the opening of new public hospitals and additional infrastructure investments to culminate into more hospital beds for Singapore.

Another 4,250 public hospital beds to be added in the next five years.

Even with the upcoming Sengkang General and Community Hospital (2018), Outram Community Hospital (2020), Integrated Care Hub (2022) and Woodlands General Hospital (2022), there will only be an additional 3,200 acute care beds and 1,050 community care beds.
Based on the pipeline of new hospitals, as well as a projected population size of 5.8m to 6.0m by 2020 and 6.5m to 6.9m by 2030, according to the 2013 government White Paper, Singapore’s hospital bed to 1,000 people ratio will inch up slightly to an estimated 2.6-2.8 over 2020 to 2030, still below the Organisation for Economic Cooperation and Development (OECD) countries’ average of 4.7 acute hospital beds per 1,000 population in 2015.
Japan and Korea have the highest hospital bed density (as of 2015 per 1,000 population), at 13.2 and 11.5 respectively, which we attribute to the higher proportion of ageing population. In 2016, the number of elderly (aged 65 and above) comprised 27.7% and 13.6% of the total population in Japan and Korea, respectively, based on local government estimates.

Unlikely to have much impact on private hospital operators.

Private healthcare providers are also increasing their bed capacity, as seen in 2H17 opening of c.30 more beds at Mount Elizabeth Novena (under IHH Healthcare), and the upcoming opening of Raffles Hospital extension (under Raffles Medical Group) in 1Q18, which could add another 50-100 beds for the group.
We do not foresee any threat of bed oversupply for these private hospital operators given the current low hospital bed density and long waiting time at restructured hospitals in Singapore. Neither do we expect the influx of hospital beds to wriggle market share away from private hospitals, in terms of inpatient admissions, as the percentage of non-public admissions has been stable over the past few years.
We also note that the increasing patients’ preference towards “day procedures” and “outpatient treatment” has also made bed capacity a less relevant constraint to growing hospital patient volume.

#2 Primary care to be the future healthcare delivery, potentially benefitting private GP players

While the government has focused more on providing tertiary care and easing hospital bed crunch in the past, it is increasingly moving towards a sustainable healthcare system, with primary and preventive care being the cornerstone of such a system. We believe earlier diagnosis and prevention can help better manage overall healthcare costs and reduce the burden on tertiary care facilities.
Initiatives that reflect national focus towards primary care include:
1. Introduction of National Electronic Health Record (NEHR) in 2011 to integrate and share medical records nationwide to support the seamless delivery of patient care, across both public and private healthcare providers.
2. Launch of the Community Health Assist Scheme (CHAS) in 2012 to enable Singapore Citizens from lower- to middle-income households to receive subsidies for medical and dental care at participating GP and dental clinics near their homes.
3. Formation of the Primary Care Network (PCN) in 2012 to encourage GPs to form virtual networks to provide team-based care to patients, with funding and administrative support from MOH.
4. Implementation of the Primary Care Master Plan in 2014 to promote the participation of public and private sectors in providing comprehensive and integrated care to patients with stable chronic conditions – such as SingHealth setting up Family Medicine Clinic at Chinatown Point.
5. Announcement of proposed changes in doctors’ training scheme in 2017 - MOH intends to review doctors training to become specialists, and also grow the number of medical trainees in family medicine from 387 over 2012- 15, to 504 over 2016-19, as part of the Healthcare 2020 Master Plan and Healthcare Manpower Plan 2020.

Grooming more non-specialists for Singapore’s future healthcare needs.

From 2008-2016, the growth in the number of specialists (6.9% CAGR) in Singapore outpaced that of non-specialists (6.2% CAGR), improving the overall doctor per 1,000 population ratio from 1.5 to 2.2, which is above the average ratio in Hong Kong and Taiwan, but at the lower range of other developed countries like Japan, UK and the US.
We think such growth trends are likely to change, as the government accelerates efforts towards strengthening primary care. For instance, MOH announced on 30 Sep 2017 its intention to review the doctors’ residency programme, which is currently adapted from the US. This is part of the move to encourage more doctors to practice family medicine, and have the right mix of specialists, including internal medicine, geriatrics and palliative care.
Meanwhile, the annual intake of medical students into local universities has also increased from 354 in 2012 to 471 in 2016, with plans by MOH to grow to 500 in 2018F, supplemented by returning Singaporean doctors who are trained overseas. As of end-2016, the medical talent pool comprised 84% local doctors.

Potential beneficiaries of shift towards primary care.

Unlike hospitalisation care which is largely provided by the public sector in Singapore, about 2,000 private general practitioners (GPs) look after 80% of primary care needs, with the remaining 20% provided by the government polyclinics, according to MOH press releases. Private GP clinics providers like Raffles Medical Group could benefit from
1. the increasing focus on primary care as government subsidies were extended to private GP clinics, and
2. possible spillover effect from overcrowded public polyclinics.
MOH reported a median wait time of 17-28 minutes in March 2017, against the median time of 14 minutes in 2015.
Raffles Medical Group owns 40-50 GP clinics (CHAS and Medisave approved) country-wide and the healthcare services segment contributed to 44% of its FY16 revenue and 17% of EBIT.
We note that earnings contribution from primary care pales in comparison with tertiary care (i.e. running a hospital), due to the lower average bill sizes and profitability. However, investments in primary care vs. tertiary care are generally less capital-intensive and have a shorter payback period. Even smaller-cap specialist healthcare groups like ISEC Healthcare (ISEC SP, Not rated) and HC Surgical Specialists (HSP SP, Not rated) have also jumped onto the GP bandwagon by purchasing stakes in JL clinics and HMC Medical, respectively.

Aged care possibly an alternative to invest in Singapore’s healthcare.

Apart from investments in public hospitals and more polyclinics, there is also an increasing national focus to build and expand more aged care facilities to cope with an ageing population in the future. From 2017 to 2020, MOH plans to add another 4,200 nursing home beds, 6,200 day care places and 2,500 home care places.
SGX-listed companies that currently have exposure to this area include Singapore Press Holdings (SPH SP, Reduce) which acquired Orange Valley Healthcare (operates five nursing homes and two senior activity centres) in 2017; and G.K.Goh Holdings (GKG SP, Not Rated) which recently invested in a Singapore-based nursing home and owns a 47.6% stake in Opal Aged Care in Australia. First REIT (FIRT SP, Hold) also has three Singapore-based assets in its portfolio, namely Pacific Healthcare Nursing Home I and II, and The Lentor Residence.

#3 New guidelines on medical practitioners’ fees

The Singapore Medical Association (SMA) first introduced the Guidelines on Fees in 1987, which covered 1,500 procedures broadly categorised into:
1. General Consultation fees,
2. Professional Fees, and
3. Fees for Operations and Anaesthesia.
The guidelines were removed in 2007 as they were deemed anti-competitive then by the Competition Commission of Singapore. Intended to improve price transparency for patients, the topic of developing new benchmarks for doctors’ fees resurfaced 10 years on, following recommendations made by the Health Insurance Task Force, which was set up in Feb 2016 to study Singapore’s health insurance, healthcare cost inflation and rising claims costs.
Pending more details of the new benchmarks to be unveiled in 2018, we are overall neutral on this change, as we think it is unlikely to be a catalyst for Singapore listed healthcare companies. More initiatives are needed to complement the fee benchmarks to reap full benefits for the end consumers, in our view.

What we foresee as potential implications for the industry …

We deem it less relevant for the primary care market, given that it is more homogeneous and recurring in nature. Patients are also more cognisant of pricing information and drug prescription.
Improves price transparency for highly specialised services, particularly useful for foreign patients to make more informed decisions, as well as insurance companies for their product design and pricing.
But may not be beneficial to end consumers. Existing medical practitioners charging below the fee benchmarks may take the opportunity to revise their charges higher; at the same time this may present little incentive to adjust prices below the recommended range, for fear of perceived quality discrepancy.
Younger doctors and new private practice entrants may use the lower range of fee benchmarks as a yardstick to set their prices.

Potential stock implications.

Amongst the companies under our coverage, we suspect the impending changes to the Guidelines on Fees would have the biggest impact on Talkmed, a premier provider of medical oncology and palliative care in Singapore, whose doctors’ fees we believe are at the higher end of the market range. Raffles Medical Group might also face some pricing pressure, even though its treatment charges are still below the top tier of the private hospitals’ fees.
On the other hand, a pure hospital operator like Parkway Hospitals (under IHH Healthcare) could be spared from this new implementation to some extent, as it does not recruit its own specialists.
Greater price transparency could also boost medical tourism in Singapore, from which both Parkway Hospitals and Raffles Medical Group could benefit as overseas patients currently account for an estimated 30% of their total revenue.
We think Q&M Dental and Health Management International (HMI) are unlikely to be negatively affected, given that they are already offering competitive pricing, and in the case of HMI, both its hospitals are based in Malaysia.

Outlook for Singapore Healthcare sector

What catalysts lie ahead in 2018?

Last year was a muted year for most healthcare stocks in Singapore, with averaging returns of -14.8% vs. +18.1% gain in STI. There were snippets of M&A action, including Singapore Medical Group’s (SMG SP, Not rated) purchase of paediatric clinics, OUE’s takeover of International Healthway Corporation (now known as OUE Lippo Healthcare), and Rowsley’s proposed acquisition of healthcare assets (Thomson Medical and TMC Life Sciences).
We also saw mixed performance in medical tourism, with Raffles Medical Group reporting flat foreign patient numbers in 2017, while Parkway Pantai Singapore operations recorded 25% growth in patients from Indonesia and Indo-China.
We think 2018F could be another unexciting year for the healthcare sector with medical tourism likely to remain stable, barring a few key catalysts – we expect hospital operators to execute their North Asia expansion plans, specifically Chongqing (estimated in 4Q18F) for Raffles Medical Group, and Gleneagles HK (GHK) and Chengdu (2H18F) for IHH.
We also believe M&As will continue to be a growth driver for most healthcare companies in Singapore.

Medical tourism – here to stay but hard to grow

Singapore’s quality healthcare is internationally recognised – in 2014, it was ranked first for most efficient healthcare system, out of 51 countries, by Bloomberg. Its other credentials include second ranking in the world for healthcare outcomes according to The Economist Intelligence Unit in 2014, as well as the top global favourite medical tourism destination in PHD Chamber Medical and Wellness Tourism Report 2013.
While Singapore healthcare sector is likely to maintain its international standing, its competitors in neighbouring countries like Malaysia and Thailand are fast catching up in terms of healthcare quality and international accreditation. The strong Singapore dollar against regional currencies (with THB being the exception) and potential hike in goods and services tax (GST) remain as possible deterrents, but private healthcare groups are intensifying efforts to reach out to both new and existing overseas markets.
Overall, we expect medical tourism in Singapore to see little growth in 2018F.

Sector performance now depends on companies’ overseas delivery

Since 2014, most healthcare companies in Singapore have ventured overseas to seek growth, as medical tourism slows in the face of rising competition from regional peers in Malaysia and Thailand. By leveraging their operating track record and established brand names, the likes of “Gleneagles”, “Raffles Medical”, “Q&M” and “Singapore Cancer Centre”, these companies seek to capitalise on growth opportunities in the developing markets.
In 2018, North Asia expansion plans will take centre stage for both IHH and Raffles Medical Group -- with continual ramp-up of Gleneagles HK (GHK) and targeted 4Q18 opening of 350-bed Chengdu for the former, and the 2H18 opening of 700-bed Chongqing hospital for the latter.
Gestation from these new hospitals has largely been priced in, and we think the start-up costs for both Chongqing and Chengdu would be less extensive as compared to GHK, given
1. the asset-light model for Chengdu hospital, and
2. the hospital beds will be opened in phases (vs. 500 beds all at once for GHK).
Stronger-than-expected earnings delivery from their respective new hospital/s is a potential catalyst for both Raffles Medical Group and IHH, in our view.

M&As still a driver for the healthcare sector

In recent years, we saw a series of industry consolidation by several asset-light specialist groups, which commonly employ an acquisition strategy of majority stake purchase at 10-15x P/E multiples, in clinics that offer them diversified healthcare exposure, using a combination of cash and shares. Companies that fall within the “asset-light specialist” category include Q&M Dental, Singapore Medical Group, Singapore O&G, ISEC Healthcare, Talkmed and HC Surgical Specialists.
We expect this trend to sustain into 2018F, mainly for ISEC Healthcare (ISEC SP, Not rated) and HC Surgical Specialists (HSP SP, Not rated) which we deem as potential laggard plays. For companies like Singapore Medical Group (SMG SP, Not rated) and Singapore O&G (SOG SP, Not rated) which already had an acquisition spree earlier, 2018F could be the year of organic growth as they focus on improving operational efficiencies, extracting synergies and possibly hiring of new doctors.
We also reckon this M&A fever could now spill over to asset-heavy hospital operators, especially among those which can replicate their earlier M&A success. In this case, IHH is well-positioned to pursue acquisitions in India as valuations of potential targets now look more attractive, and its recent issuance of US$500m senior perps could serve as a sizeable, timely war chest. HMI could similarly benefit from possible regional partnerships with the recent S$11m new share placement to Heliconia Capital Management, following their consolidation of minority interests in both Mahkota Medical Centre (MMC) and Regency Specialist Hospital (RSH).
Lastly, we also highlight Rowsley (ROWS SP, Not rated) as a new “re-entrant” to Singapore healthcare landscape, and potentially interesting stock to watch out for.

Rowsley returns with Thomson Medical.

On 18 Jul 2017, Rowsley announced its proposed acquisitions of a 100% stake in Thomson Medical and 70.36% in TMC Life Sciences (TMCLS), as it expands into healthcare business from a multidisciplinary real estate company. Thomson Medical was previously delisted from the Singapore Exchange in 2011, at which point it was valued at an estimated S$513m, according to past SGX filings. It has since grown from 11 specialist outpatient clinics in FY11 to 25 in FY16, doubling its revenues and EBITDA.
Rowsley reported 9MFY12/17 net loss of S$10.6m and was in a net debt position as of end-Sep 2017. The company will be renamed Thomson Medical Group upon completion of the asset injections (subject to shareholders’ approval), potentially becoming the 2nd largest healthcare play on SGX. At S$1.6bn purchase consideration (S$1.64bn if include proposed acquisition of TMCLS warrants), this implies a FY8/17 P/E multiple of 48.8x (50x P/E) and 30.1x (30.8x) FY8/17 EBITDA for both target assets.

Valuation and Recommendations

Maintain sector Neutral, with IHH as our top large cap pick and HMI our top small cap pick

Overall, we think gestation from new hospital openings could weigh on near-term sentiment, but for large-cap hospital groups, such weaknesses are largely in the price.
We are also wary of the sector valuation, with 12M rolling EV/EBITDA at 1 s.d. above 5-year historical mean, and 12M forward P/E multiple below the historical average.
Stronger execution of overseas projects and synergistic M&As could revive interest and re-rate the sector, in our view. Hence, we maintain our Neutral stance on the healthcare sector, and switch our large-cap top pick from Raffles Medical Group to IHH.
We believe IHH is poised for strong earnings recovery over FY18-19F as GHK losses narrow on the back of patient load ramp-up, and its capex cycle is largely over.
HMI remains our small-cap top pick for its robust operations and as a proxy for improving medical tourism in Malaysia.
We continue to like Raffles Medical Group given its beaten-down share price and exposure to the China healthcare market in the longer term.
Our Hold rating on Talkmed is unchanged in view of potential stock overhang in the short term arising from the suspension of its key doctor.
We also keep Q&M Dental at Reduce despite its recent share price correction, as we see little excitement in its growth outlook, coupled with premium valuation vs peers.

Singapore Healthcare Sector Company Reports

NGOH Yi Sin CIMB Research | http://research.itradecimb.com/ 2018-01-07

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