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Healthcare In Singapore: Hazy Or Healthy?
Perspective | 28 June 2013
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By: Louis Kent Lee
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By: Choo Hao Xiang
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When people say that Singapore goes through only two seasons – dry and rainy, they are forgetting something. Over the past few weeks, residents in the city-state experienced the annual haze season. Neighbouring nations such as Malaysia were also at the receiving end of the smoke. Short-term as the catalyst is, this prompted Shares Investment to examine the impacts on the healthcare sector and what lies ahead for these companies.

If you were out on the roads in Singapore recently, you would have spotted a lot of people donning masks. Perhaps, even proportionally higher than in a medical clinic. No thanks to the smog that had blanketed Singapore over the past fortnight, locals were seen wearing masks, be it the N95 mask or just a normal surgical mask, whenever they were in the open.

During the week ended 21 June, the Singapore air pollution index, Pollutant Standards Index, went on a record-breaking streak, reaching a fresh all-time high of 401 on 21 June. According to the National Environment Agency, readings above 300 are considered hazardous.

In light of this, companies have already taken steps to ensure employee welfare through the distribution of masks, installation of additional air purifiers and flexible work arrangements. With that, consumer-driven businesses such as those in the hospitality, retail or transportation sector, would likely be squeezed on both ends. As residents are encouraged to stay indoors, business activities would suffer a blow, translating to lower revenue.

Benefiting From Outbreaks
Having said that, such outbreaks would actually bode well for one sector – healthcare. As depicted in the indexed performance chart, there was an uptick in the FTSE ST Health Care index on 21 June, the day the worst air quality levels were recorded here, while the broader market suffocated.

In particular, Medtecs International Corporation, a manufacturer of medical consumables (including N95 masks), saw a surge in buying activities. The firm’s share price gained a massive 51.7 percent from $0.06 on 14 June to $0.091 on 21 June, with trading volume rising ferociously from an average of 1 to 2 million to 129.6 million.

Given the current condition and word from Prime Minister Lee Hsien Loong that the hazardous smog could last for several weeks, one might be thinking of joining the chase. Hold your horses though. What one needs to recognise here is that the haze season is a one-time event. In addition, the degree to which smog conditions disrupt people’s lives also plays a part. As such, this event is a short-term catalyst.

What should concern an investor is the long-term outlook of a business. In view of that, obvious questions popped up in our heads. What exactly anchors the healthcare sector? And what affects this sector the most?

Recession Proof, Aging Population, Longer Life Expectancy
It might be crude to put this in such blatant and bold sub-heading, but it is true, the healthcare sector is recession proof. Think about it, even in the face of a recession, people will still continue to fall sick, go for check-ups and continue to take care of their personal well-being. Unlike other industries, the healthcare sector fulfils a “need” instead of a “want”. Therefore in good times or bad, a need that has to be fulfilled, will need to be fulfilled.

While it is true that the healthcare sector is resilient against recession shocks, another interesting anchor that will continue to benefit the healthcare sector is that of Singapore’s aging population. According to the latest statistical data (shown in the Resident Population Profile table) compiled by the Singapore Department of Statistics, we are seeing significant increases in the population category of “65 years and over”. In both periods under comparison (2012 versus 2011 and 2011 versus 2010), the “65 years and over” age category registered the biggest increase among the other age categories.

Also, the bulk of the population, represented by the “20 to 64 years” age category is also expected to see slow rates of increment, as some of these people age and move over to the “65 years and over” age category. In addition to that, the mean life expectancy at birth as at 2012 increased from 2011’s 81.9 years old to 82.3 years old, which means that people are living longer now.

These factors, coupled together will most probably bring forth increased healthcare spending, possible government initiatives to help subsidise rising healthcare costs, and increased demand for healthcare services. And all these, are nothing but positive anchors for the healthcare sector.

High Operating Costs
So if the healthcare sector is so robust, there is nothing to be worried about and let this industry ride the trend of the catalysts coming its way right? Wrong.

Rising cost pressure has been touted as one of the main key risks encircling the healthcare industry. Rising staff costs, rental costs and perhaps costs involved in new expansion start-ups all contribute to potential weight bags on the eventual financial performance of this sector in general. Zooming in on what makes up the bulk of the operating costs of healthcare providers, we look at the percentage of the staff costs relative to its respective revenue of three healthcare firms that have strong footholds in Singapore.

In terms of materiality, anything more than five percent of revenue should be deemed material. Therefore, the table above does show the impact of staff costs that these healthcare stocks are absorbing. As seen in the table, the proportion which staff costs account for spans a wide range from 29 percent to 63 percent. Why the huge difference? It basically boils down to the business segments that the company is engaged in (such as radiology, eye surgery and plastic surgery). This would then determine the cost incurred based on the staff mix.

Revisiting the Healthcare 2020 Masterplan that was revealed in March 2012, expected increase of about 20 percent in the pay of doctors will be expected to kick in by 2014, and this is believed to already be in progress. Base pay of nurses, which saw increments in the range of 4 to 17 percent since April 2012 will continue to be lumped together with the increased doctors’ pay, which inevitably raises the entire sum of operating costs moving forward for the healthcare companies.

In summation, the healthcare sector is expected to see increased demand from the gradual greying population of Singapore. Coupling this with the strategic objectives outlined in Healthcare 2020 Masterplan, where the focus is based on accessibility, affordability, quality and the possibility of exploring more ways to tap on private healthcare operators by the health ministry, it is likely that this sector is going to see interesting developments in the mid- to long-term. At the end of the day, just remember that a need is not a want, and no matter how bad the economy gets, when you get ill, you’ll still need to go visit a doctor.

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

Healthway Medical Corp  0.027 -0.001 -3.57%   
Business: Network of private medical centers & clinics, providing primary healthcare, dental & specialist services in Singapore.

Insight: May-19, 1Q19 revenue slid 5.4% with decreased reve... Read More
Medtecs Int'l Corp  0.028 -0.002 -6.67%   
Business: Healthcare products & services provider in the APAC region. [FY18 Turnover] Manufacturing (76.4%), hospital services (20.4%), distribution & others (3.2%).

Insight: Feb-19, FY18 revenue rose 10.5% due to higher orde... Read More
Singapore Medical Group  0.310 -0.010 -3.13%   
Business: Co is a private specialist healthcare provider in Singapore. [FY18 Turnover] Health (70.7%), aesthetics (28.6%), others (0.7%).

Insight: Feb-19, FY18 revenue jumped 25.1% to $85.1m driven... Read More

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The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

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