TTI’s Thoughts (Jan 2017) + Sabana REIT & International Healthway Corporation

Here’s wishing all readers of SG TTI a fantastic CNY and a fruitful year ahead, both financially and in all your endeavors! I’m just back from a trip (again), and feeling as refreshed as ever.

Check this out:

435) Jeju.jpg

This is a world heritage site: a massive crater that’s on top of a hill, that looks out to the vast sea. Simply marvelous. See if you can guess where it is.

In the past several months, I’ve met up with some of my readers, some fellow bloggers, and many other investors. The people I’ve met literally spans across several age groups, with different portfolio sizes and come from all walks of life.

There’re quite a few accountants, 2 professional fund managers, 3 students, 4 IT professionals, a compliance officer, some guys who work in the media and quite a few retirees who are investing their nest egg.

Interestingly, both the fund managers (in separate meetings), asked me practically the exact same, sharp questions. All of which revolve around healthcare. Looks like they sure know what they’re looking out for.

I do have a confession to make.

I was initially very apprehensive about meeting any of you (which is why I turned down some and postponed many) because I thought that there’s surely a hidden agenda. I’m glad and sheepish, to report that nobody has tried to sell me insurance or some financial plan. Yes, I gotta try to be less skeptical of the good nature of people.

It’s like… the investing community here is just genuinely and sincerely interested to meet and know each other. I’m really surprised by that. In some meetings, I’ve arrived only to find that everyone seems to know everyone else. Almost like it’s a club. Yet, it’s not.

I’ve enjoyed the meetings immensely. Particularly the larger group organised by “sgmystique” from valuebuddies. I think we spent >3 hours discussing and debating, very passionately I’d have to add.

I don’t think you guys noticed it, but some of the other patrons from the other tables away from our cozy corner were peering/staring at us cos I think our discussions got a bit loud at times. There was a rather pretty girl who was seated facing us, but she stood up and changed to the other seat so that her back was towards us. I get the vibe that she’s not very interested in what you guys had to say about G.K Goh Holdings… LOL!

Anyway, I genuinely feel bad to be the guy who had to break up the meeting cos I had to leave. Otherwise, I think we’d be at it for yet another couple of hours…

Also, here I’ll apologize to Budget Babe (once again) ( for being very late for our meeting. I usually have an organized daily schedule, and I’m seldom very late. But I was for this, and I think it kinda screwed up her appointments after that too. No defense for that.

While I was away, 2 events in our local investing scene caught my attention.

The 1st is the currently ongoing push by unitholders of Sabana REIT to vote out the manager. I received a polite email from a unitholder asking if I could participate. Somehow, people think I’m deep pocketed enough to make a big difference.

I did take a look at the situation, worked out some math superficially, but ultimately, I declined.

I really really hope the minority shareholders making a push for this, do succeed though.

We can debate about their compensation structure, but come on, look at the long term performance of Sabana REIT. There’s no denying that it’s been outright terrible.

In the managers’ defence,the industrial property sector is undergoing one of its worst periods in recent memory. I think it’s even worse than during the GFC, cos at least the GFC is a relatively short, albeit sharp, correction. This is kinda like death by a thousand cuts… and counting.

Sabana REIT’s manager said as much in this press interview:

BUT, tbh, IMO the interview reeks of arrogance.  Mr Xayaraj is basically saying that the problems for Sabana is industry wide. (read: there’s nothing the manager or any other new manager could’ve done)

But that’s not completely true. Sabana’s performance is the worst amongst all related peers. Yes, the worst.

Of course, there’s always a reason to point to for poor performance. In all my experience looking at companies, I’ve never come across shitty management who says the reason for the poor performance is because they suck.

There’s always something to blame.

“It was only in the last three years that we had quite a number of leases that were not renewed, and many of them were converted into multi-tenanted leases. To find suitable, qualified anchor tenants, there are just not enough to go round in Singapore right now,” he said over the phone.

“There is a mismatch in supply and demand in the current economic slowdown, that explains why our distribution per unit (DPU) has been on the decline for the last three years.”

To stabilise the DPU, the Reit manager will continue to divest underperforming assets. It is in the process of divesting a warehouse-cum-office building at 218 Pandan Loop, which will be sold for a gain, Mr Xayaraj added.

Right. So master leases were converted to multi tenanted ones, and basically nobody wants to lease from them.

If a manager cannot foresee these problems, and correct them, then what good is the manager?

Yes, there are lesser anchor tenants around, but what about the other industrial REITs that have done better? What are they doing that this manager isn’t?

Finally, divesting assets to stabilise the DPU, is like saying “oh, the arm has a cut so we’re going to cut it off to stop the bleeding.” Unitholders don’t want to “stabilise the DPU”. They want to increase it.

If what they do want is just to “stabilise the DPU”, why not make the DPU…. zero. That’s as stable as it can be.

He emphasised that the manager’s fee structure is “in line with market practice in the Singapore Reit sector”, and offered another perspective on the recently completed rights issue: “Certainly the rights issue has strengthened our balance sheet. It was a great success, and two times subscribed. Even better than our IPO subscription.”

Does anyone seriously think that it’s over subscribed because unitholders are clamoring for more units because of the excellent performance of the REIT?

The simple fact is that the exercise price is substantially below that of the market price, and unit holders do not want to get diluted. We can argue whether it’s a smart move or not, but that’s not the key.

The key is that they were almost strong armed to subscribe. These same subscribers would be clamoring to sell once the price rises and they could “break even”.

Ultimately, I declined to participate because:

  1. I have minimal experience with REITs and their structures.
  2. I’ve already committed funds elsewhere, any new idea will have to be amazingly compelling.
  3. Honestly, I think the odds are stacked against the MI. (Sorry, but that’s just the nature of the world. It’s not fair, and never will be)

“Asked how Sabana Real Estate Investment Management would act if unit holders decided to press on with requesting a meeting to vote on its removal, Mr Xayaraj said: “We will comply with the relevant rules and regulations, and if it ends up in (extraordinary general meeting) voting, then all unit holders are entitled to exercise their voting rights.”

The Reit manager would exercise its votes as well, he said.”

Unless big boys come in to support this movement to remove the manager, it’s tough to win, even if they get an EGM going.

Having said all that, from an investment perspective, it may not be a bad one. The share price has tanked to multi year lows, and it is substantially below the market value of it’s assets.

My declining to get involved is simply a reflection of my lack of knowledge in this sector, not an opinion on the actual merits of Sabana REIT as an investment, at this stage.

As they say, knowing what you don’t know is probably much more important than knowing what you do.

The 2nd incident is that of International Healthway Corporation and all the saga in the news. I followed it with great interest because sagas like these can sometimes be great for finding value.

One of the best investments I’ve made was in Tepco sometime back, when the earthquake and tsunami struck, causing the nuclear plant/radiation fallout. My investing thesis then was that the markets think Tepco would go bankrupt under the liabilities from the nuclear fallout, but the markets didn’t realize that the Japanese government would backstop them because they just cannot afford to let Tepco go under.

So I do look out for such “difficult situations”.

I can’t comment too much on this intelligently though, because although this is somewhat healthcare related, IHC behaves more like a property developer or manager rather than a healthcare player.

It just so happens that the assets are healthcare related.

On top of that, they’re not local assets, so my knowledge of it is further crimped.

I am still in the midst of doing DD on this, but superficially, my initial thoughts are that IHC’s assets are currently earning next to nothing on it’s returns. Most of IHC’s earnings come from revaluations, which can be quite crazy. One of them that I briefly looked at, had a 500% revaluation gain in a single year.

LOL! Maybe I oughta look more carefully. That asset must be in Zimbabwe.

Yup, the wealthiest country in the world, where you need to be a multi billionaire to enjoy a banana.

436) zimbabwe inflation.jpg

Where the people are so rich, they use money as toilet paper:

437) zimbabwe toilet paper.jpg

The dreamland where inflation looks like this:

437) Zimbabwe-inflation-graph.jpg

1300% inflation rate. Yup, that’d explain the asset’s valuation gain.

Damn. Why do these iffy management think they can get away with doing shit like this?!

It’s almost funny if you really think about it. I wonder what they talk about during management meetings. In my work, I sit through management meetings every week. I betcha theirs would be a lot more fun than mine.

The healthcare company that I’m working in currently, is likely to do an IPO in the somewhat near future. It’s highly likely in fact. I hope we don’t ever screw up as badly. And even if we do, it won’t be for lack of trying. Or a lack of integrity.

As an industry insider, I actually have a lot of in depth knowledge of our local healthcare sector. I wish I can talk about it here in greater detail, but I can’t. Or rather, shouldn’t.

I will say that most of the analyses (most, meaning >50% of the time) that I’ve read, either in blog posts, in forums or even in analyst reports, are either misguided, looking at the wrong things, 1 dimensional and sometimes, just outright plain wrong.

1 particular blog report that I’ve read on a local healthcare company, is SO plain outrageously ridiculous (to me), that I even shared it with colleagues in our internal whatsapp group, and we all had a good laugh at it. Seriously. Even the colleagues who are working in the mentioned company had a good laugh. (Of course, I can’t be rude and link to it here.)

Yet “investors” read stuff like this, some even believe it. It does look credible to the noob on the streets. I shudder to think that these guys doing this analysis are running courses and teaching others how to, errr think like them. (To be fair, only their qualitative analysis is so wrong that it is funny. Their quantitative part, albeit backward looking and simple, isn’t wrong)

Anyway, back to IHC. The Oxley and Quarz capital guys have done a good job kicking out the previous management, of course with the help of disgruntled minorities. It’s hard to not have their support, seeing how the previous management had screwed it up real badly.

My only issue with Quarz’s plans… is that they all revolve around realizing the stated valuations for IHC’s assets. Stuff like hiving off assets into a REIT, selling part of the land parcel to recognize the value etc do not improve the OPERATIONAL efficacy of the business.

It’s how an investor would think, but not how a business owner would.

On top of that, there’s also the big question mark of the $100mil bond that IHC may have to pay back if the convenants are breached. Since nobody knows where OUE got it’s stake from, and what they intend to do with it, it’s hard to predict if the bond needs to be repaid.

Again, I’ve only superficial knowledge of this issue currently (I did just return from a trip, didn’t I?) so my thoughts may, and in fact, most likely would, change as I start to investigate further.

On a separate note, it’s interesting how once you have a vested interest in a company, any news that you read that affects the company, immediately catches your attention.

I’ve previously described my positions in Dutech Holdings, so when this came up, it caught my attention:

Now, this oughta keep steel prices contained in the immediate to mid term. If China has difficulty off loading the steel produced in the country, they’d have only 2 options:

  1. Limit steel production by the producers
  2. Lower steel prices to stimulate demand

Well, theoretically there’s a 3rd option, which is to find novel new ways to utilize steel, so as to create new avenues for steel demand, but since steel is an age old material, there’s no easy new way to massively increase demand with new avenues.

Option 1 is also tough as the producers themselves are in a tough spot. Many would be laid off if the economy switches to a true free market tomorrow, and everything is guided by supply and demand.

The Chinese government cannot have these producers going under in a broad way. The implications would be catastrophic. Many loans would go sour, the banks would be insolvent. Not to mention the massive layoffs in some steel towns, and that’d lead to unrest and anarchy.

So IMO, the steel prices would have to moderate somewhat from here. It has been rising rather rapidly in the 4Q16 as I’ve mentioned in my report on Dutech Holdings. Low to moderate steel price is a good thing for Dutech, obviously.

Anyway, that’s all I have for this post. It’s time to start getting into the groove of things, feels weird to have been disconnected, even if it’s only for a couple of days.

As always, have fun hunting!


  1. Glad to see someone as cynical as me with regards to the local healthcare industry – well, at least for the listed ones anyway.

    IHC was more of a shareholder issue than actual operational issue, yes, so hence the need to acquire Healthway a while ago. If Oxley, Quarz and OUE can save this company, then I think IHC will morph into a different animal. Let’s see.


    1. Hi LepakInvestor
      According to Quarzs’ plans, it will be quite a different animal, but I still don’t think it’s one for the long term.
      From the initial media reports, OUE seems to be coming in from the standpoint of a passive investor. Not sure if they will help operationally.
      But then again, you don’t take up a 12% stake and sit on it and watch it go up in flames and not intervene right…


  2. Hi TTI,

    You mentioned that the fund managers asked you about healthcare.

    Is it be possible for you to shed some insight into Singapore healthcare industry? It would be great to learn more about the healthcare industry, especially from an industry insider who possesses great analytical skills.



    1. Hi
      I’m reluctant to talk in depth about our local healthcare scene publicly. Perhaps in future I’ll write a heavily censored, generic post about it.
      I think it is some healthcare companies are misunderstood by the markets. It is not easy to know the characteristics of the industry, even insiders may not know unless you own a related business.
      A quick example: I read several analysis and analyst reports that talk about gov support through CHAS scheme, as though it’s some holy grail. One analysis even describes (obviously wrongly) how healthcare is now almost free/affordable for almost all Singaporeans because of this. In reality, CHAS is only available to a small segment of the population through means testing. Also, thinking of CHAS as a competitive edge when looking at a healthcare company, is superficial thinking. Do u know how does a healthcare business qualify to be a CHAS provider? As long as the dr has a license to practice, and has no previous infringements, u apply online n get approval within a few days. That’s it. How can that be a competitive edge? The only clinics that are NOT in this scheme are those who are too lazy to do so because of the delayed payment n the administrative work. In fact, starting this yr, CHAS n other gov schemes are going to be a drag for many healthcare companies who r heavily reliant on gov schemes (read: mass market target audience, primary healthcare providers with no competitive edge other than ease of access)
      Because the scheme is heavily abused and the claims have ballooned n exceeded the gov’s budgeting plans. By a mile.
      Read the latest news reports of practitioners who got hauled up and sanctioned and suspended.
      Yet you cannot find a single report that talks about this as a potential headwind.
      And this is just 1 example.

      Liked by 2 people

  3. Hi TTI,

    Thanks for sharing some of your views.

    Upon reading your reply, I did a quick google on CHAS ( As you mentioned, CHAS is applicable to only selective portion of the population with a minimum household income per pax or home value. It is definitely not almost all Singaporeans.

    In addition, I agree that CHAS is by no means a competitive edge. If most healthcare companies qualify for CHAS, how can it be a competitive edge? There is no differentiation.

    From an economics viewpoint, by artificially lowering the prices for the consumers, it will increase demand. By further assuming supply cannot catch up with demand increase, healthcare companies will have the more pricing power to increase prices (this is one of the main reason why healthcare in the US is so expensive). Hence, CHAS will definitely increase the market size of the healthcare industry, providing tailwinds. This is because demand will be generated by people who will most likely minimize/delay or cannot afford their health treatments previously.

    This is where I don’t understand why CHAS and other government schemes are going to be a drag for healthcare companies. Even if the government is going to scrap CHAS and other government schemes due to unexpected bursting of budget, the situation will return to status quo and it will revert back to the original norm. This is assuming that there will not be an oversupply of healthcare companies due to the government policies (companies overinvest/overexpand, leading to oversupply, but insufficient demand to meet this supply).

    Not to mention that there are additional tailwinds like aging population, increasing population and increasing affluence.

    Would be great to learn and discuss about your views (generic) about the healthcare industry.


    1. Hi Botak,
      Yes, CHAS has been a great tailwind for healthcare clinics. It creates (Artifical) demand, I don’t think I should talk in detail here how so.

      The problem is, as with such free schemes, there’s bound to be abuse. The system relies a lot on the integrity of the dr. Basically, if the dr claims for something, there’s no way the gov can know if it’s done or not done. Sure, you can do some audit, but it’s tedious, you can’t cover everyone, and even if you do, they don’t have the expertise to understand what’s done anyway.
      So over the past few years since the implementation and subsequent expansion of CHAS and PG, there are actually a lot of newer clinics that are opened, supported by these schemes. For some of them, 80% of their revenue comes from these schemes.
      Now, imagine if the government starts to restrict (They won’t scrape it completely immediately, it is not acceptable to the populace who have gotten use to such benefits), the limitations impact on these practices immediately. The bottomline shrinks immediately.
      That is the headwind I am talking about.
      What you are describing is a very simplistic way of looking at these effects: basically you are saying ok the schemes have no disadvantages. So even if the gov removes it or restricts it, there’s just less of a benefit. So its not a drag…
      But in reality, in business, it is all relative to recent figures. To illustrate this, let me give a fictitious example:
      Imagine you are a dr, you open a sole practitioner practice. You hire a nurse, a receptionist. Now, with this scheme, you have a huge influx of demand (or you “create” this demand… if u get my drift). So you can’t cope. You hire an associate, more nurses, and more receptionists. You expand the number of consultation rooms etc.
      1 fine day, the gov decides ok we shan’t fund this anymore. Can you still “go back to normal”?can your situation “return to status quo and it will revert back to the original norm.”?
      Now, using another example, think in terms of an investor. If you own healthcare company ABC, and 80% of the revenues comes from this scheme. If the scheme is limited (and it is changed starting from jan 2017 btw), and now your revenue drops such that the scheme accounts for 50% of revenue… what would that do to the sentiment for the company? What would the share price likely do?
      I don’t think people will think “ok it’s still an additional benefit wad…. 50% additional revenue is not as good as 80% but still good.”
      It would be a massive headwind.

      Liked by 1 person

      1. Your 2nd point about aging population, increasing population, affluence etc.
        Yes that is all true. The legendary “resilience of earnings” for healthcare companies is the reason why we get such high multiples.
        This is my personal opinion. Investing based on these broad concepts are a sure way to die.
        Again, let me illustrate with examples.
        Coupled with aging population, increasing population blah blah, is a sharp rise in the number of foreign drs that have been admitted to practice in singapore. A lot of drs from other countries are dying to get into Sg to practice. A decade ago, the typical dr that you see in the polyclinic or in your neighborhood practice, is a local grad. These days, it’s MOSTLY foreign.
        They are dying to come in precisely of these supportive measures by the gov.
        Many of them make their fortunes from these schemes, and if anything happens, run back to their country.
        So we have an explosion of new, small practices.
        That means supply of services have gone up tremendously. So if you had vested in company ABC thinking of broad concepts like “increasing population”, this company ABC could now actually be suffering despite the supposed increasing population.

        Or perhaps you invest in ABC thinking healthcare earnings are relatively resilient. Maybe. But not all. If a recession hits, it doesn’t hit all healthcare companies equally. If you are a primary care provider, and relatively low cost, heartland type of practice, you would be hit less. If you are the uber high end, treating tertiary conditions of wealthy patients, you would be hit less. If you are doing cancer surgery, you’re relatively resilient.
        If you are doing Lasik, or Botox cosmetic procedures, good luck to you in a recession. Do you think it will still be “resilient”?
        So broad concepts like these actually matter very little when you do your DD. It’s the specific details that one has to look into and consider.

        Liked by 2 people

        1. Hi TTI,

          Agreed with your views, which is why I made the disclaimer earlier: “assuming that there will not be an oversupply of healthcare companies due to the government policies (companies overinvest/overexpand, leading to oversupply, but insufficient demand to meet this supply)”. Which you explained in much more detail with a realistic example. I do think that how inflated this artifical demand is (or bubble), depends on the degree and ease of subsidise claims, as well as how long these government policies are in place. And how this demand will sustain, depends on the government’s budget and political desire to please the citizens (welfare, population etc).

          Something interesting that you pointed out is, there are a lot of newer clinics that opened up and for some of them, 80% of the revenue comes from these subsidises scheme. This is good and interesting information, are such information readily available on public domain or you are aware of as an industry insider (perhaps I would do my due diligence harder)? I think a way to estimate is, to see the delta difference (in rate of increase of healthcare market revenue) before and after the implementation of these schemes. This is because people who geniunely need doctor’s consultation will still do so regardless of these schemes, but since they can save money, so might as well use it. In addition, Singapore’s population isn’t increasing at a rapid rate, so the healthcare market ideally should be increasing fairly stable (I could be wrong). Any difference would probably be due to the as mentioned subsidises schemes.

          Agree that healthcare industry is broad, the branding and resilience will be different for different specializations. The details of specific companies are more important than the broad concepts. For example, perceived product differentiation is important for a Lasik provider as the eye is a critical function that most people dare not risk and are willing to pay more. Same goes for plastic surgery. However, branding might not be that important for GP or dental services.

          At a point of time, I was interested in Raffles Medical Group due to its strong moat in brand and management. However, its high valuation and my lack of visibility in the healthcare industry deterred me from doing so. I am unable to see how RMG is able to cope with the boatload supply of hospitals (Woodlands, Ng Teng Fong, Sengkang, Outram etc). In addition, a substantial portion of RMG’s revenue is dependent on international patients. Given that RMG invested in China, other healthcare companies could probably invest in Indonesia, Russia and Middle East and competition could intense. Not to mention that Malaysia and Thailand are gearing to be medical tourism hubs as well. Given my lack of visibility and competition, it is risky to assume and extrapolate RMG historical growth into the future. One can definitely take a gamble by analyzing purely based on the release of RMG’s financial results, but my intuition and calculations tells me the RMG’s valuation is too rich to take such a gamble.


          1. Hi Botak
            ” 80% of the revenue comes from these subsidises scheme. ”
            Nope, of course it’s not public information. In fact, even insiders won’t know unless you are in management. There is a recent case of a clinic being censured and the dr is currently being investigated. (It’s being investigated as a criminal case aka fraud). The entire clinic was closed because once the dr was disbarred from this scheme, the operations were unsustainable. On top of that, the media reports made it impossible to do business. That already tells you that the entire business model revolves around such CHAS schemes. If CHAS accounts for a small segment of revenues, the business would continue operating, albeit with reduced revenues. I know the figures because well, subsequently another colleague bought over the assets of the defunct clinic.
            I havent done an in depth analysis of RMG’s valuations so I have no idea how it is from an investment perspective, but from an insider standpoint on its operations, RMG is one of the healthcare providers who are relatively solid. If you look at the operations of the newer healthcare providers (Recently listed), many of them grow by M&A. RMG does have some M&A, but most of its growth is organic. They build and grow. They focus on building their brand this way. There is a reason for this, and if I explain in detail any further, it’d be a long post by itself.
            In short, in recent years, many big funds came into SG and bought up many practices that are large, but not quite large enough to list. They bought a few, merged them, and listed them in IPOs and made huge profit doing so. It makes sense to do so because there is a BIG valuation gap between listed healthcare providers and unlisted ones.
            Look at the PE of all the listed healthcare providers. What is the norm?
            30? 40? 50?
            I think not too long ago, Q&M dental’s was the most crazy. At 1 point it reached 70+, although that has come down significantly.
            Now if you decide to buy UNLISTED, private clinics, guess what multiples would you pay?
            For a reputable chain, with major competitive edges, perhaps unique or established patient pool, maybe 12-20 times.
            For a relatively sizable chain, with a nice story, perhaps 7-8 times
            Individual standalone small clinics can be bought for *gasp 2-3 times PE.
            Q&M previously bought a new medical practice for $1. Yes, $1. aka just took over the debts of the clinic. Once in its fold, it theorectically is worth PE50?60? 70??
            (Don’t just take my word for it. There are clinic brokers around, much like property agents. Call up 1 of them, act as an interested dr looking to buy, and see what you are quoted)
            And that is the game these guys are playing.
            Get funds, buy over and merge, package and IPO to exit.
            Which is why when I saw PE of 70, it’s mind boggling to me why the public thinks it is worth it to buy. I warned on Investing Note as best as I could, without being undiplomatic. But the general public who claim to be investors, really honestly think in damn weird ways:
            “it needs to break $0.70, then it will start to move higher”
            is the exact comment I got from someone.

            Liked by 2 people

            1. Hi TTI,

              Ahhh… Speaking of big funds reminds me of my fairly recent research based on Fullerton Healthcare prospectus with MAS. Fullerton has only 4 years of history as a group, and will be listed at $1.70 (P/E at the low 30s). The astonishing part to me was, they acquired companies at a much lower P/E of 5 to 15, which explains the massive goodwill on their balance sheet. David Sin of Sin Capital, majority shareholder will be cashing out about 66% of his shares outstanding after the IPO. This sounds like a very lucrative quick-to-get-rich business plan to me.

              For RMG, they grew organically, except with the recent acquisition of International SOS (probably international expansion strategy). RMG is recognized by its own brand (RMG) and less so by key person, unlike smaller healthcare companies or those that grow by acquisition. Personally, I am apprehensive of companies that grow by acquisitions because it makes my analysis messier (I am not good enough) and there is a limit to growth by acquisition, as sooner or later you will run out of quality companies to acquire. However, Fullerton does have some moats, they have some synergy between the companies they own (cross referral) and more importantly, they acquired Integrated Health Plans (IHP). My company only allows medical reimbursement from IHP panel of clinics or RMG, hence there is a very great disincentive for me not to use their services. This is a very strong form of moat (although I am aware of several doctors are unhappy with Fullerton taking a huge cut of the fees). Not to mention the Fullerton’s inherent network effect of 500+ clinics.

              On the other hand, I don’t see much positives in Q&M acquisitions, probably some economics of scale through consumables or equipment purchases and training their dentist to operate efficiently. I read in Q&M’s announcement (or somewhere) that there is an contract clause for acquired doctors to improve their earnings. In my humble opinion, healthcare is a service-based industry, one is selling his time for money. Hence to increase earnings, one has to either: raise prices (but dental is more of a commodity service), increase your patient-turns (quality of service might be affected), increase the amount of services sold (might affect branding if patients are charged unfairly and unnecessarily). In fact, one can easily find out that although Q&M’s revenue and earnings are growing rapidly, the growth in Q&M’s earnings per share definitely does not justify that kind of rich P/E valuation (dilutive). I would not touch Q&M with a ten foot pole.

              Really surprised to learn that there are such things as clinic brokers.. The magic of the free market ha.

              Anyhow, thanks for the discussion TTI, really enjoy it, always learn something new each time you post.


              1. Hi Botak
                Not sure if you aware of this as you didn’t mention it, but Fullerton’s IPO is scrapped. Basically their business model, although scalable and great from an economics/business standpoint, is apparantly considered “unethical”. Healthcare practitioners are not supposed to “induce patients to do treatments”. This means, by extension, the clinics cannot get middlemen and pay these middlemen a commission based on the treatment fees paid by the patient.
                Some drs in their panel complained, and MAS and SGX may not care, but Singapore Medical Council would. (Or rather, they have to because of the high profile nature of the company).
                In reality, many healthcare companies do something similar actually, but in a grey area sorta way to get around the rules…
                Dr Michael Tan is an extremely capable guy though, so I wouldn’t bet against him coming up with something else.
                For Q&M, I don’t think acquired clinics have to improve their earnings. They have to maintain it over a certain guaranty period. This is to prevent the main drs from sipping wine in the Bahamas after selling out. They are locked in for the period and have to ensure the earnings that the acquisition was based on, still maintains or improves over a certain period.
                “Hence to increase earnings, one has to either: raise prices (but dental is more of a commodity service), increase your patient-turns (quality of service might be affected), increase the amount of services sold (might affect branding if patients are charged unfairly and unnecessarily).”
                All of which applies to a typical medical practice as well.
                I wouldn’t consider dental any more of a commodity than medical actually. Perhaps it is, but if it is, than a medical service is too.


                1. Q&M does have profit escalation guarantees clause for some of their acquisitions. In the case of Lee and Lee, it would be 10% every 2 years. So, it got me thinking: how can L&L increase their earnings consistently, given an average annual earnings of 500k per clinic (no idea if this is above or below average earnings for a clinic, didn’t bother to compare with other Q&M acquisitions). Will L&L’s customers be the high end clientele or are sticky that they wouldn’t mind the hike in charges? Or will L&L attempt and risk by having higher turns or introduce additional services per patient. Of course, hiring additional dentist and establishing consultation room is an option if the demand is there…

                  Although Q&M’s acquisitions are “accretive” (P/E wise) and seem to be profitable by comparing the purchase price and profit guarantees. But there are two assumptions. (1) Q&M’s sky high valuation will remain to be so, (2) the value of a business is the present value of its future cash flow (according to Warren Buffett and my idol, Jeff Bezos’s 2004 shareholder letter), and I doubt Q&M’s purchase price gives decent returns over the PV of its future cash flow (one can easily do the maths based on the announced profit guarantees, but I am lazy).



                  Perhaps, I use the wrong wording in “commodity service”. Honestly, I feel dental and GP as not having that strong a moat as other medical practices. There are at least 5-6+ clinics and dental clinics each around within a 15mins walk from my home. Personally, I have an unwritten rating for them and blacklisted some. But I wouldn’t deliberately travel to my favourite practitioner. I will go to whomever is available and convenient and meets my minimum quality criteria. In this sense, I think it is kind of “commoditized”, or rather many available choices that I don’t mind going for a visitation. However, I do know some people are insistent in getting treatment from a particular doctor or dentist. Maybe, I am just the oddball. But, I will bother to research and travel if I am getting a treatment for some critical parts of my body (eye, heart etc).

                  Fullerton has been expanding vertically down the value chain and there is more value added in that (cross referral). Q&M is expanding vertically as well, by acquiring medical suppliers. But that’s kind of a different ball game. Not to mention, I can’t see the value add through the acquisition of additional dental or GP clinics to existing ones. Hence, I think acquisition in dentistry has much lower synergy than that of medical practices.

                  Disclaimer: I didn’t do comprehensive research on Q&M, as some quick thoughts on the quality of business (as discussed above) and a quick calculation of its growth in earnings per share did not justify the P/E (time is a valuable resource). However, I do scroll through SGX announcements regularly and sometimes I read announcements for fun.

                  PS: I was a silent reader until this post on the healthcare industry intrigued me to comment (due to my previous research in RMG and Fullerton). SG TTI and Investment Moats are the few, rare quality investment blogs that I follow. Unfortunately, IM is mostly about REITs, which I am uncomfortable (highly leveraged amidst potential rising interest rates) and currently lack an understanding to invest in REITs.


                  1. Hi Botak
                    Thank you for your comments.

                    I believe Lee&Lee serves the upper-mid clientale, so, it’s not the mass market target audience. In fact, from my understanding, L&L used to be one of the most upmarket practices a couple of decades back. It is probably one of Q&M’s better acquisitions.

                    Dental appears to be commoditized because you are talking about primary care services. But primary care services for medical, is commoditized as well. People with cough and cold just visit any clinics near to them.

                    For secondary and tertiary treatments that are more complex, or for clientale that is the upper mid to high end, such services are definitely not commodities. There’s pricing power.

                    I guess in this regard, it’s no different from the hairdressing industry. You have the $10 quick cuts in the malls. But is hairdressing a commodity service? Sure, for the majority. But do you think David Gan’s clientale will go for a $10 cut in the mall?

                    Q&M’s acquisitions are done solely based on a financial standpoint. I don’t think there’s much synergy aside from the usual mass ordering of supplies. Even manpower is not a synergy, as from what I understand, the acquired practices continue to operate independently, and the clinic name remains. (not changed to Q&M).
                    I do know that they tried to synergize it by encouraging these clinics to refer patients who need complex work to their centres for treatment. The smaller standalone clinics previously couldn’t provide these services as they don’t have the expertise to, and after acquisition, they could send it to Q&M’s centres and thus keep the profit within the business.
                    The M&A is done mostly because their shares trade at fat valuations, while these clinics can be bought at a fraction of these valuations.
                    In fact, if you understand doctors, they are (generally) a very difficult group of people to manage. Almost every dr is somewhat arrogant. Even the worst doctor, thinks highly of his own skills. Now knowing the attitude of clinicians, why would these clinic founders be willing to sell out? Simply because the valuations are similar to if they do an IPO themselves. (they can’t though because of the relatively small size)


  4. Hi TTI Was wondering if you can meet up for a chit chat session? Date, time and venue at your convenience. To be frank with you, I hope to meet up to discuss about stocks and also my health condition. I have congenital lymphodema of the left limb.


    Augustine Lim

    From: SG ThumbTack investor To: Sent: Sunday, 29 January 2017, 23:52 Subject: [New post] TTI’s Thoughts (Jan 2017) + Sabana REIT & International Healthway Corporation #yiv4745747199 a:hover {color:red;}#yiv4745747199 a {text-decoration:none;color:#0088cc;}#yiv4745747199 a.yiv4745747199primaryactionlink:link, #yiv4745747199 a.yiv4745747199primaryactionlink:visited {background-color:#2585B2;color:#fff;}#yiv4745747199 a.yiv4745747199primaryactionlink:hover, #yiv4745747199 a.yiv4745747199primaryactionlink:active {background-color:#11729E;color:#fff;}#yiv4745747199 | ThumbTackInvestor posted: “Here’s wishing all readers of SG TTI a fantastic CNY and a fruitful year ahead, both financially and in all your endeavors! I’m just back from a trip (again), and feeling as refreshed as ever.Check this out:This is a world heritage site: a massive crat” | |


    1. Hi Augustine
      Regarding your medical condition, it’d be best if you rely on the expertise of the dr who has been treating you. It’d be wrong for me to give any advice, aside from the generic, useless ones.
      Actually, I honestly wouldn’t know what advice to give either.
      All the best.


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