Tuesday, 26 May 2015

Healthcare Sector

OCBC on 19 May 2015

In recent days, we witnessed more players in the healthcare sector announcing expansion plans into China. Aging population, rising consumer wealth and government reforms, underpins the supportive outlook for healthcare players entering China. For one, Raffles Medical Group (RFMD) [HOLD, S$4.17] has formed a JV to develop a 400-bed international general hospital in Shanghai by mid-2018. We view this positively especially for local players, as competition in Singapore continues to increase from both the private and public sectors coupled with the risk of waning medical tourism. However, the growth story is not always smooth sailing, as we recall Biosensors International Group’s (BIG) [SELL, S$0.60] sales performance was affected by lower ASPs for its products amid structural changes in China. Given the early stage of expansion plans at this juncture, we maintain a NEUTRAL stance for the sector. Valuations are not sufficiently attractive on a broad-based level as the FSTHC is currently trading slightly above 1 s.d. of its two-year historical forward P/E average.

More players expanding into China 
In recent days, we witnessed more players in the healthcare sector announcing expansion plans into China. Raffles Medical Group (RFMD) formed a JV with Shanghai LuJiaZui Group to develop a 400-bed international general hospital in Shanghai’s Pudong New Area by mid-2018. Ramsay Health Care [non-rated] had also recently signed a JV with a Chinese healthcare company to operate hospitals in Chengdu. There appears to be an apparent consensus on China’s growth prospects as IHH Healthcare Berhad’s [non-rated] chairman was previously reported to have continued interest in growing their presence in China. At present, they have some clinics in the country and a hospital in Shanghai. Q & M Dental Group [non-rated] had also announced a proposed spin-off and listing of their dental healthcare business in PRC to potentially grow in scale. 

China offers attractive prospects amid liberalization 
According to EIU, annual healthcare spending in China is expected to grow 9.5% a year from 2015-2019 to US$911.4b by 2019. Aging population, rising consumer wealth and government reforms, underpins the supportive outlook. With long waiting times and poor services at public hospitals, private sector players can easily position themselves to capture patients. We view the players’ development plans positively, especially for local players like RFMD, as competition in Singapore continue to increase from both the private and public sectors coupled with the risk of waning medical tourism. RFMD’s management also expects higher pricing and better profit margins from their Shanghai hospital project. 

A challenging road nonetheless 
However, the growth story in China is not always smooth sailing, as we recall Biosensors International Group’s (BIG) sales performance was affected by lower ASPs for its products amid structural changes in China. Another key concern is the lack of adequate supply of trained and qualified medical professionals. Strict regulations are also imposed on the employment of foreign staffs.

Still in early stages; Maintain NEUTRAL
Given the early stage of expansion plans at this juncture, we maintain a NEUTRAL stance for the sector. Valuations are not sufficiently attractive on a broad-based level as the FTSE ST Health Care Index (FSTHC) is currently trading slightly above 1 s.d. of its two-year historical forward P/E average. Notably, the index has gained 27.7% YTD vs. 2.6% by the FSSTI. Looking back at Raffles Medical Group [HOLD, S$4.17], growth ahead would be driven by its Singapore Holland Village project and Raffles Hospital extension slated for opening in the next two years. As BIG [SELL, S$0.60] faced unfavourable factors in China, the group hopes a management change in China since 2QFY15 will improve performance. BIG’s FY15 results will be released on 27 May.

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