|11 January 2018|
|Demand-Supply Dynamics of Asia’s Healthcare Sector|
Opportunities and challenges abound within the demand and supply dynamics of Asia’s healthcare services industry. In terms of demand drivers, Asia’s growing population is ageing. Rising affluence and a surge in lifestyle diseases are additional key structural drivers. On the supply side, the number of doctors, nurses, hospitals and medical equipment still trail the per capita averages of the 34 OECD member countries. With many Asian emerging economies grappling with limited fiscal funding, there is an increasing role for corporations to engage in these opportunities and challenges.
Investors can participate in the structural Asian healthcare theme through SGX-listed healthcare stocks, which are rapidly expanding into regional and global markets to meet growing patient needs.
Accelerated Ageing Rates
Asia’s demographics are favourable for the region’s healthcare spending outlook. According to the International Monetary Fund (IMF), East Asia – which includes China, Hong Kong, Japan, North and South Korea, Mongolia, Macao and Taiwan – is ageing faster than anywhere else in the world, with its old-age dependency ratio roughly tripling by 2050.
Japan is the world’s most-aged country, with an old-age dependency ratio of 43.3% at the end of 2015, with this figure forecast to rise to 70.9% by 2050, the IMF wrote in its Asia-Pacific economic outlook report published last Spring. For Hong Kong, the end-2015 figure was 20.6%, and is projected to rise to 64.6% by 2050, while the equivalent figures for China are 13.1% and 46.7% respectively, the IMF noted. As for South Korea, the country will become a “super-aged” society by 2030, with 24.5% of the population over the age of 65, according to projections by the Bank of Korea.
East Asia’s Old-Age Dependency Ratios Set to Surge in Next Three Decades
Rise of Lifestyle Diseases
In its 2018 Global Health Care Outlook report, Deloitte noted that rapid urbanisation, sedentary lifestyles, changing diets, and rising obesity levels are fuelling a surge in lifestyle diseases – most notably, cancer, heart disease, and diabetes.
China and India have the largest number of diabetes sufferers in the world, at around 114 million and 69 million respectively, while globally, the number is expected to rise from the current 415 million to 642 million by 2040, Deloitte noted. According to OECD, cancer is the second leading cause of death after cardiovascular disease in the Asia Pacific region.
Increasing Healthcare Expenditure
In line with these factors, global healthcare spending is projected to increase at an annual rate of 4.1% between 2017 and 2021, up from just 1.3% between 2012 and 2016, the Deloitte report noted. In Asia, the share of government spending in healthcare is estimated to be on average one-third less than that of the OECD average, other studies showed.
As for Singapore, government expenditure on healthcare is expected to accelerate over the next three to five years – rising by at least S$3 billion by 2020 from current levels, Finance Minister Heng Swee Keat said last month.
Global Healthcare Spending Forecast to Rise
The rapid emergence of the middle class in Asia could also turn the region into a consumption powerhouse, and have far-reaching implications on healthcare demand. According to OECD estimates, two-thirds of the global middle class – defined as households with daily expenditures of US$10-US$100 per person in 2005 purchasing power parity (PPP) terms – will be residents of the Asia-Pacific region, with China home to the largest share of this demographic.
Regional Supply Shortfall
In terms of medical technology, equipment and manpower, Asia suffers a shortfall compared with the developed markets. According to OECD data, Asia has 1.2 doctors per 1,000 people, compared to 3.2 for the OECD average, and 2.8 nurses per 1,000 people compared to 8.7 for the OECD average. The number of hospital beds per person for Asia is also almost a third less than the OECD average. Asia has less tomography scanners, MRI units, mammography units and radiation therapy units versus the OECD average.
The region’s demand drivers, coupled with the current shortfall in comparative services, supplies and technology, offer opportunities for increased participation by Singapore-listed providers and suppliers in the region’s healthcare sector.
Healthcare Sector Benchmark
The SGX All Healthcare Index is a free-float, market capitalisation-weighted index that measures the performance of Singapore’s listed healthcare sector. Currently, the five largest components by index weight are Top Glove (15.4%), Parkway Life REIT (10.1%), Haw Par Corp (9.9%), First REIT (9.7%), IHH Healthcare (9.5%). These five stocks make up more than half the index.
For calendar year 2017, the SGX All Healthcare Index registered a price gain of 9.5%, compared with the MSCI AC Asia Health Care Index’s 16% gain in Singapore dollar terms. Between January and September last year, institutional investors were net-sellers of Singapore healthcare stocks, as funds rotated out of defensive stocks into cyclical plays. However, the tide turned in the last quarter of 2017, as selected healthcare plays with exposure to recovering consumer sentiment rebounded, making Healthcare the best-performing sector on a market capitalisation-weighted basis for the month of December. For a report on the Healthcare sector’s momentum in the first week of January, published earlier this week, click here.
SGX All-Healthcare Index vs MSCI AC Asia Health Care Index in 2017
The 10 largest constituents of the SGX All-Healthcare Index comprise three healthcare providers, two medical equipment providers, two pharmaceutical companies, and three healthcare REITs, and have a combined market capitalisation of over S$31 billion. They are: IHH Healthcare, Raffles Medical Group and Talkmed Group, Top Glove and Riverstone Holdings, Haw Par and Tianjin Zhongxin Pharmaceutical, Parkway Life REIT, First REIT and RHT Health Trust.
Expanding Geographical Reach
Seven of the 10 largest constituents of the SGX All-Healthcare Index report more than a third of their group revenues to Asia Pacific, ex-Singapore. They have operations and assets that span the following geographical markets: Singapore, Malaysia, Vietnam, Thailand, Cambodia, Brunei, Indonesia, Hong Kong, China, Japan, South Korea, Bangladesh, India, Turkey, Bulgaria, and Macedonia.
Healthcare Service Providers – Revenue Breakdown by Geography (%)
· Although Raffles Medical Group derives 100% of group revenue from Singapore, it has recently set up operations in Hong Kong and Shanghai, and acquired clinics in Vietnam and Cambodia. It now has a presence in 13 cities in Asia.
· IHH Healthcare’s APAC ex-Singapore exposure comprises medical centre and hospital operations in China, Hong Kong, India, Brunei and Malaysia, while its EMEA exposure comprises Iraq, United Arab Emirates, Turkey, Bulgaria and Macedonia.
· Talkmed’s APAC ex-Singapore exposure comprises medical oncology and stem cell transplant services in Hong Kong, Vietnam and Indonesia.
· Parkway Life REIT’s APAC ex-Singapore exposure primarily comprises hospital, medical centre and nursing home operations in 14 prefectures in Japan and Malaysia.
· First REIT’s APAC ex-Singapore exposure comprises hospital operations in Indonesia and a nursing facility in South Korea.
Healthcare Equipment and Product Suppliers – Revenue Breakdown by Geography (%)
Source: Company data and annual reports
Note: Healthcare equipment suppliers export their products globally, while their manufacturing and/or sales offices are located throughout Asia Pacific, USA and/or Europe.
Did You Know?
SGX’s healthcare sector comprises 30 listed healthcare companies and healthcare-related trusts with a combined market capitalisation of more than S$34 billion. Healthcare Providers form the largest sub-industry within the sector with 16 companies. The remaining 14 healthcare companies fall under various sub-industries, including Healthcare Equipment, Pharmaceuticals, and Real Estate asset owners, according to the Global Industry Classification Standard (GICS).
The 30 constituents of the SGX All-Healthcare Index are detailed below, sorted by market capitalisation. Click on each stock name to access its profile in SGX StockFacts.
Source: SGX StockFacts, Bloomberg (Data as of 10 January 2018)
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