Thursday, February 23, 2006

From East to West

Thomson Medical Centre [Thom SP, S$0.29]
The last post featured a traditional chinese medicine player in mainland China. Today, we traverse from East to West. Unlike Tong Ren Tang, Thomson Medical Centre ("TMC") is a niche hospital in Singapore that specialises in obstetrics & gynecology ("O&G") and paediatric services. It has only one medical centre located in Thomson which operates a 190 bed private hospital. TMC delivers about 600 babies a month. A milestone in its history was that its Fertility Clinic delivered Singapore's first surviving IVF triplets in 1988.

Let's look a summarized breakdown of TMC.

Niche positioning: With its fees and charges, it targets the "middle segment" of mothers to be who do not wish to pay high end private hospital rates nor stay in a government hospital.
Established brand name with mothers: Whilst it has only been listed for over a year, TMC has a fairly long operational history. From memory, it has at least been around for 25 years.
Possible boost to top and bottom line: Six new O&G specialists have set out practice in TMC in middle of 2005. TMC expects their full year contribution only in the coming FY.
More satellite clinics in housing estates: TMC is targeting to open 2 or 3 such clinics to add to its current seven. These clinics serve as an outreach of TMC into the population and allows it to refer mothers to be to TMC for inpatient or other diagnostic services.
Consultancy work: An MOU has been inked for TMC to provide its O&G expertise to a Vietnamese hospital in Binh Buong Province, near Ho Chi Minh City. TMC will provide hospital planning, design and project management, technical advisory and operational planning services. TMC is attempting to sign a 3 - 5 year contract to run the medical centre. If successful, this should provide another source of a recurring earnings.
Major stake by founder/chairman: Founder and executive chairman, Dr Cheng has retained more than a third of its shares after its IPO in Jan 05.
Pro active government perks for child birth: Singapore's child birth rate is below current population replacement levels. However, in recent years, the government has been doling out baby bonuses, in a bid to encourage procreation. The most recent package was introduced in August 2004. Recent statistics show that these measures have helped to reverse the declining birth rate. Unfortunately, based on studies in other developed European countries, such stimulus are unlikely to persist in the long term, suggesting that the child boom could be a short term phenomena unless steps are taken again. In this connection, it may be heartening to note that the government pays close attention to this issue.

Limited growth: Other than the Vietnamese tie-up, organic growth of TMC is expected to be limited. As pointed out above, the managing the birth rate in Singapore is a severe challenge. TMC may have to venture abroad for growth but for a traditionally local player, its first forays overseas should be tough.
Management renewal: TMC is the result of chairman's Dr Cheng's life work. Whilst Dr Cheng is nearly 75 years old, he still runs its own clinic at TMC. Dr Cheng's son has assumed the role of deputy chairman of TMC too.

Even though, the contribution from the Vietnamese venture has not been factored in, TMC looks relatively cheap compared to its local hospital plays in Parkway and Raffles Medical. The latter two are trading at historical P/Es of about 30 and at a P/B of about 3. In contrast, TMC's historical P/E is approximately 19 while its current P/E is 13. As for P/B, it is at an inexpensive 1.1x as TMC owes the medical centre at Thomson Road. Its ROE of about 9 is comparable to both peers too and it is managed with a low debt to asset ratio of 12%.

Granted that TMC is the smaller of the three hospital plays and its growth prospects appear limited currently, the discount applied to TMC appears overly done. Over the long term, if its growth stagnates, TMC could also appear attractive as a yield play. Its current yield is 4.2% and with a quick ratio of 1.1, TMC could dip its hand into this kitty to fund future payouts.



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