Medical services (US$55bn, up 3.8% y-y) take up 72.4% (up 0.8%p y-y) of domestic healthcare market (US$76bn, up 2.7% y-y)
- In 2012, the global healthcare market was estimated to be worthUS$7.3tn (up 5.7% y-y), with the medical service market reaching US$6.1tn (up 6.5% y-y), representing a whopping 82.7% (up 0.5%p y-y) of the overall total. Meanwhile, Korea’s healthcare market amounted to US$76bn (up 2.7% y-y), with the medical service market accounting for 72.4% of the total at US$55bn (up 3.8% y-y). Despite this heavy portion, Korean hospitals are not publicly listed due to their non-profit governance structure and public nature. Thus, the domestic healthcare industry accounts for only a small portion (vs that in major economies) of the overall stock market.
Top-three Asian hospitals’ steady top-and bottom-line growth could be benchmark for Korean hospitals
- Over 2009~2013, the top-three hospital players in Asia (Malaysia’s Integrated Healthcare Holdings (IHH), Thailand’s Bumrungrad International Hospital (BIH), and India’s Apollo Hospitals Enterprise (‘Apollo Hospitals’) posted combined annual sales growth of 16.8%, operating profit growth of 34.8%, and net profit growth of 14.1%. As of May 6, 2014, their combined market cap amounted to US$14.2bn and their average P/E multiple stood at 40.1x. Defying global economic downturns, the firm has enjoyed steady top- and bottom-line growth on effective growth strategies, including M&As, the promotion of medical tourism, and the opening of new facilities. Meanwhile, over 2009~2012, combined sales at Korea’s top-six general hospitals grew 7.1% pa, while operating profit and adjusted net profit fell 23.2% pa and 2.5% pa, respectively. Given that they are non-profit medical institutions, Korean hospitals face several negatives, including: 1) limited growth potential due to a lack of growth strategies; 2) restrictions hindering medical fee hikes; and 3) deteriorated profit structures.
Authorization of for-profit subsidiaries to transform domestic healthcare sector landscape
- On Dec 13, 2013, the Korean government unveiled its ‘4th Investment Promotion Plan’, which includes: 1) allowing medical institutions to establish for-profit subsidiaries for the purpose of carrying out services auxiliary to healthcare; 2) expanding the scope of permitted auxiliary services; 3) allowing M&As between medical institutions; 4) promoting medical tourism; 5) permitting the operation of medical tourism hotels (‘meditels’) for medical tourists; and 6) allowing medical-related advertisements in areas where there are large numbers of foreign residents. We believe that: 1) Management Service Organizations (MSOs; organizations that do not provide healthcare, but rather are in charge of the business management of medical institutions), meditels (for medical tourists), and companies in other sectors planning to enter the medical sector are all well positioned to benefit from the government’s plan; 2) air transportation, travel, accommodation, entertainment/leisure, insurance, and financing players would be allowed to enter healthcare-related businesses. With the regulatory environment surrounding the medical service sector changing, we forecast that the landscape for Korea’s healthcare sector will transform over the mid- to long term. Of note, in 2013, Korea’s medical tourism revenue amounted to US$304.3mn (up 50.9% y-y, at an 8yr CAGR of 26.4% over 2006~2013) and its medical tourism trade balance reached US$210.5mn (up 117.0% y-y). Going forward, we expect the medical tourism market to expand further on: 1) eased regulation; 2) policy support; and 3) the joining of players from other sectors.
Suggest CHA Bio&, IMK, and JVM
- Looking at the likely primary beneficiaries of the government’s 4th Investment Promotion Plan, we suggest CHA Bio& (to enjoy synergies with CHA Hospital and foreign hospitals acquired via M&As), iMarketKorea (IMK; growth anticipated alongside its recent entry into healthcare logistics market), and JVM (sales of new products to rise in keeping with greater capital available to hospitals).
*Source: Woori Investment & Securities Co.