SCB Singapore Healthcare Initiation 2010-09-16

Asia Pacific | Emerging Companies Health Care
EQUITY RESEARCH
16 September 2010
Singapore Healthcare
Growth quantified
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 Thomsons 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
Raffles Medical Thomson Medical Parkway Healthway KPJ Healthcare Bangkok Dusit Medical Bumrungrad Hospital RFMD SP THOM SP PWAY SP HMED SP KPJ MK BGH TB BH TB
Rec
OP OP IL IL NR NR NR
Mkt cap (US$mn)

828.2 195.6 3,282.8 237.0 617.0 1,500.7 793.4
Ccy
SGD SGD SGD SGD MYR THB THB
Price
2.13 0.90 3.85 0.17 3.45 37.75 32.75
FV
2.50 1.10 4.00 0.2 N/A N/A N/A
Up/ Down
17% 22% 4% 18% N/A N/A N/A
PER (x) 2010E 2011E

25.0 16.8 30.7 79.6 16.0 23.2 20.6 21.0 15.1 26.8 30.8 14.8 19.5 18.2
PBR (x) 2010E 2011E

4.0 2.2 2.7 2.1 1.7 3.0 4.1 3.6 2.0 2.5 2.0 1.6 2.7 3.7
Div yield (%) 2010E 2011E

1.6 2.4 0.4 0.3 3.2 2.2 2.6 1.9 2.6 0.4 0.7 3.4 2.7 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
Pauline Lee
Pauline-Hwee-Chen.Lee@sc.com +65 6307 1512
All rights reserved. Standard Chartered Bank 2010 IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPENDIX. http://research.standardchartered.com
Equity Research Singapore Healthcare | 16 September 2010
Contents
Growth quantified Investment summary and valuations Demographics drive domestic demand Private sector should gain market share Revenue intensification will be strongest driver Sector should grow at 7% CAGR until 2020E Foreign patients market to grow Clear segmentation reduces competition Company updates Raffles Medical Thomson Medical Parkway Holdings Healthway Medical KPJ Healthcare Bumrungrad Bangkok Dusit Disclosures appendix 29 46 63 84 99 104 109 116 3 4 7 11 16 18 19 24
Growth quantified
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 Thomsons specialty leadership in birth deliveries and its attractive valuations. We downgrade Parkway from OUTPERFORM to IN-LINE to reflect the stocks 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.
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).
Base case sector growth of 7%

we expect demographics, a shift towards private healthcare and a rise of revenue intensity to drive 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
7%
Population
2%
Aging population
1.4%
Private sectorshare gain
0.4%
Revenue intensification
Source: Standard Chartered Research estimates
3%
Growth in foreign patient market expected to return

foreign patient volumes should grow with the economy of source countries 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.
Fig 2: Foreign patient volumes

600,000 500,000 Foreign patients 400,000 300,000 200,000 100,000 0 2002 2004 2005 2006 2007 2008 2009 2010E
Singapore Foreign patients

Source: Singapore Tourism Board, Standard Chartered Research estimates
A market with strong segmentation

market segmentation reduces competition 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. 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. Thomsons previous peak valuation was in June 2007 at PER 20x 12-month forward earnings. We like Thomsons 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.
expansion of specialist services will give Raffles operating leverage
Thomsons leadership in a niche sector and valuations are attractive
Parkway is a strong franchise but valuations are high
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 companys 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 groups position in its home market but uncertainties remain as to the hospitals 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.
Healthway has great potential, but wait for proof of execution
Fig 3: Valuation table

Share Market price Fair Upside/ cap PER Current value (Downside) Current (x) LCY Coverage stocks Raffles Medical (RFMD SP, S$) Thomson Medical (THOM SP, S$) Parkway (PWAY SP, S$) Healthway (HMED SP, S$) Average Non-covered stocks KPJ Healthcare (KPJ MK, MYR) Bumrungrad Hospital (BH TB, THB) Average
* After factoring in potential loss for Parkway Novena in 2012. Source: Bloomberg, Standard Chartered Research estimates
Rating
PER (x)
PER (x)
2009-2012E earnings CAGR
LCY 2.50 1.10 4.00 0.20
% USD m 2009 2010E 2011E 17% 22% 4% 18% 828 29.5 196 20.5 3,283 36.7 237 15.2 25.5 25.0 16.8 30.7 79.6 38.0 16.0 23.2 20.6 19.9 21.0 15.1 26.8 30.8 23.4 14.9 18.2 17.4 16.8 n.a. n.a. n.a. 18% 14% 9%* -3%
PB Div. (x) Yield 2009 2010E 2009 4.4 2.4 3.0 1.6 2.8 3.2 3.4 4.6 3.7 4.0 0.0% 2.2 2.0% 2.7 0.3% 1.5 1.4% 2.6 1.7 2.4% 3.0 2.0% 4.1 2.5% 2.9 2.3%
PB (x)
OUTPERFORM OUTPERFORM IN-LINE IN-LINE
2.13 0.90 3.85 0.17
Non-covered Non-covered
3.45 37.75 32.75
n.a. n.a. n.a.
n.a. n.a. n.a.
617 20.1 1,501 28.0 793 20.9 23.0
Bangkok Dusit Medical (BGH TB, THB) Non-covered
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.
Demographics drive domestic demand

Growing population
strong growth in past nine years from inflow of foreigners Strong historical growth: historical population CAGR 2.8% From 2000 to 2009, Singapores 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 governments 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 nonresidents, the total population still grew by 115,000 people. Fig 4: Population by citizen, PR, non-residents
100% 80% 60% 40% 20% 0% 1990 2000 Singapore citizens
Source: Department of Statistics- Singapore
10.2% 3.7%
18.7% 7.1%
18.1% 8.5%
18.7% 9.1%
19.9% 9.5%
21.9% 9.8%
24.7% 9.9%
25.1% 10.7%
86.1%
74.1%
73.4%
72.2%
70.6%
68.3%
65.4%
64.2%
2004
2005 Singapore PR
2006
2007
2008
2009
Non-residents
foreigners needed to drive economic growth
Population policy to drive economic growth Part of Singapores reason for boosting population growth is demographic. The countrys 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 governments policy desire to drive economic growth through the importation of foreign talent and cheap labour. Fig 5: Support ratio
12 10 Support ratio 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 10.2
9.9
9.7
9.4
9.3
9.1
8.9
8.7
8.5
8.3
Support ratio
Source: Global Demographics Limited
government indicating awareness, not closing the door
Government is indicating awareness, but population should still grow In recent years there has been much concern over the Singapore governments 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 peoples concerns and will review its population policy. But, Singapores population continues to grow. Singapores 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, Singapores population has grown by about 100,000. Even in Mr Lees 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 Singapores economy is to continue to grow, population growth is required. Population CAGR of 2% until 2020 Looking forward, based on data from Global Demographics, Singapores 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 Singapores 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
7,000 6,000 Population ('000s) 5,000 4,000 3,000 2,000 1,000 0 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1% 2% 3% 4%
population should reach 6mn by 2020
Growth
Total population
Source: Global Demographics Limited, Standard Chartered Research
Grow th
Aging population
population is aging quickly Low fertility rate leading to skewed demographics The proportion of Singapores population aged 65 and over has increased from 6.9% in 2000, to 8.8% in 2009. The aging population is symptomatic of Singapores low fertility rate. Singapores 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
60,000 50,000 Total live briths 40,000 30,000 20,000 10,000 0 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 1.4 1.2 1.0 2.0 Resident total fertility rate 1.8 1.6
Total live births

Source: Global Demographics Limited, Standard Chartered Research
Resident total fertility rate
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: Singapores population over the age of 65
100 80 Population % 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
< 15
Source: Global Demographics Limited
15-64
65+
Compounded growth in admissions

rate of admissions increases with age 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
Admission rate per 1,000 resident population 450 400 350 300 250 200 150 100 50 0 0-4
Source: Ministry of Health
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 70+ 2004 2005 2006 2007
admission CAGR of 3.25%. Aging population contributes 1.4 percentage points of that
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.
Fig 10: Admissions forecast

700,000 600,000 Admissions 500,000 400,000 300,000 200,000 100,000 0 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2020E 2003 2004 2005 2006 2007 2008 2009 2019e -5% 10% 5% 0% 15% Admissions growth
Total admissions
Source: Ministry of Health, Standard Chartered Research estimates
Grow th
10
Private sector should gain market share

Public sector dominates tertiary healthcare
public sector has 76% share of admissions 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 sectors 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 Public
2005
2006 Private
2007
2008
2009
public sector hospitals are 71 to 76% cheaper
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 Public Private Discount
Surgical specialties 2,173 7,596 71.4%
Medical specialties 1,538 6,329 75.7%
government heavily subsidises class C and class B2 wards
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%.
more people are choosing A class wards
11
Fig 13: Ward choice for top 20% of households by income, 2002.
Fig 14: Ward choice for top 20% of households by income, 2005.
A and B1 62%
B2 and C 38%
A and B1 78%
B2 and C 22%
Legend: segments listed clockwise from top


Many Singaporeans can afford private healthcare

Singapore healthcare finance is based on 3Ms: Medisave, Medishield and Medifund Healthcare finance introduction Besides the governments subsidy for public healthcare, Singapores 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 sectors 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 Singapores 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).
average private hospital surgical bill is about S$7,000. average Medisave balance is SGD$15,000
half of Singapores population has a private integrated shield. Average bill would be lowered to SGD3,400
12
Fig 15: Percentage of residents with Medishield 2008
Fig 16: Percentage of residents with private integrated shield plans 2008
Non Medishield Holders 15.6%
Non MediShield Private 50.9%
MediShield policy holders 84.4%
MediShield Policyholders with Private Integrated Shield plans 49.1%


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 patients out-of-pocket cost should be below SGD1,800. Half of the population should have substantial savings Furthermore, based on government statistics, over half of Singapores 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 Singaporeans 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 61st quintile, which on average saves SGD27k a year excluding CPF contribution, the private share of admissions should be much higher than only 24%.
half of Singapores population should have substantial savings
Fig 17: Average monthly household income and expenditure, by income (2007/2008)
Income quintile Total 1st 20th 21st 40th 41st 60th 61st 80th 81st 100th Monthly income 7,440 1,274 3,476 5,480 8,495 18,472 Monthly expenditure 3,764 1,760 2,881 3,571 4,532 6,078 Monthly savings Annual income 3,676 (486) 595 1,909 3,963 12,394 89,280 15,288 41,712 65,760 101,940 221,664 Annual savings 44,112 (5,832) 7,140 22,908 47,556 148,728 Annual savings ex CPF 26,256 (8,890) (1,202) 9,756 27,168 104,395 % income saved ex CPF 29.4% -58.1% -2.9% 14.8% 26.7% 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 Singapores 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. 13
Fig 18: Public and private market share for Fig 19: Public and private market share for total admissions in 2009 deliveries, Aug 09 Jul 10
Public admissions 75.8%
A class ward delivery 59.2%
Private admissions 24.2%
Private delivery 40.8%


Government will likely encourage shift

the government has indicated a desire to contain its healthcare subsidy to 1% of GDP 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
means testing was launched in January 2009 to stretch the health subsidy dollar
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 patients income increases. If the patient earns over SGD5,201 a month, the subsidy in Class C wards falls to 65%.
14
Fig 21: Means testing

Average Monthly Income of Patient $3,200 and below $3,201 - $3,350 $3,351 - $3,500 $3,501 - $3,650 $3,651 - $3,800 $3,801 - $3,950 $3,951 - $4,100 $4,101 - $4,250 $4,251 - $4,400 $4,401 - $4,550 $4,551 - $4,700 $4,701 - $4,850 $4,851 - $5,000 $5,001 - $5,100 $5,101 - $5,200 $5,201 and above
Class C Subsidy (Citizens) 80% 79% 78% 77% 76% 75% 74% 73% 72% 71% 70% 69% 68% 67% 66% 65%
Class B2 Subsidy (Citizens) 65% 64% 63% 62% 61% 60% 59% 58% 57% 56% 55% 54% 53% 52% 51% 50%
Class C Subsidy (Permanent Residents) 70% 69% 68% 67% 66% 65% 64% 63% 62% 61% 60% 59% 58% 57% 56% 55%
Class B2 Subsidy (Permanent Residents) 55% 54% 53% 52% 51% 50% 49% 48% 47% 46% 45% 44% 43% 42% 41% 40%
Conservative growth assumption of 0.4%

private share of admissions to gain 1 percentage point 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 80 70 60 50 40 30 20 10 0 Admissions % breakdown 24.2 24.3 24.4 24.5 24.6 24.7 24.8 24.9 25.0 25.1 25.2 25.3
private admissions to grow at CAGR of 3.7%. Share gain contributes growth of 0.4%
75.8
75.7
75.6
75.5
75.4
75.3
75.2
75.1
75.0
74.9
74.8
74.7
2010E
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
Public
Source: Ministry of Health, Standard Chartered estimates
Private
15
2020E
2009
Revenue intensification will be strongest driver

What is revenue intensity?
revenue intensity driven by demand for more sophisticated care 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 CAGR 6% From 2003 to 2009, Parkways 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 groups shift towards day surgeries, which management advises has lower revenues per case. From 2003 to 2009, Parkways in-patient admissions actually declined, while day-cases rose three-fold. Despite the dilutive effect of daycases, Parkways 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, Thomsons average revenue per admission increased from SGD2,046 to SGD2,295, a CAGR of 2%. Thomsons 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, Thomsons 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 Parkways SGD5,660. The reason is that Raffles hospital services revenue includes specialist fees as Raffles employs its doctors. In contrast, Parkway and Thomsons 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.
Parkways average revenue per patient grew at 5.2%.
Thomsons 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
Others experience
government expenditure per capita grown at 12% from 2002 to 2008 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
Fig 23: Government expenditure per capita

Per capita government expense on health (SGD) 500 450 400 350 300 250 200 150 100 50 0 2002 2003 2004 2005 2006 2007 Grow th 2008 Per capita government expenditure on health
Source: World Health Organization
40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15%
Growth %
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
Sector should grow at 7% CAGR until 2020E

Summarising the drivers
combining population, aging, private share gain and inflation, the sector should grow at 7% CAGR until 2020E 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
7%
Population
2%
Aging population
1.4%
Private sectorshare gain
0.4%
Revenue intensification
3%
18
Foreign patients market to grow

Critical for private healthcare
foreign patients is an important market for private hospital operators Foreign patients represent a significant share of revenue Medical tourism is a significant contributor to Singapores private healthcare market. According to Singapore Tourism Boards (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 SGDm 600 400 200 0 2002 2003 S.E. Asia
Source: Singapore Tourism Board
2004 Americas
2005 N. Asia S. Asia
2006 Europe
2007 Oceania
2008
Indonesia provides half of Singapores foreign patients
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
Singapore 72.0% Indonesia 16.0% Malaysia 3.0% Bangladesh 1.0% Middle East/Africa 1.0% Others 7.0% Legend: segments listed clockw ise from top
Source: Straits times, Singapore Tourism Board
19
Highly correlated with economy

USD/IDR rose from 2,000 to 16,000 Indonesia was hurt by Asian financial crisis in 1998 Singapores 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 Oct-98 May-98 May-99 Feb-98 Feb-99 Mar-98 Nov-98 Dec-98 Mar-99 Oct-99 Jan-98 Jun-98 Jan-99 Jun-99 Jul-98 Jul-99 Nov-99 Aug-98 Aug-99 Dec-99 2000 Sep-98 Sep-99 Apr-98 Apr-99
Source: Bloomberg
foreign patient volumes fell sharply in 1998
So foreign patient numbers fell The impact on Singapores 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 Number 12,000 9,000 6,000 3,000 0 1991 1992 1993 1994 In-Patients
Source: Healthcare strategic working group paper, Ministry of Health
IDR
1995
1996
1997
1998
1999
Day Surgery Patients
foreign patient volumes numbers fell 15% in 2007
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
Singapore likely miss its target of 1mn foreign patients by 2012

Singapore Medicine to spearhead foreign patient drive 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 Singapores 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 Foreign patients 800,000 600,000 400,000 200,000 0 2002 2004 2005 2006 2007 2008E 2009E 2010E ?
growth interrupted during financial crisis
unlikely to reach 1mn foreign patients

Source: Singapore Tourism Board, Standard Chartered Research estimates
Growth will return

Standard Chartered forecasts Indonesian 2010 GDP growth of 6.2% 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 Indonesias GDP to 6.2% in 2010. Fig 30: Indonesia Real GDP Growth rate
600,000 500,000 400,000 USDm 300,000 200,000 100,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 60% 40% 20% 0% -20% -40% -60%
% growth
Indonesia GDP at current price

Source: Central Agency of Statistics (actual figures), Standard Chartered Research
Grow th
21
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: focusing on community hospitals KPJs 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 Singapores foreign patient market comes from Indonesia. Due to the current lack of direct flights and Indonesians 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)
Japan 3.9% UK 3.4% UAE 3.0% US 2.6% Germany 2.6% Others 84.5% Legend: segments listed clockw ise from top
Source: Central Agency of Statistics (actual figures), Standard Chartered Research
KPJ still focused on domestic Malaysian market
Thai hospitals do not target Indonesians
Thailand and Malaysia probably target different income segments as they are much cheaper
Much cheaper than Singapore As shown in charts below, Thailand and Malaysias 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 Heart Bypass Heart Valve Replacement Angioplasty Hip Replacement Hysterectomy Knee Replacement (single)
Singapore (USD) 16,500 12,500 11,200 9,200 6,000 11,100
USA (USD) 130,000 160,000 57,000 43,000 20,000 40,000
Thailand (USD) 11,000 10,000 13,000 12,000 4,500 10,000
Malaysia (USD) 12,000 15,000 8,000 10,000 4,000 8,000
22
What is Singapores edge?

Singapores edge is a strong clinical sciences sector Cluster healthcare services with clinical sciences We believe Singapores 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 Singapores 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 Singapores 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.
new clinical applications to drive Singapores reputation as a healthcare hub
23
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: strength with corporate patients

Raffles is the leader in private primary care and corporate patients Leadership in primary care and corporate patients Raffles 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 Raffles
Source: Company, Standard Chartered Research
GP doctors Parkw ay Healthw ay
strength in primary care creates strong referral system
Strong referral system for specialist clinics and hospital Raffles strength in primary care creates a strong referral system for its specialist clinics and inturn, Raffles Hospital. We estimate that about 30% of the patients going to Raffles specialist clinics are referred from the groups 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
GP doctors 55%
GP doctors 6.8%
Specialists 45%
Specialists 93.2%

Source: Company, Standard Chartered Research estimates

24
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 Parkways 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
Singapore 72% Singapore 70% Indonesia 16% Malaysia 3% Indonesia 7.5% Bangladesh 1% Middle East/ Africa 1% Vietnam 1% Other 22.5% Eastern Europe 1% Others 5% Legend: segments listed clockwise from top

Raffles patients more likely to attend without specific specialist doctor in mind
group practice model and medical audit to ensure quality of care
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 Parkways 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

Parkway is the highend segment leader, focusing on priceinelastic segment 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, Parkways 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 Parkways 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.
dominant share of almost every aspect of private tertiary healthcare
25
Fig 38: Parkway s share of total specialists Fig 39: Parkways share of private 2009 specialists
Parkway Hospital 27%
Raffles hospitals 3% Raffles hospitals 6% Other private specialists 10% Other private specialists 25% Public hospitals 61%

Source: Singapore Medical Council, Standard Chartered Research estimates

Fig 40: Parkway's share of private admissions 2009
Fig 41: Parkway's share of private acute hospital beds
Thomson Medical 21%
Raffles hospitals 24%
Raffles Medical 14% Other private hospitals 20%
Thomson medical 12% Other private beds 16%


Parkway Novena should be completed by 2012 and will focus on foreign patients
Strengthening leadership with Parkway Novena Parkway expects its Novena project, which will be the groups new state-of-the-art hospital, to reach completion in 2012. This should further consolidate Parkways 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 sites 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 is the market leader in obstetrics and gynaecology and has limited overlap with other operators Thomsons operating model is very similar to Parkways 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 groups core focus is still on women and children.
26
Positioning reflected in average bills

Parkway is the most expensive, followed by Raffles and then Thomson The Ministry of Health publishes average hospital bills for the private hospital operators. Comparing the average total bill of the players, Parkways 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
Hospitals Parkway East Hospital Gleneagles Hospital Mount Alvernia Hospital Mount Elizabeth Hospital Raffles Hospital Thomson Medical Centre
Average per day (S$) 2,379 3,342 2,317 3,955 3,404 1,928
Average total bill (S$) 6,127 8,900 6,375 11,518 7,716 4,938
Total bill at 90th percentile (S$) 11,686 15,565 11,640 22,444 14,499 7,806
Total bill at 95th percentile (S$) 17,824 21,405 16,052 30,392 18,005 9,344
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. 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.
will compete directly with Parkway for foreign patients
likely to compete with Parkway for doctors
Competition should still be muted

We do not believe Farrer Park will have a severe impact on Parkways operations in the medium term. Conventional economics may not apply As noted in a paper by Singapores 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:
potential supplyinduced demand
27
Fig 43: Farrer Park Hospital
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 Roemers 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 Parks introduction We do not believe Farrer Park will have a pronounced impact on Parkways 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
Raffles Medical
Robust business model
OUTPERFORM
SGD2.14
(unchanged)
PRICE as at 14 September 2010
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.
Bloomberg code
Reuters code
RFMD SP
Market cap
RAFG.SI
12 month range
SGD1,149.52m (US$860.46m) SGD1.32 - 2.19

EPS est. change n.a.
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 groups 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 groups 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 groups 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 groups 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.
Year end: Dec 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 (%)
2009 218.6 45.5 52.3 45.0 37.9 7.22 0.02 NM 24% 21% 17% 34% 0.48 10% 15% 17% 43.3 4.79 20.0 4.4 29.5 0.0%
2010E 245.2 53.6 61.0 53.2 44.7 8.53 0.03 38% 25% 22% 18% 40% 0.53 9% 16% 19% 20.8 4.27 17.2 4.0 25.0 0.0%
2011E 279.1 63.5 72.2 63.1 53.1 10.12 0.04 19% 26% 23% 19% 40% 0.59 8% 17% 20% 4.7 3.75 14.5 3.6 21.0 0.0%
2012E 317.7 75.0 86.1 74.6 62.7 11.97 0.05 18% 27% 24% 20% 40% 0.66 7% 18% 21% 17.2 3.30 12.2 3.2 17.8 0.0%
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 Sep09 Dec09 Mar10 Jun10 Sep10 RafflesMedicalGroup STRAITSTIMESINDEX(rebased)
Share price (%) Ordinary shares Relative to Index Relative to Sector Major shareholder Free float Average turnover (US$)
Source: Company, Bloomberg
-1 mth -3 mth -12 mth 12 12 66 7 3 43 Raffles Medical Holdings (39.4%) 46% 744,158
Stephen Hui
Magnus Gunn
Pauline Lee
Pauline-Hwee-Chen.Lee@sc.com
+65 6307 1512
29
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. Our investment rating in Raffles is based on the following: expansion of specialist services to drive operating leverage 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 groups 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 groups initiatives in China may also prove fruitful in the long term.
robust and defensive business model
should have secular growth ahead
Valuation
fair value offers 17% upside based on PER target multiple 25x2011E 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 2.0 1.5 1.0 0.5 0.0 Jan-02 23x 19x 15x 11x 7x
deserves premium multiple as it has a proven and robust business model
Jul-03
Jan-05
Jul-06
Jan-08
Jul-09
Source: Bloomberg, Standard Chartered Research estimates
30

Share Market price Fair Upside/ cap PER Current value (Downside) Current (x) LCY Coverage stocks Raffles Medical (RFMD SP, S$) Thomson Medical (THOM SP, S$) Parkway (PWAY SP, S$) Healthway (HMED SP, S$) Average
Rating
PER (x)
PER (x)
LCY 2.50 1.10 4.00 0.20
% USD m 2009 2010E 2011E 17% 22% 4% 18% 828 29.5 196 20.5 3,283 36.7 237 15.2 25.5 25.0 16.8 30.7 79.6 38.0 21.0 15.1 26.8 30.8 23.4 18% 14% 9%* -3%
PB Div. (x) Yield 2009 2010E 2009 4.4 2.4 3.0 1.6 2.8 4.0 0.0% 2.2 2.0% 2.7 0.3% 1.5 1.4% 2.6
PB (x)
2.13 0.90 3.85 0.17
Discount cash flow model We believe a DCF approach is best suited to capture the groups 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 EBIT EBIT (1-tax) Add: Depreciation and amortization Less: Change in working capital Less: Capital expenditure Unlevered free cash flow Terminal value FY09 45 38 7 1 -4 41 FY2010E 486 928 1,414 -62 1,476 2.84 2.13 33% FY10E 54 44 7 -1 -30 21 FY11E 63 53 9 3 -60 4 FY12E 75 62 11 3 -60 17 FY13E 82 68 13 3 -20 64 FY14E 88 73 14 2 -12 77 FY15E 93 77 15 2 -12 82 FY16E 99 83 15 2 -12 88 FY17E 106 88 16 2 -13 93 FY18E 113 94 16 2 -13 99 FY19E 121 100 17 3 -14 106 FY20E 129 107 17 3 -14 113 1,876
DCF of operations NPV of the terminal value Total value of the operations Net (cash)/debt Equity value Equity value per share (SGD) Current share price (SGD) Upside
Per share 0.93 1.78 2.72 -0.12 2.84
WACC assumptions Risk-free rate Equity risk premium Equity beta Cost of equity Cost of debt (after tax) Target debt to firm value WACC Perpetual growth rate
3% 5% 1.00 8% 3% 10% 7.1% 1.0%
Sensitivity of Share value (SGD per share) WACC Terminal Growth 7.7% 0.0% 0.5% 1.0% 1.5% 2.0% 2.35 2.45 2.56 2.70 2.85 8.2% 2.18 2.27 2.36 2.47 2.60 8.7% 2.04 2.11 2.19 2.28 2.38 9.2% 1.91 1.97 2.04 2.11 2.20 9.7% 1.79 1.85 1.90 1.97 2.04
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Company overview
History
started as a primary healthcare clinic in CBD Raffles was founded in 1976 by Dr. Loo Choon Yong (current Chairman) and Dr. Alfred Loh (current medical director) with two primary care clinics in Singapores Central Business Direct. In 1990, Raffles was appointed as the exclusive medical provider for Changi International Airport. The group continued to expand its network of primary care clinics and by 2001 had reached 60 clinics. To cater to the groups growing patient base, Raffles established an ambulatory surgery centre in 1993. Raffles Medical was listed on SGX in 2000. In 2001, the groups flagship Raffles Hospital started operations.
listed on SGX in 2000
Business segments
leading private primary healthcare provider Healthcare services Raffles is one of the largest private primary healthcare providers in Singapore. The group currently has 76 primary healthcare clinics across Singapore and employ over 100 primary care doctors. Raffles is one of the leading providers of healthcare services to the corporate segment, serving over 5,500 corporate clients. In FY09, healthcare services accounted for 38% of revenues and 15% of operating profit. Hospital services The groups flagship Raffles Hospital at North Bridge Road started operations in 2001 and signalled the groups strong push in specialty services. We estimate that from 2001 to 2009, the group grew its panel of specialist doctors from 40 to about 90. During the same period, Raffles grew its tertiary care revenues from SGD17k to SGD138m. In FY09, hospital services accounted for 59% of revenue and 72% of operating profit.
increasing contribution from hospital and specialty services
Business model
employs all its doctors Raffles operates under the institutional group practice model where doctors work as a team to provide integrated healthcare to patients. Under such a model, Raffles also employs all its doctors. This contrasts to other hospital operators such as Parkway and Thomson where they only provide hospital services and doctors are independent. For Raffles, its revenues include doctors fees while Parkway and Thomsons revenues are net of doctor fees. Fig 47: Revenue breakdown FY09 Fig 48: Operating profit breakdown FY09
Healthcare services 40.6%
Healthcare services 14.6%
Hospital services 59.4%
Hospital services 72.0%
Investment holdings 0.1%
Investment holdings 13.4%

Source: Company

Source: Company
32
SWOT
Fig 49: SWOT analysis Raffles Medical
Strengths Leader in primary healthcare in Singapore with particular strength in the corporate segment. Weaknesses A group practice model employing doctors may make it difficult to attract specialists Doctors may be difficult employees to manage. Primary healthcare has lower margins and is a more commoditized service. Has been slow to expand geographically, although the group has sustained strong growth in Singapore.
Wide patient base: with contracts with over 5,500 corporate clients Robust and defensive model from its integrated healthcare model. Strength in primary care reinforces specialist business. Diversified foreign patient base with Indonesians accounting for only 25-30% as compared to 50% for Singapore as a whole. Strong brand and reputation. Ranked #2 in healthcare for the Singapore customer satisfaction survey index for 2009. Opportunities Expansion of Raffles Hospital offers additional capacity for the group to grow the breadth and depth of its specialist services. Margins should expand as Raffles grows its specialist business, while maintaining costs. Growth in foreign patient market should accelerate and Raffles is positioned to benefit. Recent expansion into China with a clinic in Shanghai could prove fruitful in the long-term.
Threats Competitors like Parkway Shenton and Healthway have aggressive plans to grow in primary healthcare. Healthway Medical is growing aggressively and is adopting a similar model to Raffles with a wide primary care network integrated into specialist care. Although Raffles advantage is control of its own hospital. Departure of key specialists may impact operations, although Raffles employs a group practice model and has relatively less reliance on star doctors.
Source: Company. Standard Chartered Research
33
Specialist healthcare to provide operating leverage

Past margins demonstrate operating leverage
began with two clinics in CBD Roots were in primary care Raffles was founded in 1976 by Dr. Loo Choon Yong (current Chairman) and Dr. Alfred Loh (current medical director) with two primary care clinics in Singapores Central Business Direct. From 1976 to 2001, Raffles grew its number of clinics to 60 and expanded its panel of GP doctors from 2 to 70. Raffles Hospital started new focus in specialist care In 2001, the groups flagship Raffles Hospital started operations. With its foundation of primary care built, and a hospital on hand, Raffles focused on building up its specialist services. From 2000 to 2009, we estimate Raffles grew its number of full-time specialists from 40 to 80. Hospital services has far superior margins As the chart below shows, the operating margins in primary care have ranged from above 6% to 13%. In contrast, Raffles hospital services margins have expanded every year from 2% in 2002 (when the group had just started Raffles Hospital) to 25%. Driven by the specialist business, group operating margins expanded from 12% in 2000, when the group was purely a primary care business, to 22% in 2009. Fig 50: Operating margin breakdown healthcare services and hospital services 2002 to 2009 hospital services have much higher margins
30% 25% 20% Margins 15% 10% 5% 0% 2002
Raffles Hospital started in 2001 and signalled expansion of specialty services
2003
2004 Healthcare services
2005
2006
2007
2008
2009
Hospital services
Source: Company
much faster growth in hospital revenues
Fig 51: Revenue breakdown healthcare services and hospital services 2000 to 2009
250 200 SGDm 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Healthcare services
Source: Company
Hospital services
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Substantial growth in average revenue per specialist doctor

growth in revenue per specialist driven by revenue intensity From 2001 to 2009, we estimate Raffles expanded its number of specialists from 40 to 80. Based on its disclosed hospital services revenues, we calculate that average revenue per specialist has increased from SGD654k in 2002 to SGD1.6mio in 2009. We believe this sharp growth reflects the incubation period of the groups specialty operations (the hospital only started in 2001). More importantly, however, we believe the growth in average revenue per specialist doctor reflects the group driving revenue intensity by moving up the value chain. In the past few years, Raffles has opened new specialty centres in dermatology, urology, and oncology. These are high-value areas where each doctor added could potentially generate very high revenues. Fig 52: Average revenue per specialist
100 90 80 70 60 50 40 30 20 10 0 2003 2004 2005 2006 2007 2008 2009 Specialists doctors
Source: Company
Number of specialists
average revenue per specialist has grown from SGD654k in 2002 to SGD1.6mio in 2009
1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 Revenue per specialist doctor
Average revenue per specialist
Going forward: broadening the breadth and depth

expansion of Raffles Hospital should provide room to grow specialty service Going forward, Raffles strategy is to continue to broaden the breadth and depth of its specialty services. The objective is to focus on higher intensity and higher value services. The recently announced expansion of the floor area of Raffles Hospital is for this reason. Raffles plans to expand its floor area from the current 307,875 square feet to 410,283 square feet to allow for more space for specialist services. The planned areas of expansion are in urology and radiation oncology. Urology is an example of broadening its breadth as the group currently already has a urology department and plan to hire three more specialists. Radiation oncology is an example of broadening its depth as it is a sub-specialty within oncology. Now that Raffles oncology centre has established a critical volume of patients, it allows Raffles to expand into sub-specialties of greater revenue intensity.
Group practice model allows for strong cost management

Perhaps more important to expand margins is the groups cost management capabilities. Healthcare is a people business and staff compensation is the groups largest cost. From a business perspective, Raffles challenge is to attract talented doctors and keep them motivated while not overpaying them. In the past, Raffles has demonstrated a strong capability to manage staff costs. From 2001 to 2009, at the group level, staff costs as a % of revenue have decreased from 59% to 48%.
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Fig 53: Staff costs as a percentage of revenue

Staff cost as % of revenue
staff costs as % of revenue has steadily declined
65% 63% 61% 59% 57% 55% 53% 51% 49% 47% 45% 2001
2002
2003
2004
2005
2006
2007
2008
2009
Staff cost as % of revenue

Source: Company
36
A defensive model
Primary care reinforces specialist business
one of the largest in primary care Scale in primary care Raffles is one of the largest operators in the primary healthcare market. We estimate that it has 76 primary care clinics compared with competitors like Healthway with 70 and Parkway Shenton with 50. In terms of number of doctors, Raffles also leads with an estimated 110 GPs compared with Parkways 100 and Healthways 80. Besides the market shares of these three, the rest of the market is highly fragmented with an estimated 2,526 western clinics in Singapore (Singapore department of statistics). This means that by number of clinics, the top three players in primary care account for less than 10% of the market. Fig 54: Number of clinics FY09
80 70 Number of clinics Number of doctors Parkway Shenton Raffles Healthway medical 60 50 40 30 20 10 0 20 0 Raffles Parkway Healthway
Fig 55: Number of GP doctors FY09

120 100 80 60 40
clear leadership in corporate segment
Leader in corporate segment Raffles clear leadership is in the corporate segment, where it has contracts with over 5,500 entities. Our understanding from Parkway is that its number of corporate contracts is far lower. Raffles management advises that corporate patients account for about 60% of its primary care services. This compares with about 30% for Healthway, according to that companys management. A strong referral system We believe Raffles leadership in primary care has enabled it to create a strong referral system for its specialist business. We estimate that internal referrals account for over 30% of Raffles specialist patients. Raffles success in building a referral system likely encouraged its competitors to follow suit. Healthways management estimates that 10% to 20% of its specialist patients are from referrals and that it needs to increase this percentage. Parkway also appreciates the merits of a strong primary care network and has an aggressive target of opening two new clinics a month. Consciously designed proportion Although Parkway plans to grow its primary network, it is unlikely it can achieve the same effect as Raffles. This is because Raffles business model was intentionally designed for a balance between primary and specialist care. This is reflected in its proportion of primary and specialist doctors. 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. Raffles believes its services needs to be proportioned to its patients needs as the average person attends a general physician about four times a year and is admitted to the hospital only once every 10 years.
referral system creates franchise value. Competitors are following
Raffles balances primary and specialist. Parkway is specialist heavy
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Fig 56: Raffles: GPs cf. Specialists
Fig 57: Parkway: GPs cf. Specialists
GP doctors 55%
GP doctors 7%
Specialists 45%
Specialists 93%

Source: Raffles

Source: Parkway Medical
Raffles balances primary and specialist. Parkway is specialist heavy
Less dependent on star doctors We believe Raffles strong cost management is also related to the groups strength in primary care. Its strong volume of patients allows the group to hire highly competent, but less prominent specialists. This minimizes the groups dependence on star doctors and allows it to maintain cost discipline.
Less exposed to cycles

Less reliant on Indonesia Raffles has also successfully diversified away from the Indonesian market. According to management, Indonesians account for 25-30% of the groups foreign patient volume. This contrasts with Singapores overall foreign patient market where 50% of patients are estimated to be from Indonesia. Raffles currently serves patients from over 100 countries, led by Indonesia, the UAE countries, Malaysia and Russia. Fig 58: Raffles: Foreign patient breakdown Fig 59: Parkway: Foreign patient breakdown
Singapore 72% Singapore 70% Indonesia 16% Malaysia 3% Indonesia 7.5% Bangladesh 1% Middle East/ Africa 1% Other 22.5% Vietnam 1% Eastern Europe 1% Others 5% Legend: segments listed clockwise from top

Conservative management
Dr. Loo is conservative and pays great attention to risks Our view on Raffles management is that it is very conservative and it takes a cautious approach. This is reflected in its adoption of a defensive business model. Its caution is also evident in its approach to overseas expansion. While Parkway and Thomson have long sought expansion, Raffles first venture abroad only came this year with a clinic in Shanghai. However, we do not believe management should be penalized when it has meanwhile delivered 33% earnings CAGR over the last 4 years.
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Will continue to grow

Primary care sensitive to domestic economy
primary business should improve along with domestic economy As the corporate segment accounts for 60% of Raffles primary care business, it is sensitive to the domestic economy. As the Singapore economy grows, corporates hiring increases and along with it the attendances at Raffles primary care clinics. From 2006 to 2009, Raffles primary care margins declined from 10% to 7.8%. We expect in the next two years the primary care operating margins should return to the 10% level.
Growth in foreign patients will accelerate

foreign patient market will return As the global economy continues to recover, growth in foreign patient volumes should also accelerate. 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 is forecasting a further acceleration of Indonesias GDP to 6.2% in 2010. Fig 60: Foreign patients in Singapore are growing
600,000 500,000 Foreign patients 400,000 300,000 200,000 100,000 0 2010F 2002 2004 2005 2006 2007 2008 2009

Source: Standard Chartered Research
China expansion to provide long-term growth

Shanghai clinic a first step Although Raffles management is very conservative in expansion, the recent venture into China through a setup of a clinic in Shanghai could prove fruitful in the long-term. As Raffles started its business with a clinic in Singapore in 1976 , we believe the groups operations in China could also potentially expand from one clinic into a network and eventually a hospital. According to company, Shanghai has an estimated population of 1mio foreigners. Its clinic will target the highend and expat population in Shanghai.
Raffles Hospital is an under-utilized asset

Raffles has sufficient capacity to grow Unlike its peers, Raffles Hospital has sufficient capacity for growth. The hospital is licensed for 380 beds, but is currently operating only about 200 beds. It currently has two floors (out of the total 13 floors) that were constructed as hospital rooms, but were never utilized. As a result, backroom services such as administration and finance staff are currently occupying about 120 hospital rooms, which could be quickly cleared for hospital admissions.
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Group financials
Profit and loss
Fig 61: Profit and loss summary
2007 Revenue (S$m) Operating profit (S$m) Pre-tax profit (S$m) adjusted Net profit (S$m) adjusted Diluted earnings per share (S$cents)
2008 201 28 38 32 6.02
2009 219 39 45 38 7.22
2010F 245 45 53 45 8.59
2011F 279 54 63 53 10.20
2012F 318 63 75 63 12.05
169 19 29 23 4.71
revenue growth has been strong and should continue
Revenue growth Raffles has sustained revenue growth in the last nine years, despite SARS in 2003 and the global financial crisis in 2008. Revenue CAGR from 2004 to 2009 was 17%. Revenue increased 9% yoy in 2009 and with the Singaporean and the world economy continuing to recover, we anticipate revenue CAGR of 13% to 2012. Fig 62: Pace of revenue growth starting to pick up again after financial crisis
350 300 250 SGDm 200 150 100 50 0 2010F 2011F 2012F 24% 22% 20% 18% 16% 14% 12% 10% 2005 2006 2007 2008 2009 2010 2011 2012 Operating profit (LHS)
30% 25% 20% 15% 10% 5% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Revenue
Grow th (RHS)
operating margin expansion should continue
Operating margins expansion to continue As Raffles grew its hospital and specialist services, operating margin grew from 12% in 2005 to 22% in 2009. We believe this expansion will continue as Raffles continues to grow its specialty care services. Fig 63: Operating margins to further improve
70 60 50 SGDm 40 30 20 10 0 Operating profit margin
40
net margins have expanded as staff costs as % of revenue has declined
Net margins have remained stable over the last 2 years at 16-17%. The spike in net margins in 2007 was due to the fair value gain from the purchase of Raffles Hospital. The decline in staff costs as a percentage in revenue has been a key net margin driver. Fig 64: Declining staff costs as a % of revenue and improving net margins
60% 50% 40% 30% 20% 10% 0% 2005 2006 2007 2008 2009 2010 2011 2012 22% 20% 18% 16% 14% 12% 10%
Staff cost as a% of revenue (LHS)

Net margin (RHS)
Costs Staff payments are the largest cost component for Raffles, accounting for 49% of revenue in 2009. Staff costs as a percentage of revenue has steadily declined over the last few years. Inventories and other consumables accounted for only 11% of revenue.
Balance sheet
strong balance sheet Debt and financing Raffles fell into net debt in 2007 when it took on SGD25m of debt for the purchase of the remaining 50% share of Raffles Hospital. The gearing level has declined over the last 4 years and as of 2Q 10 stood at 30%. The company reported net cash of SGD62m in 2Q 10, although part of it may be used to fund the expansion of Raffles Hospital, which could cost up to SGD100m. Fig 65: Net cash/(debt) and gearing
70 60 50 SGDm 40 30 20 10 0 -10 2003 2004 2005 Net cash / (debt)
10% 0% -10% -20% -30% -40% -50% -60% 2006 2007 2008 2009 Gearing 2Q10
22% of total assets in cash and cash equivalents Fixed assets account for 43% of total assets, the Raffles hospital being its largest asset. With the 30% expansion in floor area, we would expect this value to increase in the next 2 years. As at end December 2009, the company had SGD74m in cash and cash equivalents; this rose to SGD85m by end 2Q2010. Debt financing accounted for only 7% of total equity and liabilities.
41
Fig 66: Assets
Fig 67: Liabilities and equity
Fixed assets 43% Other non-cur. assets 26% Stocks 2% Debtors 7% Cash 22% Other cur. assets 0%
Creditors 15%
Debt financing 7%
Other liabilities 3%
Equity 74%

Source: Company

Source: Company
Cash flow
Free cash flow Raffles is a strong cash flow business as capex spend has remained insignificant over the last decade, ranging between SGD2-6m. We factor in a significant increase in capex spend of SGD30m in 2010, SGD60 in 2011, and SGD60 in 2012 for the expansion of Raffles Hospital. Raffles management estimates expansion cost to be SGD80-100m. Fig 68: Strong free cash flows strong free cash flow generation except for 2011 and 2012 due to Raffles Hospital expansion
80 70 60 SGDm 50 40 30 20 10 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Capex 2012
Operating cashflow
Free cash flow
Working capital cycle The working capital cycle is close to negative as the company has long payable days of almost 120 days as calculated from its financials. This is offset by inventory days of 80 and receivable days of 40. Fig 69: Working capital cycle is negative
150 100 50 0 -50 -100 -150 2007 Inventory days (LHS)
100
-100
-200 2008 2009 Receivable days (LHS) 2010F 2011F Payable days (LHS) 2012F WCC (RHS)
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Corporate information
Corporate structure
20 fully owned subsidiaries Raffles Medical Group is the holding company for 21 subsidiaries, all fully owned by the group except Raffles Japanese Clinic, RMG has an 80% shareholding. The flagship Raffles hospital development was initiated in 2002 as a joint venture with Capitaland. Subsequently, in 2007, the Raffles Group acquired the entire holding in the JV to become the 100% owner of the building. Raffles Hospital International (RHI) is the international arm of the Raffles Medical Group. The group diversified in to offering the allied services of healthcare insurance through establishing the International Medical Insurers subsidiary, which now offers both medical and life insurance. Raffles Medical Group (Hong Kong) is the holding company for the groups subsidiaries in Hong Kong. RMG also has a fully owned subsidiary in Indonesia PT Raffles Medika Indonesia
Shareholding structure
Dr. Loo is the largest shareholder Dr. Choon Yong Loo holds 43.19% in the company, through direct ownership of 10.3% and further through his shareholding in Raffles Medical Holdings. Fig 70: Shareholding structure
Raffles Medical Hldgs 39.4% Choon Yong Loo 10.3% S&D Holdings Pte Ltd 3.4% Aberdeen Investments 2.5% Fidelity International 2.1% Other 42.3%
Legend: segments listed clockw ise from top

Source: Bloomberg
43
Board
unique board structure with 4 out of 5 being independent Raffles board consists of the chairman and five independent directors.
Loo Choon Yong Co-founded the group in 1976; appointed Executive Chairman in 1997.
Independent Directors:
Lim Pin Former Vice Chancellor of the National University of Singapore from 1981-2000 and
currently chairs the National Wages Council. Joined the board in 2001.
Tan Soo Nan - Former CEO of Temasek Capital (Private) Limited and Senior Managing
Director of DBS Bank. Joined the board in 2000.

Wee Beng Geok- Associate Professor at Nanyang Technological University (NTU) and
Director of the Asian Business Case Centre at the University. Joined the board in 2000.
Tham Kui Seng- Director of Straits Trading Company Limited and Capitaland China among
others. Joined the board in October 2009.

Olivier Lim- Group CFO of CapitaLand Limited and a member of the board of both Sentosa
Development Corporation and the Corporate Regulatory Authority. Joined the board in October 2009. Management Other key management figures include:
Kenneth Wu - General Manager of Raffles Medical Clinics. Kimmy Goh - Group Financial Controller of Raffles Medical Group. Prem Kumar Nair - Chief Talent Officer of Raffles Medical Group. Victor Lye - General Manager of International Medical Insurers. Sok Lee Chandran - Director, Corporate Finance of Raffles Medical Group. Kimmy Goh Group Financial Controller of Raffles Medical Group. Lawrence Lim - General Manager of Raffles Hospital. Linus Tham - Chief Information Officer of Raffles Medical Group. Jean Lee Yong - Deputy Director, Human Resources of Raffles Medical Group.
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Income statement (SGDm) Year end: Dec Group Revenue Growth % COGS Gross profit GP margin (%) Others,net Total EBIT Growth % OP margin (%) Net interest income Others,Goodwill, net PBT Taxation Effective rate (%) Exceptional PAT Minority interest PATMI Growth % PATMI margin (%) MI interest in PAT (%) EPS basic (SGD cents) EPS diluted (SGDcents) EPS Growth (%) DPS (SGDcents) DPS Growth (%) Payout (%)
2008 200.8 19% -35.5 165.2 82% -126 39.0 38% 19% -0.6 0 38.4 -6.7 -17% 0 31.7 -0.1 31.5 NM 16% 0% 6.10 6.02 NA 2.50 41%
2009 218.6 9% -40.5 178.1 81% -133 45.5 17% 21% -0.4 0 45.0 -7.0 -16% 0 38.0 -0.2 37.9 20% 17% 0% 7.30 7.22 20% 2.49 0% 34%
2010E 245.2 12% -45.5 199.7 81% -146 53.6 18% 22% -0.4 0 53.2 -8.3 -16% 0 44.9 -0.2 44.7 18% 18% 0% 8.59 8.53 18% 3.44 38% 40%
2011E 279.1 14% -51.8 227.3 81% -164 63.5 19% 23% -0.4 0 63.1 -9.8 -16% 0 53.3 -0.2 53.1 19% 19% 0% 10.20 10.12 19% 4.08 19% 40%
2012E 317.7 14% -58.9 258.8 81% -184 75.0 18% 24% -0.4 0 74.6 -11.6 -16% 0 63.0 -0.3 62.7 18% 20% 0% 12.05 11.97 18% 4.82 18% 40%
Balance sheet (SGDm) Year end: Dec Property, plant & equipment Goodwill & intangibles Others Long term assets C&CE STI Inventories Receivables Others Total current assets Total assets Payables ST debt Others Current liabilities LT debt Deferred income tax Others Total liabilities Minorities Shareholders funds Gross liabilities + equity
2008 150.3 0.4 85.6 236.2 44.5 0.0 4.8 24.9 0.0 74.2 310.4 51.5 4.6 9.3 65.4 22.0 0.7 0.0 88.2 0.3 221.9 310.4
2009 146.4 0.4 85.5 232.3 74.4 0.0 5.3 24.3 0.6 104.5 336.8 52.0 4.5 8.7 65.2 20.0 1.4 0.0 86.7 0.4 249.8 336.8
2010E 169.0 0.3 85.5 254.8 77.5 0.0 5.9 27.2 0.6 111.2 366.0 54.2 4.5 8.7 67.4 20.0 1.4 0.0 88.9 0.6 276.6 366.0
2011E 220.3 0.3 85.5 306.1 61.2 0.0 6.7 31.0 0.6 99.5 405.6 61.7 4.5 8.7 74.9 20.0 1.4 0.0 96.4 0.8 308.4 405.6
2012E 269.2 0.2 85.5 355.0 53.5 0.0 7.7 35.3 0.6 97.0 452.0 70.2 4.5 8.7 83.5 20.0 1.4 0.0 104.9 1.0 346.1 452.0
Cash Flow (SGDm) Year end: Dec 2008 Cash flows from operating activities PBT 38.4 6.7 Depreciations -0.2 Gains / Disposals Interest income -0.3 0.6 Interest expenses FX 0.0 1.3 Share options & other 46.5 Op CF, pre WC Receiveables -4.7 Inventories -0.9 3.8 Payables -1 Other 43.8 Op CF, after WC Interest received 0.3 -0.6 Interest paid Income taxes -4.0 39.5 Op CF, post tax & WC -6.1 Capex 1.1 Other, investing Increase in debt 28.8 -27.9 Repayment of debt 1.3 Others, financing -12.9 Dividends paid Net cash flow 24.3 C&CE at open Change C&CE at close Free cashflow 19.7 24.3 44.0 33.9
2009 45.0 6.9 -0.6 -0.2 0.4 0.0 1.6 53.3 0.8 -0.5 0.3 -1 53.3 0.2 -0.4 -6.2 46.8 -3.9 0.3 3.1 -5.1 1.3 -13.0 29.9 44.0 29.9 73.9 43.3
2010E 53.2 7.5 0.0 -0.2 0.4 0.0 0.0 60.9 -3.0 -0.6 2.2 -1 58.9 0.2 -0.4 -8.3 50.4 -30.0 0.2 0.0 0.0 0.0 -17.9 3.2 74.4 3.2 77.5 20.8
2011E 63.1 8.7 0.0 -0.2 0.4 0.0 0.0 72.0 -3.8 -0.8 7.5 -1 74.3 0.2 -0.4 -9.8 64.3 -60.0 0.2 0.0 0.0 0.0 -21.2 -16.3 77.5 -16.3 61.2 4.7
2012E 74.6 11.1 0.0 -0.2 0.4 0.0 0.0 85.9 -4.3 -0.9 8.5 -1 88.7 0.2 -0.4 -11.6 76.9 -60.0 0.2 0.0 0.0 0.0 -25.1 -7.7 61.2 -7.7 53.5 17.2
Key ratios Year end: Dec ROE (%) Post tax ROACE (%) Total debt (m) Net debt (m) Net debt to equity (%) Net debt / Net debt + equity (%) Equity (m) Book value per share - (S$) PBR (x) Interest cover (x) Payout ratio (%) FCF Yield (%)
2008 14% 13% 26.6 17.9 8% 7% 222.2 0.4 5.0 62.6 41% 3%
2009 15% 15% 24.5 49.9 20% 17% 250.2 0.5 4.4 110.9 34% 4%
2010E 16% 16% 24.5 53.0 19% 16% 277.2 0.5 4.0 138.2 40% 2%
2011E 17% 17% 24.5 36.7 12% 11% 309.2 0.6 3.6 163.8 40% 0%
2012E 18% 18% 24.5 29.0 8% 8% 347.1 0.7 3.2 193.5 40% 2%
45
Thomson Medical
The womens and childrens specialist
OUTPERFORM
SGD0.89
(initiating coverage)
We initiate coverage on Thomson Medical (Thomson) with an OUTPERFORM and a fair value of SGD1.1 per share, offering potential upside of 24%. Thomson operates a womens and childrens hospital and has established itself as the market leader in the obstetrics and gynaecology (O&G) specialty. In 2009, Thomson had a 23% share of births in the private sector. We believe Thomson is the most attractively priced Singapore healthcare stock, trading at a PE of 15x 2011E, a 34% discount to the sector average.
Bloomberg code
Reuters code
THOM SP
Market cap
THOM.SI
12 month range
SGD260.07m (US$194.673m) SGD0.56 - 0.90

Leadership in an attractive specialty. We like Thomson for its focus and established leadership in O&G, a specialty where Singaporeans are most willing to spend money. Even though only 24% of total admissions in Singapore are to private hospitals, we estimate 60% of live births are in private hospitals or A-class wards. Thomson is the first private women and childrens hospital in Singapore and has an established brand in O&G. From 2003 to 2009, Thomson delivered 18% of all births in Singapore. Domestic operations still have room for growth. Even though Thomsons 180-bed hospital has operated at near full occupancy for many years, the group has continued to deliver revenue growth on an increasing number of births. We believe the group can continue to increase its hospital revenue through operating efficiencies and shortening average admission days. Thomson is also expanding its specialty services. For example, in 2009, it established the Thomson Women Cancer Centre, the first dedicated womens cancer centre in Singapore. Overseas will provide long-term growth. In 2005, Thomson expanded into Vietnam through management consultancy contracts. Construction of the groups first hospital, the Hanh Phuc hospital near Ho Chi Minh, is complete and is scheduled to soft launch in October. Thomson has additional contracts for two more hospitals in Vietnam. Thomson has the option to acquire a 25% stake at founders price. We believe in the long term, these projects will add an additional avenue of growth for the firm. Risks. Key risks for Thomson is a pandemic such as SARS that would discourage patients from attending its hospital, departure of key specialist doctors, or a medical incident that damages its reputation and brand.
2009 67.4 15.8 19.2 15.7 12.8 4.38 1.80 NM 29% 23% 19% 41% 0.38 2% 11% 14% 13.8 4.08 14.3 2.4 20.5 2.0%
2010E 77.1 19.3 22.8 19.2 15.7 5.37 2.15 19% 30% 25% 20% 40% 0.41 2% 13% 16% 14.9 3.56 12.1 2.2 16.8 2.4%
2011E 85.2 21.4 25.0 21.3 17.4 5.95 2.38 11% 29% 25% 20% 40% 0.45 2% 13% 17% 16.6 3.22 11.0 2.0 15.1 2.6%
2012E 93.2 23.6 27.3 23.4 19.1 6.55 2.62 10% 29% 25% 21% 40% 0.49 2% 13% 17% 18.4 2.95 10.1 1.8 13.8 2.9%

0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.50 Sep09 Dec09 Mar10 Jun10 Sep10 ThomsonMedicalCentre STRAITSTIMESINDEX(rebased)
-1 mth 7 3 -
-3 mth -12 mth 24 60 14 38 T Holdings (20%) 36% 89,708
Stephen Hui
Magnus Gunn
Pauline Lee
+65 6307 1512
46

We initiate on Thomson Medical with an OUTPERFORM rating and a fair value of SGD1.1 per share, offering a potential upside of 24%. Our OUTPERFORM rating is based on the following key points: market leader of deliveries in Singapore Thomson is an established, leading brand and holds the market leader status in an attractive specialty. From 2003 to 2009, Thomson delivered 49,000 babies, 18% of all births during this period. Even though, as a whole, only 24% of admissions in Singapore are into private hospitals, for deliveries, 60% of admissions are into private or A-class wards in public hospitals. Thomsons growth is limited by the capacity at its hospital, but the group still has some room to grow through reduction in the average admitted patient days. In FY2009, we estimate an average admitted patient day figure of 2.46. We expect the group gradually bring down the average patient days admitted to 2.1 by 2020, sustaining a volume CAGR of 1.9% until 2020. This should partly come through medical advancement and partly through the groups shift in mix towards other specialty areas. In the first 3 quarters of FY2010, the group already posted 5% growth in deliveries. Thomsons expansion into Vietnam through management consultancy projects should contribute in the long term. Thomsons first project in Binh Duong province has completed construction and should be fully operational by March 2011. We believe this route paves the way for the group to move onto its second and third hospital projects in Vietnam.
still has some capacity to grow in Singapore
Vietnam should provide long-term growth
Valuation
fair value offers 24% upside and based on PER target multiple 19x2011E Our fair value of SGD1.1 for Thomson offers potential upside of 24%. Thomson is currently trading on PE15x2011E and our fair is based on a target multiple of PE19x2011E. Thomsons previous peak valuation was in Jun 2007 at forward PER20x. We like Thomsons leadership in 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.

Rating
PER (x)
PER (x)
LCY 2.50 1.10 4.00 0.20
% USD m 2009 2010E 2011E 17% 22% 4% 18% 828 29.5 196 20.5 3,283 36.7 237 15.2 25.5 25.0 16.8 30.7 79.6 38.0 21.0 15.1 26.8 30.8 23.4 18% 14% 9%* -3%
PB Div. (x) Yield 2009 2010E 2009 4.4 2.4 3.0 1.6 2.8 4.0 0.0% 2.2 2.0% 2.7 0.3% 1.5 1.4% 2.6
PB (x)
2.13 0.90 3.85 0.17
47
Fig 72: PE Band

1.2 1.0 0.8 0.6 9x 0.4 0.2 0.0 Sep-06 6x 21x 18x 15x 12x
Sep-07
Sep-08
Sep-09
Sep-10
DCF valuation We value Thomson on a DCF basis to capture the companys long term growth prospects. Our long-term DCF translates to revenue and net profit CAGR until 2020 of 7% and 8% respectively. Fig 73: DCF Valuation
SGDm EBIT EBIT (1-tax) Add: Depreciation and amortization Less: Change in working capital Less: Capital expenditure Unlevered free cash flow Terminal value FY09 16 13 3 3 -5 14 FY2010E 171 223 394 (12) 406 1.39 0.90 54% FY10E 19 16 3 1 -5 15 FY11E 21 18 4 1 -5 17 FY12E 24 20 4 1 -5 19 FY13E 26 21 4 1 -5 21 FY14E 27 23 4 1 -5 22 FY15E 29 24 4 1 -5 24 FY16E 30 25 4 1 -5 25 FY17E 31 26 4 1 -5 26 FY18E 33 27 5 1 -5 27 FY19E 34 28 5 1 -5 29 FY20E 36 30 5 1 -5 30 469
DCF of operations NPV of the terminal value Total value of the operations Net (cash)/debt Equity value Equity value per share (SGD) Current share price Upside
Per share 0.58 0.76 1.35 -0.04
3.0% 4.5% 1.10 8.0% 3.3% 10.0% 7.5% 1.0%
48
Company overview
23% share of deliveries in 2009 Thomson Medical was founded in 1979 by Dr W.C. Cheng as the first private women and childrens hospital. Since then, the 190 bed hospital located on Thomson Road in Singapore has established itself as the market leader for private obstetrics and gynaecology. In 2009, Thomson had a 23% share of deliveries in Singapore. The group has also expanded regionally with management consultancy projects in Vietnam.
Business segments
Thomson has two main revenue streams: 1) hospital operations and ancillary services and 2) specialty services. Its 2009 revenue breakdown was 77% hospital operations and 23% specialty services. Hospital operations Revenue from hospital operations is mainly from accommodation (in-patient stays in its hospital rooms), use of its operating theatres and labour suites, and other test and screening services such as foetal assessment and diagnostics. Thomson also acts as a landlord, renting out medical suites to specialist doctors and a small portion to retail operators within the hospital. Unlike Raffles which employs its doctors, doctors at Thomson are independent. Thomson only provides hospital services and its revenue is net of doctor fees. Specialty services Revenue from specialty services is from its network of specialist O&G clinics and from specialty centres such as the Thomson Fertility Centre, the Womens Cancer Centre and the Thomson Aesthetics Centre. Thomsons operations in Vietnam will also be part of this segment. Fig 74: Revenue breakdown FY09 Fig 75: Operating profit breakdown FY09
provides hospital services, revenue is net of doctor fees
expanding its O&G specialty network and into other specialty areas
Hospital Operations and Ancillary Services 76.9%
Hospital Operations and Ancillary Services 88.4%
Specialised and Other Services 23.1%
Specialised and Other Services 11.6%

Source: Company

Source: Company
Fig 76: Thomson suite
Fig 77: Thomson hospital
Source: Company
Source: Company
49
SWOT
Fig 78: SWOT analysis Thomson Medical
Strengths Market leader in deliveries with 23% share of total deliveries in 2009. Long established brand. The first company to be inducted in the Singapore Brand Prestige Award hall of fame having won the award on 6 consecutive occasions. Strong reputation. In 2009, it had the top ranking for healthcare in the customer satisfaction index of Singapore, beating peers such as Raffles (#2), and Mount Alvernia (#3). Thomson had a score of 73.3 compared with the healthcare average of 68.9. Resilient business model as proven through the global financial crisis with revenues growing 15% YoY in 2008 and 12% YoY in 2009. Opportunities Continued expansion of the groups network of obstetrics and gynaecology clinics in Singapore. Expansion into new specialty areas such as its newly established paediatric, womens cancer, and traditional Chinese medicine centres. These centres should strengthen the flow of patients to Thomson hospital and allow the group to grow its outpatient specialist services. Continued expansion in Vietnam. Thomsons first hospital in Vietnam should be operational by March 2011. Subsequently, the group will start work on its second and potentially third hospital in Vietnam. Threats Departure/retirement of key specialists could impact financial performance. We estimate there are three to four specialists that could account for 20% of Thomsons deliveries. But as the hospital is operating near full capacity, filling the void should not be an issue. Medical pandemic such as SARS could discourage patients from going to the hospital, as experienced in 2003. A medical incident could damage Thomsons reputation and brand. Weaknesses Thomson is facing physical constraints with near maximum occupancy at its hospital and limited parking space. This may limit the groups longterm capacity for growth. Focus on deliveries restricts Thomsons ability to drive revenue intensity as deliveries is relatively less complex. As Thomsons doctors operate independently, it fails to capture the high margins of specialist doctor fees.
50
Market leader in deliveries

A premium brand
market leader in deliveries with 18% of all births from 2003 to 2009 Thomsons core strength is in its branding and mind share with the Singapore population. From 2003 to 2009, Thomson delivered 49,000 babies, 18% of all live births during the period. Thomsons market share has improved steadily every year from 14% in 2003 to 23% in 2009. As Thomson Hospital started operations in 1979, the first generation of Thomson babies is coming to average child-bearing age. As Thomsons reputation and brand has only strengthened in the last 30 years, we believe the franchise will be further reinforced by the coming second generation of Thomson babies. Fig 79: Thomsons deliveries and market share
25% 20% Market share 15% 10% 5% 0% 2003 2004 2005 2006 2007 2008 2009 10,000 8,000 Deliveries 6,000 4,000 2,000 0
market share has steadily improved from 14% in 2003 to 23% in 2009
Market share
Source: Company, Singapore Department of statistics
Deliveries by Thomson Medical
Where Singaporeans are willing to spend money

Singaporeans are willing to spend on birth deliveries Singaporeans are generally highly price-sensitive, with 76% of admissions into public hospitals and only 24% into the more expensive private hospitals. For deliveries, however, we estimate 40% are in private hospitals. If we include deliveries in A-class wards of public hospitals, where prices are similar to private hospitals, the percentage increases to 60%. This is despite the wide price difference between public and private hospitals. For example, the median cost for a normal delivery (with no complications) in Thomson is SGD4,451. In contrast, the median of a normal delivery at the public Singapore General Hospital in a C-class ward is only SGD904. Fig 80: Sector-wide admissions
Private % 24% Public % 76% Private and A class 59% Private 41%
only 24% of total admissions are in private hospitals. But 40% for deliveries and 60% if including A class wards
Fig 81: Delivery market share
Source: Company
Source: Company
51
Thomson costs over 4 times of a C class ward
Fig 82: Comparison of prices

Bill size (SGD) Thomson Medical Ward A Ward B1 Ward B2 Ward C
Source: Company data, Standard Chartered Research
4,451 3,385 2,528 1,124 904
Competition
largest competitor is governments KK Womens and Childrens hospital From volume data released by the Ministry of Health, we calculate a market share for Thomson from 1 Aug 2009 to 31 Jul 2010. Thomson is the market leader in the private market (including A class wards) with a 23% share. The largest competitor is KK Womens and Childrens Hospital, a government restructured hospital with a similar share of 22%. Parkway as a group would be larger than Thomson with 26% share but this is shared amongst 3 hospitals. Mount Alvernia, a not-for-profit hospital run by a Catholic organization, is also a popular choice with a 13% share. Mount Alvernia is likely the most direct competitor with a similar positioning by price and its focus on intimate care. Fig 83: Thomson market share for deliveries in private market (private + A class wards), August 09 to July 2010
National University Hospital 6% Singapore General Hospital 4% Thomson Medical 23%
Thomson is the leader with 23% share of private and A class ward market
KK Women's and Children's Hospital 22% Raffles Hospital 6% Parkw ay East Hospital 5% Mount Elizabeth Hospital 12%
Gleneagles Hospital 9%
Mount Alvernia Hospital 13%
52
Room for growth

Limited by capacity but still room for expansion
from 2006, Thomson hospital has been operating near full capacity Strong historical growth in deliveries Thomsons limiting factor is its capacity. Thomson Hospital is licensed for 190 beds and in the past three years, the hospital has generally run at the maximum 75-80% occupancy. Despite this high occupancy, Thomson has continued to grow its delivery numbers. From 2006 to 2009, the group grew its deliveries from 7,172 to 8,907, a CAGR of 7.5%. It achieved this increase through continued shortening the average length of stay. Fig 84: Historical deliveries and growth rate
10,000 Number of deliveries 8,000 6,000 4,000 2,000 0 2003 2004 Deliveries
but deliveries have grown at a CAGR of 7.5% from 2006 to 2009
18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2005 2006 2007 2008 Grow th (RHS) 2009
Capacity expansion through shortening average length of stay We can estimate the average length of stay based on certain assumptions. Thomsons 190 licensed beds mean 69,350 total bed days capacity. Assuming a constant occupancy of 80% from 2006 onwards the total bed day capacity is 52,013. Based on the reported admission numbers, we calculate that average length of stay has declined from 2.84 in 2006 to 2.46 in 2009, an average reduction of 0.13 days per year. increasing capacity through shortening average length of stay Fig 85: Thomson hospital operating statistics
2006 Deliveries Deliveries % of admissions Admissions Beds (licensed) Bed days capacity Bed days admitted Occupancy (estimated) Average length of stay
2007 7,665 38% 20,331 190 69,350 55,480 80% 2.73
2008 8,567 39% 22,032 190 69,350 55,480 80% 2.52
2009 8,907 39% 22,590 190 69,350 55,480 80% 2.46
7,172 37% 19,546 190 69,350 55,480 80% 2.84
Thomsons average length of stay for deliveries was 2.7 compared to 2.3 for Raffles Hospital and Parkway East
Still room to shorten for deliveries Going forward, we believe Thomson could further bring down the average length of stay. Management believes that for mothers who have normal deliveries with no complications, two days should be sufficient. Mothers with caesarean deliveries may need to stay three days. Based on data published on the MOH website, from 1 Aug 2009 to 31 Jul 2010 Thomson delivered 867 babies (36%) by caesarean and 1,554 babies (64%) from normal deliveries. If we assume mothers with caesareans stay 3 days and mothers with normal deliveries stay 2 days, the weighted average length of stay would be 2.36. Based on data published by the Ministry of Health from 1 Aug 2009 to 31 Jul 2010, Thomsons weighted average length of stay was 2.7 days. Peers like Raffles Hospital, Parkway East, and KK achieved a shorter average length of stay of 2.3, 2.3, and 2.2, respectively. 53
Fig 86: Comparison of hospital operating statistics 1 August 2009 to 31 July 2010
Average length of stay Volume Normal Caesarean Normal Caesarean Gleneagles Mount Alvernia Mount Elizabeth Parkway East Raffles Hospital Thomson Medical KK Women's and children's
Weighted average length of stay 2.8 2.7 2.9 2.3 2.3 2.7 2.2
2.4 2.4 2.6 2.1 2.0 2.4 1.8
3.4 3.2 3.5 3.0 3.1 3.2 3.0
616 907 818 332 380 1,554 1,474
400 618 473 110 163 867 616
other admissions besides delivery have shorter average length of stay
Other specialties have shorter length of stay As Thomsons average length of stay for deliveries is 2.7, and our calculation of its total average length of stay is 2.46 (in-line with managements advise of 2.5), it means Thomsons other specialty areas must have a shorter length of stay than deliveries. In 2009, deliveries accounted for 39% of total admissions into Thomson hospital. Management advised that most of the other admissions were related to gynaecology. Partly through constant medical improvement, we believe there is room to reduce the admission days for these other specialty areas. This trend is confirmed by other hospital operators which have seen a rise in day surgeries as previously complex procedures are simplified. We believe the group could, over time, potentially bring down the average length of stay to 2.1. This would allow for an admission volume CAGR of 1.9% until 2020. Fig 87: Admissions and average admission days 2003-2015
30,000 3.0 2.8 2.6 2.4 2.2 2.0
Number of admissions
we estimate a volume CAGR of 1.9% until 2020
25,000 20,000 15,000 10,000 5,000 0
Days
2010F
2011F
2012F
2013F
2014F
Admissions
Average admission days
5% growth in deliveries up to Q3 2010
2010 results so far point to growth Despite all the concern on Thomson hitting its capacity ceiling, the group continues to deliver growth. In the first three quarters of 2010 (up to May 31), Thomson has achieved 5% growth in deliveries. Fig 88: 3Q2010 Results
3Q2010 Deliveries Revenue (SGDm) Operating profit (SGDm) Net profit (SGDm)
3Q2009 6,628 49 12 5
2015F
2003
2004
2005
2006
2007
2008
2009
Growth 5% 20% 27% 128%
6,976 59 15 12
54
Operating leverage through cost

hospital margins have expanded from 19% to 27% Growth in operating profit per admission From 2004 to 2009, Thomson expanded its operating margins in hospital operations from 19% to 27%. This is similar to Raffles where during this same period, operating margins for its hospital services margin expanded from 10% to 26%. But Raffles margin expansion has been driven by increasing revenue intensity, whereas Thomsons has been through cost management. Driven by costs, not revenue intensity From 2004 to 2009, Thomsons revenue per admission grew from SGD1,874 to SGD2,295, a CAGR of 4%. Meanwhile, the operating profit per admission grew from SGD349 to SGD619, a CAGR of 12%. (We take 2004 as a starting point because 2003 profit was hurt by SARs. If we use 2003 as base, the operating profit per admission would have grown at a CAGR of 59%.) margin expansion driven by cost not revenue Fig 89: Revenue per admission
2,500
Fig 90: Operating profit per admission

700 600
2,000 500
SGDm SGDm
1,500
400 300 200
1,000
500 100 0 2003

Source: Company
0 2004 2005 2006 2007 2008 2009 2003

Source: Company
2004
2005
2006
2007
2008
2009
in contrast with Raffles, where margin expansion is driven more by revenue intensity
Contrasts with Raffles Medical Thomsons slow growth in revenue intensity contrasts with Raffles Medical, where we believe revenue intensity has driven its margin expansion. We believe this is due Thomsons more uniform service. Almost 40% of patients admitted into Thomson are for deliveries, where procedures are relatively simple.
Specialist centres are new avenues

satellite clinics drive flow of patients to the hospital Strengthen flow of patients to the hospital Thomson started setting up Thomson Womens Clinics in 2000 to extend the groups specialist O&G network beyond the hospital to provide services over a more diverse area. Today, the group operates seven womens clinics. In addition, the group also operates specialty centres focusing on fertility, cosmetic procedures and paediatrics. In 2009, the group further expanded its specialty clinics into Chinese medicine and womens cancer. Through these new clinics, Thomson is expanding its range of specialty services. These new specialty areas also strengthen the flow of patients to the hospital and also allow the group to grow its outpatient specialty services. Growing faster In the past six years, specialist services grew far faster than the groups traditional hospital operations. In 2003, group revenues were entirely from hospital operations, but by 2009, specialty services grew rapidly to constitute 24% of revenues. Going forward, the new centres for womens cancer and Chinese medicine centres should continue to drive growth.
strong speciality services growth
55
lower margins than hospital operations
Lower margins Operating margins in the specialty business declined from 22% in 2005 to 12% in 2009, as the start-up costs of new specialty centres have weighed on margins. For example, the new cancer centre will take time to establish and is still incurring in a slight loss. Thomson does not employ any of the doctors at its specialty clinics as it believes it is very difficult to manage and incentivize doctors that are employed. As a result, most of the margin is from the specialist referrals of patients to Thomsons hospital. Fig 91: Operating margins of specialist versus hospital
30% 25% 20% 15% 10% 5% 0% 2005 2006 Specialist
declining operating margins for specialised services reflect start up costs
2007
2008 Hospital
2009
56
Regional expansion to drive growth

Vietnam is the new frontier
partner is Hanh Phuc JSC, linked to Vietnamese government Hanh Phuc Joint Stock Company Thomson expanded into Vietnam in October 2005 through a consultancy project to build the Hanh Phuc Hospital in Binh Duong province. Thomsons partner is the Hanh Phuc Joint Stock Company (Hanh Phu JSC), a company that is 60% owned by Protrade Corporate and 40% by Mr. Van Minh Nguyen. Protrade is owned by the Vietnamese government. Ascendas, Singapores leading industrial park developer, has also partnered with Protrade to build industrial parks in Vietnam. Management contract for Hanh Phuc hospital In November 2006, Thomson was also awarded the management contract for the hospital for a period of 5 years (with the first right of refusal to renew the agreement for a further 5 years). Thomson will be compensated based on a revenue and profit share agreement (management has not disclosed details to the public). Fully operational March 2011 Construction of the hospital is complete and the group expects the hospital to soft launch in Oct 2010 and to go fully operational by March 2011. Management expects the hospital to break-even in three years time. The hospital will cater to the middle to upper income segment and the expat community in Ho Chi Minh. Management advised Vietnam has an estimated 1.6m births a year so the potential market is large. Option to acquire In May 2008, Thomson announced that it had secured an option to acquire a 25% stake in Hanh Phuc JSC, owner of the Hanh Phuc hospital. The option gives Thomson an exercise period of three years from the commencement of operation of Hanh Phuc hospital. The price will be based on the same price per share as the founders paid. Thomson also has a put option to dispose of its 25% stake should its management contract for Hanh Phuc hospital be terminated, or if there are significant changes to the management or ownership of Hanh Phuc JSC.
revenue and profit share arrangement
Hanh Phuc Hospital will soft launch in Oct 2010
option to purchase 25% stake at founders price. Put option to dispose if management contract terminated
Additional Vietnam hospitals down the road

agreement for three hospitals in total. Hanoi is next Total of three hospitals Hanh Phuc JSC had also committed with Thomson to build a total of three womens and childrens hospital in Vietnam, with Thomson as the exclusive project and management consultant. Hanoi is next location and Thomson has completed a business plan. Management has advised work will start once they identify a suitable location Low risk expansion In our view, Thomsons partnership with Hanh Phuc JSC has little risk. The development period gives Thomson a period to familiarize themselves with the new market and partner. Thomson is not putting any capital up-front and has the option to acquire a stake should the project prove successful.
no capital up front. Low risk expansion
Other markets may follow

Malaysia may be the next target for expansion We understand that Thomson management continues to explore opportunities in other markets. Thomsons CEO, Allan Yeo, was previously the CEO of HMI Holdings, a group with two hospitals in Malaysia. His experience in Malaysia makes the country a natural path for expansion should a suitable opportunity arise.
57
Group financials
Profit and loss
Fig 92: Profit and loss statement
SGDm Revenue (S$m) Operating profit (S$m) Pre-tax profit (S$m) adjusted Net profit (S$m) adjusted Diluted earnings per share (S$cents)
2007 52 12 11 10 3.25
2008 60 14 14 11 3.82
2009 67 16 16 13 4.38
2010F 77 19 19 16 5.37
2011F 85 21 21 17 5.95
2012F 93 24 23 19 6.55
revenues should still grow from Singapore
Revenue growth Thomson Medical showed robust revenue growth over the last decade as it ramped up occupancy of its hospital and expanded its specialist services. In the first 3 quarters of 2010, Thomson has already delivered revenue growth of 20%. We expect revenue growth to remain steady at 11% CAGR 10-12E as Thomson continues to grow its delivery numbers and expand its specialist services. Fig 93: Continual revenue improvement going forward
100 90 80 70 60 50 40 30 20 10 0 2010E 2011E 2012E 2011F 2003 2004 2005 2006 2007 2008 2009 35% 30% 25% 20% 15% 10% 5% 0%
SGDm
Revenue (LHS)
Source: Company data, Standard Chartered Research estimates
Growth (RHS)
Margins Thomson fell into a net loss in 2003 due to SARS, but margins have remained resilient since then. Operating margins improved to 23% in 2009 from 19% in 2004, while net margins improved to 19% from 13% over the same period. Going forward, we expect margins to remain stable. Fig 94: Margins to hold steady in future periods
30% 25% 20% 15% 10% 5% 0% -5% 2003 2004 2005 2006 2007 2008 2009 2010F 2012F
Operating margin
Source: Company data
PBT margin
Net Profit margin
58
Balance sheet
Debt and financing In FY09, cash amounted to 15% of total assets. As of 3Q 10, Thomson had net cash of SGD23m. Fig 95: Assets breakdown FY09
Fixed assets 80% Other non-cur. assets 0% Stocks 1% Debtors 3% Cash 15% Other cur. assets 1% Debt financing 2%
Fig 96: Liabilities and equity breakdown FY09
Creditors 11%
Other liabilities 3% Equity 84%

Source: Company

Source: Company
Cash flow
robust free cash flow generation We expect Thomson Medical to generate robust positive free cash flow at a CAGR in 2009-15 of 18% as it continues to effectively manage its working capital and maintains a steady capex rate of SGD6 per annum. Fig 97: Cash should remain robust and positive
30 25 SGDm 20 15 10 5 0 2010E 2011E 2012E 2003 2004 2005 2006 2007 2008 2009
Operating cash flow

Free cash flow
Capex
59
Corporate structure
operations through wide array of subsidiaries Each of Thomsons specialty areas are owned under a subsidiary. Thomson Womens Clinic Holdings is the holding company for Thomsons network of O&G clinics. The recently launched Womens Cancer Centre and Thomson Aesthetics Centre are under joint-venture arrangements, with Thomson holding 55% and 51%, respectively.
Fig 98: Corporate structure

Thomson Medical Centre Thomson Medical Centre 100% 100% 100% 100% 100% 55% 51%
Thomson Chinese Medicine Pte Ltd
Thomson Fertility CentrePte Ltd
Thomson Pre-Natal Diagnostics Laboratory Pte Ltd
Thomson International Health Service Pte Ltd
Thomson Womens Women s Clinic Holdings Pte Ltd Ltd
Thomson Womens Women Cancer Centre Pte Ltd Ltd
Thomson Aesthetics Centre Pte Pte Ltd
100%
100%
100%
100%
100%
100%
100%
100%
Thomson Womens Womens Clinic (AMK Hub) Pte Ltd Ltd

Thomson Womens Womens Client (Bukit Batok) Batok) Pte Ltd Ltd
Thomson Womens Womens Clinic ( Choa Chu Kang) (Choa Pte Ltd Ltd
Thomson Womens Womens Clinic (Katong) (Katong ) Pte Ltd Ltd
Thomson Womens Womens Clinic (Sengkang) (Sengkang ) Pte Ltd Ltd
Thomson Womens Womens Clinic (Serangoon Garden) Pte Ltd Garden) Ltd
Thomson Womens Womens Clinic (Sun Plaza) Pte Ltd Ltd
Thomson Womens Womens Clinic (Tiong Bahra) (TiongBahra) Pte Ltd Ltd
T holdings largest shareholder T holdings owns 20% of the company, while Chairman Wei Chen cheng owns 16%. Fig 99: Share holding structure
T Holdings Pte Ltd 20% Harilela Singapore 17% Wei Chen Cheng 16% Kabouler Management 5% Clariden Leu AG 5% Other 37% Legend: segments listed clockw ise from top
Source: Bloomberg
60
Board
Thomson Medicals board consists of an Executive Chairman, an Executive Deputy Chairman, 2 Non-Executive Directors, 1 Alternative Director and 3 Non-Executive, Independent Directors. Cheng Wei Chen The founder and Executive Chairman. He was reappointed Director from 2009. He is also a member of the Singapore Institute of Directors. Cheng Li Chang The Executive Deputy Chairman and was appointed Director in 2002. He is also Medical Director of the Thomson Fertility Centre and a member of the Singapore Institute of Directors. He is on the Singapore Ministry of Healths Human Reproductive & Embryology advisory committee. Directors: Hari Naroomal Harilela Appointed Director in 1978 and re-appointed in 2008. He is the founder of Harilela Hotels, an honorary of the Grand Bauhinia Medal and Hong Kong's Affairs Advisor to the Chinese Government. He serves as a Non-Executive Director of the company Mohinder Singh Kalra Appointed alternative Director to Dr. Harilela in 1998. He is the senior executive at Harilela Hotels. He is a bachelor in Arts and Law. Cheng Shao Shiong Mr. Shiong was appointed director in 1999 and reappointed director in 2008. He is also a member of the audit committee. He is a former CEO of POSBank and Managing director at T Holdings Ltd. Independent Directors: Quek Shi Kui Appointed director in 2004 and is also the Chairman on the Audit Committee and the Nomination Committee. He also serves as the Chairman of the ACCA Singapore Board of Trustees. He was re-appointed director in 2008. Phua Wee Thuan Dr. Thuan was appointed Director in 2003. He is an accredited specialist under the Singapores Ministry of Health and is a private practicing anaesthesiologist. Chin Sek Peng Mr. Peng was appointed Director in 2004 and is a member of the Audit Committee and Remuneration Committee. He is a Director of PKF-CAP Advisory Partners Ltd and PKF-CAP Risk Consulting. He is also a partner at PKF-CAP LLP. He is a Certified Public Accountant in Singapore. Management Yeo Hwee Tiong Group Chief Executive. Mega Tianadi Group Chief Operating Officer. Tan Zing Yuen Group Chief Financial Officer. Soh Chin Chin Director of Business Development. Ho Soo Sum Group Nursing Manager. Wong Peng Chi May Director of Corporate Development. Tan Chye Huat Peter Director of Property and Operational Support. Tan Hwee Choo Director of Doctor Relations.
61
2008 60.3 15% -33.7 26.6 44% -13 14.1 19% 23% -0.3 0 13.8 -2.6 -19% 0 11.2 0.0 11.2 NM 19% 0% 3.84 3.82 NA 1.50 39%
2009 67.4 12% -38.3 29.1 43% -13 15.8 13% 23% -0.1 0 15.7 -3.0 -19% 0 12.9 -0.1 12.8 14% 19% -1% 4.38 4.38 15% 1.80 20% 41%
2010E 77.1 14% -43.2 33.9 44% -15 19.3 22% 25% -0.1 0 19.2 -3.6 -19% 0 15.8 -0.1 15.7 23% 20% -1% 5.37 5.37 23% 2.15 19% 40%
2011E 85.2 11% -47.7 37.5 44% -16 21.4 11% 25% -0.1 0 21.3 -4.0 -19% 0 17.5 -0.1 17.4 11% 20% -1% 5.96 5.95 11% 2.38 11% 40%
2012E 93.2 9% -52.2 41.0 44% -17 23.6 10% 25% -0.1 0 23.4 -4.4 -19% 0 19.2 -0.1 19.1 10% 21% -1% 6.55 6.55 10% 2.62 10% 40%
2008 109.0 0.1 0.0 109.2 15.6 0.0 1.0 4.1 0.9 21.5 130.7 12.9 1.4 2.6 16.9 2.7 1.6 0.0 21.2 0.1 109.4 130.7
2009 106.9 0.1 0.0 107.1 20.6 0.0 1.2 3.5 0.8 26.0 133.1 15.1 1.4 2.3 18.7 1.4 1.7 0.0 21.8 0.0 111.3 133.1
2010E 108.8 0.1 0.0 109.0 29.1 0.0 1.3 4.0 0.9 35.3 144.3 17.0 1.4 2.3 20.6 1.4 1.7 0.0 23.7 -0.1 120.7 144.3
2011E 110.6 0.1 0.0 110.7 38.8 0.0 1.4 4.4 1.0 45.7 156.4 18.8 1.4 2.3 22.4 1.4 1.7 0.0 25.5 -0.2 131.2 156.4
2012E 112.2 0.1 0.0 112.4 49.7 0.0 1.6 4.8 1.1 57.2 169.6 20.6 1.4 2.3 24.2 1.4 1.7 0.0 27.2 -0.3 142.6 169.6
Cash Flow (SGDm) Year end: Dec 2008 Cash flows from operating activities PBT 13.8 2.9 Depreciations 0.0 Gains / Disposals Interest income -0.2 0.3 Interest expenses FX 0.2 Share options & other 17.0 Op CF, pre WC Receiveables -2.1 Inventories -0.1 1.7 Payables -1 Other 16.0 Op CF, after WC Interest received 0.2 -0.3 Interest paid Income taxes -2.2 13.7 Op CF, post tax & WC -3.3 Capex 0.2 Other, investing Increase in debt 0.0 -4.4 Repayment of debt -0.1 Others, financing -5.8 Dividends paid Net cash flow 0.3 C&CE at open Change C&CE at close Free cashflow 15.1 0.3 15.4 10.8
2009 15.7 3.4 0.0 -0.1 0.1 0.4 19.6 0.6 -0.2 2.2 0 22.3 0.1 -0.1 -3.2 19.0 -5.3 0.1 0.0 -1.4 -0.1 -7.3 5.0 15.4 5.0 20.4 13.8
2010E 19.2 3.4 0.0 -0.1 0.1 0.0 22.7 -0.5 -0.1 1.9 0 23.7 0.1 -0.1 -3.6 20.1 -5.3 0.1 0.0 0.0 0.0 -6.3 8.6 20.6 8.6 29.1 14.9
2011E 21.3 3.6 0.0 -0.1 0.1 0.0 24.9 -0.4 -0.1 1.8 0 25.9 0.1 -0.1 -4.0 21.9 -5.3 0.1 0.0 0.0 0.0 -7.0 9.7 29.1 9.7 38.8 16.6
2012E 23.4 3.7 0.0 -0.2 0.1 0.0 27.1 -0.4 -0.1 1.8 0 28.0 0.2 -0.1 -4.4 23.7 -5.3 0.2 0.0 0.0 0.0 -7.6 10.9 38.8 10.9 49.7 18.4
2008 10% 10% 4.1 11.4 10% 9% 109.5 0.4 2.4 45.4 39% 4%
2009 11% 11% 2.7 17.8 16% 14% 111.3 0.4 2.4 109.2 41% 5%
2010E 13% 13% 2.7 26.4 22% 18% 120.6 0.4 2.2 177.8 40% 6%
2011E 13% 14% 2.7 36.1 28% 22% 131.0 0.4 2.0 197.0 40% 6%
2012E 13% 14% 2.7 47.0 33% 25% 142.3 0.5 1.8 216.5 40% 7%
62
Parkway Holdings
The pre-eminent franchise
IN-LINE
SGD3.85
(from OUTPERFORM)
We assume coverage of Parkway with an IN-LINE rating and new fair value of SGD4 per share. Parkway is Asias pre-eminent franchise with a dominant position in Singapore and the widest geographical reach among competitors in the sector. We like Parkway for its leadership in high-end patient care and its potential for long-term growth in its international operations. But we have downgraded the stock from OUTPERFORM to IN-LINE as the stock is trading at 27X PER 2011E and near our fair value.
Bloomberg code
Reuters code
PWAY SP
Market cap
PARM.SI
12 month range
SGD4,389.78m (US$3,285.94m) SGD1.95 - 3.94

Dominant in Singapore. In our view, Parkway has a dominant position in Singapore with its leadership in high-end patient care. Strong market segmentation exists in the Singapore hospital sector and there is little direct competition for Parkway. The opening of the Farrer Park Hospital in 2012 signals the beginning of competition, although we do not anticipate things to change significantly for Parkway. Novena Parkway should contribute in the long-term. Parkways surprising SGD1.2bn bid for Novena in 2008 caused many concerns over the value destructive potential of the project. We believe Parkway paid a high price for the Novena land plot, but we take the view that the project may contribute in the long term. Novenas value has been helped by the strong sales of Novenas medical suites in phase 1. We also believe Parkways aggressive bid for Novena reflects the premium required to maintain its dominant position in Singapore. International expansion should continue to drive growth. We believe an attractive part of Parkway for many investors is its pan-Asian franchise and we anticipate it will continue to execute its international expansion strategy. Parkway will continue to grow aggressively in Malaysia through Pantai and the group should continue to expand in China and India. Risks. Key risks for Parkway are that the real estate market takes a down-turn and impacts sales of its Novena medical suites, an economic downturn which impacts foreign patient numbers and a longer-than-expected breakeven period for its new Novena Parkway Hospital.
2009 979.2 144.9 199.8 155.0 118.9 10.50 1.15 NM 20% 15% 12% 11% 1.29 78% 8% 5% 168.9 4.99 24.5 3.0 36.7 0.3%
2010E 1,062.5 158.4 207.5 185.4 142.2 12.56 1.38 20% 20% 15% 13% 11% 1.41 71% 9% 6% 102.3 4.60 23.6 2.7 30.7 0.4%
2011E 1,183.6 177.7 228.6 211.8 162.4 14.35 1.57 14% 19% 15% 14% 11% 1.53 65% 9% 6% 121.0 4.13 21.4 2.5 26.8 0.4%
2012E 1,313.0 203.1 255.9 240.6 184.5 16.30 1.78 14% 19% 15% 14% 11% 1.68 60% 9% 7% 143.2 3.72 19.1 2.3 23.6 0.5%

4.0 3.5 3.0 2.5 2.0 1.5 Sep09 Dec09 ParkwayHoldings Mar10 Jun10
STRAITSTIMESINDEX(rebased)
-1 mth -3 mth -12 mth 2 2 99 -3 -7 71 Kazanah Nasional (95.7%) 4% 7,904,889
Stephen Hui
Magnus Gunn
Pauline Lee
+65 6307 1512
63

We introduce a new fair value of SGD4 per share (previous fair value SGD3.66, March 2010) for Parkway and transfer coverage to Stephen Hui from Wei-ling Tan. We lower our recommendation to IN-LINE from Outperform due to the stocks high valuation. Our investment rating on Parkway is based on the following: leader in high-end patient care in Singapore Parkway has a leading position in Singapore, with ownership of two of the most prestigious hospitals and a dominant share of private specialists and private admissions. The market is currently highly segmented with little direct competition for Parkway, making it the de facto leader in high-end patient care. We believe Parkway overpaid for the Novena hospital, but we view this as a defensive move. We expect Novena Parkway to bring synergies with Parkways existing hospitals and expect Novena Parkway to break-even by 2015. We believe Parkway Novena will contribute in the long-term and bolster the groups dominant position in Singapore. Parkway has the widest geographical reach of all hospital groups in Asia. We expect its international operations will continue to grow at a fast pace.
Novena should contribute in the longterm and will bolster Parkways position international operations will continue to grow
Valuation
trading at 27x PER 2011E core earnings Our IN-LINE rating for Parkway is based on valuations. Our fair value of SGD4 translates to a PER target multiple of 29x 2011E. Parkway is trading on PE27x2011E on our core earnings estimate, stripping out the gain from sales of its Novena medical suites. In July 2007, Parkway traded at PER 40x forward earnings. Our target multiple is at a discount to peak valuations as our DCF shows fair value of SGD4.34, offering only 13% upside (in contrast, Raffles DCF fair value over offers 30% upside). In our view, Parkway is the pre-eminent healthcare franchise in Asia with its dominant position in Singapore and wide geographical reach. We believe Parkway paid a high price for the Novena site but we believe the move was defensive in nature and the upcoming Parkway Novena hospital will strengthen the groups position in its home market. Fig 100: Valuation table
Rating
PER (x)
PER (x)
LCY 2.50 1.10 4.00 0.20
% USD m 2009 2010E 2011E 17% 22% 4% 18% 828 29.5 196 20.5 3,283 36.7 237 15.2 25.5 25.0 16.8 30.7 79.6 38.0 21.0 15.1 26.8 30.8 23.4 18% 14% 9%* -3%
PB Div. (x) Yield 2009 2010E 2009 4.4 2.4 3.0 1.6 2.8 4.0 0.0% 2.2 2.0% 2.7 0.3% 1.5 1.4% 2.6
PB (x)
2.13 0.90 3.85 0.17
64
Fig 101: PE band chart

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07 Jan-09 Jul-10 30x 26x 22x 18x 14x 10x
Discounted cash flow We value Parkways existing operations on a discounted cash flow model to capture the groups long-term growth prospects. We value Parkway Novena separately, on a forward looking basis, based on a free cash flow to firm basis. In this approach, we do not explicitly model Parkway Novenas total project value but only capture the future cash flows, with the historical costs already captured in the groups net debt. Fig 102: Parkway DCF valuation
SGD m EBIT EBIT (1-tax) Add: Depreciation and amortization Less: Change in working capital Less: Capital expenditure Unlevered free cash flow Terminal value FY2011E DCF of operations NPV of the terminal value Total value of the operations Net cash/(debt) Parkway Life REIT Novena value Equity value Equity value per share (SGD) Current share price Upside 1,564 2,392 3,956 (584) 346 1,185 4,903 4.34 3.85 13%
FY09 FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E 145 120 55 29 (95) 109 158 131 49 6 (75) 111 Per share 1.38 2.12 3.50 (0.52) 0.31 1.05 4.34 Cost of debt (after tax) Target debt to firm value WACC Perpetual growth rate 3.3% 10.0% 7.5% 1.0%
178 148 51 9 (75) 132 -
203 169 53 9 (75) 156 -
238 197 55 10 (75) 187 -
259 215 57 8 (77) 203 -
279 231 58 8 (80) 218 -
300 249 60 8 (82) 236 -
323 268 62 9 (84) 255 -
348 289 65 10 (87) 276 -
375 311 67 10 (90) 298
403 335 69 11 (92) 323 5,025
WACC assumptions Risk-free rate Equity risk premium Equity beta Cost of equity 3.0% 4.5% 1.10 8%
65
Company overview
History
founded by the Tan family Parkway was founded by the Tan family, also the developers of Singapores first shopping complex, Parkway Parade. Parkway has maintained a listing on the Singapore exchange since 1975. Parkway acquired Gleneagles Hospital in 1987 and the Mount Elizabeth and Parkway East Hospital in 1995.
Shareholding
number of different shareholders over the years Over the years, many different parties have been major shareholders in Parkway. The Tan family were the founders, but sold out most of its shares in 1999. Pantai Holdings of Malaysia was also a shareholder in the 1990s. In 2005, Newbridge capital (which subsequently became TPG Capital) acquired a 26% stake, becoming the groups largest shareholder. In 2008, the Malaysian sovereign wealth fund Khazanah acquired a 23.9% stake in Parkway. In March 2010, Fortis acquired TPG Capitals 23.9% stake at a price of SGD3.55 per share. Fortis gained 4 board seats on Parkways 12-person board and Fortis founder Malvinder Mohan Singh became Parkways chairman. This started a tussle between Fortis and Khazanah for control of Parkway. On 27 May, Integrated Healthcare, an indirect wholly owned subsidiary of Khazanah, made a partial offer to acquire 313m shares of Parkway at SGD3.78 per share. On 1 July, Fortis, through its RHC Healthcare subsidiary, made a voluntary general offer (GO) for Parkway at SGD3.80 per share. In response to the Fortis bid, Khazanah made a counter-offer on 26 July, Khazanah revised its partial offer to a general offer (GO) at SGD3.95 per share, a 4.5% increase from the partial offer price. The same day, Fortis withdrew its general offer, thereby ending the battle for control. As of the latest announcement on 3 Sep, Khazanah held 95% of Parkways shares. In its offer document on July 26, Khazanah indicated its current intention to maintain the present listing status of [Parkway]. Fig 103: Current ownership of Parkway
Fortis bought TPGs stake in March 2010 and started a battle for control Khazanah won the battle and now has 95%
Khazanah plans to keep Parkway listed
Khazanah Nasional BH 95.77%
Others 4.3%

Source: Bloomberg
66
Business segments
largest hospital operator in Singapore Singapore hospitals Parkway presently operates three hospitals in Singapore: Mount Elizabeth, Gleneagles and Parkway East. It has scheduled the opening of its fourth hospital, Parkway Novena, for 2012. Revenues from this segment are from hospital services such as accommodation (in-patient stays in hospital rooms), use of operating theatres, prescription of medicine, and sale and rental of medical suites. In FY09, Singapore hospitals accounted for 48% of its revenues. International hospitals Outside of Singapore, Parkway operates 14 hospitals across Malaysia, Brunei, India and China. Parkway has two hospitals in Malaysia in Kuala Lumpur and Penang. In China, Parkway has a surgical centre. In India, Parkway has a JV with the Apollo group to operate the Apollo Gleneagles Hospital in Kolkata. Parkway also has a hospital in Brunei and the U.A.E. In FY09, international hospitals accounted for 23% of revenues. Healthcare services In Singapore, Parkway Shenton is one of the largest primary care healthcare providers after Raffles and Healthway. Parkway is also one of the major providers of radiology and laboratory services. Outside of Singapore, Parkway operates primary care clinics in China and International patient assistance centres in several countries. In FY09, healthcare services accounted for 31% of revenues. Within healthcare services, Singapore accounted for 56% of revenues. Fig 104: Revenue breakdown FY09 Fig 105: EBITDAR breakdown FY09
Pan-Asian franchise
one of the largest primary care providers in Singapore
Singapore hospitals 48% International hospitals 21% Singapore healthcare services 17% International healthcare services 13% Other 1% Legend: segments listed clockwise from top
Source: Company
Singapore hospitals 48% International hospitals 19% Singapore healthcare services 19% International healthcare services 13% Other 1%

Source: Company
also has Parkway Life REIT and Parkway College
Others Parkway has a 35.6% stake in Parkway Life REIT. Parkway is also in education through Parkway College. In 2009, Parkway College became the only private institution to receive full accreditation from the Singapore Nursing Board for its nursing course. About 150 nurses graduate from Parkway college a year. Pantai also has an education arm in Malaysia.
67
Fig 106: Organization chart of Parkway

Parkw ay Holdings Lim ited
Singapore Hospitals
International Hospitals
Healthcare Services
Others
Mount Elizabeth Gleneagles and Park East Hospitals

Source: Company
14 hospitals across Malaysia, Brunei, India and China
50 Shenton clinics including 25 retail and 19 inhouse clinics, 6 Medi-rad clinics
Parkw ay College and Parkw ay REIT
68
SWOT
Fig 107: SWOT analysis Parkway Holdings
Strengths Dominant position in Singapore with leading share of private specialists, private admissions, and private acute hospital beds. Weaknesses Compared to Raffles, Parkway has a higher dependency on Indonesia as a source for foreign patients.
Wide geographical reach in Asia with hospitals Overpaying for Novena plot may weigh on the spread across Malaysia, Brunei, India, and China groups balance sheet in the near term.
Leader in high-end patient care with minimal

direct competition in Singapore. Opportunities Threats
Novena Parkway will be Parkways new flagship Arrival of Farrer Park hospital may signal hospital and should drive its focus on the pricebeginning of competition, although we do not expect competitive dynamics to change inelastic high-end segment. significantly. Extension of its network in Malaysia through its own Gleneagles hospitals or through its 40% Economic downturn may hurt foreign patient stake in Pantai. volumes and impact Parkways operations. Continued expansion of its international business Medical accident may damage Parkways in China, India, and Middle East to drive growth reputation and brand. New owner Khazanah may potentially change strategic direction and management.
69
Strong base in Singapore

Singapore is operational base and largest market Parkway is the dominant private hospital operator in Singapore, its operational base and its largest market. Parkway Shenton is also one of the largest primary healthcare providers to the corporate market. In FY09, Singapore (combining hospitals and healthcare services) accounted for 65% of group revenues.
Dominant position
operates two of the most prestigious hospitals in Singapore Two of the most prestigious hospitals Parkways two flagship hospitals in Singapore, Mount Elizabeth and Gleneagles, have long been regarded in Singapore as the two most prestigious hospitals of choice. This is partly due to the two hospitals long histories. Parkway acquired Gleneagles Hospital in 1987 and Mount Elizabeth (and Parkway East Hospital) in 1995. Dominant share Parkways 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 acute hospital beds in Singapore. Fig 108: Parkway s share of total specialists Fig 109: Parkways share of private 2009 specialists
dominant share of almost every aspect of private tertiary healthcare
27% share of total specialists and 68% share of private specialists
Parkway Hospital 27% Parkway Hospital 68% Raffles hospitals 3% Raffles hospitals 6% Other private specialists 10% Other private specialists 25% Public hospitals 61%


44% share of private admissions and 48% share of private acute beds
Fig 110: Parkway's share of private admissions 2009
Fig 111: Parkway's share of private acute hospital beds
Thomson Medical 21%
Raffles hospitals 24%
Raffles Medical 14%
Thomson medical 12% Other private beds 16%
Other private hospitals 20%


70
Strong market segmentation

Competition is relatively muted in Singapore as there are only three for-profit private hospital operators in Singapore Parkway, Raffles and Thomson - and each has its own niche. Raffles employs its doctors Raffles strength in primary care creates a strong referral system to its specialist business. Because Raffles has a sufficient volume of patients, it generally avoids hiring star doctors with high price tags. Raffles focus is on patients who are attracted by the Raffles brand, rather than specific named doctors. As a result, patients who are relatively price-inelastic and want top name doctors will choose to go to Parkway. Thomson specialises in women and children Thomson is focused on obstetrics and gynecology and is the market leader in the segment. It operates on a similar model to Parkway, whereby doctors operate independently, but rent medical suites on its premises (it differs from Parkway in that it does not sell its medical suites). As Thomson is focused on womens and children healthcare, it competes with Parkway only in those particular specialties. Parkway leader in high-end In contrast to Raffles, Parkway attracts the most prominent and high-end doctors to purchase or rent medical suites on the premises of its hospitals. By default of proximity, doctors admit their patients into Parkways hospitals. As Parkway dominates the supply of private acute hospital beds, private speciialists also do not have much other choice. Making Parkway the leader in highend patient care almost by default.
Raffles targets patients who choose its brand rather than a specific doctor
Thomson only competes with Parkway in O&G
Parkway is the leader in the high-end market
Foreign patient market

in 2Q 10, 28% of patients were foreigners Because Parkway attracts the most prominent doctors with strong earnings power, patients with deep pockets who want the best, regardless of price, will generally choose Parkway. As of 2Q 2010, 28% of Parkways patients are foreigners with Indonesians accounting for over half of its foreign patients. Fig 112: Parkway patient breakdown by country 2Q 2010
Singapore 72% Indonesia 16% Malaysia 3% Bangladesh 1% Middle East/ Africa 1% Vietnam 1% Eastern Europe 1% Others 5% Legend: segments listed clockw ise from top
Indonesia is an important foreign patient market
Still room for growth

day cases have provided a growth driver, not hospital admissions Day cases driving growth Day-cases have driven Parkways growth in Singapore. From 2000 to 2009, in-patient admissions actually declined (in 2000, in-patient admissions were 51k, while in 2009 the total was 47k). In contrast, day-case admissions grew at a CAGR of 13% over the period. Going forward, we assume no volume growth for in-patient admissions, but continued growth of 5% for day-case admissions. Management indicates that Parkway still has capacity to increase daypatient admissions. 71
from 2000 to 2009, hospital admissions actually declined by day cases grew at 13% CAGR
Fig 113: Day case versus in-patient admissions

60,000 50,000 40,000 30,000 20,000 10,000 0 2000 2001 2002 Inpatient
Source: Company
2003
2004
2005
2006
2007 Day cases
2008
2009
revenue per admissions has grew at 5.2% CAGR from 2000 to 2009
Revenue intensity improving From 2000 to 2009, we calculate that Parkways average revenue per admission (total of inpatient and day-cases) improved from SGD3,587 to SGD5,660, a CAGR of 5.2%. Managements advise is that Parkway has succesfully driven revennue intensity by focusing on complex procedures. Fig 114: Historical average revenue per admission for Singapore
7,000 6,000 5,000 SGDm 4,000 3,000 2,000 1,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 30% 25% 20% 15% 10% 5% 0% -5%
Revenue
Source: Company
Grow th
72
Parkway Novena: Overpaid but not end of the world

Background
Parkway paid SGD1.2bn for the Novena plot, 1.2x the second bid Parkway overpaid for Novena In 2008, the Urban Redevelopment Authority of Singapore launched a hospital site at Novena for sale by public tender. It was the first hospital site to go up for tender in 30 years, with the previous instance being Parkways Mount Elizabeth. Parkway entered the top bid of SGD1.2bn. The other 2 bids were by Napier Medical at SGD541m and Raffles Hospital at SGD268m. The 3 bids worked out at SGD1,540, SGD695, and SGD344 per square foot, respectively. By comparison, Singapore Healthpartners paid SGD265.3m or SGD431 psf per plot ratio for the Farrer Park site. After construction costs of SGD400m and equipment costs of SGD150m, Parkways total cost for Novena Hospital excluding interest payment will total SGD1.8bn. Fig 115: Bids for Novena plot
Total bid SGDm Parkway Napier Raffles
Source: Straits Times
psf SGD 1,540 695 344
1,200 541 268
total costs excluding interest cost will be SGD1.8bn
Fig 116: Estimated costs for Novena

SGDm Land costs Construction costs Equipment costs Total
1,245 400 150 1,795
Parkway Novena overview

333 bed hospital with 259 medical suites and first with exclusively single rooms will be Parkways most high-end hospital with segmentation within its portfolio New pinnacle When completed, Parkway Novena will be a 333 bed hospital with 259 medical suites, primarily offering services in the fields of neurology, heart and vascular medicine, orthopaedics and general surgery. All of the beds in Parkway Novena will be single rooms. Management states the hospital will feature top-class connectivity with its state-of-the-art IT system and with Singapores next generation broadband network. Focus on price-inelastic and foreign patients Novena will maintain its focus on the price-inelastic patient segment. Management does identify some segmentation in its hospitals. Novena Parkway will be the most high-end, Mount Elizabeth will focus on cardiology and other complex cases, and Gleneagles and Parkway East will cater more to the mass market. Higher share of foreign patients By nature of serving price-inelastic segments, management anticipates that Novena will have a higher share of foreign patients than the groups existing hospitals. Management expects Novena to serve 40% foreign patients in comparison with the groups existing mix of 30% of such cases. Management optimistic On opening, Parkway will likely only operate 150 beds out of the licensed 333 beds. Management does, however, plan to staff Novena hospital as if for a full-opening. This reflects its optimistic view that demand will quickly fill capacity.
expect 40% foreign patient compared to 30% for existing Parkway hospitals on opening, will operate less than half of beds, but will staff as if for full-opening
73
Sale of medical suites key to recoup costs

sale of medical suites key to recoup costs With the high price Parkway paid for the Novena site, sales of the medical suites at the site are key for the group to recoup costs. Of the total 259 medical suites available at Novena, the group has launched 100 suites in phase 1 and plans an imminent launch of phase 2. Phase 1 sales strong In March 2010, Parkway launched phase 1 of the medical suites at Novena specialist centre for sale. The suites range in size from 452 square feet to 1,431 square feet and are priced between SGD3,588 psf and SGD3,828 psf excluding GST. In two weeks time, all 100 suites offered in phase 1 were booked. We estimate about 90,000 sqf was sold with an average price of about SGD3700, with total sales of SGD334m. Phase 2 to be launched soon Out of the total 259 medical suites, 159 are yet to be launched. We expect phase 2 to be launched soon, with another 100 suites on offer at an average price of SGD4,000 psf. The suites vary in size, but if it is another 90,000 sqf as in phase 1, this would generate another SGD361m in sales. Remaining suites to be leased Management indicates that it may retain the remaining suites for leasing. We conservatively estimate that the remaining suites could be lease at an average rental of SGD12 psf per month. Medical suites at Far East Developments nearby Novena Medical Center is asking rental of SGD8 to SGD10.50 psf. The recently launched Novena Specialist Center, also by Far East, is asking for rental of SGD8 to SGD9 psf. Medical suites at Parkway Novena should easily fetch a high premium. Fig 117: Sale of Novena medical suites
Units Phase 1 Phase 2 Total 100 100 200 GFA sqf 90,208 90,208 180,416 ASP psf SGD 3,700 4,000 3,850 Sales SGDm 334 361 695
phase 1 sold 90k sqf with sales of SGD334m
phase 2 to be launched soon. We expect asp of SGD4k
Fig 118: Estimated rental income

Rental Units Phase 3 medical suites Retail Total
Rental income SGDm 8 4 11
sqf 53,223 38,940 92,163
psf pm SGD 12 8 10
59 NA
Parkway should raise in total SGD695m from sale of medical suites. Recognized on percentage of completion
Revenue recognition Parkway should raise a total of SGD695m from the sale of medical suites in phase 1 and phase 2. If we proportion costs based on gross floor area (the medical suites account for about 32% of total GFA), we estimate a land and construction cost of SGD2,275 per square foot. Based on our expected blended average selling price of SGD3,850 for phase 1 and phase 2, this translates to a margin of 41%. The revenue and profit will be recognized based on a percentage of completion method. Little cannibalism of own doctors Management feedback on phase 1 is that most of the doctors who booked suites are from outside of Parkways existing hospitals, such as Camden Medical Centre, Lucky Plaza and Paragon. Parkway is also targetting doctors from government restructured hospitals to move to Novena. Thus, management expects little cannibalism of its own doctors to fill the Novena medical suites. 74
target doctors outside of Parkways system such as those from government restructured hospitals
Project valuations
synergies exist with existing hospitals Synergy lowers break-even period As parkway already has three established hospitals, significant synergies should come into play. For example, Parkway may encourage doctors from other hospitals to admit patients into the Novena facilities. Shared services and staff could also potentially transfer from other hospitals for added flexibility. We believe the potential synergies should help Parkway Novena break-even faster. Operating model We have built an operating model to estimate novenas break-even period. Based on an average occupancy of 35% in 2012, we estimate Novena will admit 14k patients. We conservatively assume day-case admissions as 15% of in-patient admissions (for Parkways existing Singapore hospitals, day-cases were 76% of in-patient admissions in 2009). Based on our operating model, we estimate Novena will have a net loss of SGD30m in 2012, SGD24m in 2013, and SGD15m in 2014. In 2015, we expect Novena to turn profitable with a net profit of SGD17m.
expect break-even by 2015
Fig 119: Parkway Novena operating model

Hospital Operations Beds Licensed Operational Total inpatient days capacity Average occupancy Admissions Inpatient Day cases Total admissions Day case to inpatient ratio Average revenue per admission Growth % Revenue from operations Rental income Staff costs Inventories and consumables Purchased and contracted services Others EBITDA Depreciation and amortisation Interest expense Net income
source: company, standard chartered research estimates
2012E 333 150
2013E 333 200
2014E 333 250
2015E 333 300
2016E 333 300
2017E 333 300
2018E 333 300
2019E 333 300
2020E 333 300
2021E 333 300
2022E 333 300
121,545 121,545 121,545 121,545 121,545 121,545 121,545 121,545 121,545 121,545 121,545 35% 45% 50% 60% 65% 70% 75% 75% 75% 75% 75%
14,180 2,127 16,307 15% 6,000
18,232 3,646 21,878 20% 6,240 4%
20,258 6,077 26,335 30% 6,490 4% 171 12 -75 -34 -26 -9 39 -30 -24 -15
24,309 8,508 32,817 35% 6,749 4% 221 12 -77 -44 -33 -11 68 -30 -21 17
26,335 11,851 38,185 45% 7,019 4% 268 12 -80 -54 -40 -13 93 -30 -18 45
28,361 14,180 42,541 50% 7,300 4% 311 13 -93 -62 -47 -16 106 -30 -15 61
30,386 15,193 45,579 50% 7,592 4% 346 13 -104 -69 -52 -17 117 -30 -12 75
30,386 15,193 45,579 50% 7,896 4% 360 13 -108 -72 -54 -18 121 -30 -9 82
30,386 15,193 45,579 50% 8,211 4% 374 13 -112 -75 -56 -19 126 -30 -6 90
30,386 15,193 45,579 50% 8,540 4% 389 14 -117 -78 -58 -19 130 -30 -3 97
30,386 15,193 45,579 50% 8,881 4% 405 14 -121 -81 -61 -20 135 -30 0 105
98 11 -40 -20 -15 -5 30 -30 -30 -30
137 12 -60 -27 -20 -7 34 -30 -27 -23
Valuing Parkway Novena We value the future cash flow of Parkway novena based on a discounted cash flow approach. The WACC and terminal growth rate is the same as applied to our valuation of Parkways existing operations. Our DCF based enterprise value for Parkway Novenas future cash flow is SGD1.1bn.
75
Fig 120: Parkway Novena operating model

SGDm Asset sales Costs Construction Equipment costs Revenue from hospital operations EBITDA Maintenance capex Tax on medical suites Free cash flow to firm DCF of operations NPV of terminal value Enterprise value Enterprise value assumptions WACC Terminal growth rate
2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 334 (133) (53) 147 538 646 1,185 361 (133) (58) 170 (150) 98 30 (18) (138) 137 34 (18) 15 171 39 (19) 21 221 68 (30) 38 268 93 (31) 62 311 106 (31) 75 346 117 (32) 85 360 121 (32) 89 374 126 (33) 93 389 130 (34) 97 405 135 (34) 101
7% 1%
76
Fast growth in international operations

international operations growing faster than Singapore Outside of Singapore, Parkway operates 14 hospitals across Malaysia, Brunei, India, and China. Parkways international expansion has provided the growth driver for the group and the key differentiator when comparing it with other Singapore private hospital operators. Fig 121: Breakdown between Singapore and International operations
1,200 Revenue (SDGm) 1,000 800 600 400 200 0 2000 2001 2002 Singapore
Source: Company
2003
2004
2005
2006
2007
2008
2009
International
Malaysia
Malaysia will be key focus Hub and spoke strategy Of Parkways international expansion, it will likely place the greatest focus on Malaysia. Parkway has 2 Gleneagles hospitals, 1 in Kuala Lumpur and 1 in Penang. Through its 40% ownership of the Pantai group, it also has 9 Pantai hospitals throughout Malaysia. In Malaysia, Pantai and Parkway follow a hub and spoke strategy. Gleneagles Kuala Lumpur and other Pantai hospitals are already established as leading hospitals in their respective regions. The groups strategy is that these leading hospitals will serve as hubs and the group will build a network of local community hospitals across the country to serve as spokes. Upcoming hospitals Through Pantai, the group has plans for two new hospitals at Manjung, Perak and Medini, Johor. The hospital at Manjung, Perak is in partnership with developer YHN, where YHN will develop the hospital and Parkway will lease it. In 2009, the group also acquired two Pantai hospitals in Sungai Petani and Batu Pahat that were previously under management contract.
partnership with developers to expand
China
largest foreign owned healthcare provider in Shanghai In China, Parkway operates 6 medical and specialist centres, including a day surgery center with 16 beds. The groups operations in China were primarily established through the acquisiton of the World-Link group in Shanghai in 2007. Through the acquisition, Parkway became the largest foreign owned health service provider in Shanghai.
India
partnership with Apollo group in which Khazanah has a 13% stake In India, Parkway presently has a joint venture with Apollo group under which it operates the Apollo Gleneagles Hospital, Kolkata. The group has just completed a new oncology center at the hospital. Parkway is also building a new hospital at Mumbai called Parkway Health Khubchandani Hospital, with construction work having begun recently. Parkways partnership with Apollo is natural as Khazanah as a 13% stake in Apollo and has a board representation.
77
Group financials
Profit and loss
Fig 122: Profit and loss statement
Tables summarizing the P&L details S$m Revenue Operating profit Profit before tax Net profit adjusted Net profit with Novena Diluted EPS (S$) Diluted EPS (S$) with Novena
2007 870 135 324 96 96 0.34 0.34
2008 915 125 60 103 103 0.04 0.04
2009 979 145 155 130 130 0.11 0.11
2010F 1,062 158 185 142 142 0.14 0.14
2011F 1,184 178 212 163 163 0.17 0.17
2012F 1,313 203 241 185 155 0.19 0.14
Revenue growth Parkway revenue has more than doubled over the last five years, although the pace of growth has slowed since 2007. 1H10 revenue grew 8% yoy to SGD519m and net profit, excluding extraordinary items, grew 18% to SGD63m. Fig 123: Strong revenue growth until 2006
1,200 1,000 800 S$m 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 60% 50% 40% Growth 30% 20% 10% 0% -10%
Revenue
Source: Company
Grow th
net margins varied primarily due to oneoffs
Margins Reported net margin has hovered around 10%-12% in the recent past with the exceptions of 2006 and 2008, when it fell to 6% and 4%, respectively. The unusual 34% recorded in 2007 was due to the exceptional gain of SGD227m upon the disposal of properties to Parkway Life REIT. Net margin improved to 12% after the decline to 4% in 2008.
78
Fig 124: The gross and net profit margins for the last 10 years
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2001 2002 Gross profit
Source: Company
2003
2004
2005
2006
2007 Net profit
2008
2009
staff costs lower than Raffles as they do not employ doctors
Costs Staff costs (salaries, wages and other benefits) are the largest cost at 30% of revenue in 2009. Its staff costs as a percentage of revenue are lower than Raffles 48% as Raffles employs its doctors. Fig 125: Costs as a % of revenue- 2009
40%
30%
20%
10%
0% Inventories and consumables Purchased and contracted services Salaries, w ages and other staff benefits
Source: Company
Balance sheet
gearing has historically been high except for in 2007 when Parkway disposed hospital assets to Parkway Life REIT Debt / financing Gearing, which stood at 77% as at end 2009, declined to 70% by end June 2010. Total debt stands at SGD1.144bn, including SGD500m due in July 2011 and SGD560m due in July 2013. Gearing level has historically remained high for Parkway, hovering around 70%-100%. The exception was 2007, when Parkway disposed its hospital assets to Parkway Life REIT. In 2008, the absolute debt level of the company increased to SGD1223m in relation to the purchase of the Novena plot. Subsequently, in May 2008, Parkway launched a SGD760m equity rights issue to strengthen the balance sheet (7-for-15 rights issue at SGD2.18 per share).
79
Fig 126: Historical net cash and gearing situation

0 -100 -200 SGDm -300 -400 -500 -600 -700 -800 2004 2005 Net cash
Source: Company
120% 100% 80% 60% 40% 20% 0% 2006 2007 2008 2009 Gearing 2010F
Fig 127: History of rights issues

Date 12/12/2006 5/5/2008
Source: Company
Conditions 1 share for 20 7 share for 15
Share price(SGD) 1.8 2.18
No. of shares issued 36,522,948 358,716,124
Value raised(SGDm) 66 756
Assets and Liabilities Fig 128: Assets FY09
Fig 129: Liabilities and equity FY09
Fixed assets 44% Other non-cur. assets 20% Stocks 1% Debtors 3% Cash 20%
Creditors 5%
Debt financing 38%
Other liabilities 7% Equity 50%
Other cur. assets 12%

Source: Company

Source: Company
20% of assets in cash and cash equivalents The component of fixed assets is relatively less in the assets breakdown as part of the hospital building assets were monetized through the Parkway REIT. The company holds 20% of its total assets in cash. Equity financing amounts to 50% of total assets and liabilities and debt for 38%.
Cash flow
Favourable working capital cycle Inventory days and Receivable days are both low at 24 and 39 days respectively. Payable days are quite high at 169 days, which helps Parkway maintain a favourable working capital cycle.
80
Fig 130: High payable days keeps working capital cycle negative
150 100 50 0 -50 -100 -150 2006 Inventory days
Source: Company
70 20 -30 -80 -130 -180 2007 2008 2009 Payable days 2010F 2011F Other payable days 2012F WCC (RHS)
Receivable days
The company has been free cash flow positive throughout the last decade except in 2008 when Novena related purchasing sent it into the red.
81
Parkway Holdings operates through three major segments: Parkway Education, Parkway Health and Parkway Life REIT. Parkway Health operates three major Singapore hospitals. Internationally Parkway Health operates fourteen hospitals. Fig 131: Shareholding structure
Parkway Holdings
Parkway Education
Parkway Health
Parkway Life REIT
Training New Business
Hospitals Primary Care Services Labs, Imaging and Clinical Research
Healthcare Real Estate
Source: Company
Kazanah Nasional is largest shareholder Kazanah Nasional is the largest shareholder accouting for c. 95% of Parkway Holdings. Fig 132: Share of foreign patients
Khazanah Nasional BH 95.77%
Others 4.3%

82
2008 914.8 5% -316.7 598.2 65% -473 125.1 -7% 14% -11.7 -54 59.6 -16.2 -27% 65 108.3 -5.4 103.0 NM 11% -5% 3.77 3.75 NA 0.00 NM 0%
2009 979.2 7% -339.3 639.9 65% -495 144.9 16% 15% -2.3 12 155.0 -30.2 -19% 11 136.2 -6.0 130.3 26% 13% -4% 10.54 10.50 180% 1.15 NM 11%
2010E 1062.5 9% -368.2 694.3 65% -536 158.4 9% 15% -1.6 29 185.4 -36.1 -19% 0 149.3 -7.2 142.2 9% 13% -5% 12.59 12.56 20% 1.38 20% 11%
2011E 1183.6 11% -410.1 773.4 65% -596 177.7 12% 15% -0.2 34 211.8 -41.2 -19% 0 170.6 -8.2 162.4 14% 14% -5% 14.38 14.35 14% 1.57 14% 11%
2012E 1313.0 11% -455.0 858.1 65% -655 203.1 14% 15% 1.4 36 240.6 -46.8 -19% 0 193.8 -9.3 184.5 14% 14% -5% 16.33 16.30 14% 1.78 14% 11%
2008 1,656.2 286.3 344.3 2,286.8 542.1 0.0 18.7 137.4 3.0 701.2 2,988.0 196.6 46.1 38.9 281.6 1,177.4 26.6 88.9 1,574.5 75.3 1,338.2 2,988.0
2009 1,373.3 278.7 351.0 2,003.0 610.3 0.0 22.3 103.5 363.3 1,099.5 3,102.4 195.1 15.7 58.0 268.8 1,178.6 25.4 92.4 1,565.2 76.5 1,460.7 3,102.4
2010E 1,405.4 272.6 379.7 2,057.6 695.3 0.0 24.2 112.3 363.3 1,195.3 3,252.8 211.7 15.7 58.0 285.4 1,178.6 25.4 92.4 1,581.8 83.7 1,587.3 3,252.8
2011E 1,435.6 266.4 414.0 2,116.0 798.3 0.0 27.0 125.2 363.3 1,313.8 3,429.8 235.9 15.7 58.0 309.5 1,178.6 25.4 92.4 1,606.0 91.9 1,732.0 3,429.8
2012E 1,463.9 260.3 450.1 2,174.3 922.8 0.0 30.0 138.8 363.3 1,454.9 3,629.2 261.7 15.7 58.0 335.3 1,178.6 25.4 92.4 1,631.8 101.2 1,896.3 3,629.2
Cash Flow (SGDm) Year end: Dec 2008 Cash flows from operating activities PBT 59.6 Depreciations 112.2 5.5 Gains / Disposals Interest income -4.9 16.6 Interest expenses FX -2.8 -5.0 Share options & other Op CF, pre WC 181.2 Receiveables -19.1 Inventories -0.1 8.3 Payables Other 0.5 Op CF, after WC 170.8 Interest received 4.1 -39.6 Interest paid Income taxes -37.8 97.5 Op CF, post tax & WC -1,370.7 Capex Other, investing -74.1 Increase in debt 1,078.6 -6.4 Repayment of debt 743.5 Others, financing Dividends paid -70.9 Net cash flow 397.6 C&CE at open Change C&CE at close Free cashflow 139.2 392.1 531.3 -1,273.2
2009 155.0 62.6 3.8 -9.5 11.8 0.0 -17.4 206.4 36.6 -3.6 8.8 -0.3 248.0 9.2 -52.6 -17.7 186.9 -95.1 5.8 4.1 -33.3 -190.1 0.0 -121.7 531.3 -122.9 408.3 91.8
2010E 185.4 49.0 0.0 -10.0 11.7 0.0 -28.6 207.5 -8.8 -1.9 16.6 0.0 213.3 10.0 -11.7 -36.1 175.6 -75.0 0.0 0.0 0.0 0.0 -15.5 85.1 610.3 85.1 695.3 100.6
2011E 211.8 50.9 0.0 -11.4 11.7 0.0 -34.3 228.6 -12.8 -2.8 24.1 0.0 237.2 11.4 -11.7 -41.2 195.7 -75.0 0.0 0.0 0.0 0.0 -17.7 103.0 695.3 103.0 798.3 120.7
2012E 240.6 52.8 0.0 -13.1 11.7 0.0 -36.1 255.9 -13.7 -3.0 25.8 0.0 265.0 13.1 -11.7 -46.8 219.6 -75.0 0.0 0.0 0.0 0.0 -20.2 124.5 798.3 124.5 922.8 144.6
Key ratios Year end: Dec 2008 2009 2010E 2011E 2012E ROE (%) 3% 8% 9% 9% 9% 4% 5% 6% 6% 7% Post tax ROACE (%) Total debt (m) 1,223.4 1,194.3 1,194.3 1,194.3 1,194.3 Net debt (m) 681.4 584.0 499.0 396.0 271.5 Net debt to equity (%) 48% 38% 30% 22% 14% Net debt / Net debt + equity (%) 33% 28% 23% 18% 12% Equity (m) 1,413.4 1,537.2 1,671.0 1,823.8 1,997.5 Book value per share - (S$) 1.2 1.3 1.4 1.5 1.7 PBR (x) 3.2 3.0 2.7 2.5 2.3 7.5 12.3 13.6 15.2 17.4 Interest cover (x) Payout ratio (%) 0% 11% 11% 11% 11% FCF Yield (%) -29% 2% 2% 3% 3%
83
Healthway Medical
Great potential, but awaiting execution
IN-LINE
SGD0.17
(initiating coverage)
We initiate coverage on Healthway Medical with an IN-LINE rating and a fair value of SGD0.20 per share. . Healthway is a private healthcare provider with one of the largest network of primary and specialist clinics in Singapore. We believe the group has great potential given aggressive expansion in specialist healthcare in Singapore and its initiatives in China. But with recent staffing issues, its nearterm financials are likely to suffer and we await further execution clarity.
Bloomberg code
Reuters code
HMED SP
Market cap
HEMC.SI
12 month range
SGD316.85m (US$237.176m) SGD0.11 - 0.20

A consolidator. Healthway made its mark in private healthcare in Singapore when it acquired multiple primary care and specialist clinics in 2007. The acquisitions transformed Healthway into one of the largest primary healthcare providers in Singapore and also marked its entry into specialist care. Aggressive expansion. Healthway is aggressively expanding specialist services through establishing new clinics and its flagship Healthway Specialist Centre. Healthway also has aggressive plans to expand in China with financing from IFC of the World Bank. With these moves, we believe Healthway has the potential to make significant strides in growing its business. Execution problems. The clinics Healthway acquired in 2007 are long-established specialist brand names, but recently the prominent specialists associated with these clinics resigned. As a result, Healthways 1H 2010 net profit fell by 82%. Together with costs associated with its new clinics, the groups financials are likely to suffer near term. There is also uncertainty in the performance of its new panel of specialists. Key risks. Departure of doctors is the key risk, as was the case in the first half of this year. Its newly established specialty clinics may also take longer than expected to become profitable. As the group is exposed to high-end elective care, an economic downturn would also impact the group. Valuation. Our fair value is based on a DCF model factoring a slow recovery in the specialist business and translates to target multiple of 36x 2010 PER. Our IN-LINE rating is based on the uncertainty of execution going forward.
2009 98.6 19.1 20.1 17.7 15.2 1.12 0.24 NM 20% 19% 15% 21% 0.11 43% 10% 9% 14.7 2.63 12.9 1.6 15.2 1.4%
2010E 89.8 5.9 10.2 4.6 4.0 0.21 0.05 -78% 11% 7% 4% 21% 0.08 42% 3% 3% -10.2 2.88 25.3 2.1 79.6 0.3%
2011E 98.7 13.3 20.2 11.9 10.2 0.55 0.12 124% 20% 13% 10% 21% 0.09 40% 6% 6% -1.7 2.62 12.8 2.0 30.8 0.7%
2012E 113.3 17.4 27.0 16.0 13.8 0.74 0.16 35% 24% 15% 12% 21% 0.09 37% 8% 8% 4.3 2.28 9.6 1.8 22.8 0.9%

0.21 0.20 0.19 0.18 0.17 0.16 0.15 0.14 0.13 0.12 0.11 0.10 Sep09 Dec09 Mar10 Jun10 Sep10 HealthwayMedicalCorp.Ltd. STRAITSTIMESINDEX(rebased)
-1 mth -3 mth -12 mth -6 -15 45 -10 -22 24 One Organisation (17%) 38% 2,387,670
Stephen Hui
Magnus Gunn
Pauline Lee
+65 6307 1512
84

expanding aggressively but we await proof of quality execution We initiate coverage on Healthway Medical with an IN-LINE rating and a fair value of SGD0.2 per share. We believe Healthways aggressive expansion strategy has significant long-term potential, but we are concerned with its recent execution. We adopt an IN-LINE rating as our fair value of SGD0.2 only offers potential upside of 18%. Our fair value of SGD0.2 translates to a target PER multiple of 36x 2010 PER. We believe the potential upside is currently insufficient to warrant a superior rating given the uncertainty of execution ahead for the group. Our IN-LINE rating is based on the following key points: expansion of specialist business could deliver strong revenues and high margins strong partner in IFC for China expansion Healthways aggressive growth plans have tremendous potential, in our view. The groups new specialist clinics and the flagship Healthway specialist centre could potentially generate strong revenues and high margins. However, the group has not delivered good execution in its specialist services in the past and has limited experience of organic expansion. Healthway has plans to expand aggressively in China and has found a partner with strong credentials in the IFC of the World Bank. Again, we believe this business has tremendous potential, but there are also significant uncertainties associated with operating in China. The groups financial performance has suffered so far this year due to the mass exodus of prominent specialist doctors. We are concerned with the high turnover of key staff, including co-founder Dr. Wong Weng Hong. The groups aggressive expansion is also adding costs at a time when its new clinics need time to establish themselves. We await further clarity on execution before we could become positive.
departure of specialists have impacted; we await proof of recovery
Valuation
Our IN-LINE rating for Healthway stems from our wait and see approach on this company. We believe Healthway has tremendous potential through its aggressive expansion of its services in Singapore and China. But with the departure of some key specialist doctors, its profit fell by 82% in 1H 2010. The financial impact in the first half has been further exacerbated by the groups aggressive opening of new specialist clinics. As these clinics require time to establish a patient base, the costs are further dragging down the groups profitability. In our view, the situation for Healthway is rather binary. If its new clinics succeed in building up a customer base, the share price has significant upside. If they do not execute, there share price has significant downside as Healthways share are currently trading at PE of 79x2010E and already pricing in a significant rebound in profit. Fig 133: Valuation table
Rating
PER (x)
PER (x)
LCY 2.50 1.10 4.00 0.20
% USD m 2009 2010E 2011E 17% 22% 4% 18% 828 29.5 196 20.5 3,283 36.7 237 15.2 25.5 25.0 16.8 30.7 79.6 38.0 21.0 15.1 26.8 30.8 23.4 18% 14% 9%* -3%
PB Div. (x) Yield 2009 2010E 2009 4.4 2.4 3.0 1.6 2.8 4.0 0.0% 2.2 2.0% 2.7 0.3% 1.5 1.4% 2.6
PB (x)
2.13 0.90 3.85 0.17
85
Fig 134: DCF Valuation

SGDm Total sales COGS Operating profits Net profit Unlevered free cash flow Terminal value FY09 99 (21) 19 15 16 FY2011E 135 269 404 27 377 0.20 0.17 20% FY10E 90 (19) 6 4 (10) FY11E 99 (21) 13 10 (2) FY12E 113 (24) 17 14 4 FY13E 127 (27) 20 16 14 FY14E 138 (30) 25 20 25 FY15E 149 (32) 27 22 28 FY16E 160 (34) 29 24 31 FY17E 171 (37) 31 26 35 FY18E 183 (39) 33 28 38 FY19E 195 (42) 36 30 41 FY20E 206 (44) 38 32 44 1,942
DCF of operations NPV of the terminal value Total value of the operations Net (cash)/debt Equity value Equity value per share (SGD) Current share price Upside
3.0% 4.5% 1.30 8.9% 3.4% 10.0% 8.3% 1.0%
Fig 135: PE band chart

0.24 0.21 0.18 0.15 0.12 0.09 0.06 0.03 0.00 Jan-09 15x 60x 51x 42x 33x 24x
Jul-09
Jan-10
Aug-10
86
Company overview
History
acquired by UK health insurance company BUPA in 2001 management buy-out in 2006 Healthway started as a clinic in 1990 founded by Dr. Wong Weng Hong, and Dr. Tan See Leng (current CEO of Parkway Holdings) and his wife. By 1997, the group had expanded to 15 clinics. In 2001, the UK health insurance company, BUPA, fully acquired Healthway. The current group was formed in 2006 through a management buy-out by Fan Kow Hin (current chairman), Dr. Wong Weng Hong and several of Healthways other existing directors. By the end of 2006, the group had 38 clinics. In 2007, the group expanded aggressively through M&A. That year, the group acquired Silver Cross clinics, Peace family medicine clinics, Aaron dental, Universal dental, Thomson Paediatric Centre and BCNG for SGD72.36m. It also acquired Island Orthopaedic and Singapore Baby & Child. In 2008, Healthway was listed on SGX catalyst. Today, Healthway is one of the largest primary healthcare groups in Singapore.
formed through merger of several healthcare clinics
listed in 2008
Business segments
one of the largest primary care providers Primary care Healthway runs 56 primary clinics and 11 dental clinics in Singapore. In 2009, its primary healthcare segment generated revenues of SGD54.7m and a pre-tax profit of SGD9.5m (a margin of 17%). In 2009, primary care accounted for 55% of revenues and 44% of operating profit. Specialist & Wellness Through its acquisition of Thomson Paediatric, Singapore Baby & Child and Island Orthopaedic, Healthway acquired well-established brand names in private specialist services. The group is also expanding aggressively into new areas of specialist services. In 2009, Specialist & Wellness accounted for 45% of revenues and 56% of operating profit.
expanding aggressively in specialist care
Business model
employs all its doctors Healthways model is similar to Raffles Medical in that both companies employ their doctors. Fig 136: FY09 revenue breakdown Fig 137: FY09 operating profit breakdown
Specialist and Wellness healthcare 75% Primary healthcare 25%
Specialist and Wellness healthcare 45%
Primary healthcare 55%
87
SWOT
Fig 138: SWOT analysis Healthway Medical
Strengths Weaknesses Scale and brand as one of the largest primary Previous dependence on star specialist care provides, although branding is partly diluted doctors created significant key-man risk. through multi-brand strategy. Aggressive expansion recently leads to Management with aggressive and pro-active significant start-up costs all at the same time. approach to growing the business. Does not have significant experience in organic expansion in specialist healthcare. Strong partner in IFC for growth in China. In primary care, does not have strong share of the corporate market. Opportunities Threats
Healthways expansion into new specialty areas Mass departure of doctors/staff is key threat as through new clinics may provide significant specialist doctors have significant bargaining contributions in the future. power. Healthways new flagship Healthway specialist centre at TripleOne Somerset may significantly boost the profile and scale of the groups specialist services. Healthway has identified China as a major market for growth. China shows major potential with an ageing population with rising disposable income.
Healthway does not have significant experience in China and the operating environment may be difficult. Competitors in primary care such as Raffles and Parkway Shenton may prevent Healthway from gaining share with the corporate market.
88
Primary care is its bread and butter

Healthway operates 56 family medicine clinics and 11 dental surgery practices, making it one of the largest primary healthcare providers in Singapore.
Family clinics
family clinics under four brands Multi-brand approach As Healthway was formed through acquiring several separate family clinic practices, the groups family clinics operate under different brands. The Healthway brand is the oldest and operates over 37 family clinics with locations across Singapore. Silver Cross caters to mid-to-high income patients in areas such as Bukit Timah and Holland Village. The groups other family clinic brands are Peace and Singapore Family. Scale: One of the largest players By number of clinics, Healthway is one of the largest players in the primary care segment. Healthway has 70 clinics compared to Raffles 76 and Parkway Shentons 50. By number of GP doctors, Healthway has an estimated 80 versus Raffles 110 and Parkway Shentons 100. Healthway plans to grow its primary care network, but management advised it is dependent on good locations becoming available. Fig 139: Number of clinics FY09
80 70
Number of clinics
one of the largest private primary healthcare providers
Fig 140: Number of GP doctors FY09

120 100
Number of doctors
60 50 40 30 20 10 0 Parkway Shenton Raffles Healthway medical
80 60 40 20 0 Raffles Parkway Healthway
only 30% patients from corporate segment
Family not corporate oriented Despite its strength in primary care, Healthway does not compete directly with Raffles and Parkway Shenton, mainly because of positioning. Raffles and Parkway Shentons strength lies, in our view, with corporates and government agencies. In contrast, Healthway is positioned as a family clinic for private individuals. Management advised about 30% of Healthways patients come from the corporate segment, while we believe an estimated 60% of Raffles and Parkway Shentons primary care patients arise there. Vista: Healthcare benefits management Healthways lower contribution from the corporate segment is most likely due to its history. Until it gained scale through acquisition in 2007, Healthway did not have the ability to bid for corporate accounts. But with the current wide network, together with its affiliations with over 400 other clinics, Healthway is much better positioned to grow its corporate segment. It has formed a healthcare benefits management business to package and market healthcare services to corporate and insurance clients.
manage healthcare benefits to target corporate segment
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Dental
dental clinics under two brands Brands Healthways dentistry practice operates under Aaron and Universal and has a combined network of 11 clinics. Aaron has been established for 17 years and targets the mid-to-high end segment with its clinics located in premier locations such as the central business district and Holland Village. Universal has existed for 25 years and is positioned in the low-to-mid end, with competitive pricing. Its clinics are located in HDB housing estates. Healthway acquired both businesses in 2007. Competition: With only 11 clinics, Healthway is one of the smaller dentistry chains in Singapore. The largest dentistry chain in Singapore is Q&M Dental (not rated) with 39 clinics and 120 doctors. Other competitors like Raffles are also much smaller than Q&M. Fig 141: Number of clinics FY09
45 40 35
Number of dentists Number of clinics
relatively small player
Fig 142: Number of dentists FY09

140 120 100 80 60 40 20 0
30 25 20 15 10 5 0 Q&M Healthway Raffles
Raffles
Parkway
Healthway
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Specialist healthcare to drive growth and margins

Increasing the breadth
acquired three leading specialist brands Entry through acquisition Healthway expanded into specialist healthcare through acquisitions in 2007. It acquired Thomson Paediatric, Singapore Baby & Child and Island Orthopaedic, all long-established brand names in Singapore. Before the acquisitions, the group was solely engaged in primary healthcare. According to management, without these brand-names, it would have been very difficult for them to organically start a specialist centre. Specialists have no incentive to join a group with only GP doctors. But with the brand names that it has acquired, specialists believe they are joining an established outfit with prominent specialist doctors. Thomson Paediatric Centre was founded in 1983 and Singapore Baby & Child was established in 1980. With these two brands, Healthway is one of the largest paediatric-service providers in Singapore. Island Orthopaedic was established in 1995 and is one of the largest orthopaedic clinics in Singapore. Adding specialty areas Post those acquisitions, Healthway has continued to expand organically into new specialty areas. All these specialty areas are branded under Nobel. The group consciously avoided the Healthway brand to encourage other GPs to refer patients to its specialist clinics (other GPs may not want to refer to a competitor). In 2009, Healthway added Ear, Nose & Throat (ENT), Head & Neck and Thyroid Surgery Centre, the Eye and Vision Centre, the Heart Centre, the Psychological Wellness Clinic and a Surgery Centre. The group also opened a new NeuGlow Medical Hair Centre which offers services in hair-loss solutions and laser hair removal. Fig 143: Groups current speciality areas
Specialist Area Paediatrics Paediatrics, child development, neurology Orthropaedic Sports medicine and wellness Surgery, Heart, Phycological wellness, ENT, Chest Aesthetics, Dental, Plastic Surgery Traditional Chinese Medicine
Source: Company
entry through organic expansion would have been difficult
new specialties under Nobel to encourage referral from other GPs
Company Name Thomson Paediatric Centre SBCC Clinic Island Orthropaedic Clinic SportsMed Central Nobel Specialists Neuglow Healthway TCM
No. of Clinics 4 7 3 1 8 8 1
Acquired 2007 2008 2008 2008 2009 2007 2008
Healthway Specialist Centre

continued expansion with flagship specialist centre TripleOne Somerset The new Healthway Specialist Centre will be located at TripleOne Somerset, a building formerly occupied by Singapores Public Utilities Board (PUB). PUB will be vacating about 150,000 square feet on seven floors of space in the building over the next three years. Healthway has signed a memorandum of understanding to occupy the space. The companys original vision was to open clinics in all 150,000 sqf and invest SGD40m. Currently, it has only opened one floor of about 7,000 sqf for medical, dentistry and plastic surgery. Healthway plans to open a mezzanine floor later this year for a Japanese clinic focusing on Japanese patients, International clinic for foreign patients, and a diagnostics and plastic surgery clinic. Depending on how these clinics perform, the group will determine whether to continue to expand into additional floors.
will open two floors in TripleOne Somerset by end of the year
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China is the blue-sky opportunity

Healthway entered China in 2009 with two centres in Shanghai, i.e. Healthway Nobel Hospital and Healthway International Medical Centre.
Replication of model in China

targets twenty centres by end of 2010 Aggressive expansion At the end of 2009, Heatlhway operated two centres in Shanghai: the Healthway Nobel Hospital and Healthway International Medical Centre. In August 2010, Healthway entered into agreements to operate an additional 12 medical and dental centres in Shanghai and Hangzhou. The group has a target to grow the number of medical/dental centres to over 20 by the end of 2010. In 2011, the group plans to open 20 new clinics. Healthway does not own any of these clinics, but has arrangements for revenue or profit sharing. As the group does not have significant experience expanding aggressively in China, we await evidence on its further execution before making a judgement. IFC financing Healthway has obtained financing from the International Finance Corporation, part of the World Bank Group. The IFC has provided financing via a USGD10mequity investment in the company and advancing it a USGD15m loan. The company estimates its total capital requirements in China to be about USGD30m. Separately, the directors of the company invested SGD11.2m in new shares of the company.
IFC will finance China expansion
Joint venture in real estate

new business to invest and manage medical developments New business in real estate In Auguts 2010, Healthway annonced a diversification into real estate business through a joint venture with other companies. The JV company will invest, develop and manage medical developments in Asia, with a particular focus in China. The announcement notes that the targets wil linclude hospitals and medical centres, retirement communities, medical resorts, and medical facilities with other mixed use developments. Related party transaction The JV partners include companies owned by directors of Healthway. For example, Golden Cliff has 36% interest in the JV and is owned by Mr. Fan Kow Hin, the Chairman of Healthway. Xanery has 13% interest and is owned by Dr. Jong Hee Sen, the President of Healthway. The other two parties are Mr. Aathar Ah Kong Andrew (through Real Empire), a substantial shareholder of Healthway, and Dr. Han Cheng Fong, Chairman of Healthways China subsidiary. Fig 144: JV arrangement
The Company 25% Mr Fan Kow Hin 36% Mr Aathar Ah Kong Andrew 16% Dr Jong Hee Sen 13% Dr Han Cheng Fong 10% Legend: segments listed clockw ise from top
related party transaction potential concern
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Execution is a concern
While we acknowledge that Healthways plans to aggressively grow both its Singapore and China business is exciting, executing may be difficult. And there have already been signs that things may not be working out as planned.
Challenge of group practice model

doctors are difficult employees to manage Prominent doctors generally do not like to be employed Like Raffles, all doctors that work for Healthway are employees of the group and managing doctors is one of the most challenging aspects of the operation. Many prominent doctors shy away from becoming employees on the notion that they will not receive a fair share of the profits. This is one of the reasons why peers like Parkway and Thomson Medical have steered clear of employing doctors. Strength in primary care helps make group practice model work The group practice model works for Raffles because it has a strong referral programme and doctors understand they may not receive the same patient flow were they independent. As Healthway is also strong in primary healthcare, it has the potential to replicate this model. But Healthway likely needs to further strengthen its internal referral program.
strong referral program makes group practice model work
Departure of doctors
departure of prominent specialists has hurt Specialist clinics As mentioned previously, Healthway acquired the specialist clinics Thomson Paediatric, Singapore Baby & Child and Island Orthopaedic in 2007. The acquisition of these clinics included the senior doctors that were running them. The specialist doctors had to sign three-year contracts. With their contracts expiring this year, many of the specialist doctors left. This contributed to the groups 1H 2010 revenue decline of 9% and profit fall of 82%. The 1H results were also affected by the group opening several new clinics. As these clinics need time to establish a client base, the high costs weighed on the groups earnings. Others We understand from industry sources that a portion of Healthways dentists have also departed. In August, co-founder of the group and former Managing Director and Medical director Dr. Wong Weng Hong also announced his resignation.
departure of cofounder
Profitability to suffer near term

new panel of specialist doctors Thomson Paediatric, Singapore Baby & Child and Island Orthopaedic Healthway has replaced all the specialist doctors that departed from Thomson Paediatric, Singapore Baby & Child and Island Orthopaedic. As the new specialist doctors are less wellknown (and also cost less), it will take them some time to build up a customer base. Management believes it may take a few quarters for these clinics to breakeven. During this period, profitability is likely to suffer, in our view. New clinics At the same time, Healthway has opened new clinics in new specialty areas such as ear, nose & throat (ENT), head & neck and thyroid surgery, eyes and vision, heart, psychological wellness and surgery. All these disciplines add significant costs.
new clinics will take time to breakeven. Weight on profit
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Group financials
Profit and loss
2005-2009 revenue CAGR of 10% Revenue growth Healthway listed in 2008 so financial data is only available back to 2005. From 2005 to 2009, group revenues grew at a CAGR of 10%. The primary care business grew at a CAGR of 11%, while Specialist & Wellness grew at a CAGR of 9%. In 1H 2010, revenue fell by 9% due to the departure of key specialist doctors. We expect full-year 2010 revenue to be depressed. Fig 145: Revenue growth
120 100
SGDm
25% 20% 15% 10%
80 60
5% 40 20 0 2005 2006 2007 2008 2009 2010E

Revenue growth
0% -5% -10% 2011E 2012E
Total revenue (LHS)

operating margins likely to suffer near term
Margins Operating margins for the primary business have declined from 16% in 2005 to 9% in 2009 due to impact from the financial crisis. Specialist margins have declined from 40% in 2005 to 32% in 2009. Going forward, we expect primary margins to stabilize at around 10%, comparable to Raffles primary operating margins of 8 to 12%. For the specialist business, we expect margins to plunge from 33% in 2009 to 2% in 2010E due to the departure of doctors. Fig 146: Operating margins of segments
60% 50% 40% 30% 20% 10% 0% -10% 2005 2006 2007 2008 2009 2010F 2011F 2012F
Specialist and Wellness healthcare

Primary healthcare
Group operating margins
staff costs (doctors) are 45% of revenue
Costs Healthway has very high gross margins as cost of goods sold are only medical supplies and laboratory expenses. Gross margins have remained quite steady in the last 5 years at 79% to 81%. Healthways largest expense is staff costs as the group employs all its doctors. Staff costs were 45% of revenue in 2009. Other operating expenses account for about 16% of revenue.
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Fig 147: Costs as a percentage of revenue

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2005 2006 2007 Staff costs 2008 2009
% of sales
Medical supplies, consumables and lab. Exp

Other operating expenses
Balance sheet
risk of impairment on intangibles Intangible assets Intangibles form 77% of the groups total assets and is the result of Healthways acquisitions in 2007. The SGD176m of intangible assets are broken down as SGD49m for the family medicine business, SGD7m for dentistry, SGD70m for paediatrics, SGD45m for orthopaedics and SGD5m for Wellness and aesthetic. The values are assessed based on a discount cash flow model. With the specialist business suffering this year, we believe a key risk is that the group takes an impairment charge on its intangible assets. The DCF is based on the assumption of 2-4% growth between 2010-13. We believe the specialist business had a double-digit drop in revenues in the first half this year. With specialist clinics like paediatrics and orthopaedics accounting for 65% of intangible assets, we believe the risk of an impairment charge is significant. Fig 148: Total asset breakdown FY09 Fig 149: Intangible breakdown FY2009
Dentistry 4% Wellness and aesthetic 3%
Fixed assets 2% Intangible assets 77% Other non-cur. assets 1% Stocks 2% Debtors 5% Cash 12%
Orthopaedics 25%
Paediatrics 40%

Family medicine 28%

gearing manageable, likely to increase with Chinese expansion
Debt / Financing As of the end of FY09, gearing was at 43% and net gearing at 24%. The company had interest coverage of about 13x. In January 2010, the company secured USGD10m (SGD13.5m) of equity financing from IFC for its expansion into China. Separately, the company also raised SGD11m in new shares from investors (mostly directors of the company). As part of the IFC financing package, the group also has USGD15m loan facility from the IFC that it has yet to tap. When drawn-down fully, the USGD15m (SGD20m) will increase its total gearing to about 57%.
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Fig 150: Net debt/ cash

0 -10 -20 SGDm -30 -40 -50 -60 -70 2007 2008 2009 2010F Net cash/debt
2011F
2012F
Cash flow
strong cash flow business, but aggressive expansion will be a drag for the next two years Maintenance capex is minimal: from 2008 to 2009, Healthway spent less than SGD2m on purchase of PPE. We are expecting capex to increase with the groups aggressive expansion. But from 2010 to 2013, Healthway could spend up to SGD40m on the new Healthway Specialist Centre. For example, in 2010 it is opening two out of the total seven floors. Assuming we split the capex evenly by floor, this would account for about SGD11.4m in 2010. The group will also invest an undisclosed amount in China. We are conservatively assuming capex of SGD20m each year from 2010-12E and then capex of SGD15m in 2013E. Despite the heavy capex, we forecast that Healthway should have negative free cash flow only in 2010E and 2011E and thereafter should be free cash flow positive.
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directors are major shareholders. Largest shareholder is Fan Kow Hin The major shareholders are Mr. Fan Kow Hin, Executive Chairman with 25% (he also owns One Organization); IFC has a 6% stake via its equity financing this year. Management advised that Singaporean investor Peter Lim has a 7% stake. Fig 151: Share holding structure
One Organization 17% Ah Kong Aathar 9% Kow Hin Fan 8% Kestrel capital 7% IFC 6% Other 47% Legend: segments listed clockw ise from top
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Income statement (SGDm) Year end: Dec Group Revenue Growth % COGS Gross profit GP margin (%) Others,net Total EBIT Growth % OP margin (%) Net interest income Others,Goodwill, net PBT Taxation Effective rate (%) Exceptional PAT Minority interest PATMI Growth % PATMI margin (%) MI interest in PAT (%)
EPS basic (SGD cents) EPS diluted (SGDcents) EPS Growth (%) DPS (SGDcents) DPS Growth (%) Payout (%)
2008 80.9 -4% -16.9 64.0 79% -51 13.1 -41% 16% -1.3 0 11.8 -2.3 -19% 0 9.6 0.0 9.6 NM 12% 0% 1.32 1.32 NA 0.00 NM 0%
2009 98.6 22% -21.1 77.5 79% -58 19.1 46% 19% -1.4 0 17.7 -2.5 -14% 0 15.2 0.0 15.2 59% 15% 0% 1.12 1.12 -15% 0.24 NM 21%
2010E 89.8 -9% -19.2 70.5 79% -65 5.9 -69% 7% -1.3 0 4.6 -0.6 -14% 0 4.0 0.0 4.0 -74% 4% 0% 0.25 0.21 -81% 0.05 -78% 21%
2011E 98.7 10% -21.1 77.6 79% -64 13.3 124% 13% -1.4 0 11.9 -1.7 -14% 0 10.2 0.0 10.2 158% 10% 0% 0.55 0.55 158% 0.12 124% 21%
2012E 113.3 15% -24.3 89.0 79% -72 17.4 31% 15% -1.4 0 16.0 -2.3 -14% 0 13.8 0.0 13.8 35% 12% 0% 0.74 0.74 35% 0.16 35% 21%
Balance sheet (SGDm) Year end: Dec Property, plant & equipment Goodwill & intangibles Others Long term assets C&CE STI Inventories Receivables Others Total current assets Total assets
Payables ST debt Others Current liabilities LT debt Deferred income tax Others Total liabilities Minorities Shareholders funds Gross liabilities + equity
2008 4.2 176.5 0.0 180.7 28.9 0.0 3.3 9.7 0.0 41.9 222.6 11.1 39.8 6.8 57.8 28.9 0.1 0.4 87.2 0.0 135.4 222.6
2009 5.1 176.5 3.3 184.9 28.5 0.0 3.7 12.4 0.0 44.7 229.5 13.5 20.2 2.8 36.5 43.3 0.1 0.4 80.3 0.0 149.2 229.5
2010E 24.0 173.3 3.3 200.6 16.0 0.0 3.4 11.3 0.0 30.7 231.3 12.3 20.2 2.8 35.3 43.3 0.1 0.4 79.1 0.0 152.2 231.3
2011E 40.3 170.1 3.3 213.6 10.7 0.0 3.7 12.5 0.0 26.9 240.5 13.5 20.2 2.8 36.5 43.3 0.1 0.4 80.3 0.0 160.2 240.5
2012E 53.9 166.9 3.3 224.1 10.7 0.0 4.3 14.3 0.0 29.2 253.3 15.5 20.2 2.8 38.5 43.3 0.1 0.4 82.3 0.0 171.0 253.3
Cash Flow (SGDm) Year end: Dec 2008 Cash flows from operating activities PBT 11.8 Depreciations 0.8 0.0 Gains / Disposals Interest income 1.4 -0.1 Interest expenses FX 0.0 0.0 Share options & other 13.9 Op CF, pre WC Receiveables 9.5 Inventories -0.3 -1.1 Payables Other 0.0 Op CF, after WC 22.1 Interest received 0.1 Interest paid -1.4 Income taxes -2.2 Op CF, post tax & WC 18.6 -1.7 Capex -15.0 Other, investing Increase in debt 21.3 -0.6 Repayment of debt -21.3 Others, financing Dividends paid 0.0 Net cash flow 1.4
C&CE at open Change C&CE at close Free cashflow 6.4 1.4 7.9 18.2
2009 17.7 0.9 0.0 1.5 -0.1 0.0 0.0 20.1 -2.7 -0.4 1.8 0.0 18.7 0.1 -1.5 -3.2 14.1 -0.8 -3.3 26.5 -32.2 -3.6 -0.5 0.2 7.9 0.2 8.1 14.7
2010E 4.6 4.3 0.0 1.4 -0.1 0.0 0.0 10.2 1.1 0.3 -1.2 0.0 10.5 0.1 -1.4 -0.6 8.5 -20.0 0.0 0.0 0.0 0.0 -1.0 -12.5 28.5 -12.5 16.0 -10.2
2011E 11.9 6.9 0.0 1.4 -0.1 0.0 0.0 20.2 -1.1 -0.3 1.2 0.0 19.9 0.1 -1.4 -1.7 16.9 -20.0 0.0 0.0 0.0 0.0 -2.2 -5.3 16.0 -5.3 10.7 -1.7
2012E 16.0 9.5 0.0 1.4 0.0 0.0 0.0 27.0 -1.8 -0.6 2.0 0.0 26.6 0.0 -1.4 -2.3 22.9 -20.0 0.0 0.0 0.0 0.0 -3.0 0.0 10.7 0.0 10.7 4.3
2008 7% 6% 68.7 39.8 29% 23% 135.4 0.2 0.9 9.6 0% 15%
2009 10% 8% 63.5 35.0 23% 19% 149.2 0.1 1.6 12.8 21% 6%
2010E 3% 2% 63.5 47.5 31% 24% 152.2 0.1 2.1 4.1 21% -3%
2011E 6% 5% 63.5 52.8 33% 25% 160.2 0.1 2.0 9.2 21% -1%
2012E 8% 7% 63.5 52.9 31% 24% 171.0 0.1 1.8 12.1 21% 1%
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KPJ Healthcare
NON-COVERED COMPANY VISIT NOTE
Analysts
NOT RATED
Standard Chartered Equity Research does not cover this company and nothing herein should be interpreted to be a recommendation or fair value target with respect to the company.
Stephen Hui
Magnus Gunn
Bloomberg code: KPJ MK Mkt cap (USDm) 586m 12m range (MYR) 1.40-3.85 3m value traded 1.3m MYRm) No. of shares (m) 543 Est. free float (%) 28.2% Established 1981 Listed 1994 Secondary placement Auditors, since PWC, 1998 Year-end Dec Major shareholder
Source: Bloomberg, Company
MYR3.46
PER historical (x) Yield historical (%) P/B historical (x) ROE (%) 12.7 3.1% 2.2 18
Key points KPJ believes its strategy of building community based hospitals has proven successful and is ideally suited to Malaysia. The private Malaysian hospital operators are, it believes, largely domestically focused where there is room for growth. Despite much talk about medical tourism in Malaysia, it does not consider itself a direct competitor to Singapore. KPJs asset light model illustrates its belief that REITfinancing can fund high-growth in a capex intensive industry. What KPJ does
KPJ contends that it is the largest private sector hospital chain in Malaysia, with 19 hospitals throughout the country and two in Indonesia. KPJ aims to be the dominant community based hospital in its target areas. KPJ believes this makes its business highly defensive in nature.
Net gearing (%) 21 Net debt (cash) (MYRm) 71.8m Historical EPS (MYR) 0.53 EPS 3-yr CAGR (%) 38 EPS 7-yr CAGR (%) 31 Historical DPS (MYR) 0.20 DPS 3-yr CAGR (%) 13% Johor Corporation 48.7%
Share price performance (MYR)

4.0 3.5 3.0 2.5 2.0 1.5 Nov 09 1.0 Oct 09 Sep 09 Mar 10 May 10 Feb 10 Apr 10 Jul 10 Aug 10 Dec 09 Sep 10 Jan 10 Jun 10
Why we visited KPJ

Malaysian healthcare is enjoying robust growth and KPJ could be a key beneficiary. KPJ has launched an advertising campaign for foreign patients and could be a competitor of Singaporean providers.
KPJ Healthcare
Source: Bloomberg
KUALA LUMPUR COMP INDEX (rebased)
Valuations and share price performance

The shares are valued at 16x 2010 consensus earnings according to Bloomberg and offer a prospective yield of 3.2%. The stock has re-rated from MYR 1.40 to 3.85 and has out-performed the KLCI by 21% YTD 2010.
Related research notes
1/9/10 1/9/10 Eu Yan Sang OSIM ASEAN hospitals OUTPERFORM OUTPERFORM
Key read-across to other companies

The non-government Malaysian hospital operators, of which KPJ is the largest, are focused largely domestically and are not yet competing aggressively with the Singapore-based hospitals for either international or Singaporean patients. KPJ believes its hospitals are currently not equipped for foreign patients as occupancy is at high levels. Nevertheless, KPJ advised that its recent advertising campaign targeting foreign patients reflects KPJ positioning itself for the foreign patient market in the future. Despite Singapores recent liberalisation of the Medisave scheme for use in Malaysia, KPJ advised they are not seeing high volumes of Singaporeans crossing over to Malaysia. In KPJs view, the incubation time for medical tourism is long and public perception of Malaysia as a medical tourism destination needs to be nurtured.
16/9/10 16/9/10 16/9/10 16/9/10 16/9/10 16/9/10
Raffles Medical Thomson Medical Parkway Holdings Healthway Medical Bumrungrad Bangkok Dusit
OUTPERFORM OUTPERFORM IN-LINE IN-LINE Non-covered Non-covered
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Non-covered company visit note

Strong sector growth The Malaysian private healthcare sector is experiencing strong growth due to a demand spill-over from the public sector, which is currently stretched to capacity. In 2008, the public sector accounted for 46% total hospital expenditure, but serviced 74% of admissions according to the Ministry of Health. Government initiatives to spur private sector The recently proposed national health insurance fund should encourage a shift in demand to the private sector as under the proposal, individuals earning above a certain income level will pay insurance premiums to the fund. They will then be covered for outpatient consultation with a designated private doctor of their choice. The details have not been finalised however and implementation is expected to take 10 years. KPJ believes it the market leader According to KPJ, it is the largest private hospital operator in Malaysia by network with 19 hospitals, more than 2,000 licensed hospital beds and about 5% market share. KPJ advised they follow a community-based approach and aims to be the largest hospital in the locations where they operate, and current competition is minimal. It views Pantai (owned by Khazanah and Parkway) as its largest competitor, followed by Columbia Asia. Currently, all three have a strategy targeting community hospitals with limited overlap as there are still enough communities without a strong hospital player. Stable and defensive Although KPJ recognises medical tourism as a highly profitable business, management focus will remain on the domestic market. Part of the reason for this is it believes medical tourism will expose the group to cyclicality as medical tourism is highly correlated with the economic growth of the patient-source. In contrast, as management noted Malaysians will always be in Malaysia. Capital intensive but REITs fund expansion Recognising that it is engaged in a capital-intensive business, KPJs defined strategy has been to offload completed hospital assets into the Al-Aqar KPJ REIT to fund its continued expansion. Al-Aqar is the first Islamic REIT and the first Islamic Hospital REIT in the world. KPJ believes the REIT strategy allows for a fast turnaround of capital. KPJ owns 45% of the Al-Aqar KPJ REIT. The rental agreement is based on a formula that factors in protection against rising rates for KPJ and protection for Al-Aqar on falling rates. Fig 152: Steady growth in operating profit and net profit
MYRm 140 120 100 80 60 40
Highly scalable business model 20 KPJ believes its community-based private hospital model has 2004 2005 2006 2007 2008 2009 proven to be highly scalable given the nature of healthcare in EBIT Net profit Malaysia. Its strategy has been to target communities with a Source: Company population of at least 200,000 and build a strong local hospital there. KPJ aims to open at least 2 hospitals in Malaysia a year for the next 3 years. If an opportunity Cash generation presents itself, KPJ will also consider expanding through KPJ acknowledges that higher capex dragged its FCF into acquisitions of smaller hospital chains. The group has the red in 2009. It states, however, that operating cash flow regional exposure it has two hospitals in Indonesia, but remains strong and further disposals of hospital buildings to recently scaled back its presence in Saudi Arabia and the Al-Aqar REIT will strengthen the cash position. Bangladesh. The focus for overseas expansion will be through management contracts to minimise capital risk. It Shareholdings has taken 26 years for KPJ to become a company with KPJ is the healthcare division of state-owned corporation, MYR1.1bn in turnover and its revenue objective is MYR2.0bn Johor Corp and is 49% owned by the corporation. Johor by FY12. Corp has RM3.58 bn of debt due in 2012. Johor Corp owns 8 listed entities, including Kulim, the Malaysian palm oil Some medical tourism, but not in a big way just yet plantation. Although Malaysia has plans to boost its medical tourism industry, the incubation period is long. In KPJs view, the key Corporate governance to success for medical tourism is marketing and branding. The board consists of seven Independent Non-Executive KPJ notes that Malaysian private healthcare should not be Directors and two Non-Independent Non-Executive inferior to Singapores as most of the doctors from both Directors. countries are trained abroad. It believes Malaysia needs to overcome the general impression that its healthcare services are inferior to Singapores. KPJ states that its hospitals are currently highly occupied, so the group has limited capacity to serve significant numbers of foreign patients.
Analysts
Stephen Hui
Magnus Gunn
Pauline Lee
Stephen.Hui@sc.com Magnus.Gunn@sc.com +65 6307 1513 +65 6307 1520
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Competition
Fig 153: Competition
Business segment Specialist hospitals in Malaysia Competitor Pantai Holdings Bhd Columbia Asia Health Management International (HMI) Parkway Holdings Limited Metro Specialist Hospital Loh Guan Lye Specialists Centre Normah Medical Specialist Centre Prince Court Medical Centre Listed / private Private Private Listed (HMI SP) Listed (PWAY SP) Private Private Private Private
Source: Association of Private Hospitals of Malaysia, Reuters
Market share
Fig 154: KPJ had 17% of total private patient beds in Malaysia in 2009
KPJ Healthcare 17% KPJ Healthcare Other private hospitals 83% Others 96% 4%
Fig 155: KPJ treated 4% of medical tourists to Malaysia in 2009
Source: Ministry of Health (MoH), Company, Standard Chartered Research
Source: MoH, Company, Standard Chartered Research
Company background
Fig 156: Company background
Main shareholders Johor Corporation 49.3% Kumpulan Waqaf An-Nur Bhd 8.7% Public Mutual Bhd 5.9% Head office and key assets Address: 7 Pesiaran Titiwangsa 3, 53200 Kuala Lumpur, Wilayah Persekutuan, Malaysia. (Tel : +60-3 4022 6222) www.kpjhealth.com.my 19 hospitals in Malaysia, 2 in Indonesia 6,978 employees, 680 medical consultants Associates operate specialist hospitals and provide other services for specialist hospitals Recent M&A/disposals/failed business Acquired 51% interest in SMC Healthcare for MYR51m Acquired 30% interest in Bukit Mertajam for MYR4.7m Disposed interests in Bangladesh and Saudi Arabia Injected most of its buildings in to Al-Aqar KPJ REIT, unlocking MYR1,294m worth of assets Latest results highlights 1Q10 EBIT grew 15%YoY to MYR42m and the EBIT margin improved to 11.2% in 1Q10 from 10.9% in 1Q09 Revenue grew 11%YoY, although it remained flat on a QoQ basis
Employees Provident Fund 4.9%

Management and directors Chairman Tan Sri Dato Muhammad Ali Hashim Managing Director Datin Paduka Siti Sadiah Sheikh Bakir Seven Independent Non-Executive Directors Two Non-Independent Non-Executive Directors Significant outside business interests Chairman Tan Sri Dato Muhammad Ali Hashim Managing Director Datin Paduka Siti Sadiah Sheikh Bakir Corporate/management dealing in company shares Tan Sri Datuk Arshad Ayub 0.7% Datin Paduka Siti Sadiah Sheikh Bakir 0.2%
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Four key operational charts

Fig 157: No. of patients treated growing steadily
2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2004 2005 Out-patient 2006 2007 In-patient 2008 2009
KPJs patient numbers have steadily increased over the past five years with both inpatients and outpatients growing at a 1314% 5-year CAGR while the number of hospitals increased to 21 from 15 during the same period, with the number of beds rising from c.1,400 to over 2,000 currently.
Source: Company
Fig 158: Revenue per patient

MYR 2,600 MYR 250 240 230 220 210 200 190 180 170 160 150 2004 2005 2006 2007 2008 2009
2,400
KPJs revenue per inpatient grew from c.RM1,900 in 2004, to c. RM2,000 by 2009, as did the revenue per outpatient from RM174 to RM225 during the same period. Growth in revenue per bed exceeded this at a 5-year CAGR of 11%, reflecting improving capacity utilisation.
2,200
2,000
1,800
Revenue per in-patient
Revenue per out-patient
Source: Company
Fig 159: Segmental revenue growth

MYR m 600 500 400 300 200 100 0 2004 2005 2006 2007 2008 Hos pital incom e Consultation incom e Sale of pharm aceutical, m edical and s urgical products others 2009
Hospital income, consultation income and sale of drugs, medical and surgical products contributed nearly equally to the top line and each segment showed steady growth over the last five years.
Source: Company
Fig 160: Renewed focus on domestic operations

25 20 15 10 5 0 2004 Malays ia 2005 2006 2007 Banglades h 2008 2009 Indonesia Saudi Arabia
KPJ opened a number of hospitals in Indonesia, Bangladesh and Saudi Arabia over the past few years. With a strategic decision to refocus on domestic operations, it disposed of the hospitals in Bangladesh and Saudi Arabia in 2008, and sold one of its Indonesian hospitals. The company has not given up on global expansion though, as management commented in the 2009 annual report that it had been approached to extend operations to countries throughout the world.
Source: Company
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Trends and six-year financial data

Growth
Sales growth & earnings growth
80 70 60 50 40 30 20 10 0 2004 2005 2006 2007 2008 2009 %
Income statement (MYRm)

Year-end: Dec Sales revenue Gross profit EBITDA Depreciation & Amortisation EBIT Net interest (expense) / income Associates Others Income tax expense PAT Minorities Net income 2004 583 169 94 (35) 59 (19) 0 0 (9) 32 (0) 32 2005 660 188 94 (35) 59 (16) (0) 0 (14) 29 (4) 33 2006 831 243 108 (33) 75 (20) 5 0 (19) 41 0 41 2007 1,108 327 136 (43) 93 (20) 12 0 (7) 78 4 74 2008 1,267 368 155 (42) 114 (19) 19 0 (25) 89 4 86 2009 1,456 419 188 (46) 142 (17) 19 0 (29) 115 4 111
Sales growth
Earnings growth
Margins
EBIT & Net Profit margin
12 10 8
Cash flow (MYRm)

Year-end: Dec Operating profit Depreciation & Amortisation Working capital Others Operational cash flow Tax paid After-tax operational cash flow Capex Net interest Debt Dividends Others Net flow 2004 59 35 (1) 3 95 (8) 87 (71) (18) 21 (9) (5) 6 2005 59 35 (1) 14 107 (10) 97 (81) (16) 52 (10) (20) 22 2006 75 33 (12) 2 98 (17) 81 (70) (20) (78) (16) 109 6 2007 93 43 4 11 150 (25) 125 (102) (19) 17 (21) 57 57 2008 114 42 (18) 21 158 (5) 154 (121) (14) (27) (26) 44 10 2009 142 46 (19) 17 186 (23) 163 (222) (14) 2 (77) 189 41
6 4 2 0 2004 2005 2006 2007 2008 2009

EBIT margin Net margin (%)
Cash flow
Op Cash Flow Generated & Capex
250 200 MYR m 150 100 50 0 2004
Balance sheet (MYRm)

Year-end: Dec Tangible assets Intangible assets Associates/Investments/Others Stocks Debtors Cash and liquid assets Total assets Current creditors Current borrowings Long-term borrowings Others Total liabilities Shareholders' funds Minority interests Equity Total capital employed 2004 618 63 59 16 79 19 854 104 54 261 58 476 359 18 378 854 2005 647 67 137 18 91 37 996 111 53 324 74 561 410 25 435 996 2006 512 101 241 22 131 95 1,102 173 48 323 70 615 443 45 487 1,102 2007 464 100 360 27 153 100 1,205 210 87 307 46 650 509 46 555 1,205 2008 304 110 533 30 195 106 1,278 236 101 268 45 650 581 48 629 1,278 2009 428 116 412 30 243 144 1,372 261 66 303 65 695 632 45 677 1,372
2005
2006
2007
2008 Capex
2009
Operating cash flow
Balance sheet
Net debt (cash) / equity
80 70 60 50 40 30 20 10 0 2004 2005 2006 2007 2008 2009 %
Key data & ratios

Year-end: Dec EPS (MYR) Chg (%) DPS (MYR) CFPS (MYR) BVPS (MYR) Wtd avg shares (m) EBIT margins (%) ROE (%) Post-tax ROCE (%) Capex/Sales (%) Capex/Depreciation (%) Net debt/equity (%) Total debt/Total capital (%) Net interest cover (x)
Source: Company
Net debt(cash) /Equity
Returns
ROE & ROCE
20 16 12 % 8 4 0 2004
2005
ROE
2006
2007
2008
2009
Post-tax ROCE
2004 0.16 n/a 0.07 0.34 1.78 202 10% 9% 8% 12% 257% 78% 45% 3.2
2005 0.16 2.2% 0.11 0.40 2.02 203 9% 8% 6% 12% 270% 78% 46% 3.6
2006 0.20 24.1% 0.14 0.29 2.16 205 9% 9% 8% 8% 217% 57% 43% 3.8
2007 0.36 77.8% 0.10 0.50 2.44 209 8% 15% 11% 9% 241% 53% 42% 4.6
2008 0.41 14.8% 0.07 0.64 2.77 210 9% 15% 11% 10% 292% 42% 37% 6.1
2009 0.53 30.7% 0.20 0.70 3.04 208 10% 18% 13% 15% 479% 33% 35% 8.5
Source: Company
103
Bumrungrad
Analysts
NOT RATED
Stephen Hui
Magnus Gunn
Bloomberg code: Mkt cap (USGD) 12m range (THB) 3m value traded (USGD) No. of shares (m) Est. free float (%) Established Listed Secondary placement Auditors, since Year-end Major shareholder
THB34.00
BH TB 697.9m 23.6-31.4 0.95m 728.304 70.4 1980 1989 E&Y, 1997 Dec PER historical (x) Yield historical (%) P/B historical (x) ROE (%) 17.3 2.7 3.9 22.8
Key points Bumrungrad Hospitals (BH) strategy has been to focus on one single flagship hospital, rather than a network. BH believes it has created a leading position in both the high-end domestic segment and in attracting international patients. Given capacity constraints, the companys focus is on driving revenue intensity by expanding its specialty areas. BH does not view Singapores private hospitals as direct competition as they target different countries and somewhat different segments. What Bumrungrad does
BH operates one of the largest and what it sees as one of most sophisticated hospitals in Southeast Asia. Located in Bangkok, it has a licensed capacity of 538 beds and 4,500 outpatients per day. BH also has a stake in a hospital in the Philippines, a management contract for a public hospital in Abu Dhabi and some clinical research activities.
Net gearing (%) 28.3 Net debt (cash)(USGD) 64m Historical EPS(THB) 1.44 EPS 3-yr CAGR (%) 4.2 EPS 7-yr CAGR (%) 18.9 Historical DPS(THB) 0.85 DPS 3-yr CAGR (%) 4.3 Bangkok Insurance Pcl. -13.17%
Share price performance (THB)

38.0 36.0 34.0 32.0 30.0 28.0 26.0 Nov 09 24.0 Oct 09 Sep 09 Mar 10 May 10 Feb 10 Apr 10 Jul 10 Aug 10 Dec 09 Sep 10 Jan 10 Jun 10
Why we visited Bumrungrad

BH believes it is a leading destination for medical tourists in Southeast Asia. In 2009, BH treated 400,000 international patients from 190 countries. BH believes it is a preferred medical destination for patients seeking complex treatment, especially for oncology and cardiology.
Bumrungrad
Source: Bloomberg
STOCK EXCH OF THAI INDEX (rebased)

1/9/10 Eu Yan Sang OSIM ASEAN hospitals 16/9/10 16/9/10 16/9/10 16/9/10 16/9/10 16/9/10 Raffles Medical Thomson Medical Parkway Holdings Healthway Medical KPJ Healthcare Bangkok Dusit OUTPERFORM OUTPERFORM IN-LINE IN-LINE Non-covered Non-covered OUTPERFORM OUTPERFORM

The shares are valued at 19.4x 2010 consensus earnings according to Bloomberg and offer a prospective yield of 2.7%. The share price has moved from THB 25 to 33.5 and has underperformed the SET by 17% year-to-date.
1/9/10
Read-across to other companies

BH does not view the Singapore hospitals as a competitive threat as they target largely different markets and different price segments.
104

Market positioning as the leading hospital BH believes it is one of the leading hospitals for international patients in the world having treated over 400,000 patients in 2009. As a comparison, according to the latest foreign patient numbers released by the Singapore Tourism Board, Singapore received 348,000 foreign patients in 2007. BH is also the second-largest hospital in Thailand in terms of revenue after Bangkok Dusit Medical. Focus on one flagship hospital in Bangkok The companys focus has been on its flagship hospital asset, the Bumrungrad International Hospital in Bangkok. BH does not own any other hospital in Thailand. The groups focus on Bangkok is due to the higher income profile of its residents. Given that the hospital is currently running at about 70% capacity with 80% at maximum, the group has plans to expand its capacity. Over the next five years, BH aims to increase its outpatient capacity from 4,500 visits per day to 6,000, and inpatient beds from 500 to 600. Focus on revenue intensity for growth With limitations on capacity, BH has focused on driving the revenue intensity of its patients. The group has been adding specialty and sub-specialty services to improve the range of its services. In 2010 alone, BH opened a new womens centre and a new digestive diseases centre. The origins of medical tourism BH first expanded aggressively in medical tourism during the Asian financial crisis in 1997/8. BHs success is reflected in its claim that in 2009, they served over 400,000 international patients from 190 countries. From 2005 to 1Q 2010, international patients as a percentage of its total volume increased from 38% to 45%. (Expatriates living in Thailand are included in international patient numbers and account for about half of the total number of international patients). As a percentage of revenues, the contribution from international patients has increased from 53% in 2005 to 61% in 1Q 10. The group believes that its current mix is ideal and does not want to focus too heavily on international patients as this segment is volatile. International patient market rebounds BH was hurt during the recent political turmoil in Thailand from January to mid-March, its outpatient volume declined by 9% and by a further 19% during mid-March to end-May. But in June, outpatient visits rebounded sharply by 33%. Not competing directly with Singapore BH does not view Singapore as direct competition as they service different countries. BHs leading patient-countries are the UAE, the US and Myanmar. This contrasts with Singapores where an estimated 50% of its foreign patients come from Indonesia. Change in strategy? The group is currently reviewing its strategy and may move away from its current single-asset strategy. It is considering strategies such as establishing a new hospital in Bangkok or expanding into other regions in Thailand. Expanding internationally The group has an international arm, Bumrungrad International (BI), 31.5% of which is owned by BH. BIs other shareholders include Istithmar (19.5%) and Temasek Holdings (19.5%). BIs projects include the Asian Hospital in Philippines (BI owns 56.4%) and Al Mafraq Hospital in Abu Dhabi, UAE. BI does not own the hospital in Abu Dhabi, but only receives a fee for managing it. BI recently expressed its interest to build a hospital in Hong Kong and is awaiting feedback from the Hong Kong government. Fig 161: BHs annual international patient volumes
10,000 8,000 6,000 4,000 2,000 0 2004 2005 2006 Sales revenue
Source: Company
2007 EBITDA
2008
2009
Cash generation improves in 2009 BH recorded positive net cash flow in 2009 after posting significant negative net cash flow in 2007 and 2008. Free cash flow in 2009 was THB873m. However, the company noted that growth in its corporate contracts in the Middle East has boosted its trade receivables, thereby reducing its operating cash flow. Capex With the group focusing on its Bangkok hospital, capex has been stable over the past six years. If it decides to change its strategy (as described in an earlier section), the company stated that its capital requirements may increase. Balance sheet According to the company, about 25% of its trade accounts receivables are overdue by more than 180 days. Its bad debt provision is quite conservative, in its view, with a 13% provision for doubtful debts. This provision is smaller than the amounts due for more than 365 days.
Analysts
Stephen Hui
Magnus Gunn
Pauline Lee
105
Competition
Business segment Healthcare Hospital operators in Thailand Hospital operators in Malaysia Competitor Bangkok Dusit Medical Services PCL Bangkok Chain Hospital Public Co. Ltd KPJ Healthcare Pantai Holdings Bhd Health Management International (HMI) Raffles Medical Group Ltd Parkway Holdings Ltd Thomson Medical Centre Ltd Apollo Hospitals Enterprise Ltd Listed / private Listed (BGH TB) Listed (KH TB) Listed (KPJ MK) Private Listed (HMI SP) Listed (RFMD SP) Listed (PWAY SP) Listed (THOM SP) Listed (APHS IN)
Hospital operators in Singapore
Hospital operators in India

Market share
Fig 163: 25% share of medical tourists to Thailand 2009 Fig 164: 2% of private sector hospital beds in Thailand 2009
Bangkok Dusit Medical 45% Bumrungrad Hospital 25% Others 30%
Company background
Main shareholders Bangkok Insurance Pcl. 13.17% Thai NVDR Co., Ltd. 9.90% Sinsuptawee Asset Management Co., Ltd. 8.66% Management and directors Mr. Chai Sophonpanich-Chairperson Dr. Chanvit Tanphiphat,MD -Vice Chairperson Mrs. Linda Lisahapanya -Managing Director Mr. Curtis John Schroeder Director-Group Chief Executive Officer Board includes seven other directors Corporate/management dealing in company shares Chairperson 1.09% of the shareholding Professor Emeritus Chanvit Tanphiphat, MD 0.07% Clinical Professor Emeritus Dhanit Dheandhanoo, MD 0.02% Others BH plans to expand its facilities over the next five years and increase its current outpatient volume to 6,000 per day and inpatient beds to 600 beds. The capex allocated for this capacity expansion is THB1,601m.
Source: Company
Head office and key assets 33 Soi 3 (Nana Nua) Sukhumvit Road, Klongtoey Nua Sub District, Wattana District, Bangkok (Tel : +66-2 667 1000) 1,174 doctors in 60 sub-specialties In 2009, BH was recognised as the most desirable healthcare th employer in Thailand and ranked 6 among the most admired Thai companies by a Wall Street Journal Asia survey in 2009 Recent M&A/disposals/failed business The sale of the 51% stake in Asia Renal Care (Thailand) Co Ltd. Latest results highlights Strong revenues from hospital operations, driven mainly by the international segment were offset by the political unrest of 2Q10, resulting in a 7% YoY increase in 1H10 revenue to THB4.7bn. EBITDA margin declined 230bp YoY to 21.5% in 2Q10, and brought down the 1H10 EBITDA margin to 23.8% (cf.25.1% in1H09). Losses resulting from the sale of the investment in the Asia Renal Care Group resulted in a 42% YoY decline in net profit to THB288m for 2Q10. For 1H10, net profit declined by 14% to THB537m (THB600m excluding extraordinary items).
106

Fig 166: International patients contribute 55% of revenue
100% 80% 60% 40% 20% 0% 2004 2005 2006 Thai patients 2007 International patients 2008 2009
BHs revenue from the hospital segment, which accounted for c.97% of total revenue in 2009, grew at a 200409 CAGR of 9.8%, reaching THB9bn in 2009. The company said that international patients remain the main contributor to its top line, accounting for as much as 55% of revenue in 2009 (c.THB 4.7bn), while domestic patients, contributed c.THB 4.0bn i.e. about 45% of revenue.
Source: Company
Fig 167: Volume volatility in 2010 due to political instability

No. of visits/day 3000 2900 2800 2700 2600 2500 2400 2300 2200 2100 2000 1 Jan- 11 March (Before protests) 12 Mar- 2 Apr (Protest at Panfah) 3 Apr- 31 May (Protest at Rajprasong) 1Jun- 30 Jun (After protest) No. of in-patients 400 380 360 340 320 300 280 260 240 220 200
BH said its outpatient numbers took the hardest hit during the Rajprasong protests (3 April31 May), with outpatient visits per day declining by 26% from pre-protest levels of c.2,111 visits per day. Outpatient visits have since recovered, but have yet to return to pre-riot levels. BHs inpatient volumes also declined 16% during protests and continued to remain weak even after the protests. Inpatient volumes for June stood at c.305, down 15% from the preprotest levels.
Outpatient visits trend (OPD)
In patient Volume (ADC) Trend
Source: Company
Fig 168: No. of medical tourists to Thailand is growing

Medical tourists 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 2005 2006
Medical Tourists
14% 12% 10% 8% 6% 4% 2% 0% 2007 2008 2009E
BH believes that the growing number of medical tourists has been the key driver for its International patient revenue, with the number of medical tourists to BH growing at a 20052009 CAGR of 7.02% This is higher than the 5% CAGR growth in tourists to the country. The proportion of medical tourists as a percentage of total tourists to Thailand is also on the rise.
Medical tourists as a % of total tourists
Source: Company
Fig 169: Outpatient capacity per day and inpatient capacity

Inpatient capacityOpen beds 700 600 6000 500 400 300 200 4500 100 0 2009 2010E 2011E 2012E 2013E 2014E Max Capacity 4000 5500 Outpatient vis it capacity per day 6500
5000
BH expects its inpatient capacity to remain relatively stable over 201014, at around 484 beds, up 5.7% from 458 beds in 2009. However, BH expects more aggressive expansion in its outpatient capacity, estimating that its outpatient capacity will increase at a 200914 CAGR of 5.9% to 6,000 beds.
Inpatient capacity- Open beds
Outpatient visit capacity per day
Source: Company
107

Growth
60
Income statement (THBm)

Year end: Dec Sales revenue Gross profit EBITDA Depreciation & Amortisation EBIT Net interest (expense) / income Associates Others Income tax expense PAT Minorities Net income 2004 5,809 2,144 1,369 -242 1,127 -119 0 64 -129 879 8 935 2005 6,804 2,658 1,660 -292 1,369 -107 3 0 -218 1,047 -6 1,053 2006 7,888 3,113 1,954 -342 1,612 -110 8 0 -432 1,077 -19 1,096 2007 8,559 3,439 1,712 -408 1,305 -111 854 0 -445 1,603 -2 1,605 2008 8,882 3,557 2,161 -459 1,702 -114 43 0 -440 1,191 0 1,191 2009 9,338 3,785 2,273 -539 1,734 -91 47 0 -444 1,246 0 1,246
30 % 0 2005 -30 Sales growth Earnings growth 2006 2007 2008 2009
Margins
EBIT and Net profit growth
30 25 20
%
Cash flow (THBm)

Year end: Dec Operating profit Depreciation & Amortisation Working capital Others Operational cash flow Tax paid After-tax operational cash flow Capex Net interest Debt Dividends Others Net flow 2004 1,127 242 8 346 1,239 -78 1,161 -508 -127 -82 -219 -731 -507 2005 1,369 292 149 287 1,513 -73 1,440 -653 -106 -329 -511 -44 -203 2006 1,612 342 -345 213 1,137 -442 695 -690 -110 -29 -548 998 318 2007 1,305 408 -224 1,223 1,896 -446 1,451 -573 -110 21 -621 -30 138 2008 1,702 459 106 969 2,318 -440 1,877 -1,723 -115 113 -583 266 -165 2009 1,734 539 -52 1,073 2,216 -430 1,786 -834 -78 -265 -583 -22 2
15 10 2005
2006
2007
2008
2009
EBIT margin
Net profit margin
Cash flow
2,000 1,500 TH B m 1,000 500 0 2004 2005 2006
Op. cash flow
Balance sheet (THBm)

Year end: Dec Tangible assets Intangible assets Associates/Investments/Others Stocks Debtors Cash and liquid assets Total assets Current creditors Current borrowings Long-term borrowings Others Total liabilities Shareholders' funds Minority interests Equity Total capital employed 2004 2,802 476 751 104 235 653 5,021 461 329 1,779 392 2,961 2,060 0 2,060 5,021 2005 3,270 624 801 150 339 544 5,728 555 329 1,451 697 3,032 2,615 81 2,696 5,728 2006 3,752 732 593 166 525 854 6,623 580 329 1,422 664 2,994 3,284 344 3,629 6,623 2007 4,145 349 1,622 203 590 550 7,459 651 437 1,335 687 3,110 4,349 0 4,349 7,459 2008 5,374 310 1,353 188 494 385 8,104 598 769 1,116 756 3,239 4,865 0 4,865 8,104 2009 5,667 286 1,371 199 658 387 8,567 564 190 1,430 911 3,094 5,473 0 5,473 8,567
2007
Capex
2008
2009
Balance sheet
80 60 % 40 20 0 2004 2005 2006 2007 2008 2009
Returns
ROE & ROCE
100 80 60
Key data & ratios

Year end: Dec EPS (THB) Chg % DPS (THB) CFPS (THB) BVPS (THB) W.Avg Shares ROE (%) Post-tax ROCE (%) Capex/Sales (%) Capex/Depreciation (%) Net debt/equity (%) Total debt/Total capital (%) Net interest cover (x)
Source: Company
40 20 0 2004
2005
2006 ROE
2007 ROCE
2008
2009
2004 1.01 n/a 0.7 1.20 2.39 863 45% 25% 9% 238% 71% 51% 9..5
2005 1.21 20% 0.75 1.54 3.01 867 40% 27% 10% 280% 46% 40% 12.8
2006 1.26 4% 0.75 0.68 3.79 867 33% 23% 9% 249% 25% 33% 14.7
2007 1.85 47% 0.80 1.55 5.01 867 37% 29% 7% 174% 28% 29% 11.8
2008 1.37 -26% 0.80 2.03 5.61 867 24% 20% 19% 410% 31% 28% 14.9
2009 1.44 5% 0.85 1.97 6.31 867 23% 19% 9% 168% 23% 23% 19.1
Source: Company
108
Bangkok Dusit
Analysts
NOT RATED
Magnus Gunn
Stephen Hui
Stephen.Hui@sc.com + 65 6307 1513
Bloomberg code: Mkt cap (USGD) 12m range (THB) 3m value traded (USGD) No. of shares (m) Est. free float (%) Established Listed Secondary placement Auditors, since Year-end Major shareholder
THB37.00
BGH TB 1211.3m 23.3-35.75 1.2m 1214 54.15 1969 1991 N/A E&Y, 2005 Dec PER historical (x) Yield historical (%) P/B historical (x) ROE (%) 17.5 2.41 2.14 12
Key points Bangkok Dusits (BDMS) model has been to build the largest network of hospitals in Thailand to capture rising domestic incomes and medical tourists. The group has stated further ambitions and capacity to grow both in the domestic and foreign patient markets. BDMS has substantial exposure to medical tourism, but limited exposure to Indonesia, which is the primary overseas market for the Singapore hospitals. BDMS has substantial operational leverage to an industry upturn given its cost structure. What Bangkok Dusit does
According to the company, it is the largest private hospital group in Thailand. The group owns 16 hospitals in Thailand and two in Cambodia, operating under four brands namely, Bangkok Hospital, Samitivej Hospital, BNH Hospital and Royal International Hospital.
Net gearing (%) 38 Net debt (cash) (USGD) 326m Historical EPS (THB) 1.42 EPS 3-yr CAGR (%) 8 EPS 5-yr CAGR (%) 21 Historical DPS (THB) 0.70 DPS 3-yr CAGR (%) 12 Prasarttong Osoth 12.68%
Share price performance (THB)

38.0 36.0 34.0 32.0 30.0 28.0 26.0 24.0 22.0 Oct 09 Sep 09
Why we visited BDMS

BDMS believes it has a long-established and good reputation for medical tourism and a proven model that works. The purpose of our visit was to assess whether BDMS competes directly with Singapore for foreign patients.
Nov 09
Mar 10
May 10
Feb 10
Apr 10
Jul 10
Aug 10
Bangkok Dusit
Source: Bloomberg
Dec 09
STOCK EXCH OF THAI INDEX (rebased)

The shares trade at 20x 2010 consensus earnings and offer a prospective yield of 2.6%. The share price has moved from THB 23.3 to 35.75 and has outperformed the SET by 3.8% year to date.
1/9/10 1/9/10 Eu Yan Sang OSIM ASEAN hospitals OUTPERFORM OUTPERFORM
Read-across to other companies

BDMS does not see itself as direct competitor to the Singapore private hospital companies, as they target different countries. However, for the wider international market, BDMS believes it has a strong competitive position given a combination of an established reputation for quality healthcare and the attractions of Thailand as a tourist destination for family and convalescence. In addition, it sees the large domestic market providing some insulation against the fluctuations in the overall market. BDMS alone recorded 730,000 foreign patient visits in 2009, almost double the number reported by Singapore as a whole in 2007, according to the last reported figure from the Singapore Tourism Board.
16/9/10 16/9/10 16/9/10 16/9/10 16/9/10 16/9/10
Raffles Medical Thomson Medical Parkway Holdings Healthway Medical KPJ Healthcare Bumrungrad
OUTPERFORM OUTPERFORM IN-LINE IN-LINE Non-covered Non-covered
109
Sep 10
Jan 10
Jun 10

Strong sector growth fundamentals Like much of the rest of the world, Thailand is facing an aging population. The percentage of population older than 60 years is expected to increase from 9% in 2000 to 18% by 2020 according to NESDB. Thailand offers a universal healthcare coverage without co-payment. Market leadership BDMS states it is the largest private hospital operator in Thailand by capacity with 18 hospitals and a total of 3,186 beds, as well as by revenue with 2009 sales of USGD643m. Fig 170: Revenue has grown at four-fold since 2004
THB m 25,000 20,000 15,000 10,000 5,000 2004 2005 2006
Revenue
Does not compete directly with Singapore BDMS top five international patient revenues are from Japan (3.9%), UK (3.4%), UAE (3%), the US (2.6%) and Germany (2.6%). The UAE and Germany are mainly medical tourists, while the rest are mainly expatriates living in Thailand. BDMS states it has few patients from Indonesia as there are no direct flights between the two countries, but its volumes of foreign patients are substantial. BDMS advised in 2009 that it had 1,987 outpatient visits by international patients per day. This translates to over 730,000 foreign patient visits in 2009, ie. almost double Singapores last reported foreign patient arrival in 2007. Room for growth for foreign and domestic patients International patients accounted for 38% of revenue in 1H 2010 compared to BHs stated 61% in 1Q 2010. But the share of foreign patient revenue has increased from 26% in 2005 to 38% in 2010. Management believes this share could increase to 50%, but does not want to increase the share further as this segment is subject to volatility. Occupancy rate at the groups hospitals was only 61% in 1H10 compared to BHs stated 70%. Capital intensive Capex as a percentage of sales slowed to 7% in 2009 from a high of 26% in 2005, while gearing fell from a peak of 1.1x in 2005, to 0.7x at 1H10. Fig 171: BDMS balance sheet
THB m 25,000 20,000 15,000 10,000 5,000 2004 2005 2006
Revenue
2007
EBITDA
2008
2009
Source: Company
Aggressive growth strategy In contrast to Bumrungrad (BH Non-covered, BH TB/THB34) which focuses on one flagship hospital, BDMS has expanded aggressively. The group has grown from one hospital in 1969 to the current 18 hospitals. Its Bangkok Hospital brand has grown from a 100 bed-facility in 1972 to the current 12 hospitals. And in 2004, the group also acquired the Samitivej Hospital chain with three hospitals and BNH Hospital in 2005 and Royal Ankor International Hospital in Cambodia in 2007. According to the company, it has a 7% market share of total beds in Thailand. Going forward, the group continues to see opportunities for both organic growth and M&A. Different philosophy from BH The reason BDMS has chosen to expand its network aggressively vis--vis to BH is BDMS aims to capture the increasing domestic medical spending as incomes rise. Thailands urbanisation rate is still low at an estimated 34% in 2010 (Thailand National Statistical Office). With Thailands public healthcare system strained by overutilisation, there has been an increasing shift towards private healthcare. As an example, the percentage of Thais in urban areas choosing private healthcare has increased from 24% in 2001 to 34.5% in 2006 according to the National Statistical Office.
2007
EBITDA
2008
2009
Source: Company
Operational leverage, margins and returns BDMS stated it has high operational leverage to the industry recovery. Its stated depreciation expenses at 10% of sales are double the level stated by BH. Stated margins are lower than BHs, in part to depreciation from its newer hospitals but also its hospitals outside Bangkok target lower income Thais. .
Analysts
Stephen Hui
110
Magnus Gunn
Pauline Lee
Competition
Business segment Healthcare Operators in Thailand Operators in Malaysia Competitor Bumrungrad Hospital Public Co Ltd Bangkok Chain Hospital Public Co Ltd KPJ Healthcare Pantai Holdings Bhd Health Management International (HMI) Raffles Medical Group Ltd Parkway Holdings Ltd Thomson Medical Centre Ltd Apollo Hospitals Enterprise Ltd Listed / private Listed (BH TB) Listed (KH TB) Listed (KPJ MK) Private Listed (HMI SP) Listed (RFMD SP) Listed (PWAY SP) Listed (THOM SP) Listed (APHS IN)
Operators in Singapore
Operators in India
Market share
Fig 173: 45% share of medical tourists to Thailand 2009 Fig 174: 7% of private sector hospital beds in Thailand 2009
Company background
Main shareholders Group CEO/President, Prasert Prasartthong-Osoth, MD and spouse 13% Satit Viddayakorn and spouse 11% Free 76% Management and directors Chairman Arun Pausawasdi Group CEO/President Prasert Prasartthong-Osoth, MD Twelve other directors Significant outside business interests Chairman Arun Pausawasdi Group CEO and President Prasert Prasartthong-Osoth, MD Corporate/management dealing in company shares Chairman Arun Pausawasdi 0.03% Group CEO/President Prasert Prasartthong-Osoth, MD 13% Others BDMS expects to complete two 60-bed hospitals by 2H 2011 one in Hua Hin and the other in Khao Yai, both of which are under construction.
Source: Company
Head office and key assets Company address: 2 Soi Soonvijai 7, New Phetchburi Road, Bangkapi, Huay Kwang, Bangkok 10320. Website: http://www.bangkokhospital.com Telephone: +62-2 318 0066, +62-2 310 3000 Headquarters in Bangkok, 18 hospitals in Thailand and Cambodia under four brands as at 1Q 2010. BDMS had 2,384 employees and 802 physicians as at end-2009. JCI accreditation received for seven hospitals in addition to Hospital Accreditation (Thailand) status. Recent M&A/disposals/failed business Acquired 16.8% in Krunghon pcl (KDP) for a consideration of THB83.3m in 1Q 2010. BDMS acquired 100% in Bangkok Hospital Khao Yai Co Ltd in 2009. Latest results highlights Utilisation of beds in 1Q 2010 was 64%, up from 61% in 2009. Highest patient revenue of THB5,997m was recorded in 1Q10 (13% YoY) of which in patient contributed 56%. Net profit increased to THB 764m (66% YoY); the company attributed this to cost savings and growth in patients.
111

Fig 176: Number of beds and bed utilisation
Number of beds 3500 3000 2500 2000 1500 1000 500 0 2007 2008 Utilisation of beds 2009 Utilisation rate 1Q2010 70% 60% 50% 40% 30% 20% 10% 0%
BDMS increased its bed utilisation rate during 200709 to 61%, and further improved to 64% in 1Q 2010, despite a decline in the average length of stay at its hospitals.
Source: Company
Fig 177: Trend in patient revenue

THBm 6400 6000 5600 5200 4800 4400 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10
BDMS revenue from hospital operations is continuously increasing, although there are quarterly fluctuations in line with the tourist season. Despite the economic slowdown and political instability during 2009 in Thailand, patient revenue increased marginally by 2%. In addition, BDMS recorded 7% QoQ and 13% YoY patient revenue growth in 1Q 2010.
Source: Company
Fig 178: Revenue mix of BDMS

100% 80% 60% 40% 20% 0% 2004 2005 IPD 2006 2007 OPD 2008 Others 2009 1Q10
BDMS revenue breakdown between in-patient and outpatient services have remained relatively stable. Inpatients accounted for 54% of revenues in 2005 and the ratio remained at 54% in 1H 2010.
Source: Company
Fig 179: Patient revenue by nationality

100% 80% 60% 40% 20% 0% 2005 2006 2007 Thai patients 2008 2009 1Q2010 International patients
BDMS notes that domestic patients still contribute the majority of its revenue, although this was down by a 5% CAGR 200409 and down by 20% YoY in 1Q 2010. The company attributed this to the increasing proportion of medical tourists in the patient mix.
Source: Company
112

Growth
120 90 60 % 30 0 2005 -30 2006 2007 Sales growth 2008 Earnings growth 2009
Income statement (THBm)

Year end: Dec Sales revenue Gross profit EBITDA Depreciation & Amortisation EBIT Net interest (expense) / income Associates Others Income tax expense PAT Minorities Net income 2004 5,413 2,414 1,006 -367 639 -122 223 0 -212 528 -95 623 2005 10,565 4,630 2,176 -992 1,184 -276 159 0 -208 859 27 832 2006 15,946 7,274 3,700 -1,419 2,281 -546 35 0 -386 1,384 62 1,323 2007 18,879 8,691 4,446 -1,946 2,501 -688 7 0 -527 1,292 48 1,244 2008 21,652 9,603 5,042 -2,170 2,872 -647 180 0 -689 1,717 55 1,662 2009 21,974 9,520 5,048 -2,277 2,771 -641 202 0 -547 1,785 60 1,725
Margins
EBIT and Net profit margin
16 14 12
%
Cash flow (THBm)

Year end: Dec Operating profit Depreciation & Amortisation Working capital Others Operational cash flow Tax paid After-tax operational cash flow Capex Net interest Debt Dividends Others Net flow 2004 639 367 229 218 1,453 -171 1,282 -1,504 -123 128 -300 1,031 513 2005 1,184 992 -17 130 2,289 -233 2,057 -2,728 -285 743 -582 285 -510 2006 2,281 1,419 -345 287 3,642 -514 3,128 -3,650 -439 3,796 -592 -1,672 572 2007 2,501 1,946 117 -79 4,484 -530 3,954 -2,998 -691 178 -618 38 -137 2008 2,872 2,170 71 -66 5,047 -644 4,403 -1,976 -557 228 -613 -1,202 283 2009 2,771 2,277 48 212 5,308 -595 4,712 -1,496 -542 1,151 -756 -2,429 640
10 8 6 4 2005 2006 2007 2008

EBIT margin
2009
Net profit margin
Cash flow
5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2004 2005 2006 2007 2008 Capex 2009
TH B m
Balance sheet (THBm)

Year end: Dec Tangible assets Intangible assets Associates/Investments/Others Stocks Debtors Cash and liquid assets Total assets Current creditors Current borrowings Long-term borrowings Others Total liabilities Shareholders' funds Minority interests Equity Total capital employed 2004 10,755 288 1,952 115 450 1,039 14,598 713 520 4,464 1,014 6,711 7,525 362 7,887 14,598 2005 13,853 737 1,830 161 567 529 17,677 833 1,142 5,995 1,290 9,260 7,890 528 8,418 17,677 2006 18,303 1,132 2,969 201 1,226 1,101 24,934 1,110 1,177 10,550 2,113 14,949 9,477 507 9,984 24,934 2007 19,769 1,106 2,669 212 1,511 964 26,232 1,108 1,902 9,208 2,304 14,522 11,114 596 11,710 26,232 2008 19,752 1,377 3,731 225 1,600 1,246 27,931 1,613 896 10,293 2,141 14,943 12,413 575 12,988 27,931 2009 19,602 1,467 5,573 255 1,574 1,886 30,359 1,422 395 11,687 2,108 15,612 14,151 596 14,747 30,359
After-tax operational cash flow
Balance sheet
120 100 80 % 60 40 20 0 2004 2005 2006 2007 2008 2009
Key data & ratios

Year end: Dec EPS (THB) Chg % DPS (THB) CFPS (THB) BVPS (THB) W.Avg Shares ROE (%) Post-tax ROCE (%) Capex/Sales (%) Capex/Depreciation (%) Net debt/equity (%) Total debt/Total capital (%) Net interest cover (x)
Source: Company
Returns
ROE & ROCE
15
10
2004
-5
2005
2006
2007
2008
2009
ROE
ROCE
2004 0.71 n/a 0.50 1.32 8.60 875 3% 8% 28% 410% 50% 39% 5.3
2005 0.72 1.41% 0.50 1.52 6.78 1,163 -2% 9% 26% 275% 79% 46% 4.3
2006 1.12 55.56% 0.50 2.28 8.05 1,177 14% 9% 23% 257% 60% 42% 4.2
2007 1.04 -7.14% 0.50 2.73 9.29 1,196 11% 8% 16% 154% 57% 39% 3.6
2008 1.37 31.73% 0.60 3.17 10.22 1,214 13% 9% 9% 91% 20% 23% 4.4
2009 1.42 3.65% 0.70 3.42 11.65 1,214 12% 9% 7% 66% 8% 17% 4.3
Source: Company
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Disclosures appendix
Global disclaimer
The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore branch and/or one or more of its affiliates (together with its group of companies,SCB) and the research analyst(s) named in this report. SCB makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information contained or referred to in the document.
DISCLOSURES INCLUDING THOSE REQUIRED BY THE UNITED STATES

The research analysts responsible for the content of this research report certify that
The view expressed and attributed to the research analyst or Analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and No part of his or her compensation and other benefits was, is or will be directly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. Our ratings are under constant review.
Additional information with respect to any securities referred to herein will be available upon request. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES. Disclosures Appendix Where disclosure date appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the date of the report, unless otherwise stated.
Company Raffles Medical Group As at the disclosure date, the following applies:
Raffles Medical Group - current rating is: OUTPERFORM
2.2 2.1 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 Aug 09
Sep 09
Oct 09
Nov 09
Dec 09
Jan 10
Feb 10
Mar 10
Apr 10
May 10
Jun 10
Jul 10
Aug 10
Sep 10
Source: FactSet prices / SCB ratings and fair values
Company Thomson Medical Centre As at the disclosure date, the following applies:
Thomson Medical Centre - current rating is: OUTPERFORM
0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 Aug 09
Sep 09
Oct 09
Nov 09
Dec 09
Jan 10
Feb 10
Mar 10
Apr 10
May 10
Jun 10
Jul 10
Aug 10
Sep 10
116
Company Parkway Holdings As at the disclosure date, the following applies:
Parkway Holdings - current rating is: IN-LINE
4.0 3.5 3.0 2.5 2.0 1.5 Jul 09
Aug 09
Sep 09
Oct 09
Nov 09
Dec 09
Jan 10
Feb 10
Mar 10
Apr 10
May 10
Jun 10
Jul 10
Aug 10
Company Healthway Medical Corp. Ltd. As at the disclosure date, the following applies:
Healthway Medical Corp. Ltd. - current rating is: IN-LINE
0.21 0.20 0.19 0.18 0.17 0.16 0.15 0.14 0.13 0.12 0.11 0.10 Aug 09
Sep 09
Oct 09
Nov 09
Dec 09
Jan 10
Feb 10
Mar 10
Apr 10
May 10
Jun 10
Jul 10
Aug 10
Sep 10
Company KPJ Healthcare As at the disclosure date, the following applies:
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Sep 09 Oct 09 Nov 09 Dec 09
C ur r ent r at ing is: N OT R A T ED
Jan 10
Feb 10
M ar 10
Apr 10
M ay 10
Jun 10
Jul 10
Aug 10
Sep 10
Source: Bloomberg
117
Company Bumrungrad As at the disclosure date, the following applies:
35.0 32.0 29.0 26.0 23.0 20.0 Sep 09
C ur r ent r at i ng i s: N O T R A T ED
Oct 09
Nov 09
Dec 09
Jan 10
Feb 10
M ar 10
Apr 10
M ay 10
Jun 10
Jul 10
Aug 10
Sep 10
Source: Bloomberg
Company Bangkok Dusit As at the disclosure date, the following applies:
41.0 38.0 35.0 32.0 29.0 26.0 23.0 20.0 Sep 09 Oct 09 Nov 09 Dec 09
C ur r ent r at ing is: N OT R A T ED
Jan 10
Feb 10
M ar 10
Apr 10
M ay 10
Jun 10
Jul 10
Aug 10
Sep 10
Source: Bloomberg
Company Q&M Dental Group As at the disclosure date, the following applies:
0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Nov 09 Dec 09 Jan 10
Feb 10
M ar 10
Apr 10
M ay 10
Jun 10
Jul 10
Aug 10
Source: Bloomberg
Company Fortis Healthcare As at the disclosure date, the following applies:
0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Sep 09 Oct 09 Nov 09
C ur r ent r at ing i s: N OT R A T ED
Dec 09
Jan 10
Feb 10
M ar 10
Apr 10
M ay 10
Jun 10
Jul 10
Aug 10
Sep 10
Source: Bloomberg
118
Company Parkway Life REIT As at the disclosure date, the following applies:
1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 Sep 09 Oct 09 Nov 09
Dec 09
Jan 10
Feb 10
M ar 10
Apr 10
M ay 10
Jun 10
Jul 10
Aug 10
Sep 10
Source: Bloomberg
Recommendation Distribution and Investment Banking Relationships

% of covered companies currently assigned this rating % of companies assigned this rating with which SCB has provided investment banking services over the past 12 months
OUTPERFORM IN-LINE UNDERPERFORM
55.8% 28.8% 15.5%
11.9% 7.7% 5.7%
Research Recommendation Terminology OUTPERFORM (OP) IN-LINE (IL) Definitions The total return on the security is expected to outperform the relevant market index by 5% or more over the next six months The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more over the next six months
UNDERPERFORM (UP) The total return on the security is expected to underperform the relevant market index by 5% or more over the next six months
119
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Hong Kong: This document is being distributed in Hong Kong by, and is attributable to, Standard Chartered Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority Singapore: This document is being distributed in Singapore by Standard Chartered Bank Singapore branch only to accredited investors, expert investors or institutional investors, as defined in the Securities and Futures Act, Chapter 289 of Singapore. Recipients in Singapore should contact Standard Chartered Bank Singapore branch in relation to any matters arising from, or in connection with, this document. United States: Except for any documents relating to foreign exchange, FX or global FX, Rates or Commodities, distribution of this document in the United States or to US persons is intended to be solely to major institutional investors as defined in Rule 15a-6(a)(2) under the US Securities Act of 1934. 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SCB Singapore Healthcare Initiation 2010-09-16

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Asia Pacific | Emerging Companies Health Care

Mkt cap (US$mn)

PER (x) 2010E 2011E

PBR (x) 2010E 2011E

Div yield (%) 2010E 2011E

Equity Research Singapore Healthcare | 16 September 2010

Equity Research Singapore Healthcare | 16 September 2010

Equity Research Singapore Healthcare | 16 September 2010

Investment summary and valuations

Base case sector growth of 7%

Private sectorshare gain

Growth in foreign patient market expected to return

Equity Research Singapore Healthcare | 16 September 2010

Fig 2: Foreign patient volumes

Singapore Foreign patients

A market with strong segmentation

Sector valuation and stock picks

expansion of specialist services will give Raffles operating leverage

Thomsons leadership in a niche sector and valuations are attractive

Equity Research Singapore Healthcare | 16 September 2010

Parkway is a strong franchise but valuations are high

Healthway has great potential, but wait for proof of execution

Fig 3: Valuation table

2009-2012E earnings CAGR

LCY 2.50 1.10 4.00 0.20

OUTPERFORM OUTPERFORM IN-LINE IN-LINE

2.13 0.90 3.85 0.17

3.45 37.75 32.75

n.a. n.a. n.a.

n.a. n.a. n.a.

617 20.1 1,501 28.0 793 20.9 23.0

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

Equity Research Singapore Healthcare | 16 September 2010

Demographics drive domestic demand

foreigners needed to drive economic growth

Equity Research Singapore Healthcare | 16 September 2010

government indicating awareness, not closing the door

population should reach 6mn by 2020

Total live births

Resident total fertility rate

Equity Research Singapore Healthcare | 16 September 2010

percentage of population over 65 should reach 14% by 2020

Compounded growth in admissions

Equity Research Singapore Healthcare | 16 September 2010

Fig 10: Admissions forecast

Equity Research Singapore Healthcare | 16 September 2010

Private sector should gain market share

public sector hospitals are 71 to 76% cheaper

Surgical specialties 2,173 7,596 71.4%

Medical specialties 1,538 6,329 75.7%

government heavily subsidises class C and class B2 wards

more people are choosing A class wards

Equity Research Singapore Healthcare | 16 September 2010

Legend: segments listed clockwise from top

Legend: segments listed clockwise from top

Many Singaporeans can afford private healthcare

Equity Research Singapore Healthcare | 16 September 2010

Fig 15: Percentage of residents with Medishield 2008

Non Medishield Holders 15.6%

Non MediShield Private 50.9%

MediShield policy holders 84.4%

MediShield Policyholders with Private Integrated Shield plans 49.1%

Legend: segments listed clockwise from top