Thursday, October 26

Parkway: Best Healthcare Idea in Asia

As a number of my clients / readers are in the medical profession, I guess it would be nice to write something on healthcare as an investment opportunity.

Parkway Holdings (ticker: PARM.SI), based in Singapore, operates the largest network of hospital and healthcare centers in Asia. This includes 3 hospitals in Singapore -- the venerable East Shore, Gleneagles and Mount Elizabeth Hospital, as well as the Pantai Hospital chain in Malaysia (31% ownership). In addition, Parkway has a joint venture in India, a government partnership project in Brunei and recently, a specialty medical center each in China (Shanghai) and Vietnam. Parkway is listed in the Singapore Stock Exchange and is currently trading at S$2.73.

What I like about Parkway

  • Focus on high-end market: Parkway is selective in focusing on the high-end, high-margin business. This is a smart strategy as there is an acute demand of high-quality healthcare services in the relatively poor region of South East Asia.
  • Well positioned in health-tourism: The Singapore hospitals are boasting a good proportion of foreign patients (35% of total), and increasingly capturing patients from non-traditional region such as Middle East. The company is well positioned to ride the big wave of health-tourism, and at the same time diversifying risk e.g. a repeat of the Asian Financial Crisis.
  • Strong fundamental: healthy operating margin of 18% and net profit margin of 11%. Return on equity is also increasing every year.
  • Government support: The Singapore government is eager to develop the country as the regional healthcare hub and has a number of favorable policies towards healthcare and pharmaceutical companies.
  • Owned by smart investors: Newbridge, one of the best private equity firms in Asia, is a major shareholder of Parkway. Looks like a big stamp of approval to me!

Potential risks

  • Sensitive to recession: Parkway saw its margin squeezed considerably during the Asian financial crisis. Another recession will certainly affect the profitability (although not a problem long-term).
  • Competition intensifies: Malaysia and Thailand are actively promoting their respective healthcare industries. In particular, Thailand, a world-class tourist destination and a substantially cheaper place to operate, has great potential to capture the health-tourism boom. Parkway has reacted by “buying out the competition”: Pantai Hospitals that Parkway bought 35% in September 2005 is the largest private healthcare provider in Malaysia.
  • Shortage of nursing staff: This seems to be a global phenomenon. Parkway is trying to mitigate by operating a nursing school in Malaysia.
  • Stock getting expensive: with 2006 P/E of 24x and 2007 P/E of 20x, it looks expensive as an Asian stock (average: mid teens). However, it is expected to give out a nice dividend at 5%.

Conclusion

  • Healthcare industry in Asia is one of the most attractive investment proposition because it captures (1) the general trend of aging population, (2) regional acute demand (lack of good quality service in South East Asia), and (3) increasing popularity of health-tourism.
  • As the largest and most established player in the region, Parkway is an obvious buy. The company is rather expensive, but considering its potential it's worth the premium.

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