Global investors are sizing up the opportunities in south east Asia’s health sector, finds Adrian Murdoch
Towards the end of January, a third of Civen-owned Spire Healthcare’s hospitals across the UK were sold. The deal raised around £700 million and has been much debated as a potential precursor to one of the longest-running rumoured deal in recent healthcare history – the hook up between Spire and Australia’s Ramsay Health Care.
That industry rom-com aside, there has not nearly been as much attention on the buyers of the hospitals. It was a consortium made up of the affiliated investment funds of publicly owned investment manager Och-Ziff Capital Management Group and Moor Park Capital, specialists in corporate finance-led real estate transactions. But significantly the consortium was led by Malaysia’s Employees Provident Fund, the country’s weighty state pension fund.
This is just the most recent sign that south east Asia is starting to flex its muscles in the global health market. The growth figures for the region have investors justifiably salivating. The Asia Pacific healthcare market was worth almost £244 billion in 2012 and is expected to reach £495 billion by 2018, according to consultants Frost & Sullivan. While the rest of the world is lagging behind at less than 6% growth a year, it is going to see a compound growth rate of almost 13%.
“Rising patient demands for better healthcare will result in healthcare reforms in Asia Pacific,” says Rhenu Bhuller, vice president of healthcare for Asia Pacific at Frost & Sullivan, explaining the growth. “Increasing urbanisation is accompanied with growing consumer awareness and an expanding middle class, progressively skewing population density. This all translates to an increased demand for improved healthcare services.”
The figures become even more seductive when the private hospital figures are pulled out. Private hospital revenue in Asia Pacific is expected to grow at a compound rate of just over 17% a year for the next five years. “The increasing life expectancy in the region will result in more elderly requiring long-term care,” continues Bhuller, pointing out that the average percentage of people above 65 in the region will rise from 9.8% this year to 11% by 2018.
Private equity-backed acquisitions in Asia are booming too. Other sectors might be down, activity sucked out of them thanks to a global slowdown, but in healthcare year-on-year deal value doubled in the first half of 2012 to £437 million, according to figures from Thomson Reuters.
On the basis of all of those figures, little surprise then that the landmark healthcare deal last year was the £1.5 billion dual listing of Malaysia’s IHH Healthcare on the Malaysian and Singaporean stock exchanges in July last year. It is a big player. IHH has a global network of over 4,900 beds in 33 hospitals across the region. It has more than 3,300 new beds in 15 hospitals currently in the pipeline and employs more than 24,000 people. It was the world’s third largest IPO last year and created the world’s second largest listed private healthcare provider based on market capitalisation, after US hospital operator HCA Holdings.
A sign of how attractive the deal was to institutional investors like Singapore’s state investment agency Temasek and BlackRock is that the institutional tranche was more than 130 times covered, with demand split equally between foreign and domestic investors. The deal priced at MYR2.80/SGD1.113 (£0.59) per share. This was just below the top of the MYR2.67-MYR2.85 range, which left some money on the table for investors. And even more convincingly, both the Malaysian and the Singaporean tranches appreciated as much as 14% when they debuted.
In Thailand, at the moment there is soul searching about the extent to which medical tourism impacts the economy. The country has had more than a 40% share of Asia medical tourist arrivals since 2011 and patient numbers are expected to double by 2015 according to research from Renub. While medical services provided to foreigners generate a hefty THB120 billion (£2.6 billion) a year for the Thai economy, local papers complain that locals are excluded. “It’s ironic that many Thais are still struggling with bad service, inadequate medical equipment and a shortage of doctors,” was the leader in Thailand’s leading English newspaper in mid February.
Yet for the investor this is good news: there is clearly room to grow. One of the biggest deals last year was a 212.2 million-share block trade in Bangkok Dusit Medical Services, the country’s biggest private-hospital operator, via Bualuang Securities and Credit Suisse as joint global co-ordinators and with Credit Suisse as sole bookrunner in October last year. It raised THB22.2
The money was used for a war chest. At the end of January, Dusit made its bid for Krungdhon Hospital, the country’s second-smallest publicly traded hospital operator. The comparatively low cost of the deal – estimated at THB700 million – gives Dusit bulk and allows it to increase its total number of beds by 11% to about 5,900.
While institutional investors are bullish on the south east Asian story in general, this is not to say that the story is problem free. The question is how much growth can be delivered and for how long. The difficulty in the region remains that healthcare is relatively defensive. It is rare to see an operator play much outside its own geographical area.
The limitations of this can be seen most clearly in Singapore where the biggest player is the Raffles Medical Group, and the market is getting close to saturation. Although the company’s Q3 results at the end of October last year were solid – net profits grew by 6.6% to SGD12.6 million (£6.7 million), on the back of revenue growth of 13.9% to SGD78.7 million – they were hardly stellar, and especially so given rising costs on the island state. Analysts are mixed on how the company develops too. “We believe that Raffles Medical Group intends to rationalise its manpower and other resources to focus on chasing higher-margin healthcare businesses,” says Gary Ng, analyst at CIMB Bank.
Similarly, while IHH Hospital’s performance last year was exemplary, it is not all good news. Despite its size, IHH is facing many of the same issues as Raffles. IHH managing director Lim Cheok Peng speaks of “continuing to strive for greater efficiencies and synergies within our existing business”. At the time of writing, IHH Healthcare shares are currently trading at MYR3.34, comfortably off the November high of MYR3.48. This is on the back of Q3 figures to the end of September which showed that net profits dropped 47% to MYR75.7 million from MYR142.9 million the previous year.
Words of caution aside, the country to watch this year is Indonesia. The £15 billion healthcare sector in Asia’s third largest economy is expected to jump as investors are attracted by the country’s growing middle class and stability. To put the potential for growth into perspective, while Germany has 82 hospital beds per 10,000 people and China has 42 beds, Indonesia at the moment only has only six hospital beds according to the latest figures from the World Bank.
All attention is currently focused on the country’s largest private hospital operator, Siloam Hospitals. Currently owned by PT Lippo Karawaci, also the country’s largest property company, in August last year it announced that it was looking to split off its hospital division into a separate unit to prepare for an IPO or a strategic investment.
Siloam is expected to more than double its revenue over the next two years – from around £135 million in 2012 to between £327 million and £392 million in 2015. It currently operates 13 hospitals and is currently building to hit a target of 20 in the next few years.
Initial attempts at a private sale of 20% of Siloam for up to £196 million and led by Bank of America Merrill Lynch eventually stalled at the end of last year when first round bids were lower than expected, but expectations are that there will be another attempt later this year.
Interest came almost at once from first division private equity firms like Blackstone, KKR, Bain Capital and Dubai-based Abraaj Capital while others are starting to rally around too.
Perhaps the most telling indication of how much the region is expected to grow and the opportunities for private investors is that at the end of January, pan-emerging markets private equity firm Actis appointed Arjun Oberoi as global healthcare sector head and named Ivy Santoso as Indonesian country head. They are based out of Singapore and Jakarta respectively.