OUE Lippo Healthcare Ltd (SGX: 5WA) is the owner and manager of 12 nursing home facilities in Japan and a pharmaceutical distribution business in China. The company also owns land for development in China and Malaysia. As of 31 December 2018, OUE Ltd (SGX: LJ3) had a 64.35% stake in OUE Lippo Healthcare.
OUE Lippo Healthcare recently released its annual report for the financial year ended 31 December 2018. I took a look to find out how the company intends to grow in the years ahead. Under the Chairman’s Statement, OUE Lippo Healthcare’s chairman, Lee Yi Shyan, revealed a “three-pronged growth strategy”.
OUE Lippo Healthcare’s first growth avenue entails establishing strategic partnerships.
In 2018, the company welcomed a strategic shareholder, ITOCHU, which is listed on the Tokyo Stock Exchange. ITOCHU is one of the world’s largest and most diversified trading companies with a presence in 63 countries. ITOCHU owns 25.3% of OUE Lippo Healthcare, and this ownership materialised through a share placement completed in February 2018.
During the year, OUE Lippo Healthcare also deepened its partnership with China Merchants Group (CMG). The collaboration with new partners allows OUE Lippo Healthcare to expand its Pan-Asian presence.
The next growth strategy is building an asset-light business model through strategic acquisitions.
In October last year, OUE Lippo Healthcare acquired a 10.6% stake in First Real Estate Investment Trust (SGX: AW9U), a Singapore-listed healthcare REIT. OUE Lippo Healthcare also purchased a 40% stake in Bowsprit, the manager of First REIT, with the remaining 60% bought over by OUE.
The acquisition has done well for OUE Lippo Healthcare so far. Lee explained:
“The acquisitions are earnings accretive and contribute positively to the Group’s cash flows. Since the completion of the acquisitions, First REIT and Bowsprit have contributed approximately S$6.1 million to our results for FY2018. We look forward to growing from strength to strength with First REIT, as we continue to optimise the synergy between us.”
First REIT will act as a capital-recycling platform for OUE Lippo Healthcare, helping the company transition into an asset-light business model. OUE Lippo Healthcare believes that “being asset-light will greatly increase our capital efficiency and flexibility to capture future growth opportunities”.
Expanding its healthcare network
OUE Lippo Healthcare’s third growth platform hinges on expanding its Pan-Asian healthcare business network.
On top of providing a capital-recycling platform, the link-up with Bowsprit and First REIT has also allowed OUE Lippo Healthcare to enter the Indonesian healthcare sector, which is a high-growth market. Lee went on to say:
“The demand for private healthcare is expected to see continued government support with the nation-wide adoption of a national health insurance scheme. The rise in household income will continue to drive an increase in healthcare expenditure, which is projected to rise to approximately Rp1,224 trillion by 2027.”
China is another high-growth market for OUE Lippo Healthcare. In December 2018, the company entered into a non-binding letter of intent with China Merchants Shekou Industrial Zone Holdings to jointly develop, operate and manage a high-end international hospital in Prince Bay, Shekou, Shenzhen.
During the same period, China Merchants Lippo Hospital Management (Shenzhen) Limited (OUE Lippo Healthcare’s 50:50 joint venture company with CMG) entered into management agreements with other CMG-linked companies to manage three medical facilities in Shanghai, Chongqing and Nanjing.
OUE Lippo Healthcare has also made a foray into Myanmar, where demand for quality healthcare is proliferating. Lee explored the company’s plans in that country:
“In January 2019, we announced the proposed acquisition of a 40.0% stake in Yoma Siloam Hospital Pun Hlaing Limited (“YSHPH”), which operates three hospitals, a medical centre and two clinics, and a 35.0% stake in Pun Hlaing International Hospital Limited (“PHIH”), which owns or holds the leases of the land and properties on which YSHPH operates. With the support of our valued shareholders, the acquisitions were approved at the extraordinary general meeting held in the same month. The proposed acquisitions are expected to be completed by the first half of 2019.”
The Foolish diagnosis
OUE Lippo Healthcare’s growth plans sound thrilling. The company is tapping into the growing healthcare demand in this part of the world, underpinned by urbanisation and a rising middle-class. While the growth strategies sound exciting, only time will tell if management executes the plans soundly and whether shareholders see the fruits of the labour in the company’s financial statements. It’s worth noting, however, that over the past three financial years, the company has been loss-making.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended units of First REIT. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.