• A largely rewarding year
• Unfavourable conditions for medical device industry
• Clearer growth stories for healthcare providers

Healthcare stocks posted good gains

The healthcare sector has generally been rewarding this year, with a comparably better gain of 25.7% by the FTSE ST Health Care Index (FSTHC) vs. the benchmark STI’s decline of 16.5% YTD as of 14 Dec. Looking back, the FSTHC had enjoyed a strong run in the first half of this year. Although healthcare stocks do warrant a certain premium, we highlighted that valuations were running high within the sector in our report on 22 Jun-15, and thereafter the FSTHC index had seen a decline of ~16% from its peak in early Jun before recovering again.

Diversification plans to sustain growth for the long term

The long-term prospects of the healthcare sector have been well documented. We witness that in Singapore, on the back of supportive population demographics, new supply of hospital beds continue to come from both the public and private sector to meet demand.

However, in the longer run, it is worth considering about the limited headroom for hospital operators to further expand locally. This makes current diversification plans even more pertinent for growth then.

Countries of interest for expansion include China, Vietnam, Cambodia, as well as India. We think developing countries in particular, are likely to offer attractive opportunities as local players are relatively weaker in terms of service.

Singapore healthcare providers still strong contenders in the region

Amid concerns over the risk of flagging medical tourism in Singapore, in the near to medium term, we think the loss in medical tourist volume to Malaysia/Thailand would likely be constrained as Singapore healthcare providers have established a strong brand, targets the premiumend patients, and remains focused on enhancing their expertise offerings to reinforce their position as strong contenders against their regional competitors.

Our view is also supported by the observation that regional providers are currently facing distinct domestic challenges ranging from regulatory limitations to talent crunch.

Broad-based valuations have not been sufficiently attractive

We believe the sector would likely continue to be favoured by investors, given the early stage of growth for the sector across the region and range of long term opportunities. On the other hand, some sub-sectors such as the medical device industry are still characterized by intense competition and pricing pressures. Thus we are keeping our NEUTRAL stance, noting that valuations do not seem sufficiently attractive on a broad-based level and we prefer stocks that can deliver decent earnings.

While we are cognizant of higher expenses ahead, we advocate longer term investors to consider Raffles Medical Group [BUY, S$4.59] within the local bourse as we believe their pipeline of expansion plans would sustain growth, and their outlook is comparably comforting in uncertain times.

Source: OCBC Research - 16 Dec 2015