SINGAPORE (Jan 8): Although healthcare stocks in Singapore underperformed last year largely due to the setting up of new hospitals overseas, CIMB says the sector would be rerated once they stabilised.
In 2017, average returns for healthcare stocks came in at –14.8% versus the Straits Times Index's 18.1% gain.
Indeed, many healthcare companies in Singapore have been tapping overseas growth since 2014 in the wake of slowing medical tourist arrivals at Singapore.
This year, North Asia expansion plans looks like the focal point for both Raffles Medical and IHH Healthcare, with planned 2H18 openings of 700-bed Chongqing and 350-bed Chengdu hospitals.
"We think such gestation costs are priced in, but expect sector sentiment to improve when these overseas hospitals stabilise, and stronger catalysts emerge," says analyst Ngoh Yi Sin in a report this week.
CIMB's top picks are IHH Healthcare and Health Management International with target prices of $2.35 and 83 cents respectively.
Ngoh expects sequential earnings recovery for IHH Healthcare supported by narrowing losses and continual patient ramp-up for Gleneagles HK.
Meanwhile, HMI is well-positioned to benefit from growing medical tourism in Malaysia with its two established hospitals.
Raffles Medical remains an "add" as Ngoh believes its current share price is attractive for China healthcare exposure in the longer term.
She is also maintaining Talkmed at "hold" on near-term stock overhang while keeping Q&M Dental at "reduce" as its lacklustre earnings outlook does not justify its valuation.
"We also highlight ISEC Healthcare 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," adds Ngoh.
One important industry trend seen is rising regulatory intensity amid changing healthcare landscape.
These include the ban on third-party administrators, prohibition of profit guarantees for M&A deals, growing emphasis on primary care and introduction of fees benchmark.
Ngoh says the changes could make competition more severe and drive consolidation, impacting asset-light specialist groups more than hospitals whose market share of inpatient admissions has been resilient.
Another trend is the strong Singapore dollar against regional currencies and a potential GST hike which could make medical tourism less affordable and appealing to foreign patients.
"However, the high international standing of Singapore healthcare system, coupled with active outreach of private healthcare groups to new and existing overseas markets, could help counter such headwinds, keeping medical tourism stable," says Ngoh.
Shares in IHH Healthcare are trading at $1.92 or 48 times FY18 earnings while shares in HMI are trading at 67 cents or 33.5 times FY18 earnings.