Oil slumps. Middle Eastern patients cancel treatments abroad. Thai hospital stocks slide.
It's 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's clouding the outlook for Thailand's health-care shares, which surged more than 800% over the past seven years, as valuations start to look stretched amid the falling demand. Bangkok's Bumrungrad Hospital Plc, known as the grandaddy of international clinics, has slumped 17% since early March after patient volumes from the United Arab Emirates, its second-biggest source of overseas visitors, fell 20% in the first quarter.
Thailand attracted as many as 1.8 million international patients in 2015, many of whom stayed on afterwards 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 stay home for medical care, are curbing demand.
Cautious, but still bullish
"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, which oversees about $325 billion globally. "We are still bullish on the sector" in the long term as it will benefit from growth in countries like Myanmar and Vietnam that have less-developed health systems, she said.
The SET Health Care Services Index has fallen 2.6% since closing a record high on April 21. It's still the best-performing industry group in the SET Index, rallying almost 28% 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.
"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 travelled to Thailand last year, according to figures from Patients Beyond Borders, a consulting firm in Chapel Hill, North Carolina. The country is well known for cosmetic and sex-change procedures. Medical tourism generated 107 billion baht ($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. A reported 67% of revenue came from overseas visitors last quarter, company figures show. Myanmar residents were the biggest source, accounting for 8.4% of total patients, followed by 8.3% from the UAE and 5.9% from Oman.
Kasikorn Securities downgraded its earning forecasts for Bumrungrad by 8% to 13% 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 since mid-2014 and is forecast to expand 2.5% this year, from more than 7% in 2012.
Other Thai hospitals are also under pressure. Chiang Mai Ram Medical Business Plc reported a 41% slump in first-quarter profit. Bangkok Dusit Medical Services Plc, the largest company in the Thai health gauge, was downgraded to neutral from outperform by Credit Suisse Group AG last week.
Recognising the importance of health care to the Thai economy, Prime Minister Prayut Chan-o-cha'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.
Southeast Asian demand
Even if Middle East demand keeps declining, growth in Southeast Asia will support the industry, said Voravan Tarapoom, the Bangkok-based chief executive officer at BBL Asset Management Co, which oversees $15 billion.
Manulife has cut holdings in Bangkok Dusit because its rising share price provided an opportunity to lock in profit, said Ms Jintana. It's buying Bumrungrad because it's dropped to an attractive level and is also looking at other health companies but is wary of high valuations, she said.
"Health-care stocks were the good defensive stocks during the market downturn," said Kasem Prunratanamala, the head of research at CIMB Securities (Thailand) Co in Bangkok. "Now, with the high valuations, those shares have lost a little bit of allure."