en scb 2014 4 8 indonesia healthcare scout siloam and tempo intiation

| Equity Research | Indonesia | Health Care |

8 April 2014

Indonesia healthcare
Power of healing

 Poised for structural growth: After a detailed study of health expenditure to GDP trends across 25 countries over 19952012, we conclude that Indonesia’s healthcare market is still at an early stage of development. We found that low- to middleincome countries have a health expenditure to GDP ratio of 3.5-5.5% while the ratio for high-income countries is above 7%.
With Indonesia’s ratio of 3% in 2012, our study gives us confidence in the long-term growth outlook for Indonesian healthcare.
 Multi-country study: We delved further into the health expenditure trends in Brazil, Malaysia and Poland, countries with a
significant rise in GDP per capita over the study period. Over 1995-2012, their health expenditure to GDP ratio rose to 4-9.5%
from 2.5-6.5%, as GDP per capita rose from under USD 5k to USD 10k. Health expenditure was a robust 10-14% CAGR
when per capita GDP hit USD 5k, compared to 4-7% annual growth when below USD 5k. We expect a similar transition in
Indonesia, as we forecast GDP per capita to exceed USD 5k in 2016 and USD 10k in 2023.
 Health expenditure to GDP model shows a ‘sweet spot’: Our model shows that the next five years are likely to be a sweet
spot for growth in Indonesia’s healthcare sector. We forecast a 17% CAGR in healthcare spending, up from 13% in 2008-13.
We expect health expenditure per capita to double to USD 229 in 2018 from USD 107 in 2013. Rising incomes and the launch
of a national health insurance programme (the JKN) in 2014 should drive growth. We think the JKN will spur middle- to upperincome Indonesians to switch to private hospitals as public hospitals become overcrowded, while expanded coverage under
the JKN will boost drug consumption.
 Actionable ideas: We initiate coverage of the sector with Outperform ratings on Siloam Hospitals Internasional (Siloam), the
largest private hospital operator by number of beds, and Tempo Scan Pacific (Tempo), the largest drug producer by volume

and a leading personal care player. Our top pick is Siloam, for its market leadership, robust growth outlook, and attractive
valuations given its long-term growth potential. We also present three non-rated companies in the sector – Kalbe Farma,
Kimia Farma and Sido Muncul. Click here to get The Scoop, an audiovisual summary of the report.

Alvin Witirto

Stephen Hui

+65 6596 8530
Equity Research
Standard Chartered Bank, Singapore Branch

+65 6596 8514
Equity Research
Standard Chartered Bank, Singapore Branch

Important disclosures can be found in the Disclosures Appendix
All rights reserved. Standard Chartered Bank 2014

http://research.standardchartered.com


Equity Research l Indonesia healthcare

Contents
Investment highlights

3

Investment implications

6

An underserved market

8

Health expenditure to GDP model

12


Prognosis: Positioned to take off

16

JKN improves affordability

19

Increased private investment in healthcare

23

Favourable long-term trends

25

Companies
Siloam Hospitals International
Tempo Scan Pacific
Kalbe Farma

Kimia Farma
Sido Muncul

28
58
87
91
95

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8 April 2014

2

Equity Research l Indonesia healthcare

Investment highlights

Higher incomes drive growth
A study of 25 countries
We analysed health expenditure trends across 25 countries from 1995-2012, and
conclude that Indonesia’s healthcare sector is still at an early stage of development,
but is entering a period of structural growth. We estimate Indonesia’s health
expenditure to GDP ratio was only 3.0% in 2012, compared to 3.5-5.5% in low- to
middle-income countries and over 7% in high-income countries. The correlation
between rising incomes and a higher health expenditure to GDP ratio has been well
1
documented across low, middle and high income countries.

Nominal GDP per capita (USD)

12,000

Figure 2: High-income countries*

Time series: 1995-2012
12 countries


10,000
8,000
6,000
4,000
2,000

102,000
Nominal GDP per capita (USD)

Figure 1: Low- to middle-income countries*

0

Time series: 1995-2012
13 countries

92,000
82,000
72,000
62,000

52,000
42,000
32,000
22,000
12,000

1.5%

2.5%

3.5%

4.5%

5.5%

5.0%

10.0%


Healthcare expenditure as a % of GDP

15.0%

20.0%

Healthcare expenditure as a % of GDP

* GDP per capita below USD 12,000. Countries: China, India, Indonesia, Malaysia,
Philippines, Thailand, Vietnam, Cambodia, Singapore.
Source: Global Health Expenditure Database, World Development Indicators

GDP per capita above USD 12,000. Countries: Australia, Denmark, France, Italy, Japan,
Norway, Spain, Sweden, United Kingdom, United States, South Korea, Canada.
Source: Global Health Expenditure Database, World Development Indicators

Our health expenditure to GDP model
We have developed a health expenditure to GDP model to assess the growth
potential for Indonesia’s healthcare sector. We model this ratio to increase to 3.4% in
2018 and 3.9% in 2023. Based on our economists’ forecast of a nominal 2013-30

GDP CAGR of 10%, we estimate a health expenditure CAGR of 12% over the same
period. We estimate health expenditure per capita will rise from USD 107 in 2013 to
USD 229 in 2018 and USD 402 in 2023.
Figure 3: Health expenditure to GDP ratio, 2012

100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0

High income

Healthcare expenditure per capita

450

NW

350
AU
SW

SG

KR
MX PO
MY
CN
ID
TH
CM VN
IN PH

DN

CA
JP GR
UK
FR
IT
SP

US

Source: WHO, World Bank, Standard Chartered Research estimates

17.5%

3.5%

2.8%

3.0%
2.5%

250
402

200

2.0%
1.5%

150
50

4.5%
4.0%

3.4%
3.1%

229

100

BRL

7.5%
12.5%
Health expenditure as a % of GDP

300

% of GDP
3.9%

400

2.5%

1

Figure 4: Healthcare expenditure per capita, Indonesia

Time series: 1995-2012
25 countries

USD per capita

Nominal GDP per capita (USD)

Low-to-middle income

61

107

2008

2013E

1.0%
0.5%
0.0%

0
2018E

2023E

Source: WHO, World Bank, Frost & Sullivan, Standard Chartered Research estimates

OECD (2010), Health at a glance: Europe 2010; OECD (2013), Health at a glance: Asia Pacific 2012; World Health Organization and Results for Development Institute (2011), The Determinants of Health Expenditure; Huber

(1999), Health expenditure trends in OCED countries 1970-99; Huber and Orosz (2003), Health expenditure trends in OECD countries in 1999-2001.

8 April 2014

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Equity Research l Indonesia healthcare

A severely underserved market
Poor healthcare infrastructure
In 2012, Indonesia’s hospital bed per 1,000 persons ratio of 1.0 was well below
Thailand’s (2.0) and Malaysia’s (1.6). In 2012, the OECD average for hospital beds
per 1,000 people was 4.93, and the OECD average was 3.14. Indonesia’s doctors
per 1,000 persons ratio was 0.3, compared to 1.5 in China and 1.3 in Malaysia.
Low health expenditure per capita
The fact that the market is underserved is reflected in the low health expenditure per
capita, which was USD 108 in 2012. Indonesia’s health expenditure per capita is only
26% and 49% of Malaysia’s and Thailand’s, respectively (see table below).
Figure 5: Beds & doctors per 1,000 population, 2012
Hospital Beds per 1,000 population
Doctors per 1,000 population

Per 1,000 population

3.0

450

2.5
2.0
1.5
1.0
0.5
Indonesia

India

Malaysia

Thailand

Singapore

UK

US

China

0.0

Source: Frost & Sullivan

Health expenditure per capita (USD)

3.5

Figure 6: Health expenditure per capita, 2012
410

400
322

350
300
250

215

200
150

119

108

102

100

61

51

IN

CM

50
0
MY

CN

TH

PH

ID

VN

Source: Global Health Expenditure Database

National healthcare insurance a catalyst
Universal health coverage for
Indonesians by 2019 with the JKN

Introducing the JKN
The JKN is the national health insurance programme introduced in January 2014. It
aims to provide universal health insurance coverage in Indonesia by 2019 from 63% in
2012. Participants pay a monthly insurance premium to the National Social Security
Agency (BPJS). (In Indonesia the JKN is also sometimes referred to as the BJPS, as
the BJPS administers the JKN.) The premium is sponsored by the government for poor
and near-poor Indonesians. JKN participants will have access to healthcare services at
9,217 community clinics and 1,710 participating hospitals (out of Indonesia’s 2,300).
Figure 8: Universal coverage by 2019

37%
Insured
Uninsured
63%

Populaiton with health insurance
(mn)

Figure 7: Health insurance coverage, 2012

300
258
250
200

175
152

150
100
50
0
2012

Source: Road Map Toward National Health Insurance 2012-19

8 April 2014

2014E

2019E

Source: Road Map Toward National Health Insurance 2012-19

4

Equity Research l Indonesia healthcare

The JKN could increase patient
volumes at private hospitals...

Hospital services – ready to take-off
We expect the JKN rollout to drive demand for inpatient and outpatient services at
public hospitals and participating private hospitals, as large ticket hospitalisation and
specialist expenses will now be covered by the JKN. We estimate the overall hospital
services market will increase at a 2013-23 CAGR of 13-16%. We think the higher
patient volume at private hospitals will be driven by: (1) rising purchasing power, as
the JKN will subsidise or fully cover medical costs at participating hospitals; and (2)
middle- to upper-income patients switching to private hospitals as public hospitals
become overcrowded by JKN patients.

…and drive demand for generic
prescription drugs

Pharmaceuticals – Sustainable growth
We expect the JKN to boost demand for pharmaceutical products, and we estimate a
2013-23 CAGR of 13-18% for the overall pharmaceutical market. In the short term,
we expect the JKN to significantly boost prescription drug demand, as it will cover
medical consultation and drug costs for participants.

Figure 9: Indonesia’s private hospital market
Public

Private

Figure 10: Indonesia’s pharmaceutical market

5-year forward CAGR

80

OTC

12%
13.1

30

46.1

20
6.4
3.8
6.9

11.9

2008

2013E

5-year forward CAGR

20%

18%

6%
2018E

Source: Frost & Sullivan, Standard Chartered Research estimates

2023E

7.2

14%
12%

9%
10%

10

13.7
5
0

2.0
1.4
1.8

3.0

2008

2013E

10%
8%

4.2

10%
8%

25.4

15

16%
13%

CAGR

12%

USD bn

13% 14%

13%

40

8 April 2014

20

Prescription

26.5

50

0

16%

CAGR

USD bn

60

10

25

18%

16%

70

18%

6%
4%

7.3

2%
0%

2018E

2023E

Source: IMS, Standard Chartered Research estimates

5

Equity Research l Indonesia healthcare

Investment implications
Positive on Indonesian healthcare
 Expect ‘sweet spot’ for growth over the next five years: We expect health
expenditure per capita in Indonesia to double to USD 229 in 2018 from USD 107 in
2013. This implies an acceleration to a total health expenditure CAGR of 17% in
2013-18 (13% in 2008-13). Thereafter, we expect health expenditure to compound
at 13% p.a. in 2018-23 and 10% p.a. in 2023-30.
 See robust growth drivers ahead: We see rising incomes as the primary driver
for rising healthcare demand, the rollout of the JKN as a catalyst, and increasing
private sector investment as an enabler for structural growth in Indonesia’s
healthcare sector.
 Proxies for each segment: The five stocks we identify are prominent players in
their respective segments – Siloam in private hospitals, Tempo in over-the-counter
(OTC) drugs and personal care, Kalbe Farma in overall pharmaceuticals, Kimia
Farma in pharmacies, and Sido Muncul in traditional herbal medicine.

Siloam Hospitals: Top pick
We initiate coverage of Siloam with an Outperform rating and a price target of IDR
13,982, implying 34% upside potential.
 Market leadership: Siloam is the largest private hospital operator in Indonesia
with twelve hospitals and, 3,000 beds in 2012, when it had a 7% share of the
private hospital market by bed capacity. Mitra Keluarga, the second largest
operator, has 10 hospitals with1,200 beds or a c.3.0% share. Other major private
hospital operators have market shares of less than 3.0% each. As of end-2013
Siloam had 16 hospitals and 3,700 beds.
 Robust expansion: It plans to more than double its bed capacity by 2017, to 40
hospitals with 10,000 beds. We expect 2013-16 revenue/earnings CAGRs of
44%/86%, driven by: (1) rapid expansion; and (2) maturing hospitals, as EBITDA
margins and occupancy rise as younger hospitals mature.
 Attractive valuations: On PE, Siloam’s multiples look rich at 67x 2015E PE, but
we believe more appropriate valuation metrics are DCF and EV/EBITDA given the
high upfront capex and initial start-up losses for new hospitals. Siloam is trading at
16x 2015E EV/EBITDA and we forecast a 2013-16 EBITDA CAGR of 63%. Other
leading Asian hospital operators are trading at 15-17 2015E EV/EBITDA, with an
average 2013-16 EBITDA CAGR of 14-23% (based on our estimates and
consensus). Our DCF-based price target translates to 21x 2015E EV/EBITDA.
 Top pick: We prefer Siloam to Tempo given its: (1) market leadership in the
private hospital market – its market share is more than double that of the second
largest private hospital player; (2) stronger growth profile (we forecast an 86%
earnings CAGR in 2013-16, compared to a 15% CAGR for Tempo over the same
period); and (3) good execution track record.

8 April 2014

6

Equity Research l Indonesia healthcare

Tempo: Riding two growth waves
We initiate coverage of Tempo with an Outperform rating and a price target of IDR
3,878, implying 26% upside potential.
 Riding the JKN wave: We expect Tempo’s fledgling prescription drug business to
benefit from the JKN rollout. Management expects to increase this business more
than threefold to IDR 592bn in 2017. As Indonesia’s largest pharmaceutical
producer by volume, we believe Tempo is well positioned to leverage on its
production scale to deliver the government’s generic drug needs at a cost-efficient
level.
 Strong earnings growth: We expect 2014-16 revenue and earnings CAGRs of
14% and 15%, respectively, driven by volume growth and margin expansion as it
focuses more on its own products in the pharmaceutical and personal care
segments. Management plans to allocate more distribution capacity to higher
margin own-brand products (16-17% EBIT margin) rather than low-margin third
party products (3-3.5% EBIT margin).
 Valuation appealing: Despite being the second-largest listed pharmaceutical
player by market capitalisation, Tempo is only trading at 17x 2015E PE, a 35%
discount to Kalbe Farma, trading at 26x (Bloomberg consensus). Our sum-of-theparts derived price target implies a target multiple of 21x 2015E PE, close to its
three-year historical average.
Figure 11: Coverage and non-rated stock highlights
Price
target
Name

Ticker

Rating

Siloam Internasional SILO IJ

OP

Tempo Scan Pacific

TSPC IJ

OP

Kalbe Farma

KLBF IJ

Kimia Farma

KAEF IJ

Sido Muncul

SIDO IJ

(LC)

3M avg
value
traded

Last

(LC) (USD mn) (USD mn)

FYE

Price

13,982 10,400

Market
cap

Price
2-yrs
/
EPS 2-yrs sales

PE (x)
FY0

FY1

FY2 CAGR

Div.
yield ROCE
(%)
(%)

EV/EBITDA

PEG

FY1

FY0

FY1

FY2

FY1

FY1

1,062

8.44 12/13 218.4

100.3 67.3

80%

0.8

3.0

34.5

23.8

16.4

0.1

8.5

3,070

1,221

0.23 12/13 21.8

19.8 16.5

15%

1.1

1.8

12.3

12.3

10.2

2.8

19.5

NR

1,500

6,213

8.43 12/13 36.2

30.8 25.6

NR

895

439

NR

825

1,093

3,878

19%

1.3

3.8

24.4

20.6

17.1

1.5

27.1

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

14.1

2.43 12/13 31.7

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

0.52 12/13

Above data as of 4 April 2014. Bloomberg consensus for non-rated stocks.
Source: Bloomberg, Standard Chartered Research estimates

8 April 2014

7

Equity Research l Indonesia healthcare

An underserved market
Indonesia’s pharmaceutical and hospital services markets are still underserved and
underpenetrated. We believe this presents a significant growth opportunity for large
hospital operators, such as Siloam, and leading domestic pharmaceutical producers,
such as Tempo.

Structural growth opportunity
Low healthcare expenditure per capita
Indonesia’s healthcare expenditure per capita of USD 108 in 2012 was well below
regional peers Thailand (USD 215) and Malaysia (USD 410). Indonesia’s total
healthcare expenditure, at 3.0% of GDP, also lagged these regional peers’ level of
3.9% in 2012.
Figure 12: Health expenditure per capita, 2012

20%

8,895

9,000
8,000
7,000
6,000
5,000

3,647

4,000

2,426

3,000
2,000
1,000

410

322

215

108

61

MY

CN

TH

ID

IN

Health expenditure as a % of GDP

Health expenditure per capita (USD)

10,000

Figure 13: Health expenditure as a % of GDP, 2012

0

17.9%

18%
16%
14%
12%

9.4%

10%
8%

5.4%

6%

4.7%

4.0%

3.9%

3.9%

IN

MY

TH

4%

3.0%

2%
0%

US

UK

SG

Source: Global Health Expenditure Database

US

UK

CN

SG

ID

Source: Global Health Expenditure Database, World Development Indicators

Low drug expenditure per capita
Although Indonesia is already one of the largest pharmaceutical markets in Asia, its
drug expenditure per capita is still among the lowest in the region, at USD 21 in 2010.
This is significantly below regional peers such as Malaysia (USD 65) and Thailand
(USD 61). We believe this indicates the strong growth potential for the domestic
pharmaceutical industry.
Figure 14: Pharmaceutical market size, 2012

Figure 15: Drug expenditure per capita, 2010

6

180
5.0

5

160
4.4

140
USD per capita

4

USD bn

154

3.1
3
2.0
2
0.8

1

120
100
80

65

61

60

56
31

40

21

20
0

0
Indonesia

Thailand

Philippines

Malaysia

Singapore

Source: UNDESA-PA, IMS Health, Business Monitor International, media reports, Standard
Chartered Research

8 April 2014

Singapore Malaysia

Thailand

China

Philippines Indonesia

Source: Kalbe Farma, Business Monitor International

8

Equity Research l Indonesia healthcare

Poor healthcare infrastructure
Indonesia’s healthcare infrastructure is still limited, with 0.3 doctors per 1,000
population (OECD: 3.1) and 1.0 hospital beds per 1,000 population (OECD: 4.9).
Frost & Sullivan estimates Indonesia has a shortfall of 267,000 doctors. Although the
annual supply of doctors exceeds growth in annual demand, it expects the shortage
to persist beyond 2020 given the size of the shortfall.

0.7
0.3

0.5

0.3

Thailand

Indonesia

India

Malaysia

China

Singapore

US

UK

0.0

Source: Frost & Sullivan

2.0

2.0

1.6

1.5

1.0

1.0

Indonesia

1.0

2.2

India

1.3

2.5

1.0
0.5
0.0
Malaysia

1.5

2.8

Thailand

1.5

2.8

UK

1.8

2.0

3.0

3.0

US

2.3

2.5

OECD average 4.93, Global average 3.00

3.5

Singapore

OECD average 3.14

2.8

Hospital Beds per 1,000 population

Doctors per 1,000 population

3.0

Figure 17: Hospital beds per 1,000 population, 2012

China

Figure 16: Doctors per 1,000 population, 2012

Source: Frost & Sullivan

Fragmented market
Pharmaceuticals: Large incumbents, but still fragmented
The two largest listed pharmaceutical producers in Indonesia controlled less than
15% of the market each in 2012: Kalbe Farma with a 12% market share by value
(10% by volume) and Tempo with a 12.4% market share by volume (3% by value).
Kalbe’s total pharmaceutical market share by sales is much larger than Tempo’s due
to Kalbe’s market leadership in the higher-priced and higher-margin prescription drug
business, where it had a 13% market share by sales in 2012, compared to Tempo’s
fledgling prescription drug business. Overall, the market is still fragmented – the top
60 companies control over 84% of the market by value, with only eight companies
having a market share of 3% or more. Both the prescription and OTC markets are
fragmented.
Figure 18: Pharmaceutical market share by sales, 2012

Figure 19: Structure of pharmaceutical market, 2012
Largest 60 companies

Other players

100%

12%

16%

Kalbe
6%

80%

5%
4%

Soho
Dexa Medica
Pharos

65%
3%

Tempo
Others

% Total market

Sanbe

5%

60%

140

84%

40%
20%

60

0%
No of companies
Note: Market share data includes both prescription and OTC drugs.
Source: IMS

8 April 2014

Market share by sales

Source: Ministry of Health (Direktorat Jenderal Bina Kefarmasian dan Alat Kesehatan)

9

Equity Research l Indonesia healthcare

Public hospitals remain dominant
Public hospitals still make up 74% of total hospitals and 83% of bed capacity in
Indonesia. Patients of public healthcare service systems are required to seek primary
care at community clinics (puskesmas) before proceeding to public hospitals. Private
patients can go directly to private hospitals without going through a primary
healthcare service provider.
Fragmented private hospital market; Siloam is leader
The private hospital market in Indonesia is extremely fragmented, with the top 10
major hospital groups controlling only c.24% of the private hospital market by bed
capacity in 2012 (or