Asian Insights SparX – Future of Singapore Singapore Healthcare Refer to important disclosures at the end of this report DBS Group Research . Equity 4 Jul 2016 KLCI : 1,654.08 Grow old with you STI : 2,840.93 Healthcare expenditure to triple by 2030 with ageing demographics Analyst Rachel TAN +65 6682 3713 Expect public sector to bear bulk of demand; private [email protected] sector has available headroom Opportunities in primary healthcare and long-term care Andy SIM CFA +65 6682 3718 [email protected] Initiate SOG; upgrade IHH and maintain BUY on PREIT Healthcare expenditure to triple by 2030. With ageing STOCKS demographics, we project total healthcare expenditure (THE) to Performance (%) Price (LCY) Mkt Cap Target Price triple by 2030, rising to S$44bn from S$17bn in 2013 at 5.9% 30 Jun 16 US$m LC 3 mth 12 mth Rating CAGR. Personal healthcare expenditure is projected to rise to IHH Healthcare RM6.60 13,607 RM7.60 0.6 16.6 BUY S$28bn from S$11bn in 2013 at 5.7% CAGR. Singapore O&G Ltd S$0.83 147 S$1.05 9.2 25.8 BUY Parkway Life REIT S$2.42 1,087 S$2.65 1.3 5.2 BUY Long term: Public sector to bear bulk of demand; private Raffles Medical S$1.51 1,941 S$1.43 0.5 (1.5) HOLD hospitals have available headroom. We estimate that hospital Riverstone Holdings S$0.905 497 S$1.00 (5.7) 7.1 HOLD admissions to grow by 1.5x to 791k per year in 2030, from 520k Q & M Dental Group S$0.72 425 S$0.80 5.1 0.0 NR Cordlife Group Ltd S$1.265 243 S$1.41 (4.5) 12.4 NR currently. But, the pressure on healthcare infrastructure is uneven. UG Healthcare Corp S$0.295 56 S$0.44 (19.2) (4.8) NR Of the estimated 7k total additional beds needed by 2030, we Source: DBS Bank, Bloomberg Finance L.P., *NR = Not rated estimate public: private bed additions ratio to be 6-to-1. Private hospitals currently already have the existing capacity to add c.500 Total Healthcare Expenditure (THE) estimated to triple by 2030 beds. We believe private infrastructure expansion is not priority, 50 and could benefit more if they could tap the flow-over effects 44 45 from the public sector. 40 Health expenditure p.a. increase ~3x in Stock picks: BUY - IHH, PREIT, initiate SOG. Sector valuations 35 2030 with an ageing population are at premium thus we are selective. We upgrade IHH to BUY, 30 [IHH MK; TP: RM7.60], being the key proxy to healthcare services 25 CAGR = 5.9% counter in this region. We initiate coverage on Singapore O&G 20 [SOG SP; BUY, TP: S$1.05] for its specialised focus on women’s 15 health, high growth and reasonable yield. We believe the opening 10 5 of its Gleneagles HK hospital will be well-received and provide T (S$'bn) Expenditure otalHealthcare - another earnings boost to the Group over the medium term. We like ParkwayLife REIT for its defensive and resilient model [PREIT 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2030E Source: Singstat, WHO, DBS estimates SP; BUY, TP: S$2.65]. ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: JC Page 1 Asian Insights SparX – Future of Singapore Singapore Healthcare The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination. Table of Contents EXECUTIVE SUMMARY 3 Ageing population – A demand driver for Healthcare? 5 Ageing demographics in Singapore 5 Ageing population – higher consumption of healthcare 7 Who pays for medical bills? 13 Healthcare financing system in Singapore 14 Healthcare Infrastructure 18 Singapore’s medical infrastructure versus peers 18 Capacity required and ability to meet this by 2030 22 Plans to increase public medical services infrastructure – Healthcare 2020 Masterplan 24 Private sector has sufficient capacity in the near term 27 The Healthcare Marketplace 28 Market segments within the healthcare industry 28 Healthcare value chain in Singapore 29 Private hospitals 31 Primary Healthcare 32 Valuations and stock picks in the healthcare sector 35 Appendix 41 Stock Profiles 49 IHH Healthcare 50 Singapore O&G 58 Parkway Life REIT 77 Raffles Medical 84 Riverstone Holdings 90 Q & M Dental Group 97 Cordlife Group Ltd 103 UG Healthcare Corp 109 QT Vascular 115 Special thanks to…… Alfie YEO [email protected] LING Lee Keng [email protected] Singapore Research Team For their contributions on the respective company notes Note: Prices used as of 30 Jun 2016 ASIAN INSIGHTS VICKERS SECURITIES Page 2 Asian Insights SparX – Future of Singapore Singapore Healthcare EXECUTIVE SUMMARY Singapore’s society is ageing and the impact is increasingly medium-term. IHH and Raffles have 71% and 18% market being felt. In the past decade, Singapore’s aged population share respectively in the private hospital segment. That said, (over 65 years old) has grown at a faster rate than the rest of growth should be gradual and thus, international expansion its population. In preparation for this demographic change, will play a larger factor for these companies. the Singapore government published the Population White Paper in 2013 projecting that the number of citizens aged 65 Opportunities in primary healthcare market consolidation; and above will triple to 900,000 by 2030 and the dependency long-term care an untapped long-term market. The primary ratio will fall to 2.1 by 2030 from 4.9 in 2015. healthcare segment in Singapore has progressed and matured, but is still very fragmented with the big players Healthcare expenditure to triple by 2030 with ageing comprising only 15% of the primary healthcare market by demographics. Based on the projected Singapore’s population number of clinics. We believe that there are still consolidation growth to 2030, we estimate total healthcare expenditure opportunities in the primary healthcare segment as players (THE) to triple by 2030, rising to S$44bn from S$17bn in continue to seek volume growth to benefit from economies of 2013. Personal healthcare expenditure (PHE) would rise to scale. We believe demand for enterprise healthcare services S$28bn from S$11b in 2013, comprising 64% of total will continue to grow especially as healthcare insurance healthcare expenditure, implying the potential growth in expands in a predominantly private-funded healthcare system. private healthcare. The projected THE is expected to grow at Furthermore, we believe the need for long-term nursing care 5.9% CAGR and healthcare expenditure as a percentage of will grow with ageing demographics coupled with a gradual GDP is expected to increase to 7.3% in 2030 from 4.6% in change in social stigma of long-term care homes. Based on 2013. PHE is expected to grow at 5.7% CAGR. Healthcare the OECD average, long-term nursing care expenditure has cost inflation and ageing factor are the two largest the potential to grow to S$5.4bn-S$7.3bn. contributors to the growth, representing 2.6% and 1.7% CAGR respectively. Healthcare – the most resilient sector. The healthcare sector has been the best performing sector since 2012, Demand for hospital infrastructure increases, but pressure is outperforming the market by 72% with the large cap uneven between public and private. With the increase in the healthcare providers (IHH and Raffles) leading at 91%. The aged population, we estimate that hospital admissions will healthcare sector is seen to be resilient amid the recent de- grow by more than 1.5x to 791,000 per year in 2030, from rating of the market (April 2015 to January 2016), led by the 520,000 currently, driving the need for 7,000 more hospital fall in oil prices and talk of the Fed raising interest rates, beds (c.60% increase), 5,000 physicians and 17,000 nurses. leading to the sector (large cap healthcare providers) trading We estimate that the split in beds increase need are in the at 24x forward EV/EBITDA, at the higher end of historical ratio of 6:1 (public: private). Our estimate shows that the range. public hospitals will require c.6,000 beds by 2030, of which newly completed / planned hospitals (such as Ng Teng Fong Stock picks: Hospital and Sengkang General Hospital) would add only IHH Healthcare Berhad [IHH MK, BUY; TP: S$7.60]. We 2,000 beds by 2018. upgrade our rating to BUY (from HOLD) with a revised TP of S$7.60. Among the larger cap, we prefer IHH Healthcare due Available capacity headroom on the private side. At the to its growth potential, geographically diversified operations private side, the tension is not as strong. In fact, we estimate and key management team with strong track record. Whilst that private hospitals currently already have the available earnings growth could be a tad slower in the immediate term licensed capacity to add c.500 beds, which is half of the due to opening of a number of new hospitals, we believe its c.1,000 beds required by 2030. While private hospitals may upcoming Gleneagles Hong Kong Hospital (target to open by face rising competition with ample spare capacity available in Jan 2017) could have positive impact double that of Mt E the near-term, we believe IHH Healthcare (IHH) and Raffles Novena, given that the size of Gleneagles HK is more than Medical Group (Raffles), the two largest hospital operators in double Mt E Novena, thus, leading IHH into its next phase of Singapore with the most potential capacity, will be poised to growth.