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HC Surgical Specialists (SGX:1B1) - Earlystage "Q&M" with fat FCF Margins
12-10-2019, 01:53 PM. (This post was last modified: 12-10-2019, 02:09 PM by Iosias.)
Post: #1
Photo  HC Surgical Specialists (SGX:1B1) - Earlystage "Q&M" with fat FCF Margins
Part 1/2 - HC Surgical Specialists Ltd (Catalist:1B1)
Establish:             Sep 2015
IPO Date:             Nov 2016
HQ:                     Singapore
Mkt Cap:              SGD $83mil (10 Oct 2019)
Employees:          31
Website:              www.hcsurgicalspecialists.com

Business Model:
Operates 16 clinics, and is based in Singapore. HCSS was founded by Dr Heah Sieu Min and Dr Chia Kok Hoong, who both have over 20 years of experience each.
HC Surgical Specialists, an investment holding company, provides medical services primarily in Singapore.
  • endoscopic procedures, including gastroscopies and colonoscopies;
  • general surgery services with a focus on colorectal procedures in a network of clinics.
  • treatment services for other conditions, such as haemorrhoids, anal abscesses, anal fissures, anal fistula, gallstones and inflammation of the gallbladder, hernias, colorectal cancer, stomach cancer, colonic diverticular disease, and cysts and lipomas; and vein laser vascular, laparoscopy, and other general and specialized medical services.
  • provides home care, such as nursing, physiotherapy, speech therapy, occupational therapy, and ambulance services;
  • general consultation and diagnostic services, including blood tests, X-Rays, ultrasound, CT Scans, and MRIs.
HCSS’ vision is to build an organization dedicated to making private healthcare accessible to the broadest consumer base possible. This is made possible by through Medisave and by expanding into the heartlands.

Investment Thesis:
(1) Growth Through Acquisitions - Infant stage Q&M-styled consolidation of clinics.
  • HCSS identifies undervalued young budding doctors who are at an early stage by supporting their growth through the setting up of their clinic to patient referrals. Rather than wait for these doctors to really have established themselves before acquiring them
    • Takes 51% stake of young budding doctors and incentivising them by allowing cash-out in 4-5 years by taking over their 49% stake at 10x profits (implying an approx 10% cagr organic growth not including roll-ups/M&A growth).
    • Considerations range from S$0.4m-2.2m for a 51%-100% stake in the young specialists.
    • Young doctors happy to work hard to increase cash-out, HCSS benefits from the heightened organic profits
    • Dr Jason Lim - https://www.doctorxdentist.com/the-compl...-singapore
  • Network of Clinics/GPs to channel clients to private clinics.
(2) Strong and consistent free cash flow margins of about 35%, currently generating SGD 6mil FCF yearly.
  • With about SGD 11 mil in the bank and minting 6-7mil of cash yearly and growing (unlike Q&M's rocky FCF)
  • Each of their investment stakes ranges from less than SGD 0.5 mil to $5 mil for a range of clinics, clinic chains and other businesses.
  • They have more than enough dry-powder to continue consolidating the SG heartlands Endoscopy clinics and other vertically and horizontally integrated businesses like Medinex on a yearly bases.
  • With a current chain of 15 clinics (with 2 more on the way), every additional clinic or clinic chain added has material impact to their bottom line.
(3) Medisave Accredited Private Endoscopy Clinic - Quality Services at a lower cost and nearer heartlands.
  • With Medisave Accreditation, HCSS able to encourage patients to visit private clinics instead of public hospitals as a portion of the cost is deducted from medisave account.
  • Private clinics typically have shorter waiting times than public hospitals "Average Hospital Waiting Time (1~2h)"
(4) Consolidating services to boost efficiency and build network effect
  • HCSS acquired 49% of Medinex (SGX: OTX) in 2017.
    • B2B service provider mainly supporting private specialist clinics via 3 segments:
    • Medical Support Services - overseeing the setting up of clinics; and facilitating applications for relevant clinic licenses
    • Business Support Services - accounting and tax agent services, human resource management services, and corporate secretarial services
    • Pharmaceutical Services - assistance in procuring medical and pharmaceutical products, as well as business support services to companies outside of the healthcare industry
  • HCSS as a medical support platform providing backend operational support and patient referrals takes the burden off the doctors in HCSS’ eco-system as they are able to focus on performing surgeries without the hassle of handling administrative matters.
(5) Recurring Checks + Increased aging population: Colo-rectal Cancer is the top killer in Singapore

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12-10-2019, 01:56 PM. (This post was last modified: 12-10-2019, 02:56 PM by Iosias.)
Post: #2
RE: HC Surgical Specialists Ltd (Catalist:1B1)
[b]Part 2/2 - HC Surgical Specialists Ltd (Catalist:1B1)[/b]

(6) Vietnam Growth
  • Entered into a Memorandum of Understanding with an independent party, to provide consultancy and training services at the Transport Hospital in Hanoi, Vietnam
  • Assist Transport Hospital in establishing a day surgery and endoscopy centre, where HCSS surgeons will have exclusive rights to perform surgical and endoscopic procedures for a stipulated period of time.
(7) Temasek unit invests $5m in HC Surgical Specialists (Jul 2019)
  • Heliconia, a subsidiary of Temasek providing growth capital for Singapore’s small and medium-sized enterprises, has invested $5m in medical services group HC Surgical Specialists (HCSS).
  • Done through a 3-year 5.5% convertible bond at a conversion price of $0.54 per share. Heliconia will also receive a three-year option to subscribe for up to $5m of new ordinary shares in HCSS for an exercise price of $0.62/share.
(8) Other Mentions
  • Sole provider of colorectal cancer tests for AIA clients
Key Strength:
  • Founder led business
  • Founder has majority stake in the business with about 70% of ownership
  • Strong cashflow, moderately recurring backed by increased aging population and health awareness.
  • Dividend paying company. Sustainable based on historical FCF with room for organic growth
  • Business Moat: None-Slight (from network effect)
  • Runway: Long runway of clinic consolidation and ASEAN expansion plans, aging population
Risk:
(1) Keyman Risk - Dr Heah & his team of specialist
  • Clients tend to follow familiar doctors
  • Risk lowers as more clinics come in
  • What happens after the cash-out? Will doctors stay or run by replacement doctors?
(2) Goodwill % Total assets - Wastage of shareholder's money
  • Purchases fueled by fear of missing out (fomo)
  • Purchases fueled by friendships or family / relative relationships (related party transactions) resulting in overpaying for clinics
(3) M&A complications - Consolidated synergies can potentially be over-hyped.
  • Potential of having marginal to near negligible cost savings
  • Headache of having to maintain services standards across all clinics
  • Efforts in talent / people management is almost always grossly underestimated. Every new addition loosely acquired who is not inline with company culture might potentially disrupt company dynamics.
(4) Government control of healthcare cost (5) Endoscopy substitute?
  • X-ray and MRI scans which are non-invasive procedures but patient will still need to go though horrid drink and bowel clensing and intestine inflation (same as endoscopy).
  • Will still need to do endoscopy to perform minor surgery if growth is found. Repeat of the horrible drink and 2nd visit.
  • Most patients would rather go though the entire procedure once every few year.
Management:
  • Heah, Sieu Min (CEO & ED)
  • Ong, Soo Ling (CFO)
  • Ouyang, Yuxia (COO)
TOP HOLDINGS
  • Dr. Heah, Sieu Min - Founder, CEO & ED (43.0%)
  • Dr. Chia, Kok Hoong - Founder, ED & Med Dir (23.4%)
  • Ms. Yeo, Khee Seng Benny - (2.8%)
  • Mr. Leo, Ting Ping Ronald (2.3%)
  • Ms. Low, Mui Choo (1.7%)
STRATEGIC HOLDINGS
  • Shine Venture Capital (0.9%)
  • Apex Capital Group (0.9%)
News
  • Looking out for the heartlanders
(https://www.straitstimes.com/business/companies-markets/looking-out-for-the-heartlanders)
"It was 1984 and I was 20 years old, in national service, when I had this eureka moment," recalled Dr Heah, who graduated from the Royal College of Surgeons in Ireland (Dublin) with a Bachelor of Medicine and Bachelor of Surgery degree in 1990. He started his medical career as a houseman in Ireland, then returned to Singapore in 1991 to complete his national service.
In 1992, he was awarded traineeship in general surgery, and took on the role of medical officer at Tan Tock Seng Hospital. After obtaining his Fellowship of the Royal College of Surgeons (Edinburgh) qualification in 1994, he held various positions at Singapore General Hospital - including medical officer specialist, registrar, associate consultant and consultant of the department of colorectal surgery - till 2004.
He then spent just under three years as consultant in colorectal surgery at Pacific Colorectal Centre (Pacific Healthcare) before starting his own practice - Heah Colorectal Endoscopy & Piles Centre - in 2007 at Mount Elizabeth Medical Centre.
When Dr Heah began his private practice, he considered endoscopy, which would offer a stable income due to demand as well as provide him with opportunities to treat patients with conditions such as haemorrhoids and colon cancer, further supplementing revenues.
Having trained as a surgeon, Dr Heah prefers to be in the operating theatre. "However, to be successful in private practice, one needs to strategise. I decided from the beginning I would focus on endoscopy. Since I don't see any credible substitute for this service, demand should be sustainable over the long term."
(cont) ......................

Financials:
Margins
  • Gross margins - ~50%
  • Operating Profit Margins ~30%
  • FCF Margins ~35%
  • ROE ~25%
  • ROIC ~20%
Health
  • Net Debt/Eqty ~-0.2 (net cash)
Growth
  • Revenues Growth - 20-30% CAGR
  • EBIT Growth - 15-20% CAGR
  • FCF Growth - 15-25% CAGR
Valuations
  • Avg FCF per share used: $0.036 (Currently $0.043)
  • Current Price: $0.56
  • 5Yr DCF:
    • 10% CAGR = $0.58 (MOS: 2.8%)
    • 15% CAGR = $0.74 (MOS: 24.1%)
    • 20% CAGR = $0.90 (MOS: 37.8%)
    • 25% CAGR = $1.06 (MOS: 47.3%)
    • 30% CAGR = $1.22 (MOS: 54.2%)
Others
  • Illiquid with founders holding ~70% + In catalist board
  • high potential to be listed on Main board if it continues what it is doing.
Interest:
  • Vested (Expect biased views in the sharing)
  • Discussions and differing opinions are most welcome!

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13-10-2019, 10:50 AM.
Post: #3
RE: HC Surgical Specialists (SGX:1B1) - Earlystage "Q&M" with fat FCF Margins
Sharing my view, i have little to nil knowledge in this medical industry.

I dont really like such companies in general. If the margins are too large, and we know doctors have large ego, they will ask for pay rise, if they dont get it, they will look for greener pastures or be their own boss. Not sure if HC surgical has such a strong brand that patient come for the brand or come for the doctors. I believe it is usually the doctors.

Shareholders will usually get little out of holding such companies. I feel that there is more financial engineering going on, example this dental one listed in singapore. And then there's another medical one when a few bosses came in to fight over it about 2 years ago, ohohoh, i think that company is the worst, but of course if it has some solid real estate to back it up, then that's a different story. Its daily operations produce cash for doctors not for shareholders, terrible indeed!

The one that i think is of better quality is Raffles medical. It has grown good profit over the decade but we can see that in the past few years, not much solid growth, yet the market is valuing it at 15 to 20% growth.

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20-10-2019, 10:11 AM. (This post was last modified: 20-10-2019, 10:12 AM by Iosias.)
Post: #4
RE: HC Surgical Specialists (SGX:1B1) - Earlystage "Q&M" with fat FCF Margins
(13-10-2019, 10:50 AM)money Wrote: Sharing my view,  i have little to nil knowledge in this medical industry.

I dont really like such companies in general. If the margins are too large, and we know doctors have large ego, they will ask for pay rise, if they dont get it, they will look for greener pastures or be their own boss. Not sure if HC surgical has such a strong brand that patient come for the brand or come for the doctors. I believe it is usually the doctors.

Shareholders will usually get little out of holding such companies. I feel that there is more financial engineering going on, example this dental one listed in singapore. And then there's  another medical one when a few bosses came in to fight over it about 2 years ago, ohohoh, i think that company is the worst, but of course if it has some solid real estate to back it up, then that's a different story. Its daily operations produce cash for doctors not for shareholders, terrible indeed!

The one that i think is of better quality is Raffles medical. It has grown good profit over the decade but we can see that in the past few years, not much solid growth, yet the market is valuing it at 15 to 20% growth.

(1) "If the margins are too large, and we know doctors have large ego, they will ask for pay rise, if they dont get it, they will look for greener pastures or be their own boss."
HC Surgical is helping doctors who want to startup their own clinics by imparting knowledge on admin and management while reducing their risk by partnering them capital wise. This is part of their journey of "becoming their own boss", holding 49% of their clinic's shares and also holding the group shares.

(2) Shareholders will usually get little out of holding such companies. I feel that there is more financial engineering going on, example this dental one listed in singapore.
Think you are mentioning about Q&M dental? For the first 5-6 years since their IPO, they produced over 400% returns for investors. That was until they have consolidated quite a bit of the SG market and seem to be running into cashflow problems. Q&M's FCF margins also seems lower.

Roll-ups or 'growth through acquisitions' are not uncommon and are seen all around us . 
- InvoCare Limited ASX:IVC - Oceania and SG's largest funeral services which acquired SG casket company & simplicity casket
- Facebook: Buying over whatsapp, instagram etc..
- Coca-Cola: Bought over so many brands ppl's lost count.
- Berkshire: Another large conglomerate owning multiple brands via acquisitions.

Partnering a high potential candidate to start up their own clinic by owning 51:49 while allowing them to exit and cash out down the road would be more of an incentive for the doctors to work harder and benifit both themselves and the group.


(3) there's  another medical one when a few bosses came in to fight over it about 2 years ago
Not too sure about this one. Let me know if you remember the name. Would be interesting to read up on it.


(4) The one that i think is of better quality is Raffles medical. It has grown good profit over the decade but we can see that in the past few years, not much solid growth, yet the market is valuing it at 15 to 20% growth.
I think RMG has a solid business model but hit a speed bump with its China expansions since Jan 2017. Over 11 yrs since IPO, it returned over 800% for investors. Market is prob hoping it overcomes the various issues.

I feel HC Surgical has that growth runway for at least the next 3-5 years. Can't say what issues might occur in the future though.

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