Here's why Raffles Medical is going nuts over building a hospital in Hong Kong

Huge potential awaits as private operators only account for less than 10% of the total hospital beds.

RFMD announced on Friday that they have submitted a bid for a private hospital development in Hong Kong.

The plot, Aberdeen Inland Lot No. 458, commands a size of 27,500 sqm and a height limit of 50m, resides at the residential and industrial area of Wong Chuk Hang, which is located on Hong Kong Island and in the vicinity of Ocean Park and the Hong Kong Police Training School.

The result of this tender is likely to be announced early next year.

According to a South China Morning Post article, competing tenders have been submitted by Fortis Healthcare and Parkway Health. Both Fortis Healthcare and Parkway Health also reportedly bid for
another plot in Tai Po. The second plot, Tai Po Town Lot No. 207, sized at 54,851 sqm with a 90m height limit, is located at the eponymous residential town of Tai Po, which hosts some of the most expensive and prestigious private properties and addresses of the region.

Nomura believes that there is room in HK for private operators who cater to the mid-upper income population.

"Having said that, we must admit that it is hard to reach a conclusive stand on the eventual financial profitability of the project without more details on the tender proposal submitted. Certain restrictions that have been imposed on tenderers potentially make the hospital development less attractive.
In general, we still see this as a positive move, as it will provide RFMD a third leg of growth after its planned specialist centre and capacity expansion of its flagship hospital. Comfort is also derived from the belief in management’s conservative approach to things and strong focus on profitability," Nomura analyst Jit Soon Lim said,

Here's more from the analyst:

Hong Kong’s healthcare system comprises of 38 public hospitals and 13 private hospitals. Capacity-wise however, the private sector accounts for less than 10% of total available hospital beds. To put things in
perspective, Singapore’s private sector accounts for 20% of capacity, while Malaysia has a number closer to 30%. Hence, there is potentially room for more private healthcare in Hong Kong.

Why has private healthcare not taken on a bigger role in HK?
One of the reasons is that the presence of a heavily subsidized public healthcare system has restricted the demand for private healthcare. According to BMI, the fees charged for public medical services cover
only 5% of the cost.

How is it different now? Is there room for more private hospitals?

There is arguably room for a private operator catering to the mid-upper income population who are willing to pay for quality healthcare without the long waiting times.

In our view, the dynamics of the HK market is very similar to Singapore. With a rapidly aging population, healthcare demand is expected to grow. In addition, the HK market benefits from China as a hinterland, with operators experiencing an influx of patients from the mainland. Public capacity is tight and patients experience long waiting times. Couple this with income growth in the higher income brackets and these should support and fuel demand for private healthcare in HK.

As a case in point, private bed capacity is growing at a steady clip, implying demand for private healthcare. According to a paper presented to HK’s Legislative Council, overall private bed occupancy in 2009 stands at 64%. A total of some 700 additional beds were added in the 2006 -09 period, representing a ~20% increase in bed capacity. \Private bed capacity is expected to grow by ~10% (250 beds) in the 2013–14 period. Hence, despite the presence of heavily subsidized healthcare, we are still seeing strong growth in the private healthcare market.

Is it feasible for RFMD to go in alone?

Going alone is not an issue, in our view. Raffles has a long history of operating in HK, through their primary care operations. As such, they are familiar with the regulatory and operational issues in Hong Kong. This gives us comfort that they are not going in blind.

Financial implications
Having extolled the potential of private healthcare in HK, we must admit that it is hard to reach a conclusive stand on the eventual financial profitability of the project without more details on the tender proposal submitted. Certain restrictions that have been imposed on tenderers – such as the requirement for 30% of all services to be offered as part of fixed-price packages and that 50% of all patient load must be locals – potentially make the hospital development less attractive.

We identify 5 critical questions that are left unanswered by this latest development: 1) capex requirements, 2) ease of constructing the hospital, 3) timeline and breakeven period, 4) ease and cost of hiring doctors and nurses to operate the hospital, and 5) type of services and segments targeted.

In general, we still see this as a positive move, as it will provide RFMD a third leg of growth after its planned specialist centre and capacity expansion of its flagship hospital. Comfort is also derived from our belief in management’s conservative approach to things and strong focus on profitability.