Overseas expansion key for healthcare sector in 2019 and beyond: analysts

Singapore

WITH some exceptions, the healthcare sector was not spared the trade tensions and uncertainty that dogged equity markets throughout 2018.

Going forward, cost pressures and macroeconomic headwinds are expected to moderate prospects in 2019, but the long-term view is rosier, especially for companies with overseas operations. Analysts project a positive outlook beyond 2019 when recent regional expansions for players such as IHH Healthcare Bhd and Singapore Medical Group (SMG) will start to yield results, if handled successfully.

CGS-CIMB research analyst Ngoh Yi Sin expects the sector to benefit from an increase in medical tourists from emerging markets such as Vietnam, and more healthcare funding in the form of favourable healthcare policies.

Clinic and hospital operators told BT that structural factors such as rising affluence and Singapore's ageing population supported demand for health care in the past year, and having overseas entities helped them manage in an increasingly competitive medical tourism market.

In March, SMG acquired a majority stake in the operator of aesthetics clinic SW1, and is launching a 4,000 square foot aesthetics centre in Vietnam by the end of 2018.

"Singapore has seen an increase in competition for medical tourism as local healthcare systems begin to improve around South-east Asia," the company said. "At SMG, we are unique as 50 per cent of our medical tourism comes from Vietnam as opposed to Indonesia, where the bulk of medical tourism has originated from historically in Singapore."

It added that the group is exporting healthcare practices into the region so as not to be reliant on medical tourism.

Strategic fit

IHH in November acquired a controlling stake of 31 per cent in struggling Indian hospital chain Fortis Healthcare, which IHH chief executive officer Tan See Leng told BT is a "strategic and complementary fit" for IHH. The company is pursuing an additional 26 per cent stake in Fortis through a mandatory open offer triggered by its initial subscription, and will focus on restoring Fortis' performance and integrating it into the group in the year ahead.

Dr Tan added that IHH is on track to make Greater China its fifth home market by scaling up Gleaneagles Hong Kong and completing its projects in Chengdu and Shanghai.

"We are confident that we have put in place the blocks to ensure IHH balances current returns with sustainable growth," he said.

Raffles Medical Group will soon join the ranks of Singapore-listed healthcare providers expanding overseas. It is expected to open its hospital in Chongqing, China by the end of 2018, and has another hospital slated to open in Shanghai in the second half of 2019.

Dental clinic operator Q&M said it will continue to focus on its key markets of China, Malaysia and Singapore in the near term. It is actively working on opportunities to work with or acquire established dental institutions and dental supplies manufacturers in China, and is monitoring expansion opportunities in Asean.

"With a similar path as China, Asean will see a large middle-income class and rapid urbanisation over the next decade," said Q&M. "This will likely boost demand for health care, education and infrastructural upgrades as the population in major cities begins to swell."

So far, Health Management International (HMI) has escaped the effects of a medical tourism decline, with growth in foreign patient load at its two hospitals in Malaysia outpacing local patient load over the past year. The company said that the majority of its medical tourism is still derived from Indonesia, riding on its first mover advantage in the Indonesian market since 1999.

HMI also expanded locally this year, acquiring a controlling stake in StarMed Specialist Centre near Farrer Park MRT station to capture rising demand for day surgeries and diagnostic imaging. It expects to incur gestation start-up costs from StarMed's operations for about two to three years.

However, not every company that BT spoke with is keen on overseas expansion. HC Surgical Specialists, which operates a network of endoscopy centres across Singapore, said that it will continue to focus on local expansion and leveraging its brand presence in the heartlands.

Local focus

"For several years, HCSS has sought to mitigate this (decline in foreign patients) by focusing on developing our business plans towards treating local patients and in so doing, we are able to decrease our reliance on medical tourism, which we regard as an unreliable source of revenue," CEO Heah Sieu Min said.

"At this phase of our growth, there are still ample opportunities for expansion in Singapore where we are fairly well-known. However, when a suitable reliable partner is found, one which suits our overseas business plans, we will be ready for collaboration and expand overseas."

Analysts said the sector is mostly fairly valued, trading above the market cap weighted historical mean but below the past two years when it was trading at one standard deviation above the mean. Using enterprise value/Ebitda (earnings before interest, tax, depreciation and amortisation) to value the sector, Ms Ngoh of CGS-CIMB said healthy valuations for hospital operators would be about 16 to 17 times forward on average, given their asset-heavy businesses.

For healthcare specialists such as Q&M and SMG, a range of 18 to 20 times price/earnings (P/E) would be fair, given the sector's recent de-rating, she said.

Ms Ngoh and UOB Kay Hian analyst Lucas Teng both listed HMI as a top pick on its potential to leverage medical tourism further at its two hospitals in Malaysia. Mr Teng added that he likes its expansion into the growth segment of ambulatory care through StarMed Specialist Centre, as well as its long term expansion plans from its hospital upgrades.

SMG was another attractive pick, with Mr Teng and DBS analysts Rachel Tan and Andy Sim noting that it is trading at a large discount to its peers, at roughly 12 times 2019F P/E. Mr Teng added that SMG has good growth prospects from its expansion into Vietnam.

DBS' other picks are IHH Healthcare for its larger size and diversified portfolio, and Parkway Life Reit, which it described as having a steady earnings stream, defensive profile and potential to benefit from upward trends in the consumer price index.

Key risks ahead for the sector would be impact on medical tourism from further weakening of the Indonesian rupiah against the Singapore dollar, medical inflation and increasing competition for patients and medical staff, said Ms Ngoh.

Beyond 2019, the outlook is set to improve as overseas markets such as China become a more significant growth engine.

UOB Kay Hian's Mr Teng added: "In the longer term, the sector still has a good runway, given structural factors are still at play from Singapore's ageing population as well as the trend of medical inflation. Companies are also building up into the region which will take time to bear fruit."