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Healthway Medical Corporation Limited Bloomberg Code: HMED.SP

Reuters Code: HEMC.SI
Singapore Exchange: 5NG.SI

CMP: SGD 0.10 September 17,2008 HOLD

High revenue and net profit growth in 2Q08 at the back of recent acquisitions; uncertainty
due to a high debt repayment expected by end of 2008
Company Data Risk - Return Profile
Market Cap (SGD mn/USD mn) 13.55/9.47
Outstanding Equity Shares (mn) 1259.5

IPO Listing 04-Jul-08
Post IPO High/Low 0.35/0.10
Average Daily Volume 2,673,977

Cautious view till end of FY2008

Developing a stronghold in the Singapore healthcare market with several acquisitions
and re-structuring

Investment Rationale
Singapore based healthcare services provider with growing brand equity in the
domestic market. Recent re-structuring and acquisitions to increase its product
lines creating value for the company
Has delivered a 131.8% increase in revenue and 557% increase in net profit for
the first 6 month in FY2008 compared to the same period last year. However, this
can be attributed to the acquisitions
Re-structured business model adding to the strength; Committed and experienced
senior management

Key Concerns
High total debt outstanding – SGD 63.37 Mn
Limited availability of operating history
Using the DCF approach, we believe that the current share price factors a growth
of 11.03% which is a fair expectation. We initiate coverage with a HOLD.



Healthcare Services Industry - Singapore

Singapore’s share of world’s healthcare industry is expected to reach 3% by 2012. One million of
foreign patients are expect to come to Singapore by 2012 generating 2.6 billion of revenues and
13,000 jobs. With the currently medical facilities Singapore is nicely placed to achieve the above

Singapore positions itself as a destination of world class, affordable and safe healthcare. It has
established itself as Asia's leading medical hub, serving people from around the world. In 2007
Singapore was voted “Best Medical/Wellness Destination” at the TravelWeekly (Asia) Industry
Awards. The section below highlights some positives as well some challenges for the Singapore
healthcare industry:

Higher affluence coupled with higher incidence of diseases - The Singaporeans are
getting more and more affluent over the past few years. Singapore has also observed higher
incidence of diseases such as diabetes, hypertension, heart disease, stroke and cancer which are
generally associated with affluence. This situation provides a good outlook for the healthcare

Government initiatives - Singapore government has taken a number of initiatives which will
help in the growth of healthcare industry:
a. Government has launched a multi-agency initiative – Singapore Medicine in 2003 to
promote and establish Singapore as one of Asia’s leading medical hubs. Its goal is to
attract one million foreign patients annually by 2012.
b. Since 2001, Singapore government is trying to increase national birth rates by
launching some initiatives. In 2004, the Singapore government implemented a $300
million pro-family package to promote parenthood.
c. In March 2008, the government has announced that it will implement the “means of
testing” from January 2009 at all the public hospitals. Under it, the subsidy received by
the patient would be based on his/her income. It will turn many middle income
patients towards private healthcare industry.

Demography and changing lifestyles -

a. The demand for medical services in Singapore will increase as a result of changes in
demography such as an aging population. The aging population will also result in high
demand for orthopaedic services.
b. The increase in Singapore population due to immigration will result in higher demand
for the healthcare services.

Shortage of highly qualified doctors and nurses - The shortage of highly qualified medical
professional can hurt the healthcare services in Singapore.
Strengthening Singapore dollar can affect medical tourism - The Strengthening Singapore
dollar would make the treatment costlier for foreigners who can prefer other countries to
Singapore in that case.



Competition from other countries - Countries like Thailand, Malaysia, India etc are
improving their healthcare services and are attracting a number of foreign travellers.

Overall the outlook of the healthcare industry in Singapore is positive due to reasons mentioned
above. However Singapore also faces some challenges but we feel that these challenges will not
affect the strong position of healthcare industry of Singapore in near future.

Company Profile

HMC Group was formed in February 2006 when Dr Wong Weng Hong together with Fan Kow
Hin, Dr Jong Hee Sen, Aathar Ah Kong Andrew and a group of investors, through their
investment holding company, UH, acquired HMG, HME and BUPA Healthcare Singapore Pte
Ltd (subsequently renamed Vista) from BUPA Healthcare Asia (the “Management Buy-out”).

By the end of 2006, the management of UH had expanded the network of our Group to 38
clinics. In May 2007, as part of the restructuring exercise, HME was reorganized as the wholly-
owned subsidiary of HMG and HMG was incorporated by UH to hold HMG, Vista, China
Healthway and Unimedic. During the same period, HMG and HME acquired the remaining
partnership interest of Healthway Tampines Clinic, Healthway Sunshine Clinic and Healthway
Woodlands Clinic from their respective partners to consolidate its family healthcare business.

In May and June 2007, Unimedic, a wholly-owned subsidiary of HMS, acquired the Acquired
Entities (excluding IOC, IOCH, SBCC Clinic and SBCC S&T), namely the “Silver Cross” and
“Peace” groups of family medicine clinics, the “Aaron” and “Universal” groups of dental clinics,
“Pediatric Centre”, and the “BCNG Laser and Medical Aesthetics” group of specialist clinics, for
$72.32 million. In March 2007, China Healthway was incorporated as a vehicle for our Group’s
expansion into the PRC. Subsequently, our Group ventured into the PRC by way of a co-
operation agreement entered into between Shanghai Kanglian Hospital Co. Ltd (“Shanghai
Kanglian”) and China Healthway.

Re-structured Group

Business Overview

HMC is one of the largest private outpatient medical service providers in Singapore, offering
quality healthcare services across the medical value chain in family medicine, specialists care, dental



and oral care and medical aesthetics. It operates 11 medical practice groups comprising more than
80 clinics.

HMC Group’s business may be principally categorized as follows:

(a) Primary Healthcare, comprising family medicine, dentistry and healthcare benefits management
(b) Specialist & Wellness Healthcare, comprising pediatrics, orthopedics (in particular, orthopedic
surgery and sports medicine), aesthetic medicine and TCM

Segment Revenue
Primary Healthcare,
Specialized & Wellness Healthcare is
the key growth area for Healthway

Specialized &
Wellness Healthcare,

Family Medicine - Family medicine medical practice group has an island-wide network of family
medicine clinics at convenient locations such as the central business district, housing estates and
shopping centers in Singapore. There are also some in-house clinics within the premises of some
of corporate clients and some Singapore government offices.

The services provided by family medicine clinics include general medical consultations,
management of chronic conditions such as diabetes, hypertension and asthma, and minor surgical
procedures. It also provides vaccinations for all ages, travel and occupational requirements. Family
medicine clinics also provide health screening, vocational check-ups to meet statutory
requirements, preventive care and health education. The health assessment centers are supported
by comprehensive health screening facilities.

As at the Latest Practicable Date, HMC family medicine medical practice group has an aggregate
of 47 clinics (excluding the in-house clinics we operate on the premises of our corporate clients).

Dentistry - Dentistry medical practice group provides dentistry services under “Aaron” and
“Universal” service names. The “Aaron” dental group has a track record of more than 15 years
and targets the working population and expatriates as its customers, with dental clinics in the
central business district and housing estates. The “Universal” group of dental clinics has a track
record of more than 23 years and is positioned to provide a spectrum of dental services at
affordable and competitive prices. It targets the general population with dental clinics located in
HDB housing estates.

Healthcare Benefits Management - Vista operates and manages healthcare plans and third
party health benefits plans of HMC’s corporate clients and insurance companies under the service



name of Vista Healthcare Plan. Medical services under such healthcare plans and health benefits
plans are provided by a panel of clinics comprising HMC’s wholly-owned clinics and over 400
affiliated family medicine and specialist clinics.

Services provided by the two divisions

Pediatrics - Pediatrics medical practice group is one of the largest in Singapore and provides
pediatric services in housing estates and all major private hospitals. The “Pediatric Centre” group
of clinics was originally based in Thomson Medical Centre as a partnership in 1983, and
established itself as the dominant pediatric practice in Thomson Medical Centre. It provides
general pediatric services with a specialized focus on neonatology and pediatric wellness and
developmental services. The service name of “Singapore Baby & Child Clinic” was established
more than 25 years ago and its clinics provide general ambulatory pediatric services for routine
pediatric ailments as well as subspecialty pediatric services such as pediatric cardiology and

Orthopedics - Orthopedics services are provided by the “Island Orthopedic” group of clinics,
The “Island Orthopedic” group of clinics was established in 1995 and has a strong market
reputation in the private orthopedic and sports medicine fields. It focuses on providing quality
specialist orthopedic and trauma care as well as a comprehensive range of orthopedic sub-specialty
services such as spinal surgery, sports reconstructive surgery, adult reconstructive surgery and
trauma surgery.

Business Strategies and Future Plans

HMC have embarked on an active expansion plan based on organic growth, as well as appropriate
joint ventures and/or acquisitions of established healthcare businesses that are reputable in their

Expanding and enhancing integrated healthcare services

HMC continue to focus on improving the scope of their current medical services and facilities, as
well as explore other specialist healthcare related fields which complement our services. They have
identified Specialist & Wellness Healthcare division as the key growth area for the immediate
future and intend to add new specialist and wellness services to our range of medical services
provided. One of our wellness healthcare fields we are currently looking to expand is TCM.

Developing and enhancing medical service delivery platform



HMC intend to continue identifying suitable sites to expand our clinic network in strategic
locations for the provision of family medicine and specialist healthcare services. HMC’s large
network of primary care clinics provides an important channel for its specialist services.

Improving the quality of medical services

HMC physicians continuously pursue medical education, training and product knowledge, and
capitalize on technology advancements to provide comprehensive and enhanced types of medical
services and develop sub-specialties in their various medical fields. HMC also intend to use
information technology to provide better service through more efficient handling of patient data, a
more efficient billing process and to streamline our inventory management.

Developing our existing markets and enhancing our corporate positioning

By establishing a consistent and integrated corporate branding for, HMC expect that patients will
come to identify “Healthway” as a trustworthy and accessible healthcare provider of the various
healthcare services. HMC is currently undertaking a branding exercise where the “Healthway”
brand name will be made the central focus of our Group’s underlying brand strategy to which our
various medical practice groups will be linked.

Overseas expansion
HMC believes that there are growth opportunities overseas and intend to grow clinics and facilities
through acquisitions, joint ventures and strategic alliances as and when such business opportunities
arise. Currently, they have not identified any such prospective acquisitions, joint ventures, strategic
alliances or other overseas expansion initiatives.

SWOT Analysis

Strength Opportunity
- Strong Market Reputation - Rising affluence and education level

- Island wide clinic network - Government Initiatives, Rise in medical

- Experienced Management Team
- Demography and changing lifestyle
- Integrated Healthcare benefit

Weakness Threat
- Limited medical service lines - Low switching cost for customers

- Limited overseas exposure - Strong and well established competitors

like Raffles Medical
- Insignificant contribution of
medical tourist revenue in total



Key Concerns
Valuation assumptions had to be taken due to the limited availability of operating history
under the management of UH and recent expansion into the specialist and wellness healthcare

As per the financial statements ending December 2007, Healthway has a total outstanding debt
of SGD 63.37 Mn. A portion of this debt will be paid out with the capital raised through the
initial offering.

All medical facilities are leased so they face relocation risk. However, a downward trend in the
rentals market will play in the favor of the organization

Impairment of goodwill acquired through the series of acquisitions made in last 2 years may
affect the financial performance of the firm

Financial Review and Outlook

Profit and Loss Statement

Q1-2008 Q2-2008 Growth
Revenue 16,235 16,428 1.19%
Other operating income 324 1,227 278.70%
Medical supplies, consumables and lab expenses (3,619) (3,680) 1.69%
Staff costs (7,788) (7,506) -3.62%
Other operating expenses (2,952) (2,777) -5.93%
Depreciation of property, plant and equipment (174) (203) 16.67%
Amortisation of intangible assets (5) (5) 0.00%
Finance costs (199) (80) -59.80%
Profit before income tax 1,822 3,404 86.83%
Income tax expense (338) (414) 22.49%
Profit for the period attributable to shareholders 1,484 2,990 101.48%

278% rise in Q2 2008 income from other operations

This sharp rise in income from other operations can be attributed to acquisitions made by the
company. As greater synergies are achieved for the acquired units this income can be expected to



Operating Expenses
Operating expense of the company has fallen by 6% in Q2 of 2008. This in spite of the fact that
revenue has gone up by more than 1%. This indicates that company has economies of scale and
will become more profitable as the operation size increase.

Financial Ratios
2006 2007
Operating margin - 14.57%
Net Income margin - 13.09%
EBITD margin - 15.52%
Tax/EBT (%) 17.9% 10.2%
Current Ratio 0.50 1.38
Interest Coverage 25.98 32.65
Return on Asset - 2.32%
Return on Equity - 38.67%


The company has been valued by discounting the free cash flow to equity. Due to availability of
limited operating and financial performance of the company several assumptions have been made
in order to forecast revenue and expense buckets of different nature. The cost of equity used in
the valuation process is an average of four close competitors of Healthway Medical – Raffles
Medical, Pacific Healthcare, Thomson Medical and Asiamedic. The average value of cost of equity
is 10.33% as highlighted in the table below.

Comparables 12/2007A
Company PE P/BV P/Sales P/CF P/EBITDA Sales Sales Growth Cost of Equity
Raffles Medical 17.68 2.53 2.80 12.95 13.48 168.66 25.63 10.29
Pacific Healthcare 11.84 1.19 0.90 6.45 5.85 75.16 17.73 9.80
Thomson Medical 18.10 1.86 3.29 12.80 12.01 52.36 12.57 9.74
Asiamedic Ltd 14.86 1.42 1.47 8.26 7.69 11.58 7.44 11.50
Average 15.62 1.75 2.12 10.12 9.76 76.94 15.84 10.33
Healthway Medical 9.16 1.64 1.79 8.59 6.59 84.61 - -

The valuation assumptions are as follows:

COGS, Other Expenses, Capital Expenditure and Working Capital will vary as per there ratio
with Revenue in FY2007
o COGS/Revenue = 0.67
o Other Expense/Revenue = 0.18
o Working Capital/Revenue = 0.0122

Depreciation & Amortization will vary as per the Depreciation & Amortization/Capital
Expenditure in FY2007, this ratio is equal to 0.129

Tax rate = 12%



Terminal Growth = 2% (as per the IPO prospectus), this growth rate commences from 2012

Cost of Equity = 10.33%

The table below gives the estimated FCFE forecast till 2012. Using the terminal growth
assumption we arrive at the terminal value of SGD 39.86 Mn (present value today = SGD 24.38

In order to assess the whether the company has been valued fairly as per the current share price
we have identify the annual sales growth rate that will justify the current share price of SGD 0.10.
It comes out to be 11.03%. We believe that this growth rate is a fair expectation by the market
especially because the average annual sales growth rate of the four close competitors is 15.84%.

The company has recently undergone extensive re-structuring and has done acquisitions in last one
year. Due to lack of availability of operating and financial performance of the company we believe
that investors should continue to hold the stock. The decision to buy or sell should be based on
the quarter financial results of FY2008. The next two quarter results will demonstrate how well
Healthway will be able to grow sales and margins post re-structuring and acquisition spree. Based
on this argument we initiate coverage with a HOLD.

Valuation Forecast
Year To 12/2008E 12/2009E 12/2010E 12/2011E 12/2012E
Revenue 47.50 52.74 58.55 64.60 65.90
COGS 32.03 35.56 39.48 43.56 44.43
D&A 0.51 0.57 0.65 0.73 0.45
Other Exp 8.55 9.49 10.54 11.63 11.86
EBIT 6.41 7.11 7.89 8.68 9.15
EBIT(1-t) 5.64 6.26 6.94 7.64 8.05
Capex 3.50 3.76 4.03 4.33 3.50
Interest Expense 1.80 1.41 1.41 1.41 1.41
Change in WC 0.05 -1.76 0.07 0.07 0.02
FCFE -22.20 3.42 2.07 2.56 3.32




Group’s M&A activity highlights



Analyst Details:

Company Name – NUS Business School, Singapore

Rajesh Khanna Ph – 91191894

Aayush Jain Ph – 96431734

Nevaj Kochhar Ph – 91552666

Prateek Jain Ph – 96320425

Vikas Gupta Ph – 97534171