en asean hospitals sector 15 jan defensive growth a myth
15 January 2016
Asia Pacific
Equity Research
Healthcare
ASEAN Hospitals Sector
Research Analysts
Anand Swaminathan
65 6212 3012
[email protected]
Thaniya Kevalee
66 2 614 6219
[email protected]
Dawei Lee
65 6212 3004
[email protected]
SECTOR REVIEW
'Defensive growth' – a myth?
Figure 1: Consensus EPS revisions (% change) (FY16E)
10
3M
5
1
2
3
6M
1
0
-5
0
-1
-3
-10
-5 -5
-4
-4 -5
-8
-12
-15
-13
-20
-25
-24
-30
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles
Siloam
Mitra
Source: Bloomberg
■ History suggests 'defensive growth' mostly a myth. 'Defensive growth' is
one of the key reasons investors cite for the premium valuations enjoyed by
the healthcare sector. Yet, our analysis of history suggests this is mostly a
myth: (1) Organic healthcare demand appears to be neither uncorrelated nor
less volatile than overall economic growth; (2) reported earnings of private
players are more volatile and in line with economic cycles than perceived;
and (3) hospital stocks appear to be more resilient during initial stages of an
economic downturn, but eventually prove to be less resilient.
■ Is this cycle 'different' or are we setting up for disappointment? There
are two key differences this cycle: (1) The pace of capacity expansion by
ASEAN players is unprecedented and (2) stocks have already outperformed
significantly and are trading at premium valuations going into this economic
downturn. But signs of organic growth weakness are evident now—most
ASEAN hospitals have seen consensus EPS cuts over the past few months.
With stock prices continuing to outperform, we are potentially setting up for
disappointment with stocks more reliant on underlying macro.
■ How to play this cycle? IHH & BDMS top picks. We look for stocks with
following characteristics: (1) more resilient organic growth drivers (right
segments / geographies); (2) strong expansion pipeline / track record; and
(3) cheaper relative valuations. Our stock recommendations with a better
risk-reward profile: IHH (one of the best structural growth stories), BDMS
(attractive pipeline and track record), Raffles Medical (expansion plans in
Singapore / China) and Siloam (best play on Indonesia macro story).
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do
business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS
BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
15 January 2016
Focus charts
Figure 2: H'care expenditure versus nominal GDP growth—
Figure 3: US—total h'care expenditure YoY versus GDP
10-year CAGR (%) – better growth over longer periods…
growth YoY (%) – …but not uncorrelated to overall macro
18
20
18.5
HC exp. 10Y CAGR (%)
18
GDP 10Y CAGR (%)
US Total Health Exp. (YoY%)
US Nom. GDP growth (YoY%)
16
16.8
14
16
12
14
10
12
10.7
9.9
9.1
10
8
9.3
8.4
6
7.4
8
4
6
2
4
0
2
-2
0
Indo
TH
MY
-4
SG
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2011
Figure 4: Quarterly patient volume growth (YoY%)—in the
Figure 5: …driving a top-line growth (YoY%) slowdown
current cycle, organic demand losing momentum...
across markets
35
50
1Q15
2Q15
3Q15
30
30
40
25
22
30
20
21
18
17
16
20
15
15
14
12 13
10
10
10
0
6
5
-10
10
9
7
7
7
2
0
IHH
KPJ
BDMS
-20
IHH SG IHH MY
KPJ
BDMS
BH
BCH
CHG
Siloam
BH
BCH
CHG
1Q15
2Q15
3Q15
Raffles Siloam
Mitra
Figure 6: EV/EBITDA (x)—despite earnings volatility,
Figure 7: 1Y absolute / relative price performance (%)—
hospital stocks continue to re-rate
ASEAN hospital stocks have outperformed significantly
45
2013
2014
1Y absolute
2015
38
40
37
35
27
40
20
33
38
19
15
17
15
20
15
15
16
14
16
52
36
21
21
Relative to market
72
55
60
30
24
25
20
30
28
30
74
80
32
23
16
13
4
14
0
10
-20
5
-16
-31
-40
0
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles Siloam
Mitra
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles
Siloam
Sources for figures 2-7: CEIC, Company data, Datastream, Thomson Reuters, World Bank
ASEAN Hospitals Sector
2
15 January 2016
Defensive growth – a myth?
'Defensive growth' is one of the key reasons investors cite for the premium valuations
enjoyed by the healthcare sector. In this report, we explore whether this assumption holds
true through historical periods of economic slowdown.
Healthcare demand not immune to economic slowdown
Through cycle the long-term growth of healthcare demand appears to outperform the
overall economy. However, to be termed 'defensive growth', the healthcare sector needs
to either show a low correlation to the overall macroeconomic growth or display less
volatile demand characteristics. We fail to see both these characteristics looking at the
historical healthcare expenditure growth across countries. Some countries do show more
defensiveness than others, mostly due to structural differences. Looking at the historical
correlation between nominal GDP growth and private healthcare expenditure growth over
the past 20 years, we find a high correlation in most countries. We find that income growth
in general explains the volatility in healthcare demand. But surprisingly, the volatility in
healthcare demand appears to be more accentuated by changes in income growth and
healthcare demand seemingly recovering only with a lag. A look at the healthcare demand
characteristics in the US over several decades displays similar characteristics. ASEAN
hospitals in general have seen a general slowdown in demand growth so far this year.
Healthcare demand has
historically been surprisingly
more volatile and correlated
to macro growth
Stock performance more defensive than underlying earnings
From an investor perspective, what is probably more important is the impact of macro
slowdown on earnings and stock price performance of private healthcare operators.
Reported earnings of private players historically appear to be more volatile than expected
and more correlated to economic growth through cycles, barring very few exceptions. Most
hospitals in our universe have seen consensus EPS cuts over the past few months. The
absolute stock price performance appears to be lot more correlated to the overall
economic growth than you would expect for a defensive sector.
Can hospital stocks be more
resilient this cycle because
of unprecedented capacity
expansion?
Interestingly, hospital stocks appear to be more resilient during initial stages of an
economic downturn and then eventually tend to follow suit in line with economic growth
trends. Almost all hospital stocks in our coverage have massively outperformed their local
markets, mainly driven by investor perception of 'defensiveness'. Historically, hospital
stock valuations appear to be more correlated to economic cycles than not. Valuation
multiples for almost all hospitals stocks in our universe have expanded over the past two
years—despite a clearly mixed scorecard in terms in earnings delivery.
How to play the current macro slowdown?
We find two key differences this cycle: (1) The level of capacity expansion by private
players across ASEAN is unprecedented and is probably the biggest difference compared
to previous cycles; and (2) another key difference from a stock performance perspective is
the already expensive valuations (both absolute and relative). We look at three key stock
price/valuation drivers to screen sectors/stocks that could prove to be defensive this cycle:
(1) more resilient organic growth drivers, (2) strong capacity expansion pipeline and
delivery and (3) cheaper relative valuations. Key stock recommendations:
Stick to players with better
(1) organic growth profile,
(2) expansion pipeline and
(3) cheaper relative
valuations
IHH Healthcare: With a good track record of regional expansion and attractive
optionalities in India and China, IHH is one of the best structural stories in ASEAN.
BDMS: Attractive medium-term growth potential through greenfield expansion and M&A
supported by a strong execution track record.
Raffles Medical: Expansion plans in Singapore and China have significantly improved the
medium-term growth and profitability profile.
Siloam: Attractive macro + capacity expansion story, now at a favourable risk-reward.
ASEAN Hospitals Sector
3
15 January 2016
Valuation snapshot
Figure 8: ASEAN hospitals—valuation comparison
13-Jan-16
Malaysia
IHH
KPJ
Thailand
BDMS
BH
BCH
CHG
Singapore
Raffles
Indonesia
Siloam
Mitra
Malaysia
IHH
KPJ
Thailand
BDMS
BH
BCH
CHG
Singapore
Raffles
Indonesia
Siloam
Mitra
Year-end
US$ bn
Mkt cap
Rating
Currency
LC
Price
LC
TP
Ups.
1M
3M
6M
12M
IHHH.KL
KPJH.KL
Dec-14
Dec-14
BDMS.BK
BH.BK
BCH.BK
CHG.BK
Price performance (%)
YTD
2015
2014
12.2
1.1
O
N
MYR
MYR
6.50
4.36
6.80
4.00
5%
-8%
3.2
3.3
2.5
1.9
11.3
0.9
33.7
17.2
-1.2
3.3
36.5
14.1
24.9
-4.6
14.5
4.9
Dec-14
Dec-14
Dec-14
Dec-14
9.2
4.5
0.7
0.9
O
O
N
O
THB
THB
THB
THB
21.60
224.00
9.55
2.92
22.50
245.00
6.50
2.50
4%
9%
-32%
-14%
1.9
7.7
15.8
20.7
11.3
-2.2
38.4
30.4
3.8
12.0
27.3
56.1
15.5
60.6
17.2
61.3
-3.1
6.2
5.5
9.8
29.7
49.6
14.6
47.8
46.4
60.7
30.6
80.0
3.5
18.6
-16.4
-
RAFG.SI
Dec-14
1.6
O
SGD
3.99
5.00
25%
-7.9
-10.3
-12.9
3.6
-4.1
6.9
26.6
18.7
SILO.JK
MIKA.JK
Dec-14
Dec-14
0.8
2.2
O
-
IDR
IDR
9,400
2,120
13,000
-
38%
-
-2.8
-0.7
-24.5
-23.7
-33.9
-12.3
-30.4
-
-4.1
-11.7
-28.5
-
44.2
-
-
P/B (x)
'16E
'17E
2013
EPS G'th (%)
'15E
'16E
'17E
'15E
P/E (x)
'16E
'17E
EV / EBITDA (x)
'15E
'16E
'17E
ROE (%)
'16E
'17E
Yield (%)
'16E
'17E
IHHH.KL
KPJH.KL
47.9
34.5
22.3
15.2
20.8
12.2
47.7
29.5
39.0
25.6
32.3
22.8
24.8
14.3
20.3
12.0
17.0
10.2
6.4
12.5
7.4
12.8
2.5
2.9
2.4
2.7
0.5
1.8
0.5
1.8
BDMS.BK
BH.BK
BCH.BK
CHG.BK
7.3
26.7
-23.8
5.1
25.2
22.5
26.0
39.5
21.5
13.0
28.8
22.9
43.5
47.8
59.9
63.6
34.7
39.0
47.5
45.6
28.6
34.5
36.9
37.1
25.8
31.1
21.8
40.4
21.8
26.2
19.4
29.9
18.7
23.5
17.0
24.0
17.1
27.4
11.3
22.2
18.6
26.7
13.5
24.7
5.9
10.7
5.3
10.1
5.3
9.2
5.0
9.2
1.4
1.4
1.4
1.5
1.8
1.6
1.8
1.9
RAFG.SI
8.5
21.6
13.9
31.8
26.2
23.0
22.8
18.6
16.0
12.9
13.0
3.4
3.0
1.5
1.5
SILO.JK
MIKA.JK
57.4
8.7
61.9
16.5
74.9
23.6
110.4
52.2
68.2
44.8
39.0
36.2
19.2
36.6
13.4
30.9
9.1
24.7
8.5
17.8
13.1
19.0
5.8
7.9
5.1
6.9
0.1
0.7
0.3
0.8
Source: Bloomberg, Credit Suisse estimates
Figure 9: P/E (x)
68.2
70
2016E
2017E
60
47.5
50
40
39.0
39.0
34.7
32.3
25.6
30
45.6
39.0
37.1
36.9
34.5
28.6
26.2
22.8
23.0
20
10
0
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles
Siloam
Figure 10: EV/EBITDA (x)
35
2016E
2017E
29.9
30
26.2
25
20
15
19.4
18.7
17.0
12.0
24.0
23.5
21.8
20.3
18.6
17.0
16.0
13.4
10.2
9.1
10
5
0
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles
Siloam
Source: Credit Suisse estimates
ASEAN Hospitals Sector
4
15 January 2016
Healthcare demand not immune to
economic slowdown
'Defensive growth' is one of the key reasons investors cite for the premium valuations
enjoyed by the healthcare sector. In this report, we explore whether this assumption holds
true through historical periods of economic slowdown.
First, we look at the 'defensiveness' of the macro healthcare demand metrics. Second, we
look at the stock valuation and price performance of the healthcare stocks through
economic cycles. Finally, we provide our key recommendations on how to play the current
macro slowdown in ASEAN.
Healthcare demand outperforms overall economic
growth over longer periods…
Through cycle the long-term growth of healthcare demand clearly appears to outperform
the overall economy. In the past 5-10 years, Singapore and Indonesia have seen the
fastest growth in healthcare expenditure and have also outperformed the overall GDP
growth by the most. Interestingly, the gap between healthcare expenditure and GDP
growth appears to have widened in the past five years compared to last ten years.
Figure 11: Healthcare expenditure versus nominal GDP
Figure 12: Healthcare expenditure versus nominal GDP
growth—five-year CAGR (%)
growth—ten-year CAGR (%)
16
15.0
HC exp. 5Y CAGR (%)
GDP 5Y CAGR (%)
20
18
14
18.5
HC exp. 10Y CAGR (%)
GDP 10Y CAGR (%)
16.8
16
12.0
12
14
9.9
10
12
8.8
8.2
8
6.8
5.9
6
10.7
9.9
5.8
9.1 9.3
10
8.4
7.4
8
6
4
4
2
2
0
0
Indo
TH
Source: CEIC, World Health Organisation
MY
Indo
SG
TH
MY
SG
Source: CEIC, World Health Organisation
…but is not immune to short-term volatility in the economy
To be termed 'defensive growth', the healthcare sector needs to either show a low
correlation to the overall macroeconomic growth or display less volatile demand
characteristics. We fail to see both these characteristics looking at the historical healthcare
expenditure growth across countries. But some countries do show more defensiveness
than others, mostly due to structural differences.
To be termed defensive, we
need to see either low
macro correlation or
volatility
Healthcare demand shows decent correlation to overall macro…
We look at the historical correlation between nominal GDP growth and private healthcare
expenditure growth over the past 20 years. We surprisingly find a decent correlation in
most countries. It is interesting to note that there is probably a lag between GDP growth
and healthcare expenditure growth—implying healthcare expenditure demand probably
takes a bit more time to react to turns in an economic cycle.
ASEAN Hospitals Sector
5
15 January 2016
Singapore: Healthcare demand displays a good correlation to overall GDP growth with a
lag, despite highly subsidised healthcare services provided by the government and
reliance on medical tourism.
Malaysia: Appears a bit more defensive during certain periods of economic stress, but in
general shows decent correlation of overall GDP growth.
Figure 13: Singapore—GDP growth YoY versus
Figure 14: Malaysia—GDP growth YoY versus healthcare
healthcare expenditure growth YoY
expenditure growth YoY
30
40
25
30
20
20
15
10
10
5
0
0
-10
-5
-20
-10
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
SG GDP (YoY%)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total exp. on health (YoY%)
Source: CEIC, World Health Organisation
Msia GDP (YoY%)
Total exp. on health (YoY%)
Source: CEIC, World Health Organisation
Thailand: Probably shows the most correlation to overall economic growth among the
ASEAN countries.
Indonesia: Surprisingly appears more volatile than the underlying economic growth.
Figure 15: Thailand—GDP growth YoY versus healthcare
Figure 16: Indonesia—GDP growth YoY versus healthcare
expenditure growth YoY
expenditure growth YoY
45
20
40
15
35
30
10
25
20
5
15
10
0
5
-5
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Thai GDP (YoY%)
Total exp. on health (YoY%)
Source: CEIC, World Health Organisation
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Indo GDP (YoY%)
Total exp. on health (YoY%)
Source: CEIC, World Health Organisation
Clearly, it is difficult to draw conclusions just looking at the correlation with overall
economic growth. We look for other potential drivers of healthcare expenditure growth in
an effort to explain the volatility in healthcare expenditure growth.
ASEAN Hospitals Sector
6
15 January 2016
…and overall consumption growth
Now we look at how healthcare demand tracks against overall consumption growth in the
economy, in trying to understand whether healthcare demand is at least more defensive
than broader consumption demand. Popular logic suggests healthcare is more resilient
than the broader consumption trends in the economy.
Singapore: Surprisingly, healthcare demand appears to be more volatile that the broader
consumption in the economy. Overall, there appears to be some correlation with
healthcare expenditure growth lagging overall expenditure.
Malaysia: Healthcare expenditure shows a decent correlation to private consumption
growth and with a lag.
Figure 17: Singapore—private consumption growth YoY
Figure 18: Malaysia—private consumption growth YoY
versus healthcare expenditure growth YoY
versus healthcare expenditure growth YoY
40
15
30
10
30
30
25
25
20
20
20
15
5
10
10
15
0
0
5
10
0
-5
-10
-20
-10
1995
1997
1999
2001
2003
2005
SG Total exp.on health YoY%
2007
2009
2011
5
-5
-10
0
2013
1995
SG PCE YoY% (RHS)
1997
1999
2001
2003
2005
MY Total exp.on health YoY%
Source: CEIC, World Health Organisation
2007
2009
2011
2013
MY PCE YoY% (RHS)
Source: CEIC, World Health Organisation
Thailand: Similar to GDP, healthcare expenditure in Thailand shows the best correlation
to private consumption growth through economic cycles.
Indonesia: Healthcare expenditure shows less correlation to overall consumption in the
economy, but nevertheless appears to be more volatile.
Figure 19: Thailand—private consumption growth YoY
Figure 20: Indonesia—private consumption growth YoY
versus healthcare expenditure growth YoY
versus healthcare expenditure growth YoY
25
12
70
6
20
10
60
5
15
8
10
6
5
4
50
4
40
3
30
0
2
-5
0
-10
-2
10
-4
0
-15
1995
1997
1999
2001
2003
2005
TH Total exp.on health YoY%
Source: CEIC, World Health Organisation
ASEAN Hospitals Sector
2007
2009
2011
2013
TH PCE YoY% (RHS)
2
20
1
0
1995
1997
1999
2001
2003
2005
Indo Total exp.on health YoY%
2007
2009
2011
2013
Indo PCE YoY% (RHS)
Source: CEIC, World Health Organisation
7
15 January 2016
Income growth the key driver of demand – and a source of volatility
Finally, we look at how healthcare demand tracks against overall income growth in the
economy—a key determinant of consumption and affordability. We find that income growth
in general explains the volatility in healthcare demand. But surprisingly, the volatility in
healthcare demand appears to be more accentuated by changes in income growth and
healthcare demand seemingly recovering only with a lag.
Singapore: Changes in healthcare demand appear to be more correlated on the
downside. This is probably explained by the fact that Singapore is one of the most
penetrated in terms of healthcare expenditure among ASEAN countries and any slowdown
in income growth appears to have a disproportionate impact. This is surprising given the
level of buffer provided by government subsidies and support from medical tourism.
Malaysia: Appears to be the least volatile and correlated to income growth.
Figure 21: Singapore—income growth YoY versus
Figure 22: Malaysia—income growth YoY versus
healthcare expenditure growth YoY
healthcare expenditure growth YoY
40
12
10
30
16
30
14
25
12
8
20
6
10
4
2
0
10
20
8
6
15
4
10
2
0
-10
-2
-20
-4
1995
1997
1999
2001
2003
2005
SG Total exp.on health YoY%
2007
2009
2011
0
5
-2
-4
0
1995
2013
1997
1999
2001
2003
2005
2007
MY Total exp.on health YoY%
SG Wage growth YoY% (RHS)
Source: CEIC, World Health Organisation
2009
2011
2013
MY Wage growth YoY% (RHS)
Source: CEIC, World Health Organisation
Thailand: Shows a decent correlation to the changes in wage growth in the economy.
Indonesia: Healthcare expenditure shows more correlation to wage growth that to overall
GDP growth or GDP growth.
Figure 23: Thailand—income growth YoY versus
Figure 24: Indonesia—income growth YoY versus
healthcare expenditure growth YoY
healthcare expenditure growth YoY
25
20
10
70
30
8
60
25
15
6
10
50
20
40
4
5
15
30
0
2
-5
-10
-15
1995
1997
1999
2001
2003
2005
TH Total exp.on health YoY%
Source: CEIC, World Health Organisation
ASEAN Hospitals Sector
2007
2009
2011
2013
TH Wage growth YoY% (RHS)
10
20
0
10
-2
0
5
0
1995
1997
1999
2001
2003
Indo Total exp.on health YoY%
2005
2007
2009
2011
2013
Indo Wage growth YoY% (RHS)
Source: CEIC, World Health Organisation
8
15 January 2016
A look at US healthcare demand through cycles
Looking at the historical trends of US healthcare expenditure growth would be instructive,
mainly given the long historical data available.
Over a 50-year period, while overall healthcare expenditure growth has been mostly above
nominal GDP growth, it is nevertheless quite volatile and shows good correlation with the
overall economic growth.
Figure 25: The US—total healthcare expenditure YoY versus GDP growth YoY (%)
18
US Total Health Exp. (YoY%)
US Nom. GDP growth (YoY%)
16
14
12
Over a 50-year period,
overall healthcare
expenditure growth has
been mostly above nominal
GDP growth
10
8
6
4
2
0
-2
-4
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2011
Source: Bloomberg, Credit Suisse research
A look at the correlation with overall consumption growth in the economy and wage growth
further confirms our theory that (1) healthcare expenditure is neither defensive nor immune
to the underlying consumption growth in the economy, and (2) wage growth seems to be a
critical driver of healthcare expenditure growth.
What is interesting is that these trends seem to hold largely true despite the average
income level in the economy, the level of healthcare penetration and difference in the
funding mix of healthcare expenditure.
Figure 26: The US—total healthcare expenditure YoY
Figure 27: The US—total healthcare expenditure YoY
versus consumption YoY (%)
versus wage growth YoY (%)
18
12
16
10
14
18
14
16
12
10
14
8
12
8
12
6
10
6
10
4
8
4
6
8
2
6
0
2
4
4
2
0
1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
US Total Health Exp. (YoY%)
Source: Bloomberg, Credit Suisse research
ASEAN Hospitals Sector
US PCE YoY% (RHS)
-2
-4
2
1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
US Total Health Exp. (YoY%)
US Wage growth YoY% (RHS)
Source: Bloomberg, Credit Suisse research
9
15 January 2016
Experience so far this cycle: Weakness in healthcare
demand already apparent
ASEAN hospitals in general have seen a general slowdown in healthcare demand growth
so far this year. While some hospital players with new developing hospitals have seen
better-than-average volume growth owing to capacity addition, the organic volume growth
in mature hospitals has remained lacklustre.
Figure 28: Quarterly patient volume growth (YoY %)
BDMS and Siloam got a
boost from newly opened
hospitals
50
42
40
30
26
18
17
20
10
7 6
10
1
10
2
2
0
0
0
-1 0
0
0 -1
-10
-7
-20
IHH SG
IHH MY
KPJ
BDMS
1Q15
BH
2Q15
-10 -9
-15
BCH
CHG
Siloam
3Q15
Source: Company data
In an environment of weak demand growth and overall weakness in consumption,
hospitals are also finding it difficult to push through higher average pricing on services. In
the current cycle Thai hospitals (especially BH and CHG) have displayed more demand
resilience and have been able to push through price increases in the recent quarters.
With weaker local currencies pushing up costs of imported medicines, hospital players are
likely to pass through higher costs to patients, further restricting their ability to increase
average net revenue per patient. This has further impacted the overall top-line growth.
Figure 29: ASEAN hospitals—quarterly top-line growth (YoY %)
40
4Q14
1Q15
2Q15
Hospitals are also finding it
difficult to push through
higher average pricing
37
3Q15
35
30
30
24
25
22
20
18
15
10
12
17
16
16
14
21
19 19
14
13
121313
15
14
13
10
9
8
5
9
7 7
6
14
1011
7 7
7
2
0
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles
Siloam
Mitra
Source: Company data
ASEAN Hospitals Sector
10
15 January 2016
Why has healthcare demand been not so defensive?
While it is too early in the cycle to draw conclusions, we list a few reasons based on our
discussions with the stakeholders:
■
Postponement of discretionary / non-emergency procedures. With the increase in
macro uncertainty and a slowdown in consumption demand, hospital players see
patients delaying certain discretionary / non-emergency procedures. If this is a
genuine 'postponement', demand should probably be back within a couple of quarters.
If demand does not pick up in 2H15, probably other structural issues drive weaker
demand.
■
Move to cheaper alternatives locally. With weaker wage and consumption growth,
there is also a general shift in healthcare demand to cheaper alternatives, mainly
cheaper services at government facilities. Especially in the case of Indonesia, the rollout of the government's universal insurance scheme has resulted in some shift of
demand away from private healthcare players.
■
Impact of weaker currency / macro on medical tourism. Sustained weakness in
emerging market currencies has affected medical tourism demand especially into
Singapore. A weaker currency is probably only a minor driver, with weaker overall
macro conditions probably having a bigger influence.
ASEAN Hospitals Sector
Drivers of organic growth
slowdown vary across
geographies
11
15 January 2016
Stock performance more defensive
than underlying earnings
From an investor perspective, what is probably more important is the impact of macro
slowdown on earnings and stock price performance of private healthcare operators. In this
section, we take a look at the sensitivity of earnings and stock price/valuations to macro
volatility through cycles. For a lack of history, we restrict this analysis to hospital stocks
listed before 2008-09 in Singapore, Malaysia and Thailand.
Reported earnings not all that 'defensive'
We look at how reported earnings have responded to volatility in economic growth over
the past cycles to assess 'defensiveness'. Reported earnings historically appear to be
more volatile than expected and more correlated to economic growth through cycles.
Figure 30: Raffles Med—EPS versus GDP growth YoY (%)
150
25
100
20
Figure 31: KPJ—EPS versus GDP growth YoY (%)
80
25
20
60
15
15
50
10
40
10
0
5
20
5
-50
0
-100
0
0
-5
-5
-150
-10
-15
-200
2Q98
2Q00
2Q02
2Q04
2Q06
2Q08
RFMG - 12M TRAILING EPS
2Q10
2Q12
-20
-10
-40
-15
1Q04
2Q14
1Q06
1Q08
1Q10
1Q12
KPJ - 12M TRAILING EPS
GDP YoY% (RHS)
1Q14
GDP YoY% (RHS)
Source: CEIC, Datastream
Source: CEIC, Datastream
Figure 32: BDMS—EPS versus GDP growth YoY (%)
Figure 33: BH—EPS versus GDP growth YoY (%)
70
60
25
50
25
20
40
20
50
15
40
30
15
20
30
10
10
10
20
5
5
10
0
0
0
0
-10
-10
-20
-30
1Q06
1Q08
1Q10
BDMS - 12M TRAILING EPS
Source: CEIC, Datastream
ASEAN Hospitals Sector
1Q12
1Q14
GDP YoY% (RHS)
-5
-20
-10
-30
-5
-10
1Q06
1Q08
1Q10
BH - 12M TRAILING EPS
1Q12
1Q14
GDP YoY% (RHS)
Source: CEIC, Datastream
12
15 January 2016
Figure 34: Consensus EPS revisions (% change)
10
3M
5
1
2
Most hospitals in our
universe have seen
consensus EPS cuts over
the past few months
6M
3
1
0
0
-1
-3
-5
-5 -5
-4
-4 -5
-8
-10
-12
-15
-13
-20
-25
-24
-30
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles
Siloam
Mitra
Source: Bloomberg
Stock price performance – more resilient in relative terms
We now look at the historic stock performance of hospital stocks through economic cycles
to understand the impact of a more volatile than expected earnings profile on stock
performance – both in absolute terms and relative to local markets.
Absolute terms – resilient only during initial stages of an economic downturn
The absolute stock price performance appears to be lot more correlated to overall
economic growth than you would expect for a defensive sector. Interestingly, hospital
stocks appear to be more resilient during initial stages of an economic downturn and then
eventually tend to follow suit inline with economic growth trends.
Figure 35: Raffles Medical—stock price YoY versus GDP
Figure 36: KPJ Healthcare—stock price YoY versus GDP
growth YoY (%)
growth YoY (%)
25
200
25
200
20
150
20
150
15
10
100
15
10
100
5
50
0
5
50
0
-5
0
-5
0
-10
-50
Mar-02
-15
Mar-04
Mar-06
Mar-08
KPJ price YoY%
Source: CEIC, Datastream
ASEAN Hospitals Sector
Mar-10
Mar-12
Mar-14
GDP YoY% (RHS)
-10
-50
Mar-02
-15
Mar-04
Mar-06
Mar-08
KPJ price YoY%
Mar-10
Mar-12
Mar-14
GDP YoY% (RHS)
Source: CEIC, Datastream
13
15 January 2016
Figure 37: BDMS—stock price YoY versus GDP growth
Figure 38: BH—stock price YoY versus GDP growth YoY
YoY (%)
(%)
200.0
25.0
200
25
150.0
20.0
150
20
15.0
100.0
15
100
10.0
50.0
10
50
5.0
0.0
0.0
-50.0
-100.0
Dec-96
-5.0
-10.0
Dec-99
Dec-02
Dec-05
Dec-08
BDMS price YoY%
Dec-11
Dec-14
5
0
0
-50
-100
Dec-95
-5
-10
Dec-98
GDP YoY% (RHS)
Dec-01
Dec-04
BH price YoY%
Source: CEIC, Datastream
Dec-07
Dec-10
Dec-13
GDP YoY% (RHS)
Source: CEIC, Datastream
Relative terms – some evidence of outperformance during downturns
Looking at the performance of hospital stocks relative to their respective local markets,
there is no conclusive evidence of consistent outperformance during economic downturns
or volatility. But in majority of cases, hospital stocks have indeed outperformed their
broader market segments.
More interestingly, partly owing to outperformance during economic downturns, hospital
stocks tend to underperform during early stages of an economic recovery.
Both these observations are not conclusive and local/specific issues appear to be affecting
stock performance during certain periods.
Figure 39: Raffles Medical—stock price relative to local
Figure 40: KPJ Healthcare—stock price relative to local
market versus GDP growth YoY (%)
market versus GDP growth YoY (%)
600
25.0
20.0
500
600
25.0
20.0
500
15.0
400
10.0
300
5.0
0.0
200
15.0
400
10.0
300
5.0
0.0
200
-5.0
100
-10.0
0
Dec-99 Jan-02 Feb-04 Mar-06 Apr-08 May-10 Jun-12
RFMD price perf. Rel to index
Source: CEIC, Datastream
ASEAN Hospitals Sector
-15.0
Jul-14
GDP YoY% (RHS)
-5.0
100
-10.0
0
Mar-02 Dec-03 Sep-05 Jun-07 Mar-09 Dec-10 Sep-12 Jun-14
KPJ price perf. Rel to index
-15.0
GDP YoY% (RHS)
Source: CEIC, Datastream
14
15 January 2016
Figure 41: BDMS—stock price relative to local market
Figure 42: BH—stock price relative to local market versus
versus GDP growth YoY (%)
GDP growth YoY (%)
12,000
25
3,500
25
10,000
20
3,000
20
15
2,500
15
10
2,000
10
5
1,500
5
0
1,000
0
-5
500
-5
8,000
6,000
4,000
2,000
0
Dec-95 Jul-98 Feb-01 Sep-03 Apr-06 Nov-08 Jun-11 Jan-14
BDMS price perf. Rel to index
0
Dec-95
-10
-10
Jul-98
Feb-01 Sep-03 Apr-06 Nov-08 Jun-11 Jan-14
BH price perf. Rel to index
GDP YoY% (RHS)
Source: CEIC, Datastream
GDP YoY% (RHS)
Source: CEIC, Datastream
Hospital stocks in our coverage have massively outperformed in the past year
Except for two, all hospital stocks in our coverage have massively outperformed their local
markets, mainly driven by investor perception of 'defensiveness'.
Figure 43: 1Y absolute / relative price performance (%)
1Y absolute
74
80
Figure 44: 2Y absolute / relative price performance (%)
Relative to market
250
2Y absolute
72
199
200
55
60
40
33
200
156 156
150
38
36
15
20
52
Relative to market
32
23
21
16
100
13
69
79
78 78
68 68
4
45
50
0
20
-20
-16
-31
-40
IHH
KPJ
BDMS
Source: Bloomberg
ASEAN Hospitals Sector
BH
BCH
CHG
Raffles
Siloam
31
31
0
-1 -4
-50
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles
Siloam
Source: Bloomberg
15
15 January 2016
In fact, the healthcare sector has been a standout performer across all countries in Asia.
Figure 45: Overall market versus healthcare sector 2015 price performance (%)
120
Market
Healthcare
In 2015, healthcare sector
outperformed in almost all
countries
100
100
80
60
40
27
20
12
6
8
2
0
0
0
0
-20
-11
-10
-4
-3
-7
-8
-21
-40
-8
-21
-22
-14
-26
-35
-60
NJA
CN
HK
IN
ID
KR
MY
PH
SG
TW
TH
Source: Datastream
Valuations: Not immune historically to economic cycles
With ASEAN hospital valuations continuing to re-rate during the current economic
weakness, we look at history to get some sense of whether this can be sustained.
Absolute valuations – mostly correlated to economic cycles
Historically, hospital stock valuations appear to be more correlated to economic cycles
than not. In the historical context, the ongoing re-rating of ASEAN hospital in an
environment of economic uncertainty appears to be more an anomaly.
This could either mean 'this time is different' or we are in for a significant compression in
valuation multiples if the current economic slowdown becomes more prolonged.
Figure 46: Raffles Medical—12-month forward P/E versus
Figure 47: KPJ Healthcare—12-month forward P/E versus
GDP growth YoY (%)
GDP growth YoY (%)
40
25
35
25
35
20
30
20
30
15
25
10
15
25
10
20
20
5
5
15
15
0
10
-5
5
-10
0
-15
Apr-97 Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 Apr-13 Apr-15
RFMG FPE
Source: CEIC, Datastream
ASEAN Hospitals Sector
Nom. GDP YoY% (RHS)
0
10
-5
5
0
Dec-02
-10
-15
Dec-04
Dec-06
KPJ FPE
Dec-08
Dec-10
Dec-12
Dec-14
Nom. GDP YoY% (RHS)
Source: CEIC, Datastream
16
15 January 2016
Figure 48: BDMS—12-month forward P/E versus GDP
Figure 49: BH—12-month forward P/E versus GDP growth
growth YoY (%)
YoY (%)
25
45
40
20
25
50
45
20
40
35
15
30
10
25
15
35
30
10
25
20
5
15
0
10
5
20
15
0
10
-5
5
0
Aug-03
0
Nov-03
-10
Aug-05
Aug-07
Aug-09
BDMS FPE
Aug-11
Aug-13
-5
5
Aug-15
Nov-05
Nov-07
Nov-09
BH FPE
Nom. GDP YoY% (RHS)
Source: CEIC, Datastream
Nov-11
-10
Nov-15
Nov-13
Nom. GDP YoY% (RHS)
Source: CEIC, Datastream
Multiples have expanded meaningfully over the past two years
Valuation re-rating has been
driven by aggressive
expansion strategies
announced by the new and
incumbent players
Valuation multiples for almost all hospital stocks in our universe have expanded over the
past two years—despite a clearly mixed scorecard in terms of earnings delivery. The key
driver has been the increasingly aggressive expansion strategies announced by the new
and incumbent players which has resulted in investors willing to pay ever expanding
valuation multiples in hope of an improved medium- to long-term growth outlook. The new
hospital openings have also been a drag on reported earnings due to start-up losses.
Figure 50: P/E (x)
160
2013
Figure 51: EV/EBITDA (x)
2014
45
2015
140
2014
2015
38
37
35
120
85
20
60
52
46
30 27
24
40
40
38
38
24
20
40
25
23
30
30
27
24
25
80
30
28
30
100
40
2013
40
133
20
21
19
15
17
15
15
14
16 16
14
10
20
5
0
0
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles Siloam
Mitra
Source: Thomson Reuters
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles Siloam
Mitra
Source: Thomson Reuters
Relative valuations – no evidence of outperformance
While hospital stock relative valuations do indeed continue to improve during periods of
economic growth acceleration, there is no evidence that relative valuations improve during
economic downcycles.
In fact, relative valuations have deteriorated in a few cases during economic downturns.
This might be partly because high growth expectations tend to be priced in, only to be
disappointed once reality hits and reported earnings fail to meet expectations.
ASEAN Hospitals Sector
17
15 January 2016
Figure 52: Raffles Medical—12-month forward P/E relative
Figure 53: KPJ Healthcare—12-month forward P/E relative
to local market versus GDP growth YoY (%)
to local market versus GDP growth YoY (%)
3.0
-15
2.5
-15
-10
-10
2.5
2.0
-5
-5
2.0
0
1.5
0
1.5
5
5
10
1.0
1.0
10
15
0.0
Apr-97
15
0.5
0.5
20
25
Apr-00
Apr-03
Apr-06
Apr-09
RFMG FPE rel. to index
Apr-12
Apr-15
20
0.0
Apr-02
Nom. GDP YoY% (RHS)
25
Apr-04
Apr-06
Apr-08
Apr-10
KPJ FPE rel. to index
Apr-12
Apr-14
Nom. GDP YoY% (RHS)
Source: CEIC, Datastream
Source: CEIC, Datastream
Figure 54: BDMS—12-month forward P/E relative to local
Figure 55: BH—12-month forward P/E relative to local
market versus GDP growth YoY (%)
market versus GDP growth YoY (%)
3.5
25
4.0
25
3.0
20
3.5
20
2.5
15
2.0
10
15
3.0
10
2.5
1.5
5
1.0
0
0.5
-5
1.5
-10
1.0
Nov-03
0.0
Aug-03
Aug-05
Aug-07
Aug-09
BDMS FPE rel. to index
Source: CEIC, Datastream
ASEAN Hospitals Sector
Aug-11
Aug-13
Aug-15
Nom. GDP YoY% (RHS)
5
2.0
0
-5
Nov-05
Nov-07
BH FPE rel. to index
Nov-09
Nov-11
Nov-13
-10
Nov-15
Nom. GDP YoY% (RHS)
Source: CEIC, Datastream
18
15 January 2016
How to play the current macro
slowdown?
The key question is, 'Is this cycle different?'. In this section, we look at the key differences
this cycle and potential ways to play this cycle from a risk-reward perspective.
Two key differences this cycle
We find two key differences in terms of the underlying earnings profile and valuations:
(1) Aggressive pipeline expansion cycle. The level of capacity expansion by private
players across ASEAN is unprecedented and is probably the biggest difference compared
to previous cycles (and also used as an in support of relatively higher valuations). In the
current environment, management's ability to deliver on their pipeline expansion plans will
be under closer scrutiny. Any changes to pipeline expansion plans will also potentially
signal management's view on the sustainability of overall healthcare demand.
Level of capacity expansion
this cycle is unprecedented
across markets
(2) Relative valuations already quite expensive. Another key difference from a stock
performance perspective is the already expensive valuations (both absolute and relative).
With stocks already priced for perfection, it would make sustained outperformance all the
more difficult. There is also scope for divergence of performance based on earnings
delivery.
Who can outperform this cycle?
We look at three key stock price / valuation drivers to screen sectors / stocks that could
prove to be defensive this cycle:
(1) Strong organic growth drivers. The current slowdown could help differentiate
between the segmentation strategy of the players and resilience of their underlying
demand drivers. Hospital players who are better able to adapt to changes in demand
fundamentals and better protect their market shares would be in a better position to deliver
on earnings growth targets.
Perception of management
track record could become
key to hold on to premium
valuations
(2) Strong capacity expansion pipeline and delivery. In our view, this could be the
primary driver of outperformance this cycle. Given the level of expectations priced in, there
is a lot of scope for managements to disappoint on their promised pipeline or with potential
changes to expansion plans. A challenging demand environment will also test the target
ramp-up schedules of developing new hospitals.
(3) Cheaper relative valuations. So far this cycle, hospital stocks with higher valuation
multiples have continued to outperform as healthcare demand in general has remained
strong and investors have preferred the more expensive stocks with superior expansion
pipelines. With weaker-than-expected organic healthcare demand and potential
recalibration of expansion plans, the more expensive healthcare stocks are probably
primed for disappointment. We would prefer stocks with relatively cheap valuations and
better underlying demand fundamentals (based on target customer segments, expansion
pipeline delivery track record and also the diversity of earnings streams).
ASEAN Hospitals Sector
19
15 January 2016
Singapore: Near-term risks to organic growth
Figure 56: Singapore hospitals—valuation comparison
13-Jan-16
US$ bn
Mkt cap Rating
Singapore
IHH
IHHH.SI
Raffles
RAFG.SI
12.2
1.6
O
O
LC
Price
LC
TP
Ups.
2.08
3.99
2.67
5.00
28%
25%
EPS G'th (%)
'16E '17E
22.3
21.6
20.8
13.9
P/E (x)
EV / EBITDA (x)
'16E
'17E
'16E
'17E
ROE (%)
'16E
'17E
38.2
26.2
6.4
12.9
31.6
23.0
20.3
18.6
17.0
16.0
7.4
13.0
P/B (x)
'16E
'17E
2.5
3.4
2.4
3.0
Yield (%)
'16E
'17E
0.5
1.5
0.5
1.5
Source: Credit Suisse estimates, Thomson Reuters
Impact of the current macro slowdown on healthcare demand
Slower inbound medical tourism volumes. The weakness in the regional macro
environment and a strong SGD has negatively impacted the inbound medical tourist
volumes into Singapore. A slowdown in Indonesia, which is a key source of inbound
medical tourists, continues to be a drag. To offset weak demand from ASEAN countries,
Singapore hospitals have been diversifying into non-traditional sources like Indo-China
and Middle East, which has provided a cushion.
Surprisingly, Singapore is
seeing better local demand
growth than other markets
Local healthcare demand remains mostly resilient. Driven by an ageing population,
local healthcare demand in Singapore has remained robust and has so far been able to
partly offset slowing demand from overseas.
Government subsidised schemes remain a key driver. Another key driver of local
demand has been the increasing stimulus from Government in the form of higher
subsidies and more comprehensive medical insurance schemes. This is likely to remain a
key driver of private healthcare demand over the medium term.
Key risks to earnings over the medium term
Sustained weakness in regional macro environment. Sustained economic weakness in
Singapore and the region could make a dent on consumer affordability, adversely affecting
both the demand growth and pricing power of private hospital players.
Supply of government could
prove to be a drag on
private demand
Increased supply of government hospital beds. Singapore government has aggressive
plans to increase hospital bed supply by as much as 20% over the next three years. While
this could benefit supply conditions over the medium term, the pricing power of private
hospital players might be affected in the near term (especially for players targeting the
middle income segment).
Most and least preferred stocks in the medium term
Raffles Medical is one of our top picks in the ASEAN space driven by a strong growth
pipeline in both Singapore and overseas.
Raffles Medical has announced a 70:30 JV with Shanghai LuJiaZui Group to build and
operate a 400-bed hospital in Shanghai. We are positively surprised by this development
and believe China could be a game changer over the medium term.
Raffles Medical's potential
upside from capacity
expansion is still
underappreciated by the
market
With more clarity on its China plans, the optionalities now appear significant: (1) the 400bed Shanghai hospital could potentially be as valuable as the Singapore hospital given the
economics, (2) the 200-bed Shenzhen hospital (still under discussion) could add further
upside, and (3) further projects over the medium term cannot be ruled out.
Meanwhile, the Singapore business is likely to see a gradual improvement in profit
contribution driven by collaboration with the government on emergency services (2H15),
Holland Village specialist centre (1Q16) and Raffles hospital extension (1Q17).
ASEAN Hospitals Sector
20
15 January 2016
Singapore: Key long-term charts
Figure 57: Total healthcare expenditure and % GDP
Figure 58: GDP growth YoY versus healthcare
expenditure growth YoY
5.0
40
Singapore
4.5
4.2
30
3.9
3.9
4.0
3.6
3.5
3.0
20
3.2
3.1
2.9
2.7
2.8
10
2.5
0
2.0
1.5
-10
1.0
-20
0.5
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0.0
1995
1999
2003
2007
2011
SG GDP (YoY%)
Total exp. on health (YoY%)
Source: World Health Organization
Source: World Health Organization
Figure 59: Annual top line (S$ mn)
Figure 60: Annual EBITDA margin (%)
1,200
Raffles
Parkway
979
1,000
30
Raffles
25
25
25
24
25
24
24
22 23
870
Parkway
20
800
20
17
564
600
14
15
11
357
400
349
341
10
273
219
169
200
5
113
99
0
0
'00
'02
'04
'06
'08
'10
'12
'14
'01
'03
'05
'07
'09
Source: Company data
Source: Company data
Figure 61: Stock price relative to market
Figure 62: Forward P/E relative to market
'11
'13
600
2.7
500
400
2.2
300
1.7
200
1.2
100
0
Dec-99 Oct-01 Aug-03 Jun-05 Apr-07 Feb-09 Dec-10 Oct-12 Aug-14
0.7
Sep-00
Sep-03
RFMD price perf. Rel to index
Source: Datastream, MSCI
ASEAN Hospitals Sector
Sep-06
Sep-09
Sep-12
Sep-15
RFMG FPE rel. to index
Source: Datastream, MSCI
21
15 January 2016
Malaysia: Tough macro conditions likely to test
organic demand
Figure 63: Malaysia hospitals valuation comparison
13-Jan-16
Malaysia
IHH
KPJ
US$ bn
Mkt cap Rating
IHHH.KL
KPJH.KL
12.2
1.0
O
N
LC
Price
LC
TP
Ups.
6.50
4.36
6.80
4.00
5%
-8%
EPS G'th (%)
'16E '17E
22.3
15.2
20.8
12.2
P/E (x)
EV / EBITDA (x)
'16E
'17E
'16E
'17E
ROE (%)
'16E
'17E
39.0
25.6
6.4
12.5
32.3
22.8
20.3
12.0
17.0
10.2
7.4
12.8
P/B (x)
'16E
'17E
2.5
2.9
2.4
2.7
Yield (%)
'16E
'17E
0.5
1.8
0.5
1.8
Source: Credit Suisse estimates, Thomson Reuters
Impact of the current macro slowdown on healthcare demand
Double impact of GST and slowing economy. Overall consumption demand has seen a
visible slowdown hit by a double whammy of a slowing economy and introduction of a new
GST earlier this year. The impact of GST on healthcare demand is yet to be ascertained.
GST is net margin negative for Malaysian hospitals since healthcare is a GST-exempt
sector, but majority of input costs are GST liable. In the near term, this could also curtail
the ability of hospitals to increase prices.
Local demand is likely to be
weighed down by macro
factors near term
Medical tourism remains a work in progress. While Malaysia has been able to attract
some cost-conscious medical tourists away from Singapore due to a weaker currency, it
continues to underperform on its medical tourism capability. Sustained support from
government on improving infrastructure and connectivity would be required to improve
Malaysia's medium-term healthcare potential.
Key risks to earnings over the medium term
Weaker currency increases capex outlays. With the bulk of the medical equipment
imported, a continued weakness in currency would affect the capex outlays of hospital
players—both maintenance capex and purchase of equipment for new hospitals. This
could add to cash flow problems in an already challenging environment.
Will hospitals stick to their
expansion plans in the face
of macro headwinds
Sustained macro uncertainty could result in pipeline expansion delays. If the
demand environment continues to remain lacklustre, hospital players might be forced to
reconsider their expansion plans. Any cutbacks could have a significant impact on the
premium valuation multiples enjoyed by the hospital stocks.
Risks from overseas expansion plans. Both Malaysian hospital players, KPJ and IHH,
have overseas ambitions and venturing into new geographies. M&A and execution risks in
new markets remain key medium risks.
Most and least preferred stocks in the medium term
IHH is our top pick in the ASEAN hospital space. We like it both for its strong market
positioning in its existing markets and potential upside from expansion into new attractive
markets, especially India and China.
IHH deserves to trade at a
premium to the peer group
IHH has announced they entered into an agreement to buy 73.4% of Global Hospitals
(India) at a consideration of Rs12.84 bn (US$196 mn). The Global Hospitals Group is a
chain of tertiary / quaternary care hospitals in India having facilities across four cities with
approximately 1,100 operational beds in total, with potential to grow up to ~1,900 beds (in
five years). We think it is a decent deal for IHH (and not very expensive) that gives decent
scale to drive long term growth in a strategically important market in Asia. But execution
will be key – so far, management's M&A integration track record has been good across
various geographies.
IHH is trading in line with ASEAN peer group average. Now with the establishment of a
good growth platform in India and potential China plans, it is shaping up to be a unique
pan-Asia player and deserves to trade at a premium.
ASEAN Hospitals Sector
22
15 January 2016
Malaysia: Key long-term charts
Figure 64: Total healthcare expenditure and % GDP
Figure 65: GDP growth YoY versus healthcare
expenditure growth YoY
4.5
30
Malaysia
4.0
4.0
4.0
3.7
3.7
3.5
2.8
3.0
25
3.5
3.4
20
3.0
2.9
15
2.5
10
2.0
5
1.5
0
1.0
-5
0.5
-10
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0.0
1995
1999
2003
2007
Msia GDP (YoY%)
2011
Total exp. on health (YoY%)
Source: World Health Organization
Source: World Health Organization
Figure 66: Annual top line (RM mn)
Figure 67: Annual EBITDA margin (%)
30
8,000
KPJ
KPJ
IHH
IHH
6,758
7,000
25
25
6,000
5,191
20
20
20
5,000
16
15
3,946
4,000
15
13
12
'06
'08
13
12
12
3,000
10
2,000
1,267
1,000
583
5
831
223
0
0
'02
'04
'06
'08
'10
'12
'14
'02
'04
'10
Source: Company data
Source: Company data
Figure 68: Stock price relative to market
Figure 69: Forward P/E relative to market
600
3.5
500
3.0
'12
'14
2.5
400
2.0
300
1.5
200
1.0
100
0.5
0
Mar-02 Oct-03 May-05 Dec-06 Jul-08 Feb-10 Sep-11 Apr-13 Nov-14
KPJ price perf. Rel to index
Source: Datastream, MSCI
ASEAN Hospitals Sector
IHH price perf. Rel to index
0.0
Sep-03
Sep-05
Sep-07
Sep-09
KPJ FPE rel. to index
Sep-11
Sep-13
Sep-15
IHH FPE rel. to index
Source: Datastream, MSCI
23
15 January 2016
Thailand: Riding through short-term challenges
Figure 70: Thailand hospitals valuation comparison
13-Jan-16
Thailand
BDMS
BH
BCH
CHG
US$ bn
Mkt cap Ratin
Asia Pacific
Equity Research
Healthcare
ASEAN Hospitals Sector
Research Analysts
Anand Swaminathan
65 6212 3012
[email protected]
Thaniya Kevalee
66 2 614 6219
[email protected]
Dawei Lee
65 6212 3004
[email protected]
SECTOR REVIEW
'Defensive growth' – a myth?
Figure 1: Consensus EPS revisions (% change) (FY16E)
10
3M
5
1
2
3
6M
1
0
-5
0
-1
-3
-10
-5 -5
-4
-4 -5
-8
-12
-15
-13
-20
-25
-24
-30
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles
Siloam
Mitra
Source: Bloomberg
■ History suggests 'defensive growth' mostly a myth. 'Defensive growth' is
one of the key reasons investors cite for the premium valuations enjoyed by
the healthcare sector. Yet, our analysis of history suggests this is mostly a
myth: (1) Organic healthcare demand appears to be neither uncorrelated nor
less volatile than overall economic growth; (2) reported earnings of private
players are more volatile and in line with economic cycles than perceived;
and (3) hospital stocks appear to be more resilient during initial stages of an
economic downturn, but eventually prove to be less resilient.
■ Is this cycle 'different' or are we setting up for disappointment? There
are two key differences this cycle: (1) The pace of capacity expansion by
ASEAN players is unprecedented and (2) stocks have already outperformed
significantly and are trading at premium valuations going into this economic
downturn. But signs of organic growth weakness are evident now—most
ASEAN hospitals have seen consensus EPS cuts over the past few months.
With stock prices continuing to outperform, we are potentially setting up for
disappointment with stocks more reliant on underlying macro.
■ How to play this cycle? IHH & BDMS top picks. We look for stocks with
following characteristics: (1) more resilient organic growth drivers (right
segments / geographies); (2) strong expansion pipeline / track record; and
(3) cheaper relative valuations. Our stock recommendations with a better
risk-reward profile: IHH (one of the best structural growth stories), BDMS
(attractive pipeline and track record), Raffles Medical (expansion plans in
Singapore / China) and Siloam (best play on Indonesia macro story).
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do
business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS
BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
15 January 2016
Focus charts
Figure 2: H'care expenditure versus nominal GDP growth—
Figure 3: US—total h'care expenditure YoY versus GDP
10-year CAGR (%) – better growth over longer periods…
growth YoY (%) – …but not uncorrelated to overall macro
18
20
18.5
HC exp. 10Y CAGR (%)
18
GDP 10Y CAGR (%)
US Total Health Exp. (YoY%)
US Nom. GDP growth (YoY%)
16
16.8
14
16
12
14
10
12
10.7
9.9
9.1
10
8
9.3
8.4
6
7.4
8
4
6
2
4
0
2
-2
0
Indo
TH
MY
-4
SG
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2011
Figure 4: Quarterly patient volume growth (YoY%)—in the
Figure 5: …driving a top-line growth (YoY%) slowdown
current cycle, organic demand losing momentum...
across markets
35
50
1Q15
2Q15
3Q15
30
30
40
25
22
30
20
21
18
17
16
20
15
15
14
12 13
10
10
10
0
6
5
-10
10
9
7
7
7
2
0
IHH
KPJ
BDMS
-20
IHH SG IHH MY
KPJ
BDMS
BH
BCH
CHG
Siloam
BH
BCH
CHG
1Q15
2Q15
3Q15
Raffles Siloam
Mitra
Figure 6: EV/EBITDA (x)—despite earnings volatility,
Figure 7: 1Y absolute / relative price performance (%)—
hospital stocks continue to re-rate
ASEAN hospital stocks have outperformed significantly
45
2013
2014
1Y absolute
2015
38
40
37
35
27
40
20
33
38
19
15
17
15
20
15
15
16
14
16
52
36
21
21
Relative to market
72
55
60
30
24
25
20
30
28
30
74
80
32
23
16
13
4
14
0
10
-20
5
-16
-31
-40
0
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles Siloam
Mitra
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles
Siloam
Sources for figures 2-7: CEIC, Company data, Datastream, Thomson Reuters, World Bank
ASEAN Hospitals Sector
2
15 January 2016
Defensive growth – a myth?
'Defensive growth' is one of the key reasons investors cite for the premium valuations
enjoyed by the healthcare sector. In this report, we explore whether this assumption holds
true through historical periods of economic slowdown.
Healthcare demand not immune to economic slowdown
Through cycle the long-term growth of healthcare demand appears to outperform the
overall economy. However, to be termed 'defensive growth', the healthcare sector needs
to either show a low correlation to the overall macroeconomic growth or display less
volatile demand characteristics. We fail to see both these characteristics looking at the
historical healthcare expenditure growth across countries. Some countries do show more
defensiveness than others, mostly due to structural differences. Looking at the historical
correlation between nominal GDP growth and private healthcare expenditure growth over
the past 20 years, we find a high correlation in most countries. We find that income growth
in general explains the volatility in healthcare demand. But surprisingly, the volatility in
healthcare demand appears to be more accentuated by changes in income growth and
healthcare demand seemingly recovering only with a lag. A look at the healthcare demand
characteristics in the US over several decades displays similar characteristics. ASEAN
hospitals in general have seen a general slowdown in demand growth so far this year.
Healthcare demand has
historically been surprisingly
more volatile and correlated
to macro growth
Stock performance more defensive than underlying earnings
From an investor perspective, what is probably more important is the impact of macro
slowdown on earnings and stock price performance of private healthcare operators.
Reported earnings of private players historically appear to be more volatile than expected
and more correlated to economic growth through cycles, barring very few exceptions. Most
hospitals in our universe have seen consensus EPS cuts over the past few months. The
absolute stock price performance appears to be lot more correlated to the overall
economic growth than you would expect for a defensive sector.
Can hospital stocks be more
resilient this cycle because
of unprecedented capacity
expansion?
Interestingly, hospital stocks appear to be more resilient during initial stages of an
economic downturn and then eventually tend to follow suit in line with economic growth
trends. Almost all hospital stocks in our coverage have massively outperformed their local
markets, mainly driven by investor perception of 'defensiveness'. Historically, hospital
stock valuations appear to be more correlated to economic cycles than not. Valuation
multiples for almost all hospitals stocks in our universe have expanded over the past two
years—despite a clearly mixed scorecard in terms in earnings delivery.
How to play the current macro slowdown?
We find two key differences this cycle: (1) The level of capacity expansion by private
players across ASEAN is unprecedented and is probably the biggest difference compared
to previous cycles; and (2) another key difference from a stock performance perspective is
the already expensive valuations (both absolute and relative). We look at three key stock
price/valuation drivers to screen sectors/stocks that could prove to be defensive this cycle:
(1) more resilient organic growth drivers, (2) strong capacity expansion pipeline and
delivery and (3) cheaper relative valuations. Key stock recommendations:
Stick to players with better
(1) organic growth profile,
(2) expansion pipeline and
(3) cheaper relative
valuations
IHH Healthcare: With a good track record of regional expansion and attractive
optionalities in India and China, IHH is one of the best structural stories in ASEAN.
BDMS: Attractive medium-term growth potential through greenfield expansion and M&A
supported by a strong execution track record.
Raffles Medical: Expansion plans in Singapore and China have significantly improved the
medium-term growth and profitability profile.
Siloam: Attractive macro + capacity expansion story, now at a favourable risk-reward.
ASEAN Hospitals Sector
3
15 January 2016
Valuation snapshot
Figure 8: ASEAN hospitals—valuation comparison
13-Jan-16
Malaysia
IHH
KPJ
Thailand
BDMS
BH
BCH
CHG
Singapore
Raffles
Indonesia
Siloam
Mitra
Malaysia
IHH
KPJ
Thailand
BDMS
BH
BCH
CHG
Singapore
Raffles
Indonesia
Siloam
Mitra
Year-end
US$ bn
Mkt cap
Rating
Currency
LC
Price
LC
TP
Ups.
1M
3M
6M
12M
IHHH.KL
KPJH.KL
Dec-14
Dec-14
BDMS.BK
BH.BK
BCH.BK
CHG.BK
Price performance (%)
YTD
2015
2014
12.2
1.1
O
N
MYR
MYR
6.50
4.36
6.80
4.00
5%
-8%
3.2
3.3
2.5
1.9
11.3
0.9
33.7
17.2
-1.2
3.3
36.5
14.1
24.9
-4.6
14.5
4.9
Dec-14
Dec-14
Dec-14
Dec-14
9.2
4.5
0.7
0.9
O
O
N
O
THB
THB
THB
THB
21.60
224.00
9.55
2.92
22.50
245.00
6.50
2.50
4%
9%
-32%
-14%
1.9
7.7
15.8
20.7
11.3
-2.2
38.4
30.4
3.8
12.0
27.3
56.1
15.5
60.6
17.2
61.3
-3.1
6.2
5.5
9.8
29.7
49.6
14.6
47.8
46.4
60.7
30.6
80.0
3.5
18.6
-16.4
-
RAFG.SI
Dec-14
1.6
O
SGD
3.99
5.00
25%
-7.9
-10.3
-12.9
3.6
-4.1
6.9
26.6
18.7
SILO.JK
MIKA.JK
Dec-14
Dec-14
0.8
2.2
O
-
IDR
IDR
9,400
2,120
13,000
-
38%
-
-2.8
-0.7
-24.5
-23.7
-33.9
-12.3
-30.4
-
-4.1
-11.7
-28.5
-
44.2
-
-
P/B (x)
'16E
'17E
2013
EPS G'th (%)
'15E
'16E
'17E
'15E
P/E (x)
'16E
'17E
EV / EBITDA (x)
'15E
'16E
'17E
ROE (%)
'16E
'17E
Yield (%)
'16E
'17E
IHHH.KL
KPJH.KL
47.9
34.5
22.3
15.2
20.8
12.2
47.7
29.5
39.0
25.6
32.3
22.8
24.8
14.3
20.3
12.0
17.0
10.2
6.4
12.5
7.4
12.8
2.5
2.9
2.4
2.7
0.5
1.8
0.5
1.8
BDMS.BK
BH.BK
BCH.BK
CHG.BK
7.3
26.7
-23.8
5.1
25.2
22.5
26.0
39.5
21.5
13.0
28.8
22.9
43.5
47.8
59.9
63.6
34.7
39.0
47.5
45.6
28.6
34.5
36.9
37.1
25.8
31.1
21.8
40.4
21.8
26.2
19.4
29.9
18.7
23.5
17.0
24.0
17.1
27.4
11.3
22.2
18.6
26.7
13.5
24.7
5.9
10.7
5.3
10.1
5.3
9.2
5.0
9.2
1.4
1.4
1.4
1.5
1.8
1.6
1.8
1.9
RAFG.SI
8.5
21.6
13.9
31.8
26.2
23.0
22.8
18.6
16.0
12.9
13.0
3.4
3.0
1.5
1.5
SILO.JK
MIKA.JK
57.4
8.7
61.9
16.5
74.9
23.6
110.4
52.2
68.2
44.8
39.0
36.2
19.2
36.6
13.4
30.9
9.1
24.7
8.5
17.8
13.1
19.0
5.8
7.9
5.1
6.9
0.1
0.7
0.3
0.8
Source: Bloomberg, Credit Suisse estimates
Figure 9: P/E (x)
68.2
70
2016E
2017E
60
47.5
50
40
39.0
39.0
34.7
32.3
25.6
30
45.6
39.0
37.1
36.9
34.5
28.6
26.2
22.8
23.0
20
10
0
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles
Siloam
Figure 10: EV/EBITDA (x)
35
2016E
2017E
29.9
30
26.2
25
20
15
19.4
18.7
17.0
12.0
24.0
23.5
21.8
20.3
18.6
17.0
16.0
13.4
10.2
9.1
10
5
0
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles
Siloam
Source: Credit Suisse estimates
ASEAN Hospitals Sector
4
15 January 2016
Healthcare demand not immune to
economic slowdown
'Defensive growth' is one of the key reasons investors cite for the premium valuations
enjoyed by the healthcare sector. In this report, we explore whether this assumption holds
true through historical periods of economic slowdown.
First, we look at the 'defensiveness' of the macro healthcare demand metrics. Second, we
look at the stock valuation and price performance of the healthcare stocks through
economic cycles. Finally, we provide our key recommendations on how to play the current
macro slowdown in ASEAN.
Healthcare demand outperforms overall economic
growth over longer periods…
Through cycle the long-term growth of healthcare demand clearly appears to outperform
the overall economy. In the past 5-10 years, Singapore and Indonesia have seen the
fastest growth in healthcare expenditure and have also outperformed the overall GDP
growth by the most. Interestingly, the gap between healthcare expenditure and GDP
growth appears to have widened in the past five years compared to last ten years.
Figure 11: Healthcare expenditure versus nominal GDP
Figure 12: Healthcare expenditure versus nominal GDP
growth—five-year CAGR (%)
growth—ten-year CAGR (%)
16
15.0
HC exp. 5Y CAGR (%)
GDP 5Y CAGR (%)
20
18
14
18.5
HC exp. 10Y CAGR (%)
GDP 10Y CAGR (%)
16.8
16
12.0
12
14
9.9
10
12
8.8
8.2
8
6.8
5.9
6
10.7
9.9
5.8
9.1 9.3
10
8.4
7.4
8
6
4
4
2
2
0
0
Indo
TH
Source: CEIC, World Health Organisation
MY
Indo
SG
TH
MY
SG
Source: CEIC, World Health Organisation
…but is not immune to short-term volatility in the economy
To be termed 'defensive growth', the healthcare sector needs to either show a low
correlation to the overall macroeconomic growth or display less volatile demand
characteristics. We fail to see both these characteristics looking at the historical healthcare
expenditure growth across countries. But some countries do show more defensiveness
than others, mostly due to structural differences.
To be termed defensive, we
need to see either low
macro correlation or
volatility
Healthcare demand shows decent correlation to overall macro…
We look at the historical correlation between nominal GDP growth and private healthcare
expenditure growth over the past 20 years. We surprisingly find a decent correlation in
most countries. It is interesting to note that there is probably a lag between GDP growth
and healthcare expenditure growth—implying healthcare expenditure demand probably
takes a bit more time to react to turns in an economic cycle.
ASEAN Hospitals Sector
5
15 January 2016
Singapore: Healthcare demand displays a good correlation to overall GDP growth with a
lag, despite highly subsidised healthcare services provided by the government and
reliance on medical tourism.
Malaysia: Appears a bit more defensive during certain periods of economic stress, but in
general shows decent correlation of overall GDP growth.
Figure 13: Singapore—GDP growth YoY versus
Figure 14: Malaysia—GDP growth YoY versus healthcare
healthcare expenditure growth YoY
expenditure growth YoY
30
40
25
30
20
20
15
10
10
5
0
0
-10
-5
-20
-10
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
SG GDP (YoY%)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total exp. on health (YoY%)
Source: CEIC, World Health Organisation
Msia GDP (YoY%)
Total exp. on health (YoY%)
Source: CEIC, World Health Organisation
Thailand: Probably shows the most correlation to overall economic growth among the
ASEAN countries.
Indonesia: Surprisingly appears more volatile than the underlying economic growth.
Figure 15: Thailand—GDP growth YoY versus healthcare
Figure 16: Indonesia—GDP growth YoY versus healthcare
expenditure growth YoY
expenditure growth YoY
45
20
40
15
35
30
10
25
20
5
15
10
0
5
-5
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Thai GDP (YoY%)
Total exp. on health (YoY%)
Source: CEIC, World Health Organisation
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Indo GDP (YoY%)
Total exp. on health (YoY%)
Source: CEIC, World Health Organisation
Clearly, it is difficult to draw conclusions just looking at the correlation with overall
economic growth. We look for other potential drivers of healthcare expenditure growth in
an effort to explain the volatility in healthcare expenditure growth.
ASEAN Hospitals Sector
6
15 January 2016
…and overall consumption growth
Now we look at how healthcare demand tracks against overall consumption growth in the
economy, in trying to understand whether healthcare demand is at least more defensive
than broader consumption demand. Popular logic suggests healthcare is more resilient
than the broader consumption trends in the economy.
Singapore: Surprisingly, healthcare demand appears to be more volatile that the broader
consumption in the economy. Overall, there appears to be some correlation with
healthcare expenditure growth lagging overall expenditure.
Malaysia: Healthcare expenditure shows a decent correlation to private consumption
growth and with a lag.
Figure 17: Singapore—private consumption growth YoY
Figure 18: Malaysia—private consumption growth YoY
versus healthcare expenditure growth YoY
versus healthcare expenditure growth YoY
40
15
30
10
30
30
25
25
20
20
20
15
5
10
10
15
0
0
5
10
0
-5
-10
-20
-10
1995
1997
1999
2001
2003
2005
SG Total exp.on health YoY%
2007
2009
2011
5
-5
-10
0
2013
1995
SG PCE YoY% (RHS)
1997
1999
2001
2003
2005
MY Total exp.on health YoY%
Source: CEIC, World Health Organisation
2007
2009
2011
2013
MY PCE YoY% (RHS)
Source: CEIC, World Health Organisation
Thailand: Similar to GDP, healthcare expenditure in Thailand shows the best correlation
to private consumption growth through economic cycles.
Indonesia: Healthcare expenditure shows less correlation to overall consumption in the
economy, but nevertheless appears to be more volatile.
Figure 19: Thailand—private consumption growth YoY
Figure 20: Indonesia—private consumption growth YoY
versus healthcare expenditure growth YoY
versus healthcare expenditure growth YoY
25
12
70
6
20
10
60
5
15
8
10
6
5
4
50
4
40
3
30
0
2
-5
0
-10
-2
10
-4
0
-15
1995
1997
1999
2001
2003
2005
TH Total exp.on health YoY%
Source: CEIC, World Health Organisation
ASEAN Hospitals Sector
2007
2009
2011
2013
TH PCE YoY% (RHS)
2
20
1
0
1995
1997
1999
2001
2003
2005
Indo Total exp.on health YoY%
2007
2009
2011
2013
Indo PCE YoY% (RHS)
Source: CEIC, World Health Organisation
7
15 January 2016
Income growth the key driver of demand – and a source of volatility
Finally, we look at how healthcare demand tracks against overall income growth in the
economy—a key determinant of consumption and affordability. We find that income growth
in general explains the volatility in healthcare demand. But surprisingly, the volatility in
healthcare demand appears to be more accentuated by changes in income growth and
healthcare demand seemingly recovering only with a lag.
Singapore: Changes in healthcare demand appear to be more correlated on the
downside. This is probably explained by the fact that Singapore is one of the most
penetrated in terms of healthcare expenditure among ASEAN countries and any slowdown
in income growth appears to have a disproportionate impact. This is surprising given the
level of buffer provided by government subsidies and support from medical tourism.
Malaysia: Appears to be the least volatile and correlated to income growth.
Figure 21: Singapore—income growth YoY versus
Figure 22: Malaysia—income growth YoY versus
healthcare expenditure growth YoY
healthcare expenditure growth YoY
40
12
10
30
16
30
14
25
12
8
20
6
10
4
2
0
10
20
8
6
15
4
10
2
0
-10
-2
-20
-4
1995
1997
1999
2001
2003
2005
SG Total exp.on health YoY%
2007
2009
2011
0
5
-2
-4
0
1995
2013
1997
1999
2001
2003
2005
2007
MY Total exp.on health YoY%
SG Wage growth YoY% (RHS)
Source: CEIC, World Health Organisation
2009
2011
2013
MY Wage growth YoY% (RHS)
Source: CEIC, World Health Organisation
Thailand: Shows a decent correlation to the changes in wage growth in the economy.
Indonesia: Healthcare expenditure shows more correlation to wage growth that to overall
GDP growth or GDP growth.
Figure 23: Thailand—income growth YoY versus
Figure 24: Indonesia—income growth YoY versus
healthcare expenditure growth YoY
healthcare expenditure growth YoY
25
20
10
70
30
8
60
25
15
6
10
50
20
40
4
5
15
30
0
2
-5
-10
-15
1995
1997
1999
2001
2003
2005
TH Total exp.on health YoY%
Source: CEIC, World Health Organisation
ASEAN Hospitals Sector
2007
2009
2011
2013
TH Wage growth YoY% (RHS)
10
20
0
10
-2
0
5
0
1995
1997
1999
2001
2003
Indo Total exp.on health YoY%
2005
2007
2009
2011
2013
Indo Wage growth YoY% (RHS)
Source: CEIC, World Health Organisation
8
15 January 2016
A look at US healthcare demand through cycles
Looking at the historical trends of US healthcare expenditure growth would be instructive,
mainly given the long historical data available.
Over a 50-year period, while overall healthcare expenditure growth has been mostly above
nominal GDP growth, it is nevertheless quite volatile and shows good correlation with the
overall economic growth.
Figure 25: The US—total healthcare expenditure YoY versus GDP growth YoY (%)
18
US Total Health Exp. (YoY%)
US Nom. GDP growth (YoY%)
16
14
12
Over a 50-year period,
overall healthcare
expenditure growth has
been mostly above nominal
GDP growth
10
8
6
4
2
0
-2
-4
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2011
Source: Bloomberg, Credit Suisse research
A look at the correlation with overall consumption growth in the economy and wage growth
further confirms our theory that (1) healthcare expenditure is neither defensive nor immune
to the underlying consumption growth in the economy, and (2) wage growth seems to be a
critical driver of healthcare expenditure growth.
What is interesting is that these trends seem to hold largely true despite the average
income level in the economy, the level of healthcare penetration and difference in the
funding mix of healthcare expenditure.
Figure 26: The US—total healthcare expenditure YoY
Figure 27: The US—total healthcare expenditure YoY
versus consumption YoY (%)
versus wage growth YoY (%)
18
12
16
10
14
18
14
16
12
10
14
8
12
8
12
6
10
6
10
4
8
4
6
8
2
6
0
2
4
4
2
0
1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
US Total Health Exp. (YoY%)
Source: Bloomberg, Credit Suisse research
ASEAN Hospitals Sector
US PCE YoY% (RHS)
-2
-4
2
1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
US Total Health Exp. (YoY%)
US Wage growth YoY% (RHS)
Source: Bloomberg, Credit Suisse research
9
15 January 2016
Experience so far this cycle: Weakness in healthcare
demand already apparent
ASEAN hospitals in general have seen a general slowdown in healthcare demand growth
so far this year. While some hospital players with new developing hospitals have seen
better-than-average volume growth owing to capacity addition, the organic volume growth
in mature hospitals has remained lacklustre.
Figure 28: Quarterly patient volume growth (YoY %)
BDMS and Siloam got a
boost from newly opened
hospitals
50
42
40
30
26
18
17
20
10
7 6
10
1
10
2
2
0
0
0
-1 0
0
0 -1
-10
-7
-20
IHH SG
IHH MY
KPJ
BDMS
1Q15
BH
2Q15
-10 -9
-15
BCH
CHG
Siloam
3Q15
Source: Company data
In an environment of weak demand growth and overall weakness in consumption,
hospitals are also finding it difficult to push through higher average pricing on services. In
the current cycle Thai hospitals (especially BH and CHG) have displayed more demand
resilience and have been able to push through price increases in the recent quarters.
With weaker local currencies pushing up costs of imported medicines, hospital players are
likely to pass through higher costs to patients, further restricting their ability to increase
average net revenue per patient. This has further impacted the overall top-line growth.
Figure 29: ASEAN hospitals—quarterly top-line growth (YoY %)
40
4Q14
1Q15
2Q15
Hospitals are also finding it
difficult to push through
higher average pricing
37
3Q15
35
30
30
24
25
22
20
18
15
10
12
17
16
16
14
21
19 19
14
13
121313
15
14
13
10
9
8
5
9
7 7
6
14
1011
7 7
7
2
0
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles
Siloam
Mitra
Source: Company data
ASEAN Hospitals Sector
10
15 January 2016
Why has healthcare demand been not so defensive?
While it is too early in the cycle to draw conclusions, we list a few reasons based on our
discussions with the stakeholders:
■
Postponement of discretionary / non-emergency procedures. With the increase in
macro uncertainty and a slowdown in consumption demand, hospital players see
patients delaying certain discretionary / non-emergency procedures. If this is a
genuine 'postponement', demand should probably be back within a couple of quarters.
If demand does not pick up in 2H15, probably other structural issues drive weaker
demand.
■
Move to cheaper alternatives locally. With weaker wage and consumption growth,
there is also a general shift in healthcare demand to cheaper alternatives, mainly
cheaper services at government facilities. Especially in the case of Indonesia, the rollout of the government's universal insurance scheme has resulted in some shift of
demand away from private healthcare players.
■
Impact of weaker currency / macro on medical tourism. Sustained weakness in
emerging market currencies has affected medical tourism demand especially into
Singapore. A weaker currency is probably only a minor driver, with weaker overall
macro conditions probably having a bigger influence.
ASEAN Hospitals Sector
Drivers of organic growth
slowdown vary across
geographies
11
15 January 2016
Stock performance more defensive
than underlying earnings
From an investor perspective, what is probably more important is the impact of macro
slowdown on earnings and stock price performance of private healthcare operators. In this
section, we take a look at the sensitivity of earnings and stock price/valuations to macro
volatility through cycles. For a lack of history, we restrict this analysis to hospital stocks
listed before 2008-09 in Singapore, Malaysia and Thailand.
Reported earnings not all that 'defensive'
We look at how reported earnings have responded to volatility in economic growth over
the past cycles to assess 'defensiveness'. Reported earnings historically appear to be
more volatile than expected and more correlated to economic growth through cycles.
Figure 30: Raffles Med—EPS versus GDP growth YoY (%)
150
25
100
20
Figure 31: KPJ—EPS versus GDP growth YoY (%)
80
25
20
60
15
15
50
10
40
10
0
5
20
5
-50
0
-100
0
0
-5
-5
-150
-10
-15
-200
2Q98
2Q00
2Q02
2Q04
2Q06
2Q08
RFMG - 12M TRAILING EPS
2Q10
2Q12
-20
-10
-40
-15
1Q04
2Q14
1Q06
1Q08
1Q10
1Q12
KPJ - 12M TRAILING EPS
GDP YoY% (RHS)
1Q14
GDP YoY% (RHS)
Source: CEIC, Datastream
Source: CEIC, Datastream
Figure 32: BDMS—EPS versus GDP growth YoY (%)
Figure 33: BH—EPS versus GDP growth YoY (%)
70
60
25
50
25
20
40
20
50
15
40
30
15
20
30
10
10
10
20
5
5
10
0
0
0
0
-10
-10
-20
-30
1Q06
1Q08
1Q10
BDMS - 12M TRAILING EPS
Source: CEIC, Datastream
ASEAN Hospitals Sector
1Q12
1Q14
GDP YoY% (RHS)
-5
-20
-10
-30
-5
-10
1Q06
1Q08
1Q10
BH - 12M TRAILING EPS
1Q12
1Q14
GDP YoY% (RHS)
Source: CEIC, Datastream
12
15 January 2016
Figure 34: Consensus EPS revisions (% change)
10
3M
5
1
2
Most hospitals in our
universe have seen
consensus EPS cuts over
the past few months
6M
3
1
0
0
-1
-3
-5
-5 -5
-4
-4 -5
-8
-10
-12
-15
-13
-20
-25
-24
-30
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles
Siloam
Mitra
Source: Bloomberg
Stock price performance – more resilient in relative terms
We now look at the historic stock performance of hospital stocks through economic cycles
to understand the impact of a more volatile than expected earnings profile on stock
performance – both in absolute terms and relative to local markets.
Absolute terms – resilient only during initial stages of an economic downturn
The absolute stock price performance appears to be lot more correlated to overall
economic growth than you would expect for a defensive sector. Interestingly, hospital
stocks appear to be more resilient during initial stages of an economic downturn and then
eventually tend to follow suit inline with economic growth trends.
Figure 35: Raffles Medical—stock price YoY versus GDP
Figure 36: KPJ Healthcare—stock price YoY versus GDP
growth YoY (%)
growth YoY (%)
25
200
25
200
20
150
20
150
15
10
100
15
10
100
5
50
0
5
50
0
-5
0
-5
0
-10
-50
Mar-02
-15
Mar-04
Mar-06
Mar-08
KPJ price YoY%
Source: CEIC, Datastream
ASEAN Hospitals Sector
Mar-10
Mar-12
Mar-14
GDP YoY% (RHS)
-10
-50
Mar-02
-15
Mar-04
Mar-06
Mar-08
KPJ price YoY%
Mar-10
Mar-12
Mar-14
GDP YoY% (RHS)
Source: CEIC, Datastream
13
15 January 2016
Figure 37: BDMS—stock price YoY versus GDP growth
Figure 38: BH—stock price YoY versus GDP growth YoY
YoY (%)
(%)
200.0
25.0
200
25
150.0
20.0
150
20
15.0
100.0
15
100
10.0
50.0
10
50
5.0
0.0
0.0
-50.0
-100.0
Dec-96
-5.0
-10.0
Dec-99
Dec-02
Dec-05
Dec-08
BDMS price YoY%
Dec-11
Dec-14
5
0
0
-50
-100
Dec-95
-5
-10
Dec-98
GDP YoY% (RHS)
Dec-01
Dec-04
BH price YoY%
Source: CEIC, Datastream
Dec-07
Dec-10
Dec-13
GDP YoY% (RHS)
Source: CEIC, Datastream
Relative terms – some evidence of outperformance during downturns
Looking at the performance of hospital stocks relative to their respective local markets,
there is no conclusive evidence of consistent outperformance during economic downturns
or volatility. But in majority of cases, hospital stocks have indeed outperformed their
broader market segments.
More interestingly, partly owing to outperformance during economic downturns, hospital
stocks tend to underperform during early stages of an economic recovery.
Both these observations are not conclusive and local/specific issues appear to be affecting
stock performance during certain periods.
Figure 39: Raffles Medical—stock price relative to local
Figure 40: KPJ Healthcare—stock price relative to local
market versus GDP growth YoY (%)
market versus GDP growth YoY (%)
600
25.0
20.0
500
600
25.0
20.0
500
15.0
400
10.0
300
5.0
0.0
200
15.0
400
10.0
300
5.0
0.0
200
-5.0
100
-10.0
0
Dec-99 Jan-02 Feb-04 Mar-06 Apr-08 May-10 Jun-12
RFMD price perf. Rel to index
Source: CEIC, Datastream
ASEAN Hospitals Sector
-15.0
Jul-14
GDP YoY% (RHS)
-5.0
100
-10.0
0
Mar-02 Dec-03 Sep-05 Jun-07 Mar-09 Dec-10 Sep-12 Jun-14
KPJ price perf. Rel to index
-15.0
GDP YoY% (RHS)
Source: CEIC, Datastream
14
15 January 2016
Figure 41: BDMS—stock price relative to local market
Figure 42: BH—stock price relative to local market versus
versus GDP growth YoY (%)
GDP growth YoY (%)
12,000
25
3,500
25
10,000
20
3,000
20
15
2,500
15
10
2,000
10
5
1,500
5
0
1,000
0
-5
500
-5
8,000
6,000
4,000
2,000
0
Dec-95 Jul-98 Feb-01 Sep-03 Apr-06 Nov-08 Jun-11 Jan-14
BDMS price perf. Rel to index
0
Dec-95
-10
-10
Jul-98
Feb-01 Sep-03 Apr-06 Nov-08 Jun-11 Jan-14
BH price perf. Rel to index
GDP YoY% (RHS)
Source: CEIC, Datastream
GDP YoY% (RHS)
Source: CEIC, Datastream
Hospital stocks in our coverage have massively outperformed in the past year
Except for two, all hospital stocks in our coverage have massively outperformed their local
markets, mainly driven by investor perception of 'defensiveness'.
Figure 43: 1Y absolute / relative price performance (%)
1Y absolute
74
80
Figure 44: 2Y absolute / relative price performance (%)
Relative to market
250
2Y absolute
72
199
200
55
60
40
33
200
156 156
150
38
36
15
20
52
Relative to market
32
23
21
16
100
13
69
79
78 78
68 68
4
45
50
0
20
-20
-16
-31
-40
IHH
KPJ
BDMS
Source: Bloomberg
ASEAN Hospitals Sector
BH
BCH
CHG
Raffles
Siloam
31
31
0
-1 -4
-50
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles
Siloam
Source: Bloomberg
15
15 January 2016
In fact, the healthcare sector has been a standout performer across all countries in Asia.
Figure 45: Overall market versus healthcare sector 2015 price performance (%)
120
Market
Healthcare
In 2015, healthcare sector
outperformed in almost all
countries
100
100
80
60
40
27
20
12
6
8
2
0
0
0
0
-20
-11
-10
-4
-3
-7
-8
-21
-40
-8
-21
-22
-14
-26
-35
-60
NJA
CN
HK
IN
ID
KR
MY
PH
SG
TW
TH
Source: Datastream
Valuations: Not immune historically to economic cycles
With ASEAN hospital valuations continuing to re-rate during the current economic
weakness, we look at history to get some sense of whether this can be sustained.
Absolute valuations – mostly correlated to economic cycles
Historically, hospital stock valuations appear to be more correlated to economic cycles
than not. In the historical context, the ongoing re-rating of ASEAN hospital in an
environment of economic uncertainty appears to be more an anomaly.
This could either mean 'this time is different' or we are in for a significant compression in
valuation multiples if the current economic slowdown becomes more prolonged.
Figure 46: Raffles Medical—12-month forward P/E versus
Figure 47: KPJ Healthcare—12-month forward P/E versus
GDP growth YoY (%)
GDP growth YoY (%)
40
25
35
25
35
20
30
20
30
15
25
10
15
25
10
20
20
5
5
15
15
0
10
-5
5
-10
0
-15
Apr-97 Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 Apr-13 Apr-15
RFMG FPE
Source: CEIC, Datastream
ASEAN Hospitals Sector
Nom. GDP YoY% (RHS)
0
10
-5
5
0
Dec-02
-10
-15
Dec-04
Dec-06
KPJ FPE
Dec-08
Dec-10
Dec-12
Dec-14
Nom. GDP YoY% (RHS)
Source: CEIC, Datastream
16
15 January 2016
Figure 48: BDMS—12-month forward P/E versus GDP
Figure 49: BH—12-month forward P/E versus GDP growth
growth YoY (%)
YoY (%)
25
45
40
20
25
50
45
20
40
35
15
30
10
25
15
35
30
10
25
20
5
15
0
10
5
20
15
0
10
-5
5
0
Aug-03
0
Nov-03
-10
Aug-05
Aug-07
Aug-09
BDMS FPE
Aug-11
Aug-13
-5
5
Aug-15
Nov-05
Nov-07
Nov-09
BH FPE
Nom. GDP YoY% (RHS)
Source: CEIC, Datastream
Nov-11
-10
Nov-15
Nov-13
Nom. GDP YoY% (RHS)
Source: CEIC, Datastream
Multiples have expanded meaningfully over the past two years
Valuation re-rating has been
driven by aggressive
expansion strategies
announced by the new and
incumbent players
Valuation multiples for almost all hospital stocks in our universe have expanded over the
past two years—despite a clearly mixed scorecard in terms of earnings delivery. The key
driver has been the increasingly aggressive expansion strategies announced by the new
and incumbent players which has resulted in investors willing to pay ever expanding
valuation multiples in hope of an improved medium- to long-term growth outlook. The new
hospital openings have also been a drag on reported earnings due to start-up losses.
Figure 50: P/E (x)
160
2013
Figure 51: EV/EBITDA (x)
2014
45
2015
140
2014
2015
38
37
35
120
85
20
60
52
46
30 27
24
40
40
38
38
24
20
40
25
23
30
30
27
24
25
80
30
28
30
100
40
2013
40
133
20
21
19
15
17
15
15
14
16 16
14
10
20
5
0
0
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles Siloam
Mitra
Source: Thomson Reuters
IHH
KPJ
BDMS
BH
BCH
CHG
Raffles Siloam
Mitra
Source: Thomson Reuters
Relative valuations – no evidence of outperformance
While hospital stock relative valuations do indeed continue to improve during periods of
economic growth acceleration, there is no evidence that relative valuations improve during
economic downcycles.
In fact, relative valuations have deteriorated in a few cases during economic downturns.
This might be partly because high growth expectations tend to be priced in, only to be
disappointed once reality hits and reported earnings fail to meet expectations.
ASEAN Hospitals Sector
17
15 January 2016
Figure 52: Raffles Medical—12-month forward P/E relative
Figure 53: KPJ Healthcare—12-month forward P/E relative
to local market versus GDP growth YoY (%)
to local market versus GDP growth YoY (%)
3.0
-15
2.5
-15
-10
-10
2.5
2.0
-5
-5
2.0
0
1.5
0
1.5
5
5
10
1.0
1.0
10
15
0.0
Apr-97
15
0.5
0.5
20
25
Apr-00
Apr-03
Apr-06
Apr-09
RFMG FPE rel. to index
Apr-12
Apr-15
20
0.0
Apr-02
Nom. GDP YoY% (RHS)
25
Apr-04
Apr-06
Apr-08
Apr-10
KPJ FPE rel. to index
Apr-12
Apr-14
Nom. GDP YoY% (RHS)
Source: CEIC, Datastream
Source: CEIC, Datastream
Figure 54: BDMS—12-month forward P/E relative to local
Figure 55: BH—12-month forward P/E relative to local
market versus GDP growth YoY (%)
market versus GDP growth YoY (%)
3.5
25
4.0
25
3.0
20
3.5
20
2.5
15
2.0
10
15
3.0
10
2.5
1.5
5
1.0
0
0.5
-5
1.5
-10
1.0
Nov-03
0.0
Aug-03
Aug-05
Aug-07
Aug-09
BDMS FPE rel. to index
Source: CEIC, Datastream
ASEAN Hospitals Sector
Aug-11
Aug-13
Aug-15
Nom. GDP YoY% (RHS)
5
2.0
0
-5
Nov-05
Nov-07
BH FPE rel. to index
Nov-09
Nov-11
Nov-13
-10
Nov-15
Nom. GDP YoY% (RHS)
Source: CEIC, Datastream
18
15 January 2016
How to play the current macro
slowdown?
The key question is, 'Is this cycle different?'. In this section, we look at the key differences
this cycle and potential ways to play this cycle from a risk-reward perspective.
Two key differences this cycle
We find two key differences in terms of the underlying earnings profile and valuations:
(1) Aggressive pipeline expansion cycle. The level of capacity expansion by private
players across ASEAN is unprecedented and is probably the biggest difference compared
to previous cycles (and also used as an in support of relatively higher valuations). In the
current environment, management's ability to deliver on their pipeline expansion plans will
be under closer scrutiny. Any changes to pipeline expansion plans will also potentially
signal management's view on the sustainability of overall healthcare demand.
Level of capacity expansion
this cycle is unprecedented
across markets
(2) Relative valuations already quite expensive. Another key difference from a stock
performance perspective is the already expensive valuations (both absolute and relative).
With stocks already priced for perfection, it would make sustained outperformance all the
more difficult. There is also scope for divergence of performance based on earnings
delivery.
Who can outperform this cycle?
We look at three key stock price / valuation drivers to screen sectors / stocks that could
prove to be defensive this cycle:
(1) Strong organic growth drivers. The current slowdown could help differentiate
between the segmentation strategy of the players and resilience of their underlying
demand drivers. Hospital players who are better able to adapt to changes in demand
fundamentals and better protect their market shares would be in a better position to deliver
on earnings growth targets.
Perception of management
track record could become
key to hold on to premium
valuations
(2) Strong capacity expansion pipeline and delivery. In our view, this could be the
primary driver of outperformance this cycle. Given the level of expectations priced in, there
is a lot of scope for managements to disappoint on their promised pipeline or with potential
changes to expansion plans. A challenging demand environment will also test the target
ramp-up schedules of developing new hospitals.
(3) Cheaper relative valuations. So far this cycle, hospital stocks with higher valuation
multiples have continued to outperform as healthcare demand in general has remained
strong and investors have preferred the more expensive stocks with superior expansion
pipelines. With weaker-than-expected organic healthcare demand and potential
recalibration of expansion plans, the more expensive healthcare stocks are probably
primed for disappointment. We would prefer stocks with relatively cheap valuations and
better underlying demand fundamentals (based on target customer segments, expansion
pipeline delivery track record and also the diversity of earnings streams).
ASEAN Hospitals Sector
19
15 January 2016
Singapore: Near-term risks to organic growth
Figure 56: Singapore hospitals—valuation comparison
13-Jan-16
US$ bn
Mkt cap Rating
Singapore
IHH
IHHH.SI
Raffles
RAFG.SI
12.2
1.6
O
O
LC
Price
LC
TP
Ups.
2.08
3.99
2.67
5.00
28%
25%
EPS G'th (%)
'16E '17E
22.3
21.6
20.8
13.9
P/E (x)
EV / EBITDA (x)
'16E
'17E
'16E
'17E
ROE (%)
'16E
'17E
38.2
26.2
6.4
12.9
31.6
23.0
20.3
18.6
17.0
16.0
7.4
13.0
P/B (x)
'16E
'17E
2.5
3.4
2.4
3.0
Yield (%)
'16E
'17E
0.5
1.5
0.5
1.5
Source: Credit Suisse estimates, Thomson Reuters
Impact of the current macro slowdown on healthcare demand
Slower inbound medical tourism volumes. The weakness in the regional macro
environment and a strong SGD has negatively impacted the inbound medical tourist
volumes into Singapore. A slowdown in Indonesia, which is a key source of inbound
medical tourists, continues to be a drag. To offset weak demand from ASEAN countries,
Singapore hospitals have been diversifying into non-traditional sources like Indo-China
and Middle East, which has provided a cushion.
Surprisingly, Singapore is
seeing better local demand
growth than other markets
Local healthcare demand remains mostly resilient. Driven by an ageing population,
local healthcare demand in Singapore has remained robust and has so far been able to
partly offset slowing demand from overseas.
Government subsidised schemes remain a key driver. Another key driver of local
demand has been the increasing stimulus from Government in the form of higher
subsidies and more comprehensive medical insurance schemes. This is likely to remain a
key driver of private healthcare demand over the medium term.
Key risks to earnings over the medium term
Sustained weakness in regional macro environment. Sustained economic weakness in
Singapore and the region could make a dent on consumer affordability, adversely affecting
both the demand growth and pricing power of private hospital players.
Supply of government could
prove to be a drag on
private demand
Increased supply of government hospital beds. Singapore government has aggressive
plans to increase hospital bed supply by as much as 20% over the next three years. While
this could benefit supply conditions over the medium term, the pricing power of private
hospital players might be affected in the near term (especially for players targeting the
middle income segment).
Most and least preferred stocks in the medium term
Raffles Medical is one of our top picks in the ASEAN space driven by a strong growth
pipeline in both Singapore and overseas.
Raffles Medical has announced a 70:30 JV with Shanghai LuJiaZui Group to build and
operate a 400-bed hospital in Shanghai. We are positively surprised by this development
and believe China could be a game changer over the medium term.
Raffles Medical's potential
upside from capacity
expansion is still
underappreciated by the
market
With more clarity on its China plans, the optionalities now appear significant: (1) the 400bed Shanghai hospital could potentially be as valuable as the Singapore hospital given the
economics, (2) the 200-bed Shenzhen hospital (still under discussion) could add further
upside, and (3) further projects over the medium term cannot be ruled out.
Meanwhile, the Singapore business is likely to see a gradual improvement in profit
contribution driven by collaboration with the government on emergency services (2H15),
Holland Village specialist centre (1Q16) and Raffles hospital extension (1Q17).
ASEAN Hospitals Sector
20
15 January 2016
Singapore: Key long-term charts
Figure 57: Total healthcare expenditure and % GDP
Figure 58: GDP growth YoY versus healthcare
expenditure growth YoY
5.0
40
Singapore
4.5
4.2
30
3.9
3.9
4.0
3.6
3.5
3.0
20
3.2
3.1
2.9
2.7
2.8
10
2.5
0
2.0
1.5
-10
1.0
-20
0.5
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0.0
1995
1999
2003
2007
2011
SG GDP (YoY%)
Total exp. on health (YoY%)
Source: World Health Organization
Source: World Health Organization
Figure 59: Annual top line (S$ mn)
Figure 60: Annual EBITDA margin (%)
1,200
Raffles
Parkway
979
1,000
30
Raffles
25
25
25
24
25
24
24
22 23
870
Parkway
20
800
20
17
564
600
14
15
11
357
400
349
341
10
273
219
169
200
5
113
99
0
0
'00
'02
'04
'06
'08
'10
'12
'14
'01
'03
'05
'07
'09
Source: Company data
Source: Company data
Figure 61: Stock price relative to market
Figure 62: Forward P/E relative to market
'11
'13
600
2.7
500
400
2.2
300
1.7
200
1.2
100
0
Dec-99 Oct-01 Aug-03 Jun-05 Apr-07 Feb-09 Dec-10 Oct-12 Aug-14
0.7
Sep-00
Sep-03
RFMD price perf. Rel to index
Source: Datastream, MSCI
ASEAN Hospitals Sector
Sep-06
Sep-09
Sep-12
Sep-15
RFMG FPE rel. to index
Source: Datastream, MSCI
21
15 January 2016
Malaysia: Tough macro conditions likely to test
organic demand
Figure 63: Malaysia hospitals valuation comparison
13-Jan-16
Malaysia
IHH
KPJ
US$ bn
Mkt cap Rating
IHHH.KL
KPJH.KL
12.2
1.0
O
N
LC
Price
LC
TP
Ups.
6.50
4.36
6.80
4.00
5%
-8%
EPS G'th (%)
'16E '17E
22.3
15.2
20.8
12.2
P/E (x)
EV / EBITDA (x)
'16E
'17E
'16E
'17E
ROE (%)
'16E
'17E
39.0
25.6
6.4
12.5
32.3
22.8
20.3
12.0
17.0
10.2
7.4
12.8
P/B (x)
'16E
'17E
2.5
2.9
2.4
2.7
Yield (%)
'16E
'17E
0.5
1.8
0.5
1.8
Source: Credit Suisse estimates, Thomson Reuters
Impact of the current macro slowdown on healthcare demand
Double impact of GST and slowing economy. Overall consumption demand has seen a
visible slowdown hit by a double whammy of a slowing economy and introduction of a new
GST earlier this year. The impact of GST on healthcare demand is yet to be ascertained.
GST is net margin negative for Malaysian hospitals since healthcare is a GST-exempt
sector, but majority of input costs are GST liable. In the near term, this could also curtail
the ability of hospitals to increase prices.
Local demand is likely to be
weighed down by macro
factors near term
Medical tourism remains a work in progress. While Malaysia has been able to attract
some cost-conscious medical tourists away from Singapore due to a weaker currency, it
continues to underperform on its medical tourism capability. Sustained support from
government on improving infrastructure and connectivity would be required to improve
Malaysia's medium-term healthcare potential.
Key risks to earnings over the medium term
Weaker currency increases capex outlays. With the bulk of the medical equipment
imported, a continued weakness in currency would affect the capex outlays of hospital
players—both maintenance capex and purchase of equipment for new hospitals. This
could add to cash flow problems in an already challenging environment.
Will hospitals stick to their
expansion plans in the face
of macro headwinds
Sustained macro uncertainty could result in pipeline expansion delays. If the
demand environment continues to remain lacklustre, hospital players might be forced to
reconsider their expansion plans. Any cutbacks could have a significant impact on the
premium valuation multiples enjoyed by the hospital stocks.
Risks from overseas expansion plans. Both Malaysian hospital players, KPJ and IHH,
have overseas ambitions and venturing into new geographies. M&A and execution risks in
new markets remain key medium risks.
Most and least preferred stocks in the medium term
IHH is our top pick in the ASEAN hospital space. We like it both for its strong market
positioning in its existing markets and potential upside from expansion into new attractive
markets, especially India and China.
IHH deserves to trade at a
premium to the peer group
IHH has announced they entered into an agreement to buy 73.4% of Global Hospitals
(India) at a consideration of Rs12.84 bn (US$196 mn). The Global Hospitals Group is a
chain of tertiary / quaternary care hospitals in India having facilities across four cities with
approximately 1,100 operational beds in total, with potential to grow up to ~1,900 beds (in
five years). We think it is a decent deal for IHH (and not very expensive) that gives decent
scale to drive long term growth in a strategically important market in Asia. But execution
will be key – so far, management's M&A integration track record has been good across
various geographies.
IHH is trading in line with ASEAN peer group average. Now with the establishment of a
good growth platform in India and potential China plans, it is shaping up to be a unique
pan-Asia player and deserves to trade at a premium.
ASEAN Hospitals Sector
22
15 January 2016
Malaysia: Key long-term charts
Figure 64: Total healthcare expenditure and % GDP
Figure 65: GDP growth YoY versus healthcare
expenditure growth YoY
4.5
30
Malaysia
4.0
4.0
4.0
3.7
3.7
3.5
2.8
3.0
25
3.5
3.4
20
3.0
2.9
15
2.5
10
2.0
5
1.5
0
1.0
-5
0.5
-10
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0.0
1995
1999
2003
2007
Msia GDP (YoY%)
2011
Total exp. on health (YoY%)
Source: World Health Organization
Source: World Health Organization
Figure 66: Annual top line (RM mn)
Figure 67: Annual EBITDA margin (%)
30
8,000
KPJ
KPJ
IHH
IHH
6,758
7,000
25
25
6,000
5,191
20
20
20
5,000
16
15
3,946
4,000
15
13
12
'06
'08
13
12
12
3,000
10
2,000
1,267
1,000
583
5
831
223
0
0
'02
'04
'06
'08
'10
'12
'14
'02
'04
'10
Source: Company data
Source: Company data
Figure 68: Stock price relative to market
Figure 69: Forward P/E relative to market
600
3.5
500
3.0
'12
'14
2.5
400
2.0
300
1.5
200
1.0
100
0.5
0
Mar-02 Oct-03 May-05 Dec-06 Jul-08 Feb-10 Sep-11 Apr-13 Nov-14
KPJ price perf. Rel to index
Source: Datastream, MSCI
ASEAN Hospitals Sector
IHH price perf. Rel to index
0.0
Sep-03
Sep-05
Sep-07
Sep-09
KPJ FPE rel. to index
Sep-11
Sep-13
Sep-15
IHH FPE rel. to index
Source: Datastream, MSCI
23
15 January 2016
Thailand: Riding through short-term challenges
Figure 70: Thailand hospitals valuation comparison
13-Jan-16
Thailand
BDMS
BH
BCH
CHG
US$ bn
Mkt cap Ratin