Healthy sector but wait for price weakness to buy

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631
KGI securities

Singapore healthcare stocks have outperformed the STI index over the past 1-2 years. Valuations are at their multi-year highs. Future growth potential (e.g., expansion plans locally and overseas) and healthy earnings growth over the past two years are driving their current high valuations, in our view. Healthcare stocks’ current valuations may continue to be supported by earnings growth and their defensive nature amid an uncertain economic landscape. Hence, we believe that the healthcare sector may continue to outperform the general market. Investors looking for exposure to the healthcare sector may accumulate during price pullbacks.

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Sector riding on supportive long-term trends. The healthcare sector is riding on structural changes in Singapore’s population age profile. Our aging population is expected to require more healthcare services. Furthermore, medical tourism is recovering as regional currencies stabilize and as income levels continue to rise. Singapore ranks highly for its efficient healthcare system and we believe local private healthcare services can continue to tap into this growing segment despite increased competition in the region from countries like Thailand and Malaysia.

Tapping on new and opening markets. Key SGX-listed healthcare players like IHH Healthcare (IHH), Raffles Medical Group (RMG) and Q&M Dental (Q&M) are expanding into China, given its huge market potential.

China represents a significant market for healthcare companies as the country only spends 5% of GDP on healthcare against 10% for the developed nations.

Long term trend is also driven by an aging population with people in China aged 65 and older increasing to 331m by 2050 from 132m in 2015, according to estimates by the UN Population Division.

Accumulate healthcare services stocks at 5-15% discount to current prices. Based on P/E and justified P/B approach (page 6 & 7) and utilizing Bloomberg consensus forecasts, most of the healthcare stocks are trading inline or above their fair values, including RMG (FV S$1.60 based on blended 34x FY16/17F P/E), IHH Healthcare (FV S$2.11 based on 44x blended FY16/17F P/E), Q&M (FV S$0.71 based on 32x blended FY16/17F P/E) and Singapore O&G (FV S$0.89 based on 23x blended FY16/17F P/E).

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Key catalysts. Short term catalysts may include spin off of subsidiaries (e.g., Q&M) or earnings accretive acquisitions given that most healthcare companies are in a net cash position.

Key risks. Appreciation of the SGD against regional currencies, notably the Indonesian Rupiah, may affect medical tourism. Indonesian market makes up around ~60% of medical tourism revenues. Delays in expansion in overseas markets due to regulatory hurdles.

Joel Ng
joel.ng@kgi.com
+65 6236 2630

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