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Equity Research

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Indonesia

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Health Care

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8 April 2014

Indonesia healthcare

Power of healing

Poised for structural growth: After a detailed study of health expenditure to GDP trends across 25 countries over 1995-2012, we conclude that Indonesia’s healthcare market is still at an early stage of development. We found that low- to middle-income countries have a health expenditure to GDP ratio of 3.5-5.5% while the ratio for high-middle-income countries is above 7%.

With Indonesia’s ratio of 3% in 2012, our study gives us confidence in the long-term growth outlook for Indonesian healthcare.  Multi-country study: We delved further into the health expenditure trends in Brazil, Malaysia and Poland, countries with a significant rise in GDP per capita over the study period. Over 1995-2012, their health expenditure to GDP ratio rose to 4-9.5% from 2.5-6.5%, as GDP per capita rose from under USD 5k to USD 10k. Health expenditure was a robust 10-14% CAGR when per capita GDP hit USD 5k, compared to 4-7% annual growth when below USD 5k. We expect a similar transition in Indonesia, as we forecast GDP per capita to exceed USD 5k in 2016 and USD 10k in 2023.

Health expenditure to GDP model shows a ‘sweet spot’: Our model shows that the next five years are likely to be a sweet

spot for growth in Indonesia’s healthcare sector. We forecast a 17% CAGR in healthcare spending, up from 13% in 2008-13. We expect health expenditure per capita to double to USD 229 in 2018 from USD 107 in 2013. Rising incomes and the launch of a national health insurance programme (the JKN) in 2014 should drive growth. We think the JKN will spur middle- to upper-income Indonesians to switch to private hospitals as public hospitals become overcrowded, while expanded coverage under the JKN will boost drug consumption.

Actionable ideas: We initiate coverage of the sector with Outperform ratings on Siloam Hospitals Internasional (Siloam), the largest private hospital operator by number of beds, and Tempo Scan Pacific (Tempo), the largest drug producer by volume and a leading personal care player. Our top pick is Siloam, for its market leadership, robust growth outlook, and attractive valuations given its long-term growth potential. We also present three non-rated companies in the sector – Kalbe Farma, Kimia Farma and Sido Muncul. Click here to get The Scoop, an audiovisual summary of the report.

Alvin Witirto

+65 6596 8530 Equity Research

Standard Chartered Bank, Singapore Branch

Stephen Hui

+65 6596 8514 Equity Research

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8 April 2014 2

Contents

Investment highlights 3

Investment implications 6

An underserved market 8

Health expenditure to GDP model 12

Prognosis: Positioned to take off 16

JKN improves affordability 19

Increased private investment in healthcare 23

Favourable long-term trends 25

Companies

Siloam Hospitals International 28

Tempo Scan Pacific 58

Kalbe Farma 87

Kimia Farma 91

Sido Muncul 95

SCout is Standard Chartered’s premium research

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Investment highlights

Higher incomes drive growth

A study of 25 countries

We analysed health expenditure trends across 25 countries from 1995-2012, and conclude that Indonesia’s healthcare sector is still at an early stage of development,

but is entering a period of structural growth. We estimate Indonesia’s health

expenditure to GDP ratio was only 3.0% in 2012, compared to 3.5-5.5% in low- to middle-income countries and over 7% in high-income countries. The correlation between rising incomes and a higher health expenditure to GDP ratio has been well documented across low, middle and high income countries.1

Figure 1: Low- to middle-income countries* Figure 2: High-income countries*

* GDP per capita below USD 12,000. Countries: China, India, Indonesia, Malaysia, Philippines, Thailand, Vietnam, Cambodia, Singapore.

Source: Global Health Expenditure Database, World Development Indicators

GDP per capita above USD 12,000. Countries: Australia, Denmark, France, Italy, Japan, Norway, Spain, Sweden, United Kingdom, United States, South Korea, Canada. Source: Global Health Expenditure Database, World Development Indicators

Our health expenditure to GDP model

We have developed a health expenditure to GDP model to assess the growth

potential for Indonesia’s healthcare sector. We model this ratio to increase to 3.4% in 2018 and 3.9% in 2023. Based on our economists’ forecast of a nominal 2013-30 GDP CAGR of 10%, we estimate a health expenditure CAGR of 12% over the same period. We estimate health expenditure per capita will rise from USD 107 in 2013 to USD 229 in 2018 and USD 402 in 2023.

Figure 3: Health expenditure to GDP ratio, 2012 Figure 4: Healthcare expenditure per capita, Indonesia

Source: WHO, World Bank, Standard Chartered Research estimates Source: WHO, World Bank, Frost & Sullivan, Standard Chartered Research estimates

1

OECD (2010), Health at a glance: Europe 2010; OECD (2013), Health at a glance: Asia Pacific 2012; World Health Organization and Results for Development Institute (2011), The Determinants of Health Expenditure; Huber (1999), Health expenditure trends in OCED countries 1970-99; Huber and Orosz (2003), Health expenditure trends in OECD countries in 1999-2001.

0

Health expenditure as a % of GDP

Time series: 1995-2012 25 countries Low-to-middle income High income

61 107

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8 April 2014 4

A severely underserved market

Poor healthcare infrastructure

In 2012, Indonesia’s hospital bed per 1,000 persons ratio of 1.0 was well below Thailand’s (2.0) and Malaysia’s (1.6). In 2012, the OECD average for hospital beds per 1,000 people was 4.93, and the OECD average was 3.14. Indonesia’s doctors

per 1,000 persons ratio was 0.3, compared to 1.5 in China and 1.3 in Malaysia. Low health expenditure per capita

The fact that the market is underserved is reflected in the low health expenditure per

capita, which was USD 108 in 2012. Indonesia’s health expenditure per capita is only

26% and 49% of Malaysia’s and Thailand’s, respectively (see table below).

Figure 5: Beds & doctors per 1,000 population, 2012 Figure 6: Health expenditure per capita, 2012

Source: Frost & Sullivan Source: Global Health Expenditure Database

National healthcare insurance a catalyst

Introducing the JKN

The JKN is the national health insurance programme introduced in January 2014. It aims to provide universal health insurance coverage in Indonesia by 2019 from 63% in 2012. Participants pay a monthly insurance premium to the National Social Security Agency (BPJS). (In Indonesia the JKN is also sometimes referred to as the BJPS, as the BJPS administers the JKN.) The premium is sponsored by the government for poor and near-poor Indonesians. JKN participants will have access to healthcare services at

9,217 community clinics and 1,710 participating hospitals (out of Indonesia’s 2,300).

Figure 7: Health insurance coverage, 2012 Figure 8: Universal coverage by 2019

Source: Road Map Toward National Health Insurance 2012-19 Source: Road Map Toward National Health Insurance 2012-19 0.0

Hospital Beds per 1,000 population

Doctors per 1,000 population 410

322

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Hospital services – ready to take-off

We expect the JKN rollout to drive demand for inpatient and outpatient services at public hospitals and participating private hospitals, as large ticket hospitalisation and specialist expenses will now be covered by the JKN. We estimate the overall hospital services market will increase at a 2013-23 CAGR of 13-16%. We think the higher patient volume at private hospitals will be driven by: (1) rising purchasing power, as the JKN will subsidise or fully cover medical costs at participating hospitals; and (2) middle- to upper-income patients switching to private hospitals as public hospitals become overcrowded by JKN patients.

Pharmaceuticals – Sustainable growth

We expect the JKN to boost demand for pharmaceutical products, and we estimate a 2013-23 CAGR of 13-18% for the overall pharmaceutical market. In the short term, we expect the JKN to significantly boost prescription drug demand, as it will cover medical consultation and drug costs for participants.

Figure 9: Indonesia’s private hospital market Figure 10: Indonesia’s pharmaceutical market

Source: Frost & Sullivan, Standard Chartered Research estimates Source: IMS, Standard Chartered Research estimates

6.9 11.9

Public Private 5-year forward CAGR

1.8 3.0

Prescription OTC 5-year forward CAGR …and drive demand for generic

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8 April 2014 6

Investment implications

Positive on Indonesian healthcare

Expect ‘sweet spot’ for growth over the next five years: We expect health expenditure per capita in Indonesia to double to USD 229 in 2018 from USD 107 in 2013. This implies an acceleration to a total health expenditure CAGR of 17% in 2013-18 (13% in 2008-13). Thereafter, we expect health expenditure to compound at 13% p.a. in 2018-23 and 10% p.a. in 2023-30.

See robust growth drivers ahead: We see rising incomes as the primary driver for rising healthcare demand, the rollout of the JKN as a catalyst, and increasing private sector investment as an enabler for structural growth in Indonesia’s healthcare sector.

Proxies for each segment: The five stocks we identify are prominent players in their respective segments – Siloam in private hospitals, Tempo in over-the-counter (OTC) drugs and personal care, Kalbe Farma in overall pharmaceuticals, Kimia Farma in pharmacies, and Sido Muncul in traditional herbal medicine.

Siloam Hospitals: Top pick

We initiate coverage of Siloam with an Outperform rating and a price target of IDR 13,982, implying 34% upside potential.

Market leadership: Siloam is the largest private hospital operator in Indonesia with twelve hospitals and, 3,000 beds in 2012, when it had a 7% share of the private hospital market by bed capacity. Mitra Keluarga, the second largest operator, has 10 hospitals with1,200 beds or a c.3.0% share. Other major private hospital operators have market shares of less than 3.0% each. As of end-2013 Siloam had 16 hospitals and 3,700 beds.

Robust expansion: It plans to more than double its bed capacity by 2017, to 40 hospitals with 10,000 beds. We expect 2013-16 revenue/earnings CAGRs of 44%/86%, driven by: (1) rapid expansion; and (2) maturing hospitals, as EBITDA margins and occupancy rise as younger hospitals mature.

Attractive valuations: On PE, Siloam’s multiples look rich at 67x 2015E PE, but we believe more appropriate valuation metrics are DCF and EV/EBITDA given the high upfront capex and initial start-up losses for new hospitals. Siloam is trading at 16x 2015E EV/EBITDA and we forecast a 2013-16 EBITDA CAGR of 63%. Other leading Asian hospital operators are trading at 15-17 2015E EV/EBITDA, with an average 2013-16 EBITDA CAGR of 14-23% (based on our estimates and consensus). Our DCF-based price target translates to 21x 2015E EV/EBITDA.  Top pick: We prefer Siloam to Tempo given its: (1) market leadership in the

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Tempo: Riding two growth waves

We initiate coverage of Tempo with an Outperform rating and a price target of IDR 3,878, implying 26% upside potential.

Riding the JKN wave:We expect Tempo’s fledgling prescription drug business to benefit from the JKN rollout. Management expects to increase this business more than threefold to IDR 592bn in 2017. As Indonesia’s largest pharmaceutical producer by volume, we believe Tempo is well positioned to leverage on its

production scale to deliver the government’s generic drug needs at a cost-efficient level.

Strong earnings growth: We expect 2014-16 revenue and earnings CAGRs of 14% and 15%, respectively, driven by volume growth and margin expansion as it focuses more on its own products in the pharmaceutical and personal care segments. Management plans to allocate more distribution capacity to higher margin own-brand products (16-17% EBIT margin) rather than low-margin third party products (3-3.5% EBIT margin).

Valuation appealing: Despite being the second-largest listed pharmaceutical player by market capitalisation, Tempo is only trading at 17x 2015E PE, a 35% discount to Kalbe Farma, trading at 26x (Bloomberg consensus). Our sum-of-the-parts derived price target implies a target multiple of 21x 2015E PE, close to its three-year historical average.

Figure 11: Coverage and non-rated stock highlights

Price target Price

Market cap

3M avg value

traded Last PE (x)

2-yrs EPS 2-yrs

Price /

sales EV/EBITDA

Div. yield (%)

ROCE (%)

Name Ticker Rating (LC) (LC) (USD mn) (USD mn) FYE FY0 FY1 FY2 CAGR PEG FY1 FY0 FY1 FY2 FY1 FY1

Siloam Internasional SILO IJ OP 13,982 10,400 1,062 8.44 12/13 218.4 100.3 67.3 80% 0.8 3.0 34.5 23.8 16.4 0.1 8.5

Tempo Scan Pacific TSPC IJ OP 3,878 3,070 1,221 0.23 12/13 21.8 19.8 16.5 15% 1.1 1.8 12.3 12.3 10.2 2.8 19.5

Kalbe Farma KLBF IJ NR 1,500 6,213 8.43 12/13 36.2 30.8 25.6 19% 1.3 3.8 24.4 20.6 17.1 1.5 27.1

Kimia Farma KAEF IJ NR 895 439 0.52 12/13 NA NA NA NA NA NA NA NA NA NA 14.1

Sido Muncul SIDO IJ NR 825 1,093 2.43 12/13 31.7 NA NA NA NA NA NA NA NA NA NA

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8 April 2014 8

An underserved market

Indonesia’s pharmaceutical and hospital services markets are still underserved and

underpenetrated. We believe this presents a significant growth opportunity for large hospital operators, such as Siloam, and leading domestic pharmaceutical producers, such as Tempo.

Structural growth opportunity

Low healthcare expenditure per capita

Indonesia’s healthcare expenditure per capita of USD 108 in 2012 was well below

regional peers Thailand (USD 215) and Malaysia (USD 410). Indonesia’s total

healthcare expenditure, at 3.0% of GDP, also lagged these regional peers’ level of

3.9% in 2012.

Figure 12: Health expenditure per capita, 2012 Figure 13: Health expenditure as a % of GDP, 2012

Source: Global Health Expenditure Database Source: Global Health Expenditure Database, World Development Indicators

Low drug expenditure per capita

Although Indonesia is already one of the largest pharmaceutical markets in Asia, its drug expenditure per capita is still among the lowest in the region, at USD 21 in 2010. This is significantly below regional peers such as Malaysia (USD 65) and Thailand (USD 61). We believe this indicates the strong growth potential for the domestic pharmaceutical industry.

Figure 14: Pharmaceutical market size, 2012 Figure 15: Drug expenditure per capita, 2010

Source: UNDESA-PA, IMS Health, Business Monitor International, media reports, Standard Chartered Research

Source: Kalbe Farma, Business Monitor International 8,895

Indonesia Thailand Philippines Malaysia Singapore

U

Singapore Malaysia Thailand China Philippines Indonesia

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Poor healthcare infrastructure

Indonesia’s healthcare infrastructure is still limited, with 0.3 doctors per 1,000

population (OECD: 3.1) and 1.0 hospital beds per 1,000 population (OECD: 4.9). Frost & Sullivan estimates Indonesia has a shortfall of 267,000 doctors. Although the annual supply of doctors exceeds growth in annual demand, it expects the shortage to persist beyond 2020 given the size of the shortfall.

Figure 16: Doctors per 1,000 population, 2012 Figure 17: Hospital beds per 1,000 population, 2012

Source: Frost & Sullivan Source: Frost & Sullivan

Fragmented market

Pharmaceuticals: Large incumbents, but still fragmented

The two largest listed pharmaceutical producers in Indonesia controlled less than 15% of the market each in 2012: Kalbe Farma with a 12% market share by value (10% by volume) and Tempo with a 12.4% market share by volume (3% by value).

Kalbe’s total pharmaceutical market share by sales is much larger than Tempo’s due to Kalbe’s market leadership in the higher-priced and higher-margin prescription drug business, where it had a 13% market share by sales in 2012, compared to Tempo’s fledgling prescription drug business. Overall, the market is still fragmented – the top 60 companies control over 84% of the market by value, with only eight companies having a market share of 3% or more. Both the prescription and OTC markets are fragmented.

Figure 18: Pharmaceutical market share by sales, 2012 Figure 19: Structure of pharmaceutical market, 2012

Note: Market share data includes both prescription and OTC drugs. Source: IMS

Source: Ministry of Health (Direktorat Jenderal Bina Kefarmasian dan Alat Kesehatan) 2.8

OECD average 4.93, Global average 3.00

12%

No of companies Market share by sales

%

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8 April 2014 10 Public hospitals remain dominant

Public hospitals still make up 74% of total hospitals and 83% of bed capacity in Indonesia. Patients of public healthcare service systems are required to seek primary care at community clinics (puskesmas) before proceeding to public hospitals. Private patients can go directly to private hospitals without going through a primary healthcare service provider.

Fragmented private hospital market; Siloam is leader

The private hospital market in Indonesia is extremely fragmented, with the top 10 major hospital groups controlling only c.24% of the private hospital market by bed capacity in 2012 (or <5% of the total market – public and private beds). Siloam has a significant lead, with a 7.4% market share by bed capacity (2013: 16 hospitals), while Mitra Keluarga was a distant second with a 3.0% market share.

Figure 20: Public vs. private hospitals breakdown, 2012 Figure 21: Private hospital market by bed capacity, 2012

Note: Figures exclude bed capacity available at community clinics.

Source: Frost & Sullivan, Ministry of Health, companies, Standard Chartered Research

Source: Frost & Sullivan, Ministry of Health, companies, Standard Chartered Research

Low health insurance coverage

Two in five Indonesians are uninsured

In 2012, the government estimated only 152mn people, or 63% of the population, was covered by some form of health insurance. The public sector accounted for 88% of the covered population, while the private sector accounted for the remaining 12%,

or c.7.6% of Indonesia’s total population.

High proportion of out-of-pocket expenditure

In 2010, the average Indonesian paid 38% of his or her healthcare expenditure out of pocket. This is well above the average out-of-pocket expenditure (OPE) of 16% in developed markets and 14% in Thailand. We think the JKN rollout could reduce the

proportion of OPE, as seen in the case of Thailand’s implementation of universal

healthcare since 2002, especially for services at public hospitals, where most JKN patients will be seeking treatment.

543

40,629 1,540

197,744

0% 20% 40% 60% 80% 100%

Total hospitals Total bed capacity

%

ma

rk

et

s

h

ar

e

Private

Public 7.4%

3.0% 2.5%

2.2% 2.0%

1.6% 1.1%

0.5%

79.8%

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Figure 22: Penetration of health insurance, 2012 Figure 23: OPE as a % of health expenditure, 2010

Source: Ministry of Health, National Statistics Agency *Japan, France, United States.

Source: Global Health Observatory, WHO, Roland Berger

Significant growth potential for the private insurance market

While the JKN will provide universal health insurance coverage by 2019, we think more middle- to upper-income Indonesians will opt to purchase private health insurance given the better coverage. In 2010, private health insurance accounted for just c.1.3% of healthcare expenditure, well below the regional average of 4.3%.

Roland Berger estimates the annual premiums for Indonesia’s personal accident and health insurance will grow 19% p.a. to USD 4bn in 2020, from USD 0.7bn in 2010. (This is the second fastest growth it estimates in the region after the Philippines, where it forecasts 21% p.a. growth in 2010-20.) We think growth in the private health insurance market could boost demand for private healthcare services, as it helps to reduce the proportion of OPE.

Figure 24: Private insurance payment as a % of

healthcare expenditure, 2010

Figure 25: Lower OPE on healthcare correlates with higher growth in healthcare expenditure per capita in 2010-20E

Source: Global Health Observatory, WHO, Roland Berger, Standard Chartered Research Source: Global Health Observatory, WHO, Roland Berger, Standard Chartered Research

.

Singapore Indonesia Malaysia Developed markets*

Thailand Singapore Malaysia SEA Indonesia Philippines Vietnam

%

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8 April 2014 12

Health expenditure to GDP model

Our health expenditure to GDP model is driven by our economists’ GDP forecasts and our health expenditure to GDP ratio assumptions for Indonesia. We have studied health expenditure to GDP trends across 25 countries from 1995-2012 from the World Health Organization (WHO) and World Bank.

Health expenditure to GDP trends, 1995-2012

Still at an early stage

Based on our multi-country time-series analysis, we conclude that Indonesia’s 2012 health expenditure to GDP ratio of 3.0% means its healthcare sector is at an early stage of development. This ratio is below the 3.5-5.5% range among low- to middle-income countries, while high middle-income countries spend 7% or more of GDP.

Figure 26: Health expenditure to GDP, 2012

Indonesia’s health expenditure to

GDP ratio of 3.0%, is below the 3.5-5.5% for other low-to-middle

income countries

Source: Global Health Expenditure Database, World Development Indicators

Correlation between income and health expenditure

The relationship between rising incomes and increasing health expenditure to GDP ratio is well established in the fields of economics and public health management.2

Figure 27: Low- to middle-income countries* Figure 28: High-income countries*

*GDP per capita under USD 12,000. Countries: China, India, Indonesia, Malaysia, Philippines, Thailand, Vietnam, Cambodia, Brazil, Mexico, Poland.

Source: Global Health Expenditure Database, World Development Indicators

*GDP per capita over USD 12,000. Countries: Australia, Denmark, France, Italy, Japan, Norway, Spain, Sweden, United Kingdom, United States, South Korea, Canada, Singapore. Source: Global Health Expenditure Database, World Development Indicators.

2 OECD (2010), Health at a glance: Europe 2010; OECD (2013), Health at a glance: Asia Pacific 2012; World Health Organization and Results for Development Institute (2011), The Determinants of Health Expenditure; Huber

(1999), Health expenditure trends in OCED countries 1970-99; Huber and Orosz (2003), Health expenditure trends in OECD countries in 1999-2001. ID TH

Health expenditure as a % of GDP

Time series: 1995-2012 25 countries Low-to-middle income High income

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Insights from transition countries

Transition countries as a guide

We dug further to study growth in health expenditure in Brazil, Malaysia and Poland,

which we consider ‘transition countries’. We selected these three countries because:

(1) they underwent a transition in economic development in 1995-2012, with GDP per capita rising from below USD 5,000 to above USD 10,000; and (2) they have

implemented a universal health coverage programme. Malaysia’s health programme

was implemented in 1957, while Brazil and Poland rolled out their universal coverage programmes in 1988 and 1999, respectively.

Health expenditure to GDP rose to 4.0-9.5%

We believe these ‘transition countries’ can provide insights into Indonesia’s structural growth potential going forward, as our economists expect Indonesia’s GDP per capita

to rise to USD 10,371 by 2023, from USD 3,409 in 2013. We think Indonesia’s health

expenditure per capita could follow a similar path to the transition countries, rising to 4.1% of GDP in 2023E from 3.1% in 2013.

Figure 29: Brazil, 1995-2012 Figure 30: Malaysia, 1995-2012 Figure 31: Poland, 1995-2012

Source: WHO, World Bank Source: WHO, World Bank Source: WHO, World Bank

Health expenditure growth picks up

We also note that in each of the transition countries health expenditure growth accelerated to double digits once GDP per capita rose above USD 5,000, rising to a 10-15% CAGR from a 6-7% CAGR when GDP per capita was below USD 5,000.

Figure 32: Brazil – Comparison of

health expenditure growth rates

Figure 33: Malaysia – Comparison of

health expenditure growth rates

Figure 34: Poland – Comparison of

health expenditure growth rates

Source: WHO, World Bank, Standard Chartered Research Source: WHO, World Bank, Standard Chartered Research Source: WHO, World Bank, Standard Chartered Research 0

Healthexpenditure as a % of GDP

0

Health expenditure as a % of GDP

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8 April 2014 14

Comparison to ASEAN experience

We also studied the more recent implementation of health coverage programmes in Thailand and the Philippines; while the programmes differ in approach and scale both have had a similar impact on increasing the health expenditure to GDP ratio.

Thailand: Universal coverage programme

Thailand introduced a universal health coverage programme (UHC) in 2002. It managed to achieve 100% coverage within two to three years, and has had a significant impact as it provides essentially free healthcare to all Thais. Since the UHC was introduced, health expenditure per capita has risen to USD 215 in 2012 from USD 74 in 2002, a CAGR of 11%. The health expenditure to GDP ratio rose by a moderate 0.4ppt over the same period. We think this is likely the result of UHC implementation coinciding with a period of high economic growth.

Figure 35: Health expenditure to GDP, Thailand Figure 36: Healthcare services utilisation

Source: WHO, World Bank Source: WHO, World Bank

Philippines: Improving health coverage for the poor

The Philippines’ introduced its Health Coverage Program (HCP) for the poor in 1996. Despite the early launch, the HCP only gained meaningful traction in 2005, when its coverage reached 26% of the population. By end-2011, coverage had increased to 35% of Filipinos. The country’s health expenditure per capita more than doubled, to USD 119 in 2012 from USD 41 in 1995, a CAGR of 6.4%. The health expenditure to GDP ratio rose 1.1ppt over the same period.

Figure 37: Health expenditure to GDP, Philippines Figure 38: Population under coverage, Philippines

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%

Health expenditure per capita % of GDP (RHS)

Outpatient visits per capita Occupancy (RHS)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%

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Healthcare sector forecasts

‘Sweet spot’ for growth in 2013-18E

We expect Indonesia’s healthcare expenditure per capita to increase at a CAGR of

17% in 2013-18 and a CAGR of 13% in 2018-23. This CAGR of 15% in the first 10 years of the JKN programme is above the 12% CAGR in the first 10 years of

Thailand’s UHC programme. We forecast a higher growth rate because Indonesia is

introducing the JKN at a point when its 3.0% health expenditure to GDP ratio is below

Thailand’s 3.4% when it launched the UHC, while Indonesia’s GDP per capita of USD 3,409 is already higher than Thailand’s (USD 1,989) when the UHC began.

Expect sustained double digit growth in 2023-30

We expect growth in healthcare expenditure per capita to moderate to a CAGR of 10% in 2023-30, as the new spending pattern settles after the JKN. However, longer-term drivers such as the changing epidemiological landscape and gradually ageing population could lead to upside risk to our growth forecasts during this period.

Figure 39: Standard Chartered Research healthcare sector forecasts – Key items

Source: IMF, WHO, IMS, Frost & Sullivan, Standard Chartered Research estimates

Health expenditure to GDP ratio

Similarly, we expect Indonesia’s health expenditure to GDP ratio to increase to 3.4%

in 2018 and 3.9% in 2023. This is in line with the 3.9% ratio in Thailand and Malaysia in 2012. We believe our estimates are conservative given: (1) the higher poverty rate in Indonesia, which has a poor and near-poor population of 96mn; (2) the larger increase in the population under coverage; and (3) the potentially higher healthcare service delivery costs in Indonesia due to its wider geographic spread.

Figure 40: Uninsured population, pre-universal coverage Figure 41: Nominal GDP per capita and poverty incidence

Source: Ministry of Public Health of Thailand, Standard Chartered Research estimates Source: World Bank 18

Uninsured population % uninsured (RHS)

0

Indonesia (2011) Thailand (2009) Malaysia (2009)

G

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8 April 2014 16

Prognosis: Positioned to take off

Based on our health expenditure to GDP model, Indonesia’s healthcare sector is entering a period of structural growth. We forecast a health expenditure per capita CAGR of 17% in 2013-18 and 13% in 2018-23.

Expect health expenditure to double by 2018E

We expect healthcare expenditure per capita to rise to USD 229 in 2018 and USD 402 in 2023, from USD 107 in 2013. This implies a 2013-18 CAGR of 17% and a 2018-23 CAGR of 13%. In turn, we expect its health expenditure to GDP ratio to rise to 3.4% in 2018 and 3.6% in 2023. We estimate this will drive 2013-23 revenue CAGRs of 15.4% in the pharmaceutical sector and 15.2% in the private hospital market.

Figure 42: Health expenditure per capita, Indonesia Figure 43: Healthcare sector by segments, Indonesia

Source: WHO, World Bank, Frost & Sullivan, Standard Chartered Research estimates Source: WHO, World Bank, Frost & Sullivan, IMS, Standard Chartered Research estimates

Forecast to be fastest growing healthcare market in ASEAN

Based on our healthcare expenditure to GDP model, we estimate Indonesia’s

healthcare sector will expand to USD 59bn in 2018, USD 107bn in 2023 and USD 212bn in 2030, from USD 27bn in 2013; implying a 17% CAGR in 2013-18. This is the highest forecast healthcare expenditure per capita growth in ASEAN over this

period, according to both our estimates and Frost & Sullivan’s. .

Figure 44: Healthcare expenditure breakdown, Indonesia Figure 45: Healthcare expenditure per capita comparison

Source: WHO, IMF, Frost & Sullivan, IMS, Standard Chartered Research estimates Note: Our forecast is for Indonesia only.

Source: WHO, UNDESA-PA, 2012, Frost & Sullivan estimates, Standard Chartered Research estimates

Pharmaceutical Private hospital

CAGR

Pharmaceuticals Public hospital Private hospital

Others % of GDP

China Malaysia Thailand Indonesia India

USD

2007 2012 2018E

+16% +5% +9% +14% +15%

CAGR Robust growth drivers in 2013-23E

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Pharmaceuticals

Rapid growth in pharmaceutical market

We estimate pharmaceutical demand in Indonesia will rise to USD 11.5bn in 2018 and USD 20.9bn in 2023, from USD 5.3bn in 2013. This implies CAGRs of 18% in 2013-18 and 13% in 2018-23. The Association of Indonesian Pharmaceutical Companies (GP Farmasi) is more optimistic, and has indicated the JKN could boost pharmaceutical market growth to 20% p.a. over the next few years.

Prescription drugs to grow faster than OTC drugs

We think the prescription drug market will grow faster than the OTC drug market in 2013-23, as the JKN will directly drive demand for prescription drugs. Despite this, we think large OTC players such as Tempo could still grow faster than the industry, as intensifying competition favours larger players with sufficient marketing firepower. Drug spend per capita

We expect drug spend per capita to increase to USD 45 in 2018 and USD 78 in 2023, from USD 20 in 2013 i.e. a tripling of drug spend per capita in 2013-23. We believe our forecast is relatively conservative, as it implies Indonesia’s drug spend per capita would reach the 2012 spend levels in Malaysia and Thailand by 2021. Drug to total health expenditure ratio

We assume drug spend as a percentage of total health expenditure will exceed 19%. This is close to the 16-18% range in more developed economies such as France, Germany, the UK and the US, while drug spend in other low- to middle-income countries varies widely, at c.9-51% of total health expenditure. We expect this to rise to 19.5% in the longer term driven by the JKN and improving medicine availability.

Figure 46: Indonesia pharmaceutical market forecasts, 2013-30E

2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2023-30E CAGR

Total (USD bn) 4.2 4.8 5.0 5.0 5.9 7.2 8.5 9.8 11.5 13.0 14.7 16.6 18.6 20.9 10%

Prescription 2.5 2.8 3.0 3.0 3.6 4.5 5.3 6.2 7.3 8.3 9.4 10.7 12.1 13.7 10%

OTC 1.7 2.0 2.0 2.0 2.3 2.8 3.2 3.7 4.2 4.7 5.3 5.9 6.5 7.2 11%

% YoY 24% 14% 4% 0% 19% 22% 17% 16% 17% 13% 13% 13% 12% 12%

Prescription 28% 13% 7% 1% 19% 23% 18% 17% 18% 14% 14% 14% 13% 13%

OTC 17% 17% 0% 2% 14% 20% 16% 15% 15% 11% 12% 11% 11% 11%

Spend per capita (USD) 17 20 20 20 24 29 33 38 45 50 56 63 70 78 10%

% healthcare expenditure 20.3% 19.8% 18.8% 18.9% 19.0% 19.1% 19.2% 19.3% 19.4% 19.5% 19.5% 19.5% 19.5% 19.5%

Source: WHO, IMF, IMS, Standard Chartered Research estimates

Hospital services

Expect double-digit growth until 2030

We expect 2013-18 to be a growth sweet spot for the Indonesian hospital market, with revenue growth for the period picking up to a CAGR of 17%. The Ministry of Health estimates visits to community clinics and hospitals could double to 9.1 per 1,000 Indonesians in 2014, from 4.6 per 1,000 in 2013. We expect overall hospital market growth to moderate to a CAGR of 14% in 2018-23 and 10% in 2023-30. Public hospitals could lead growth in 2014

(18)

8 April 2014 18 and near-poor Indonesians will effectively be free, as their JKN health insurance premiums are covered by the government. Preliminary data from various media reports indicate JKN patient volume at public hospitals has risen 40-200%. We expect the JKN rollout to increase occupancy at public hospitals to 80-90% from 55-65%.

Private hospitals should drive growth from 2015 onwards

As the public hospital system becomes increasingly strained by rising patient volumes after the JKN launch, we expect more middle- to upper-income patients to switch to private hospitals. The Ministry of Health estimates 60% of middle income earners (the middle four income deciles) and 47% of high income earners (the top three deciles) still use public hospitals for inpatient services. Assuming a 55% switch rate by middle- to upper-income patients we estimate there could be 1.9mn additional inpatients for private hospitals.

Hospital to total health expenditure

We have modelled a hospital expenditure as a share of total health expenditure of 63-68%. The earlier decline in the share of hospital expenditure as a proportion of total health expenditure was likely due to a greater emphasis on government aid recipients (e.g. Jamkesmas patients) seeking care in community clinics (primary healthcare facilities) before seeking treatment at public hospitals. JKN participants are also required to seek treatment at community clinics or participating private clinics before visiting specialists at hospitals. Unlike the US or European experience, it is common for Indonesians to seek specialist care directly at hospitals before consulting general practitioners at clinics.

Figure 47: Indonesia hospital market forecasts

2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

2023-30E CAGR Total revenue (USD bn) 15.1 16.0 16.9 18.3 21.0 24.0 28.1 32.8 38.6 43.6 49.9 56.6 64.2 72.6 10% Public 9.8 10.4 11.0 11.9 13.8 16.0 18.7 21.8 25.4 28.6 32.4 36.5 41.1 46.1 10% Private 5.3 5.6 5.9 6.4 7.2 8.0 9.3 11.1 13.1 15.1 17.5 20.1 23.1 26.5 10%

% YoY 35% 6% 6% 9% 14% 14% 17% 17% 18% 13% 14% 14% 13% 13%

Public* 34% 6% 6% 9% 15% 16% 17% 16% 17% 12% 13% 13% 12% 12%

Private 33% 6% 6% 9% 12% 11% 17% 18% 19% 15% 16% 15% 15% 15%

Spending per capita (USD) 63 65 68 74 84 95 110 128 149 168 191 215 242 272 % healthcare expenditure 73% 66% 63% 69% 67% 63% 64% 64% 65% 66% 66% 67% 67% 68%

(19)

JKN improves affordability

Status quo pre-JKN

Early efforts to expand insurance coverage...

In 2004, parliament passed a law (the SJSN law) mandating the creation of a national social security programme. It then began improving access to healthcare services for the poor and near-poor (the bottom three income deciles, earning less than USD 4 per day). In 2005, the government introduced Askeskin, which aimed to provide healthcare insurance coverage to the poorest 40mn Indonesians. The programme was seen as a first step to improve access to healthcare services for the poor. In 2008, the Askeskin programme was replaced by Jamkesmas, which expanded

coverage to include the ‘near poor’; by end-2012 the programme covered 76.4mn people.

Figure 48: Poor and near-poor population covered by insurance, mn

An additional 10mn people will be covered by health insurance as part of the JKN rollout in 2014

Source: Centre for Health Financing and Security, Ministry of Health

...but two of five Indonesians are still not covered

Based on the latest government estimates in the Roadmap Toward National Health Insurance 2012-19, 151mn people (63% of the population) are currently covered under some form of health insurance – 133mn under public insurance schemes and 18mn through private insurance.

Figure 49: Health insurance penetration, 2012 Figure 50: Health insurance coverage breakdown, 2012

Program Population (mn)

Health insurance for civil servants (AskesPNS) 17.3

Military and police (Asabri) 2.2

Health insurance for the poor (Jamkesmas) 76.4

Workers social security (Jamsostek) 5.6

Regional governments' health insurance (Jamkesda) 31.9

Corporate insurance (private) 15.4

Commercial health insurance participants (private) 2.9

Total population with insurance coverage 151.5

Total population of Indonesia 239.7

Source: Roadmap Toward National Health Insurance 2012-19 Source: Roadmap Toward National Health Insurance 2012-19 36.4

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8 April 2014 20

Change agent: JKN rollout in 2014-19

Programme structure

The programme will be managed by the BPJS, which will merge all existing state-owned entities involved in the provision of healthcare insurance, life insurance and pensions. The BPJS will be responsible for registering participants, medical service and supply purchasing, and overall coordination of the JKN.

Universal health insurance coverage by 2019

The government aims to provide all Indonesians with health insurance by 2019. The insurance premium for the poor and near poor will be covered by the government’s healthcare budget. This group will be classified as aid recipients. The government is spending over USD 2.6bn on these integration efforts, and funding the insurance premiums for the poor and near poor.

Putting their money where their mouth is

Higher health insurance assistance for the needy: The government’s budget allocation for health insurance assistance to the poor and near poor rose to IDR 8.3tn in 2013 (2008-13 CAGR of 12%). In 2014, it will rise to IDR 19.9tn to fund the IDR 19,225 monthly health insurance premium for 86.4mn poor and near-poor Indonesians.

Boosting the Ministry of Health budget: We see the steady 18% CAGR for the

Ministry of Health’s budget in 2008-13 (to IDR 37tn in 2013) as a positive. The budget rose to IDR 45tn in 2014. We see this as an indication of the government’s seriousness in delivering a public health system that can support the delivery of universal healthcare for the population by 2019.

Figure 51: Government healthcare budget Figure 52: Government-owned hospitals

Source: APBN 2014, Ministry of Finance, Standard Chartered Research Note: Non-profit hospitals were reclassified as public hospitals in 2011. Source: Ministry of Health

Expected impact of JKN rollout

In 2014, the government will integrate the various state-owned enterprises which currently manage assorted social security and health insurance schemes (Jamkesmas, Askes, Jamsostek, Jamkesda) under the BPJS.

Single risk pool: This integration will pool 121mn people under the JKN by end- 2014. The remaining 32mn people under the various regional insurance schemes will be incorporated in subsequent years.

15.9 18.0

(21)

Standardised insurance premium: Under the JKN, there will be three insurance premiums depending on in-patient services class. The premiums for class I/II/III are IDR 25,500/IDR 42,500/IDR 59,500 per month. This is significantly above prior rates under Jamkesmas (IDR 6,500pm), Jamsostek (IDR 19,000pm), and ASKES (IDR 36,000pm).

Standardised quality of care: In the initial phase, the quality of care under the JKN will be differentiated between premium payers and government aid recipients. However, the government is aiming to provide at least a class II ward service for aid recipients by 2019.

Figure 53: Benefits across health insurance programmes

Benefits Jamkesmas Jamkesda Askes Jamsostek JKN

In-patient Class III public and private hospitals

Class III public hospitals

Class I & II public and private hospitals*

Class II public hospitals Class III private hospitals Up to 60-days of

*There is a claim ceiling for treatment in private hospitals.

**Varies depending on the recipient’s initial health insurance membership. ***Not an exhaustive list.

Source: Roadmap Toward National Health Insurance 2012-19, Standard Chartered Research

Update on rollout in January-February 2014

Increasing participation from hospitals: As of December 2013, the Ministry of Health had secured the participation of 9,217 community clinics and 1,710 hospitals (out of 2,300) in the JKN. BPJS cardholders will now be able to access free healthcare (within allowable caps) in these locations. The government is still negotiating with 582 hospitals.

Sharp increase in patient volume: The government estimates overall patient volume could double at hospitals that are participating in the JKN. It expects clinic/hospital visits per 1,000 people to rise to 9.1 following JKN rollout in 2014 from 4.6 previously. Recent news reports indicate patient volumes at three provincial hospitals rose 40-200% in January-February 2014.

(22)

8 April 2014 22

Figure 54: Participating clinics and hospitals, 2013 Figure 55: Patient volume increase

Source: Ministry of Health Note: This is a sample based on three provincial hospitals and does not necessarily represent national level patient volume increases.

Source: Media reports, Standard Chartered Research 9,217

Public hospitals Specialist hospitals

Bandung Sumedang Tegal

(23)

Increased private investment in healthcare

Unconventional economics for hospital services

We think greater availability of healthcare touch-points could contribute to faster growth in healthcare demand due to a mix of: (1) pent-up demand for healthcare in some localities; and (2) supply-induced demand (SID). Various studies have noted that conventional economics might not apply to healthcare due to:

Information asymmetry in favour of doctors: Unlike in most market structures, administering healthcare services requires a specialised knowledge that only doctors (sellers) have, providing them with a disproportionate influence over

patients’ (buyers) consumption decisions. One of the theoretical extensions of SID

is the target income hypothesis, which contends that doctors increase their fees or schedule more return visits to achieve their target income when patient volumes fall.

Dual moral hazard: This moral hazard exists for both doctors and patients. Doctors could charge patients for more services than the patients require, as they have an informational advantage over patients. On the other hand, in cases where healthcare services are free, patients are likely to over-consume

Capacity build-up in pharmaceuticals

Pharmaceutical companies have been expanding their production capacity in anticipation of the JKN rollout. State-owned pharmaceutical companies Kimia Farma and Indofarma increased their production capacity 123% and 200%, respectively in 2012-13. In 2013, we estimate major producers spent IDR 1,260bn on capacity expansion, above the average capex of IDR 1tn p.a. over the past five years (according to the Association of Indonesian Pharmaceutical Producers).

Figure 56: Capex by pharmaceutical companies, 2013 Figure 57: Capacity expansion, 2012-13

Source: Media reports, Standard Chartered Research Source: Media reports, Standard Chartered Research

Greater private sector investment in hospitals

We think rising private sector investment in expanding hospital, clinic and pharmacy

networks could lead to higher demand for healthcare. Following the government’s

commitment to increase its healthcare spending budget in 2014-19, major business groups have announced greater resource commitments to the private clinic and hospital markets. We estimate total investment in new hospitals of IDR 9,120bn in 2014-16, for 42 new private hospitals.

(24)

8 April 2014 24

Figure 58: Competitors in Indonesia’s healthcare services sector

Company Ticker Sector Profile and expansion plan

Siloam Hospital SILO IJ Healthcare Siloam targets to operate 40 hospitals with over 10,000 beds by 2017. It is evaluating the possibility of setting up a network of 10 community clinics in 2014 to provide primary healthcare services.

Mitra Keluarga Private Healthcare Mitra is the privately held hospital arm of the Kalbe Group. It is the second largest private hospital operator, with 10 hospitals. According to Forbes, management plans to add two hospitals p.a. in the next few years.

Awal Bros Group Private Healthcare Awal Bros currently operates eight hospitals - four in Greater Jakarta and two in Riau. The other two are located in Batam and Makassar. Management is building a new hospital in Riau (capex of IDR 200bn).

Ciputra Hospital CTRA IJ Property Ciputra Group plans to develop up to 15 hospitals by 2016. It currently operates one hospital in Jakarta.

Mayapada Hospital SRAJ IJ Healthcare SRAJ operates the Mayapada Hospital network. As of December 2013, SRAJ operated two hospitals in Greater Jakarta with a total capacity of 500 beds. SRAJ plans to build at least two more hospitals by 2016.

Omni Hospital SAME IJ Healthcare SAME operates two hospitals in Greater Jakarta under the Omni Hospital brand.

Kalbe Farma KLBF IJ Pharmaceuticals Kalbe Farma entered the healthcare services segment with its Mitrasana Clinic network. It plans to expand its network to 200 clinics by 2015 from 60 currently.

Kimia Farma KAEF IJ Pharmaceuticals Kimia Farma is the largest operator of pharmacies in Indonesia, with over 500 outlets. As of December 2013, it also operated 200 Kimia Farma clinics offering primary healthcare services (GP and pharmacy). Kimia Farma plans to expand its clinic network to 1,000 outlets by 2018.

Elang Mahkota is the holding company of the Sariaatmadja family, owner of Surya Citra Media (SCMA IJ). It owns one hospital in Greater Jakarta and is planning to acquire two hospitals in partnership with Pakuwon Jati (PWON IJ), a major property developer in Surabaya and Jakarta.

Ramsay Sime Darby Private Healthcare Ramsay Sime Darby currently operates three hospitals in Indonesia. The JV was set up to invest further in Asian healthcare assets, however, no details were disclosed on further plans in Indonesia.

KPJ Healthcare KPJ MK Healthcare Currently operates two hospitals in Greater Jakarta. Management indicated it is keen to acquire more hospitals in Indonesia.

IHH Healthcare IHH MK Healthcare IHH is a leading regional healthcare operator with hospitals in Malaysia and Singapore. Management is evaluating the possibility of re-entering the Indonesian market.

Source: Companies, media reports

Narrowing but persistent hospital bed shortage

We estimate Indonesia’s bed supply pipeline will be 15,000-19,000 beds p.a. in 2014-19. We expect Indonesia to achieve a 1.5 beds per 1,000 persons ratio in 2019, in

line with the government’s target. This implies that Indonesia’s bed shortage could

persist beyond 2030, assuming a demand level at the OECD average of 3.0 hospital beds per 1,000 persons.

Figure 59: New hospital bed supply Figure 60: Beds per 1,000 persons ratio

Source: Standard Chartered Research estimates Source: Ministry of Health, Standard Chartered Research estimates 0

2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

(25)

Favourable long-term trends

Rising incomes in fast-growing Indonesia

Expanding middle class boosts healthcare demand

The Boston Consulting Group estimates Indonesia’s middle and affluent classes

(those earning a monthly household income of IDR 2-7.5mn), will expand at a CAGR of 8.2% in 2012-20, to over 134mn people in 2020. We believe rising incomes and an expanding middle class will boost healthcare demand as affordability and health awareness increase.

Figure 61: Population by monthly household income

The middle and upper classes are expanding

Source: Boston Consulting Group

GDP growth likely to be faster outside Greater Jakarta

The McKinsey Global Institute expects economic growth in Indonesia’s smaller urban

centres (populations of 150k to 10mn) to be 6.3-9.1% p.a. in 2010-30, compared to 5.1% p.a. for the overall economy. We think this will increase demand for private hospital services in second-tier cities with a shortage of quality private healthcare services, particularly outside Java.

Siloam: Good exposure to second-tier cities

We think the number of Siloam’s beds located in these faster growth cities will grow

fourfold to 8,276 beds in 2023 (1,906 beds in 2013). We estimate Siloam will only open three to four more hospitals in Greater Jakarta, which are likely to be higher

revenue generating ‘hub’ hospitals.

Tempo: Well positioned to benefit

Similarly, we expect Tempo’s OTC drug and personal care products businesses to

benefit from faster growth in these cities. Tempo’s distribution network covers over

100,000 retail outlets in 57 cities in Indonesia.

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8 April 2014 26

Figure 62: GDP growth by city size, 2010-30E Figure 63: Distribution of Siloam’s beds

Source: SUSENAS 2010, National Statistics Agency, McKinsey Global Institute Source: Standard Chartered Research estimates

Urbanisation and lifestyle changes

Urbanisation boosts healthcare demand and supply

Increasing urbanisation facilitates healthcare services delivery because higher population density supports the minimum scale required by larger healthcare facilities such as specialist hospitals. We think urbanisation and the accompanying lifestyle changes will drive demand for healthcare services and pharmaceuticals. On the supply side, the government is targeting to ensure that 60-80% of the population is within an hour of either a community clinic or hospital.

Higher incidence of non-communicable diseases

Lifestyle changes among Indonesia’s young urban population will render the

population more prone to non-communicable diseases (NCD), according to Siloam. The WHO estimates NCDs will account for 77% of mortality in Indonesia by 2030, up from 64% in 2008. We think this changing epidemiological profile will drive demand for more specialised hospitals, particularly those focusing on cardiology and oncology. NCDs such as cardiovascular diseases tend to require more regular outpatient care and longer term drug consumption.

Figure 64: Urbanisation trend in Indonesia Figure 65: Rise of non-communicable diseases

Source: US Census Bureau estimates Note: Most recent estimates available. Source: World Health Organization 5.1%

Greater Jakarta Faster growing cities

17%

Population (mn) % Urbanization (RHS)

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Gradually ageing population

Indonesia’s population is relatively young, with more than two-thirds of Indonesians aged 60 or under. Healthcare experts often note that healthcare spending per person

tends to be concentrated in the first 10 years and last 20 years of a person’s life. In

2012-22, the United Nations Department of Economic and Social Affairs expects

Indonesia’s population of people aged 60 and above to rise 52% to 12mn people.

This is indicative of the longer-term growth potential for healthcare demand in Indonesia.

Figure 66: Population aged 60 and above Figure 67: Change in population aged >60, 2012-22E

Source: United Nations Department of Economic and Social Affairs Source: United Nations Department of Economic and Social Affairs 0

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8 April 2014 28

Siloam Hospital Internasional

Less pain, more gain

Siloam is the largest private hospital operator in Indonesia with, a 7% market share by bed capacity. It had 16 hospitals and 3,700 beds as of end-2013. Siloam plans to expand its network to 40 hospitals with 10,000 beds by end-2017.

We forecast 2013-16 revenue/earnings CAGRs of 44%/86%, driven by capacity expansion and increasing revenue per bed as its hospital portfolio matures.

We initiate coverage with an Outperform rating and price target of IDR 13,982, implying 34% upside potential. We think Siloam deserves a premium to peers given its strong growth outlook, and see valuation as attractive at 16x 2015E EV/EBITDA.

OUTPERFORM

(initiating coverage)

Market leader. Siloam was the largest private hospital operator in Indonesia by bed capacity in 2012, with a 7.4% market share, while the second largest player, Mitra Keluarga, had a 3.0% share, according to Frost & Sullivan.

Robust growth outlook in 2013-16E. We forecast 2013-16 revenue and earnings CAGRs of 44% and 86%, respectively. This

is driven by Siloam’s aggressive expansion pipeline, with an

average of six to eight hospitals scheduled to come on stream p.a. in 2013-17. Siloam’s revenue and earnings growth outlook is the highest among regional hospital operators based on our own and consensus estimates.

Maturing hospitals drive margin expansion. We expect EBITDA margin to expand to 16% in 2016 from 11% in 2013, after

Siloam’s aggressive expansion. This is driven largely by maturing

hospitals, as new hospitals take three to five years to mature. We expect new hospitals to incur start-up losses only in year one and deliver a 16-18% EBITDA margin from year four onwards.

Beneficiary of JKN. The JKN rollout is likely to lead to overcrowding in public hospitals from 2014 on. We think Siloam could benefit from middle- to upper-income earners switching to private hospitals. The National Statistics Agency estimates 47% of middle- and high-income earners still rely on public hospitals for inpatient services.

Attractive valuation. Siloam trades at 16.4x 2015E EV/EBITDA and offers a 2013-16E EBITDA CAGR of 63%. Regional peers Bangkok Dusit, IHH Healthcare, and Apollo Hospitals, trading at 15-17x 2015E EV/EBITDA offer 2013-16E EBITDA CAGRs of 14-23% only (our and consensus estimates).

Source: Company, Standard Chartered Research estimates

Share price performance

IDR 10,889.3bn (USD 962mn) IDR 9,050 - 11,400

EPS adj est change NA

Year-end: December 2013 2014E 2015E 2016E

Sales (IDR bn) 2,504 3,638 5,241 7,502

EBITDA (IDR bn) 281 517 798 1,208

EBIT (IDR bn) 79 215 352 620

Pre-tax profit (IDR bn) 72 176 263 475

Net profit adj. (IDR bn) 50 120 179 323

FCF (IDR bn) (409) (507) (611) (384)

EPS adj. (IDR) 48 104 155 279

DPS (IDR) 5 10 23 56

Book value/share (IDR) 1,565 1,514 1,650 1,882

EPS growth adj. (%) -5.6 117.7 49.1 80.6

DPS growth (%) nm 117.7 123.7 140.8

EBITDA margin (%) 11.2 14.2 15.2 16.1

EBIT margin (%) 3.1 5.9 6.7 8.3

Net margin adj. (%) 2.0 3.3 3.4 4.3

Div. payout (%) 10.0 10.0 15.0 20.0

Net gearing (%) -27.8 15.0 55.1 72.2

ROE (%) 5.3 7.1 9.8 15.8

ROCE (%) 4.3 8.5 11.9 17.4

EV/sales (x) 4.1 3.4 2.5 1.8

EV/EBITDA (x) 36.1 23.8 16.4 11.3

PBR (x) 6.1 6.9 6.3 5.5

PER adj. (x) 209.2 100.3 67.3 37.3

Dividend yield (%) 0.0 0.1 0.2 0.5

9,000 10,250 11,500

Sep-13 Dec-13 Mar-14

Siloam Hospital Internasional JAKARTA COMPOSITE INDEX (rebased)

Share price (%) -1 mth -3 mth -12 mth

Ordinary shares -1 9

-Relative to index -6 -4

-Relative to sector - -

-Major shareholder LIPPO KARAWACI TBK PT (78.9%)

Free float 21%

Average turnover (USD) 6,393,689

Alvin Witirto

+65 6596 8530 Equity Research

Standard Chartered Bank, Singapore Branch

Stephen Hui

+65 6596 8514 Equity Research

(29)

Investment highlights

We initiate coverage of Siloam with an Outperform rating and a price target of IDR 13,982, implying 34% upside potential. Siloam is the largest operator of private hospitals in Indonesia by capacity, with 16 hospitals and 3,700 beds as of end-2013. We believe the combination of an underserved healthcare services market, rising

incomes and the government’s committment to roll out universal healthcare in 2014

-19 points to a strong structural growth opportunity in Indonesia’s healthcare sector.

Market leadership in private hospitals

Largest private hospital operator in Indonesia

The private hospital market is still highly fragmented, but Siloam is the market leader with a 7.4% market share. As of end-2013, it operated 16 hospitals with a total capacity of 3,700 beds (1,900 operational beds).

Strong execution track record

Siloam successfully developed four greenfield hospital projects (Manado, Makassar, Sriwijaya and Bali) in 2013, while also managing a turnaround project at Siloam Hospitals Jambi (SHJ). In 2012, SHJ posted YoY revenue and EBITDA growth of 85% and 166%, respectively.

Figure 68: Total bed capacity, 2012

Siloam has the largest bed capacity among private players

Figure 69: Private hospital market share, 2012

Fragmented private hospital sector

Source: Frost & Sullivan, Ministry of Health, Companies Source: Frost & Sullivan, Ministry of Health, Standard Chartered Research estimates

Robust earnings growth

Expect strong revenue and earnings growth until 2020

We forecast 2013-16 revenue/EBITDA/net income CAGRs of 44%/63%/86% driven by: (1) rapid capacity expansion; and (2) increasing revenue per bed as its hospital portfolio matures. Our 2013-16 earnings growth estimate for Siloam is above the consensus estimates for other private hospital operators in the region. We expect earnings growth to moderate to a 56% CAGR in 2016-20, as Siloam’s hospital portfolio begin to stabilise (with half of its beds at year four and above), delivering a consolidated EBITDA margin of 16% and above after 2016E.

Targeting 40 hospitals and 10,000 beds by 2017

Siloam plans to expand bed capacity to 10,000 beds in 2017 from 3,700 beds in 2013. We expect it to open an average of six to eight hospitals p.a. and expand its capacity by an average 1,600 beds p.a. in 2014-17. We assume a peak opening of seven hospitals and c.2,000 beds in 2015.

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8 April 2014 30

Figure 70: Strong growth potential in 2013-20E Figure 71: Siloam’s capacity expansion, 2013-17E

Source: Company, Standard Chartered Research estimates Source: Company, Standard Chartered Research estimates

Operating leverage to drive growth

In 2012, the four mature hospitals in Siloam’s portfolio contributed 60% of revenue

despite accounting for only 36% of operational bed capacity. We estimate revenue per operational bed at its mature hospitals (year five and older) was IDR 1.9bn in 2013, compared to IDR 0.9bn at its developing hospitals (year three to five) and IDR 0.6bn at new hospitals (year one to two). We believe there is significant ramp-up potential for revenue per bed as younger hospitals mature in 2014-17.

Figure 72: Siloam’s hospital portfolio, 2013 Figure 73: Revenue per operational bed, 2013

Mature: more than five years, developing: three to five years, new: one to two years. Source: Company

*Excluding Mochtar Riady Comprehensive Cancer Centre (MRCCC) and Cinere Hospital. Source: Company, Standard Chartered Research estimates

Attractive valuation for a growth stock

Attractive 2015E EV/EBITDA valuation

Siloam’s 16.4x 2015E EV/EBITDA seems attractive given our forecast 2013-16 EBITDA CAGR of 63%. Regional peers such as Bangkok Dusit, IHH Healthcare and Apollo Hospitals who are also trading at 15-17x 2015E EV/EBITDA offer EBITDA CAGRs of 14-23% over the same period. We think Siloam deserves a premium to regional peers given its superior revenue and earnings growth outlook

A bargain on 2015E EV/bed valuation

In our view, Siloam’s valuation is even more compelling on a 2015E EV/EBITDA

basis as it trades at USD 0.3mn per bed, while the regional average 2015E EV/bed is at USD 1.6mn per bed with 2013-16E EBITDA CAGRs of 8-23% (on our and consensus estimates). Our implied target EV/bed is USD 0.4mn per bed, in line with

Bangkok Chain Hospital’s 2015E EV/bed of USD 0.4mn per bed, which offers a

2013-16E EBITDA CAGR of just 16%, based on consensus estimates

44%

Revenue EBITDA Net profit

C

Number of hospitals (RHS)

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Revenue Number of hospitals Operational beds

%

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Figure 74: Forward EV/EBITDA vs. 2013-16E EBITDA CAGR

Figure 75: Forward EV/bed vs. 2013-16E EBITDA CAGR

*Bloomberg consensus estimates for non-rated stocks. Data as of 4 April 2014. Note: EV is 2015E EV for covered stocks or Bloomberg current EV for non-covered stocks. Source: Bloomberg, Standard Chartered Research estimates

*Bloomberg consensus estimates for non-rated stocks. Data as of 4 April 2014. Note: EV is 2015E EV for covered stocks or Bloomberg current EV for non-covered stocks. Source: Bloomberg, Standard Chartered Research estimates

Competitive edge amid high barriers to entry

Established player with a strong brand

Siloam is one of the most established players in Indonesia’s private hospital market

with close to 20 years of experience. We think its strong brand and Siloam Doctor Partnership Development programme provide it with a competitive edge in attracting scarce medical talent; this is particularly important since Frost & Sullivan estimates Indonesia was short of c.267,000 doctors in 2012.

Favourable asset-light approach

Management said that of the USD 25mn capex it expects per greenfield hospital, Siloam will only incur USD 15mn for medical equipment and pre-operating expenses, while Lippo will incur the remaining USD 10mn for land and building costs. The completed buildings will in turn be leased to Siloam at a turnover rent of 1-3% of revenue. We believe this asset-light approach will allow Siloam to expand more rapidly than its competitors.

Scalable network approach

In our view, Siloam has adopted a sophisticated network approach in delivering healthcare through its hub-and-spoke model. It offers specialist consultations at

spoke hospitals, typically located in smaller cities via its ‘tele-medicine’ system. With

‘tele-medicine’, doctors in a hub and a spoke hospital can jointly manage cases by holding video/voice calls while sharing real-time medical data through Siloam’s Hospital Information System, an electronic medical records system. This ensures better cost-efficiency and staffing as specialists can be located in larger urban areas where there is sufficient critical mass for their specialisation.

Gambar

Figure 58: Competitors in Indonesia’s healthcare services sector
Figure 80: Annualised returns since December 2011
Figure 86: Forward EV/bed
Figure 89: Peer valuation comparison
+7

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