Healthcare Providers & Services - CGS-CIMB Research 2019-09-24: Unmasking The Effects Of Haze On Healthcare

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IHH HEALTHCARE BERHAD (SGX:Q0F) RAFFLES MEDICAL GROUP LTD (SGX:BSL)

Healthcare Providers & Services - Unmasking The Effects Of Haze On Healthcare

• Our study shows share price movements have a low correlation with haze conditions; Raffles Medical Group is more sensitive due to its Singapore concentration.
• Haze had twice contributed to higher private hospital admissions in the past; Raffles Medical Group could benefit more from patient load growth in 4Q19F if haze persists.
• Maintain sector Neutral. IHH Healthcare is more diversified and our preferred sector pick. Raffles Medical Group continues to ramp up in Chongqing and remains a HOLD for us.

HAZE VS SHARE PRICES VS REVENUE

Can haze drive healthcare share prices? Possibly yes, for a short-term rally

• Hazy skies and potentially unhealthy air quality hit Singapore in early-Sep 2019, after an almost 3-year absence since the last serious case of this phenomenon in Aug 2016. While a prolonged period of the haze could trigger respiratory problems and possibly lead to more patient visits to medical clinics and hospital admissions, medical tourism could also be impacted as foreign patients delay treatment for non-critical and elective cases.
• Given the uncertain severity and duration of the forest fires in Indonesia that is causing the haze this time round, we study if any relationship exists between haze, as represented by the Singapore Pollutant Standards Index (PSI) 3-hour reading, and the share prices and earnings of healthcare companies under our coverage, namely Raffles Medical Group (SGX:BSL) and IHH Healthcare (SGX:Q0F).
• Visual comparisons of share price movement against PSI readings for both Raffles Medical Group and IHH Healthcare (see attached PDF for figures) seem to suggest a mixed and weak association between these two variables. We next ran a correlation analysis across 5 different time periods, which include pre-and post-haze incidences, and possess varying characteristics. Two key observations stood out from our test:
  1. correlations of PSI readings and share prices were not strong for Raffles Medical Group and IHH Healthcare, with overall correlation coefficients of only 0.39x and 0.35x respectively;
  2. there were negative correlation coefficients over certain time periods, for instance, Raffles Medical Group’s -0.44x for Jun-Jul 2013 period, as well as -0.19x for IHH Healthcare over the Aug-Sep 2016 period.
• See Raffles Medical Group’s share price and IHH Healthcare share price.

Raffles Medical Group’s share price is slightly more correlated with PSI readings.

• Our results reveal that across the four sub-periods, Raffles Medical Group consistently records a higher correlation coefficient, and wider share price volatility (except for the Jul- Oct 2015 period) than IHH Healthcare. We think Raffles Medical Group’s share price exhibits greater sensitivity to haze conditions given its highly concentrated presence in Singapore, whereas IHH Healthcare’s Singapore and Malaysia operations contributed 50- 55% to its total revenue during the same period.
• We also note that while Raffles Medical Group’s share price rose during Jun-Jul 2013 and Aug-Sep 2016, these were short-lived and have negative correlation coefficient with changes in PSI readings. These suggest that there could be a time lag between the onset of haze and share price reaction, which could also have been contributed by factors other than haze.

Can haze drive better earnings of healthcare companies? Yes, if haze is prolonged

• Apart from possible association with price volatility, we also analyse if the haze has any cause-and-effect relationships with patient footfall and hence revenue performance for Raffles Medical Group and IHH Healthcare to potentially justify the share price reaction. Based on monthly acute hospital admissions (public and non-public) in Singapore, we have not observed any material increase in overall hospital admissions in the affected months throughout 2013-2016. However, private hospital admissions outpaced public admissions in Oct 14 with a higher market share of 25.7%, vs. 23-24% on average. Oct 15 also saw a repeat of higher private hospital admissions for the year of 2015. These two time frames coincided with a prolonged period of bad haze.
• Based on the key drivers’ trend of Raffles Medical Group and IHH Healthcare over 2013-2016, we note that topline growth was more pronounced for Raffles Medical Group during the affected periods of 2Q13, 3Q14 and 4Q15 at low-teens (vs. high single-digit growth rates in other quarters), taking into account that healthcare businesses typically exhibit stronger seasonality in 2H. We believe the haze could have played a role in driving higher domestic healthcare demand to mitigate the fall in Indonesian patients and medical tourism receipts in 2014 and 2015 which arose from a weaker rupiah against the S$. As for IHH Healthcare, the y-o-y increases in inpatient admission volumes were more significant in 3Q14, 4Q15 and 3Q16.

In summary, 3 key takeaways…

1. Over the period of Sep-Nov 2014, both Raffles Medical Group and IHH Healthcare hospitals benefitted from higher inpatient volume and revenue growth, which is in line with the overall market share gain of inpatient admissions by the private hospitals. This was also corroborated by a slightly positive correlation coefficient (Raffles Medical Group: 0.23x, IHH Healthcare: 0.22x). Similarly, in Jul-Nov 2015, the prolonged hazy weather translated to more local inpatient numbers for Raffles Medical Group and IHH Healthcare, which helped to mitigate the continual medical tourism weakness in Singapore.
2. Based on the correlation analysis between haze (PSI readings) and share prices, we establish the association to be weak and not providing any meaningful insight (almost zero correlation coefficient for the Jul- Nov 2015 period).
3. While Jun-Jul 2013 recorded critically high PSI readings, only Raffles Medical Group saw an increase in revenue. But this was compensated with a negative correlation coefficient of 0.44x. The duration of haze in Aug-Sep 2016 was shorter, thus it had a limited impact on Raffles Medical Group’s revenue (still growing for IHH Healthcare), and share price movements.

VALUATION AND RECOMMENDATION

Still prefer IHH Healthcare to Raffles Medical Group for now, maintain sector Neutral

• If the hazy days and poor air quality persist till early-Nov, we think Raffles Medical Group could see a repeat of stronger revenue growth in 4Q19F, which could add an estimated 2-3% upside to our FY19F earnings, assuming its Chongqing hospital performs in line with our expectations. However, it is too early to tell how bad the haze will be, and we maintain sector Neutral. Declining medical tourism can pose a downside risk to our sector call, while stronger inpatient admissions is a potential catalyst.
• We make no changes to our FY19-21F EPS forecasts for Raffles Medical Group, and expect management to deliver on its EBITDA loss guidance of S$8m-10m for FY19F as the group continues to add new specialists (1 gastroenterology and 1 endocrinology consultants) to its Chongqing hospital to attract more patient volume. Apart from domestic performance, we think a bigger share price driver for Raffles Medical Group would be its overseas execution of new hospitals in China. Maintain HOLD with an unchanged SOP-based Target Price of S$1.10; we see a more attractive entry point below S$0.98.
• We are keeping our ADD rating and FY19-21F EPS assumptions for IHH Healthcare, as the group is today more diversified vs. 2013-2016 given its recent India acquisition and ventures in North Asia. We think its share price is more susceptible to poor M&A execution, unfavourable FX and policy changes, while faster North Asia ramp-up and successful debt restructuring in Turkey could re-rate the stock.

NGOH Yi Sin CGS-CIMB Research | https://www.cgs-cimb.com 2019-09-24

SGX Stock Analyst Report ADD MAINTAIN ADD 6.370 SAME 6.370

HOLD MAINTAIN HOLD 1.100 SAME 1.100