(Sept 4): At 39, Chin Wei Jia is fresh-faced, youthful and poised to take over the running of Health Management International (HMI) as it embarks on its next phase of life. The company is set to expand the capacity of its two hospitals in Malaysia, while keeping a close eye on increasingly affluent locals as well as visitors from the region heading there to seek specialist medical treatment.

As The Edge Singapore reported last week (Issue 794, Aug 28), HMI is among a clutch of healthcare stocks listed on the Singapore Exchange that has benefited from positive investor sentiment over the past couple of years. The sector outperformed the benchmark Straits Times Index last year, buoyed by expectations that rising wealth and ageing populations in Singapore and the region would be lucrative for healthcare services providers.

HMI offers investors a play on growing demand in Malaysia. The company traces its roots to Chin’s father, family physician Dr Chin Koy Nam, who banded together with fellow doctors to found Balestier Medical Centre in 1991. It was incorporated as HMI in 1998, listed on the secondary board in 1999, and moved to the Mainboard in 2008. Chin currently serves as CEO while her mother, Gan See Khem, is executive chairman. Her brother, Wei Yao, is the group’s chief financial officer.

As Chin recalls, the 60-bed HMI Balestier, sited at the junction of Thomson Road and Balestier Road, had been doing well, thriving on the Indonesian patients who came to Singapore for specialist treatment. But the business suffered the effects of the Asian financial crisis, as well as the overall increase in capacity for specialist treatment at other hospitals in Singapore.

HMI Balestier closed in 2003. By then, the company already had a stake in Mahkota Medical Centre, a private hospital in Melaka’s city centre. It was also operating a vocational institute to train nurses and other healthcare workers, which started in 2001.

According to its website, HMI was the first in Malaysia, through Mahkota, to intro duce the business model of selling medical suites to doctors, adapted from the Singapore private hospital scene. Mahkota was also among the first hospitals to attract patients from Indonesia. Today, the 266-bed hospital serves 10% of Malaysia’s medical tourists, or more than 80,000 foreign patients a year, who make up about a third of its overall patient load.

HMI also wholly owns and operates the Regency Specialist Hospital in Iskandar Malaysia, Johor, which started operations in November 2008. Singaporeans can use funds from the national medical savings scheme, Medisave, at both the Mahkota and Regency hospitals.

Medical tourism on the rise in Malaysia HMI plans to add 34 beds to the Melaka hospital during the current financial year, to increase its capacity to 300 beds, and another 40 beds eventually. Regency hospital in Johor will also have 34 beds added. HMI is building an extension block to raise its capacity to 380 beds by FY2021, with the potential to expand to an eventual 500-bed hospital.

More hospital capacity is being built in Iskandar, though. Besides Regency and the newer Gleneagles Medini, some 1,000 beds will be added, including at billionaire Peter Lim’s Thomson Medical complex.

Chin believes there is ample room, and cause, for HMI to thrive. “Domestically, certain key trends are driving the growth in private healthcare — [increasing] insurance coverage, an ageing population, increasing affluence and, of course, a lot of chronic diseases,” she says. Also, the government is pushing the development of healthcare, both in the private and public sectors, for the people. “That augurs well for the industry.”

Malaysia is well situated to take advantage of the growth of medical tourism, which in turn benefits HMI. According to the Malaysia Healthcare Travel Council, the industry is expected to generate 30% more in revenues, which will hit RM1.3 billion ($412.78 million) this year.

“Our target audience is the middle- to upper middle-income population, and that is the biggest growing group of people regionally,” Chin adds. Perhaps as a sign of a flourishing business, she observes that there is an increase in medical insurance coverage. “For example, some of the Indonesian third-party administrators are starting to look at covering Malaysian healthcare as well because they know it’s very cost-effective. The weak ringgit is also very good for medical tourism.”

Would HMI consider returning to operating a medical centre or hospital in Singapore? The healthcare services sector in the city state is certainly competitive, Chin says, “but we are open to looking at various options. It could be strategic collaborations, it could be investment opportunities”.

HMI would be interested in opportunities in Malaysia, Indonesia and Singapore. The collaborations could include clinical exchanges with other doctors and hospitals, with the aim of exchanging ideas and building up expertise. As a result, HMI could offer new services. In terms of investments, Chin says HMI is likely to be interested in medical centres or similar facilities, though that would very much depend on market conditions and the ability to attract and retain doctors.

Ultimately, HMI is concentrating on the organic expansion plans at both its hospitals, she adds. “We’re going to build on clinical services, in areas such as cancer, cardiology and neurosurgery, and that will drive continued growth.”

Strong earnings projected HMI recently paid $183.2 million to acquire shares in the two hospitals in Malaysia that it did not already own. Before the acquisitions, it owned 48.9% of Mahkota and 60.8% of Regency. The acquisitions were financed by cash and new shares, which were issued to non-controlling shareholders in the two hospitals. The cash component was funded in part by a five-year term loan of up to $62 million, as well as a rights issue of $18.5 million.

HMI is expected to take on more debt to fund the bulk of the construction cost of the Regency expansion, estimated at RM160 million. As at FY2017 ended June, the company had a net debt-to-equity ratio of 0.5 times. Analysts say it intends to pay down 50% of the acquisition debt by December, which should lower its gearing to 0.42 times in FY2018.

Following the consolidation, HMI posted a 3.5% y-o-y rise in earnings for FY2017 to RM20.6 million. Revenue increased 9% to RM435.8 million. Earnings were affected somewhat by one-off costs associated with the consolidation. Stripping out those costs, the company would have reported a 40% jump in earnings to RM32.1 million.

At 59 times current earnings, some might find HMI’s stock richly valued. But on a forward price-to-earnings basis, it is trading at 30 times earnings, below its peers’ valuations of 35 times.

In an Aug 25 report, UOB Kay Hian writes that it is expecting a seasonally strong 1QFY2018. “Patients who delayed procedures during the fasting month of June tended to return in July,” the report says. The brokerage also expects HMI’s earnings growth to outpace the industry’s over the next two years, “buoyed by expansion plans as well as strong medical tourism prospects in Malaysia”.

Analysts at UOBKH project a compound annual growth in HMI’s earnings per share of 21.5% from FY2018 to FY2020. It has a “buy” recommendation on the stock, with a discounted cash flow-based price target of 83 cents.

Analysts at OCBC Investment Research cite developments in Melaka, “such as the Melaka gateway, more flight routes and the proposed upgrading of the Melaka International Airport” as other likely drivers of growth. OCBC believes that earnings for FY2018, with fewer one-off costs, should give investors a clearer picture of what HMI offers.

“The group is able to generate strong cash flows, and we believe our investment thesis remains intact with it on a healthy growth momentum, as both hospitals work on expanding services, operational excellence, as well as [the] capacity to effectively capture the expected increase in demand from both local and foreign patients,” the brokerage says. It expects earnings to almost triple to RM57.6 million, on the back of an 8.4% increase in turnover to RM472.5 million.

For FY2019, earnings are forecast to go up 13.9% y-o-y to RM65.6 million, as revenues rise 8.6% to RM513.3 million. OCBC has a “buy” call on the stock, with a fair value of 80 cents.

Health Management International a play on growth of medical tourism in Malaysia 

Health Management International a play on growth of medical tourism in Malaysia

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