SCB Singapore Healthcare Initiation 2010-09-16

All rights reserved. Standard Chartered Bank 2010

IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPENDIX. http://research.standardchartered.com

Stephen Hui [email protected] +65 6307 1513

Magnus Gunn [email protected] +65 6307 1520

Pauline Lee [email protected] +65 6307 1512

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 ofits specialist services. We like Thomson’s specialty leadership in birth deliveries and its attractive valuations.

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

BB code Rec Mkt cap Ccy Price FV Up/ PER (x) PBR (x) Div yield (%)

(US$mn) Down 2010E 2011E 2010E 2011E 2010E 2011ERaffles Medical RFMD SP OP 828.2 SGD 2.13 2.50 17% 25.0 21.0 4.0 3.6 1.6 1.9Thomson Medical THOM SP OP 195.6 SGD 0.90 1.10 22% 16.8 15.1 2.2 2.0 2.4 2.6Parkway PWAY SP IL 3,282.8 SGD 3.85 4.00 4% 30.7 26.8 2.7 2.5 0.4 0.4Healthway HMED SP IL 237.0 SGD 0.17 0.2 18% 79.6 30.8 2.1 2.0 0.3 0.7KPJ Healthcare KPJ MK NR 617.0 MYR 3.45 N/A N/A 16.0 14.8 1.7 1.6 3.2 3.4Bangkok Dusit Medical BGH TB NR 1,500.7 THB 37.75 N/A N/A 23.2 19.5 3.0 2.7 2.2 2.7Bumrungrad Hospital BH TB NR 793.4 THB 32.75 N/A N/A 20.6 18.2 4.1 3.7 2.6 2.9Note: OP = OUTPERFORM, UP = UNDERPERFORM, IL = IN-LINE, NR = NOT RATED Source: Company, Bloomberg, Standard Chartered Research estimates

Equity Research – Singapore Healthcare | 16 September 2010

2

Contents

Growth quantified… 3

Investment summary and valuations 4

Demographics drive domestic demand 7

Private sector should gain market share 11

Revenue intensification will be strongest driver 16

Sector should grow at 7% CAGR until 2020E 18

Foreign patients market to grow 19

Clear segmentation reduces competition 24

Company updates

Raffles Medical 29

Thomson Medical 46

Parkway Holdings 63

Healthway Medical 84

KPJ Healthcare 99

Bumrungrad 104

Bangkok Dusit 109

Disclosures appendix 116


3

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 Thomson’s specialty leadership in birth deliveries and its attractive valuations. We downgrade Parkway from OUTPERFORM to IN-LINE to reflect the stock’s current high valuations. Healthway is expanding aggressively and has strong potential, in our view, but given recent staffing issues we will await further execution before taking a more positive view.


4

Investment summary and valuations 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 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

Revenue intensification

Private sectorshare gain

Population

Aging population

2 %

1.4%

0.4%

3%

7%Sector growth



Population

Aging population

2 %2 %

1.4%1.4%

0.4%0.4%

3%3%

7%

Source: Standard Chartered Research estimates

Growth in foreign patient market expected to return

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

Singapore healthcare stocks deserve to trade at a premium

we expect demographics, a shift towards private healthcare and a rise of revenue intensity to drive sector growth of 7%

foreign patient volumes should grow with the economy of source countries


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Fig 2: Foreign patient volumes

0

100,000

200,000

300,000

400,000

500,000

600,000

2002 2004 2005 2006 2007 2008 2009 2010E

For

eign

pat

ient

s

Singapore Foreign patients

Source: Singapore Tourism Board, Standard Chartered Research estimates

A market with strong segmentation

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

Sector valuation and stock picks

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

Our fair value of S$2.5 for Raffles offers potential upside of 17%. The stock is trading on 21x 2011E and our fair value is based on a PER target multiple of 25x 2011E. Raffles’ previous peak valuation was in January 2008 at a forward PER of 25x. Our DCF valuation results in a fair value closer to S$2.8. We like Raffles for its robust and defensive business model and its operating leverage through the expansion of its specialist services. In 2009, Raffles’ hospital business (hospital and specialist services) posted an operating margin of 26% compared with 8% for its primary services. As the group continues to expand its specialist services, we expect continued margin expansion.

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

market segmentation reduces competition

expansion of specialist services will give Raffles operating leverage

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


6

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

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

Fig 3: Valuation table 2009-2012E

Share price Fair Upside/

Market cap PER PER PER earnings PB PB

Rating Current value (Downside) Current (x) (x) (x) CAGR (x) (x)Div.

Yield LCY LCY % USD m 2009 2010E 2011E 2009 2010E 2009

Coverage stocks

Raffles Medical (RFMD SP, S$) OUTPERFORM 2.13 2.50 17% 828 29.5 25.0 21.0 18% 4.4 4.0 0.0%

Thomson Medical (THOM SP, S$) OUTPERFORM 0.90 1.10 22% 196 20.5 16.8 15.1 14% 2.4 2.2 2.0%

Parkway (PWAY SP, S$) IN-LINE 3.85 4.00 4% 3,283 36.7 30.7 26.8 9%* 3.0 2.7 0.3%

Healthway (HMED SP, S$) IN-LINE 0.17 0.20 18% 237 15.2 79.6 30.8 -3% 1.6 1.5 1.4%

Average 25.5 38.0 23.4 2.8 2.6

Non-covered stocks

KPJ Healthcare (KPJ MK, MYR) Non-covered 3.45 n.a. n.a. 617 20.1 16.0 14.9 n.a. 3.2 1.7 2.4%

Bangkok Dusit Medical (BGH TB, THB) Non-covered 37.75 n.a. n.a. 1,501 28.0 23.2 18.2 n.a. 3.4 3.0 2.0%

Bumrungrad Hospital (BH TB, THB) Non-covered 32.75 n.a. n.a. 793 20.9 20.6 17.4 n.a. 4.6 4.1 2.5%

Average 23.0 19.9 16.8 3.7 2.9 2.3%* After factoring in potential loss for Parkway Novena in 2012. Source: Bloomberg, Standard Chartered Research estimates

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

Parkway is a strong franchise but valuations are high

Healthway has great potential, but wait for proof of execution


7

Demographics drive domestic demand

Growing population

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

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

86.1%74.1% 73.4% 72.2% 70.6% 68.3% 65.4% 64.2%

3.7%7.1% 8.5% 9.1% 9.5% 9.8% 9.9% 10.7%

10.2% 18.7% 18.1% 18.7% 19.9% 21.9% 24.7% 25.1%

0%

20%

40%

60%

80%

100%

1990 2000 2004 2005 2006 2007 2008 2009

Singapore citizens Singapore PR Non-residents

Source: Department of Statistics- Singapore

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

Fig 5: Support ratio

10.2 9.9 9.7 9.4 9.3 9.1 8.9 8.7 8.5 8.3

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Sup

port

rat

io

Support ratio

Source: Global Demographics Limited

strong growth in past nine years from inflow of foreigners

foreigners needed to drive economic growth


8

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

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

Fig 6: Singapore population growth

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

F

2011

F

2012

F

2013

F

2014

F

2015

F

2016

F

2017

F

2018

F

2019

F

2020

F

Pop

ulat

ion

('000

s)

1%

2%

3%

4%

Grow

th

Total population Grow th

Source: Global Demographics Limited, Standard Chartered Research

Aging population

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

Fig 7: Resident total fertility rate and total live births

0

10,000

20,000

30,000

40,000

50,000

60,000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

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2004

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2006

2007

2008

Tot

al li

ve b

riths

1.0

1.2

1.4

1.6

1.8

2.0

Resident total fertility rate

Total live births Resident total fertility rate

Source: Global Demographics Limited, Standard Chartered Research

government indicating awareness, not closing the door

population should reach 6mn by 2020

population is aging quickly


9

Population over 65 to increase to 14% by 2020 Based on data from Global Demographics, we expect the percentage of the population aged over 65 to expand from 8.8% in 2009, to 13.7% in 2020. In absolute numbers, this means this segment of the population will increase from 440,000 in 2009, to 840,000 in 2020, a CAGR of 6.1%.

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

0

20

40

60

80

10020

00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Pop

ulat

ion

%

< 15 15-64 65+

Source: Global Demographics Limited

Compounded growth in admissions

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

Fig 9: Admissions rate per age group

0

50

100

150

200

250

300

350

400

450

0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70+

Adm

issi

on r

ate

per

1,00

0 re

side

nt

popu

latio

n

2004 2005 2006 2007

Source: Ministry of Health

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

percentage of population over 65 should reach 14% by 2020

rate of admissions increases with age

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


10

Fig 10: Admissions forecast

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

2003

2004

2005

2006

2007

2008

2009

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

e

2020

E

Adm

issi

ons

-5%

0%

5%

10%

15%

Adm

issions growth

Total admissions Grow th

Source: Ministry of Health, Standard Chartered Research estimates


11

Private sector should gain market share

Public sector dominates tertiary healthcare

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

Fig 11: Singapore total admissions of Private and public share

0%

20%

40%

60%

80%

100%

1998 1999 2003 2004 2005 2006 2007 2008 2009

Public Private


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

Fig 12: Average bill comparison SGD Surgical specialties Medical specialties

Public 2,173 1,538

Private 7,596 6,329

Discount 71.4% 75.7%Source: Ministry of Health

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

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

public sector has 76% share of admissions

public sector hospitals are 71 to 76% cheaper

government heavily subsidises class C and class B2 wards

more people are choosing A class wards


12

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%

Legend: segments listed clockwise from top

A and B1 78% B2 and C 22%


Source: Ministry of Health Source: Ministry of Health

Many Singaporeans can afford private healthcare

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

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

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

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

average private hospital surgical bill is about S$7,000. average Medisave balance is SGD$15,000

half of Singapore’s population has a private integrated shield. Average bill would be lowered to SGD3,400


13

Fig 15: Percentage of residents with Medishield 2008

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

Non Medishield Holders15.6%

MediShield policy holders84.4%


Non MediShield Private50.9%

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

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

Income quintileMonthly income

Monthly expenditure

Monthly savings Annual income

Annual savings

Annual savings ex CPF

% income saved ex CPF

Total 7,440 3,764 3,676 89,280 44,112 26,256 29.4%

1st – 20th 1,274 1,760 (486) 15,288 (5,832) (8,890) -58.1%

21st – 40th 3,476 2,881 595 41,712 7,140 (1,202) -2.9%

41st – 60th 5,480 3,571 1,909 65,760 22,908 9,756 14.8%

61st – 80th 8,495 4,532 3,963 101,940 47,556 27,168 26.7%

81st – 100th 18,472 6,078 12,394 221,664 148,728 104,395 47.1%

Source: SingStats, Singapore Household Expenditure Survey 2009

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

half of Singapore’s population should have substantial savings

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


14

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

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

Public admissions 75.8%

Private admissions 24.2%


A class ward delivery 59.2%

Private delivery 40.8%



Government will likely encourage shift

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

Fig 20: Government health expenditure as a % of GDP

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

FY2007 FY2008 FY2009F


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

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

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


15

Fig 21: Means testing

Average Monthly Income of Patient

Class C Subsidy

(Citizens)

Class B2 Subsidy

(Citizens)

Class C Subsidy (Permanent Residents)

Class B2 Subsidy (Permanent Residents)

$3,200 and below 80% 65% 70% 55%

$3,201 - $3,350 79% 64% 69% 54%

$3,351 - $3,500 78% 63% 68% 53%

$3,501 - $3,650 77% 62% 67% 52%

$3,651 - $3,800 76% 61% 66% 51%

$3,801 - $3,950 75% 60% 65% 50%

$3,951 - $4,100 74% 59% 64% 49%

$4,101 - $4,250 73% 58% 63% 48%

$4,251 - $4,400 72% 57% 62% 47%

$4,401 - $4,550 71% 56% 61% 46%

$4,551 - $4,700 70% 55% 60% 45%

$4,701 - $4,850 69% 54% 59% 44%

$4,851 - $5,000 68% 53% 58% 43%

$5,001 - $5,100 67% 52% 57% 42%

$5,101 - $5,200 66% 51% 56% 41%

$5,201 and above 65% 50% 55% 40%Source: Ministry of Health

Conservative growth assumption of 0.4%

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

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

Fig 22: Admissions market share forecast

75.8 75.7 75.6 75.5 75.4 75.3 75.2 75.1 75.0 74.9 74.8 74.7

24.2 24.3 24.4 24.5 24.6 24.7 24.8 24.9 25.0 25.1 25.2 25.3

0102030405060708090

100

2009

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

Adm

issi

ons

% b

reak

dow

n

Public Private

Source: Ministry of Health, Standard Chartered estimates

private share of admissions to gain 1 percentage point

private admissions to grow at CAGR of 3.7%. Share gain contributes growth of 0.4%


16

Revenue intensification will be strongest driver

What is revenue intensity?

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

Singapore hospital experience

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

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

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

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

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

Others experience

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

revenue intensity driven by demand for more sophisticated care

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

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

Raffles average revenue per patient may have grown at 9%.

Raffles captures specialist fees, an important driver of revenue intensity

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


17

Fig 23: Government expenditure per capita

0

50

100

150

200

250

300

350

400

450

500

2002 2003 2004 2005 2006 2007 2008

Per

cap

ita g

over

nmen

t exp

ense

on

heal

th (

SG

D)

-15%-10%-5%0%5%10%15%20%25%30%35%40%

Grow

th %

Per capita government expenditure on health Grow th

Source: World Health Organization

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

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


18

Sector should grow at 7% CAGR until 2020E

Summarising the drivers

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

Fig 24: Sector growth breakdown

Sector growth



Population

Aging population

2 %

1.4%

0.4%

3%

7%Sector growth



Population

Aging population

2 %2 %

1.4%1.4%

0.4%0.4%

3%3%

7%


combining population, aging, private share gain and inflation, the sector should grow at 7% CAGR until 2020E


19

Foreign patients market to grow

Critical for private healthcare

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

Fig 25: STB foreign patient expenditure

0

200

400

600

800

1,000

1,200

2002 2003 2004 2005 2006 2007 2008

SG

Dm

S.E. Asia Americas N. Asia S. Asia Europe Oceania

Source: Singapore Tourism Board

Indonesia is the most important market Of particular importance is Indonesia. Singapore tourism board data showed that Indonesia accounted for 52% of the foreign market in 2005. STB surveyed visitors departing from Singapore and estimates that Indonesians accounted for over 80% of foreign patient medical spending in 2008. For Parkway, Indonesians accounted for about half of all its foreign patients in 2009. For Raffles, management advised Indonesians accounted for about 25-30% of its foreign patients in 2009.

Fig 26: Singapore Hospital patient mix

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

foreign patients is an important market for private hospital operators

Indonesia provides half of Singapore’s foreign patients


20

Highly correlated with economy

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

Fig 27: USD/IDR Price Chart

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000Ja

n-98

Feb

-98

Mar

-98

Apr

-98

May

-98

Jun-

98

Jul-9

8

Aug

-98

Sep

-98

Oct

-98

Nov

-98

Dec

-98

Jan-

99

Feb

-99

Mar

-99

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-99

May

-99

Jun-

99

Jul-9

9

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-99

Sep

-99

Oct

-99

Nov

-99

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-99

IDR

Source: Bloomberg

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

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

0

3,000

6,000

9,000

12,000

15,000

18,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Num

ber

In-Patients Day Surgery Patients

Source: Healthcare strategic working group paper, Ministry of Health

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

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

foreign patient volumes fell sharply in 1998

foreign patient volumes numbers fell 15% in 2007


21

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

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

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

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

Fig 29: Foreign patient volumes

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

2002 2004 2005 2006 2007 2008E 2009E 2010E ?

For

eign

pat

ient

s


Source: Singapore Tourism Board, Standard Chartered Research estimates

Growth will return

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

Fig 30: Indonesia – Real GDP Growth rate

0

100,000

200,000

300,000

400,000

500,000

600,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

US

Dm

-60%

-40%

-20%

0%

20%

40%

60%

% grow

th

Indonesia GDP at current price Grow th

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

Singapore Medicine to spearhead foreign patient drive

growth interrupted during financial crisis

unlikely to reach 1mn foreign patients

Standard Chartered forecasts Indonesian 2010 GDP growth of 6.2%


22

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

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

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


Japan 3.9%

UK 3.4%

UAE 3.0%

US 2.6%

Germany 2.6%

Others 84.5%

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

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

Fig 32: Price comparison of medical procedures

Medical procedure Singapore (USD) USA (USD) Thailand (USD) Malaysia (USD)

Heart Bypass 16,500 130,000 11,000 12,000

Heart Valve Replacement 12,500 160,000 10,000 15,000

Angioplasty 11,200 57,000 13,000 8,000

Hip Replacement 9,200 43,000 12,000 10,000

Hysterectomy 6,000 20,000 4,500 4,000

Knee Replacement (single) 11,100 40,000 10,000 8,000


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


23

What is Singapore’s edge?

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

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

Singapore’s edge is a strong clinical sciences sector

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


24

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

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

Fig 33: Number of clinics and General Practitioners FY2009

0

20

40

60

80

100

120

Clinics GP doctors

Raff les Parkw ay Healthw ay

Source: Company, Standard Chartered Research

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

Fig 34: Raffles: doctor breakdown between GP and specialists

Fig 35: Parkway: doctor breakdown between GP and specialists

GP doctors 55%

Specialists 45%


GP doctors 6.8%

Specialists 93.2%


Source: Company, Standard Chartered Research estimates Source: Company, Standard Chartered Research estimates

Raffles is the leader in private primary care and corporate patients

strength in primary care creates strong referral system


25

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

Fig 36: Raffles: Foreign patient breakdown Fig 37: Parkway: Foreign patient breakdown

Singapore 70%

Indonesia 7.5%

Other 22.5%


Singapore 72%

Indonesia 16%

Malaysia 3%

Bangladesh 1%

Middle East/ Africa 1%

Vietnam 1%

Eastern Europe 1%

Others 5%



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

Parkway: leader in high-end tertiary care

Strength with price-inelastic segment With only three private for-profit hospital operators in Singapore, and Raffles and Thomson operating with a different focus, Parkway has become the de facto leader in high-end patient care. The group operates what is generally considered the two most prestigious hospitals in Singapore: Mount Elizabeth and Gleneagles Hospital. As a result, Parkway’s strength lies within the relatively price-inelastic segment. When patients want the best care and are willing to pay for it, they are most likely to go to Mount Elizabeth or Gleneagles.

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

Raffles less dependent on Indonesians

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

group practice model and medical audit to ensure quality of care

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

dominant share of almost every aspect of private tertiary healthcare


26

Fig 38: Parkway’ s share of total specialists 2009

Fig 39: Parkway’s share of private specialists

Parkway Hospital 27%

Raffles hospitals 3%

Other private specialists 10%

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 Medical 14%

Other private hospitals 20%




Thomson medical 12%

Other private beds 16%


Source: Ministry of Health, Standard Chartered Research estimates Source: Company, Standard Chartered Research estimates

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

Thomson: Focus on women and children

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

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

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


27

Positioning reflected in average bills

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

Fig 42: Average private hospital bill for surgical specialty

HospitalsAverage per day

(S$)Average total

bill (S$)Total bill at 90th

percentile (S$)Total bill at 95th

percentile (S$)

Parkway East Hospital 2,379 6,127 11,686 17,824

Gleneagles Hospital 3,342 8,900 15,565 21,405

Mount Alvernia Hospital 2,317 6,375 11,640 16,052

Mount Elizabeth Hospital 3,955 11,518 22,444 30,392

Raffles Hospital 3,404 7,716 14,499 18,005

Thomson Medical Centre 1,928 4,938 7,806 9,344 Source: Ministry of Health

New kid on the block

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

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

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

Competition should still be muted

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

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

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

will compete directly with Parkway for foreign patients

likely to compete with Parkway for doctors

potential supply-induced demand


28

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 Roemer’s law from 1951: “a built bed is a filled bed” to which he subsequently added in 1993 “when there is assured payment.”

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

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

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.

Parkway will still be dominant

additional entrants may change things


29

Raffles Medical

OUTPERFORM (unchanged) PRICE as at 14 September 2010

SGD2.14

Robust business model

Bloomberg code Reuters codeRFMD SP RAFG.SI

Market cap 12 month rangeSGD1,149.52m (US$860.46m) SGD1.32 - 2.19

EPS est. change n.a.

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.

Year end: Dec 2009 2010E 2011E 2012ESales (SGDm) 218.6 245.2 279.1 317.7EBIT (SGDm) 45.5 53.6 63.5 75.0EBITDA (SGDm) 52.3 61.0 72.2 86.1Pretax profit (SGDm) 45.0 53.2 63.1 74.6Earnings (SGDm) adj. 37.9 44.7 53.1 62.7Diluted EPS (SGDcents) adj. 7.22 8.53 10.12 11.97DPS (SGDcents) 0.02 0.03 0.04 0.05DPS growth (%) NM 38% 19% 18%EBITDA margin (%) 24% 25% 26% 27%EBIT margin (%) 21% 22% 23% 24%Net margin (%) 17% 18% 19% 20%Div payout (%) 34% 40% 40% 40%Book value / share (SGD) 0.48 0.53 0.59 0.66Debt/ Equity (%) 10% 9% 8% 7%ROE (%) 15% 16% 17% 18%ROACE (%) 17% 19% 20% 21%FCF (SGDm) 43.3 20.8 4.7 17.2EV/Sales (x) 4.79 4.27 3.75 3.30EV/EBITDA (x) 20.0 17.2 14.5 12.2PBR (x) 4.4 4.0 3.6 3.2PER (x) 29.5 25.0 21.0 17.8Dividend yield (%) 0.0% 0.0% 0.0% 0.0%

Source: Company, Standard Chartered Research estimates Share price performance

1.21.31.41.51.61.71.81.92.02.12.2

Sep‐09 Dec‐09 Mar‐10 Jun‐10 Sep‐10

Raffles Medical Group

STRAITS TIMES INDEX (rebased)

Share price (%) -1 mth -3 mth -12 mthOrdinary shares 12 12 66Relative to Index 7 3 43Relative to Sector - - -Major shareholder Raffles Medical Holdings (39.4%)Free float 46%Average turnover (US$) 744,158

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

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

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

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

Source: Company, Bloomberg





30

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:

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

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

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

Valuation

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

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

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

Fig 44: PE band chart

0.0

0.5

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Jan-02 Jul-03 Jan-05 Jul-06 Jan-08 Jul-09

7x

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19x

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Source: Bloomberg, Standard Chartered Research estimates

expansion of specialist services to drive operating leverage

robust and defensive business model

should have secular growth ahead

fair value offers 17% upside based on PER target multiple 25x2011E

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


31






Coverage stocks





Average 25.5 38.0 23.4 2.8 2.6* After factoring in potential loss for Parkway Novena in 2012. Source: Bloomberg, Standard Chartered Research estimates

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

Fig 46: DCF valuation

SGDm FY09 FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E

EBIT 45 54 63 75 82 88 93 99 106 113 121 129

EBIT (1-tax) 38 44 53 62 68 73 77 83 88 94 100 107

Add: Depreciation and amortization 7 7 9 11 13 14 15 15 16 16 17 17

Less: Change in working capital 1 -1 3 3 3 2 2 2 2 2 3 3

Less: Capital expenditure -4 -30 -60 -60 -20 -12 -12 -12 -13 -13 -14 -14

Unlevered free cash flow 41 21 4 17 64 77 82 88 93 99 106 113

Terminal value - - - - - - - - - - - 1,876

FY2010E Per share WACC assumptions

DCF of operations 486 0.93 Risk-free rate 3%

NPV of the terminal value 928 1.78 Equity risk premium 5%

Total value of the operations 1,414 2.72 Equity beta 1.00

Net (cash)/debt -62 -0.12 Cost of equity 8%

Equity value 1,476 2.84 Cost of debt (after tax) 3%

Equity value per share (SGD) 2.84 Target debt to firm value 10%

Current share price (SGD) 2.13 WACC 7.1%

Upside 33% Perpetual growth rate 1.0%

Sensitivity of Share value (SGD per share)

7.7% 8.2% 8.7% 9.2% 9.7%

0.0% 2.35 2.18 2.04 1.91 1.79

0.5% 2.45 2.27 2.11 1.97 1.85

1.0% 2.56 2.36 2.19 2.04 1.90

1.5% 2.70 2.47 2.28 2.11 1.97

2.0% 2.85 2.60 2.38 2.20 2.04

WACC

Ter

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32

Company overview

History

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 Singapore’s 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 group’s growing patient base, Raffles established an ambulatory surgery centre in 1993. Raffles Medical was listed on SGX in 2000. In 2001, the group’s flagship Raffles Hospital started operations.

Business segments

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 group’s flagship Raffles Hospital at North Bridge Road started operations in 2001 and signalled the group’s 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.

Business model

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 Thomson’s revenues are net of doctor fees.

Fig 47: Revenue breakdown FY09 Fig 48: Operating profit breakdown FY09

Healthcare services 40.6%

Hospital services 59.4%

Investment holdings 0.1%


Healthcare services 14.6%

Hospital services 72.0%

Investment holdings 13.4%


Source: Company Source: Company

started as a primary healthcare clinic in CBD

listed on SGX in 2000

leading private primary healthcare provider

increasing contribution from hospital and specialty services

employs all its doctors


33

SWOT

Fig 49: SWOT analysis – Raffles Medical

Strengths

Leader in primary healthcare in Singapore with particular strength in the corporate segment.

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.

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.

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


34

Specialist healthcare to provide operating leverage

Past margins demonstrate operating leverage

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 Singapore’s 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 group’s 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

0%

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Source: Company

Fig 51: Revenue breakdown healthcare services and hospital services – 2000 to 2009

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began with two clinics in CBD

Raffles Hospital started in 2001 and signalled expansion of specialty services

hospital services have much higher margins

much faster growth in hospital revenues


35

Substantial growth in average revenue per specialist doctor

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 group’s 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

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Specialists doctors Revenue per specialist doctor

Source: Company

Going forward: broadening the breadth and depth

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 group’s cost management capabilities. Healthcare is a people business and staff compensation is the group’s 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%.

growth in revenue per specialist driven by revenue intensity

average revenue per specialist has grown from SGD654k in 2002 to SGD1.6mio in 2009

expansion of Raffles Hospital should provide room to grow specialty service


36

Fig 53: Staff costs as a percentage of revenue

45%47%49%

51%53%55%57%59%

61%63%65%

2001 2002 2003 2004 2005 2006 2007 2008 2009

Sta

ff co

st a

s %

of r

even

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Staff cost as % of revenue

Source: Company

staff costs as % of revenue has steadily declined


37

A defensive model

Primary care reinforces specialist business

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 Parkway’s 100 and Healthway’s 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 Fig 55: Number of GP doctors FY09

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Source: Company, Standard Chartered Research Source: Company, Standard Chartered Research

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 company’s 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. Healthway’s 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.

one of the largest in primary care

clear leadership in corporate segment

referral system creates franchise value. Competitors are following

Raffles balances primary and specialist. Parkway is specialist heavy


38

Fig 56: Raffles: GPs cf. Specialists Fig 57: Parkway: GPs cf. Specialists

GP doctors 55%

Specialists 45%


GP doctors 7%

Specialists 93%


Source: Raffles Source: Parkway Medical

Less dependent on star doctors We believe Raffles’ strong cost management is also related to the group’s strength in primary care. Its strong volume of patients allows the group to hire highly competent, but less prominent specialists. This minimizes the group’s 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 group’s foreign patient volume. This contrasts with Singapore’s 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 70%

Indonesia 7.5%

Other 22.5%


Singapore 72%

Indonesia 16%

Malaysia 3%

Bangladesh 1%


Vietnam 1%

Eastern Europe 1%

Others 5%



Conservative management

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.

Raffles balances primary and specialist. Parkway is specialist heavy

Dr. Loo is conservative and pays great attention to risks


39

Will continue to grow

Primary care sensitive to 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

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 Indonesia’s GDP to 6.2% in 2010.

Fig 60: Foreign patients in Singapore are growing

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Source: Standard Chartered Research

China expansion to provide long-term growth

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 group’s 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 high-end and expat population in Shanghai.

Raffles Hospital is an under-utilized asset

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.

primary business should improve along with domestic economy

foreign patient market will return

Shanghai clinic a first step

Raffles has sufficient capacity to grow


40

Group financials

Profit and loss

Fig 61: Profit and loss summary 2007 2008 2009 2010F 2011F 2012F

Revenue (S$m) 169 201 219 245 279 318

Operating profit (S$m) 19 28 39 45 54 63

Pre-tax profit (S$m) adjusted 29 38 45 53 63 75

Net profit (S$m) adjusted 23 32 38 45 53 63

Diluted earnings per share (S$cents) 4.71 6.02 7.22 8.59 10.20 12.05Source: Company, Standard Chartered Research estimates

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

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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

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revenue growth has been strong and should continue

operating margin expansion should continue


41

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

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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

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

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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.

net margins have expanded as staff costs as % of revenue has declined

strong balance sheet


42

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%



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

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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

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strong free cash flow generation except for 2011 and 2012 due to Raffles Hospital expansion


43

Corporate information

Corporate structure

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 group’s subsidiaries in Hong Kong. RMG also has a fully owned subsidiary in Indonesia – PT Raffles Medika Indonesia

Shareholding structure

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%


Source: Bloomberg

20 fully owned subsidiaries

Dr. Loo is the largest shareholder


44

Board

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.

unique board structure with 4 out of 5 being independent


45

Income statement (SGDm) Balance sheet (SGDm)Year end: Dec 2008 2009 2010E 2011E 2012E Year end: Dec 2008 2009 2010E 2011E 2012EGroup Revenue 200.8 218.6 245.2 279.1 317.7 Property, plant & equipment 150.3 146.4 169.0 220.3 269.2Growth % 19% 9% 12% 14% 14% Goodwill & intangibles 0.4 0.4 0.3 0.3 0.2COGS -35.5 -40.5 -45.5 -51.8 -58.9 Others 85.6 85.5 85.5 85.5 85.5Gross profit 165.2 178.1 199.7 227.3 258.8 Long term assets 236.2 232.3 254.8 306.1 355.0GP margin (%) 82% 81% 81% 81% 81% C&CE 44.5 74.4 77.5 61.2 53.5Others,net -126 -133 -146 -164 -184 STI 0.0 0.0 0.0 0.0 0.0Total EBIT 39.0 45.5 53.6 63.5 75.0 Inventories 4.8 5.3 5.9 6.7 7.7Growth % 38% 17% 18% 19% 18% Receivables 24.9 24.3 27.2 31.0 35.3OP margin (%) 19% 21% 22% 23% 24% Others 0.0 0.6 0.6 0.6 0.6Net interest income -0.6 -0.4 -0.4 -0.4 -0.4 Total current assets 74.2 104.5 111.2 99.5 97.0Others,Goodwill, net 0 0 0 0 0 Total assets 310.4 336.8 366.0 405.6 452.0PBT 38.4 45.0 53.2 63.1 74.6Taxation -6.7 -7.0 -8.3 -9.8 -11.6 Payables 51.5 52.0 54.2 61.7 70.2Effective rate (%) -17% -16% -16% -16% -16% ST debt 4.6 4.5 4.5 4.5 4.5Exceptional 0 0 0 0 0 Others 9.3 8.7 8.7 8.7 8.7PAT 31.7 38.0 44.9 53.3 63.0 Current liabilities 65.4 65.2 67.4 74.9 83.5Minority interest -0.1 -0.2 -0.2 -0.2 -0.3 LT debt 22.0 20.0 20.0 20.0 20.0PATMI 31.5 37.9 44.7 53.1 62.7 Deferred income tax 0.7 1.4 1.4 1.4 1.4Growth % NM 20% 18% 19% 18% Others 0.0 0.0 0.0 0.0 0.0PATMI margin (%) 16% 17% 18% 19% 20% Total liabilities 88.2 86.7 88.9 96.4 104.9MI interest in PAT (%) 0% 0% 0% 0% 0% Minorities 0.3 0.4 0.6 0.8 1.0

Shareholders funds 221.9 249.8 276.6 308.4 346.1Gross liabilities + equity 310.4 336.8 366.0 405.6 452.0

EPS basic (SGD cents) 6.10 7.30 8.59 10.20 12.05EPS diluted (SGDcents) 6.02 7.22 8.53 10.12 11.97EPS Growth (%) NA 20% 18% 19% 18%DPS (SGDcents) 2.50 2.49 3.44 4.08 4.82DPS Growth (%) 0% 38% 19% 18%Payout (%) 41% 34% 40% 40% 40%

Cash Flow (SGDm) Key ratiosYear end: Dec 2008 2009 2010E 2011E 2012E Year end: Dec 2008 2009 2010E 2011E 2012ECash flows from operating activities ROE (%) 14% 15% 16% 17% 18%PBT 38.4 45.0 53.2 63.1 74.6 Post tax ROACE (%) 13% 15% 16% 17% 18%Depreciations 6.7 6.9 7.5 8.7 11.1 Total debt (m) 26.6 24.5 24.5 24.5 24.5Gains / Disposals -0.2 -0.6 0.0 0.0 0.0 Net debt (m) 17.9 49.9 53.0 36.7 29.0Interest income -0.3 -0.2 -0.2 -0.2 -0.2 Net debt to equity (%) 8% 20% 19% 12% 8%Interest expenses 0.6 0.4 0.4 0.4 0.4 Net debt / Net debt + equity (%) 7% 17% 16% 11% 8%FX 0.0 0.0 0.0 0.0 0.0 Equity (m) 222.2 250.2 277.2 309.2 347.1Share options & other 1.3 1.6 0.0 0.0 0.0 Book value per share - (S$) 0.4 0.5 0.5 0.6 0.7Op CF, pre WC 46.5 53.3 60.9 72.0 85.9 PBR (x) 5.0 4.4 4.0 3.6 3.2Receiveables -4.7 0.8 -3.0 -3.8 -4.3 Interest cover (x) 62.6 110.9 138.2 163.8 193.5Inventories -0.9 -0.5 -0.6 -0.8 -0.9 Payout ratio (%) 41% 34% 40% 40% 40%Payables 3.8 0.3 2.2 7.5 8.5 FCF Yield (%) 3% 4% 2% 0% 2%Other -1 -1 -1 -1 -1Op CF, after WC 43.8 53.3 58.9 74.3 88.7Interest received 0.3 0.2 0.2 0.2 0.2Interest paid -0.6 -0.4 -0.4 -0.4 -0.4Income taxes -4.0 -6.2 -8.3 -9.8 -11.6Op CF, post tax & WC 39.5 46.8 50.4 64.3 76.9Capex -6.1 -3.9 -30.0 -60.0 -60.0Other, investing 1.1 0.3 0.2 0.2 0.2Increase in debt 28.8 3.1 0.0 0.0 0.0Repayment of debt -27.9 -5.1 0.0 0.0 0.0Others, financing 1.3 1.3 0.0 0.0 0.0Dividends paid -12.9 -13.0 -17.9 -21.2 -25.1Net cash flow 24.3 29.9 3.2 -16.3 -7.7

C&CE at open 19.7 44.0 74.4 77.5 61.2Change 24.3 29.9 3.2 -16.3 -7.7C&CE at close 44.0 73.9 77.5 61.2 53.5

Free cashflow 33.9 43.3 20.8 4.7 17.2 Source: Company, Standard Chartered Research estimates


46

Thomson Medical

OUTPERFORM (initiating coverage) PRICE as at 14 September 2010

SGD0.89

The women’s and children’s specialist

Bloomberg code Reuters codeTHOM SP THOM.SI

Market cap 12 month rangeSGD260.07m (US$194.673m) SGD0.56 - 0.90


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 women’s and children’s 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.

Year end: Dec 2009 2010E 2011E 2012ESales (SGDm) 67.4 77.1 85.2 93.2EBIT (SGDm) 15.8 19.3 21.4 23.6EBITDA (SGDm) 19.2 22.8 25.0 27.3Pretax profit (SGDm) 15.7 19.2 21.3 23.4Earnings (SGDm) adj. 12.8 15.7 17.4 19.1Diluted EPS (SGDcents) adj. 4.38 5.37 5.95 6.55DPS (SGDcents) 1.80 2.15 2.38 2.62DPS growth (%) NM 19% 11% 10%EBITDA margin (%) 29% 30% 29% 29%EBIT margin (%) 23% 25% 25% 25%Net margin (%) 19% 20% 20% 21%Div payout (%) 41% 40% 40% 40%Book value / share (SGD) 0.38 0.41 0.45 0.49Debt/ Equity (%) 2% 2% 2% 2%ROE (%) 11% 13% 13% 13%ROACE (%) 14% 16% 17% 17%FCF (SGDm) 13.8 14.9 16.6 18.4EV/Sales (x) 4.08 3.56 3.22 2.95EV/EBITDA (x) 14.3 12.1 11.0 10.1PBR (x) 2.4 2.2 2.0 1.8PER (x) 20.5 16.8 15.1 13.8Dividend yield (%) 2.0% 2.4% 2.6% 2.9%


0.500.550.600.650.700.750.800.850.900.95


Thomson Medical Centre


Share price (%) -1 mth -3 mth -12 mthOrdinary shares 7 24 60Relative to Index 3 14 38Relative to Sector - - -Major shareholder T Holdings (20%)Free float 36%Average turnover (US$) 89,708

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 children’s 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 Thomson’s 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 women’s cancer centre in Singapore.

Overseas will provide long-term growth. In 2005, Thomson expanded into Vietnam through management consultancy contracts. Construction of the group’s 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 founder’s 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.






47

Investment summary and valuation 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:

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.

Thomson’s 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 group’s shift in mix towards other specialty areas. In the first 3 quarters of FY2010, the group already posted 5% growth in deliveries.

Thomson’s expansion into Vietnam through management consultancy projects should contribute in the long term. Thomson’s 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.

Valuation

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. Thomson’s previous peak valuation was in Jun 2007 at forward PER20x. We like Thomson’s 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.






Coverage stocks






market leader of deliveries in Singapore

still has some capacity to grow in Singapore

Vietnam should provide long-term growth

fair value offers 24% upside and based on PER target multiple 19x2011E


48

Fig 72: PE Band

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

6x

9x

12x

15x

18x

21x


DCF valuation We value Thomson on a DCF basis to capture the company’s 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


EBIT 16 19 21 24 26 27 29 30 31 33 34 36

EBIT (1-tax) 13 16 18 20 21 23 24 25 26 27 28 30


Less: Change in working capital 3 1 1 1 1 1 1 1 1 1 1 1

Less: Capital expenditure -5 -5 -5 -5 -5 -5 -5 -5 -5 -5 -5 -5


Terminal value - - - - - - - - - - - 469


DCF of operations 171 0.58 Risk-free rate 3.0%

NPV of the terminal value 223 0.76 Equity risk premium 4.5%

Total value of the operations 394 1.35 Equity beta 1.10

Net (cash)/debt (12) -0.04 Cost of equity 8.0%

Equity value 406 Cost of debt (after tax) 3.3%

Equity value per share (SGD) 1.39 Target debt to firm value 10.0%

Current share price 0.90 WACC 7.5%



6.6% 7.1% 7.6% 8.1% 8.6%

0.0% 1.47 1.36 1.27 1.18 1.11

0.5% 1.54 1.42 1.31 1.22 1.15

1.0% 1.62 1.49 1.37 1.27 1.19

1.5% 1.72 1.57 1.44 1.33 1.23

2.0% 1.85 1.66 1.51 1.39 1.28

WACC

Ter

min

al G

row

th

Source: Company, Standard Chartered Research estimates


49

Company overview Thomson Medical was founded in 1979 by Dr W.C. Cheng as the first private women and children’s 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 Women’s Cancer Centre and the Thomson Aesthetics Centre. Thomson’s operations in Vietnam will also be part of this segment.

Fig 74: Revenue breakdown FY09 Fig 75: Operating profit breakdown FY09

Hospital Operations andAncillary Services 76.9%

Specialised and OtherServices 23.1%


Hospital Operations andAncillary Services 88.4%

Specialised and OtherServices 11.6%



Fig 76: Thomson suite Fig 77: Thomson hospital


23% share of deliveries in 2009

provides hospital services, revenue is net of doctor fees

expanding its O&G specialty network and into other specialty areas


50

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.

Weaknesses

Thomson is facing physical constraints with near maximum occupancy at its hospital and limited parking space. This may limit the group’s long-term capacity for growth.

Focus on deliveries restricts Thomson’s ability to drive revenue intensity as deliveries is relatively less complex.

As Thomson’s doctors operate independently, it fails to capture the high margins of specialist doctor fees.

Opportunities

Continued expansion of the group’s network of obstetrics and gynaecology clinics in Singapore.

Expansion into new specialty areas such as its newly established paediatric, women’s 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. Thomson’s 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 Thomson’s 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 Thomson’s reputation and brand.



51

Market leader in deliveries

A premium brand

Thomson’s 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. Thomson’s 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 Thomson’s 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: Thomson’s deliveries and market share

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Source: Company, Singapore Department of statistics

Where Singaporeans are willing to spend money

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 Fig 81: Delivery market share

Private %24%

Public %76% Private

41%

Private and A class59%


market leader in deliveries with 18% of all births from 2003 to 2009

market share has steadily improved from 14% in 2003 to 23% in 2009

Singaporeans are willing to spend on birth deliveries

only 24% of total admissions are in private hospitals. But 40% for deliveries and 60% if including A class wards


52

Fig 82: Comparison of prices

Bill size (SGD)

Thomson Medical 4,451

Ward A 3,385

Ward B1 2,528

Ward B2 1,124

Ward C 904Source: Company data, Standard Chartered Research

Competition

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 Women’s and Children’s 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

Gleneagles Hospital9%

Mount Alvernia Hospital

13%

Singapore General Hospital

4%

Thomson Medical23%

National University Hospital

6%

KK Women's and Children's Hospital

22%

Raffles Hospital6%

Parkw ay East Hospital5%

Mount Elizabeth Hospital

12%


Thomson costs over 4 times of a C class ward

largest competitor is government’s KK Women’s and Children’s hospital

Thomson is the leader with 23% share of private and A class ward market


53

Room for growth

Limited by capacity but still room for expansion

Strong historical growth in deliveries Thomson’s 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

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Deliveries Grow th (RHS)

Source: Company data, Standard Chartered Research

Capacity expansion through shortening average length of stay We can estimate the average length of stay based on certain assumptions. Thomson’s 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.

Fig 85: Thomson hospital operating statistics 2006 2007 2008 2009

Deliveries 7,172 7,665 8,567 8,907

Deliveries % of admissions 37% 38% 39% 39%

Admissions 19,546 20,331 22,032 22,590

Beds (licensed) 190 190 190 190

Bed days capacity 69,350 69,350 69,350 69,350

Bed days admitted 55,480 55,480 55,480 55,480

Occupancy (estimated) 80% 80% 80% 80%

Average length of stay 2.84 2.73 2.52 2.46Source: Company, Standard Chartered Research estimates

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, Thomson’s 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.

from 2006, Thomson hospital has been operating near full capacity…

…but deliveries have grown at a CAGR of 7.5% from 2006 to 2009

increasing capacity through shortening average length of stay

Thomson’s average length of stay for deliveries was 2.7 compared to 2.3 for Raffles Hospital and Parkway East


54

Fig 86: Comparison of hospital operating statistics 1 August 2009 to 31 July 2010 Average length of stay Volume Weighted average

Normal Caesarean Normal Caesarean length of stay

Gleneagles 2.4 3.4 616 400 2.8

Mount Alvernia 2.4 3.2 907 618 2.7

Mount Elizabeth 2.6 3.5 818 473 2.9

Parkway East 2.1 3.0 332 110 2.3

Raffles Hospital 2.0 3.1 380 163 2.3

Thomson Medical 2.4 3.2 1,554 867 2.7

KK Women's and children's 1.8 3.0 1,474 616 2.2 Source: Ministry of Health

Other specialties have shorter length of stay As Thomson’s 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 management’s advise of 2.5), it means Thomson’s 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

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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 3Q2009 Growth

Deliveries 6,976 6,628 5%

Revenue (SGDm) 59 49 20%

Operating profit (SGDm) 15 12 27%

Net profit (SGDm) 12 5 128%Source: Company data, Standard Chartered Research

other admissions besides delivery have shorter average length of stay

we estimate a volume CAGR of 1.9% until 2020

5% growth in deliveries up to Q3 2010


55

Operating leverage through cost

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 Thomson’s has been through cost management.

Driven by costs, not revenue intensity From 2004 to 2009, Thomson’s 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%.)

Fig 89: Revenue per admission Fig 90: Operating profit per admission

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Contrasts with Raffles Medical Thomson’s slow growth in revenue intensity contrasts with Raffles Medical, where we believe revenue intensity has driven its margin expansion. We believe this is due Thomson’s more uniform service. Almost 40% of patients admitted into Thomson are for deliveries, where procedures are relatively simple.

Specialist centres are new avenues

Strengthen flow of patients to the hospital Thomson started setting up Thomson Women’s Clinics in 2000 to extend the group’s specialist O&G network beyond the hospital to provide services over a more diverse area. Today, the group operates seven women’s 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 women’s 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 group’s 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 women’s cancer and Chinese medicine centres should continue to drive growth.

hospital margins have expanded from 19% to 27%

margin expansion driven by cost not revenue

in contrast with Raffles, where margin expansion is driven more by revenue intensity

satellite clinics drive flow of patients to the hospital

strong speciality services growth


56

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 Thomson’s hospital.

Fig 91: Operating margins of specialist versus hospital

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2005 2006 2007 2008 2009

Specialist Hospital


lower margins than hospital operations

declining operating margins for specialised services reflect start up costs


57

Regional expansion to drive growth

Vietnam is the new frontier

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. Thomson’s 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, Singapore’s 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.

Additional Vietnam hospitals down the road

Total of three hospitals Hanh Phuc JSC had also committed with Thomson to build a total of three women’s and children’s 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, Thomson’s 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.

Other markets may follow

We understand that Thomson management continues to explore opportunities in other markets. Thomson’s 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.

partner is Hanh Phuc JSC, linked to Vietnamese government

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

agreement for three hospitals in total. Hanoi is next

no capital up front. Low risk expansion

Malaysia may be the next target for expansion


58

Group financials

Profit and loss

Fig 92: Profit and loss statement SGDm 2007 2008 2009 2010F 2011F 2012F

Revenue (S$m) 52 60 67 77 85 93

Operating profit (S$m) 12 14 16 19 21 24

Pre-tax profit (S$m) adjusted 11 14 16 19 21 23

Net profit (S$m) adjusted 10 11 13 16 17 19

Diluted earnings per share (S$cents) 3.25 3.82 4.38 5.37 5.95 6.55Source: Company, Standard Chartered Research estimates

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

0102030405060708090

100

2003

2004

2005

2006

2007

2008

2009

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E

2011

E

2012

E

SG

Dm

0%

5%

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15%

20%

25%

30%

35%

Revenue (LHS) Growth (RHS)

Source: Company data, Standard Chartered Research estimates

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

-5%

0%

5%

10%

15%

20%

25%

30%

2003 2004 2005 2006 2007 2008 2009 2010F 2011F 2012F

Operating margin PBT margin Net Profit margin

Source: Company data

revenues should still grow from Singapore


59

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 Fig 96: Liabilities and equity breakdown FY09

Fixed assets 80%


Stocks 1%

Debtors 3%

Cash 15%



Creditors 11%

Debt financing 2%


Equity 84%



Cash flow

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

0

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25

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2004

2005

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2007

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robust free cash flow generation


60


Corporate structure

Each of Thomson’s specialty areas are owned under a subsidiary. Thomson Women’s Clinic Holdings is the holding company for Thomson’s network of O&G clinics. The recently launched Women’s Cancer Centre and Thomson Aesthetics Centre are under joint-venture arrangements, with Thomson holding 55% and 51%, respectively.

Fig 98: Corporate structure

ThomsonWomens

Clinic(AMK Hub)

Pte Ltd

ThomsonWomensClient

(Bukit Batok)Pte Ltd

ThomsonWomens

Clinic( ChoaChu Kang)

Pte Ltd

ThomsonWomens

Clinic(Katong)Pte Ltd

ThomsonWomens

Clinic(Sengkang)

Pte Ltd

ThomsonWomens

Clinic(Serangoon

Garden) Pte Ltd

ThomsonWomens

Clinic(Sun Plaza)

Pte Ltd

ThomsonWomens

Clinic(TiongBahra)

Pte Ltd

ThomsonChinese MedicinePte Ltd

ThomsonFertility

CentrePteLtd

Thomson Pre-Natal

Diagnostics Laboratory

Pte Ltd

ThomsonInternational

Health ServicePte Ltd

ThomsonWomenCancerCentrePteLtd

ThomsonAestheticsCentre Pte

Ltd


100% 100% 100% 100% 100% 55% 51%

100% 100% 100% 100% 100% 100% 100% 100%

ThomsonWomen’s

ClinicHoldingsPte Ltd

ThomsonWomen’s

Clinic(AMK Hub)

Pte Ltd

ThomsonWomen’sClient


ThomsonWomen’s

Clinic(Choa Chu Kang)

Pte Ltd

ThomsonWomen’s

Clinic

Pte Ltd

ThomsonWomen’s

Clinic

Pte Ltd

ThomsonWomen’s

Clinic(Serangoon

Garden) Pte Ltd

ThomsonWomen’s

Clinic(Sun Plaza)

Pte Ltd

ThomsonWomen’s

Clinic(Tiong Bahra)

Pte Ltd


ThomsonFertility

CentrePteLtd

Thomson Pre-Natal


Pte Ltd



ThomsonWomen’sCancerCentrePte Ltd


Ltd


100% 100% 100% 100% 100% 55% 51%

100% 100% 100% 100% 100% 100% 100% 100%

ThomsonWomen’s


(Sengkang)(Katong)

ThomsonWomens

Clinic(AMK Hub)

Pte Ltd

ThomsonWomensClient


ThomsonWomens

Clinic( ChoaChu Kang)

Pte Ltd

ThomsonWomens

Clinic(Katong)Pte Ltd

ThomsonWomens

Clinic(Sengkang)

Pte Ltd

ThomsonWomens

Clinic(Serangoon

Garden) Pte Ltd

ThomsonWomens

Clinic(Sun Plaza)

Pte Ltd

ThomsonWomens

Clinic(TiongBahra)

Pte Ltd


ThomsonFertility

CentrePteLtd

Thomson Pre-Natal


Pte Ltd



ThomsonWomenCancerCentrePteLtd


Ltd


100% 100% 100% 100% 100% 55% 51%

100% 100% 100% 100% 100% 100% 100% 100%

ThomsonWomen’s


ThomsonWomen’s

Clinic(AMK Hub)

Pte Ltd

ThomsonWomen’sClient


ThomsonWomen’s

Clinic(Choa Chu Kang)

Pte Ltd

ThomsonWomen’s

Clinic

Pte Ltd

ThomsonWomen’s

Clinic

Pte Ltd

ThomsonWomen’s

Clinic(Serangoon

Garden) Pte Ltd

ThomsonWomen’s

Clinic(Sun Plaza)

Pte Ltd

ThomsonWomen’s

Clinic(Tiong Bahra)

Pte Ltd


ThomsonFertility

CentrePteLtd

Thomson Pre-Natal


Pte Ltd



ThomsonWomen’sCancerCentrePte Ltd


Ltd


100% 100% 100% 100% 100% 55% 51%

100% 100% 100% 100% 100% 100% 100% 100%

ThomsonWomen’s


(Sengkang)(Katong)



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%


Source: Bloomberg

operations through wide array of subsidiaries

T holdings largest shareholder


61

Board

Thomson Medical’s 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 Health’s 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 Singapore’s 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.


62

Income statement (SGDm) Balance sheet (SGDm)Year end: Dec 2008 2009 2010E 2011E 2012E Year end: Dec 2008 2009 2010E 2011E 2012EGroup Revenue 60.3 67.4 77.1 85.2 93.2 Property, plant & equipment 109.0 106.9 108.8 110.6 112.2Growth % 15% 12% 14% 11% 9% Goodwill & intangibles 0.1 0.1 0.1 0.1 0.1COGS -33.7 -38.3 -43.2 -47.7 -52.2 Others 0.0 0.0 0.0 0.0 0.0Gross profit 26.6 29.1 33.9 37.5 41.0 Long term assets 109.2 107.1 109.0 110.7 112.4GP margin (%) 44% 43% 44% 44% 44% C&CE 15.6 20.6 29.1 38.8 49.7Others,net -13 -13 -15 -16 -17 STI 0.0 0.0 0.0 0.0 0.0Total EBIT 14.1 15.8 19.3 21.4 23.6 Inventories 1.0 1.2 1.3 1.4 1.6Growth % 19% 13% 22% 11% 10% Receivables 4.1 3.5 4.0 4.4 4.8OP margin (%) 23% 23% 25% 25% 25% Others 0.9 0.8 0.9 1.0 1.1Net interest income -0.3 -0.1 -0.1 -0.1 -0.1 Total current assets 21.5 26.0 35.3 45.7 57.2Others,Goodwill, net 0 0 0 0 0 Total assets 130.7 133.1 144.3 156.4 169.6PBT 13.8 15.7 19.2 21.3 23.4Taxation -2.6 -3.0 -3.6 -4.0 -4.4 Payables 12.9 15.1 17.0 18.8 20.6Effective rate (%) -19% -19% -19% -19% -19% ST debt 1.4 1.4 1.4 1.4 1.4Exceptional 0 0 0 0 0 Others 2.6 2.3 2.3 2.3 2.3PAT 11.2 12.9 15.8 17.5 19.2 Current liabilities 16.9 18.7 20.6 22.4 24.2Minority interest 0.0 -0.1 -0.1 -0.1 -0.1 LT debt 2.7 1.4 1.4 1.4 1.4PATMI 11.2 12.8 15.7 17.4 19.1 Deferred income tax 1.6 1.7 1.7 1.7 1.7Growth % NM 14% 23% 11% 10% Others 0.0 0.0 0.0 0.0 0.0PATMI margin (%) 19% 19% 20% 20% 21% Total liabilities 21.2 21.8 23.7 25.5 27.2MI interest in PAT (%) 0% -1% -1% -1% -1% Minorities 0.1 0.0 -0.1 -0.2 -0.3


EPS basic (SGD cents) 3.84 4.38 5.37 5.96 6.55EPS diluted (SGDcents) 3.82 4.38 5.37 5.95 6.55EPS Growth (%) NA 15% 23% 11% 10%DPS (SGDcents) 1.50 1.80 2.15 2.38 2.62DPS Growth (%) 20% 19% 11% 10%Payout (%) 39% 41% 40% 40% 40%

Cash Flow (SGDm) Key ratiosYear end: Dec 2008 2009 2010E 2011E 2012E Year end: Dec 2008 2009 2010E 2011E 2012ECash flows from operating activities ROE (%) 10% 11% 13% 13% 13%PBT 13.8 15.7 19.2 21.3 23.4 Post tax ROACE (%) 10% 11% 13% 14% 14%Depreciations 2.9 3.4 3.4 3.6 3.7 Total debt (m) 4.1 2.7 2.7 2.7 2.7Gains / Disposals 0.0 0.0 0.0 0.0 0.0 Net debt (m) 11.4 17.8 26.4 36.1 47.0Interest income -0.2 -0.1 -0.1 -0.1 -0.2 Net debt to equity (%) 10% 16% 22% 28% 33%Interest expenses 0.3 0.1 0.1 0.1 0.1 Net debt / Net debt + equity (%) 9% 14% 18% 22% 25%FX Equity (m) 109.5 111.3 120.6 131.0 142.3Share options & other 0.2 0.4 0.0 0.0 0.0 Book value per share - (S$) 0.4 0.4 0.4 0.4 0.5Op CF, pre WC 17.0 19.6 22.7 24.9 27.1 PBR (x) 2.4 2.4 2.2 2.0 1.8Receiveables -2.1 0.6 -0.5 -0.4 -0.4 Interest cover (x) 45.4 109.2 177.8 197.0 216.5Inventories -0.1 -0.2 -0.1 -0.1 -0.1 Payout ratio (%) 39% 41% 40% 40% 40%Payables 1.7 2.2 1.9 1.8 1.8 FCF Yield (%) 4% 5% 6% 6% 7%Other -1 0 0 0 0Op CF, after WC 16.0 22.3 23.7 25.9 28.0Interest received 0.2 0.1 0.1 0.1 0.2Interest paid -0.3 -0.1 -0.1 -0.1 -0.1Income taxes -2.2 -3.2 -3.6 -4.0 -4.4Op CF, post tax & WC 13.7 19.0 20.1 21.9 23.7Capex -3.3 -5.3 -5.3 -5.3 -5.3Other, investing 0.2 0.1 0.1 0.1 0.2Increase in debt 0.0 0.0 0.0 0.0 0.0Repayment of debt -4.4 -1.4 0.0 0.0 0.0Others, financing -0.1 -0.1 0.0 0.0 0.0Dividends paid -5.8 -7.3 -6.3 -7.0 -7.6Net cash flow 0.3 5.0 8.6 9.7 10.9

C&CE at open 15.1 15.4 20.6 29.1 38.8Change 0.3 5.0 8.6 9.7 10.9C&CE at close 15.4 20.4 29.1 38.8 49.7

Free cashflow 10.8 13.8 14.9 16.6 18.4



63

Parkway Holdings

IN-LINE (from OUTPERFORM) PRICE as at 14 September 2010

SGD3.85

The pre-eminent franchise

Bloomberg code Reuters codePWAY SP PARM.SI

Market cap 12 month rangeSGD4,389.78m (US$3,285.94m) SGD1.95 - 3.94


We assume coverage of Parkway with an IN-LINE rating and new fair value of SGD4 per share.

Parkway is Asia’s 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.

Year end: Dec 2009 2010E 2011E 2012ESales (SGDm) 979.2 1,062.5 1,183.6 1,313.0EBIT (SGDm) 144.9 158.4 177.7 203.1EBITDA (SGDm) 199.8 207.5 228.6 255.9Pretax profit (SGDm) 155.0 185.4 211.8 240.6Earnings (SGDm) adj. 118.9 142.2 162.4 184.5Diluted EPS (SGDcents) adj. 10.50 12.56 14.35 16.30DPS (SGDcents) 1.15 1.38 1.57 1.78DPS growth (%) NM 20% 14% 14%EBITDA margin (%) 20% 20% 19% 19%EBIT margin (%) 15% 15% 15% 15%Net margin (%) 12% 13% 14% 14%Div payout (%) 11% 11% 11% 11%Book value / share (SGD) 1.29 1.41 1.53 1.68Debt/ Equity (%) 78% 71% 65% 60%ROE (%) 8% 9% 9% 9%ROACE (%) 5% 6% 6% 7%FCF (SGDm) 168.9 102.3 121.0 143.2EV/Sales (x) 4.99 4.60 4.13 3.72EV/EBITDA (x) 24.5 23.6 21.4 19.1PBR (x) 3.0 2.7 2.5 2.3PER (x) 36.7 30.7 26.8 23.6Dividend yield (%) 0.3% 0.4% 0.4% 0.5%


1.5

2.0

2.5

3.0

3.5

4.0

Sep‐09 Dec‐09 Mar‐10 Jun‐10

Parkway Holdings STRAITS TIMES INDEX (rebased)

Share price (%) -1 mth -3 mth -12 mthOrdinary shares 2 2 99Relative to Index -3 -7 71Relative to Sector - - -Major shareholder Kazanah Nasional (95.7%)Free float 4%Average turnover (US$) 7,904,889

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. Parkway’s 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. Novena’s value has been helped by the strong sales of Novena’s medical suites in phase 1. We also believe Parkway’s 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 break-even period for its new Novena Parkway Hospital.






64

Investment summary and valuation 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 stock’s high valuation.

Our investment rating on Parkway is based on the following:

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 Parkway’s existing hospitals and expect Novena Parkway to break-even by 2015. We believe Parkway Novena will contribute in the long-term and bolster the group’s 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.

Valuation

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 group’s position in its home market.






Coverage stocks






leader in high-end patient care in Singapore

Novena should contribute in the long-term and will bolster Parkway’s position

international operations will continue to grow

trading at 27x PER 2011E core earnings


65


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07 Jan-09 Jul-10

22x

14x

18x

26x

30x

10x


Discounted cash flow We value Parkway’s existing operations on a discounted cash flow model to capture the group’s 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 Novena’s total project value but only capture the future cash flows, with the historical costs already captured in the group’s net debt.

Fig 102: Parkway DCF valuation

SGD m FY09 FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E

EBIT 145 158 178 203 238 259 279 300 323 348 375 403

EBIT (1-tax) 120 131 148 169 197 215 231 249 268 289 311 335


Less: Change in working capital 29 6 9 9 10 8 8 8 9 10 10 11

Less: Capital expenditure (95) (75) (75) (75) (75) (77) (80) (82) (84) (87) (90) (92)


Terminal value - - - - - - - - - - - 5,025


DCF of operations 1,564 1.38 Risk-free rate 3.0%

NPV of the terminal value 2,392 2.12 Equity risk premium 4.5%

Total value of the operations 3,956 3.50 Equity beta 1.10

Net cash/(debt) (584) (0.52) Cost of equity 8%

Parkway Life REIT 346 0.31

Novena value 1,185 1.05

Equity value 4,903 4.34 Cost of debt (after tax) 3.3%






66

Company overview

History

Parkway was founded by the Tan family, also the developers of Singapore’s 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

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 group’s largest shareholder. In 2008, the Malaysian sovereign wealth fund Khazanah acquired a 23.9% stake in Parkway.

In March 2010, Fortis acquired TPG Capital’s 23.9% stake at a price of SGD3.55 per share. Fortis gained 4 board seats on Parkway’s 12-person board and Fortis founder Malvinder Mohan Singh became Parkway’s 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 Parkway’s 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

Khazanah Nasional BH 95.77%

Others 4.3%


Source: Bloomberg

founded by the Tan family

number of different shareholders over the years

Fortis bought TPG’s stake in March 2010 and started a battle for control

Khazanah won the battle and now has 95%

Khazanah plans to keep Parkway listed


67

Business segments

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

Singapore hospitals 48%

International hospitals 21%

Singapore healthcareservices 17%

International healthcareservices 13%

Other 1%


Singapore hospitals 48%

International hospitals 19%

Singapore healthcareservices 19%

International healthcareservices 13%

Other 1%



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.

largest hospital operator in Singapore

Pan-Asian franchise

one of the largest primary care providers in Singapore

also has Parkway Life REIT and Parkway College


68

Fig 106: Organization chart of Parkway

Singapore Hospitals

Mount Elizabeth Gleneagles and

Park East Hospitals

Parkway Holdings Limited

International Hospitals

Healthcare Services

Others

14 hospitals across Malaysia, Brunei, India and China

50 Shenton clinics including 25 retail and 19 inhouse clinics, 6

Medi-rad clinics

Parkway College and

Parkway REIT

Source: Company


69

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.

Wide geographical reach in Asia with hospitals spread across Malaysia, Brunei, India, and China

Leader in high-end patient care with minimal direct competition in Singapore.

Weaknesses

Compared to Raffles, Parkway has a higher dependency on Indonesia as a source for foreign patients.

Overpaying for Novena plot may weigh on the group’s balance sheet in the near term.

Opportunities

Novena Parkway will be Parkway’s new flagship hospital and should drive its focus on the price-inelastic high-end segment.

Extension of its network in Malaysia through its own Gleneagles hospitals or through its 40% stake in Pantai.

Continued expansion of its international business in China, India, and Middle East to drive growth

Threats

Arrival of Farrer Park hospital may signal beginning of competition, although we do not expect competitive dynamics to change significantly.

Economic downturn may hurt foreign patient volumes and impact Parkway’s operations.

Medical accident may damage Parkway’s reputation and brand.

New owner Khazanah may potentially change strategic direction and management.



70

Strong base in Singapore 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

Two of the most prestigious hospitals Parkway’s 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 hospital’s long histories. Parkway acquired Gleneagles Hospital in 1987 and Mount Elizabeth (and Parkway East Hospital) in 1995.

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

Fig 108: Parkway’ s share of total specialists 2009

Fig 109: Parkway’s share of private specialists




Public hospitals 61%








Fig 110: Parkway's share of private admissions 2009

Fig 111: Parkway's share of private acute hospital beds


Thomson Medical 21%

Raffles Medical 14%





Thomson medical 12%

Other private beds 16%


Source: Ministry of Health, Standard Chartered Research estimates Source: Company, Standard Chartered Research estimates

Singapore is operational base and largest market

operates two of the most prestigious hospitals in Singapore

dominant share of almost every aspect of private tertiary healthcare

27% share of total specialists and 68% share of private specialists

44% share of private admissions and 48% share of private acute beds


71

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 women’s 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 Parkway’s 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 high-end patient care almost by default.

Foreign patient market

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 Parkway’s 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%


Vietnam 1%

Eastern Europe 1%

Others 5%



Still room for growth

Day cases driving growth Day-cases have driven Parkway’s 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 day-patient admissions.

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

in 2Q 10, 28% of patients were foreigners

Indonesia is an important foreign patient market

day cases have provided a growth driver, not hospital admissions


72

Fig 113: Day case versus in-patient admissions

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Revenue intensity improving From 2000 to 2009, we calculate that Parkway’s average revenue per admission (total of in-patient and day-cases) improved from SGD3,587 to SGD5,660, a CAGR of 5.2%. Management’s advise is that Parkway has succesfully driven revennue intensity by focusing on complex procedures.

Fig 114: Historical average revenue per admission for Singapore

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from 2000 to 2009, hospital admissions actually declined by day cases grew at 13% CAGR

revenue per admissions has grew at 5.2% CAGR from 2000 to 2009


73

Parkway Novena: Overpaid but not end of the world

Background

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 Parkway’s 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, Parkway’s total cost for Novena Hospital excluding interest payment will total SGD1.8bn.

Fig 115: Bids for Novena plot Total bid SGDm psf SGD

Parkway 1,200 1,540

Napier 541 695

Raffles 268 344Source: Straits Times

Fig 116: Estimated costs for Novena SGDm

Land costs 1,245

Construction costs 400

Equipment costs 150

Total 1,795Source: Company, Standard Chartered Research estimates

Parkway Novena overview

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 Singapore’s 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 group’s existing hospitals. Management expects Novena to serve 40% foreign patients in comparison with the group’s 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.

Parkway paid SGD1.2bn for the Novena plot, 1.2x the second bid

total costs excluding interest cost will be SGD1.8bn

333 bed hospital with 259 medical suites and first with exclusively single rooms

will be Parkway’s most high-end hospital with segmentation within its portfolio

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


74

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 Development’s 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 GFA sqf ASP psf SGD Sales SGDm

Phase 1 100 90,208 3,700 334

Phase 2 100 90,208 4,000 361

Total 200 180,416 3,850 695Source: Company, Standard Chartered Research estimates

Fig 118: Estimated rental income Rental Rental

Units sqf psf pm SGD income SGDm

Phase 3 medical suites 59 53,223 12 8

Retail NA 38,940 8 4

Total 92,163 10 11Source: Company, Standard Chartered Research estimates

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 Parkway’s 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.

sale of medical suites key to recoup costs

phase 1 sold 90k sqf with sales of SGD334m

phase 2 to be launched soon. We expect asp of SGD4k

Parkway should raise in total SGD695m from sale of medical suites. Recognized on percentage of completion

target doctors outside of Parkway’s system such as those from government restructured hospitals


75

Project valuations

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 novena’s 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 Parkway’s 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.

Fig 119: Parkway Novena operating model Hospital Operations 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E

Beds

Licensed 333 333 333 333 333 333 333 333 333 333 333

Operational 150 200 250 300 300 300 300 300 300 300 300

Total inpatient days capacity 121,545 121,545 121,545 121,545 121,545 121,545 121,545 121,545 121,545 121,545 121,545

Average occupancy 35% 45% 50% 60% 65% 70% 75% 75% 75% 75% 75%

Admissions

Inpatient 14,180 18,232 20,258 24,309 26,335 28,361 30,386 30,386 30,386 30,386 30,386

Day cases 2,127 3,646 6,077 8,508 11,851 14,180 15,193 15,193 15,193 15,193 15,193

Total admissions 16,307 21,878 26,335 32,817 38,185 42,541 45,579 45,579 45,579 45,579 45,579

Day case to inpatient ratio 15% 20% 30% 35% 45% 50% 50% 50% 50% 50% 50%

Average revenue per admission 6,000 6,240 6,490 6,749 7,019 7,300 7,592 7,896 8,211 8,540 8,881

Growth % 4% 4% 4% 4% 4% 4% 4% 4% 4% 4%

Revenue from operations 98 137 171 221 268 311 346 360 374 389 405

Rental income 11 12 12 12 12 13 13 13 13 14 14

Staff costs -40 -60 -75 -77 -80 -93 -104 -108 -112 -117 -121

Inventories and consumables -20 -27 -34 -44 -54 -62 -69 -72 -75 -78 -81

Purchased and contracted services -15 -20 -26 -33 -40 -47 -52 -54 -56 -58 -61

Others -5 -7 -9 -11 -13 -16 -17 -18 -19 -19 -20

EBITDA 30 34 39 68 93 106 117 121 126 130 135

Depreciation and amortisation -30 -30 -30 -30 -30 -30 -30 -30 -30 -30 -30

Interest expense -30 -27 -24 -21 -18 -15 -12 -9 -6 -3 0

Net income -30 -23 -15 17 45 61 75 82 90 97 105source: company, standard chartered research estimates

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 Parkway’s existing operations. Our DCF based enterprise value for Parkway Novena’s future cash flow is SGD1.1bn.

synergies exist with existing hospitals

expect break-even by 2015


76

Fig 120: Parkway Novena operating model SGDm 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E

Asset sales 334 361 - - - - - - - - - - -

Costs

Construction (133) (133) - - - - - - - - - - -

Equipment costs - - (150) - - - - - - - - - -

Revenue from hospital operations - - 98 137 171 221 268 311 346 360 374 389 405

EBITDA - - 30 34 39 68 93 106 117 121 126 130 135

Maintenance capex - - (18) (18) (19) (30) (31) (31) (32) (32) (33) (34) (34)

Tax on medical suites (53) (58) - - - - - - - - - - -

Free cash flow to firm 147 170 (138) 15 21 38 62 75 85 89 93 97 101

DCF of operations 538

NPV of terminal value 646

Enterprise value 1,185

Enterprise value assumptions

WACC 7%

Terminal growth rate 1% Source: Bloomberg, Standard Chartered Research estimates


77

Fast growth in international operations Outside of Singapore, Parkway operates 14 hospitals across Malaysia, Brunei, India, and China. Parkway’s 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

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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enue

(S

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Singapore International

Source: Company

Malaysia

Hub and spoke strategy Of Parkway’s 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 group’s 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.

China

In China, Parkway operates 6 medical and specialist centres, including a day surgery center with 16 beds. The group’s 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

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. Parkway’s partnership with Apollo is natural as Khazanah as a 13% stake in Apollo and has a board representation.

international operations growing faster than Singapore

Malaysia will be key focus

partnership with developers to expand

largest foreign owned healthcare provider in Shanghai

partnership with Apollo group in which Khazanah has a 13% stake


78

Group financials

Profit and loss

Fig 122: Profit and loss statement Tables summarizing the P&L details

S$m 2007 2008 2009 2010F 2011F 2012F

Revenue 870 915 979 1,062 1,184 1,313

Operating profit 135 125 145 158 178 203

Profit before tax 324 60 155 185 212 241

Net profit adjusted 96 103 130 142 163 185

Net profit with Novena 96 103 130 142 163 155

Diluted EPS (S$) 0.34 0.04 0.11 0.14 0.17 0.19

Diluted EPS (S$) with Novena 0.34 0.04 0.11 0.14 0.17 0.14Source: Company, Standard Chartered Research estimates

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

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th

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Source: Company

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.

net margins varied primarily due to one-offs


79

Fig 124: The gross and net profit margins for the last 10 years

0%

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50%

60%

70%

80%

90%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Gross profit Net profit

Source: Company

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

0%

10%

20%

30%

40%

Inventories and consumables Purchased and contracted services Salaries, w ages and other staffbenefits

Source: Company

Balance sheet

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).

staff costs lower than Raffles’ as they do not employ doctors

gearing has historically been high except for in 2007 when Parkway disposed hospital assets to Parkway Life REIT


80

Fig 126: Historical net cash and gearing situation

-800

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2004 2005 2006 2007 2008 2009 2010F

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Net cash Gearing

Source: Company

Fig 127: History of rights issues

Date Conditions Share price(SGD) Value raised(SGDm)

12/12/2006 1 share for 20 1.8 66

5/5/2008 7 share for 15 2.18 756

No. of shares issued

36,522,948

358,716,124

Source: Company

Assets and Liabilities

Fig 128: Assets FY09 Fig 129: Liabilities and equity FY09

Fixed assets 44%


Stocks 1%

Debtors 3%

Cash 20%



Creditors 5%

Debt financing 38%


Equity 50%



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.


81

Fig 130: High payable days keeps working capital cycle negative

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2006 2007 2008 2009 2010F 2011F 2012F

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Inventory days Receivable days Payable days Other payable days WCC (RHS)

Source: Company

The company has been free cash flow positive throughout the last decade except in 2008 when Novena related purchasing sent it into the red.


82

Corporate information 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 Education

TrainingNew Business

Parkway Health

HospitalsPrimary Care Services

Labs, Imaging and Clinical Research

Parkway Life REIT

Healthcare Real Estate

Parkway Holdings

Source: Company


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%



Kazanah Nasional is largest shareholder


83

Income statement (SGDm) Balance sheet (SGDm)Year end: Dec 2008 2009 2010E 2011E 2012E Year end: Dec 2008 2009 2010E 2011E 2012EGroup Revenue 914.8 979.2 1062.5 1183.6 1313.0 Property, plant & equipment 1,656.2 1,373.3 1,405.4 1,435.6 1,463.9Growth % 5% 7% 9% 11% 11% Goodwill & intangibles 286.3 278.7 272.6 266.4 260.3COGS -316.7 -339.3 -368.2 -410.1 -455.0 Others 344.3 351.0 379.7 414.0 450.1Gross profit 598.2 639.9 694.3 773.4 858.1 Long term assets 2,286.8 2,003.0 2,057.6 2,116.0 2,174.3GP margin (%) 65% 65% 65% 65% 65% C&CE 542.1 610.3 695.3 798.3 922.8Others,net -473 -495 -536 -596 -655 STI 0.0 0.0 0.0 0.0 0.0Total EBIT 125.1 144.9 158.4 177.7 203.1 Inventories 18.7 22.3 24.2 27.0 30.0Growth % -7% 16% 9% 12% 14% Receivables 137.4 103.5 112.3 125.2 138.8OP margin (%) 14% 15% 15% 15% 15% Others 3.0 363.3 363.3 363.3 363.3Net interest income -11.7 -2.3 -1.6 -0.2 1.4 Total current assets 701.2 1,099.5 1,195.3 1,313.8 1,454.9Others,Goodwill, net -54 12 29 34 36 Total assets 2,988.0 3,102.4 3,252.8 3,429.8 3,629.2PBT 59.6 155.0 185.4 211.8 240.6Taxation -16.2 -30.2 -36.1 -41.2 -46.8 Payables 196.6 195.1 211.7 235.9 261.7Effective rate (%) -27% -19% -19% -19% -19% ST debt 46.1 15.7 15.7 15.7 15.7Exceptional 65 11 0 0 0 Others 38.9 58.0 58.0 58.0 58.0PAT 108.3 136.2 149.3 170.6 193.8 Current liabilities 281.6 268.8 285.4 309.5 335.3Minority interest -5.4 -6.0 -7.2 -8.2 -9.3 LT debt 1,177.4 1,178.6 1,178.6 1,178.6 1,178.6PATMI 103.0 130.3 142.2 162.4 184.5 Deferred income tax 26.6 25.4 25.4 25.4 25.4Growth % NM 26% 9% 14% 14% Others 88.9 92.4 92.4 92.4 92.4PATMI margin (%) 11% 13% 13% 14% 14% Total liabilities 1,574.5 1,565.2 1,581.8 1,606.0 1,631.8MI interest in PAT (%) -5% -4% -5% -5% -5% Minorities 75.3 76.5 83.7 91.9 101.2

Shareholders funds 1,338.2 1,460.7 1,587.3 1,732.0 1,896.3Gross liabilities + equity 2,988.0 3,102.4 3,252.8 3,429.8 3,629.2

EPS basic (SGD cents) 3.77 10.54 12.59 14.38 16.33EPS diluted (SGDcents) 3.75 10.50 12.56 14.35 16.30EPS Growth (%) NA 180% 20% 14% 14%DPS (SGDcents) 0.00 1.15 1.38 1.57 1.78DPS Growth (%) NM NM 20% 14% 14%Payout (%) 0% 11% 11% 11% 11%

Cash Flow (SGDm) Key ratiosYear end: Dec 2008 2009 2010E 2011E 2012E Year end: Dec 2008 2009 2010E 2011E 2012ECash flows from operating activities ROE (%) 3% 8% 9% 9% 9%PBT 59.6 155.0 185.4 211.8 240.6 Post tax ROACE (%) 4% 5% 6% 6% 7%Depreciations 112.2 62.6 49.0 50.9 52.8 Total debt (m) 1,223.4 1,194.3 1,194.3 1,194.3 1,194.3Gains / Disposals 5.5 3.8 0.0 0.0 0.0 Net debt (m) 681.4 584.0 499.0 396.0 271.5Interest income -4.9 -9.5 -10.0 -11.4 -13.1 Net debt to equity (%) 48% 38% 30% 22% 14%Interest expenses 16.6 11.8 11.7 11.7 11.7 Net debt / Net debt + equity (%) 33% 28% 23% 18% 12%FX -2.8 0.0 0.0 0.0 0.0 Equity (m) 1,413.4 1,537.2 1,671.0 1,823.8 1,997.5Share options & other -5.0 -17.4 -28.6 -34.3 -36.1 Book value per share - (S$) 1.2 1.3 1.4 1.5 1.7Op CF, pre WC 181.2 206.4 207.5 228.6 255.9 PBR (x) 3.2 3.0 2.7 2.5 2.3Receiveables -19.1 36.6 -8.8 -12.8 -13.7 Interest cover (x) 7.5 12.3 13.6 15.2 17.4Inventories -0.1 -3.6 -1.9 -2.8 -3.0 Payout ratio (%) 0% 11% 11% 11% 11%Payables 8.3 8.8 16.6 24.1 25.8 FCF Yield (%) -29% 2% 2% 3% 3%Other 0.5 -0.3 0.0 0.0 0.0Op CF, after WC 170.8 248.0 213.3 237.2 265.0Interest received 4.1 9.2 10.0 11.4 13.1Interest paid -39.6 -52.6 -11.7 -11.7 -11.7Income taxes -37.8 -17.7 -36.1 -41.2 -46.8Op CF, post tax & WC 97.5 186.9 175.6 195.7 219.6Capex -1,370.7 -95.1 -75.0 -75.0 -75.0Other, investing -74.1 5.8 0.0 0.0 0.0Increase in debt 1,078.6 4.1 0.0 0.0 0.0Repayment of debt -6.4 -33.3 0.0 0.0 0.0Others, financing 743.5 -190.1 0.0 0.0 0.0Dividends paid -70.9 0.0 -15.5 -17.7 -20.2Net cash flow 397.6 -121.7 85.1 103.0 124.5

C&CE at open 139.2 531.3 610.3 695.3 798.3Change 392.1 -122.9 85.1 103.0 124.5C&CE at close 531.3 408.3 695.3 798.3 922.8

Free cashflow -1,273.2 91.8 100.6 120.7 144.6



84

Healthway Medical

IN-LINE (initiating coverage) PRICE as at 14 September 2010

SGD0.17

Great potential, but awaiting execution

Bloomberg code Reuters codeHMED SP HEMC.SI

Market cap 12 month rangeSGD316.85m (US$237.176m) SGD0.11 - 0.20


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 near-term financials are likely to suffer and we await further execution clarity.

Year end: Dec 2009 2010E 2011E 2012ESales (SGDm) 98.6 89.8 98.7 113.3EBIT (SGDm) 19.1 5.9 13.3 17.4EBITDA (SGDm) 20.1 10.2 20.2 27.0Pretax profit (SGDm) 17.7 4.6 11.9 16.0Earnings (SGDm) adj. 15.2 4.0 10.2 13.8Diluted EPS (SGDcents) adj. 1.12 0.21 0.55 0.74DPS (SGDcents) 0.24 0.05 0.12 0.16DPS growth (%) NM -78% 124% 35%EBITDA margin (%) 20% 11% 20% 24%EBIT margin (%) 19% 7% 13% 15%Net margin (%) 15% 4% 10% 12%Div payout (%) 21% 21% 21% 21%Book value / share (SGD) 0.11 0.08 0.09 0.09Debt/ Equity (%) 43% 42% 40% 37%ROE (%) 10% 3% 6% 8%ROACE (%) 9% 3% 6% 8%FCF (SGDm) 14.7 -10.2 -1.7 4.3EV/Sales (x) 2.63 2.88 2.62 2.28EV/EBITDA (x) 12.9 25.3 12.8 9.6PBR (x) 1.6 2.1 2.0 1.8PER (x) 15.2 79.6 30.8 22.8Dividend yield (%) 1.4% 0.3% 0.7% 0.9%


0.100.110.120.130.140.150.160.170.180.190.200.21


Healthway Medical Corp. Ltd.


Share price (%) -1 mth -3 mth -12 mthOrdinary shares -6 -15 45Relative to Index -10 -22 24Relative to Sector - - -Major shareholder One Organisation (17%)Free float 38%Average turnover (US$) 2,387,670

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, Healthway’s 1H 2010 net profit fell by 82%. Together with costs associated with its new clinics, the group’s 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 basedon the uncertainty of execution going forward.






85

Investment summary and valuation We initiate coverage on Healthway Medical with an IN-LINE rating and a fair value of SGD0.2 per share. We believe Healthway’s 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:

Healthway’s aggressive growth plans have tremendous potential, in our view. The group’s 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 group’s 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 group’s 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.

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 group’s aggressive opening of new specialist clinics. As these clinics require time to establish a patient base, the costs are further dragging down the group’s 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 Healthway’s share are currently trading at PE of 79x2010E and already pricing in a significant rebound in profit.






Coverage stocks






expanding aggressively but we await proof of quality execution

expansion of specialist business could deliver strong revenues and high margins

strong partner in IFC for China expansion

departure of specialists have impacted; we await proof of recovery


86

Fig 134: DCF Valuation


Total sales 99 90 99 113 127 138 149 160 171 183 195 206

COGS (21) (19) (21) (24) (27) (30) (32) (34) (37) (39) (42) (44)

Operating profits 19 6 13 17 20 25 27 29 31 33 36 38

Net profit 15 4 10 14 16 20 22 24 26 28 30 32

Unlevered free cash flow 16 (10) (2) 4 14 25 28 31 35 38 41 44

Terminal value - - - - - - - - - - - 1,942

FY2011E WACC assumptions

DCF of operations 135 Risk-free rate 3.0%

NPV of the terminal value 269 Equity risk premium 4.5%

Total value of the operations 404 Equity beta 1.30

Net (cash)/debt 27 Cost of equity 8.9%

Equity value 377 Cost of debt (after tax) 3.4%





6.0% 6.5% 7.0% 7.5% 8.0%

0.0% 0.29 0.26 0.24 0.21 0.20

0.5% 0.31 0.28 0.25 0.23 0.21

1.0% 0.34 0.30 0.27 0.24 0.22

1.5% 0.37 0.32 0.29 0.25 0.23

2.0% 0.41 0.35 0.31 0.27 0.24

WACC

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Jan-09 Jul-09 Jan-10 Aug-10

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87

Company overview

History

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 Healthway’s 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.

Business segments

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.

Business model

Healthway’s model is similar to Raffles Medical in that both companies employ their doctors.

Fig 136: FY09 revenue breakdown Fig 137: FY09 operating profit breakdown

Primary healthcare

55%

Specialist and

Wellness healthcare

45%

Primary healthcare

25%

Specialist and

Wellness healthcare

75%

Source: Company. Standard Chartered Research Source: Company. Standard Chartered Research

acquired by UK health insurance company BUPA in 2001

management buy-out in 2006

formed through merger of several healthcare clinics

listed in 2008

one of the largest primary care providers

expanding aggressively in specialist care

employs all its doctors


88

SWOT

Fig 138: SWOT analysis – Healthway Medical

Strengths

Scale and brand as one of the largest primary care provides, although branding is partly diluted through multi-brand strategy.

Management with aggressive and pro-active approach to growing the business.

Strong partner in IFC for growth in China.

Weaknesses

Previous dependence on star specialist doctors created significant key-man risk.

Aggressive expansion recently leads to significant start-up costs all at the same time.

Does not have significant experience in organic expansion in specialist healthcare.

In primary care, does not have strong share of the corporate market.

Opportunities

Healthway’s expansion into new specialty areas through new clinics may provide significant contributions in the future.

Healthway’s new flagship Healthway specialist centre at TripleOne Somerset may significantly boost the profile and scale of the group’s specialist services.

Healthway has identified China as a major market for growth. China shows major potential with an ageing population with rising disposable income.

Threats

Mass departure of doctors/staff is key threat as specialist doctors have significant bargaining power.

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.



89

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

Multi-brand approach As Healthway was formed through acquiring several separate family clinic practices, the group’s 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 group’s 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 Shenton’s 50. By number of GP doctors, Healthway has an estimated 80 versus Raffles’ 110 and Parkway Shenton’s 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 Fig 140: Number of GP doctors FY09

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Parkway Shenton Raffles Healthway medical

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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 Shenton’s 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 Healthway’s patients come from the corporate segment, while we believe an estimated 60% of Raffles’ and Parkway Shenton’s primary care patients arise there.

Vista: Healthcare benefits management Healthway’s 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.

family clinics under four brands

one of the largest private primary healthcare providers

only 30% patients from corporate segment

manage healthcare benefits to target corporate segment


90

Dental

Brands Healthway’s 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 Fig 142: Number of dentists FY09

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Q&M Healthway Raffles

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dental clinics under two brands

relatively small player


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Specialist healthcare to drive growth and margins

Increasing the breadth

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: Group’s current speciality areas

Specialist Area Company Name No. of Clinics Acquired

Paediatrics Thomson Paediatric Centre 4 2007

Paediatrics, child development, neurology SBCC Clinic 7 2008

Orthropaedic Island Orthropaedic Clinic 3 2008

Sports medicine and wellness SportsMed Central 1 2008

Surgery, Heart, Phycological wellness, ENT, Chest Nobel Specialists 8 2009

Aesthetics, Dental, Plastic Surgery Neuglow 8 2007

Traditional Chinese Medicine Healthway TCM 1 2008

Source: Company

Healthway Specialist Centre

TripleOne Somerset The new Healthway Specialist Centre will be located at TripleOne Somerset, a building formerly occupied by Singapore’s 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 company’s 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.

acquired three leading specialist brands

entry through organic expansion would have been difficult

new specialties under Nobel to encourage referral from other GPs

continued expansion with flagship specialist centre

will open two floors in TripleOne Somerset by end of the year


92

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

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.

Joint venture in real estate

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 Healthway’s 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%



targets twenty centres by end of 2010

IFC will finance China expansion

new business to invest and manage medical developments

related party transaction potential concern


93

Execution is a concern While we acknowledge that Healthway’s 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

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.

Departure of doctors

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 group’s 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 group’s earnings.

Others We understand from industry sources that a portion of Healthway’s 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.

Profitability to suffer near term

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 well-known (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.

doctors are difficult employees to manage

strong referral program makes group practice model work

departure of prominent specialists has hurt

departure of co-founder

new panel of specialist doctors

new clinics will take time to breakeven. Weight on profit


94

Group financials

Profit and loss

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

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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

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Specialist and Wellness healthcare Primary healthcare Group operating margins


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%. Healthway’s 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.

2005-2009 revenue CAGR of 10%

operating margins likely to suffer near term

staff costs (doctors) are 45% of revenue


95

Fig 147: Costs as a percentage of revenue

0%5%

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Medical supplies, consumables and lab. Exp Staff costs Other operating expenses


Balance sheet

Intangible assets Intangibles form 77% of the group’s total assets and is the result of Healthway’s 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

Fixed assets 2%

Intangible assets 77%


Stocks 2%

Debtors 5%

Cash 12%


Paediatrics40%

Orthopaedics25%

Dentistry4%

Wellness and aesthetic

3%

Family medicine

28%


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%.

risk of impairment on intangibles

gearing manageable, likely to increase with Chinese expansion


96

Fig 150: Net debt/ cash

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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 group’s 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.

strong cash flow business, but aggressive expansion will be a drag for the next two years


97



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%



directors are major shareholders. Largest shareholder is Fan Kow Hin


98

Income statement (SGDm) Balance sheet (SGDm)Year end: Dec 2008 2009 2010E 2011E 2012E Year end: Dec 2008 2009 2010E 2011E 2012EGroup Revenue 80.9 98.6 89.8 98.7 113.3 Property, plant & equipment 4.2 5.1 24.0 40.3 53.9Growth % -4% 22% -9% 10% 15% Goodwill & intangibles 176.5 176.5 173.3 170.1 166.9COGS -16.9 -21.1 -19.2 -21.1 -24.3 Others 0.0 3.3 3.3 3.3 3.3Gross profit 64.0 77.5 70.5 77.6 89.0 Long term assets 180.7 184.9 200.6 213.6 224.1GP margin (%) 79% 79% 79% 79% 79% C&CE 28.9 28.5 16.0 10.7 10.7Others,net -51 -58 -65 -64 -72 STI 0.0 0.0 0.0 0.0 0.0Total EBIT 13.1 19.1 5.9 13.3 17.4 Inventories 3.3 3.7 3.4 3.7 4.3Growth % -41% 46% -69% 124% 31% Receivables 9.7 12.4 11.3 12.5 14.3OP margin (%) 16% 19% 7% 13% 15% Others 0.0 0.0 0.0 0.0 0.0Net interest income -1.3 -1.4 -1.3 -1.4 -1.4 Total current assets 41.9 44.7 30.7 26.9 29.2Others,Goodwill, net 0 0 0 0 0 Total assets 222.6 229.5 231.3 240.5 253.3PBT 11.8 17.7 4.6 11.9 16.0Taxation -2.3 -2.5 -0.6 -1.7 -2.3 Payables 11.1 13.5 12.3 13.5 15.5Effective rate (%) -19% -14% -14% -14% -14% ST debt 39.8 20.2 20.2 20.2 20.2Exceptional 0 0 0 0 0 Others 6.8 2.8 2.8 2.8 2.8PAT 9.6 15.2 4.0 10.2 13.8 Current liabilities 57.8 36.5 35.3 36.5 38.5Minority interest 0.0 0.0 0.0 0.0 0.0 LT debt 28.9 43.3 43.3 43.3 43.3PATMI 9.6 15.2 4.0 10.2 13.8 Deferred income tax 0.1 0.1 0.1 0.1 0.1Growth % NM 59% -74% 158% 35% Others 0.4 0.4 0.4 0.4 0.4PATMI margin (%) 12% 15% 4% 10% 12% Total liabilities 87.2 80.3 79.1 80.3 82.3MI interest in PAT (%) 0% 0% 0% 0% 0% Minorities 0.0 0.0 0.0 0.0 0.0


EPS basic (SGD cents) 1.32 1.12 0.25 0.55 0.74EPS diluted (SGDcents) 1.32 1.12 0.21 0.55 0.74EPS Growth (%) NA -15% -81% 158% 35%DPS (SGDcents) 0.00 0.24 0.05 0.12 0.16DPS Growth (%) NM NM -78% 124% 35%Payout (%) 0% 21% 21% 21% 21%

Cash Flow (SGDm) Key ratiosYear end: Dec 2008 2009 2010E 2011E 2012E Year end: Dec 2008 2009 2010E 2011E 2012ECash flows from operating activities ROE (%) 7% 10% 3% 6% 8%PBT 11.8 17.7 4.6 11.9 16.0 Post tax ROACE (%) 6% 8% 2% 5% 7%Depreciations 0.8 0.9 4.3 6.9 9.5 Total debt (m) 68.7 63.5 63.5 63.5 63.5Gains / Disposals 0.0 0.0 0.0 0.0 0.0 Net debt (m) 39.8 35.0 47.5 52.8 52.9Interest income 1.4 1.5 1.4 1.4 1.4 Net debt to equity (%) 29% 23% 31% 33% 31%Interest expenses -0.1 -0.1 -0.1 -0.1 0.0 Net debt / Net debt + equity (%) 23% 19% 24% 25% 24%FX 0.0 0.0 0.0 0.0 0.0 Equity (m) 135.4 149.2 152.2 160.2 171.0Share options & other 0.0 0.0 0.0 0.0 0.0 Book value per share - (S$) 0.2 0.1 0.1 0.1 0.1Op CF, pre WC 13.9 20.1 10.2 20.2 27.0 PBR (x) 0.9 1.6 2.1 2.0 1.8Receiveables 9.5 -2.7 1.1 -1.1 -1.8 Interest cover (x) 9.6 12.8 4.1 9.2 12.1Inventories -0.3 -0.4 0.3 -0.3 -0.6 Payout ratio (%) 0% 21% 21% 21% 21%Payables -1.1 1.8 -1.2 1.2 2.0 FCF Yield (%) 15% 6% -3% -1% 1%Other 0.0 0.0 0.0 0.0 0.0Op CF, after WC 22.1 18.7 10.5 19.9 26.6Interest received 0.1 0.1 0.1 0.1 0.0Interest paid -1.4 -1.5 -1.4 -1.4 -1.4Income taxes -2.2 -3.2 -0.6 -1.7 -2.3Op CF, post tax & WC 18.6 14.1 8.5 16.9 22.9Capex -1.7 -0.8 -20.0 -20.0 -20.0Other, investing -15.0 -3.3 0.0 0.0 0.0Increase in debt 21.3 26.5 0.0 0.0 0.0Repayment of debt -0.6 -32.2 0.0 0.0 0.0Others, financing -21.3 -3.6 0.0 0.0 0.0Dividends paid 0.0 -0.5 -1.0 -2.2 -3.0Net cash flow 1.4 0.2 -12.5 -5.3 0.0

C&CE at open 6.4 7.9 28.5 16.0 10.7Change 1.4 0.2 -12.5 -5.3 0.0C&CE at close 7.9 8.1 16.0 10.7 10.7

Free cashflow 18.2 14.7 -10.2 -1.7 4.3



99

KPJ Healthcare NOT RATEDNON-COVERED COMPANY VISIT NOTE

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.

Analysts PRICE as at 14 September 2010Stephen Hui Magnus Gunn [email protected] [email protected] +65 6307 1513 +65 6307 1520

MYR3.46

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.

KPJ’s asset light model illustrates its belief that REIT- financing can fund high-growth in a capex intensive industry.

Bloomberg code: KPJ MK PER historical (x) 12.7Mkt cap (USDm) 586m Yield historical (%) 3.1%12m range (MYR) 1.40-3.85 P/B historical (x) 2.23m value traded MYRm)

1.3m ROE (%) 18

No. of shares (m) 543 Net gearing (%) 21Est. free float (%) 28.2% Net debt (cash) (MYRm) 71.8mEstablished 1981 Historical EPS (MYR) 0.53Listed 1994 EPS 3-yr CAGR (%) 38Secondary placement EPS 7-yr CAGR (%) 31Auditors, since PWC, 1998 Historical DPS (MYR) 0.20Year-end Dec DPS 3-yr CAGR (%) 13%Major shareholder Johor Corporation 48.7%Source: Bloomberg, Company

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.

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.

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.

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 Singapore’s 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 KPJ’s view, the incubation time for medical tourism is long and public perception of Malaysia as a medical tourism destination needs to be nurtured.

Share price performance (MYR)

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Sep

09

Oct

09

Nov

09

Dec

09

Jan

10

Feb

10

Mar

10

Apr

10

May

10

Jun

10

Jul 1

0

Aug

10

Sep

10

KPJ Healthcare KUALA LUMPUR COMP INDEX (rebased)

Source: Bloomberg

Related research notes

1/9/10 Eu Yan Sang OUTPERFORM

1/9/10 OSIM OUTPERFORM

ASEAN hospitals

16/9/10 Raffles Medical OUTPERFORM

16/9/10 Thomson Medical OUTPERFORM

16/9/10 Parkway Holdings IN-LINE

16/9/10 Healthway Medical IN-LINE

16/9/10 Bumrungrad Non-covered

16/9/10 Bangkok Dusit Non-covered



100

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.

Highly scalable business model KPJ believes its community-based private hospital model has proven to be highly scalable given the nature of healthcare in Malaysia. Its strategy has been to target communities with a 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 presents itself, KPJ will also consider expanding through acquisitions of smaller hospital chains. The group has regional exposure – it has two hospitals in Indonesia, but recently scaled back its presence in Saudi Arabia and Bangladesh. The focus for overseas expansion will be through management contracts to minimise capital risk. It has taken 26 years for KPJ to become a company with MYR1.1bn in turnover and its revenue objective is MYR2.0bn by FY12.

Some medical tourism, but not in a big way just yet Although Malaysia has plans to boost its medical tourism industry, the incubation period is long. In KPJ’s view, the key to success for medical tourism is marketing and branding. KPJ notes that Malaysian private healthcare should not be inferior to Singapore’s as most of the doctors from both countries are trained abroad. It believes Malaysia needs to overcome the general impression that its healthcare services are inferior to Singapore’s. KPJ states that its hospitals are currently highly occupied, so the group has limited capacity to serve significant numbers of foreign patients.

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, KPJ’s 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 andthe 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

20

40

60

80

100

120

140

2004 2005 2006 2007 2008 2009

MYRm

EBIT Net profit

Source: Company

Cash generation KPJ acknowledges that higher capex dragged its FCF into the red in 2009. It states, however, that operating cash flow remains strong and further disposals of hospital buildings to the Al-Aqar REIT will strengthen the cash position.

Shareholdings KPJ is the healthcare division of state-owned corporation, Johor Corp and is 49% owned by the corporation. Johor Corp has RM3.58 bn of debt due in 2012. Johor Corp owns 8 listed entities, including Kulim, the Malaysian palm oil plantation.

Corporate governance The board consists of seven Independent Non-Executive Directors and two Non-Independent Non-Executive Directors.

Analysts Stephen Hui Magnus Gunn Pauline Lee [email protected] [email protected] [email protected]+65 6307 1513 +65 6307 1520 +65 6307 1512


101

Competition

Fig 153: Competition

Business segment Competitor Listed / private

Specialist hospitals in Malaysia Pantai Holdings Bhd Private Columbia Asia Private Health Management International (HMI) Listed (HMI SP) Parkway Holdings Limited Listed (PWAY SP) Metro Specialist Hospital Private Loh Guan Lye Specialists Centre Private Normah Medical Specialist Centre Private Prince Court Medical Centre 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

Fig 155: KPJ treated 4% of medical tourists to Malaysia in 2009


KPJ Healthcare 17%



KPJ Healthcare 4%

Others 96%

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% Employees Provident Fund – 4.9%

Management and directors Chairman Tan Sri Dato’ Muhammad Ali Hashim Managing Director Datin Paduka Siti Sa’diah 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 Sa’diah Sheikh Bakir

Corporate/management dealing in company shares Tan Sri Datuk Arshad Ayub 0.7% Datin Paduka Siti Sa’diah Sheikh Bakir 0.2%

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 Source: Company, Bloomberg


102

Four key operational charts

Fig 157: No. of patients treated growing steadily

0

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2,500,000

2004 2005 2006 2007 2008 2009

Out-patient In-patient

KPJ’s patient numbers have steadily increased over the past five years – with both inpatients and outpatients growing at a 13–14% 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

1,800

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2,600

2004 2005 2006 2007 2008 2009

MYR

150

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Revenue per in-patient Revenue per out-patient

KPJ’s 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.

Source: Company

Fig 159: Segmental revenue growth

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2004 2005 2006 2007 2008 2009

MYR m

Hospital incomeConsultation incomeSale of pharmaceutical, medical and surgical productsothers

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

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5

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25

2004 2005 2006 2007 2008 2009

Malaysia Indonesia Bangladesh 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


103

Trends and six-year financial data

Growth Sales growth & earnings growth

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Cash flow Op Cash Flow Generated & Capex

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Balance sheet Net debt (cash) / equity

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

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

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

Key data & ratios Year-end: Dec 2004 2005 2006 2007 2008 2009EPS (MYR) 0.16 0.16 0.20 0.36 0.41 0.53 Chg (%) n/a 2.2% 24.1% 77.8% 14.8% 30.7%DPS (MYR) 0.07 0.11 0.14 0.10 0.07 0.20 CFPS (MYR) 0.34 0.40 0.29 0.50 0.64 0.70 BVPS (MYR) 1.78 2.02 2.16 2.44 2.77 3.04 Wtd avg shares (m) 202 203 205 209 210 208 EBIT margins (%) 10% 9% 9% 8% 9% 10%ROE (%) 9% 8% 9% 15% 15% 18%Post-tax ROCE (%) 8% 6% 8% 11% 11% 13%Capex/Sales (%) 12% 12% 8% 9% 10% 15%Capex/Depreciation (%) 257% 270% 217% 241% 292% 479%Net debt/equity (%) 78% 78% 57% 53% 42% 33%Total debt/Total capital (%) 45% 46% 43% 42% 37% 35%Net interest cover (x) 3.2 3.6 3.8 4.6 6.1 8.5



104

Bumrungrad NOT RATEDNON-COVERED COMPANY VISIT NOTE



Analysts PRICE as at 14 September 2010Stephen Hui Magnus Gunn [email protected] [email protected] +65 6307 1513 +65 6307 1520

THB34.00

Key points Bumrungrad Hospital’s (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 company’s focus is on driving revenue intensity by expanding its specialty areas.

BH does not view Singapore’s private hospitals as direct competition as they target different countries and somewhat different segments.

Bloomberg code: BH TB PER historical (x) 17.3Mkt cap (USGD) 697.9m Yield historical (%) 2.712m range (THB) 23.6-31.4 P/B historical (x) 3.93m value traded (USGD)

0.95m ROE (%) 22.8

No. of shares (m) 728.304 Net gearing (%) 28.3Est. free float (%) 70.4 Net debt (cash)(USGD) 64mEstablished 1980 Historical EPS(THB) 1.44Listed 1989 EPS 3-yr CAGR (%) 4.2Secondary placement - EPS 7-yr CAGR (%) 18.9Auditors, since E&Y, 1997 Historical DPS(THB) 0.85Year-end Dec DPS 3-yr CAGR (%) 4.3Major shareholder Bangkok Insurance Pcl. -13.17%Source: Bloomberg, Company

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.

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.

Valuations and share price performance 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.

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.

Share price performance (THB)

24.0

26.0

28.0

30.0

32.0

34.0

36.0

38.0

Sep

09

Oct

09

Nov

09

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10

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10

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10

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10

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10

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10

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10

Bumrungrad STOCK EXCH OF THAI INDEX (rebased)

Source: Bloomberg




ASEAN hospitals





16/9/10 KPJ Healthcare Non-covered

16/9/10 Bangkok Dusit Non-covered



105


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 company’s focus has been on its flagship hospital asset, the Bumrungrad International Hospital in Bangkok. BH does not own any other hospital in Thailand. The group’s 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 women’s 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. BH’s 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. BH’s leading patient-countries are the UAE, the US and Myanmar. This contrasts with Singapore’s 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. BI’s othershareholders include Istithmar (19.5%) and Temasek Holdings (19.5%). BI’s 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: BH’s annual international patient volumes

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8,000

10,000

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Sales revenue EBITDA

Source: Company

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.



106

Competition

Fig 162: Competition


Healthcare Hospital operators in Thailand Bangkok Dusit Medical Services PCL Listed (BGH TB) Bangkok Chain Hospital Public Co. Ltd Listed (KH TB) Hospital operators in Malaysia KPJ Healthcare Listed (KPJ MK) Pantai Holdings Bhd Private Health Management International (HMI) Listed (HMI SP) Hospital operators in Singapore Raffles Medical Group Ltd Listed (RFMD SP) Parkway Holdings Ltd Listed (PWAY SP) Thomson Medical Centre Ltd Listed (THOM SP) Hospital operators in India Apollo Hospitals Enterprise Ltd Listed (APHS IN) Source: Standard Chartered Research

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

Fig 165: 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.

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

employer in Thailand and ranked 6th 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).

Source: Company


107


Fig 166: International patients contribute 55% of revenue

0%

20%

40%

60%

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100%

2004 2005 2006 2007 2008 2009

Thai patients International patients

BH’s revenue from the hospital segment, which accounted

for c.97% of total revenue in 2009, grew at a 2004–09 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

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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-patientsNo. of visits/day

Outpatient visits trend (OPD) Inpatient Volume (ADC) Trend

BH said its outpatient numbers took the hardest hit during

the Rajprasong protests (3 April–31 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. BH’s 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 pre-protest levels.

Source: Company

Fig 168: No. of medical tourists to Thailand is growing

0

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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 2005–2009 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.

Source: Company

Fig 169: Outpatient capacity per day and inpatient capacity

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2009 2010E 2011E 2012E 2013E 2014E MaxCapacity

Inpatient capacity- Open beds

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Inpatient capacity- Open beds Outpatient visit capacity per day

BH expects its inpatient capacity to remain relatively stable

over 2010–14, 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 2009–14 CAGR of 5.9% to 6,000 beds.

Source: Company


108



-30

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%

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%

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

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

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

Key data & ratios Year end: Dec 2004 2005 2006 2007 2008 2009EPS (THB) 1.01 1.21 1.26 1.85 1.37 1.44 Chg % n/a 20% 4% 47% -26% 5%DPS (THB) 0.7 0.75 0.75 0.80 0.80 0.85CFPS (THB) 1.20 1.54 0.68 1.55 2.03 1.97BVPS (THB) 2.39 3.01 3.79 5.01 5.61 6.31W.Avg Shares 863 867 867 867 867 867 ROE (%) 45% 40% 33% 37% 24% 23%Post-tax ROCE (%) 25% 27% 23% 29% 20% 19%Capex/Sales (%) 9% 10% 9% 7% 19% 9%Capex/Depreciation (%) 238% 280% 249% 174% 410% 168%Net debt/equity (%) 71% 46% 25% 28% 31% 23%Total debt/Total capital (%) 51% 40% 33% 29% 28% 23%Net interest cover (x) 9..5 12.8 14.7 11.8 14.9 19.1



109

Bangkok Dusit NOT RATEDNON-COVERED COMPANY VISIT NOTE



Analysts PRICE as at 14 September 2010Magnus Gunn Stephen Hui [email protected] [email protected] +65 6307 1520 + 65 6307 1513

THB37.00

Key points Bangkok Dusit’s (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.

Bloomberg code: BGH TB PER historical (x) 17.5Mkt cap (USGD) 1211.3m Yield historical (%) 2.4112m range (THB) 23.3-35.75 P/B historical (x) 2.143m value traded (USGD)

1.2m ROE (%) 12

No. of shares (m) 1214 Net gearing (%) 38Est. free float (%) 54.15 Net debt (cash) (USGD) 326mEstablished 1969 Historical EPS (THB) 1.42Listed 1991 EPS 3-yr CAGR (%) 8Secondary placement N/A EPS 5-yr CAGR (%) 21Auditors, since E&Y, 2005 Historical DPS (THB) 0.70Year-end Dec DPS 3-yr CAGR (%) 12Major shareholder Prasarttong Osoth 12.68%Source: Bloomberg, Company

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.

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.

Valuations and share price performance 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.

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.

Share price performance (THB)

22.024.026.028.030.032.034.036.038.0

Sep

09

Oct

09

Nov

09

Dec

09

Jan

10

Feb

10

Mar

10

Apr

10

May

10

Jun

10

Jul 1

0

Aug

10

Sep

10

Bangkok Dusit STOCK EXCH OF THAI INDEX (rebased)

Source: Bloomberg




ASEAN hospitals





16/9/10 KPJ Healthcare Non-covered

16/9/10 Bumrungrad Non-covered



110


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

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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-à-vis to BH is BDMS aims to capture the increasing domestic medical spending as incomes rise. Thailand’s urbanisation rate is still low at an estimated 34% in 2010 (Thailand National Statistical Office). With Thailand’s 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.

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 Singapore’s 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 BH’s 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 group’s hospitals was only 61% in 1H10 compared to BH’s 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

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25,000

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THB m

Revenue EBITDA

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 BH’s, in part to depreciation from its newer hospitals but also its hospitals outside Bangkok target lower income Thais. .



111

Competition Fig 172: Competition


Healthcare Operators in Thailand Bumrungrad Hospital Public Co Ltd Listed (BH TB) Bangkok Chain Hospital Public Co Ltd Listed (KH TB) Operators in Malaysia KPJ Healthcare Listed (KPJ MK) Pantai Holdings Bhd Private Health Management International (HMI) Listed (HMI SP) Operators in Singapore Raffles Medical Group Ltd Listed (RFMD SP) Parkway Holdings Ltd Listed (PWAY SP) Thomson Medical Centre Ltd Listed (THOM SP) Operators in India Apollo Hospitals Enterprise Ltd Listed (APHS IN) Source: Standard Chartered Research

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 Fig 175: 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.

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. Source: Company


112


Fig 176: Number of beds and bed utilisation

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2007 2008 2009 1Q2010

Number of beds

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Utilisation of beds Utilisation rate

BDMS increased its bed utilisation rate during 2007–09 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

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THBm

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

0%

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100%

2004 2005 2006 2007 2008 2009 1Q10IPD OPD Others

BDMS’ revenue breakdown between in-patient and out-

patient services have remained relatively stable. In-patients accounted for 54% of revenues in 2005 and the ratio remained at 54% in 1H 2010.

Source: Company

Fig 179: Patient revenue by nationality

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2005 2006 2007 2008 2009 1Q2010

Thai patients International patients

BDMS notes that domestic patients still contribute the

majority of its revenue, although this was down by a 5% CAGR 2004–09 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


113



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%

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Margins EBIT and Net profit margin

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Net profit margin EBIT margin Cash flow

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0500

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2004 2005 2006 2007 2008 2009

TH

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After-tax operational cash flow Capex Balance sheet

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

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

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

Key data & ratios Year end: Dec 2004 2005 2006 2007 2008 2009EPS (THB) 0.71 0.72 1.12 1.04 1.37 1.42 Chg % n/a 1.41% 55.56% -7.14% 31.73% 3.65%DPS (THB) 0.50 0.50 0.50 0.50 0.60 0.70 CFPS (THB) 1.32 1.52 2.28 2.73 3.17 3.42BVPS (THB) 8.60 6.78 8.05 9.29 10.22 11.65W.Avg Shares 875 1,163 1,177 1,196 1,214 1,214 ROE (%) 3% -2% 14% 11% 13% 12%Post-tax ROCE (%) 8% 9% 9% 8% 9% 9%Capex/Sales (%) 28% 26% 23% 16% 9% 7%Capex/Depreciation (%) 410% 275% 257% 154% 91% 66%Net debt/equity (%) 50% 79% 60% 57% 20% 8%Total debt/Total capital (%) 39% 46% 42% 39% 23% 17%Net interest cover (x) 5.3 4.3 4.2 3.6 4.4 4.3



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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 personalopinion(s) about the subject securities and issuers and/or other subject matter as appropriate; andNo part of his or her compensation and other benefits was, is or will be directly related to the specific recommendations or viewscontained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisalsof 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

1.31.41.51.61.71.81.92.02.12.2

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


Thomson Medical Centre - current rating is: OUTPERFORM

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95




117

Company Parkway Holdings


Parkway Holdings - current rating is: IN-LINE

1.5

2.0

2.5

3.0

3.5

4.0

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.


Healthway Medical Corp. Ltd. - current rating is: IN-LINE

0.100.110.120.130.140.150.160.170.180.190.200.21


Source: FactSet prices / SCB ratings and fair values Company KPJ Healthcare


0.0

0.51.0

1.5

2.0

2.53.0

3.5

4.0

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

C urrent rat ing is: N OT R A TED


118

Company Bumrungrad


20.0

23.0

26.0

29.0

32.0

35.0


Source: Bloomberg

C urrent rat ing is: N OT R A T ED

Company Bangkok Dusit


20.0

23.0

26.0

29.0

32.0

35.0

38.0

41.0


Source: Bloomberg


Company Q&M Dental Group


0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

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


0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7


Source: Bloomberg



119

Company Parkway Life REIT


1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7


Source: Bloomberg


Recommendation Distribution and Investment Banking Relationships

% of covered companies currently assignedthis rating

% of companies assigned this rating with whichSCB has provided investment banking services overthe past 12 months

OUTPERFORM 55.8% 11.9%

IN-LINE 28.8% 7.7%

UNDERPERFORM 15.5% 5.7%

Research Recommendation

Terminology Definitions

OUTPERFORM (OP) The total return on the security is expected to outperform the relevant market index by 5% or more over the next six months

IN-LINE (IL) 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


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