Healthcare Sector - A look back at 2QCY11 results (OCBC)

Overweight

2QCY11 results recap. Both the healthcare-related companies under our coverage reported a decent set of results during the last reporting season. Raffles Medical Group's (RMG) 2QFY11 results were in-line with our expectations while Biosensors International Group (BIG) reported a stellar set of 1QFY12 results which beat ours and the street's estimates. Other companies with notable performances include dental operator Q&M Dental [NON-RATED] and airway management device firm LMA International [NON-RATED]. The former posted a 21.8% and 12.1% YoY rise in top-line and bottom-line respectively; while the latter saw sales and net profit (excluding litigation settlement gains and non-cash charges) growth of 19.6% and 214.9% YoY respectively thanks to strong growth from its flagship LMA Supreme™ product, improved operating efficiencies and reversal of overprovision of tax.

Medical tourism pie getting bigger. Besides RMG's strong performance, some regional healthcare providers like Thailand's Bumrungrad Hospital and Bangkok Dusit Medical Services also reported good revenue growth. We believe this provides a signal that the lucrative medical tourism pie in Asia is getting larger. We opine that RMG would continue to thrive well despite increasing competitive pressures due to its established track record and ability to offer high quality curative services and sophisticated medical specialties. Operating leverage would continue to play a huge role in its growth especially when its new specialist medical centre and Raffles Hospital expansion comes on board in 2H12 and 2013 respectively.

Growing need for medical devices. Within the medical device industry, we like BIG as it has put in place a series of growth drivers. We believe that the group is on track to possibly exceed management's revenue guidance of 50%-60% top-line growth (subject to completion of JWMS acquisition) in FY12. This stems largely from its new licensing revenue stream from Terumo Corp (contribution started in 1QFY12) for the sales of the Nobori stent (uses BIG's technology) in Japan, as well as continued market share gains in BIG's addressable markets.

Maintain OVERWEIGHT on Healthcare sector.

Fundamentals for the Healthcare sector remain solid, as highlighted by the positive results for most of the healthcare players which we have tracked. The FTSE ST Health Care Index has also showcased its resilience in current times of uncertainty, declining just 2.1% YTD versus the broader market's 11.4% tumble. Hence we remain OVERWEIGHT on the sector. Within this space, our top pick is BIG [BUY; FV: S$1.68], underpinned by its robust earnings growth potential and competitive position vis-à-vis its peers as highlighted by its impressive market share gains.