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Imagine the scene. Overcrowded hospitals with patients on trolleys in the corridors. People travelling from hundreds of miles away to be treated in a clinic with decent standards. Hard-pressed management charging extra for access to essential facilities like lifts.
For once, I’m not talking about the NHS. While we rightly complain about the quality of service we get from Britain’s crumbling state healthcare system, it remains significantly better than anything available to patients in much of Asia.
But that is set to change.
As economies develop and become richer, spending on healthcare rises hugely. This process takes some time, but it’s already underway in many Asian countries. And not only will it dramatically improve life expectancy and quality of life in these countries, but it will provide us with some excellent investment opportunities…
Take a lot at the chart below. It shows the percentage of GDP that is spent in various countries on healthcare, both by the government and directly out of people’s pockets. As you can see, richer nations spend considerably more than poor ones.
While there are some outliers – like America’s hideously expensive and dysfunctional system – most developed countries are spending 8%-10% of GDP on healthcare. Many emerging markets are still spending only half that. (This study is from 2003, but there’s little to suggest the picture has changed much since then.)
That suggests that a huge amount of money is likely to flow into this sector as Asia becomes richer, and indeed, emerging market healthcare is likely to be a theme we return to often in MoneyWeek Asia. Several Asian nations overhauling their healthcare systems, including a very large investment by China, and there are plenty of ways to gain exposure. But today, I’m going to focus on Vietnam and a stock that could be a big beneficiary of this trend.
Vietnam is very poor - but it's getting richer
Vietnam is still very poor, with a GDP per head that’s less than half that of China. It’s a long way down the development scale, exporting mainly commodities and textiles. And it’s certainly going through a rough patch at the moment, with 27% inflation, slowing growth and a substantial trade deficit. But it’s a compelling long-term story.
The countryside is rich in natural resources (especially agriculture ones), while wages are low, making it an attractive place to relocate factories. The people are well-educated, with a literacy rate of more than 90% for both men and women. Best of all, it has a young population – much more so than in China, meaning it has an abundant workforce and relatively few older people to support.
A middle class is slowly emerging among its population of 85 million, and the conditions are in place for many more to join them in the next few decades. And, as ever, a wealthier population will demand better standards in everything, including medicine.
Unfortunately, while the healthcare system in Vietnam is much better than in many other developing countries, it is still nowhere close to meeting their needs. The socialist dream of free healthcare for all began to collapse in the late 1980s, with the government progressively withdrawing free services, first through user charges and then by withdrawing from certain sectors altogether and leaving the private sector to pick up the slack. Around 70% of spending on healthcare in Vietnam is paid for out of patients’ pockets rather than the state, according to a 2005 IMF study.
While the government is keen to improve the quality of its healthcare system and its affordability, it’s neither willing nor able to set up a UK-style NHS where the state pays for and provides everything. Instead the plan is to expand the health insurance sector and encouraging companies to set up new private hospitals.
Foreign investors are welcome: out of 22 hospitals established recently, 10 included foreign investment and two were wholly foreign-owned, according to the government-run Vietnam News Agency.
Low competition and rising demand spells a great opportunity
So private healthcare could be a big winner in Vietnam. You have a fast-growing region where people are accustomed to paying for their own care and – as they grow wealthier – should be prepared to spend more and more on it. Yet facilities are inadequate and much more investment is needed, meaning limited competition for early movers. So how can you get exposure to this opportunity?
One way is through a little-known firm called Thomson Medical Centre. For now, Thomson is best known for operating Singapore’s largest private maternity hospital, where around 20% of the city-state’s births take place. It also runs a fertility centre and a chain of women’s clinics. It’s a successful, if unglamorous, business that’s shown solid growth in recent years and demand for its services should stay robust, as we’ll see below.
Where the business starts getting exciting is in its plans to expand into Vietnam. This is a move that could eventually - assuming it gets it right - transform the firm. There are 45,000 births in Singapore each year; in Vietnam there are 1.3 million, nearly 30 times as many.
As Thomson’s chief executive Allan Yeo told Bloomberg, “even 20% of that is a good enough market for us”.
The firm’s first step towards entering Vietnam is a consultancy and management project on a new 260-bed women’s and children’s hospital called Hanh Phuc in Binh Duong, a fast-growing province in the southeast which is one of the country’s top destinations for foreign investment.
Thomson has helped develop the hospital and will manage the complex on an initial five-year contract when it opens in the second half of 2009. It also has an option to take a 25% equity stake in the hospital once construction is complete. The firm is also looking at several other potential hospital projects in Vietnam with the Hanh Phuc consortium, and is also considering setting up a fertility centre there.
While fees in Vietnam will obviously be a lot lower than in Singapore at first – and so far there’s no indication from Thomson of how profitable the Vietnamese business might be – by establishing itself at this early stage, Thomson will be very well-placed to benefit as Vietnam's middle class expands and becomes richer over the next couple of decades.
Why Thomson should gain more business in Singapore too
But Thomson isn't all 'jam tomorrow'. The group also has a very solid business in its home state. Revenues, profits and clients have been rising strongly for several years.
There’s every reason to expect this to continue. Singapore is concerned about its relatively low birth rate and the government is trying to encourage larger families through financial incentives. It also hopes to grow the population significantly through immigration. This should mean a higher number of births and more demand for Thomson’s services.
Thomson looks well placed to pick up business from other hospital groups, who are trying to attract higher-margin business from medical tourists – people who travel to foreign countries for treatment because the facilities are better, costs are lower or waiting lists are shorter.
Medical tourism is a theme that’s likely to benefit several parts of Asia – and especially Singapore with its world-class facilities. We looked at this in a recent issue of MoneyWeek (see Fleeing the NHS - profit from the exodus) and it’s a theme that we’ll return to in future issues of MoneyWeek Asia.
For now, we’ll just note that to focus on these patients, firms such as Parkway and Raffles are cutting back on sectors such as obstetrics and gynaecology which form the bulk of Thomson’s business, reducing competition for clients.
Thomson has a strong balance sheet - and it's cheap
Financially, Thomson’s balance sheet is in good shape. At the end of February, the ratio of total liabilities (including payables) to equity was 0.25; bank debt was just 8% of equity. In the last full year, operating profit covered interest expenses by more than 25 times. The working capital position is sound, with a quick ratio (short-term assets to short-term liabilities) of 1.35. Borrowings have been steadily reduced in recent years and cash on the balance sheet amounted to S$17m or almost 6S¢ a share in February.
On a trailing price/earnings ratio of 16.3 and an estimated one of 15.4, the firm looks good value given its growth potential. It aims to pay out at least 50% of net profit to shareholders each year, suggesting a dividend of around 2S¢/share and a dividend yield of more than 3% next year - very attractive given its growth potential.
Reflecting its strong fundamentals and defensive business, the stock has been something of a safe haven against the global downturn. As the chart below shows, it’s down less than 8% over the last year, against a fall of almost 22% in the Straits Times All-Share index.
Of course, no stock is risk-free. In Thomson’s case, while its domestic business looks very solid, there is the risk that its international plans might not develop in the way it expects or that it could over-reach itself in chasing these exciting growth markets. There’s also the possibility that Vietnamese government policy could turn against foreign investment in the sector, although that seems unlikely.
Investors should also be aware that this is a small company, with a market cap of just S$175m (£65m) and the stock is lightly-traded, especially in these tough conditions when small caps are out of favour. Three shareholders account for more than 50% of the shares, including the company founder/chairman.
But in my view, small caps are where some of Asia’s most exciting opportunities lie. We'll be looking at a number of these stocks in MoneyWeek Asia. However, investors should be aware of the higher risks that companies like this carry (even with an established, solid business such as Thomson’s). With that in mind, this looks a good way to play a very appealing theme.
Thomson is listed in Singapore under the ticker THOM. For those of you who are new to buying Asian equities directly, we are producing a guide to foreign dealing, including a list of suitable brokers, and will be adding it to the MoneyWeek website next week - look out for an update in Money Morning later this week.
Turning to the markets...
Asian markets were mixed last week. China's CSI 300 benchmark index plunged almost 9% last week, including a one-day drop of 4.7% on the eve of the Olympics, as the long-standing belief that the government would intervene to ensure a strong market during the games proved wrong. Stocks are now 58% off their peak in October last year and show no signs of bottoming.
In India, the Sensex rose 3.5% to a new two-month high. Investors seem to be regaining some confidence from the survival of the government in a crisis vote three weeks ago. There's also the hope that commodity price falls and recent interest rate hikes might bring inflation down from double-digit levels.
India is one of only two Asian markets that show signs of settling into an uptrend, having bounced 23% since its low in mid-July; the other is the Philippines. After selling off hard earlier this year on spiralling inflation and plummeting growth, the market is up 20% since the end of June, as investors bet that the worst is priced in.
On the forex markets, the renminbi's two-year rise against the dollar has stalled in the last couple of weeks. After touching RMB6.81/USD in mid-July, up 17% since China began allowing its currency to rise against the dollar, the renminbi has been largely unchanged. The government has slowed appreciation to keep its low-margin exporters competitive in the face of falling US demand. However, an unexpectedly large 27% rise in exports in July lifted the monthly trade surplus to $25.3bn, which will increase calls from trading partners for a further gains in the renminbi.
But despite the rise in July's exports, there was plenty of gloom elsewhere about the prospects for world trade, especially in the shipping sector. China Cosco Holdings, the Hong Kong-listed unit of Cosco Group, China's largest shipping firm and the world?s largest iron-ore and coal shipper, fell 23% on concerns that slowing global growth is hurting demand for Asian goods and freight transport.
Regional shipyards including Cosco's Singapore-listed shipbuilding and ship repair arm also sold off, after two major South Korean firms said that customers had failed to make payments on their orders. Investors fear that reduced demand for new ships, higher raw material costs and the inability of many buyers to get finance may severely hit profits at shipbuilders. The share prices of many yards have fallen by 50% or more since the start of the year.
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Cris Sholto Heaton
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