SINGAPORE (Sept 17): The global medical tourism industry was valued at US$100 billion in 2016 by Medical Tourism Magazine. According to Deloitte, the industry has been growing at 17.9% annually since 2013. Increasing spending on healthcare continues apace, in tandem with the rise in the global ageing population and lifestyle-related diseases. Medical tourism is a trend that has developed on the back of a growing disparity in medical costs between different countries. The idea of visiting a foreign country also adds to the appeal of medical tourism. A July 2012 publication by the University of Malaya found that similar medical procedures in Asia cost 6% to 33% less than in the US.

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Medical tourism in the Asean region is a growing trend for several reasons: quality and depth in medical personnel, pleasant climate and tourist attractions. Singapore was fourth in ranking in the 2016 World Medical Tourism Index. Malaysia was awarded the Destination of the Year from 2015 to 2017 by the International Medical Travel Journal. The Malaysia Healthcare Travel Council also received an award from IMTJ for the first time last year — it was recognised for its efforts in organising health and medical tourism clusters.

Thailand is also a popular destination for medical tourism. The International Healthcare Research Center is forecasting that medical tourism in Thailand is likely to grow 14% annually, in line with the annual 12% growth in international tourist arrivals to the Land of Smiles. Moreover, as part of a strategic plan to become a medical hub (2017 to 2026), the Thai cabinet has approved in principle extended stays for citizens of 19 countries identified as sources of medical tourism.

A handful of companies on the Singapore Exchange, Bursa Malaysia and Stock Exchange of Thailand are seen as proxies for the growth in medical tourism. Dual-listed IHH Healthcare — 40.4%-owned by Khazanah Nasional — and its real estate investment trust ParkwayLife REIT, KPJ Healthcare, Health Management International (HMI), Thomson Medical Group (TMG) and Bangkok Dusit Medical Services (BDMS) are among the most liquid stocks with exposure to the trend.

IHH has growing exposure to medical tourism

Malaysia’s healthcare sector attracts foreign visitors with its affordable prices, pristine beaches and mountains, wildlife, nature and good food. The country has best-in-class hospitals such as Prince Court Medical Centre. These hospitals are usually well connected to transport hubs, five-star hotels and shopping complexes.

The biggest company in the Malaysian healthcare sector is IHH. The group is the second-largest hospital group by market capitalisation in the Asean region, behind BDMS in Thailand, with 49 hospitals, or more than 10,000 beds, globally. The group has 18 hospitals across Malaysia and Singapore and boasts household names such as Gleneagles Hospital, Mount Elizabeth Hospital and Pantai Hospital, which enjoy an international reputation.

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The group’s revenue has grown from RM7.4 billion in 2013 to RM11.4 billion ($3.78 billion) in 2017; the momentum is set to continue with its increasing presence in two of the biggest Asian healthcare markets: ­China and India.

In the short term, investors should take a cautious stance on IHH, given its huge exposure in the Turkish market. IHH owns a 60% share in Turkey’s leading healthcare company, Acibadem Healthcare Group. Acibadem has 21 hospitals and 3,818 beds — nearly twice IHH’s Malaysian capacity of 2,182 beds. With political turmoil looming large, a weakening currency may lead to lower translated earnings in ringgit terms and translation loss on ­foreign-denominated debt, which IHH took on to acquire the Turkish unit.

Acibadem contributes around 33% to IHH’s total revenue and 10% to net income. For 2QFY2018, IHH announced progressive restructuring plans to reduce its foreign debt exposure in Acibadem. IHH’s net debt-to-equity is only 4.9%, excluding its perpetual securities, and 15%, including the perpetual securities.

A medium-term catalyst is likely to be the imminent acquisition of Fortis Healthcare, which is being carried out in two stages. IHH will acquire a 31.1% stake through a subscription of Fortis shares at the equivalent of RM10.04 a share. Subsequently, it will make a mandatory cash offer to other shareholders to acquire a further 26% stake in Fortis.

Once the Fortis acquisition is consolidated into IHH’s financials, IHH will have an additional 34 hospitals in its portfolio. With 4,600 beds and 2,600 doctors under Fortis, IHH will be able to increase its revenue exposure in the fast-growing and underdeveloped Indian market from 6% currently to 24% in future. At present, Singapore has the highest revenue contribution, with revenue per inpatient admission nearly five times higher than that in Malaysia (RM29,000 versus RM6,200).

IHH’s share price is down 13% from the year’s high of RM6.33, owing to its weak ­second-quarter performance. Earnings for 2QFY2018 and 1HFY2018 fell 48% and 77% y-o-y respectively, to RM104.5 million and RM133.64 million. The decline was due to the absence of exceptional items, including a one-off gain of RM241.1 million from the divestment of a stake in Apollo Hospitals in 2QFY2017. Excluding exceptional items, 1HFY2018 earnings would have increased 31% to RM377 million from RM288 million in 1HFY2017.

ParkwayLife REIT, which is 35.7%-owned by IHH, offers investors a regular income stream. For 1HFY2018, the REIT’s revenue rose 2.3% y-o-y to $55.87 million and net property income increased 2.2% y-o-y to $52.2 million. Distribution per unit for 1HFY2018 was 6.36 cents, which was marginally lower than the 6.6 cents for 1HFY2017. Last year, the REIT distributed 0.89 cent per unit after it made a gain of $5.39 million from the disposal of four Japanese assets in December 2016. FY2017’s DPU from recurrent income was 12.46 cents, and 1HFY2018’s DPU was 51% of last year’s total recurrent DPU.

The REIT way to invest in healthcare

ParkwayLife REIT trades at a significant premium to its net asset value and at a relatively compressed yield of around 4.8% because it is the most investable healthcare REIT and the safest healthcare play on SGX. Two of Parkway Life REIT’s hospitals — Gleneagles Hospital and Mount Elizabeth Hospital — are believed to generate around 50% of their revenue from international patients. The REIT’s main risk is concentration risk, as sponsor IHH accounts for around 60% of rental income.

Elsewhere, investors looking for pure Malaysia exposure could consider KPJ Healthcare, the biggest operator of private hospitals in the country, with 25 private hospitals and 3,052 beds. Maybank is forecasting that the Malaysian medical group plans to build a further 10 hospitals. In FY2017, 97% of its revenue was domestically sourced. Its net income has been growing at an annual rate of 12% since 2013. KPJ’s gearing has remained relatively stable, according to Bloomberg data, inching up from 61% as at end-2013 to 65% as at June 30 this year.

Listed in Singapore, HMI owns two hospitals in Malaysia and an upcoming integrated specialist centre and a medical training facility in Singapore. HMI’s earnings before interest, taxes, depreciation and amortisation (Ebitda) margin improved from 16% in 2013 to 19% in 2017. In terms of foreign patients, the revenue contribution is 24% (2Q2016: 20%). The company is building a new 10-level medical block behind the existing Regency Specialist Hospital in Johor that is on track to be completed by year-end. In May this year, HMI acquired StarMed Specialist Centre in Singapore.

Overpriced healthcare stock

TMG has a three-figure forward price-to-earnings ratio (PER) of around 190 times, making it the most expensive offering in the region. It owns Thomson Medical Centre in Singapore, the largest private hospital for women and children in the city state. It also owns Bursa Malaysia-listed TMC Life Sciences. The Malaysian subsidiary has registered strong growth in net income, from RM11 million in 2013 to RM26 million in FY2017. In its latest interim announcement, TMC Life Sciences reported positive results, owing to strong demand in fertility services and medical tourism in Malaysia. To capitalise on rising healthcare spending in Malaysia, its Thomson Hospital Kota Damansara (previously known as Tropicana Medical Centre) in Petaling Jaya will triple its bed capacity to 600 to become the largest integrated healthcare facility in Klang Valley when operations commence in 2020.

The risk for Thomson Medical is the fierce competition among Malaysia’s hos­pital ­owner-operators. For one thing, the general population prefers the heavily subsidised local government hospitals, where standards continue to improve. This leaves private operators hunting for overseas patients. With limited growth opportunities, Thomson Medical may not sustain its three-figure forward PER.

Beeline to the Land of Smiles

Thailand has perhaps the most comprehensive medical tourism sector in the Asean region. Its operators offer a one-stop service for medical tourists, including flight and accommodation arrangements for accompanying family members. Private Thai hospitals are estimated to have received the equivalent of $22 billion from billings for international patients.

BDMS is the largest hospital group by market capitalisation in Asia and the best performer among the healthcare stocks, up 27.4% in the past 12 months. With its stable of 45 hospitals, it is the main beneficiary of medical tourism in Thailand.

Its “hub and spoke” model differentiates it from other operators in the region. This model emphasises using outpatient clinics to refer patients to its hospital facilities. It also has a patient referral system that creates synergy within its network.

BDMS’ revenue grew by a compound annual rate of 21.7% between 2004 and 2017 and it has maintained an Ebitda margin of over 20% in the past 12 years. At this profitability level, BDMS has the best Ebitda and net profit margin among the five largest healthcare groups in the world, according to its corporate slide (see Chart 2). Around 30% of its revenue is contributed by foreigners, and this segment is growing at 10% a year. Although its 12-month rolling PER is a high 43 times, its enterprise value-to-Ebitda is lower, at 26 times. BDMS is in a net cash position of THB2,754 million ($115.5 million), which it can use to either invest in growth or return to shareholders.

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Proxy plays for Asean medical tourism

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