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Asia Pacific | Emerging Companies – Health Care

Asia Pacific | Emerging Companies – Health Care EQUITY RESEARCH 16 September 2010 Singapore Healthcare Growth

EQUITY RESEARCH

16 September 2010

Singapore Healthcare

Growth quantified

16 September 2010 Singapore Healthcare Growth quantified  In this note, we provide an analysis of

In this note, we provide an analysis of the growth drivers for healthcare spending. Based on our conclusions, we have a high degree of confidence in the ability of certain business models to sustain strong earnings growth.

Our analysis shows private tertiary healthcare spending in Singapore growing at a 7% CAGR until 2020E. We expect certain players such as Raffles to sustain higher growth rates.

We assume coverage of Raffles Medical and Parkway Holdings and initiate on Thomson Medical and Healthway Medical. We have OUTPERFORM ratings on Raffles and Thomson and IN-LINE ratings on Parkway (previously Outperform) and Healthway.

In our view, Raffles has the most robust and defensive business model and has operating leverage through expansion of its specialist services. We like Thomson’s specialty leadership in birth deliveries and its attractive valuations.

Our IN-LINE rating for Parkway is based primarily on valuation. Healthway is expanding aggressively and has potential, in our view, but given recent staffing issues we await further execution before turning positive.

 

BB code

Rec

Mkt cap

Ccy

Price

FV

Up/

PER (x)

PBR (x)

Div yield (%)

 

(US$mn)

Down

2010E

2011E

2010E

2011E

2010E

2011E

Raffles Medical Thomson Medical Parkway Healthway KPJ Healthcare Bangkok Dusit Medical Bumrungrad Hospital

RFMD SP

OP

828.2

SGD

2.13

2.50

17%

25.0

21.0

4.0

3.6

1.6

1.9

THOM SP

OP

195.6

SGD

0.90

1.10

22%

16.8

15.1

2.2

2.0

2.4

2.6

PWAY SP

IL

3,282.8

SGD

3.85

4.00

4%

30.7

26.8

2.7

2.5

0.4

0.4

HMED SP

IL

237.0

SGD

0.17

0.2

18%

79.6

30.8

2.1

2.0

0.3

0.7

KPJ MK

NR

617.0

MYR

3.45

N/A

N/A

16.0

14.8

1.7

1.6

3.2

3.4

BGH TB

NR

1,500.7

THB

37.75

N/A

N/A

23.2

19.5

3.0

2.7

2.2

2.7

BH TB

NR

793.4

THB

32.75

N/A

N/A

20.6

18.2

4.1

3.7

2.6

2.9

Note: OP = OUTPERFORM, UP = UNDERPERFORM, IL = IN-LINE, NR = NOT RATED Source: Company, Bloomberg, Standard Chartered Research estimates

Stephen Hui

Stephen.Hui@sc.com +65 6307 1513

Magnus Gunn

Magnus.Gunn@sc.com +65 6307 1520

IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPENDIX.

Pauline Lee

Pauline-Hwee-Chen.Lee@sc.com +65 6307 1512

All rights reserved. Standard Chartered Bank 2010

http://research.standardchartered.com

Equity Research – Singapore Healthcare | 16 September 2010

Contents

– Singapore Healthcare | 16 September 2010 Contents Growth quantified… 3 Investment summary and

Growth quantified…

3

Investment summary and valuations

4

Demographics drive domestic demand

7

Private sector should gain market share

11

Revenue intensification will be strongest driver

16

Sector should grow at 7% CAGR until 2020E

18

Foreign patients market to grow

19

Clear segmentation reduces competition

24

Company updates Raffles Medical

29

Thomson Medical

46

Parkway Holdings

63

Healthway Medical

84

KPJ Healthcare

99

Bumrungrad

104

Bangkok Dusit

109

Disclosures appendix

116

2

Medical 84 KPJ Healthcare 99 Bumrungrad 104 Bangkok Dusit 109 Disclosures appendix 116 2

Equity Research – Singapore Healthcare | 16 September 2010

Growth quantified…

Healthcare | 16 September 2010 Growth quantified… The investment case for healthcare in Singapore is

The investment case for healthcare in Singapore is exceptionally robust, in our opinion. In this note, we provide an analysis of the growth drivers for healthcare spending that goes beyond traditional demographics. Based on our conclusions from this analysis, we have a high degree of confidence in the ability of certain business models to sustain robust earnings growth, which should translate into continued long-term alpha for appropriately positioned investors.

Our analysis shows the overall market for private tertiary healthcare spending in Singapore growing at a 7% CAGR until 2020E: The drivers are: (1) population growth of 2%, (2) impact from an aging population of 1.4% and (3) a shift towards private healthcare at 0.4%. We anticipate the biggest driver will come from a fourth factor: demand for ever more specialist services and care (‘revenue intensity per patient’), which we expect to persist at 3% until 2020. Our 7% estimate for tertiary healthcare spending refers to the overall market and we estimate that certain players, such as Raffles, will sustain higher growth rates.

We believe direct competition will remain limited due to strong market segmentation, especially for two of the three private hospital operators: Raffles Medical (Raffles), which is the leader in the corporate segment and Thomson Medical (Thomson), which specialises in women and children. For Parkway Holdings (Parkway), the dominant provider in the high-end patient market, we believe the completion of the Farrer Park Hospital in 2012/2013 will signal increased competition ahead, although we do not anticipate a significant impact.

We expect the growth in the foreign patient market will return as the global economy recovers, providing an additional growth driver. The key read across from our visits to three listed ASEAN hospital operators is that there is limited direct competition with Singapore as they largely target different source countries. For the Indonesian market, Singapore has a durable competitive advantage due to proximity and established relationships.

Recommendations: We have OUTPERFORM ratings on Raffles and Thomson and IN-LINE ratings on Parkway and Healthway. In our view, Raffles has the most robust and defensive business model and has operating leverage through expansion of its specialist services. We like Thomson’s specialty leadership in birth deliveries and its attractive valuations. We downgrade Parkway from OUTPERFORM to IN-LINE to reflect the stock’s current high valuations. Healthway is expanding aggressively and has strong potential, in our view, but given recent staffing issues we will await further execution before taking a more positive view.

3

in our view, but given recent staffing issues we will await further execution before taking a

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 Investment summary and valuations Singapore healthcare

Investment summary and valuations

Singapore healthcare stocks deserve to trade at a premium

In this note, we provide an analysis of the growth drivers for healthcare spending in Singapore. Based on our conclusions from this analysis, we have a high degree of confidence in the ability of certain business models to sustain future earnings growth, which should translate into continued long-term alpha for appropriately positioned investors. As a result, we believe select stocks deserve to trade at premium multiples.

We have OUTPERFORM ratings on Raffles Medical and Thomson Medical and IN-LINE ratings on Parkway Holdings and Healthway Medical. We have a fair value of S$2.5 for Raffles (17% potential upside), S$1.1 for Thomson (24% potential upside), S$4 for Parkway (4% potential downside) and S$0.2 for Healthway (18% potential upside).

we expect demographics, a shift towards private healthcare and a rise of revenue intensity to drive sector growth of

7%

Base case sector growth of 7%

We expect the increasing population to contribute 2 percentage points of sector growth, the aging population to contribute 1.4 percentage points and a shift towards private healthcare to contribute 0.4 of a percentage point. The increase in revenue intensity (or the demand for ever more specialist services and care) should provide the biggest driver of sector growth, with a growth contribution of 3 percentage points. Combining all these drivers shows a base case sector growth of 7% for the private tertiary healthcare providers.

Fig 1: Singapore private tertiary sector growth breakdown

Sector growth

Sector growth

7% 7%
7%
7%

Population

Population

2 22 % %%
2 22
%
%%

Aging population

Aging population

1.4%1.4% 1.4%
1.4%1.4%
1.4%

Private sectorshare gain

Private sectorshare gain

0.4% 0.4%0.4%
0.4%
0.4%0.4%

Revenue intensification

Revenue intensification

3%3% 3%
3%3%
3%

foreign patient volumes should grow with the economy of source countries

Source: Standard Chartered Research estimates

Growth in foreign patient market expected to return

Singapore had previously set a target of achieving 1mn foreign patients by 2012, although we believe it is likely to miss this target. The foreign patient market is highly correlated with economic growth in the source countries, Indonesia, in particular. With expectations that the global economy will recover in the next few years (Standard Chartered economists forecast Indonesian GDP growth of 6.2% in 2010, an acceleration from 4.4% in 2009), foreign patient volumes in Singapore should continue to increase.

4

of 6.2% in 2010, an acceleration fr om 4.4% in 2009), foreign patient volumes in Singapore

Equity Research – Singapore Healthcare | 16 September 2010

Fig 2: Foreign patient volumes

| 16 September 2010 Fig 2: Foreign patient volumes 600,000 500,000 400,000 300,000 200,000 100,000 0
600,000 500,000 400,000 300,000 200,000 100,000 0 2002 2004 2005 2006 2007 2008 2009 2010E
600,000
500,000
400,000
300,000
200,000
100,000
0
2002
2004
2005
2006
2007
2008
2009
2010E
Foreign patients

market segmentation reduces competition

Foreign patients market segmentation reduces competition Singapore Foreign patients Source: Singapore Tourism Board,

Singapore Foreign patients

Source: Singapore Tourism Board, Standard Chartered Research estimates

A market with strong segmentation

The three private hospital operators each operate in a different segment with minimal overlap. Raffles is the leader in the corporate segment and the only player operating under a group practice model. Thomson is market leader in birth deliveries and focuses on women and children. Parkway is the dominant provider in Singapore and leader in high-end patient care. Healthway does not operate a hospital, but is growing aggressively in primary and specialist care. The Farrer Park Hospital, scheduled for completion in 2012, will be the first new entrant in the private hospital segment in 11 years. We believe it signals the beginning of more intense competition, although we do not anticipate a significant change in competitive dynamics.

Sector valuation and stock picks

Our approach to valuation is twofold. First, we use a DCF to capture what, in our opinion, is a fairly predictable stream of long-term cash flows. We recognize, however, that the stock market will not build in the full value potential of these businesses (though an industry buyer often will) and investors will still rely heavily on short-term earnings multiples in setting the price. Second, we set our 12-month fair value with reference to peak earnings multiples from the prior cycle, given our bullish views on these companies and in the belief that their long-term earnings potential is becoming better understood by the market.

expansion of specialist services will give Raffles operating leverage

Thomson’s leadership in a niche sector and valuations are attractive

Our fair value of S$2.5 for Raffles offers potential upside of 17%.

The stock is trading on 21x

2011E and our fair value is based on a PER target multiple of 25x 2011E. Raffles’ previous peak valuation was in January 2008 at a forward PER of 25x. Our DCF valuation results in a fair value closer to S$2.8. We like Raffles for its robust and defensive business model and its operating leverage through the expansion of its specialist services. In 2009, Raffles’ hospital business (hospital and specialist services) posted an operating margin of 26% compared with 8% for its primary services. As the group continues to expand its specialist services, we

expect continued margin expansion.

Our fair value of S$1.1 for Thomson offers potential upside of 24%. Thomson is currently trading on PER 15x 2011E and our fair is based on a target multiple of PER 19x 2011E. Thomson’s previous peak valuation was in June 2007 at PER 20x 12-month forward earnings. We like Thomson’s leadership in birth deliveries and its long-established brand name. Thomson hospital is running at near full occupancy and this may present concerns on its future growth profile. But, our analysis shows that Thomson should still have room to grow. Together with its attractive valuations, we believe there is significant upside to its share price.

5

have room to grow. Together with its attractive valuations, we believe there is significant upside to

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 Parkway is a strong franchise but valuations

Parkway is a strong franchise but valuations are high

Healthway has great potential, but wait for proof of execution

Fig 3: Valuation table

Our IN-LINE rating for Parkway is based on valuations. Our fair value of S$4 translates to PER target multiple of 29x 2011E. The stock is currently trading on 27x PER 2011E on our core earnings estimate which strips out the gain from sales of the company’s Novena medical suites. In July 2007, the stock had traded at PER 40x 12-month forward earnings. Our target multiple is at a discount to peak valuations as our DCF shows fair value of S$4.34, offering only 13% upside (in contrast, Raffles’ DCF fair value offers over 30% potential upside). In our view, Parkway is the pre-eminent healthcare franchise in Asia due to its dominant position in Singapore and wide geographical reach. We believe the upcoming Parkway Novena hospital will strengthen the group’s position in its home market but uncertainties remain as to the hospital’s operating performance.

Our IN-LINE rating for Healthway stems from our “wait and see” approach. We believe Healthway has tremendous potential through its aggressive expansion of its services in Singapore and China. But in 1H 2010, its profit fell by 82% and management has advised this was due to the departure of key specialists and the costs associated with new clinics. In our view, the situation for Healthway is rather binary. If its new clinics succeed in building up a customer base, the share price would have significant upside. If it does not execute, its share price has significant downside potential as the stock is now trading at PER of 30x 2011E, which we believe already factors in a sharp bounce in profit.

 

Share

 

Market

 

2009-2012E

 

price

Fair

Upside/

cap

PER

PER

PER

earnings

PB

PB

Div.

 

Rating

Current

value (Downside)

Current

(x)

(x)

(x)

CAGR

(x)

(x)

Yield

 

LCY

LCY

%

USD m 2009 2010E 2011E

2009 2010E 2009

Coverage stocks

Raffles Medical (RFMD SP, S$)

OUTPERFORM

2.13

2.50

17%

828 29.5

25.0

21.0

18%

4.4

4.0 0.0%

Thomson Medical (THOM SP, S$)

OUTPERFORM

0.90

1.10

22%

196 20.5

16.8

15.1

14%

2.4

2.2 2.0%

Parkway (PWAY SP, S$)

IN-LINE

3.85

4.00

4%

3,283 36.7

30.7

26.8

9%*

3.0

2.7 0.3%

Healthway (HMED SP, S$)

IN-LINE

0.17

0.20

18%

237 15.2

79.6

30.8

-3%

1.6

1.5 1.4%

Average

25.5

38.0

23.4

2.8

2.6

Non-covered stocks

KPJ Healthcare (KPJ MK, MYR)

Non-covered

3.45

n.a.

n.a.

617 20.1

16.0

14.9

n.a.

3.2

1.7 2.4%

Bangkok Dusit Medical (BGH TB, THB) Non-covered

37.75

n.a.

n.a.

1,501 28.0

23.2

18.2

n.a.

3.4

3.0 2.0%

Bumrungrad Hospital (BH TB, THB)

Non-covered

32.75

n.a.

n.a.

793 20.9

20.6

17.4

n.a.

4.6

4.1 2.5%

Average

23.0

19.9

16.8

3.7

2.9 2.3%

* After factoring in potential loss for Parkway Novena in 2012. Source: Bloomberg, Standard Chartered Research estimates

The key read across from our visits to three listed ASEAN hospital operators is limited direct competition with Singapore as they largely target different source countries. For the Indonesian market, Singapore has a durable competitive advantage due to proximity and established relationships.

6

the Indonesian market, Singapore has a durable competitive advantage due to proximity and established relationships. 6

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 Demographics drive domestic demand strong growth in

Demographics drive domestic demand

strong growth in past nine years from inflow of foreigners

Growing population

Strong historical growth: historical population CAGR 2.8% From 2000 to 2009, Singapore’s population grew from 3.9mn to 5mn, according to Global Demographics, a CAGR of 2.8%. This growth was driven by the inflow of foreigners into Singapore. From 2000 to 2009, the CAGR of permanent residents was 7.1% and non-residents 5.8%. In contrast, the CAGR of citizens was only 0.8%, reflecting the government’s policy of selectively accepting new citizens. From 2000 to 2009, Singapore added an average 120,000 people a year. For example, in 2008, Singapore granted permanent residency to 79,000 people and new citizenship to 21,000 people. In 2009, Singapore tried to stem the inflow and granted permanent residency to 59,000 people and new citizenship to 20,000. But, together with non- residents, the total population still grew by 115,000 people.

Fig 4: Population by citizen, PR, non-residents

foreigners needed to drive economic growth

100%

80%

60%

40%

20%

0%

10.2%

18.7%

18.1%

18.7%

19.9%

21.9%

   

3.7%

24.7%

25.1%

86.1%

7.1%

8.5%

9.1%

9.5%

9.8%

9.9%

10.7%

 

74.1%

73.4%

72.2%

70.6%

68.3%

65.4%

64.2%

1990

2000

2004

2005

2006

2007

2008

2009

1990 2000 2004 2005 2006 2007 2008 2009 Singapore citizens Source: Department of Statistics-

Singapore citizens

Source: Department of Statistics- Singapore

citizens Source: Department of Statistics- Singapore Singapore PR Non-residents Population policy to drive

Singapore PR

Source: Department of Statistics- Singapore Singapore PR Non-residents Population policy to drive economic growth

Non-residents

Population policy to drive economic growth Part of Singapore’s reason for boosting population growth is demographic. The country’s population support ratio (the number of people aged 15-64 per elderly aged 65 & over) has fallen rapidly. Singapore needs the inflow of new residents to support its demographic structure. The other reason is the government’s policy desire to drive economic growth through the importation of foreign talent and cheap labour.

Fig 5: Support ratio

12 10 8 6 10.2 9.9 9.7 9.4 9.3 9.1 8.9 8.7 8.5 4 8.3
12
10
8
6
10.2
9.9
9.7
9.4
9.3
9.1
8.9
8.7
8.5
4
8.3
2
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Support ratio
Support ratio

Source: Global Demographics Limited

7

2001 2002 2003 2004 2005 2006 2007 2008 2009 Support ratio Support ratio Source: Global Demographics

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 government indicating awareness, not closing the door

government indicating awareness, not closing the door

population should reach 6mn by 2020

Government is indicating awareness, but population should still grow In recent years there has been much concern over the Singapore government’s open door policy on foreigners. Prime Minister Lee Hsien Loong, in his National Day speech on August 29, indicated that the government is aware of people’s concerns and will review its population policy. But, Singapore’s population continues to grow. Singapore’s Statistics department announced on 31 August 2010 that the population had exceeded 5mn and now totals 5.08mn. This means that in less than a year, Singapore’s population has grown by about 100,000. Even in Mr Lee’s recent speech, he did not indicate a clampdown on foreign workers. His message was that Singapore must balance the needs for growth and integration. We believe that if Singapore’s economy is to continue to grow, population growth is required.

Population CAGR of 2% until 2020 Looking forward, based on data from Global Demographics, Singapore’s population should grow from the current 5mn to over 6mn by 2020. This translates to a CAGR of 2%, a slow down from the 2.8% over the past nine years. In absolute numbers, the expected growth only requires Singapore’s population to grow by an average 107,000 a year, a slowdown from the average growth of 120,000 over the past nine years. Adding another 1mn people simply represents a continuation of the trend, of the previous two decades, where 1mn people were added in each period.

Fig 6: Singapore population growth

Growth 7,000 4% 6,000 5,000 3% 4,000 3,000 2% 2,000 1,000 0 1% Total population
Growth
7,000
4%
6,000
5,000
3%
4,000
3,000
2%
2,000
1,000
0
1%
Total
population
Grow th
Population ('000s)
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010F
2011F
2012F
2013F
2014F
2015F
2016F
2017F
2018F
2019F
2020F

population is aging quickly

Source: Global Demographics Limited, Standard Chartered Research

Aging population

Low fertility rate leading to skewed demographics The proportion of Singapore’s population aged 65 and over has increased from 6.9% in 2000, to 8.8% in 2009. The aging population is symptomatic of Singapore’s low fertility rate. Singapore’s total fertility rate, i.e. the fertility rate of women of childbearing age, declined from 1.47 in 1999, to 1.28 in 2008 and hit a new historical low of 1.22 in 2009.

Fig 7: Resident total fertility rate and total live births

Resident total fertility rate 60,000 2.0 50,000 1.8 40,000 1.6 30,000 1.4 20,000 1.2 10,000
Resident total fertility rate
60,000
2.0
50,000
1.8
40,000
1.6
30,000
1.4
20,000
1.2
10,000
0
1.0
Total live births
Resident total fertility rate
Total live briths
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

Source: Global Demographics Limited, Standard Chartered Research

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Global Demographics Limited, Standard Chartered Research

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 percentage of population over 65 should reach

percentage of

population over 65 should reach 14% by

2020

Population over 65 to increase to 14% by 2020 Based on data from Global Demographics, we expect the percentage of the population aged over 65 to expand from 8.8% in 2009, to 13.7% in 2020. In absolute numbers, this means this segment of the population will increase from 440,000 in 2009, to 840,000 in 2020, a CAGR of

6.1%.

Fig 8: Singapore’s population over the age of 65

100 80 60 40 20 0 < 15 15-64 65+ Population % 2000 2001 2002
100
80
60
40
20
0
< 15
15-64
65+
Population %
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

rate of admissions increases with age

Source: Global Demographics Limited

Compounded growth in admissions

Rate of admissions increases with age The aging population further burdens the healthcare system as the rate of admissions increases with age. After age five, the rate of admissions steadily increases. In the 5-9yr age group, the admissions rate is about 30 per 1000 residents (3%). However, by the age of 70+, the admissions rate is close to 400 per 1000 residents (40%).

Fig 9: Admissions rate per age group

450 400 350 300 250 200 150 100 50 0 0-4 5-9 10-14 15-19 20-24
450
400
350
300
250
200
150
100
50
0
0-4
5-9
10-14 15-19 20-24
25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69
2004
2005
2006
2007
70+
Admission rate per 1,000 resident
population

admission CAGR of 3.25%. Aging population contributes 1.4 percentage points of that

Source: Ministry of Health

Aging population contributes growth of 1.4 percentage points As the rate of admissions increases with age, we forecast total admissions per year to rise from the current 440,000, to 624,000 by 2020E, a CAGR of 3.25%. If we assume the rate of admission per population remains constant, it means population growth contributed two percentage points of that growth, while the aging population factor contributed additional growth of 1.4 percentage points.

9

points of that growth, while the aging population factor contributed additional growth of 1.4 percentage points.

Equity Research – Singapore Healthcare | 16 September 2010

Fig 10: Admissions forecast

Healthcare | 16 September 2010 Fig 10: Admissions forecast 700,000 15% 600,000 10% 500,000 400,000 5%
700,000 15% 600,000 10% 500,000 400,000 5% 300,000 200,000 0% 100,000 0 -5% Total admissions
700,000
15%
600,000
10%
500,000
400,000
5%
300,000
200,000
0%
100,000
0
-5%
Total admissions
Grow th
Admissions growth
Admissions
2003
2004
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019e
2020E

Source: Ministry of Health, Standard Chartered Research estimates

10

2014E 2015E 2016E 2017E 2018E 2019e 2020E Source: Ministry of Health, Standard Chartered Research estimates 10

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 Private sector should gain market share p

Private sector should gain market share

public sector has 76% share of admissions

Public sector dominates tertiary healthcare

Government restructured hospitals have 76% share of admissions By total admissions, government hospitals accounted for 76% of the total in 2008. In the past 10 years, the private sector has slowly gained share. In 1998, private hospitals accounted for only 23.2% of admissions and in 2008 it had increased by 1 percentage point to 24.2%. However, we believe that going forward the private sector’s market share gain should accelerate.

Fig 11: Singapore total admissions of Private and public share

100% 80% 60% 40% 20% 0% 1998 1999 2003 2004 2005 2006 2007 2008 2009
100%
80%
60%
40%
20%
0%
1998
1999
2003
2004
2005
2006
2007
2008
2009
Public
Private

public sector hospitals are 71 to 76% cheaper

Source: Ministry of Health

Public hospitals are much cheaper The reason most Singaporeans choose government restructured hospitals is because the government heavily subsidises the bills for certain wards. Comparing the average bill charges at public and private hospitals, public hospitals are 71% cheaper for surgical specialties and 76% cheaper for medical specialties.

Fig 12: Average bill comparison

SGD

Surgical specialties

Medical specialties

Public

2,173

1,538

Private

7,596

6,329

Discount

71.4%

75.7%

government heavily subsidises class C and class B2 wards

more people are choosing A class wards

Source: Ministry of Health

Public hospital wards system Bed classes in Singapore public hospitals range from class A to class C. At the low-end, class C wards are shared with up to nine other people and are naturally ventilated. At the high-end, class A wards are single rooms with air-conditioning, TV and other amenities. Between are B2 rooms, which are shared with up to six other people and are naturally ventilated, and class B1, where the rooms are shared with up to four other people and there is air-conditioning. The government heavily subsidises class C and class B2 wards. Of the beds in public hospitals, 80% are class C or class B2.

Shift towards higher class wards Even within public hospitals, there is evidence of an increasing shift towards class A and class B2 wards. A survey by the Ministry of Health in 2002 found of the top 20% of households by income, 62% choose the higher class wards. The same survey carried out in 2005 found that this percentage had increased to 78%.

11

62% choose the higher class wards. The same survey carried out in 2005 found that this

Equity Research – Singapore Healthcare | 16 September 2010

Fig 13: Ward choice for top 20% of

Fig 14: Ward choice for top 20% of

households by income,

2002. households by income, 2005.

of households by income, 2002. households by income, 2005. Singapore healthcare finance is based on 3Ms:

Singapore healthcare finance is based on 3Ms: Medisave, Medishield and Medifund

average private hospital surgical bill is about S$7,000. average Medisave balance is

SGD$15,000

half of Singapore’s population has a private integrated shield. Average bill would be lowered to

SGD3,400

A and B1 62% Legend: segments listed clockwise from top
A and B1 62%
Legend: segments listed clockwise from top

Source: Ministry of Health

B2 and C 38%

A and B1 78% Legend: segments listed clockwise from top
A and B1 78%
Legend: segments listed clockwise from top

Source: Ministry of Health

B2 and C 22%

Many Singaporeans can afford private healthcare

Healthcare finance introduction Besides the government’s subsidy for public healthcare, Singapore’s healthcare finance system is based on the 3Ms: Medisave, Medishield, and Medifund. Medisave is a compulsory medical savings scheme, wherein working Singaporeans contribute 6.5-9% of their salaries into a savings account. The Medisave contribution is part of the 20% contribution that employees make from their income into their Central Provident Fund (CPF) accounts. Medisave funds can then be used to pay for medical treatment, with certain restrictions. Medishield is a medical insurance scheme that is designed to be low-cost, but cover the financial risks of major illnesses. The basic coverage is for public hospitals, but 50% of Singaporeans have supplemented the scheme with a “private integrated shield” which also covers private hospitals. Lastly, Medifund is a medical endowment fund which acts as a final safety net for Singaporeans who cannot afford to pay for their healthcare costs.

At least 40% Singaporeans can afford private healthcare Part of the reason for the private sector’s market share gains to date and our expectations of future growth, is that many Singaporeans can afford private healthcare. As published on the Ministry of Health website, the average bill at private hospitals for a surgical specialty is about SGD7,000 and for a medical specialty is about SGD6,000. As of 2008, the average Medisave balance was SGD15,000 per resident. This is only sufficient to cover two private hospital surgical admissions.

Insurance makes private healthcare more affordable About half of Singapore’s residents have private integrated shield policies. Annual premiums are affordable at only SGD300-500 per year. Such policies combine a guaranteed SGD3,000 deduction clause with a mandatory 10% co-payment requirement. Hence, for the average private hospital bill of SGD7,000, the patient only pays SGD3,400 (i.e. a deduction of SGD3,000 and the addition of SGD400 – the 10% of the difference between SGD7,000 and SGD3,000).

12

(i.e . a deduction of SGD3,000 and the addition of SGD400 – the 10% of the

Equity Research – Singapore Healthcare | 16 September 2010

Fig 15: Percentage of residents with Medishield 2008

2010 Fig 15: Percentage of residents with Medishield 2008 Fig 16: Percentage of residents with private

Fig 16: Percentage of residents with private integrated shield plans 2008

of residents with private integrated shield plans 2008 Non Medishield Holders 15.6% MediShield policy holders 84.4%

Non Medishield Holdersof residents with private integrated shield plans 2008 15.6% MediShield policy holders 84.4% Legend: segments

15.6%

MediShield policy holdersintegrated shield plans 2008 Non Medishield Holders 15.6% 84.4% Legend: segments listed clockwise from top Source:

84.4%

Legend: segments listed clockwise from top

Source: Ministry of Health

listed clockwise from top Source: Ministry of Health Non MediShield Private 50.9% MediShield Policyholders with

Non MediShield Privatelisted clockwise from top Source: Ministry of Health 50.9% MediShield Policyholders with Private Integrated

50.9%

MediShield Policyholders with Private Integrated Shield plans 49.1%top Source: Ministry of Health Non MediShield Private 50.9% Legend: segments listed clockwise from top Source:

Legend: segments listed clockwise from top

Source: Ministry of Health

Medisave will cover over half of the deductible The current Medisave limit is SGD450 per day for daily hospital charges (i.e. room and board). For an average stay of four days for a surgical specialty, SGD1,800 could be claimed from Medisave. An additional amount could be claimed for the surgical procedure. This ranges from SGD250 at the low end (for example, for a tattoo laser excision), to SGD7,550 at the high end (for example, for a liver transplant). The rest would need to be paid out of pocket. For the average surgical bill of about SGD7,000, Medisave should cover well over half of the SGD3,400 deductible and co-payment, meaning a patient’s out-of-pocket cost should be below SGD1,800.

half of Singapore’s population should have substantial savings

Half of the population should have substantial savings Furthermore, based on government statistics, over half of Singapore’s resident population should have substantial savings. We take the difference between average monthly household income and expenditure based on income quintile. Excluding the 20% of income that is contributed to Singaporean’s CPF account, at the 40th – 60th quintile, households save 15% of their monthly incomes (this includes housings costs such as mortgage and rent). This translates to almost SGD10,000 of savings a year. Even if we take the population starting at the 61 st quintile, which on average saves SGD27k a year excluding CPF contribution, the private share of admissions should be much higher than only 24%.

Fig 17: Average monthly household income and expenditure, by income (2007/2008)

 

Monthly

Monthly

Monthly

Annual

Annual savings ex CPF

% income saved ex CPF

Income quintile

income

expenditure

savings

Annual income

savings

Total

7,440

3,764

3,676

89,280

44,112

26,256

29.4%

1st – 20th

1,274

1,760

(486)

15,288

(5,832)

(8,890)

-58.1%

21st – 40th

3,476

2,881

595

41,712

7,140

(1,202)

-2.9%

41st – 60th

5,480

3,571

1,909

65,760

22,908

9,756

14.8%

61st – 80th

8,495

4,532

3,963

101,940

47,556

27,168

26.7%

81st – 100th

18,472

6,078

12,394

221,664

148,728

104,395

47.1%

Source: SingStats, Singapore Household Expenditure Survey 2009

private sector has high share of deliveries – reflects possibility for healthcare as a whole

Delivery market demonstrates potential for private sector Given on average a person goes to the hospital only once every 10 years (in 2009, total admissions over total population was 9%), over half of Singapore’s population should be able to afford private healthcare should they choose to. This is reflected in the obstetrics and gynaecology market. From data the Ministry of Health published for the period of 1 Aug 2009 to 31 Jul 2010, over 60% of normal deliveries occurred in private hospitals and A-class wards. This compares with total private hospital admissions share of only 24% (A class wards are only about 10% of public hospitals so the total private hospital and A class ward share cannot be more than 34%). Anecdotally, this is because husbands wish to provide a nicer environment for their wives to give birth in.

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than 34%). Anecdotally, this is because husbands wish to provide a nicer environment for their wives

Equity Research – Singapore Healthcare | 16 September 2010

Fig 18: Public and private market share for total admissions in 2009

and private market share for total admissions in 2009 Fig 19: Public and private market share

Fig 19: Public and private market share for deliveries, Aug 09 – Jul 10

the government has indicated a desire to contain its healthcare subsidy to 1% of GDP

a desire to contain its healthcare subsidy to 1% of GDP Public admissions 75.8% Private admissions

Public admissions 75.8%a desire to contain its healthcare subsidy to 1% of GDP Private admissions 24.2% Legend: segments

its healthcare subsidy to 1% of GDP Public admissions 75.8% Private admissions 24.2% Legend: segments listed

Private admissions 24.2%

Legend: segments listed clockwise from top

Source: Ministry of Health

listed clockwise from top Source: Ministry of Health A class ward delivery 59.2% Private delivery 40.8%

A class ward delivery 59.2%listed clockwise from top Source: Ministry of Health Private delivery 40.8% Legend: segments listed clockwise

top Source: Ministry of Health A class ward delivery 59.2% Private delivery 40.8% Legend: segments listed

Private delivery 40.8%

Legend: segments listed clockwise from top

Source: Ministry of Health

Government will likely encourage shift

Government money is not unlimited Although the majority of Singaporeans choose public hospitals for their world-class healthcare services and heavily subsidised prices, the costs have been increasing for the government. As the Health Minister Khaw Boon Wan emphasised in a 2004 parliamentary speech, “government money is not unlimited.” The government had indicated in the past its wish to contain subsidies to 1% of GDP (as noted in a Healthcare Strategic Working Group paper). The current subsidies have already exceeded this and a restriction to 1% is not feasible, in our view. But as healthcare costs continue to grow, the government will need to defer some costs to private individuals.

Fig 20: Government health expenditure as a % of GDP

1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% FY2007 FY2008 FY2009F
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
FY2007
FY2008
FY2009F

means testing was launched in January 2009 to “stretch the health subsidy dollar”

Source: Ministry of Health

Means testing indicates things to come The only way to encourage a shift towards private healthcare consumption is via government initiatives. In fact, means testing was implemented in January 2009, as the health minister put it, as a way to “stretch the health subsidy dollar” and direct subsidies to those who need it the most – in other words, shift some costs to private individuals who can afford it. Previously, the government subsidised up to 80% of costs for citizens who were admitted into B2 and C class wards in government-restructured hospitals, regardless of income bracket. With means testing, when a patient chooses B2 and C class hospital beds, his income is checked. If the patient earns less than SGD3,200 a month, the patient will enjoy an 80% subsidy in Class C wards. The subsidy decreases as the patient’s income increases. If the patient earns over SGD5,201 a month, the subsidy in Class C wards falls to 65%.

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patient’s income in creases. If the patient earns over SGD5,201 a month, the subsidy in Class

Equity Research – Singapore Healthcare | 16 September 2010

Fig 21: Means testing

Healthcare | 16 September 2010 Fig 21: Means testing   Class C Class B2 Class C
 

Class C

Class B2

Class C Subsidy (Permanent Residents)

Class B2 Subsidy (Permanent Residents)

Average Monthly Income of Patient

Subsidy

Subsidy

(Citizens)

(Citizens)

$3,200 and below

80%

65%

70%

55%

$3,201 - $3,350

79%

64%

69%

54%

$3,351 - $3,500

78%

63%

68%

53%

$3,501 - $3,650

77%

62%

67%

52%

$3,651 - $3,800

76%

61%

66%

51%

$3,801 - $3,950

75%

60%

65%

50%

$3,951 - $4,100

74%

59%

64%

49%

$4,101 - $4,250

73%

58%

63%

48%

$4,251 - $4,400

72%

57%

62%

47%

$4,401 - $4,550

71%

56%

61%

46%

$4,551 - $4,700

70%

55%

60%

45%

$4,701 - $4,850

69%

54%

59%

44%

$4,851 - $5,000

68%

53%

58%

43%

$5,001 - $5,100

67%

52%

57%

42%

$5,101 - $5,200

66%

51%

56%

41%

$5,201 and above

65%

50%

55%

40%

private share of admissions to gain 1 percentage point

private admissions to grow at CAGR of 3.7%. Share gain contributes growth of

0.4%

Source: Ministry of Health

Conservative growth assumption of 0.4%

Private share of admissions to gain 1 percentage point by 2020 Although we believe the government wishes to increasingly shift costs to private individuals, we expect this to be a very slow and gradual process. In our sector model, we factor in a market share gain in terms of share of admissions of only 0.1 percentage point a year, a 1 percentage point gain by 2020. This would raise the private share of admissions from 24% in 2009, to 25% in 2020E. This simply equates to a continuation of the trend of the past 10 years where the share increased from 23.2% in 1998 to 24.3% in 2008.

Private share gain contributes 0.4% growth With the private share gain of 1 percentage point by 2020, we expect private hospital admissions to grow from 106,000 in 2009, to 157,000 by 2020E, a CAGR of 3.7%. As we expect sector-wide admissions to grow at a CAGR of 3.2%, the private share gain contribution to growth is 0.4%.

Fig 22: Admissions market share forecast

100 90 24.2 24.3 24.4 24.5 24.6 24.7 24.8 24.9 25.0 25.1 25.2 25.3 80
100
90
24.2
24.3
24.4
24.5
24.6
24.7
24.8
24.9
25.0
25.1
25.2
25.3
80
70
60
50
40
75.8
75.7
75.6
75.5
75.4
75.3
75.2
75.1
75.0
74.9
74.8
74.7
30
20
10
0
Public
Private
Admissions % breakdown
2009
2010E
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E

Source: Ministry of Health, Standard Chartered estimates

15

2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Source: Ministry of Health, Standard Chartered estimates

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 Revenue intensification will be strongest driver revenue

Revenue intensification will be strongest driver

revenue intensity driven by demand for more sophisticated care

What is revenue intensity?

Revenue intensity can be summarized as increasing “average revenue per patient” or as increased demand for higher quality and sophistication of care. This phenomenon is driven by the increasing trend of specialisation and sub-specialisation. As the health minister noted in a speech in March 2010, medical advances and sub-specialisation have “become a major source of cost escalation.”

Singapore hospital experience

The trend of increasing revenue intensity and demand of sophisticated services is an evident factor in the performance of the Singapore hospitals.

Parkway’s average revenue per patient grew at 5.2%.

Thomson’s average revenue per patient grew at CAGR of 2%.

Raffles average revenue per patient may have grown at

9%.

Raffles captures specialist fees, an important driver of revenue intensity

government expenditure per capita grown at 12% from 2002 to 2008

Parkway CAGR 6% From 2003 to 2009, Parkway’s average revenue per admission (combining both in-patient admissions and day cases) increased from SGD3,919 in 2003 to SGD5,660, a CAGR of 6%. However, this growth has already been diluted by the group’s shift towards day surgeries, which management advises has lower revenues per case. From 2003 to 2009, Parkway’s in-patient admissions actually declined, while day-cases rose three-fold. Despite the dilutive effect of day- cases, Parkway’s average revenue per patient still grew, from which we can conclude that average revenue per inpatient admission must have increased.

Thomson CAGR 2% From 2003 to 2009, Thomson’s average revenue per admission increased from SGD2,046 to SGD2,295, a CAGR of 2%. Thomson’s growth in average revenue per admission should be lower as Thomson focuses on providing deliveries, a more standardized and less complex service. But note that in the past three years, Thomson’s average revenue per admission has grown at a CAGR of 6%; in our view, due to the group moving up the value chain in terms of services.

Raffles CAGR estimated 9% Raffles does not disclose patient admission numbers, but we expect its average revenue per admission to have stronger growth. Based on management guidance on historical operating bed numbers, we estimate that admissions could have grown at a CAGR of 13% from 2003 to 2009. But, during this period, Raffles’ hospital service revenues grew at a CAGR of 23%. If we take Raffles’ hospital services revenue over our estimate of admission numbers, Raffles’ average revenue per admission would have grown from SGD5,208 to SGD8,751, a CAGR of 9%.

Raffles captures specialist fees Based on that estimate, Raffles’ average revenue per admission of SGD8,751 in 2009 was 55% higher than Parkway’s SGD5,660. The reason is that Raffles’ hospital services revenue includes specialist fees as Raffles employs its doctors. In contrast, Parkway and Thomson’s revenues are net of doctor fees as their doctors operate independently. We believe Raffles’ ability to capture specialist fees is an important driver of Raffles’ revenue intensity. Specialists are the first line of contact to patients (they see a specialist before they are admitted to a hospital) and have considerable pricing power. As patients consult specialists for increasingly sophisticated areas, specialist fees are likely to rise faster than hospital fees.

Others experience

Government expenditure per capita CAGR 12% From 2002 to 2008, the amount the government spent on healthcare per capita has been growing at 12%

16

capita CAGR 12% From 2002 to 2008, the amount the government spent on healthcare per capita

Equity Research – Singapore Healthcare | 16 September 2010

Fig 23: Government expenditure per capita

16 September 2010 Fig 23: Government expenditure per capita 500 40% 450 35% 30% 400 25%
500 40% 450 35% 30% 400 25% 350 20% 300 15% 250 10% 200 5%
500
40%
450
35%
30%
400
25%
350
20%
300
15%
250
10%
200
5%
150
0%
100
-5%
50
-10%
0
-15%
2002
2003
2004
2005
2006
2007
2008
Per capita government expenditure on health
Grow th
Growth %
Per capita government expense on
health (SGD)

Source: World Health Organization

Base case revenue intensity growth of 3% CAGR till 2020E

Based on the experience of the Singapore hospitals and other industry participants, we expect a base case revenue intensity growth of 3% until 2020. Among the different operators, however, we anticipate varying growth rates. Operators like Raffles, which are moving up the value chain and can capture specialists fees are likely to achieve faster-than-industry growth of average revenue per patient.

17

and can capture specialists fees are likely to achieve faster-than-industry growth of average revenue per patient.

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 Sector should grow at 7% CAGR until

Sector should grow at 7% CAGR until 2020E

combining population, aging, private share gain and inflation, the sector should grow at 7% CAGR until

2020E

Summarising the drivers

Base case of 7% CAGR sector growth Based on all the factors discussed above, we can summarise the implications on the healthcare sector growth rate. We expect the population to grow at a CAGR of 2% until 2020E. We expect the aging population, combined with the increasing demand associated with it to contribute a CAGR of 1.4%. We have assumed minimal private market share gain of 0.1% percentage points a year, translating to growth contribution of 0.4%. Lastly, we have factored in revenue intensification growth of 3%. Summing these geometrically, we arrive at the sector growth rate of 7% until 2020E.

Fig 24: Sector growth breakdown

Sector growth

Sector growth

7% 7%
7%
7%

Population

Population

22 2 % %%
22 2
%
%%

Aging population

Aging population

1.4%1.4% 1.4%
1.4%1.4%
1.4%

Private sectorshare gain

Private sectorshare gain

0.4% 0.4%0.4%
0.4%
0.4%0.4%

Revenue intensification

Revenue intensification

3% 3%3%
3%
3%3%

Source: Standard Chartered Research estimates

18

0.4%0.4% Revenue intensification Revenue intensification 3% 3%3% Source: Standard Chartered Research estimates 18

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 Foreign patients market to grow foreign patients

Foreign patients market to grow

foreign patients is an important market for private hospital operators

Critical for private healthcare

Foreign patients represent a significant share of revenue Medical tourism is a significant contributor to Singapore’s private healthcare market. According to Singapore Tourism Board‘s (STB) 2009 annual report, foreign patients spent over SGD1bn in Singapore in 2008. Foreign patients account for about one-third of all patients admitted into Raffles Hospital and Parkway. For some specialty areas, there is a large dependency on foreign patients. For example, foreign patients account for 80% of patients receiving treatment in the Living Donor Liver Transplant programme at Gleneagles Hospital (source: Parkway Life REIT prospectus pg D-26).

Fig 25: STB foreign patient expenditure

1,200 1,000 800 600 400 200 0 2002 2003 2004 2005 2006 2007 2008 S.E.
1,200
1,000
800
600
400
200
0
2002
2003
2004
2005
2006
2007
2008
S.E. Asia
Americas
N. Asia
S. Asia
Europe
Oceania
SGDm

Indonesia provides half of Singapore’s foreign patients

Source: Singapore Tourism Board

Indonesia is the most important market Of particular importance is Indonesia. Singapore tourism board data showed that Indonesia accounted for 52% of the foreign market in 2005. STB surveyed visitors departing from Singapore and estimates that Indonesians accounted for over 80% of foreign patient medical spending in 2008. For Parkway, Indonesians accounted for about half of all its foreign patients in

2009. For Raffles, management advised Indonesians accounted for about 25-30% of its foreign

patients in 2009.

Fig 26: Singapore Hospital patient mix

patients in 2009. Fig 26: Singapore Hospital patient mix Legend: segments listed clockw ise from top

Legend: segments listed clockw ise from top

Source: Straits times, Singapore Tourism Board

19

Singapore 72.0%from top Source: Straits times, Singapore Tourism Board 19 Indonesia 16.0% Malaysia 3.0% Bangladesh 1.0% Middle

Indonesia 16.0%Straits times, Singapore Tourism Board 19 Singapore 72.0% Malaysia 3.0% Bangladesh 1.0% Middle East/Africa 1.0% Others

Malaysia 3.0%times, Singapore Tourism Board 19 Singapore 72.0% Indonesia 16.0% Bangladesh 1.0% Middle East/Africa 1.0% Others 7.0%

Bangladesh 1.0%times, Singapore Tourism Board 19 Singapore 72.0% Indonesia 16.0% Malaysia 3.0% Middle East/Africa 1.0% Others 7.0%

Middle East/Africa 1.0%Straits times, Singapore Tourism Board 19 Singapore 72.0% Indonesia 16.0% Malaysia 3.0% Bangladesh 1.0% Others 7.0%

Others 7.0%times, Singapore Tourism Board 19 Singapore 72.0% Indonesia 16.0% Malaysia 3.0% Bangladesh 1.0% Middle East/Africa 1.0%

Tourism Board 19 Singapore 72.0% Indonesia 16.0% Malaysia 3.0% Bangladesh 1.0% Middle East/Africa 1.0% Others 7.0%

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 USD/IDR rose from 2,000 to 16,000 Highly

USD/IDR rose from 2,000 to 16,000

Highly correlated with economy

Indonesia was hurt by Asian financial crisis in 1998 Singapore’s foreign patient volume is highly dependent on the economic growth of the source countries. This factor is evident from past cycles. When the financial crisis hit Indonesia in 1998, the value of the IDR fell from about 2,000 to almost 16,000 per USD. This significantly eroded the purchasing power of Indonesians abroad.

Fig 27: USD/IDR Price Chart

16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 RID Jan-98 Feb-98 Mar-98 Apr-98 May-98
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
RID
Jan-98
Feb-98
Mar-98
Apr-98
May-98
Jun-98
Jul-98
Aug-98
Sep-98
Oct-98
Nov-98
Dec-98
Jan-99
Feb-99
Mar-99
Apr-99
May-99
Jun-99
Jul-99
Aug-99
Sep-99
Oct-99
Nov-99
Dec-99

foreign patient volumes fell sharply in

1998

Source: Bloomberg

So foreign patient numbers fell The impact on Singapore’s foreign patient market was clear. As disclosed in the Healthcare Strategic Working Group paper, in-patient foreign patient numbers at public hospitals fell from 16,518 in 1997 to 10,698 in 1998, a 37% y/y decline. Similarly, day-surgery numbers also fell from 5,844 in 1997, to 3,567 in 1998, a 39% decline. Note that above figures are only for foreign patient attendance at government hospitals, a small player in the foreign patient sector, but nevertheless is reflective of the impact on the overall market.

Fig 28: In-patient foreign patient volumes at public hospitals

18,000 15,000 12,000 9,000 6,000 3,000 0 1991 1992 1993 1994 1995 1996 1997 1998
18,000
15,000
12,000
9,000
6,000
3,000
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
In-Patients
Day Surgery Patients
Number

foreign patient volumes numbers fell 15% in 2007

Source: Healthcare strategic working group paper, Ministry of Health

Impact repeated in global financial crisis of 2008 In 2008, the foreign patient market was again hurt by the global economy. Foreign patient arrivals in Singapore fell from 410,000 in 2006, to 348,000 in 2007, a drop of 15%. After 2007, the Singapore Tourism Board stopped publishing foreign patient numbers, but we suspect the volumes have remained depressed from 2006 onwards.

20

stopped publishing fo reign patient numbers, but we suspect the volumes have remained depressed from 2006

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 Singapore Medicine to spearhead foreign patient drive

Singapore Medicine to spearhead foreign patient drive

growth interrupted during financial crisis

unlikely to reach 1mn foreign patients

Singapore likely miss its target of 1mn foreign patients by 2012

Singapore Medicine as spearhead In 2002, the Healthcare Strategic Working Group (HSWG) proposed a target to grow foreign patient numbers from 210,000 in 2002, to 1mn foreign patients by 2012. To support this goal, the Singapore government established Singapore Medicine as the inter-agency department to spearhead Singapore’s campaign to attract medical tourists.

Was on track until financial crisis By 2006, foreign patient arrivals had reached 410,000, growing at a CAGR of 25% from 2002. If foreign arrivals had continued to grow at 25%, Singapore would have reached 1.2mn foreign patients by 2011. In 2007, foreign patient numbers fell by 15% to 348,000 and no numbers have been published since.

Foreign patient volumes should have recovered, but still likely to fall short We estimate that foreign patient numbers recovered in 2009 to 500,000 and we believe it may grow to 600,000 in 2010, but think Singapore will still fall far short of its 1mn foreign patient target by 2012.

Fig 29: Foreign patient volumes

1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 2002 2004 2005 2006 2007 2008E 2009E 2010E
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
2002
2004
2005
2006
2007
2008E
2009E
2010E
?
Foreign patients

Standard Chartered forecasts Indonesian 2010 GDP growth of

6.2%

Chartered forecasts Indonesian 2010 GDP growth of 6.2% Singapore Foreign patients Source: Singapore Tourism Board,

Singapore Foreign patients

Source: Singapore Tourism Board, Standard Chartered Research estimates

Growth will return

Indonesian economy is recovering strongly We believe that as the global economy continues to recover, the high growth of foreign patient volumes will return. Indonesia emerged from the financial crisis as the third-fastest growing member of the G20, with GDP growth of 4.4% in 2009. Standard Chartered forecasts a further acceleration in Indonesia’s GDP to 6.2% in 2010.

Fig 30: Indonesia – Real GDP Growth rate

% growth 600,000 60% 500,000 40% 400,000 20% 300,000 0% 200,000 -20% 100,000 -40% 0
% growth
600,000
60%
500,000
40%
400,000
20%
300,000
0%
200,000
-20%
100,000
-40%
0
-60%
Indonesia GDP at current price
Grow th
USDm
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

Source: Central Agency of Statistics (actual figures), Standard Chartered Research

21

2004 2005 2006 2007 2008 2009 Source: Central Agency of Statistics (actual figures), Standard Chartered Research

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 Singapore, Thailand, Malaysia do not compete directly

Singapore, Thailand, Malaysia do not compete directly

The key take-away from our visits to Bumrungrad Hospital, Bangkok Dusit Medical, and KPJ Healthcare is that they do not compete directly with Singapore.

KPJ still focused on domestic Malaysian market

Thai hospitals do not target Indonesians

KPJ: focusing on community hospitals KPJ’s strategy is to open community hospitals in suburban areas and service the resident population. Although management agreed that the foreign patient market is high-margin and attractive, it admitted that attracting foreign patients to Malaysia is difficult and will take time to build up. Furthermore, it said its hospitals currently have high occupancy in the 70% to 80% range so it does not have the capacity to service foreign patients. Although the group has been marketing its foreign patient services on international media, such as CNBC, management told us that it is mainly for positioning for the future and its immediate focus will remain on its community hospitals.

Bumrungrad and Bangkok Dusit: targeting different countries and segment For the leading Thai hospital operators, Bumrungrad and Bangkok Dusit, both advised that they generally do not target the same countries as Singapore. Bumrungrad and Bangkok Dusit both stated they enjoyed highly diversified pools of foreign patients with the largest segments accounting for less than 5%. In contrast, more than half of Singapore’s foreign patient market comes from Indonesia. Due to the current lack of direct flights and Indonesian’s entrenched experience of travelling to Singapore, the Thai operators see very few Indonesian foreign patients.

Fig 31: Bangkok Dusit Medical foreign patients breakdown (top 5 countries shown)

Thailand and Malaysia probably target different income segments as they are much cheaper

target different income segments as they are much cheaper Japan 3.9% UK 3.4% UAE 3.0% US

Japan 3.9%target different income segments as they are much cheaper UK 3.4% UAE 3.0% US 2.6% Germany

UK 3.4%income segments as they are much cheaper Japan 3.9% UAE 3.0% US 2.6% Germany 2.6% Others

UAE 3.0%segments as they are much cheaper Japan 3.9% UK 3.4% US 2.6% Germany 2.6% Others 84.5%

US 2.6%as they are much cheaper Japan 3.9% UK 3.4% UAE 3.0% Germany 2.6% Others 84.5% Legend:

Germany 2.6%they are much cheaper Japan 3.9% UK 3.4% UAE 3.0% US 2.6% Others 84.5% Legend: segments

Others 84.5%cheaper Japan 3.9% UK 3.4% UAE 3.0% US 2.6% Germany 2.6% Legend: segments listed clockw ise

Legend: segments listed clockw ise from top

Source: Central Agency of Statistics (actual figures), Standard Chartered Research

Much cheaper than Singapore As shown in charts below, Thailand and Malaysia’s costs are far below Singapore. As a result, we believe the countries not only target different countries, but also different income segments.

Fig 32: Price comparison of medical procedures

Medical procedure

Singapore (USD)

USA (USD)

Thailand (USD)

Malaysia (USD)

Heart Bypass

16,500

130,000

11,000

12,000

Heart Valve Replacement

12,500

160,000

10,000

15,000

Angioplasty

11,200

57,000

13,000

8,000

Hip Replacement

9,200

43,000

12,000

10,000

Hysterectomy

6,000

20,000

4,500

4,000

Knee Replacement (single)

11,100

40,000

10,000

8,000

Source: Standard Chartered Research estimates

22

Knee Replacement (single) 11,100 40,000 10,000 8,000 Source: Standard Chartered Research estimates 22

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 Singapore’s edge is a strong clinical sciences

Singapore’s edge is a strong clinical sciences sector

new clinical applications to drive Singapore’s reputation as a healthcare hub

What is Singapore’s edge?

Cluster healthcare services with clinical sciences We believe Singapore’s advantage over other markets is its strong clinical science sector. From 2000, the Singapore government has made a strong push to make the biomedical science sector a key pillar of Singapore’s economy. The Biomedical Research Council was established in 2000 to support biomedical research activities in Singapore. The initiatives consisted of two phases. During Phase 1, from 2000 to 2005, Singapore focused on building basic biomedical research capabilities. Phase 2, from 2005 to 2010, was titled “strengthening translational and clinical research capabilities.”

Translating laboratory discoveries into clinical applications The focus of Phase 2 is to translate “basic discoveries in the laboratory into clinical applications to improve human healthcare.” We believe this result is what will differentiate Singapore as a medical hub. The clustering of Singapore’s healthcare services with its strong clinical scientific research will attract patients who want the most advanced healthcare services. It should also help brand Singapore as a leading medical hub. The government is investing heavily in this area as from 2000 to 2009, public sector investment in biomedical sciences R&D increased by over 3.5 times from SGD200mio to SGD700mio.

23

public sector investment in biomedical sciences R&D increased by over 3.5 times from SGD200mio to SGD700mio.

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 Clear segmentation reduces competition In our view,

Clear segmentation reduces competition

In our view, Parkway, Raffles, and Thomson each have their own strengths with minimal overlap. This allows for a less-competitive operating environment.

Raffles is the leader in private primary care and corporate patients

Raffles: strength with corporate patients

Leadership in primary care and corporate patients Raffle’s competitive advantage is, we believe, its strong primary care network and strength with corporate patients. Raffles has the largest network of primary care clinics in Singapore and the largest number of GP doctors. Raffles services over 5,500 corporates in Singapore. We learnt from Parkway that it services about 500 corporates, making Raffles the significant leader in the corporate segment.

Fig 33: Number of clinics and General Practitioners FY2009

120 100 80 60 40 20 0 Clinics GP doctors Raffles Parkw ay Healthw ay
120
100
80
60
40
20
0
Clinics
GP doctors
Raffles
Parkw ay
Healthw ay

strength in primary care creates strong referral system

Source: Company, Standard Chartered Research

Strong referral system for specialist clinics and hospital Raffles’ strength in primary care creates a strong referral system for its specialist clinics and in- turn, Raffles Hospital. We estimate that about 30% of the patients going to Raffle’s specialist clinics are referred from the group’s primary services. Raffles has consciously proportioned its services to reflect this balance. We estimate that Raffles has about 200 doctors of which 80 are specialists. In contrast, Parkway has about 900 doctors of which 800 are specialists. Parkway plans to grow its primary services aggressively to strengthen the source of referrals, but with the disproportionate emphasis on specialists it will be very difficult to balance.

Fig 34: Raffles: doctor breakdown between GP and specialists

Fig 35: Parkway: doctor breakdown between GP and specialists

Fig 35: Parkway: doctor breakdown between GP and specialists GP doctors 55% Specialists 45% Legend: segments

GP doctors 55%Fig 35: Parkway: doctor breakdown between GP and specialists Specialists 45% Legend: segments listed clockwise from

Specialists 45%doctor breakdown between GP and specialists GP doctors 55% Legend: segments listed clockwise from top Source:

Legend: segments listed clockwise from top

Source: Company, Standard Chartered Research estimates

24

Source: Company, Standard Chartered Research estimates 24 GP doctors 6.8% Specialists 93.2% Legend: segments listed

GP doctors 6.8%Source: Company, Standard Chartered Research estimates 24 Specialists 93.2% Legend: segments listed clockwise from top

Specialists 93.2%Standard Chartered Research estimates 24 GP doctors 6.8% Legend: segments listed clockwise from top Source: Company,

Legend: segments listed clockwise from top

Source: Company, Standard Chartered Research estimates

6.8% Specialists 93.2% Legend: segments listed clockwise from top Source: Company, Standard Chartered Research estimates

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 Raffles less dependent on Indonesians Less focus

Raffles less

dependent on

Indonesians

Less focus on Indonesians than Parkway Raffles and Parkway do compete for foreign patients, but differ on their dependance on Indonesia as a market. Raffles has consciously reduced its dependence on Indonesia, with patients from there accounting for 25-30% of its total foreign patients. In contrast, Indonesians account for about 50% of Parkway’s foreign patients. We believe Raffles has consciously tried to reach out to other markets as Parkway has a strong hold on the high-end Indonesian market.

Fig 36: Raffles: Foreign patient breakdown

Fig 37: Parkway: Foreign patient breakdown

Raffles’ patients more likely to attend without specific specialist doctor in mind

group practice model and medical audit to ensure quality of care

Parkway is the high- end segment leader, focusing on price- inelastic segment

dominant share of almost every aspect of private tertiary healthcare

of almost every aspect of private tertiary healthcare Singapore 70% Indonesia 7.5% Other 22.5% Legend: segments

of almost every aspect of private tertiary healthcare Singapore 70% Indonesia 7.5% Other 22.5% Legend: segments

Singapore 70%

Indonesia 7.5%every aspect of private tertiary healthcare Singapore 70% Other 22.5% Legend: segments listed clockwise from top

Other 22.5%of private tertiary healthcare Singapore 70% Indonesia 7.5% Legend: segments listed clockwise from top Source: Company,

Legend: segments listed clockwise from top

Source: Company, Standard Chartered Research estimates

top Source: Company, Standard Chartered Research estimates Singapore 72% Indonesia 16% Malaysia 3% Bangladesh 1% Middle

Singapore 72%top Source: Company, Standard Chartered Research estimates Indonesia 16% Malaysia 3% Bangladesh 1% Middle East/ Africa

Company, Standard Chartered Research estimates Singapore 72% Indonesia 16% Malaysia 3% Bangladesh 1% Middle East/ Africa

Indonesia 16%

Malaysia 3%Chartered Research estimates Singapore 72% Indonesia 16% Bangladesh 1% Middle East/ Africa 1% Vietnam 1% Eastern

Bangladesh 1%Research estimates Singapore 72% Indonesia 16% Malaysia 3% Middle East/ Africa 1% Vietnam 1% Eastern Europe

Middle East/ Africa 1%Singapore 72% Indonesia 16% Malaysia 3% Bangladesh 1% Vietnam 1% Eastern Europe 1% Others 5% Legend:

Vietnam 1%16% Malaysia 3% Bangladesh 1% Middle East/ Africa 1% Eastern Europe 1% Others 5% Legend: segments

Eastern Europe 1%Malaysia 3% Bangladesh 1% Middle East/ Africa 1% Vietnam 1% Others 5% Legend: segments listed clockwise

Others 5%1% Middle East/ Africa 1% Vietnam 1% Eastern Europe 1% Legend: segments listed clockwise from top

Legend: segments listed clockwise from top

Source: Company, Standard Chartered Research estimates

Target patients who choose the brand rather than the doctor Raffles is the only for-profit private hospital in Singapore operating under the group practice model where the doctors are employees of the group. This contrasts to the other private hospital operators where doctors are independent and operate their own clinics. Because doctors with strong earning power often choose to open their own practice, Raffles generally hires highly competent, but less prominent doctors. (Raffles does have some prominent specialists, but always tries to balance the mix between prominent and up-and-coming.) Because of this, patients who want to see the most prominent specialist in the market usually go to Parkway’s Mount Elizabeth or Gleneagles hospitals. The typical profile of the Raffles patient is someone who chooses Raffles rather than a specific specialist, and it is a reflection of the group practice model, where specialists work in a team and services are medically audited.

Parkway: leader in high-end tertiary care

Strength with price-inelastic segment With only three private for-profit hospital operators in Singapore, and Raffles and Thomson operating with a different focus, Parkway has become the de facto leader in high-end patient care. The group operates what is generally considered the two most prestigious hospitals in Singapore:

Mount Elizabeth and Gleneagles Hospital. As a result, Parkway’s strength lies within the relatively price-inelastic segment. When patients want the best care and are willing to pay for it, they are most likely to go to Mount Elizabeth or Gleneagles.

Dominant share Parkway’s dominance is reflected in its major share of almost every aspect of private tertiary healthcare. As of 2009, there were 1,253 private specialist doctors in Singapore, and Parkway has an estimated 854 accredited specialists, a 68% share. These specialists are not bound to Parkway, but with Parkway being the dominant operator, we suspect by default most of them admit patients there. In 2009, Parkway had a 44% share of private hospital admissions, and we estimate Parkway controls 48% of private hospital beds in Singapore.

25

44% share of private hospital admissions, and we estimate Parkway controls 48% of pr ivate hospital

Equity Research – Singapore Healthcare | 16 September 2010

Fig 38: Parkway’ s share of total specialists

2009

Fig 39: Parkway’s share of private specialists

2009 Fig 39: Parkway’s share of private specialists Parkway Hospital 27% Raffles hospitals 3% Other private
2009 Fig 39: Parkway’s share of private specialists Parkway Hospital 27% Raffles hospitals 3% Other private

Parkway Hospital 27%2009 Fig 39: Parkway’s share of private specialists Raffles hospitals 3% Other private specialists 10% Public

Raffles hospitals 3%share of private specialists Parkway Hospital 27% Other private specialists 10% Public hospitals 61% Legend:

Other private specialists 10%specialists Parkway Hospital 27% Raffles hospitals 3% Public hospitals 61% Legend: segments listed clockwise from

Public hospitals 61%27% Raffles hospitals 3% Other private specialists 10% Legend: segments listed clockwise from top Source: Singapore

Legend: segments listed clockwise from top

Source: Singapore Medical Council, Standard Chartered Research estimates

Fig 40: Parkway's share of private admissions 2009

Fig 40: Parkway's share of private admissions 2009 Parkway Hospital 68% Raffles hospitals 6% Other private

Parkway Hospital 68%Fig 40: Parkway's share of private admissions 2009 Raffles hospitals 6% Other private specialists 25% Legend:

Raffles hospitals 6%share of private admissions 2009 Parkway Hospital 68% Other private specialists 25% Legend: segments listed

Other private specialists 25%admissions 2009 Parkway Hospital 68% Raffles hospitals 6% Legend: segments listed clockwise from top Source: Singapore

Legend: segments listed clockwise from top

Source: Singapore Medical Council, Standard Chartered Research estimates

Fig 41: Parkway's share of private acute hospital beds

Parkway Novena should be completed by 2012 and will focus on foreign patients

Thomson is the market leader in obstetrics and gynaecology and has limited overlap with other operators

and gynaecology and has limited overlap with other operators Parkway Hospital 44% Thomson Medical 21% Raffles

Parkway Hospital 44%and gynaecology and has limited overlap with other operators Thomson Medical 21% Raffles Medical 14% Other

Thomson Medical 21%limited overlap with other operators Parkway Hospital 44% Raffles Medical 14% Other private hospitals 20% Legend:

Raffles Medical 14%other operators Parkway Hospital 44% Thomson Medical 21% Other private hospitals 20% Legend: segments listed

Other private hospitals 20%Parkway Hospital 44% Thomson Medical 21% Raffles Medical 14% Legend: segments listed clockwise from top Source:

Legend: segments listed clockwise from top

Source: Ministry of Health, Standard Chartered Research estimates

Ministry of Health, Standard Chartered Research estimates Parkway Hospital 48% Raffles hospitals 24% Thomson medical

Parkway Hospital 48%Ministry of Health, Standard Chartered Research estimates Raffles hospitals 24% Thomson medical 12% Other private beds

Raffles hospitals 24%Standard Chartered Research estimates Parkway Hospital 48% Thomson medical 12% Other private beds 16% Legend: segments

Thomson medical 12%estimates Parkway Hospital 48% Raffles hospitals 24% Other private beds 16% Legend: segments listed clockwise

Other private beds 16%Hospital 48% Raffles hospitals 24% Thomson medical 12% Legend: segments listed clockwise from top Source: Company,

Legend: segments listed clockwise from top

Source: Company, Standard Chartered Research estimates

Strengthening leadership with Parkway Novena Parkway expects its Novena project, which will be the group’s new state-of-the-art hospital, to reach completion in 2012. This should further consolidate Parkway’s position in Singapore and provide new capacity for the group to grow (as Parkway management indicates that occupancy levels at Mount Elizabeth and Gleneagles range between 60% to 70%, already quite high as the hospital needs spare capacity to cater for emergencies). Parkway astonished some market participants by paying SGD1.2bn for the plot of land, but we believe the premium paid reflected the site’s prime location (Novena will be the future medical hub) and the defensive nature of the move (to stop further entrants).

Thomson: Focus on women and children

Thomson’s operating model is very similar to Parkway’s in that private doctors operate independently, but rent consultation clinic space in the hospital premises. For proximity reasons, by default these doctors typically admit patients into the same hospital. The reason Thomson does not compete with Parkway directly is that Thomson focuses on obstetrics and gynaecology. Thomson is the leader in birth deliveries in Singapore and in the past six years has delivered 18% of all births in Singapore. Although recently Thomson expanded into female oncology, the group’s core focus is still on women and children.

26

Although recently Thomson expanded into female oncology, the group’s core focus is still on women and

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 Parkway is the most expensive, followed by

Parkway is the most expensive, followed by Raffles and then Thomson

Positioning reflected in average bills

The Ministry of Health publishes average hospital bills for the private hospital operators. Comparing the average total bill of the players, Parkway’s Mount Elizabeth and Gleneagles hospitals are the most expensive, with Raffles following closely behind. Of course, the bill does not just reflect room pricing, but also the complexity of the service. Mount Elizabeth is renowned for complex surgical procedures so its bills are understandably the highest. As Thomson has the greatest focus on a standardised service (deliveries), its average bill is the lowest.

Fig 42: Average private hospital bill for surgical specialty

 

Average per day (S$)

Average total

Total bill at 90th percentile (S$)

Total bill at 95th percentile (S$)

Hospitals

bill (S$)

Parkway East Hospital

2,379

6,127

11,686

17,824

Gleneagles Hospital

3,342

8,900

15,565

21,405

Mount Alvernia Hospital

2,317

6,375

11,640

16,052

Mount Elizabeth Hospital

3,955

11,518

22,444

30,392

Raffles Hospital

3,404

7,716

14,499

18,005

Thomson Medical Centre

1,928

4,938

7,806

9,344

Source: Ministry of Health

New kid on the block

Farrer Park Hospital owned by Singapore Healthpartners (together with the upcoming Parkway Novena hospital) will be the first new private hospital in over 10 years and has the stated intention of competing directly with Parkway for both the high-end domestic market and the foreign patient market.

will compete directly with Parkway for foreign patients

likely to compete with Parkway for doctors

State of the art facility designed for foreign patients Farrer Park will include a 220-bed tertiary hospital, a specialist medical centre with 189 consultation suites and a 230-room luxury hotel all integrated into one site. The luxury hotel reflects the foreign patient focus of the complex. The group believes the hotel will allow the families of foreign patients to stay in close proximity to the patient. It will also allow patients with short hospital stay requirements to move to the hotel and stay within proximity for check-ups.

Doctors will be first area of competition Singapore Healthpartners was founded by a group of 40 prominent private specialist doctors, of which we believe many have their current clinics at Parkway hospitals. When Farrer Park is fully operational, it should have over 200 specialist doctors (it will need at least one doctor for each of the 189 consultation suites). As both Parkway Novena and the Farrer Park Hospital are scheduled for completion in 2012, they are likely to compete to attract doctors from the government-restructured hospitals.

Competition should still be muted

We do not believe Farrer Park will have a severe impact on Parkway’s operations in the medium term.

potential supply-

induced demand

Conventional economics may not apply As noted in a paper by Singapore’s Healthcare Strategic Working Group (HSWG) in 2002, conventional economics may not apply to healthcare, as doctors have superior knowledge of healthcare compared with their patients, a factor known as ‘information asymmetry’. As a result, unlike other markets where consumers may make informed decisions, in healthcare, doctors have significant influence over the decision making of consumers. This supplier-induced hypothesis is based on the following:

27

influence over the decision ma king of consumers. This supplier-induced hypothesis is based on the following:

Equity Research – Singapore Healthcare | 16 September 2010

Fig 43: Farrer Park Hospital

Healthcare | 16 September 2010 Fig 43: Farrer Park Hospital Source: Company  Target income hypothesis:
Healthcare | 16 September 2010 Fig 43: Farrer Park Hospital Source: Company  Target income hypothesis:

Source: Company

Target income hypothesis: doctors may have a certain target income. As the number of patients fall, doctors may just increase their prices to maintain the same level of income.

Doctor moral hazard: because of information asymmetry, doctors may provide inappropriate healthcare services for patients for personal gain.

Patient moral hazard: where the healthcare system is low-cost, with assured payment by the government or insurance, patients may try to exploit the system and over-consume healthcare services. Thus, in healthcare economics there is the famous Roemer’s law from 1951: “a built bed is a filled bed” to which he subsequently added in 1993 “when there is assured payment.”

Parkway will still be dominant

Parkway likely to remain the first choice for Singaporeans As Mount Elizabeth and Gleneagles are such long-standing institutions in the mind of Singaporeans, we believe it will be difficult for Farrer Park to gain significant market share. But for the foreign patient market, we believe a new glitzy hospital-cum-hotel may hold attraction.

Still only a two-player market after Farrer Park’s introduction We do not believe Farrer Park will have a pronounced impact on Parkway’s operations, as it will still only be a two-player market (as mentioned previously, Raffles’ operates under a different model). We also view high-end segment demand as price-inelastic and, as noted above, even with the new competition, we think it is unlikely that hospitals and doctors will cut pricing.

additional entrants may change things

Government may release more sites, but not in near term In 2007, the government indicated that it had identified four potential sites for new private hospitals. Two have been released in Farrer Park and Novena, but there are two more additional sites. Recently, groups such as real estate developer Far East have also indicated interest in building a hospital in Singapore should additional sites be released. We believe competition could intensify with more entrants, but this is likely to be at least five years away to give the two upcoming private hospitals, Farrer Park and Parkway Novena, the chance to stabilise.

28

five years away to give the two upcoming private hospitals, Farrer Park and Parkway Novena, the

Equity Research – Singapore Healthcare | 16 September 2010

Raffles Medical

Robust business model

We maintain our OUTPERFORM rating and introduce a new fair value target of SGD2.5 per share, offering potential upside of 17%.

Raffles is one of the largest primary healthcare providers in Singapore and the only private hospital operating under a group practice model

We like Raffles for its robust business model and its exposure to operating leverage through the growth of its specialty services.

Specialist healthcare to deliver operating leverage. From 2000 to 2009, Raffles’ expanded its group operating margins from 12% to 22%. This was driven by the group’s new Raffles Hospital and the expansion of its specialty services, where in 2009 the group had margins of 26%. We believe there is further upside to margins. As Raffles continues to expand the breadth and depth of its specialist services, combined with the group’s strong cost management, we expect operating leverage to continue.

Defensive business model: We believe Raffles’ management has intentionally adopted a defensive business model with robust characteristics. This is underpinned by the group’s leadership in primary healthcare, which creates a strong referral system for its specialist business. As a result of these referrals, Raffles has created franchise value, allowing it to mitigate dependency on star doctors and exercise strong cost management. Raffles’ conservative management has focused on diversifying risks, as reflected in its relatively lower dependence on Indonesian foreign patients and the balance between the primary and specialist services.

Secular growth: As the economy continues to recover, Raffles’ primary care business will benefit as the corporate segment is highly sensitive to the economy. Growth in foreign patient volumes should also accelerate. The group’s recent expansion into China may also deliver long-term growth.

Risks: Key risks for Raffles are a mass exodus of doctors, a macroeconomic downturn impacting foreign patient volumes, or a medical incident that damages its reputation and brand.

a medical incident that damages its reputation and brand. OUTPERFORM (unchanged) PRICE as at 14 September

OUTPERFORM (unchanged)

PRICE as at 14 September 2010

SGD2.14

Bloomberg code

RFMD SP

Market cap

Reuters code

RAFG.SI

12 month range

SGD1,149.52m (US$860.46m) SGD1.32 - 2.19

EPS est. change

n.a.

Year end: Dec

2009

2010E

2011E

2012E

Sales (SGDm) EBIT (SGDm) EBITDA (SGDm) Pretax profit (SGDm) Earnings (SGDm) adj. Diluted EPS (SGDcents) adj. DPS (SGDcents) DPS growth (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Div payout (%) Book value / share (SGD) Debt/ Equity (%) ROE (%) ROACE (%) FCF (SGDm) EV/Sales (x) EV/EBITDA (x) PBR (x) PER (x) Dividend yield (%)

218.6

245.2

279.1

317.7

45.5

53.6

63.5

75.0

52.3

61.0

72.2

86.1

45.0

53.2

63.1

74.6

37.9

44.7

53.1

62.7

7.22

8.53

10.12

11.97

0.02

0.03

0.04

0.05

NM

38%

19%

18%

24%

25%

26%

27%

21%

22%

23%

24%

17%

18%

19%

20%

34%

40%

40%

40%

0.48

0.53

0.59

0.66

10%

9%

8%

7%

15%

16%

17%

18%

17%

19%

20%

21%

43.3

20.8

4.7

17.2

4.79

4.27

3.75

3.30

20.0

17.2

14.5

12.2

4.4

4.0

3.6

3.2

29.5

25.0

21.0

17.8

0.0%

0.0%

0.0%

0.0%

Source: Company, Standard Chartered Research estimates

Share price performance 2.2 2.1 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 Sep‐
Share price performance
2.2
2.1
2.0
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
Sep‐ 09
Dec‐ 09
Mar ‐ 10
Jun‐ 10
Sep‐ 10
Raffles Medical Group

STRAITS TIMES INDEX (rebased)

Share price (%)

-1 mth

-3 mth

-12 mth

Ordinary shares Relative to Index Relative to Sector

12

12

66

7

3

43

---

Raffles Medical Holdings (39.4%)

Major shareholder Free float Average turnover (US$)

 

46%

744,158

Source: Company, Bloomberg

Stephen Hui

Stephen.Hui@sc.com +65 6307 1513

Magnus Gunn

Magnus.Gunn@sc.com +65 6307 1520

Pauline Lee

Pauline-Hwee-Chen.Lee@sc.com +65 6307 1512

29

Magnus Gunn Magnus.Gunn@sc.com + 6 5 6307 1520 Pauline Lee Pauline-Hwee-Chen.Lee@sc.com + 6 5 6307 1512

Equity Research – Singapore Healthcare | 16 September 2010

Equity Research – Singapore Healthcare | 16 September 2010 Investment summary and valuation We maintain our

Investment summary and valuation

We maintain our OUTPERFORM recommendation on Raffles Medical and introduce a new fair value of SGD2.5 per share (previous fair value SGD1.53, March 2010), offering potential upside of 17%. We transfer coverage of the stock from Wei-ling Tan to Stephen Hui.

expansion of specialist services to drive operating leverage

robust and defensive business model

should have secular growth ahead

fair value offers 17% upside based on PER target multiple

25x2011E

deserves premium multiple as it has a proven and robust business model

Our investment rating in Raffles is based on the following:

Raffles’ should achieve strong operating leverage through the growth of its specialty services. In 2009, Raffles’ hospital services (hospital operations and specialist services) had operating margins of 26% compared with 8% for its primary services. As Raffles continues to add specialist doctors to its panel and maintain its tight cost management, operating margins should continue to expand.

Raffles’ has what we believe is a robust and defensive business model. Raffles’ role as one of the largest primary healthcare providers creates a strong flow of referrals to its specialist business. This strong volume of patients gives Raffles a franchise value, mitigating its dependence on star doctors and allowing it exercise strong cost management. Raffles’ management is also very conservative and is focused on diversifying risks. This is reflected in the group’s relatively lower reliance on Indonesia as a source of foreign patients.

Raffles should continue to grow. As the global economy recovers, the primary care business should grow with increased hiring of Singapore corporates. Raffles should also benefit from accelerating growth of the foreign patient market. We believe the group’s initiatives in China may also prove fruitful in the long term.

Valuation

Our fair value of SGD2.5 for Raffles offers potential upside of 17%. Raffles is trading on 21x2011E and our fair value is based on a PER target multiple of 25x2011E. Raffles’ previous peak valuation was in Jan 2008 at forward PER 25x. Our DCF valuation shows a fair value closer to SGD2.8.

We believe the stock deserves to trade at a premium as Raffles proved its robust business model during the financial downturn. In 2008 and 2009, Raffles continued to grow its top line by 19% and 9%, respectively, and core profit by 35% and 20%, respectively (excluding fair value gain in 2007 from purchase of Raffles Hospital).

We like Raffles for its robust and defensive business model and its operating leverage through expansion of its specialist services. In 2009, Raffles’ hospital business (hospital and specialist services) had operating margins of 26% compared with 8% for its primary services. As the group continues to expand its specialist services, we expect continued expansion of its margins.

Fig 44: PE band chart 3.0 27x 2.5 23x 2.0 19x 1.5 15x 11x 1.0
Fig 44: PE band chart
3.0
27x
2.5
23x
2.0
19x
1.5
15x
11x
1.0
7x
0.5
0.0
Jan-02
Jul-03
Jan-05
Jul-06
Jan-08
Jul-09

Source: Bloomberg, Standard Chartered Research estimates

30

7x 0.5 0.0 Jan-02 Jul-03 Jan-05 Jul-06 Jan-08 Jul-09 Source: Bloomberg, Standard Chartered Research estimates 30

Equity Research – Singapore Healthcare | 16 September 2010

Fig 45: Valuation table

Healthcare | 16 September 2010 Fig 45: Valuation table   Share   Market   2009-2012E
 

Share

 

Market

 

2009-2012E

 

price

Fair

Upside/

cap

PER

PER

PER

earnings

PB

PB

Div.

 

Rating

Current

value (Downside)

Current

(x)

(x)

(x)

CAGR

(x)

(x)

Yield

 

LCY

LCY

%

USD m 2009 2010E 2011E

 

2009 2010E 2009

Coverage stocks

Raffles Medical (RFMD SP, S$)

OUTPERFORM

2.13

2.50

17%

828 29.5

25.0

21.0

18%

4.4

4.0 0.0%

Thomson Medical (THOM SP, S$)

OUTPERFORM

0.90

1.10

22%

196 20.5

16.8

15.1

14%

2.4

2.2 2.0%

Parkway (PWAY SP, S$)

IN-LINE

3.85

4.00

4%

3,283 36.7

30.7

26.8

9%*

3.0

2.7 0.3%

Healthway (HMED SP, S$)

IN-LINE

0.17

0.20

18%

237 15.2

79.6

30.8

-3%

1.6

1.5 1.4%

Average

25.5

38.0

23.4

2.8

2.6

* After factoring in potential loss for Parkway Novena in 2012. Source: Bloomberg, Standard Chartered Research estimates

Discount cash flow model We believe a DCF approach is best suited to capture the group’s long-term growth prospects. Our long-term DCF translates to a revenue CAGR of 9% and a net profit CAGR of 10% until 2020. Based on a WACC of 7.1% and a long-term growth rate of 1%, our fair value of SGD2.5 offers a potential upside of 17%. We believe our assumptions are very conservative and the Raffles could potentially grow much stronger than built into our model.

Fig 46: DCF valuation

SGDm

FY09

FY10E

FY11E

FY12E

FY13E

FY14E

FY15E

FY16E

FY17E

FY18E

FY19E

FY20E

EBIT

45

54

63

75

82

88

93

99

106

113