It is the butterfly effect in action. Weak growth outlooks in the Gulf states are prompting greater competition from local clinics, stemming the flow of visitors to the world’s top medical tourism destination.
That is clouding the outlook for Thailand’s healthcare shares, which surged more than 800 percent over the past seven years, as valuations start to look stretched amid falling demand. Bangkok’s Bumrungrad Hospital PLC, known as the grandaddy of international clinics, has slumped 16 percent since early March after patient volumes from the United Arab Emirates (UAE), its second-biggest source of overseas visitors, fell 20 percent in the first quarter.
Thailand attracted as many as 1.8 million international patients last year, many staying on afterward for a beach holiday. More than one in three foreigners treated at Bumrungrad are from the Gulf states, and Kasikorn Securities Co says declining growth in the region and a rise in competition from clinics in the UAE, where the government is encouraging its citizens to undergo medical care at home, are curbing demand.
“In the short term, the economic slowdown in the the Middle East will weaken some investors’ confidence on earnings growth for domestic hospital operators,” said Jintana Mekintharanggur, the Bangkok-based director of equity investment at Manulife Asset Management.
“We are still bullish on the sector” in the long term, as it will benefit from growth in nations such as Myanmar and Vietnam that have less-developed health systems, she said.
The SET Health Care Services Index has fallen 2.7 percent since closing at a record high on April 21. It is still the best-performing industry group in the SET Index, rallying almost 28 percent over the past 12 months. It trades at 6.8 times its book value, compared with 3.8 for the MSCI World Health Care Index.
The health gauge fell 0.3 percent as of 10:31am in Bangkok yesterday, the worst performer among 28 industry groups on the SET Index, which was up 0.7 percent. Bangkok Dusit Medical Services PLC, which has the biggest weighting on the measure, dropped 0.8 percent.
“Most hospital stocks have very stretched valuations, which has probably spurred some concern about overestimated earnings potential,” said Adithep Vanabriksha, Bangkok-based chief investment officer at Aberdeen Asset Management PLC. “We still see their growth potential, but have to be very careful with the current share prices.”
Between 1.3 million and 1.8 million medical tourists traveled to Thailand last year, according to figures from Patients Beyond Borders, a consulting firm in Chapel Hill, North Carolina. The nation is well known for cosmetic and sex change procedures. Medical tourism generated 107 billion baht (US$3 billion) of revenue in 2014, according to the latest Thai government estimate.
Sitting at the apex of the industry is Bumrungrad, which attracts more than half a million foreign patients a year and has a network of 32 referral offices everywhere from Mongolia to Ethiopia. Sixty-seven percent of revenue came from overseas visitors last quarter, company figures showed. Burmese were the biggest source, accounting for 8.4 percent of total patients, followed by 8.3 percent from the UAE and 5.9 percent from Oman.
Kasikorn Securities downgraded its earning forecasts for Bumrungrad by 8 percent to 13 percent in 2016 to 2018 to reflect the weak economic outlook in the Gulf and rising competition from Abu Dhabi’s al-Noor Hospitals Group, according to a May 19 note by analyst Jitima Ratanatam in Bangkok.
The UAE’s economy has been hit by the plunge in oil prices since the middle of 2014 and is forecast to expand 2.5 percent this year, from more than 7 percent in 2012.
Other Thai hospitals are also under pressure. Chiang Mai Ram Medical Business PLC reported a 41 percent slump in first-quarter profit. Bangkok Dusit was downgraded to “neutral” from “outperform” by Credit Suisse Group AG last week.
Recognizing the importance of healthcare to the economy, Thai Prime Minister Prayuth Chan-ocha’s military government has drafted a 10-year plan to promote the sector. As part of the plan, the staying period for medical treatment for patients from China, Laos, Cambodia, Myanmar and Vietnam has been tripled to 90 days.
Even if Middle East demand keeps declining, growth in Southeast Asia is likely to support the industry, said Voravan Tarapoom, Bangkok-based chief executive officer at BBL Asset Management Co.
Manulife has cut holdings in Bangkok Dusit because its rising share price provided an opportunity to lock in profit, Jintana said.
It is buying Bumrungrad because it has dropped to an attractive level and Manulife is also looking at other health companies, but is wary of high valuations, she said.
“Healthcare stocks were the good defensive stocks during the market downturn,” said Kasem Prunratanamala, the head of research at CIMB Securities Co in Bangkok. “Now, with the high valuations, those shares have lost a little bit of allure.”
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