ASEAN is fast becoming a popular destination for medical tourism, equipped with top notch medtech and highly skilled doctors. Such state-of-the-art facilities are comparable to what is available globally and together with its low price point are the main driving forces behind the thriving industry. According to TforG report, Asia Pacific’s medical tourism industry, including the ASEAN region, accounts for over EUR15 million and expected to grow at 16 percent annually for the next three years.

Despite being a booming industry, competition is accelerating and rivals are striving to improve their healthcare services while keeping costs low. As such, the future growth potential is held in high regards when investors are choosing for appropriate healthcare companies to add to their portfolio. Here are two high-growth healthcare stocks that we have identified.

Health Management International

Listed on the Singapore Exchange, Health Management International (HMI) engages in business operations over Singapore, Malaysia and Indonesia. It is also the owner and operator of two tertiary care hospitals with over 500 hospital beds in Malaysia and conducts healthcare training in Singapore.

Based on the group’s latest 1Q18 results, revenue increased by 7 percent to RM117.1 million due to a rise in patient load and larger amount of foreign patients seeking treatment.  However, operating profit came in below expectations as it dropped by 4 percent from RM20.3 million to RM19.5 million, largely due to rising expenses arising from the group’s expansion activities, along with higher finance costs relating to the take-up of term loan facility for acquisitions.

The recently confirmed direct flight networks, connecting Malacca to Guangzhou and Jakarta by AirAsia, will further increase convenience for medical tourists. According to World Health Organisation, Malaysia has 3 times more hospital beds per 1,000 people than Indonesia, this shows a lack of supply in healthcare provided in Indonesia which may drive those seeking for faster treatment at comparable prices to Malaysia.

In 2015, Malaysia Healthcare Travel Council found that patients from China have grown 30 percent while Indonesia remains the biggest contributor of 70 percent in total revenue to its medical tourism industry in the following year. Therefore, we can expect an influx of tourists seeking medical treatment in the region when it commences in 4Q17. That said, HMI owned Regency Specialist Hospital in Johor Bahru is the only exclusive full emergency specialist centre in Malaysia that will have emergency-trained specialist readily on standby round the clock to respond immediately to emergencies.

Further expansion for both hospitals is in place to increase 66 percent current total bed capacity from 506 to 840 by FY21 to meet the growing demand of hospital beds. An estimated capital expenditure of RM160 million is expected to be incurred for the expansion, although HMI may see intensifying competition from the other 25 planned new hospitals in Johor Bahru down the pipeline.

Recently a Temasek subsidiary – Heliconia – has taken a 2 percent stake in HMI at an issue price of $0.65. The net proceeds from this transaction will be utilised mainly for inorganic development and would allow HMI to exploit Heliconia’s wider network and resources.

Investors should be cautious about management’s investment decisions, as there can still be investment risks which can lead to losses. Investors should also recognise that there is execution risks involved when HMI scales up, in addition to the fact that its debt-to-equity ratio sits at 76 percent. That said, based on the management’s long track record and Heliconia’s confidence to take a stake in HMI, we believe such risks are not substantial.

Based on HMI’s current trading price of $0.68, the shares are changing hands at a price-to-earnings multiple of 30.5 times. However, given the group’s huge growth potential, we can expect earnings to grow by a conservative estimate of compound annual growth rate (CAGR) of 30 percent in earnings over the next 3 years. Comparatively, the industry’s average P/E is at about 30 times, leading to us to believe that the market may not be pricing in HMI’s growth potential.

Singapore Medical Group

Founded in 2005, Singapore Medical Group (SMG) offers specialist healthcare services with over 35 clinics in Singapore and a few medical centres overseas. SMG provides an extensive range of healthcare services, such as Diagnostic and Aesthetics, Oncology, Obstetrics and Gynecology as well as executive and corporate health screening.

The group has experienced remarkable improvements in financial performance in 1H17, as revenue rose 57.5 percent to $30.7 million, largely due to contributions from its two subsidiaries – Astra Companies and Lifescan Imaging. The Health Business segment saw contributions grew by 42.3 percent from $15.4 million to $21.9 million while the Diagnostic and Aesthetics Business segment expanded 125.7 percent from $3.8 million to $8.6 million respectively. In all, the growth in top line has led to an astonishing record net profit gain of 533.8 percent from $0.6 million to $4.0 million.

Going forward, SMG is likely to continue growing its Obstetrics and Gynecology segment via acquisitions, notwithstanding that the group can horizontally expand on offerings through cross-selling of services. Enticing customers with such packages also benefit SMG due to higher profit margins, as the group draws on synergies between different divisions.

Geographically, good results have been observed in overseas market as operations in Indonesia have recently turned profitable. Meanwhile, one of two the medical centre in Vietnam has already turned profitable and we are expecting the other to breakeven by 4Q18. Despite the group’s positive momentum, the management decided to retain earnings and not declare any dividends, leading to expectations that the group has further plans to continue expanding overseas or has other acquisition targets.

There are some risks involved if management is not careful. With the aggressive expansion underway, investors may be concern about debt. Right now, this will not be a cause for concern as the group still maintains a healthy balance sheet with debt-to-equity ratio of only 14.9 percent.

Based on SMG’s current share price of $0.56, its shares are trading at 28 times P/E, at a slight discount to the industry’s average of 30 times. In addition, given its exceptional growth rates, the current P/E multiple has seemed to have discounted its future growth as well. We believe if financial performance continues to outperform in coming quarters, SMG’s shares might just see an upgrade to its valuation.