Healthcare Sector 2020 Outlook & Strategy - DBS Research 2019-12-12: Are We There Yet?

Healthcare Sector 2020 Outlook & Strategy - DBS Research | SGinvestors.io IHH HEALTHCARE BERHAD (SGX:Q0F) PARKWAYLIFE REIT (SGX:C2PU) RAFFLES MEDICAL GROUP LTD (SGX:BSL)

Healthcare Sector 2020 Outlook & Strategy - Are We There Yet?


China is up and running; next up Shanghai.

Overcoming obstacles in India.

  • While Fortis Healthcare has been delivering accretive earnings before interest, tax. depreciation and amortisation (EBITDA) post consolidation with ongoing improvements in operations, it is unfortunate that the Supreme Court of India issued a suo moto notice of contempt to Fortis Healthcare on its acquisition by IHH Healthcare (for more details see report: IHH Healthcare - Back In Limbo).
  • IHH Healthcare remains firm that the acquisition of 31.1% stake in Fortis Healthcare was through a subscription that was conducted in a fair and transparent manner. While the ongoing legal proceedings may delay some of Fortis Healthcare’s restructuring/expansion plans, the bigger worries include the impact of a potential reversal of the acquisition by the court.
  • Nevertheless, we believe IHH Healthcare’s management remains committed in its Fortis Healthcare investment and will try its best to resolve this.

Foreign patients growth a wild card!

  • Despite foreign patients’ growth in Singapore tapering off over the past few years due to the strong Singapore Dollar (SGD) vs the region, we have seen intermittent periods when this growth returned. A more sustainable uptrend in foreign patients would benefit both IHH Healthcare and Raffles Medical Group.
  • While Raffles Hospital Singapore will benefit now with Raffles Hospital’s extension, IHH Healthcare will be able to cast its net wider with its Malaysia and Hong Kong hospitals capturing regional patients such as Indonesians and Chinese looking for alternatives to Singapore healthcare.
  • In addition, IHH Healthcare has seen an increasing trend of medical tourism in Turkey, especially its hospitals in Istanbul. IHH Healthcare’s strong organic growth of c.30% in 9M19 were partially led by higher foreign patients.


Higher-than-expected start-up/pre-operating costs.

  • Following China’s healthcare reform, we have seen an interest especially from the larger-cap healthcare companies expanding into China. While the market is promising, the operating environment of private healthcare companies is relatively uncertain with the possibility of longer-than-expected period of stabilising operations.
  • Higher-than-expected start-up/pre-operating costs are other risks that could derail earnings growth.

Macroeconomic headwinds.

  • While healthcare demand is resilient and defensive amid macroeconomic uncertainties, private healthcare demand is not fully sheltered from headwinds. With expectations of rising interest rates, costs, taxes and potential risks to unemployment, patients may turn to public healthcare for cheaper alternatives. In addition, growth in medical tourism may remain slow moving.

Pressured by health care cost inflation.

  • Healthcare is often seen as a social need and there could be potential political pressure to manage cost inflation in the sector. Following recent concerns by insurance service providers and industry stakeholders, the Singapore government conducted a study and published guidelines to manage healthcare cost inflation.
  • While there have not been any major changes to the healthcare system and regulations on private healthcare, potential pressure from stakeholders may change the landscape of the private healthcare sector in the longer term.

Forex risks.

  • As healthcare companies expand overseas (China - RMB and India - INR), foreign exchange (forex) volatility could impact headline earnings given macro uncertainties such as the trade wars. In addition, the strengthening of the US Dollar (USD) could potentially have an impact on some costs (consumables are priced in USD), albeit minimal.
  • For IHH Healthcare, any further depreciation in Turkish Lira (TRY) will continue to impact its headline earnings. However, its management has successfully reduced volatility by lowering its non-TRY debt to US$250m and expected to reduce further to below US$200m by year-end.

Valuation & Stock Picks

Large-cap healthcare service providers trade at 15.6x FY19E EV/EBITDA, close to 2-SD below historical average.

  • Large-cap healthcare service providers are trading at 15.6x FY19F enterprise value (EV)/EBITDA, close to 2-SD (standard deviation) below historical average. The sector currently trades at very attractive levels. However, we remain cautious on its near-term growth moderated by the gestation period of new hospitals and brownfield expansion plans.
  • While we are positive on the long-term prospects of the healthcare sector driven by an ageing population and growing affluent society in Asia, we are selective on our stocks and prefer those with good near-to medium-term growth prospects.

Top picks are IHH Healthcare and Parkway Life REIT.

Rachel Lih Rui TAN DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-12-12
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