Healthcare resilience the key to success

Year in review
The FTSE ST Health Care Index (FSTHC) has turned in a muted showing this year thus far, declining 7.4% YTD and underperforming the broader market. We believe this was caused by the drag from Biosensors International Group’s (BIG) weak share price performance, which carries a substantial weight in the index (prior to the listing of IHH). Nevertheless, we believe that the strong sell-off in BIG’s stock since Apr has been overdone. We expect the group to continue its market share gains, underpinned by its technologically superior drugeluting stent (DES) platform, which should mitigate the challenges in the DES industry. Meanwhile, the healthcare sector also saw the high profile IPOs of IHH Healthcare Berhad (IHH) and Religare Health Trust (RHT) in 2012. We opine that these listings have created additional limelight on the sector and also offer investors a proxy to the thriving regional healthcare scene.

Robust fundamentals to drive growth ahead
We are still sanguine on the growth prospects of the healthcare sector as we move into 2013, as robust industry fundamentals are structural and entrenched in nature. This implies that the underlying growth drivers such as a growing and fast-aging population, rising affluence, increasing incidence and morbidity of diseases and burgeoning medical tourism activities would likely persist in the long run.

Maintain OVERWEIGHT; BIG our top pick for 2013 We opine that the healthcare sector offers investors a unique investment proposition. This is because healthcare companies in general are relatively more resilient in nature due to their defensive earnings, while growth opportunities are also favourable given the aforementioned factors. This has allowed the healthcare sector to command a valuation premium to the broader market, in our opinion. We thus reiterate our OVERWEIGHT rating on the healthcare sector. However, we are cognisant of certain risk factors which could impact the margins and earnings of healthcare companies, such as rising staff and consumables cost (healthcare service providers) and price cuts (medical device and pharmaceutical companies). Within the sector, we recommend BIG [BUY; FV: S$1.69] as our top pick, given its healthy financial position and compelling valuations. We also like Raffles Medical Group [BUY; FV: S$2.82] for its capable management team and strong track record.

Section A: Review of the Healthcare Sector

Underperformance due to drag by BIG
Despite being the second best performing sector in 2011, the FTSE ST Health Care Index (FSTHC) turned in a muted showing this year thus far, declining 7.4% YTD. This is a stark contrast to the positive 16.3% and 18.5% YTD increase in the Straits Times Index (STI) and FTSE ST All- Share Index (FSTAS), respectively. In our opinion, the decline in the FSTHC has largely been skewed by the weak share price performance of Biosensors International Group (BIG). We believe that BIG carries a significant weight of at least c.60% in the modified market capitalisationweighted index (prior to the listing of IHH Healthcare Berhad).

BIG’s shares likely oversold
We believe that the strong sell-off in BIG’s stock since Apr this year has been fuelled mainly by concerns over stent price cuts in several countries such as China and Japan. While there is some overhang regarding ASP pressures as the full impact from these price reductions has yet to be realised, BIG has reaffirmed its 20-30% revenue growth guidance for FY13 (OIR forecast: +20.9%). This would be underpinned by both organic and inorganic growth. We believe that the market has overreacted and BIG’s shares have likely been oversold. The group continues to deliver positive clinical evidence and market share gains from competitors, which we attribute to its technologically superior products. Our below consensus forecasts still imply a healthy core PATMI growth of 20.1% and 16.6% for FY13F and FY14F, respectively. This translates into a PEG ratio of 0.7x for FY14, which we view as attractive (please refer to Sections C and E for a more detailed elaboration of BIG’s investment merits).

New listings generate limelight on healthcare sector
One of the most significant events within the healthcare sector in 2012 was the dual-listing of IHH Healthcare Berhad (IHH) on Bursa Malaysia and the Singapore Stock Exchange (SGX), in our view. Investors may be familiar with Parkway Holdings, which was privatised in 2010 at c.37x trailing PER (based on EPS before exceptional items) after a takeover tussle between Khazanah Nasional and Fortis Healthcare, which the former eventually won. Parkway Holdings forms only a part of IHH now, as IHH has enlarged its geographical footprint considerably, making it one of the largest healthcare service providers in the world, in terms of operational beds and market capitalisation. Although IHH’s IPO offer price translated into 91.8x FY11 PER, its share price still closed 10.1% higher on its trading debut.

Meanwhile, Fortis Healthcare also spun off some of its clinical establishments into a business trust named Religare Health Trust (RHT) on SGX. Although its debut on 19 Oct was less than impressive (closed 10.0% below its IPO price of S$0.90), RHT provides an additional avenue for investors to gain exposure to the growing Indian healthcare market.

We believe that these new IPOs have helped create additional interest in the healthcare sector and also offer investors a proxy to the thriving healthcare scene in the region.

Financial position and performance remains steadfast
Although the global economy remains fraught with uncertainties, the healthcare companies under our coverage have continued to deliver both revenue and core earnings growth YTD. We opine that this underscores their earnings resilience and defensive qualities. Raffles Medical Group’s (RMG) 9M12 revenue jumped 14.0% YoY to S$228.6m, underpinned by higher patient loads and revenue intensities. PATMI grew a more modest 8.0% to S$36.6m due largely to increases in staff costs, but this was also because of headcount expansion in anticipation of its enlarged operations. BIG’s revenue and core PATMI surged 55.3% and 38.2% YoY to US$254.2m and US$54.4m respectively, for its 9MCY12 results. This was driven by the consolidation of its JWMS business and strong growth in its drug-eluting stent (DES) sales.

Healthy free cashflows (FCF) generation was another highlight of both RMG and BIG, coming in at S$45.6m and US$84.0m for 9MCY12, respectively. As at 30 Sep 2012, RMG had a net cash position of S$68.7m, while that of BIG was US$331.7m. We believe their strong balance sheets would put them in a solid position to weather the continued vagaries in the macroeconomic environment ahead.

Other notable performers include IHH, which generates its income from no less than nine countries. For 9M12, IHH reported a stellar 120.2% YoY increase in revenue to MYR5,462.7m. Even if we exclude the recognition from sale of medical suites at Mount Elizabeth Novena Specialist Centre (MENSC), revenue still grew an impressive 71.4% due to organic and inorganic growth. Core PATMI jumped 61.9% to MYR540.0m, despite start-up losses at Mount Elizabeth Novena Hospital (MENH).

However it should also be noted that not all healthcare companies have delivered similar positive operating performance in 2012. For example, Pacific Healthcare continues to be mired in net losses of S$4.4m for 9M12, although this was an improvement from the S$7.0m net loss suffered in 9M11. Q&M Dental (Q&M) also reported a mild 0.7% fall in PATMI to S$3.2m despite revenue growth of 20.9% for 9M12.

Healthcare industry remains a key focal point of the Singapore government
The Singapore government has highlighted a number of key initiatives to develop the healthcare industry in 2012. During the Singapore Budget address for FY2012, it was announced that c.S$4.7b would be allocated to the healthcare sector. This represented a 17.8% increase from the S$4.0b spent in FY2011 and would also imply a CAGR of 16.0% from FY2006-2012. This was shortly followed by the unveiling of the “Healthcare 2020” Masterplan by the Ministry of Health (MOH), which showcased the government’s elaborated plans to bolster Singapore’s healthcare landscape. Important initiatives include MOH’s target to increase healthcare capacity by expanding the number of hospital beds by 3,700 by 2020 and enlarging the pool of healthcare professionals. The latter would also entail raising salaries in the public sector to attract people into the industry. We thus expect cost pressures to rise for the private sector as well, although part of this would likely flow through to consumers in the form of higher prices. While an increase in public hospital beds would provide competition for the private sector, investments on infrastructure take time to bear fruition. Coupled with the robust growth in demand for quality healthcare services in the region, we believe that there are still plenty of growth opportunities for healthcare service providers such as RMG and IHH.

Section B: Key Industry Trends and Outlook

Fundamentals are structural and entrenched in nature
As we move into 2013, we believe that prospects for the healthcare sector would continue to be driven by positive fundamentals which are structural and entrenched in nature (elaborated in the rest of this section). This implies that the underlying growth drivers would likely persist in the long run and hence growth opportunities are there for the taking. In particular, growth in the industry would be driven largely by the Asia-Pacific (APAC) region, and we expect Singapore to be at the forefront of this robust trend. Research firm Frost & Sullivan has projected a 12.1% CAGR in APAC healthcare revenues to US$562b from 2011 to 2015. This would constitute 34.6% of the global healthcare market, as compared to just 28.5% in 2011. However, there are also risks that could stifle margin expansion in the sector. This stems largely from competitive pressures, rising staff costs (for healthcare service providers) and price cuts (for medical device and pharmaceutical companies).

I. Healthcare Service Providers

Greying nation implies growing healthcare needs
The issue of a fast-aging population in Singapore has once again been emphasised by the government on numerous occasions. We believe this highlights the gravity of the problem, which has been compounded by the increasing life expectancy of the population and low fertility rates. Although the Total Fertility Rate (TFR) of Singapore residents improved from 1.15 in 2010 to 1.20 in 2011 and could improve further in 2012 given that it is the ‘Year of the Dragon’, birth rates in Singapore are still considered low as it is well below the replacement rate of 2.1 births per woman for industrialised nations.

The proportion of elderly in the region including Singapore is also expected to trend up (Exhibits 7-9), which implies growth opportunities that can potentially be captured by healthcare companies given that the elderly typically require more healthcare services. Singapore would also benefit from the spill over effects of an aging population in neighbouring countries, given her medical hub status in the region, in our view.

Population growth would raise healthcare demand
Given the low TFR and aging population in Singapore as mentioned earlier, Singapore has sought to supplement the labour shortfall by utilising more foreign workers. Hence it is unsurprising that the nonresident population in Singapore has grown at a faster pace of 5.9% CAGR (also partly because of a lower base) from 2000 to 2012, versus just 1.3% CAGR for resident population. However, there are growing concerns over the increasing burden placed on infrastructure due to the influx of foreigners. While the government has responded by implementing measures to moderate the number of foreign manpower, we believe that the uptrend will continue, albeit at a slower pace, as there is still a general shortage of workforce in Singapore. This would benefit private healthcare service providers as
1) foreigners are not eligible for healthcare subsidies and hence might be more incentivised to take up private medical services to mitigate longer waiting times at public establishments, and also because of
2) insurance coverage provided by their companies.

Addressing healthcare manpower needs
Although the Singapore government has sought to limit the quota on the number of foreign labour coming into the country, it recognises the dire need to fulfil the manpower requirements in the healthcare industry. In a recent paper published by the National Population and Talent Division, it was stated that Singapore would need to expand its healthcare professional workforce by 69.6%, or 32,000 people, by 2030. While the government is stepping up efforts to increase the supply of resident healthcare manpower and raising productivity, it would have to complement this with additional foreign healthcare labour. Of the expected 32,000 increase in the healthcare professional workforce, approximately 28.1% would be made up by foreigners. This would help to alleviate the manpower constraints faced by the healthcare industry.

Hospital admissions on the rise
Driven by the aforementioned factors of a growing and aging population, coupled with better health awareness, total hospital admissions in Singapore has grown at a CAGR of 1.7% to 469.4k from 2000 to 2011. Private hospital admissions have led this growth, coming in at a 2.6% CAGR during the same period, which we attribute to a larger nonresident population, rising affluence and health insurance coverage. The number of day surgery cases has also increased strongly at a CAGR of 11.4% from 78.3k in 2000 to 238.1k in 2011. We believe this has been aided by advancements in medical techniques and technology, thus making surgeries less invasive. This allows hospitals to cater to a larger pool of patients given the faster turnaround time.

Bed crunch highlights demand-supply imbalance
The Singapore government is seeking to assuage the shortfall in public hospital beds with plans to build new hospitals, such as Ng Teng Fong General Hospital (expected completion in 2014) and Sengkang General Hospital (expected completion brought forward from 2020 to 2018). However, infrastructure investments have a gestation period. Frost & Sullivan estimates that despite the addition of new beds in the public and private sector, there would still be a shortfall of 2,648 hospitals beds in 2016 (Exhibit 14). We believe this highlights the demand-supply imbalance in the industry which offers opportunities for private healthcare service providers to bridge this gap. RMG has obtained regulatory approval to expand its Raffles Hospital (RH) GFA by c.33% to 410,283 sf, which we estimate to be completed in early 2015. The group has also decanted its existing floor space at RH to ‘create’ new medical space. Meanwhile, IHH also commenced operations of its new flagship MENH with state-of-the-art medical equipment in Jul this year. Operations are ramping up as inpatient admissions gain traction as more specialists begin their clinical practice at MENSC. IHH is also upgrading its wards and operating theatres at Mount Elizabeth Orchard Hospital to improve amenities and hence quality for patients.

Initiatives to enhance public and private sector collaboration
There has been increasing collaboration between the public and private sector. For example, Changi General Hospital (CGH) recently signed an agreement to lease a 30-bed ward space (beginning 2QCY12) from IHH’s Parkway East Hospital to ameliorate its capacity constraints, whereby patients will continue to pay the same hospital charges as they would have at CGH1. MOH also signed a MOU with RMG for it to take on some subsidised patient load, with full details being worked out. We see these scenarios as a win-win situation between the collaborating parties.

Growing affluence would translate into higher demand for private healthcare services
Singapore’s GDP per capita (based on current market prices) has expanded at a CAGR of 4.1% from S$40,364 in 2000 to S$63,050 in 2011. We believe that the accumulation of wealth, coupled with an increasing uptake of private insurance, would enhance the willingness and ability of people to take up private healthcare services despite rising medical expenses. This is also driven by longer waiting times at public hospitals. For instance, it was reported that CGH had to postpone some of its scheduled surgical operations due to a shortage of beds2. While the Singapore government now expects relatively muted economic growth of ~1.5% in 2012 (lower end of its previous 1.5-2.5% guidance) and 1-3% in 2013, we view healthcare demand as defensive in nature since such services form part of one’s basic necessity needs. Hence we believe that spending on healthcare would continue to rise. This is supported by Frost & Sullivan’s projection for a 7.5% CAGR in Singapore’s healthcare expenditure from 2011 to 2016.

Burgeoning medical tourism industry…
We believe that the rise of the middle-class and affluence in the region as well as Singapore’s growing reputation as Asia’s medical hub will allow integrated private healthcare providers with strong franchise values such as IHH and RMG to benefit from the flourishing medical tourism trade. There has also been an uptrend in the number of emergency international medical evacuation cases to Singapore. Indonesia, which we believe forms the majority of medical travellers to Singapore, remains on track to deliver robust economic growth despite external macro headwinds. Backed by rising disposable income levels and a lack of healthcare infrastructure back home, we expect continued growth in Singapore’s medical tourism activity, although the strength of the SGD against the IDR could be a deterring factor (SGD has appreciated 13.1% against the IDR YTD). Frost & Sullivan projected that the number of medical travellers to Singapore and their corresponding revenues generated would grow at a healthy CAGR of 10.4% and 8.8%, respectively, from 2007 to 2016.

…but not immune to the macroeconomic malaise
While demand for quality healthcare is generally more inelastic and defensive in nature, it is not immune to an economic slowdown. This is because people may choose to reduce their discretionary spending by delaying elective surgeries and/or seek treatment at cheaper alternatives. Nevertheless, there would still be some resilience in earnings for healthcare providers, in our opinion, in particular for operators which have a strong brand equity and wide range of specialist offerings, such as RMG and IHH’s Singapore hospitals. Patients also tend to develop ‘stickiness’ with their doctors, and hence this might ensure some forms of business continuity even during uncertain times. RMG said during its 3Q12 analyst briefing that it has not experienced any impact on its medical tourist numbers despite the uncertain macroeconomic environment. Moving forward, as people in the region become increasingly more affluent, they would develop stronger resilience which would enable them to better weather the storm when another downturn occurs. Moreover, we believe that the bulk of foreign patients at RMG and IHH’s Singapore hospitals come from neighbouring Asian countries which would be relatively less adversely affected as compared to their Western counterparts in such a scenario. Exhibit 20 highlights the economic growth forecasts by IMF on selected regional countries, which we believe provide an important source of income for Singapore’s medical tourism industry.

Competitive landscape shaping up; but pie is also growing
Singapore competes most aggressively with Malaysia, Thailand and India for the thriving medical tourism dollars, in our view. Regional healthcare service providers have largely reported robust YoY revenue growth for their hospital segments ranging from 5-103% during the recent 3QCY12 results season (refer to Exhibit 21), bolstered by higher patient volumes and revenue intensity. While we remain cognisant of the competitive pressures posed by regional healthcare operators, we reckon that the overall healthcare pie is growing well, based on the revenue trends we have highlighted. This is likely underpinned by solid fundamentals which are structural in nature and thus likely to stay entrenched over the long term. In addition, we opine that Singapore’s competitive advantage lies on the sophistication and quality of its healthcare services/procedures on offer, such as in the field of organ transplants, oncology and cardiology; which is reinforced by state-of-the art infrastructure and highly-skilled specialists. Despite its small size, Singapore has 13 Joint Commission International (JCI) accredited hospitals (vs. six in Malaysia), which depicts the stringent quality control standards in place. Coupled with other factors such as a politically stable climate and vibrant tourism scene, we expect Singapore to remain as a key beneficiary of the robust healthcare dynamics in the region.

Cost pressures apparent
Given the Singapore government’s push to enlarge the workforce of healthcare professionals, a necessary course of action would be to raise the remuneration in the sector to attract the right people. Although this would provide some reprieve for the manpower shortage issue, this is expected to increase operating costs for healthcare companies due to salary increments. The private sector would also be affected as companies would want to maintain their competitiveness against the public sector. RMG has also experienced some margin pressure as it recently implemented wage increments across the board. Staff costs now form 49.3% as a percentage of its revenue for 9M12, versus 48.2% for 9M11. But we note that part of this increase was also contributed by headcount expansion in anticipation of its enlarged operations, hence contributions from these staff have yet to reach an optimal level, in our opinion. In addition, as demand for healthcare is relatively inelastic, we expect part of these cost pressures to be shared by consumers.

II. Medical Device

Companies Increasing urbanisation and lifestyle-related issues There has been a rising urbanisation trend globally especially in the developing countries. The United Nations Population Division estimates that the proportion of population residing in urban areas in ‘less developed regions’ would increase from 46.0% in 2010 to 64.1% in 2050. In particular, China, the world’s most populous nation and a huge market for medical devices, would see this ratio increasing from 49.2% in 2010 to 77.3% in 2050. We expect this urbanisation uptrend to result in more lifestyle-related diseases. This would create a myriad of growth opportunities for medical device companies besides healthcare service providers.

Growing incidence and morbidity of diseases to create higher demand for medical devices Cardiovascular diseases (CVDs) are one of the most prominent examples of the growing incidence and morbidity of diseases globally. According to the World Health Organisation (WHO), CVDs are the number one cause of death globally. 17.3m people were estimated to have died from CVDs in 2008, while almost 23.6m people are expected to die from this cause by 2030. Other critical illnesses include diabetes. During the World Diabetes Day Singapore 2012, Singapore’s Health Minister Mr. Gan Kim Yong said that there are more than 400,000 people with diabetes in Singapore. Driven by an aging population, the number of Singapore residents above the age of 40 with diabetes is estimated to balloon to 600,000 by 2030. Globally, the WHO projected that there are more than 346m people struck with diabetes. Complications include heart attacks and stroke, which implies the likelihood of an increase in need for healthcare services and interventional medical devices such as DES, which augurs well for BIG.

Rising insurance coverage
We believe that the growing trend of insurance coverage would help to drive the take-up rate of more medical services and correspondingly the use of medical consumables and devices. As illustrated in our Exhibit 16 earlier, total insurance premiums in Singapore are forecasted to increase from S$30.4b in 2010 to S$43.8b in 2016 (6.3% CAGR), according to Business Monitor International. In China, insurance schemes provide coverage for 95% of her population3.

Health insurance claims and payments have also climbed at a CAGR of 22.2% from CNY10.8b in 2005 to CNY36.0b in 2011, according to statistics from the China Insurance Regulatory Commission (Exhibit 23). We believe that this highlights the expanding insurance coverage in China. While the breadth of insurance coverage is evident, we opine that coverage is still relatively basic and hence there is room for further depth, which is likely to be complemented by private health insurance. Frost & Sullivan expects China’s private insurance industry to hit US$90b by 2020.

Robust growth in medical devices industry expected In light of the aforementioned drivers, we are sanguine on the prospects of the medical devices industry and opine that emerging markets such as China would likely see faster growth than developed markets. According to Frost & Sullivan, global revenues for the medical devices industry is projected to increase at a CAGR of 8.3% from US$253.7b in 2011 to US$348.7b in 2015, with the APAC region contributing 40.2% of the market share in 2015 (32.6% in 2011). Singapore has thus placed strong emphasis on the medical technology sector. Manufacturing output from this industry increased nearly threefold from S$1.5b in 2000 to c.S$4.3b in 2011, with a target to achieve S$5b in 2015, according to the Singapore Economic Development Board.

Healthcare reforms to improve affordability to the masses; but margins could be hit
China’s next Vice Premier Li Keqiang has been a strong advocate of healthcare reforms to improve the social welfare of its people. This would entail making healthcare costs more affordable and accessible to the masses, including the rural areas. Hence prices are expected to be regulated and this has been carried out in the form of provincial government tenders on drugs and medical devices such as coronary stents. For example, stent price cuts of c.15% were implemented in provinces such as Zhejiang and Hunan. This has resulted in a negative impact on the gross margins of medical device companies. As stent tenders in most regions have been delayed (likely until 1QCY13), the impact of such mandatory price cuts have yet to be fully realised. However, we expect pricing pressures to be mitigated by stronger volume growth. In addition, we reckon that the government would have to find a balance between making healthcare costs more affordable and yet not stifle the innovation drive of medical technology companies. Regarding its strategy in China, BIG would be focusing on developing its next generation Excel stent, while it would also file for the State Food and Drug Administration (SFDA) approval for its polymer-free BioFreedom™ drug-coated stent once it obtains the CE Mark.

Section C: Recommendations

Unique investment proposition culminates in sector premium We opine that the healthcare sector offers investors a unique investment proposition. This is because healthcare companies in general are relatively more resilient in nature due to their defensive earnings, while growth opportunities and prospects are also favourable given the uptrend in medical tourism activity and increasing demand for higher quality healthcare services. These merits, coupled with consistent positive FCF generating ability, have allowed the healthcare sector to command a valuation premium to the broader market, in our opinion. The FSTHC has traded at an average premium of 28.3% and 59.5% to the STI in terms of forward PER and historical PBR, respectively, since Jan 2008 when the STI was reconstructed as a 30-stock component index.

Maintain OVERWEIGHT on healthcare sector as a defensive play
We are reiterating our OVERWEIGHT rating on the healthcare sector as we move into 2013. We believe that fundamentals remain largely robust, although we are cognisant of certain risk factors which could impact the margins and earnings of healthcare companies, such as rising staff and consumables cost (healthcare service providers) and price cuts (medical device and pharmaceutical companies). Ongoing macroeconomic uncertainties emanating from concerns over the US fiscal cliff, eurozone sovereign debt crisis and slower growth in emerging markets have undoubtedly depressed investor sentiment. Hence we see value in the healthcare sector as a possible defensive play, underpinned by resilient earnings.

BIG remains as our top healthcare pick
While industry fundamentals are solid and growth drivers are entrenched in nature as elaborated previously, we advocate investors to cherry-pick the gems within the sector as not all companies have performed similarly. We prefer companies which have a competitive advantage over its peers, sustained track record of strong financial performance, healthy balance sheets and reasonable valuations. Given the above stated criteria, we recommend BIG as our top healthcare pick, with a BUY rating and S$1.69 fair value estimate, representing an attractive 45.1% upside potential. In our opinion, BIG has the capability to continue its market share gains due to its technologically superior DES platform. It is also in a healthy net cash position of US$331.7m (as at 30 Sep 2012) and valuations are compelling at 12.4x blended FY13/14F core PER, which is approximately one standard deviation below its 3-year average forward core PER. We also like RMG [BUY; FV: S$2.82] for its capable management team and strong track record. The stock is trading at a 9.3% discount to its regional peers’ average (based on forward PER) despite higher margins.

Section D: Company Profiles

Biosensors International Group: Top healthcare pick for 2013
We project Biosensors International Group (BIG) to report revenue and core EPS CAGR of 17.6% and 10.9% from FY12-14F, respectively. In our opinion, growth would be underpinned by its superior drug-eluting stent (DES) technology, which would enable BIG to continue its market share gains from competitors to mitigate the challenges in the industry. BIG’s healthy financial position would also enhance its ability to weather the vagaries of the global economy, finance its R&D and clinical trials, and provide it with ample ammunition for share buybacks and M&A activities. BIG currently trades at 12.4x blended FY13/14F core EPS, which is approximately one standard deviation below its 3-year average forward core PER. Maintain BUY with an unchanged DCF-derived fair value estimate of S$1.69, which implies a potential upside return of 45.1%. We are recommending BIG as our top healthcare pick for 2013.

Raffles Medical Group: Quality healthcare specialist
Raffles Medical Group (RMG) has established a solid operating track record over the years, led by a capable management team. We expect the group to leverage on the robust industry fundamentals for growth, given its strong brand equity and competitive pricing vis-à-vis its local peers. We also like RMG for its high quality defensive earnings, which are backed by healthy operating cashflows. RMG has earmarked a number of expansion initiatives, although it is still trying to obtain regulatory approval for its proposed new Specialist Centre in the Orchard area. We see minimal dilution risks to shareholders for its expansion plans. Maintain BUY on RMG, given its resilient business model, which is an investment merit in times of current macroeconomic uncertainties. Our fair value estimate is unchanged at S$2.82 (24x FY13F EPS).