Dr Cheng Wei Chen, 79, the chairman and founder of Thomson Medical Centre, might be about to top off a charmed career with the sale of his 39.34% stake in the healthcare group to billionaire investor Peter Lim for S$201.9 million (RM485.2). Cheng is perhaps best known in medical circles for delivering Singapore’s first in-vitro fertilisation triplets, but his business achievement of building a thriving hospital that specialises in obstetrics, gynaecology and paediatrics even as Singapore’s birth rate declined is probably of more interest to investors.

Over the last five years, Thomson Medical has managed to grow revenue and earnings at a compound annual growth rate of 14.7% and 24.6%, respectively. That’s despite a shrinking pool of expectant mothers in Singapore. Cheng’s secret was positioning Thomson Medical as a top-end healthcare provider in its field, with resort-style wards that attracted well-heeled patients. Cheng also shrewdly set up clinics in heartland neighbourhoods that served as a referral conduit to its flagship, 190-bed hospital on Thomson Road, which helped maxi­mise revenue and earnings at its key asset. For the financial year ending Aug 31, Thomson Medical says it handled a record 9,268 deliveries, an increase of 4% over the same period last year.

Recently, Thomson Medical has widened its range of services. In an interview with The Edge Singapore in 2006, Cheng said many of his patients who had been consulting him since their younger days have continued to see him for age-related conditions like menopause. That led him to branch into more therapeutic and preventive healthcare services. The company set up specialist clinics such as the Thomson Women Cancer Centre and Thomson Paediatric Centre in February 2009 and in January this year, respectively.

No massive investments so far
Thomson Medical has so far conscientiously steered clear of massive investments, though, creatively working around space constraints at its hospital.

For instance, it relocated its administrative staff to HDB offices nearby and it plans to move its chiller to the roof to set up another two operating theatres. It has also begun looking for opportunities to grow abroad. Yet, here too, the company took the low-capital expenditure route. It has, for instance, secured overseas management consultancy projects such as the Hanh Phuc International Women and Children Hospital in Binh Duong, Vietnam, which is expected to start operations sometime this month.

Now, Cheng’s age is fast catching up with him. While he still continues to see patients, The Edge Singapore understands that plans were underway for Cheng’s son Dr Cheng Li Chang to take over the position of chairman last month. The younger Cheng is currently deputy chairman of Thomson Medical. On top of that, growth challenges are emerging for the company.

For one thing, it might soon need cash to fund investments in the foreign hospitals that it is helping to build overseas, like the 260-bed Hanh Phuc hospital. In an interview after the results briefing on Oct 27, CEO Allan Yeo says Thomson Medical will initially earn a fee tagged to the revenue and gross profit of the hospital. In addition, the company will receive a retainer fee in the first year. If the project operates smoothly, however, Thomson Medical has plans to exercise its option to take up a 25% stake in Hanh Phuc at cost.

Already, Thomson Medical is planning another two similar projects with its local partner in the Hanh Phuc hospital project, one of which will be in the capital Hanoi. “You need to have good partners with the same vision and mission, because we are looking at long term,” Yeo says, referring to Thomson Medical’s overseas investment strategy. “You are bringing in the brand name of Thomson and if it doesn’t work, then you find it counterproductive and it may damage your brand. We need to get to know each other first. That means doing consultancy. Then, once I take up equity, that means I am going into partnership with them. That’s where you need to be careful that you have a partner that is like-minded.”

Further down the road, the company may require yet more cash for investments elsewhere in the region, as well as in Singapore, in order to compete with other emerging healthcare groups. So, how much longer can it maintain its low-capital-intensive expansion? Is it a matter of time before Thomson Medical is forced to raise cash to make an expensive land acquisition in Singapore for a new medical facility? How would its shareholders, used to steady growth and strong dividends, react to a cash call?

Enter billionaire Peter Lim, who made the headlines earlier last month with a S$622 million bid for Liverpool Football Club that ultimately failed. A former remisier, Lim made the bulk of his fortune with a fortuitous investment in palm-oil juggernaut Wilmar International while it was in its infancy in the early 1990s. He is also among the largest shareholders of the resurgent luxury goods retailer FJ Benjamin. And he has built up key stakes in troubled companies like Informatics Education, Rowsley and UPP Holdings, where bursts of speculative trading activity often stir excitement in the market.

Recently, Lim appears to have turned his attention to the medical sector. In August, he bought a 29.6% stake in Malaysia-listed fertility treatment specialist TMC Life Sciences from the founder Dr Lee Soon Soo. On Oct 14, Lim reduced his stake in Healthway Medical to 4.85% from 7.17%.

Thomson Medical said on Oct 29 that Cheng and his family have agreed to sell the 115.3 million shares they hold in Thomson Medical to Lim for S$1.75 each. Lim is making a general offer for the remaining shares at the same price. The offer is conditional on his acquiring more than 50% control of the company. As at Nov 2, Lim owned a 48.14% stake after buying more shares on the open market. At S$1.75, the offer price is a premium of 62% over the last traded price of Thomson Medical prior to the offer announcement. CIMB Research notes that the offer values the company at 32 times FY2010 earnings. That’s higher than the current market valuations of shares in Raffles Medical and Healthway Medical, which are trading at 28 and 15.8 times earnings, respectively. But it’s lower than the 36 times earnings at which Malaysia’s Khazanah Nasional recently took over Parkway Holdings after a tug-of-war with India’s Fortis Healthcare.

Billionaire Lim’s gamble
Analysts who cover healthcare stocks say Lim might be on to a good thing. In a report last week, Standard Chartered’s analyst Stephen Hui said the premium Lim is paying for control of Thomson Medical is justified because of its market leadership in birth deliveries, new specialist clinics and the moves it has made to grow regionally. Stanchart adds that private hospitals are a scarce resource in Singapore, given that only two new private hospitals have been opened in Singapore in the last 21 years.

To be sure, Thomson Medical is still relatively small. With a market capitalisation of S$513 million, it is nowhere near the size of Parkway Holdings, which was valued at S$3.5 billion when it was taken private by Khazanah Nasional. Thomson Medical is even smaller than Raffles Medical, which has a market value of S$1.18 billion. Still, it is growing fast and could expand at an even faster rate with the backing of a deep-pocketed controlling shareholder. Revenue increased 21% to S$81.68 million and earnings were up 24% to S$15.9 million for the year ended Aug 31.

Indeed, Thomson Medical might be about to journey down a similar growth path as Parkway Holdings, which was once also a family-controlled business. Parkway Holdings was founded by Malaysia’s IGB Corp’s Tan family and Petaling Garden’s Ang family in the 1970s. The company built Parkway Parade, but later morphed into a healthcare player with investments in Gleneagles Hospital, Mount Elizabeth and Parkway East hospitals in the late 1980s and early 1990s. The founding families eventually sold their stakes in the company in 1997. Since then, Parkway Holdings has grown under different private equity and institutional investors.

So, should investors in Thomson Medical accept Lim’s offer? Or, should they hold on to their shares to ride the company’s longer-term growth?
Certainly, the steep premium that Lim is offering is hard to resist. And the stock is bound to fall significantly once the offer expires. US investment fund Kabouter Management sold its stake of 5.025% on the open market on Nov 2. Stanchart expects the general offer to go through. CIMB Research is also of the view that the offer is attractive and will be accepted by shareholders. The offer price will be adjusted down for the final dividend of two cents for FY2010 and one-for-10 bonus issue that have just been proposed. An independent financial adviser will be appointed and a circular containing their advice and recommendations to the independent directors of Thomson Medical will be sent to shareholders within 14 days from the date of despatch of the offer document issued by the offeror.

Thomson Medical is up 152% YTD. Shareholders who have held on to their shares since its listing in 2005 at 22 cents would have made a capital gain of more than six times their initial investment, received a dividend payout of at least 50% of profit after tax and a bonus issue of one-for-10 shares in 2007. Using a discounted cash flow valuation, Stanchart values Thomson at S$1.80 a share.

Regional growth
In the meantime, Thomson Medical is conti­nuing with its growth plans. The start of operations at the Hanh Phuc hospital this year could have a positive impact on earnings. The prices of suites and services in Hanh Phuc are likely to be about one-half to one-third the prices in Singapore, hence attracting patients from Cambodia, Laos and even Indonesia.

To raise awareness of its facilities, Yeo says he will be hosting a series of networking sessions for Singapore, Malaysia and Australian business groups. “The idea is to get them to sign on as corporate clients so they can send their staff to our hospital for medical treatment,” says Yeo, the former managing director of Mahkota Medical Centre. He adds that Binh Duong is home to the Vietnam-Singapore Industrial Park and is about half an hour’s drive from Ho Chi Minh.

Yeo says the hospital will be targeting both locals and expatriates. “In my meeting with the president of Vietnam, he said, ‘Come and help us with our healthcare.’ The public hospitals [do not] have enough beds. And some patients are even sharing beds. If I am someone in Vietnam who is rich, I prefer better facilities. For Singaporeans, some come back to deliver. When they have treatment, sometimes they come back to Singapore. We want to change that. You have got a big hospital, a nice hospital [that is] very well equipped.”

Yeo says he is bullish on the prospects in Vietnam, given that the number of births is over a million, compared with over 39,000 births in Singapore. To draw more patients to its hospital, he says Hanh Phuc will be starting its first satellite clinic at Saigon Trade Centre, similar to the strategy used in Singapore.

As Thomson Medical’s founder Cheng hands over control of his company to Lim, these overseas growth plans may well get a shot in the arm. In an Oct 29 press release, Lim says he believes Thomson Medical has the potential to develop further as a regional healthcare company. DMG & Partners says Lim is likely to try to unlock synergies between Thomson Medical and his other healthcare holdings, particularly TMC Life. Stanchart says Thomson may eventually seek opportunities in Malaysia, where TMC Life is based.

And with any luck, it might all make the stiff valuation Lim is paying worth it.

This article appeared in Corporate page, The Edge Malaysia, Issue 831, Nov 8-14, 2010