How to make money out of the medical boom

PUBLISHED : Monday, 14 January, 2013, 12:00am
UPDATED : Monday, 14 January, 2013, 6:19am

The boom in medical care in Asia makes health care stocks the perfect buy-and-hold security. But which stocks should you buy?

Asia's medical industry is small compared to the state-supported pharma-hospital complex seen in the West and Asian health stocks are not well known.

But the small size of Asia's industry is part of why the story is so compelling. There are a lot of small stocks brimming with potential.

It's probably best to think of two distinct trends: the rise in mainland health spending, and the boom in medical tourism to Singapore, Thailand, Malaysia and India.

Partly because the mainland does not yet allow fully private hospitals, the hot health stocks aimed at the market are focused on pharmaceuticals, traditional Chinese medicine and (to a much lesser degree) medical devices.

Analysts speak of consolidation in the mainland drug industry, which will benefit the biggest listed firms such as Sinopharm Group, Shanghai Pharmaceuticals and Sino Biopharmaceutical.

Listed Chinese pharmaceutical companies traded at all-time lows in 2009-10 in part due to drug price cuts demanded by the government. The government is still reining in drug prices but it is now focused on production quality and industry consolidation, according to UBS CIO Wealth Management research.

The mainland is expanding the list of drugs it considers essential for general health and will subsidise, which will also drive up demand.

Hong Kong-listed Sinopharm is one of the mainland's largest pharmaceutical firms, and a good entry point. New York-listed Mindray, which makes scanners and diagnostic tools, is a good proxy for the mainland medical devices market. Hong Kong-listed Tong Ren Tang is a leader in traditional Chinese medicine.

Richard Yeh, a pharmaceuticals analyst for Citi, sees much demand for mainland medical services. The question is how the government will address this demand, and its impact on industry. Yeh sees high potential for the deregulation, which would let private hospitals operate in the mainland. He expects this to create increased revenues for the largest firms. New listed firms such as hospital operators will also emerge.

"But we think demand will be so strong for health services it will force the government to deregulate. We believe there is a complete health-care-services sector emerging in China," says Yeh. In other words, the mainland medical market will look radically different in 10 years' time, and the current set of mainland health care stocks may not reflect this. New star stocks will emerge.

The second part of the story centres on the boom in medical tourism unfolding in Singapore, Malaysia, Thailand and India. A lot of Indonesians go to Singapore for surgery or other treatment for serious illness, owing to a lack of quality care in their home country. Thailand attracts a lot of people seeking cosmetic surgery.

Yew Kiang Wong, a health care analyst for CLSA, a brokerage, says treatment in Asia costs about a fifth that of the United States.

The Singapore government in 2000 set a target of one million medical tourists per year. There was a high of 410,000 visitors seeking medical treatment there in 2006. This declined during the 2008-09 global financial crisis and the government has stopped releasing health tourism data over sensitivity about an influx of foreigners, says Wong.

"Singapore's population growth has outstripped its infrastructure over the past five years, with public hospitals now operating at near full utilisation rate," says Wong. "Promotion of medical tourism will only place more strain on the capacity in the short term."

An investor looking to gain exposure to this sector could pick up shares in regional hospital operators such as IHH, KPJ, Apollo Hospitals and Bangkok Dusit. (see table).

Kasem Prunratanamala, an analyst with CIMB, says the Thai medical tourism boom began after the 1997-98 Asian financial crisis when Thailand found itself with new, underused hospitals. These started marketing for patients in Asia, Australia and the Middle East, promoting Thailand as a good place to get cheap health care.

India, meanwhile, is building up its own listed hospital chains, such as Fortis Healthcare and Apollo Healthcare, which are starting to draw a regional clientele.

India is also an established hub for making generic drugs, or drugs for which patents have expired.

In virtually all cases, analysts project double-digit revenue growth for this sector, based on the converging trends of ageing and rising income.