January 7, 2018 Healthcare - Overall Checking the pulse for 2018 ■ Healthcare sector underperformed the STI in 2017, largely due to new hospitals. INGAPORE ■ We think such gestation costs are priced in, but expect sector sentiment to improve when these overseas hospitals stabilise, and stronger catalysts emerge. ■ Maintain Neutral; our top large and small cap picks are IHH and HMI, respectively. S ■ Three main healthcare changes to watch for: opening of more public hospital beds, shift from hospital-centric model to primary care, and introduction of fees benchmark. ■ 2018F key theme lies in overseas execution, with M&As as the secondary theme as rising competition could drive industry consolidation. AVIGATING AVIGATING N Analyst(s) NGOH Yi Sin T (65) 6210 8604 E [email protected] IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE Powered by END OF THIS REPORT. 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Platform Navigating Singapore│Healthcare - Healthcare - Overall│January 7, 2018 TABLE OF CONTENTS Transforming Singapore Healthcare .............................................................................................. 5 Outlook for Singapore Healthcare sector ..................................................................................... 12 Valuation and Recommendations ................................................................................................ 18 Company Briefs ............................................................................................................................ 24 2 Navigating Singapore│Healthcare - Overall│January 7, 2018 Sector Note Singapore Healthcare - Overall Checking the pulse for 2018 Neutral (no change) ■ Healthcare sector underperformed the STI in 2017, largely due to new hospitals. ■ We think such gestation costs are priced in, but expect sector sentiment to improve Highlighted companies when these overseas hospitals stabilise, and stronger catalysts emerge. Health Management International ■ Maintain Neutral; our top large and small cap picks are IHH and HMI, respectively. ADD, TP S$0.83, S$0.67 close ■ Three main healthcare changes to watch for: opening of more public hospital beds, We believe HMI is well-positioned to benefit shift from hospital-centric model to primary care, and introduction of fees benchmark. from the growing medical tourism in Malaysia ■ 2018F key theme lies in overseas execution, with M&As as the secondary theme as with its two established hospitals there. Partnership opportunities with its new strategic rising competition could drive industry consolidation. shareholder could be a catalyst. 2018F: recovering from 2017’s bout of flu; overall Neutral IHH Healthcare Bhd Most healthcare stocks in Singapore underperformed in 2017, with average returns of - ADD, TP RM7.06, RM5.82 close 14.8% vs. STI’s 18.1% gain. While start-up concerns from overseas hospitals are largely A leading private healthcare provider with in the price, we believe the sector would only re-rate once they stabilise. Hence, our 2018 diversified presence, IHH continues to add sector call remains intact at Neutral. Downside risks for the sector include intensifying capacity in its key existing and new markets. competition from regional peers, unfavourable regulations and FX movements. Stronger- Potential catalysts include improving earnings than-expected overseas execution and synergistic M&As are potential catalysts. from the ramp-up of Gleneagles HK (GHK) and synergistic M&As. Healthcare regulators playing catch-up Raffles Medical Group We see a trend of rising regulatory intensity amid changing healthcare landscape: ban of ADD, TP S$1.24, S$1.12 close third-party administrators (TPA), prohibition of profit guarantees for M&A deals, growing A beneficiary of ageing and better insured emphasis on primary care, and introduction of fees benchmark. These changes could population in Singapore, RFMD will see make competition more severe and drive consolidation, impacting asset-light specialist capacity expansion in 2018F from both hospital groups more vs. hospitals. The addition of more public hospital beds is unlikely to be a extension and the upcoming opening of threat to private hospitals, whose market share of inpatient admissions has been resilient. Chongqing hospital. Headwinds aplenty in medical tourism, but Singapore’s a survivor A strong Singapore dollar against regional currencies, coupled with a potential GST hike, Summary valuation metrics could make medical tourism less affordable and appealing to foreign patients, particularly P/E (x) Dec-17F Dec-18F Dec-19F when healthcare quality in nearby countries like Malaysia and Thailand are showing Health Management International 34.19 25.94 22.59 improvement. However, the high international standing of Singapore healthcare system, IHH Healthcare Bhd 71.05 52.71 39.75 Raffles Medical Group 28.45 31.25 36.03 coupled with active outreach of private healthcare groups to new and existing overseas markets, could help counter such headwinds, keeping medical tourism stable. P/BV (x) Dec-17F Dec-18F Dec-19F Health Management International 7.88 5.95 4.88 Overseas growth gaining prominence IHH Healthcare Bhd 1.94 1.88 1.81 Many healthcare companies in Singapore have been tapping overseas growth since Raffles Medical Group 2.83 2.72 2.65 2014, in the wake of slowing medical tourist arrivals at Singapore. In 2018, North Asia Dividend Yield Dec-17F Dec-18F Dec-19F expansion plans will be the focal point for both RFMD and IHH, with targeted 2H18 Health Management International 0.61% 0.77% 0.89% openings of 700-bed Chongqing and 350-bed Chengdu hospitals, respectively. IHH Healthcare Bhd 0.36% 0.42% 0.54% Meanwhile, we expect sequential earnings recovery for IHH, premised on narrowing Raffles Medical Group 1.79% 1.79% 1.79% losses and continual patient ramp-up for Gleneagles HK (GHK). Insert IHH and HMI as top picks Our top picks are now IHH (large-cap) and HMI (small-cap). RFMD remains an Add as we believe its current share price is attractive for China healthcare exposure in the longer term. We maintain Talkmed as a Hold on near-term stock overhang, and keep Q&M Dental at Reduce as its lacklustre earnings outlook does not justify its valuation. We also highlight ISEC and HC Surgical as possible laggard plays in the asset-light healthcare space, and think Rowsley could be interesting with the injection of Thomson Medical. Figure 1: Currently under public consultation, the draft Healthcare Services Bill (HCS) will be replacing the existing Private Hospitals and Medical Clinics Act (PHMCA) Key features of draft Healthcare Services (HCS) Bill Broadening of regulatory scope to cover healthcare services, nursing and allied health services, 1 traditional medicine, complementary and alternative medicine. Beauty and wellness services will not Analyst(s) be included. Changes to licensing framework of healthcare providers, from current premises-based licensing, to 2 services-based licensing. 3 Ensuring competent governing bodies, and refining roles and responsibilities of key personnel Changes to Quality Assurance Committees for selected licensees for clinical quality and medical 4 ethics 5 Implementing "step-in" safeguards for residential care services 6 Compulsory adoptation of National Electronic Health Record (NEHR) NGOH Yi Sin 7 Prohibition of unsafe practices, services and employment restrictions T (65) 6210 8604 8 Implementation of measures to minimise public misperception E [email protected] Penalties under the HCS Bill 9 SOURCES: CIMB, MOH IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN Powered by EFA THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. EFACustomEntityStatement Platform Navigating Singapore│Healthcare - Overall│January 7, 2018 KEY CHARTS 1,000,000 Title: At critical crossroad for ageing population No. of Singaporeans aged 65 and 1 in 4 According to the Department of Statistics and 900,000 above by 2030 to double to 900K Source: Population.sg, by 2030, the number of Singaporeans aged 800,000 1 in 5 Please fill in the values above to have them entered in your report 65 and above would double to 900k from 440K in 2015. 700,000 1 in 6 Given this, coupled with growing chronic disease 600,000 prevalence, healthcare needs and costs in Singapore will 500,000 1 in 8 continue to be on an upward trend. 900,000 400,000 760,000 1 in 10 https://population.sg/articles/older-singaporeans-to-double-by-2030 300,000 1 in 11 590,000 200,000 440,000 330,000 270,000 100,000 - 2005 2010 2015 2020 2025 2030 Projections assume Total Fertility Rate of 1.2 and current immigationrates Expanding public bed supply by c.30% by Hospital beds (public and private) in Singapore over 2006 - 2016 18,000 2.5 2.5 2.6 Title: 2020F 2.4 2.4 16,000 2.3 Source: 2.2 2.2 2.4 Hospital beds (from both restructured and private hospitals) 2.2 2.2 2.2 14,000 2.1 in Singapore have grown at 2.3% CAGR from 2006 to 2.2 Please fill in the values above to have them entered in your report 12,000 3,613 3,414 2.0 2016, with additional 3,200 acute care beds and 1,050 3,015 2,852 2,862 10,000 2,884 2,813 2,936 2,917 2,852 2,810 community care beds from the upcoming Sengkang 1.8 8,000 General and Community Hospital (2018), Outram 1.6 6,000 10,318 Community Hospital