SGX Medical Equipments & Services Companies - CGS-CIMB Research 2020-06-22: Proxies If We Are Living With COVID-19


SGX Medical Equipments & Services Companies - Proxies If We Are Living With COVID-19

  • As the world grapples with COVID-19, it faces a new normal until an effective and widely-available vaccine or treatment is developed, in our view.
  • Even as nations emerge from COVID-19 lockdown, we believe there is still a need for more testing kits and PPEs to ensure a safe reopening.
  • Singapore has a whole suite of companies that can benefit from the COVID-19 thematic, in our view, including UG Healthcare (SGX:41A) and Riverstone (SGX:AP4).

COVID-19 – the world faces a new normal

  • According to studies by the World Health Organization (WHO), people with the coronavirus are most infectious at the point when they first begin to feel unwell. This feature has made it particularly challenging to control the spread of the virus that causes COVID-19, although it can be done through rigorous testing and social distancing, the WHO said.
  • Based on our analysis of past pandemics and strategies used by countries to curb the spread of the virus, we believe the world will have to face a new normal until an effective vaccine or treatment for COVID-19 is developed. We see potential for resurgence in COVID-19 cases as countries adopt varying approaches to tackling the pandemic.

Vaccines are needed for us to return to pre-COVID life

  • Vaccine and drug development is a multistep process, typically requiring more than five years to ensure the safety and efficacy of the new compound. In Feb 2020, the WHO said it did not expect a vaccine against COVID-19 to become available in less than 18 months, and conservative estimates of time needed to prove a safe, effective vaccine is about 12 months (early-2021F). Since then, several national regulatory agencies, such as the European Medicines Agency (EMA) and the The Food and Drug Administration (FDA) of the United States, have approved procedures to expedite clinical testing.
  • Based on the latest data by WHO, there are currently 11 candidate vaccines in clinical evaluation, and 128 candidate vaccines in preclinical evaluation. One of the vaccine frontrunners, which was developed by the University of Oxford and licensed to AstraZeneca (AZN LN), is currently in Phase2b/3 clinical evaluation. AstraZeneca said that it had secured manufacturing capacity for 1bn doses, with first deliveries due to begin in Sep 2020F should the vaccine be proven effective. U.S. Health Secretary Alex Azar has agreed to provide up to US$1.2bn to accelerate AstraZeneca’s vaccine development and work towards a safe, effective, widely available vaccine by 2021F.

Exit strategies from lockdown

  • COVID-19 will remain a challenge to the world for many months to come. The Tony Blair Institute for Global Change, a UK think tank, has published an analysis of options for lifting lockdown measures in the UK. The report sets out and analyses six possible exit strategies from suppression measures:
    • Lockdown until vaccine
    • Ease of lockdown gradually
    • Adaptive triggering
    • Permits
    • Weekly testing
    • Contact tracing and testing.

Adaptive-triggering strategy

  • This strategy alternates between measures that are serious enough to cause the number of cases to decline, and more relaxed measures that allow it to grow again. The goal is to curb the spread of the virus, with the aim of buying time for vaccine development while minimising the strain on the healthcare system as much as possible. Overseas Development Institute, a global think tank, suggests that this strategy could arguably be more important in low-income countries, where already weak health systems risk becoming rapidly overwhelmed, and where enacting certain measures for long periods may be difficult.
  • The strategy proposes that as nations have the current wave of virus under control as measured by a decline in ICU admissions, they can relax social controls. If ICU admissions begin rising again, it will be an indication that the virus is spreading again, and nations should regulate the new spread by turning on suppression policies.
  • For countries that are prepared, with stronger epidemiological authority, education on hygiene and social distancing, and early detection and isolation, an outbreak can be better controlled, and longer-term effort is needed to keep COVID-19 contained until there is a vaccine, in our view. Tomas Pueyo, a prolific health writer, used the metaphor “the hammer and the dance” to describe the most successful strategies adopted by countries.
  • First come the “hammer” – where aggressive measures are used to allow healthcare system time to ramp up capacity and build up testing capability. After the virus growth is controlled, comes the “dance”, which represents longer-term effort to keep the virus contained until a vaccine is found.

History shows second waves are common

  • Over the period from 1889 to the last outbreak in 2010 before COVID-19, there were at least 8 pandemics that occurred globally. In our analysis of these past pandemics, there have been a total of 5 out of the 8 instances where a second wave broke out, and in the case of the H1N1 virus, it first occurred in 1977/78 and then reoccurred in 2009/10, demonstrating that there is a possibility pandemics can resurface again.

1918 Spanish flu

  • The 1918 Spanish flu lasted for two years, infecting some 500m people globally, with an estimated 20m-50m people dying from the pandemic. The flu occurred in three waves and was touted as the most severe pandemic in history by the Centre for Disease Control and Prevention (CDC). The US was engaged in WWI during that time and evidence suggests that the soldiers who were on the move in Europe carried the virus and caused its spread throughout England, France, Spain and Italy.
  • The second wave was the most deadly among the three, due to
    1. a mutated virus and
    2. public health officials’ unwillingness to impose quarantines during wartime,
  • according to James Harris, a historian at Ohio State University who studies both infectious disease and World War I.
  • For example, when the pandemic first hit, San Francisco reacted quickly by implementing a lockdown and made wearing face masks mandatory. In Nov 1918, the city relaxed lockdown measures and was hit by a second wave with c.45,000 cases and more than 3,000 deaths. Similarly, in Philadelphia, the city threw a parade which saw 200,000 people in attendance. This gave the virus a foothold and over 4,500 people died a week later.

1968 Hong Kong flu pandemic

  • The Hong Kong flu pandemic was a global outbreak of influenza originating from China in Jul 1968 that lasted till 1969. It resulted in an estimated 1m–4m deaths. The pandemic went through two waves, with the first wave in 1968/69 and the second in 1969/70 being more deadly across 4 of 6 countries being studied according to Oxford Academic, a university press.
  • It was observed that in North America (US and Canada), the first wave of the pandemic was more deadly than the second wave which was in contrast with Europe and Asia. Oxford Academic concluded that this was due to Europe and Asia recording a higher number of asymptomatic infections during the first wave than in North America which eventually led to a more fatal second wave.

2009 – 2010 Swine Flu

  • The swine flu was caused by a new strain of H1N1 that originated from Mexico in 2009. In a study of 19 countries, researchers estimated that c.24% of the population of these countries were infected with H1N1 and CDC estimates that c.151,700-575,400 people have died from swine flu globally. In the US, the swine flu was characterised by two waves, with the first wave peaking in Jun 2009.
  • The second wave which peaked in Oct 2009 began in the South-eastern region of the US when children returned to school in mid-Aug and early-Sep, according to the Infectious Diseases Society of America, a medical association based in the United States.

Are there signs of a potential second wave for COVID-19?

  • Several countries that have since eased lockdown measures and reopened their economies are seeing a renewed rise in the number of COVID-19 cases, prompting fears of a potential second wave.


  • In China, after the lockdown in Wuhan was gradually eased on 8 Apr 2020, the country was able to keep daily new cases low, with new cases classified as either imported or newly discovered asymptomatic cases.
  • However on 14 Jun 2020, Beijing experienced a new outbreak of coronavirus, which was traced to a wholesale meat and fish market, Xinfandi. This came after 55 days without a single local case in the Chinese capital. Since then, Beijing has reported a total of 137 new cases. Officials raised the emergency response from Level III to Level II on 16 Jun. Public places such as libraries, museums, art galleries and parks will implement time-limited reservations with visitor traffic no more than 30%. On-campus classes for all primary, middle, high school and university students were suspended to curb the spread of the virus.
  • Flights to and from Beijing were also largely cancelled shortly after the emergency response was raised to Level II.

South Korea

  • After overcoming the initial outbreak of COVID-19, South Korea is now experiencing an increase in cases. There are now fears of a second wave due to the emergence of cluster outbreaks. Of the 618 cases detected in the first two weeks of Jun, mostly in Seoul and the surrounding Gyeonggi province, 10.2% had unknown transmission routes, said the Korea Centre for Disease Control and Prevention (KCDC). Health Minister Park Neung-hoo noted that the situation in Seoul is serious, with infections stemming from Seoul-based health product retailer Richway, a door-to-door sales company that targets elderly people in the 60s.

United States

  • Since peaking at around 31,000 average new daily cases on 10 Apr, new daily cases in the United States dropped to around 22,000 on average by mid-May and have stayed almost steady over the last four weeks.
  • Weeks after parts of the U.S. began reopening, coronavirus infections have again been on the upswing in several states, including Arizona, Utah, Texas and Florida. However, according to various health experts surveyed by NBC News, this cannot be considered a second wave of the coronavirus, as the US has not yet exited the first wave. According to the news media Straits Times, the prolonged nature of the US epidemic is the result of the cumulative impact of regional outbreaks, as the virus that started out primarily on the coast regions and in major cities moves inwards.
  • Layered on top of that are the effects of lifting lockdowns in parts of the country that have been experiencing rising cases, as well as a lapse in compliance with social distancing guidelines because of economic hardship, and in some cases, a belief that the threat is overstated.

Safe reopening is key to containing the virus before a vaccine is found

  • Several countries have started progressing into reopening their economies after imposing lockdown measures to curb the spread of the virus. While we note that reopening procedures generally showed similarities (phased opening), countries have had a different pace in “opening up” the economy due to the varying conditions for easing lockdown measures.
  • For example, Singapore eased its circuit breaker measure when daily new cases from community transmission were in the single digits. UK’s preconditions for easing lockdown measures include “NHS having sufficient capacity to provide critical care” and “sustained and continuous fall in daily deaths”. Meanwhile, India started to relax its lockdown measures on 11 May despite a record number of new cases as political parties, businesses and citizens complain that containment measures have destroyed the livelihoods of millions who rely on daily wages for sustenance, according to news media Channel News Asia.

Reopening strategies of various countries compared

  • See attached PDF report for detailed comparison of re-opening strategies of Singapore, U.K. and India.

Diagnostic testing, gloves and medical supplies

Diagnostic testing

How does COVID-19 testing work?

  • In Singapore, the gold standard test for COVID-19 virus is carried out at labs using the real-time Reverse Transcription-Polymerase Chain Reaction (RT-PCR) technique to detect. The PCR test is also the most common way globally to determine if the virus is still present (also known as an active infection); this works for both symptomatic and asymptomatic people.
  • The other method that Singapore has used in research and among selected populations is the antibody (serological) testing, which unlike the nasal-swab diagnostic tests, is a form of blood test intended to determine if someone, at some point, has been infected by the virus and now could be immune (hence giving positive results). The two types of antibodies are immunoglobulin M (IgM) and immunoglobulin (IgG); the former is produced more quickly for initial attack against infections, whereas the latter is produced more slowly and retained longer for possible immunity. Antibody testing can be carried out either using a small kit that is cheaper and faster, or in a lab setting.

Who needs to be tested?

  • In Singapore, more than 408k COVID-19 tests have been conducted as of 1 Jun 2020, which translates to more than 71k tests for every 1m population. Singapore did an average of 2,900 tests per day in Apr, but is now able to conduct more than 8k tests daily, with the government aiming to scale up to 20k (by early-Jun) and eventually 40k tests per day. Apart from migrant workers and those identified as part of contact tracing efforts, Singapore recently has also required other workers in essential services to undertake COVID-19 testing, including healthcare workers, pre-school staff, residents and staff in nursing homes.
  • With effect from 17 Jun 2020, 2359 hours, all incoming travellers into Singapore will have to take a COVID-19 test which is payable out-of-pocket (can cost up to S$200, inclusive of GST), on top of the existing 14-day stay-home notice (SHN) issuance. Such COVID-19 PCR testing requirements are also applicable to short-term visitors allowed under the fast lane arrangements. We believe there will be continual demand for such tests as the economy reopens and before a vaccine is developed and made available.

How big is the market?

  • When Singapore eventually reaches its target of 40k daily testing capacity, through a combination of PCR and antibody tests, this could translate into a minimum of 10m tests annually (based on 261 working days a year), or 14m tests (if these are carried out 365 days a year). Based on our channel checks, we understand that the selling price for each COVID-19 test is between S$130 and S$270 across both public and private players. These imply that the addressable market potential across the value chain of diagnostic testing in Singapore could range from S$1.36bn to S$3.94bn, with the public sector likely to account for the bigger portion, in our view.
  • Globally, across the various sub-segments of industries that facilitate COVID-19 testing, the personal protective equipment (PPE) manufacturing sector is forecasted to have the highest growth potential, according to market researcher IBISWorld.

Proxies to diagnostic testing

  • Similar to many nations, the majority of testing for COVID-19 in Singapore is handled by government hospitals. But there are also opportunities for the private sector across the entire value chain of diagnostic testing. We identify three sources of revenue for diagnostic testing, mainly from:-

Sale of diagnostic test kits.

Fees for swabbing administered at clinics and hospitals.

Charges for lab processing services.

Venture Corp is also likely to see some benefits from COVID-19 diagnostic testing.

  • Venture Corp (SGX:V03) (ADD, Target Price S$16.78, see report: Venture Corporation - CGS-CIMB Research 2020-05-08: Exiting Lockdown Impact) is also likely to see some benefits from COVID-19 diagnostic testing. On 9 Jun 2020, Illumina Inc (ILMN US), a key customer of Venture Corp announced that the US Food and Drug Administration (FDA) has issued an Emergency Use Authorization (EUA) for the Illumina COVIDSeq™ Test, a high-throughput, sequencing-based, in vitro diagnostic (IVD) workflow enabling the detection of SARS-CoV-2.
  • The end-to-end workflow extends the options available for labs to scale diagnostic testing. llumina announced that COVIDSeq is currently available to a limited number of early access sites but is expected to be more broadly available this summer.

Personal protective equipment (PPEs)

WHO advising use of face masks in public

  • On 6 Jun, the WHO changed its advice on face masks, saying they should be worn in public where social distancing is not possible to help stop the spread of coronavirus. This comes as new information showed face masks providing "a barrier for potentially infectious droplets".
  • The shift in WHO guidance came after months where its experts stuck to the line that masks would encourage a false sense of security and would deprive medical professionals of badly needed protective equipment.
  • We note that some countries have changed their policies in accordance with the WHO guidelines. Post-reopening, the UK, France and Germany for example have mandated that face masks be compulsory for commuters on public transport. While there are exemptions, face masks are also generally required for school children and entrance to retail shops.
  • Apart from public use, surgical masks are also extensively used by physicians, nurses, social workers, housekeeping staff, and others who are at a high risk of exposure to such airborne diseases.
  • According to industry forecaster Technavio, the global surgical mask market (by value) is expected to grow by a compounded annual growth rate of 8.0% over 2019-24F. Technavio sees the surgical mask market being driven by the frequent outbreak of epidemics as well as the rising number of surgical procedures that require the use of face masks. Technavio believes that the increasing frequency of epidemics is expected to boost the growth of the surgical mask market over the forecast period of 2020-24F.

COVID-19 has also boosted demand for PPEs

  • Demand for PPEs has also reached unprecedented levels as COVID-19 has spread globally and governments have sought to prepare and respond. National stockpiling strategies by affected countries have further driven up demand. During 1Q20, the United Nations delivered over 6.4m gloves, 1.8m surgical masks, and 1.0m protective gowns to countries around the world.
  • According to another industry forecaster, Grand View Research, the global personal protective equipment (PPE) market size (by value) is expected to reach US$84.7bn by 2027F, growing at a compounded annual growth rate of 6.7% over the forecast period of 2020-27F. The increasing need for respiratory equipment in mining, emergency response, military and law enforcement, healthcare, and fire services and rising instances of injuries at the workplace, is anticipated to propel the market over the coming years, in Grand View Research’s view.

Medtecs International

Rubber gloves

Long order backlog amid global glove shortage

  • The COVID-19 pandemic has resulted in a global surge in demand for gloves. Besides a severe shortage of personal protective equipment for healthcare workers, we also see new demand coming from other sectors (e.g. retail) due to heightened emphasis on hygiene. According to the Malaysian Rubber Glove Manufacturers Association (MARGMA), global demand for rubber gloves is estimated to reach 345bn gloves in 2020F, with an expected annual growth rate of 16%.
  • Given the surge in demand, glove makers in Malaysia were generally running at full capacity ( > 90%) as at end-1Q20, and have firm order visibility till at least end- 2020F. We believe that the demand for gloves is likely to remain firm till end- FY21F, as governments and hospitals will still need to replenish safety stocks after the pandemic is contained.

More ASP increases likely

  • With the demand far exceeding supply due to COVID-19, the urgency of securing orders led to some customers offering higher prices to secure as much inventory as they can, as soon as possible.
  • As a result, glove makers are no longer pricing their healthcare gloves using the typical cost-plus mechanism. Instead, selling prices have been on a sequential uptrend since Mar, despite raw material prices trending lower. Our channel checks reveal that most glove makers are planning further ASP increases this year.
    • During its 3QFY8/20 results briefing, Top Glove (SGX:BVA) management guided that it is planning to raise its ASPs by 30% q-o-q in 4QFY8/20F followed by a 15% q-o-q rise in 1QFY21F. This is post raising its ASPs by 5% q-o-q in 3QFY8/20. See report: Top Glove - CGS-CIMB Research 2020-06-17: The Best Is Yet To Come.
    • We estimate that Supermax Corp can raise its ASPs by 10% each month from Jun till Dec 2020F, post raising its ASPs by at least 25-30% m-o-m in Apr 2020.
    • We assume UG Healthcare will hike ASP for original equipment manufacturing (OEM) customers (30-35% volume contribution) by c.10% q-o-q in both 4QFY6/20F and 1QFY21F. For its own brand manufacturing (OBM) business (65-70% volume), we estimate price hikes averaged 10% m-o-m on a monthly basis since Mar 2020.
    • For Riverstone’s healthcare segment, we are imputing 10%/15% q-o-q price hikes into our assumptions for 2Q/3QCY20F respectively. We are also forecasting its cleanroom segment will see price hikes of 8% q-o-q in 3QCY20F.
    • For Kossan and Hartalega, we estimate 5% q-o-q ASP hikes each in 2Q and 3QCY20F.
  • Companies are also starting to allocate part of their production capacity (mainly from new capacity additions) to spot orders, which have substantially higher ASPs (sometimes double that of recurring orders). With new daily cases of COVID-19 still on an uptrend worldwide, we believe that the urgent need for gloves will continue, which could catalyse further ASP increases in the remainder of CY20F.

What will happen to glove demand after COVID-19 is contained?

  • Back in 2004 and 2011 (after SARS and H1N1 respectively), demand growth for medical gloves eased to 2%/-1% y-o-y respectively, before rebounding to its longer-term average of c.8% y-o-y growth. We expect a similar trend for COVID-19, where demand growth for gloves may ease in 2022F before reverting to normalised growth of high-single-digit per annum thereafter, driven by
    1. an ageing population,
    2. rising healthcare spending, and
    3. increasing healthcare awareness in developing countries.
  • We believe the prolonged COVID-19 outbreak will catalyse a new normal with higher glove usage, given the increasing awareness of hygiene and infection control. This will be especially true for developing countries. According to MARGMA, there is also big disparity in per capita consumption of gloves between developed and developing nations, which suggests that the prospects of glove demand in the future are bright, in our view.
  • Developed economies are home to only a fifth of the world’s population yet account for nearly 70% medical glove demand due to their more stringent medical standards – at 150, US glove consumption per-capita is 25 times that of China as at 2019, the latest MARGMA data shows.
  • See report: Rubber Gloves - CGS-CIMB Research 2020-06-23: Too Early To ‘Sweat’ It.
  • See also recent SGX market update: Top Glove, Riverstone & UG Healthcare Report Quarterly Earnings.

Stock recommendations

  • We maintain our Overweight stance on the rubber glove sector in view of
    1. robust glove demand driven by COVID-19 leading to higher ASPs and margin expansion, and
    2. the favourable operating environment (weaker RM against US$ and low raw material prices).
  • While all glove makers are beneficiaries of the current environment, we advocate investors focus on glove makers with:
    1. excess capacity to cater to higher-margins orders, and
    2. larger sales contributions from the OBM segment that allows for higher ASP hike potential amid the strong glove demand due to the COVID-19 outbreak.
  • We have ADD ratings on UG Healthcare (Target Price: S$1.36) and Riverstone Holdings (Target Price: S$3.12).

UG Healthcare (SGX:41A)

Riverstone (SGX:AP4)

  • Given the surge in demand, we believe more price hikes are likely for FY20F. For the healthcare segment, we now impute 10%/15% q-o-q price hikes into our assumptions for 2Q/3Q20F respectively. Riverstone remains committed to building long-term business relationships with its regular customers, and is raising prices on a more gradual basis on that front. Meanwhile, it is allocating up to 10% of its total capacity (mainly from new production lines) for spot orders, which have substantially higher ASPs (about 2x of recurring orders). We also believe there is room for higher ASPs (+8% q-o-q in 3Q20F) in the cleanroom segment, as the demand for this segment has also been robust YTD.
  • Going into 2Q20F, we expect Riverstone to record a sequentially stronger net profit of RM72m (+54% q-o-q, +102% y-o-y). We expect Riverstone to report better FY20F results due to
    1. stronger sales volume,
    2. higher ASPs, and
    3. higher margins (due to lower raw material prices).
  • We expect Riverstone to achieve a record net profit of RM314m (+141% y-o-y) in FY20F. We have an ADD rating on Riverstone. Our Target Price of S$3.12 is based on 22.7x CY21F P/E (+2 s.d. from its 5-year mean) to reflect the current favourable operating environment for glove players.
  • We value the glove sector using P/E valuation as we think this methodology allows to incorporate near-term catalysts and risks.
  • See Riverstone Share Price; Riverstone Target Price; Riverstone Analyst Reports; Riverstone Dividend History; Riverstone Announcements; Riverstone Latest News.
  • Potential sector catalysts include
    1. further ASP increases as there is still an urgent need for gloves with worldwide daily new cases continuing to be on an uptrend,
    2. more government regulations to enforce usage of gloves, and
    3. stronger-than-expected earnings in upcoming results announcement.
  • Key risks for the glove sector include
    1. earlier than expected ASP normalisation,
    2. sudden spike in raw material prices,
    3. sharp depreciation of US$ against RM, and
    4. earlier-than-expected mass production of vaccine for COVID-19.

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More reports on SGX listed medical equipments & services companies:

ONG Khang Chuen CFA CGS-CIMB Research | William TNG CFA CGS-CIMB Research | NGOH Yi Sin CGS-CIMB Research | https://www.cgs-cimb.com 2020-06-22
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