Certainly, underlying fundamentals for the healthcare sector are positive — even if there are some uncertainties on global economic growth, which has been weaker than expected so far this year.
The International Monetary Fund cut its growth forecast, again, last week — to 3.1% from the 3.3% estimate made in April. Earlier in the year, its forecast stood at 3.5%. Demand for healthcare services, however, is widely regarded to be quite recession-proof.
Importantly, future demand growth appears secure and is underpinned by myriad factors. These include the rise in lifestyle-related diseases, growing awareness of and improved access to quality care, as well as longer life spans and an ageing population.
The expected growth in demand for healthcare services will exert an increasing burden on the public healthcare system which, in turn, is very likely to drive more demand towards the private sector. In tandem, private healthcare services are increasingly affordable to the general public, supported by rising per capita income as well as the increasing awareness and adoption of medical insurance, particularly among the younger generation.
All these factors bode well for private healthcare operators such as Bursa Malaysia-listed IHH Healthcare Bhd and KPJ Healthcare Bhd. Unsurprisingly, both companies are on aggressive expansionary modes to capture a slice of this fast-growing market.
Aggressive expansionary mode to capture growing demand
KPJ's primary focus has been on the domestic market, where it currently operates a network of 21 specialist hospitals, although the company started expanding overseas in the past two to three years.
IHH, on the other hand, has a significantly wider geographical footprint. The company operates the largest private healthcare network in neighbouring Singapore, is the second largest operator in Malaysia and has a strong presence in Turkey following the acquisition of Acibadem early last year. It currently operates nearly 5,000 licensed beds in these three markets combined.
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Based on its expansion plans, IHH will register double digit growth annually in terms of licensed beds. Bed capacity is expected to increase by more than two-thirds by end-2016, with planned capital expenditure totalling some RM3 billion.
Its strategy is multi-pronged, and it includes the development of greenfield projects, expansion of existing facilities as well as undertaking consultancy agreements (hospital management agreements) as the first step in penetrating new markets. The latter category includes the 320-bed capacity City International Hospital in Ho Chi Minh, Vietnam, that is operational this year, followed by hospitals in Shanghai, China, and Abu Dhabi in the United Arab Emirates in 2014.
The company has a string of new hospitals and expansions currently under construction in Turkey that will add an estimated 800 beds or so — equivalent to a growth of roughly 40% — by 2015.
On the home front, bed capacity is expected to expand by roughly 46% by 2016 — from both expansion of existing hospitals and greenfield projects, the latter including the Gleneagles Medini, a 300-bed tertiary healthcare complex located in Iskandar Malaysia in Johor, and the Gleneagles Kota Kinabalu.
One of IHH's biggest investments in the pipeline is the 500-bed Gleneagles Hong Kong Hospital, targeted for completion by late-2016. The company has a 60% stake in the project that is estimated to cost some HK$5 billion (RM2.1 billion), including land cost. IHH expects to generate higher charges here compared with Singapore's current average revenue per inpatient of some RM20,671.
By comparison, its hospitals in Turkey and Malaysia generated average revenue of RM9,770 and RM4,599 per inpatient respectively, in the first quarter of 2013 (1Q13).
Valuations high but earnings will grow
The projects mentioned above and organic growth will underpin continued growth for the company, going forward. We expect earnings to strengthen over the coming quarters, from net profit of RM127.3 million in 1Q13, bolstered by better contributions from newly opened hospitals including Mount Elizabeth Novena in Singapore. The latter registered narrower losses in 1Q13 compared with that in 4Q12 as operations are gradually ramped up.
IHH shares are currently trading at well above market average valuations — at roughly 52.5 and 43.3 times our estimated earnings for 2013-2014, respectively.
Nevertheless, as we have mentioned previously, aside from looking at current valuations, it is equally important to consider factors such as a company's longer-term prospects and the ability to grow earnings — and dividends — at a rate that will, at least, keep pace with inflation. In short, investors must take a long view on the stock and be patient in order to reap future rewards.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article first appeared in The Edge Financial Daily, on July 17, 2013.
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