The Positives
+ Revenue growth driven by medical clinics and test kit. 1H20 revenue was supported by the acquisition of Dental Focus Group’s nine dental clinics in Singapore and distribution of Biolidics COVID-19 Antibody Test Kits. It was not disclosed the sales contribution from sales kit. However, we expect it to be significant because Biolidics sold S$6.3mn Antibody Test Kits in 1H20.
+ Operating cash-flow turnaround. In 1H20, operating cash-flow generated was S$4.5mn, a major turnaround from the negative S$3.6mn a year ago. In addition to the increased profitability, working capital improved due to lower receivables from the public sector for the Indonesian operations.
+ Positive operating leverage. Despite revenue tripling in 1H20, employee expenses only increased by 14% YoY. Distribution of the test kits tapped on the existing marketing team or network. The acquisition of dental clinics only incorporated nurses and back-end staff.
The Negative
- Pandemic disrupted 1H20. Several businesses were hit by the pandemic. IGM Labs operates 15 clinical laboratories in Indonesia, it faced weaker traffic as the patient admission in hospitals declined due to movement restrictions. Revenue in Singapore from dental and aesthetics was similarly weak due to lower patient load following the lockdown.
Outlook
We expect all divisions to experience stronger performance in 2H20.
Investment Actions
Maintain BUY with a target price of S$0.26. CBH continues to expand and leverage its network of medical centres throughout ASEAN. The stronger operating cash-flow and balance sheet will allow CBH to - (i) further grow via acquisition; (ii) expand their Indonesian operations faster where the capital expenditure and working capital requirements are much higher.
Overview of operations:
Healthcare Systems
Medical clinics/ centres
Phillip Securities Research has received monetary compensation for the production of the report from the entity mentioned in the report. The report was previously under the ‘SGX StockFacts Research Programme’ (administered by SGX).
The Positives
+ Revenue surged to S$21.5mn. In just 2 years post IPO in December 2017, CBH has expanded revenues from just S$288k in FY17 to currently S$21.5mn. It has acquired two core assets in Indonesia (lab and renal care), aesthetic clinic and dental facilities in Singapore and a medical centre in Manila. IGM accounted for 48% of FY19 revenue (or S$10.3mn).
+ Turning EBITDA positive. CBH turned EBITDA positive* in 3Q19 of S$0.38mn. This further grew to S$0.55mn in 4Q19.
*exclude one-offs (fair value adjustments and other non-recurring opex), share option expenses and R&D expenses.
The Negative
- Operational challenges in Indonesia. After acquiring IGM Labs in May19, the ramp-up was delayed in part to contracts still novating to CBH. Another challenge in Indonesia is the long trade debtor days for government reimbursement. Trade receivables in FY19 rose 5-fold to S$10.7mn. After taking over operations, CBH is taking measures to shorten the trade debtor days from the authorities.
Outlook
We expect another year of strong growth for CBH. The largest contribution will come from recent acquisitions – IGM and Dental Focus. Newly opened facilities in Malaysia and the Philippines will be another source. Contribution from Hong Kong is at risk with Covid-19 outbreak disrupting patient flow from China.
Latest developments:
Investment Actions
Maintain BUY with a target price of S$0.26. The early years of CBH will be spent building its regional footprint. We believe CBH is focused on organic growth of its’ acquisitions through investing into newer facilities, larger economies of scale in operations, cross-sell and introduce more complex services across their regional platform.
Overview of operations:
Healthcare Systems
Medical clinics/ centres
The Positive
The report is produced by Phillip Securities Research under the ‘SGX StockFacts Research Programme’ (administered by SGX) and has received monetary compensation for the production of the report from the entity mentioned in the report.
The Negatives
Updates
The Group raised S$11.3mn from share placement to accelerate its growth plans for its South-East Asia entities and strengthen its balance sheet. The Group is currently considering Vietnam, India and Thailand as potential ventures in the future. Management has guided that the Group is done acquiring for now and focus will be placed on net income by 4Q19.
With regards to the Hong Kong protests, management did not experience a significant drop in patient volume at its Hong Kong clinic. In fact, revenue from the Hong Kong clinic rose 20-25% MoM since the expansion in May 2019.
Investment Actions
Maintain BUY with a lower TP of S$0.26 (prev TP: S$0.28). The lower target price was due to the increase in number of shares as a result of the recent share placement. We believe the two primary growth drivers for CBH is the healthy underlying demand for healthcare services in the three key countries that it is operating in – Indonesia, Philippines, Singapore, and its aggressive M&A in various EBITDA accretive businesses.
Despite this quarter’s miss in earnings forecast, we expect higher revenue contribution from the acquisitions and business expansions to kick-in in the second half of the year onwards to reach our FY19e earnings estimates. The full impact of the Group’s acquisitions will be seen in 4Q19.
Valuation
We used DCF valuation to fully capture CBH impressive growth over the next five years.
Overview of operations:
Healthcare system
Medical clinics/ centres
The Positives
The Negatives
The report is produced by Phillip Securities Research under the ‘SGX StockFacts Research Programme’ (administered by SGX) and has received monetary compensation for the production of the report from the entity mentioned in the report.
Investment Actions
Maintain BUY with an unchanged TP of S$0.28. We believe the two primary growth drivers for CBH is the healthy underlying demand for healthcare services in the three key countries that it is operating in – Indonesia, Philippines, Singapore, and its aggressive M&A in various EBITDA accretive businesses.
Despite this quarter’s miss in earnings forecast, we expect higher revenue contribution from the following acquisitions and business expansions to kick in from 2Q19 onwards to reach our FY19e earnings estimates.
The growth drivers:
Valuation
We used DCF valuation to fully capture CBH impressive growth over the next five years.
Cost of equity = 10%; WACC = 8%; terminal growth rate = 3%
For more details on CBH’s business strategy, please refer to our Initiation Report dated 1 April 2019.
Updates
Healthcare system
Medical clinics/ centres
Company Background
Clearbridge Health (CBH) began in 2010 with a focus on the medical technology industry. It made its first investment in Biolidics in 2011, listed on the Catalist in December 2018. It then co-founded Sam Lab in 2011. In 2017, CBH acquired Clearbridge Medical Group that owned two medical clinics. CBH listed on December 2017 at S$0.28 a share. 2018 was a watershed year as CBH expanded into high growth markets of Indonesia, by acquiring a renal dialysis operator, and the Philippines, by acquiring a large medical facility. There is a further proposal to acquire 12 clinical diagnostic laboratories in Indonesia.
With only two clinics during listing, CBH has expanded into a well-diversified portfolio of asset-light healthcare businesses. The focus is on healthcare segments with the fastest growth and to create an eco-system of businesses that can support each other and serve the complete lifecycle needs of a patient. We can essentially split CBH’s businesses into three key segments:
Investment Thesis
Penetrating high-growth healthcare markets in Indonesia and the Philippines. CBH has entered the fast-growing healthcare markets in Indonesia and the Philippines through two acquisitions. Both countries rank among the lowest in Asia in terms of the number of hospital beds and health professionals per capita. Healthcare spending in both countries has been growing at around 9 - 10% p.a.
Creating a recurrent revenue stream in healthcare. A key feature of its new Indonesian business is recurring revenue. Renal dialysis is a lifetime treatment, and CBH expanded from 15 hospitals at acquisition to 21 currently and another 13 under renovation.
Targeting and revitalising profitable segments. CBH acquires asset-light, fast-growing healthcare segments. After the acquisition, CBH grows the businesses through expansion in capacity, network and capabilities.
Initiate coverage with a BUY and TP of S$0.28. Initiate with a BUY recommendation and target price of S$0.28. We used DCF valuation to capture the full benefit of CBH impressive growth over the next five years.
The report is produced by Phillip Securities Research under the ‘SGX StockFacts Research Programme’ (administered by SGX) and has received monetary compensation for the production of the report from the entity.
HISTORY
Clearbridge Health (CBH) began in 2010 with a focus on the medical technology industry. It made its first investment in Biolidics in 2011, listed on the Catalist in December 2018. It then co-founded Sam Lab in 2011. In 2017, CBH acquired Clearbridge Medical Group that owned two medical clinics. CBH listed on December 2017 at S$0.28 a share. 2018 was a watershed year as CBH expanded into high growth markets of Indonesia, by acquiring a renal dialysis operator, and the Philippines, by acquiring a large medical facility. There is a further proposal to acquire 12 clinical diagnostic laboratories in Indonesia.
With only two clinics during listing, CBH has expanded into a well-diversified portfolio of asset-light healthcare businesses. The focus is on healthcare segments with the fastest growth and creates an ecosystem of businesses that can support each other and serve the complete lifecycle needs of a patient. We can essentially split its business into three key segments:
Figure 1: CBH key milestones
Source: CBH
Figure 2: Details of all acquisitions
Company |
Country |
Stake |
Acquisition Date |
Price (S$mn) |
Consideration |
Medic Laser & Surgical Pte. Ltd |
Singapore |
85% |
Jan18 |
5.5 |
Cash and shares |
Clearbridge Medical Philippines |
Philippines |
65% |
Jan18 |
1.9 |
Cash |
Tirta Medika Jaya |
Indonesia |
55% |
Apr18 |
5.5 |
Cash |
Indo Genesis Medika |
Indonesia |
75% |
Aug18 (Proposed) |
3.8 |
Cash |
Source: CBH, PSR
INDONESIA
CBH entered Indonesia through the acquisition of Tirta Medika Jaya (TMJ) in April 2018. The attractiveness of TMJ includes the recurrent nature of its revenue, high growth and low capex intensity.
Figure 3: Tirta Medika and Medic Laser were the major revenue contributors
Source: CBH, PSR
Tirta Medika Jaya (55% stake)
Kidney Disease in Indonesia
End-stage renal disease (ESRD) is also known as kidney failure. The most common cause of ESRD is diabetes, followed by high blood pressure and hypertension. There is currently no cure for ESRD. Treatment options are either dialysis or kidney transplant.
Once the kidneys fail (defined as both kidneys functioning at only 15%), the body will be unable to process toxins and waste. Consequently, the body will be filled with excess toxins, a condition called uremia. Dialysis is an artificial process for removing waste and excess water from the blood.
According to the Indonesia Nephrology Association (PERNEFRI), 25mn Indonesians have developed chronic kidney disease, with 200,000 suffering from ESRD. Hemodialysis treatment ranks the second-largest claim covered by the Healthcare and Social Security Agency (BPJS), having already cost 7% of the agency’s total spending, or Rp2.68tr (US$195mn).
There are currently two methods of dialysis.
https://www.thejakartapost.com/life/2017/09/27/living-with-kidney-failure.html
Figure 4: Revamped dialysis facility
Source: CBH
Figure 5: Dialysis treatment equipment
Source: CBH
Figure 6 : Dialysis patients is rising globally at 6% p.a.
Source: Fresenius Feb2019
In August 2018, CBH entered into a non-binding memorandum of understanding to acquire 12 clinical laboratories operated by Indo Genesis Medika (IGM) in Indonesia.
Indo Genesis Medika (75% stake)
* referral hospitals mean that these grade A hospitals are referred patients from other lower grade hospitals as grade A hospitals generally have better equipment and medical resources.
Clinical laboratory testing is the use of specimens to ascertain the health of the patient. It can be generally categorized as (i) Routine tests: Fast turnaround test on the function of organs such a kidney, liver, heart, thyroid, blood, etc. The test may be for HIV, allergy, glucose, cholesterol and various substances; (ii) Esoteric test: A more specialised and higher priced test done on the tissue or cell for cancer and other diseases, such as tissue and liquid biopsy. Or testing of biological markers in hormones, protein and genes. Hospitals may conduct routine test and more esoteric or specialised test undertaken by private labs.
Figure 7: Healthcare spending rising almost 9% p.a. in Indonesia
Source: CEIC, PSR
Figure 8: Diagnostic lab market in Indonesia to grow 12% CAGR (2016 to 2020e)
Source: IMS Health Analysis (2017), Prodia Widyahusada (Nov18), PSR
PHILIPPINES
CBH entered the Philippines healthcare sector in 2018 with the acquisition of Marzan Health in January 2018 (renamed Clearbridge Medical Philippines). Since taking over, CBH renovated the facility, introduced more medical services and opened three additional branches.
According to the Philippines statistics authority (Figure 14), total healthcare expenditure (excluding fixed capital formation) in the country grew around CAGR 9.5% p.a. over the past three years to US$13bn in 2017. A surge in government spending has been supporting growth as well. As Figure 15 suggests, the government budget for healthcare has been rising at 26% p.a. over the past five years.
Healthcare spending in the Philippines is expected to grow at a much faster pace with the introduction of universal health insurance. In February, the Universal Health Care Act was signed into law. The act is a US$4bn (P217bn) funded automatic enrollment of all citizens into the National Health Insurance Programme (NHIP) administered by PhilHealth. It is an expansion of the existing PhilHealth insurance where only 2 out of 3 Philippine citizens received coverage. Coverage will also be widened from not just hospitalization but preventive healthcare services. It will be funded by taxes on tobacco and alcohol.
Clearbridge Medical Philippines (65% stake)
Listed exposure to healthcare in the Philippines:
Figure 9: The 4-storey medical centre
Source: CBH
Figure 10: Renovated interior
Source: CBH
Figure 11: A patient waiting floor
Source: CBH
Figure 12: Facility is in Quezon City
Source: CBH
Figure 13: One branch inside a hospital in Lapulapu City, City
Source: CBH
Figure 14: Healthcare spending grew at almost 10% p.a. in the Philippines
Source: Philippine Statistics Authority (psa.gov.ph), PSR
Figure 15: Government spending will surge further with Universal Healthcare
Source: Department of Budget and Management, CEIC, PSR
SINGAPORE
CBH has a strategy to cater to the growing needs of a consumer's health care in Singapore with various medical touchpoints along the treatment journey. It owns a medical clinic, aesthetic and clinical laboratory in Singapore. This suite of services can cater to the general, lifestyle and chronic care lifecycle of a patient. The spending on healthcare in Singapore continues to escalate but competition will be intense especially from the public sector. For instance, government expenditure on health has more than doubled from S$3.9bn in 2010 to S$9.3bn in 2016. The government has built seven hospitals since 2010.
Demand for healthcare in Singapore will continue to expand as the nation faces the trifecta challenge in healthcare.
a) Ageing population (Figure 14): By 2030 and 2035, the old-age dependency ratio for Singapore will reach 36 and 43 respectively. This will be similar to Japan in 2010 and 2015. The old-age dependency ratio is the number of those aged above 65 years (defined as old age) as a share of the working age (15 to 64 years).
Figure 16: Singapore is ageing rapidly and similar to current Japan ratios by 2035
Source: UNDESA Forecast, PSR
b) Longer life expectancy of the population (Figure 17): Since 1990, the life expectancy of the population has risen from 66 in 1970 to 83 in 2017. This is a rise of 17 years. However, for every ten years we live, more than one year is spent in
Figure 17: Singapore life expectancy rise 4+ years in every decade
Source: CEIC, PSR
c) Less healthy lifestyles: In a recent budget speech, the Minister of Health highlighted the rising prevalence of chronic illness due to ageing and unhealthy lifestyle. From 2010 to 2017, diabetes has increased 4%, hypertension up 14% and hyperlipidaemia jumped 33% (Figure 18).
Figure 18: Rise in lifestyle illness
Source: National population health survey 2017, 1992-2010 based on National Health Survey; Survey is on residents aged 18-69 years
Sam Laboratory (100% stake) samlaboratory.com
Figure 19: New premises for Sam Lab
Source: CBH
Medic Surgery and Laser Clinic (85% stake) www.medicsurg.com
Figure 20: Clearbridge clinic in Tanjong Pagar
Source: CBH
Clearbridge Medical Group (100% stake)
Figure 21: Still steady 4% growth in patients for private GP clinics
Source: CEIC, PSR
HONG KONG www.clearbridgemedical.com.hk
A medical clinic that started in 2017. The target patients are medical tourists from China. The key driver to growth will be the co-operation with marketing agents in late 2018 to bring medical tourists to this clinic. Some of the services offered include health screening, vaccination and medical consultation. The clinic is also collaborating with insurance companies such as Prudential and Tai Ping. There are currently plans to expand the premises of this clinic.
There are over 3mn outbound Chinese health tourists per year. The most frequently travelled destinations for medical tourism include Hong Kong, Macau and Taiwan (using the latest total China Outbound Tourism Research Institute (COTRI) figures of 145mn in 2017). The report (as per link below) highlighted that both the number and percentage of Chinese health tourists are expected to rise in 2018.
https://www.imtj.com/news/health-tourism-flows-and-out-china/
Figure 22: Hong Kong clinic
Source: CBH
MALAYSIA
CBH expanded its presence into Malaysia with the opening of a paediatric cum family clinic in Kuala Lumpur. The commencement of the clinic is dependent on a pending license from the Ministry of Health. CBH will also work with several other GP clinics in KlangVallent to provide their Hereditary Cancer Gene Test.
Figure 23: New clinic in Desa Park, KL
Source: CBH
STRATEGIC INVESTMENT
Biolidics Ltd (24.8% stake, with Jan2020 call option for SEEDS Capital 10.67% stake)
(i) Collaboration with Sysmex. Sysmex is a US$13bn market cap leader in haematology and coagulation instrumentation worldwide. It is a Japanese company. Biolidics can tap on Sysmex’s immense distribution network to sell the FX1 system as part of a complete oncology test kit for clinical labs globally.
(ii) Lab-developed tests in China. In China, Biolidics is working with labs in Hunan and Hangzhou to gain such validation and thereafter to offer cancer diagnostic services (with these lab-developed tests) to patients. Professor Xie Tian is a shareholder and winner of the Wu Jieping Medical Innovation Award. He is considered a key opinion leader in the field of oncology in China.
(iii) China FDA Class 3 registration. The FX1 system currently has a Class 1 registration. A Class 3 registration will allow the product to be used nationwide.
Figure 24: ClearCell®FX1 System machine
Source: CBH
Figure 25: CTChip® FR1 biochip
Source: CBH
A leader in liquid biopsy is Nasdaq listed Guardant Health (GH). However, the model is different because blood samples need to be sent to Guardant labs in the U.S. to be tested. However, unlike GH, Biolidics’ ClearCell® FX1 System is a fully automated and portable CE-IVD medical device. The device uses a label-free approach to enrich circulating tumour cells (“CTCs”), which helps to maintain the CTCs in their original state and preserve their viability for further use in diagnostic tests and downstream applications.
The portability of ClearCell® FX1 System enables swift deployment and commercial scalability as compared to lab-based systems such as GH.
In addition, leveraging on its ClearCell® FX1 System, Biolidics is developing a range of laboratory developed tests for the cancer diagnostics market in China and Japan. Biolidics will be ideally positioned to increase the sales potential of its ClearCell® FX1 System and CTChip® FR1 biochips once these blood-based lab-developed tests are approved clinically.
Figure 26: Guardant share price has surged from $19 at IPO to $73.
Source: Bloomberg, PSR
OUTLOOK – Macro Tailwind + Good execution
We believe the two primary growth drivers for CBH is the healthy underlying demand for healthcare services in the three key countries that it is operating in – Indonesia, Philippines, Singapore, and it's aggressive and strong execution to grow the various businesses acquired.
A) MULTI-YEAR MACRO TAILWIND
There is low penetration of healthcare in key markets – Indonesia and the Philippines. As Figure 27 and 28 suggest, the penetration of facilities or hospital beds and medical professionals are some of the lowest in the region.
Figure 27: Low penetration of medical facilities
Source: CEIC, Media, PSR, Siloam Hospitals
Figure 28: Lack of medical professionals
Source: CEIC, Media, PSR, Siloam Hospitals
* Philippines based on 70,000 active physicians out of 130,000 registered
In Singapore, the demand for healthcare is ever growing. Over the past three years, healthcare expenditure has been rising at almost 8% CAGR. As highlighted, there are three major drivers to the rise of healthcare demand in Singapore. Firstly, Singapore population is ageing fast (Figure 16). By 2035, our number of old age to working age will be similar to current levels in Japan. Secondly, Singaporean life expectancy is rising (Figure 17), and for every ten years extra we live, more than one year is spent in illness. Thirdly, less healthy lifestyles have seen the rise of chronic diseases such as diabetes, hypertension and hyperlipidaemia (Figure 18).
Figure 29: The rise and rise of healthcare expenditure in Singapore
Source: CEIC, PSR
B) STRONG EXECUTION POST ACQUISITION
Secondly, after taking over the new acquisition, CBH has undertaken initiatives to expand the original business at a much faster pace.
(i) TMJ: When acquired, it only operated renal dialysis in 15 hospitals. After taking control in April 2018, CBH has secured contracts to expand the network to 34 hospitals. All this was completed within 12 months.
(ii) Philippines: After acquiring the four-storey medical centre, CBH undertook a renovation of the facility, introduced new services and expanded their footprint.
(iii) Hong Kong: Refocus strategy to target medical tourist from China.
(iv) Indo Genesis Medika (Proposed): Introduce more innovative clinical lab tests into Indonesia, attract more hospitals to tap on their facilities and support from Singapore on the more complex tests.
With the S$11mn raised from convertible bonds, we expect more acquisition to be undertaken by CBH. Around 70% of the proceeds will be earmarked for expansion of the business plus merger and acquisitions. The convertible bonds bear an interest of 7% p.a. and repayable at 120% of principal by January 2022. Up to 39.28mn new shares can be issued upon full conversion. Worth noting that the accounting treatment of the convertible bond is to recognize the value of the embedded option at fair value in the income statement.
INVESTMENT THESIS
Penetrating high-growth healthcare markets in Indonesia and the Philippines. CBH has entered the fast-growing healthcare markets in Indonesia and the Philippines through two acquisitions. Both countries rank among the lowest in Asia in the number of hospital beds and health professionals per capita. Healthcare spending in both countries has been growing at around 9 - 10% p.a.
Creating a recurrent revenue stream in healthcare. A key feature of its new Indonesian business is recurring revenue. Renal dialysis is a lifetime treatment, and CBH is expanding from 15 hospitals at the time of its acquisition to 21 currently and another 13 under renovation.
Targeting and revitalise profitable segments. CBH acquires asset-light, fast-growing healthcare segments. After the acquisitions, it will generally streamline operations, enhance costs efficiencies and grow revenue to maximize the business potential of the healthcare segments. After which, CBH will expand the businesses through expansion in capacity, network and capabilities.
VALUATION
Initiate coverage with a BUY and TP of S$0.28. Initiate with a BUY recommendation and target price of S$0.28. We used DCF valuation to capture the full benefit of CBH impressive growth over the next five years. Our assumptions are as follows:
A. Financial assumptions
Cost of equity = 10%; WACC = 8%; terminal growth rate = 3%
B. Operating assumptions
Indonesia
Philippines: Introduction of new services in the medical centre will be the growth driver. New services include more pharmacy sales, health screening for overseas foreign workers, renal care and new aesthetics centres.
Hong Kong: Medical tourism will be the key driver. Limitations are space and medical doctors.
Singapore
(i) Sam Lab: Introduce more high value-added esoteric tests, especially focused on oncology.
(ii) Medic Laser: With only one doctor and several therapists, growth will be driven by mid-to-high single digit volume growth.
(iii)GP clinic: Only one doctor and growth is driven by volume.
(iv) Product distribution: Distribution into the region (Singapore, Hong Kong, Malaysia, Indonesia) of esoteric tests for principals such as Biolidics ClearCell® FX1 System, CELLSEARCH® Circulating Tumor Cell Test, Prosigna® Breast Cancer Prognostic Signature Assay and MILS International diagnostics test.
Figure 30: Healthcare comparables trade at 20x EV/EBITDA but with a slower growth profile
Source: Bloomberg, PSR