Asia’s healthcare boom will have four big winners

“It’s like the Shangri-La Hotel.”

That was the answer I received when I asked what sort of service to expect from a leading Thai hospital chain in downtown Bangkok.

Shangri-La Hotel, of course, is one of Asia’s grandest five-star hotel chains, known for its excellent service and facilities.

The hospital manager told us that he had reviewed four or five design proposals for his new hospital wing. He’d even commissioned a mock-up version before giving the wing the green light.

I’ve previously experienced this attention to detail first-hand when my wife was expecting our son, a team of top-notch doctors and nurses looked after us.

Investors like Asian healthcare stocks at the moment, and that kind of attention to detail is a big reason why.

The MSCI Asia ex-Japan healthcare sector has outperformed the underlying market by far over five years and ten years and has been especially promising over the last 12 months; Asian (ex-Japan) consumer discretionary stocks have been down by nearly -16%, while the healthcare sector has been in fine fettle, up by more than 33%.

The combination of long and short-term performances is a rare feat. It deserves a proper look.

Asia’s trade sector is world-leading – the same can’t be said for its services sector (yet)

Asian emerging market success has always been built on trade prowess, with the region acting as the world’s factory floor. Factories here churn millions of products out that are consumed globally.

But the Asian service sector is yet to match the productivity, success and recognition of the trade sector.

The Asian healthcare sector comes under the services umbrella.

Healthcare spending as a proportion of GDP in Thailand, India and Singapore is only 3.2%, 4.0% and 4.2%, respectively. This can be compared with the UK’s 9.0% (and OECD average of around 10%).

In the same three countries, the number of doctors and hospital beds per 1,000 people are only 0.3, 0.7, and 1.8, respectively. In the UK, that number is 2.8; the OECD average is 4.9.

That gap cannot stay the same. This is the single most important reason why the sector is so beloved by investors.

The process of narrowing that gap is already well underway.

Governments across the region are introducing new measures to boost the healthcare sector. For instance, Indonesia introduced universal healthcare a year ago; the programme is expected to be fully rolled out in 2019.

There is a plethora of new financial products – such as insurance and pension schemes – which is helping to reduce the funding gap.

On the supply side, I have come into contact with a handful of groups which are setting up hospitals or looking to take over hospital management before spinning assets off into separate entities such as real estate investment trusts (Reit). Several sovereign wealth fund investors like this sector as it offers a chance for them to match long-term liabilities with long-term assets.

The four big winners

I’m a big fan of the Asian healthcare sector as an investment theme, but I believe the future belongs to the companies who are able to adjust to the specific needs of modern Asia.

I think there will be four kinds of winners.

First, the biggest private operators. The Asian healthcare sector is fragmented, setting the stage for a merger and acquisition (M&A) boom. Large private operators, who have superior management skills, brand name recognition and strong backing from investors will emerge as winners.

Second, entrepreneurs. The less affluent members of the population are depending on government hospitals with varying degree of quality and services. I think there is a fantastic opportunity for entrepreneurs to follow the strategy of low-cost air travel carriers over the last decade, bringing a service to people who couldn’t afford it in the past.

Third, specialist and traditional healthcare providers have enormous potential to modernise, and move into the 21st century. For instance, Thai massage is renowned but lacks recognisable brands. This opportunity also extends to plastic surgery/beauty and fitness centres catering to increasingly image-conscious millennials.

Fourth, there are big opportunities for those who reinvent the sector, package and sell it across the world. Here the best precedent is in the many Asian luxury hotels located like a string of pearls in leading Western cities. In the Travel + Leisure 2014 ranking of the 50 leading hotels, Asian brands dominated.

I envisage new Asian companies reinventing the global healthcare sector; the focus will be on hotel-like service and hospitality packages for relatives. Some listed hospitals have already started down this path, either by offering health tourism packages or through management/ownership of leisure assets.

I think this process will accelerate over the next few years, blurring the line between Asian and Western healthcare, as was the case with Asian hotels.

Customers today don’t care if the fabulous hotel they stay in was run by an Asian company; I think healthcare will soon be the same.