Sri Lanka’s Healthcare Industry

The Rising Demand for Private Healthcare in Sri Lanka

Investing in certain areas of Sri Lanka’s stock market is intriguing, despite issues the country is currently facing, namely its high level of debt and the slowdown in its exports.  I outlined a bull case for Sri Lanka in the insight Sri Lanka Is Intriguing: Initiating Coverage, and plan to keep following the market for select investment opportunities.  To review, here are some benefits I highlighted for Sri Lanka’s healthcare industry, a clear cut way to access Sri Lanka’s economic rise:

  • 9% of its population is currently over 65 years old, and this amount is likely to double by 2030.  This presents a strong opportunity for increased demand for hospitals, specifically private hospitals.
  • Private Hospitals have achieved 21% CAGR in the past four years, compared to the public sector’s growth of 10%.
  • 70% of the country’s population uses private hospitals.
  • Health expenditure per capita in Sri Lanka is only $127, significantly lagging behind much of emerging Asia.

Sri Lanka does have a nationalized healthcare system which provides free healthcare to its population, yet there still is a strong demand for private hospitals.  Sri Lanka’s healthcare spending as a % of GDP is among the lowest in Asia, and patients often still have to pay for drugs and medical expenses.  Rising incomes in the future will result in the increased capacity for the population to switch to private healthcare, as many of them may have this preference but have trouble affording it.  The government spends approximately 44% of its spending on healthcare for this universal system, yet it is currently not sufficient enough to meet the rising demand.  The demand for private healthcare usually results from the need for treatment of more complex issues, and the public healthcare system often has long waiting lists for complex medical issues.  Most of the country’s private hospitals are limited to Colombo and its suburbs although some private hospitals are also located in other cities such as Gampaha, Kandy, and Galle.  Consequently, growth for private hospitals has historically been twice as strong.

Public hospitals currently account for 73% of hospitals and 93% of the bed capacity as of the end of 2014.  The country’s top 5 private hospitals currently account for around 45% of the market for private hospitals. These hospitals include Dr. Neville Fernando Teaching Hospital (NFTH), Asiri Hospitals Holdings PLC, Nawaloka Hospitals PLC, Durdans Hospital, and The Lanka Hospitals.

Demographics: Increasing Aged Population

Age % of Population
0-14 24.7%
15-24 14.9%
25-54 42.1%
55-64 9.5%
65 and older 8.7%

Source: IndexMundi

Sri Lanka does have compelling high youth demographics, with nearly 40% of its population being under 24 years old.  The added bonus for the market is the country’s soon to be increased aged population, which presents ample potential for growth in the already thriving healthcare market.

Sri Lanka’s Healthcare Spending Lags Behind Emerging Asia

I have previously covered how Vietnam’s healthcare spending significantly lags behind other markets in emerging Asia, which consequently presents a strong case for value investing in the pharmaceutical industry. Sri Lanka’s healthcare expenditure per capita is also slightly below Vietnam, making this frontier another strong market to access early.  The country’s minimum wage also falls below other frontier markets, currently at approximately $67/month.

Country Health Expenditure(% of GDP) Heath Expenditure Per Capita(USD)
Bangladesh 2.8% 31
Cambodia 5.7% 61
China 5.5% 420
India 4.7% 75
Indonesia 2.8% 99
Japan 10.2% 3,703
South Korea 7.4% 2,060
Laos 1.9% 33
Malaysia 4.2% 456
Mongolia 4.7% 195
Myanmar 2.3% 20
Pakistan 2.6% 36
Philippines 4.7% 135
Singapore 4.9% 2,752
Sri Lanka 3.5% 127
Thailand 6.5% 360
Vietnam 7.1% 142
South Asia 4.4% 67

Source: WorldBank

Sri Lanka’s per capita income also lags behind other emerging markets, and the healthcare industry is poised to be one of the main beneficiaries of this rise in the future.  Sri Lanka’s current GDP per capita is $3,600 and has achieved CAGR of 13% over a ten-year period(2015).

Medical Tourism: Another Significant Catalyst

I also previously noted how Sri Lanka’s tourism industry was on the rise, which is one of the key benefits of its economy at the moment.  Sri Lanka currently accounts for approximately 9% of Asia’s medical tourism, and Asia is the top global destination for medical tourism.  This presents a strong opportunity for private hospitals to benefit from the increased trend of medical tourism in Asia, as Sri Lanka’s unsung tourism industry also continues to flourish.  Sri Lanka does have the comparative advantage of having a large number of English speaking staff (India is another to note), while facilities may lag behind other markets.  Medical tourists account for approximately 15% of patients treated in Sri Lanka’s private hospitals.

Uninsured Population

Another catalyst for this area’s growth includes the increased expenditure from insured patients.  As of 2013, insurance payments only accounted for 4% of private healthcare spending.  An increased insured population in the future would result in citizens having increased capacity to spend on private healthcare, allowing private hospitals to grow at the expense of the existing dominant public hospitals.

The Price is Right

Sri Lanka does luckily have several options for listed equity in this sector, and the valuation for these companies is quite reasonable considering the low investment risk and the higher valuation for other emerging markets.  This significant discount is coupled with strong industry growth and the potential for increased growth in the future due to the potential for Sri Lanka’s middle class to rise.  This growth has also been reflected in the financial performance of listed equity operating in this industry.

Company Country P/E
Shifa International Hospitals Pakistan 22.52
Ceylon Hospitals Plc (CHLN SL) Sri Lanka 8.59
Lanka Hospital Corp Plc (LHCL SL) Sri Lanka 17.93
Asiri Hospitals Holdings Plc (ASIR SL) Sri Lanka 28.74
Nawaloka Hospitals Plc (NHL SL) Sri Lanka 33.43

Source: Reuters

All four hospitals in Sri Lanka collectively trade at a PER of 22.2, a considerable premium to the MSCI Sri Lanka Index, which has a PER of approximately 12.88.  All four stocks can also be considered growth stocks, that have had consistent financial performance amid the growth of Sri Lanka’s healthcare industry.  All four companies delivered an average of 18.7% growth in revenue this year and have returned an average of 23.3%, compared to the CSE’s 1-year decline of 5.37%.  The sector is intriguing and currently one of the strongest areas investors should consider amid some of the setbacks and uncertainty ahead for the country.

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