Under the accord, the two hospitals will have a &lsquo two-way green channel access&rsquo for patients

 

CATALIST-LISTED OUE Healthcare : 5WA 0%, through its joint venture hospital in Changshu, China, has signed a healthcare alliance agreement with a hospital in Shanghai.

 

The hospital, Shanghai Changzheng Hospital, is a public Grade 3A general hospital &ndash the highest of China&rsquo s three-tier grading system for public hospitals &ndash under military jurisdiction. 

 

Meanwhile, OUE&rsquo s Changshu Hospital is the first and only private obstetrics and gynaecology (O& G) hospital in Changshu, Jiangsu province in eastern China. On top of O& G, the 100-bed hospital provides paediatric and other related medical services.

 

Under the agreement, the two hospitals will have a &ldquo two-way green channel access&rdquo for patients. This means that OUE&rsquo s Changshu Hospital will be able to host specialists from Shanghai Changzheng Hospital, who can then practise officially in Changshu Hospital, said the healthcare group in a Monday (Oct 7) press statement. 

 

Staff members from Changshu Hospital will also have the opportunity to attend training courses in Shanghai Changzheng Hospital, it said. The tie-up will also let OUE&rsquo s hospital access a new market segment, comprising military personnel and their family members. 

 

The group&rsquo s chief executive officer Yet Kum Meng believes the healthcare alliance agreement between the two hospitals is testament to the quality and public confidence in the healthcare services offered by OUE. 

 

&ldquo This win-win collaboration through sharing of medical resources between public and private hospitals will enable us to better serve the needs of our patients,&rdquo he said. 

The plot is approximately 4,724 square metres, and is a non-core legacy asset of the company and is currently not in use

 

OUE Healthcare : 5WA 0% is proposing to sell a vacant mixed commercial development plot in Kuala Lumpur for RM125 million (S$35.6 million).

 

The healthcare group expects to receive net cash proceeds of approximately RM120.3 million from the sale, after deducting the sales commission and the estimated professional fees and other related expenses, which will be used for working capital purposes, it said in a bourse filing on Wednesday (May 15) evening.

 

The buyer is a private company incorporated in Kuala Lumpur on May 13. Its primary business is in real estate activities with owned or leased properties, said the group.

 

The plot is a mixed commercial development land with a 99-year leasehold expiring in Apr 29, 2108. It is approximately 4,724 square metres, and is a non-core legacy asset of the company and currently not in use.

 

The book value of the property is RM128 million, indicated the group&rsquo s latest audited financial statements for the financial year ended Dec 31, 2023.

 

No net profit is attributable to the property as it is not in use and does not generate any income or revenue, said the company.

 

An independent valuation report commissioned by the company priced the market value of the site at RM128 million, as at Dec 31, 2023. This was arrived at by comparing recent transactions involving other similar properties in the vicinity. The location, plot size, surrounding developments, facilities and amenities were taken into consideration in the valuation.

 

The proposed disposal is part of the company&rsquo s &ldquo ongoing strategic initiatives to enhance its capital structure to support its business transformation&rdquo . It added that the deal will allow the group can achieve greater capital efficiency and flexibility, as it enables the company to unlock the property&rsquo s value and improve liquidity.

OUE Healthcare Limited 5WA -3.13% has reported earnings of $1.8 million for the 1HFY2023 ended June 30, 79% lower than earnings of $8.4 million in the same period the year before.

 

Earnings per share (EPS) for the period stood at 0.03 cents on a fully diluted basis.

 

The lower earnings came in spite of an 85% y-o-y surge in revenue of $78.7 million which was attributed mainly to the consolidation of First REIT and the medical partners as well as higher revenue from Wuxi Lippo Xi Nan hospital and the China pharmaceutical distribution business. The medical partners refer to respiratory specialists and cardiothoracic surgical practice in Singapore of RMA Global Pte. Ltd. (RMA), The Respiratory Practice (Farrer) Pte. Ltd. (TRPF) and Breathing Heart Pte. Ltd. (BH).

 

On May 23, 2022, the group had incorporated a new subsidiary, Echo Healthcare Management, to acquire the medical partners mentioned above. Echo Healthcare Management is 60% owned by OUE Healthcare while the remaining 40% is owned by a subsidiary of OUE Limited. The acquisition was completed on June 30, 2022.

 

The higher revenue from Wuxi Lippo Xi Nan hospital came on the back of higher demand for outpatient services and medical check-ups. Revenue for the China pharmaceutical distribution business increased due to the sales of biologic products.

 

The revenue growth, however, was tempered by the higher cost of sales, which surged by 5.8 times to $18.2 million mainly from the consolidation of First REIT and the medical partners.

 

Gross profit rose by 53% y-o-y to $60.5 million.

 

Administrative expenses rose while the group incurred other expenses for the 1HFY2023 compared to other income in the same period the year before.

 

Finance costs also rose while share of results of equity-accounted investees, net of tax fell.

 

See also: MoneyMax posts 19.4% y-o-y lower profit before tax of $13.8 mil for 1HFY2023

 

No dividend was declared for the period after taking into consideration the group&rsquo s cash flow requirements.

 

Cash and cash equivalents as at June 30 stood at $72.7 million.

 

OUE Healthcare : 5WA +11.54% (OUEH) will spend up to S$66.1 million to delist Healthway Medical : 5NG +36.36%at S$0.048 per share via a voluntary conditional offer.

 

This comes as OUEH looks to streamline its operations, with the enlarged OUEH group serving as a regional platform for growth, both companies said on Monday (Jul 3).

 

OUEH and its concert parties hold around 42.28 per cent of Healthway Medical&rsquo s total shares as at Monday. The maximum number of offer shares it can acquire is around 1.4 billion, which is about 30.4 per cent of the total number of issued shares.

 

Gateway Active, which owns around 27.36 per cent of Healthway Medical&rsquo s shares, has made an irrevocable undertaking to not accept the exit offer but vote in favour of the delisting.

 

The exit offer is conditional on Healthway Medical receiving shareholders&rsquo approval for the delisting and to amend the company&rsquo s constitution. Shareholders will vote at an extraordinary general meeting to be convened.

 

The exit offer price represents a premium of about 45.5 per cent over Healthway Medical&rsquo s last-traded price of S$0.033 on Jun 28 &ndash the last full trading day before the offer announcement.

 

It also implies a 45.5 per cent premium over its one-month and three-month volume-weighted average prices (VWAP), a 41.2 per cent premium over its six-month VWAP and a 37.1 per cent premium over its 12-month VWAP.

 

Healthway Medical, a private healthcare provider, has more than 100 clinics in its network, including general practitioners and family medicine clinics, offering health screening, specialist, dental and allied healthcare services.

 

OUEH said the offer will enable the group to &ldquo harness potential synergies&rdquo with Healthway Medical to deliver comprehensive healthcare services across preventive, interventive, diagnostics, treatment, aftercare and other ancillary healthcare services.

 

Its offer was made through its wholly-owned subsidiary OUEH Investments &ndash a special purpose vehicle incorporated for the purposes of the exit offer.

 

Yet Kum Meng, CEO of Catalist-listed OUE Healthcare (OUEH) 5WA 0.00% , which recently underwent a name change, has spent the last few years restructuring the company.

 

Mainboard-listed OUE acquired IHC in 2017, a company with a dubious past, before renaming it OUE Lippo Healthcare. However, following its acquisition of 40% of First REIT&rsquo s manager, and subsequently owning 33% of First REIT&rsquo s units, OUEH&rsquo s fortunes have turned around.

 

Says Yet: &ldquo Although the usual threshold for effective control is 50% from an accounting perspective, we own the largest stake of 33% and we have a stake in the manager, so the auditors assess that we have effective control.&rdquo

 

The relationship with First REIT AW9U 0.00% started in 2018, a year after OUE took control of IHC. In February 2018, OUE roped in Itochu as a shareholder when the Japanese company took a 25.3% stake in OUEH via a private placement priced at $78.8 million. Also in 2018, OUEH announced a rights issue and raised just under $150 million in October 2018. Itochu has since sold some of its shares and now holds around 19% of OUEH.

 

The 2018 fundraising opened the way for OUEH to take a 40% stake in First REIT&rsquo s manager and 10% in the REIT for $143 million. Subsequently, First REIT acquired 12 nursing homes in Japan from OUEH for the equivalent of $163.2 million. Of this, $131.5 million was paid to OUEH in the form of First REIT units.

 

&ldquo We increased our stake because of the placement in 2018 and when we transferred our 12 Japanese nursing homes to First REIT. The bulk of the consideration is in units. There was no cash call by First REIT, and we are almost neutral in our P& L and cash flow in terms of holding First REIT units,&rdquo Yet explains.

 

Yet is quick to point out that OUEH&rsquo s largest shareholder, OUE, which owns 70% of the healthcare company has three pillars: property and asset management consumer and healthcare.

 

Excluding First REIT, contributions from its other businesses are small. OUEH is still building up its other businesses such as hospitals in China and Myanmar, and last year it acquired some specialists in Singapore.

 

On May 16, its share price surged by 19% to 3.1 cents with 41 million shares changing hands, before receding. The only announcement that the company made was the opening of an obstetrics and gynaecology hospital in Changshu, near Suzhou.

 

In FY2022 ended December 2022, OUEH reported a net profit of just $4 million. However, its revenue, which includes First REIT&rsquo s rental income, surged to $119 million because it consolidated First REIT&rsquo s financials.

 

However, the company was affected by non-cash items such as net fair value losses relating to investment properties and impairment of investment in associate and joint ventures. The company is also affected by foreign exchange losses, some of which were from First REIT.

 

&ldquo In terms of revenue and earnings. IHC in 2017 had almost no operating businesses. The only income-generating assets were the 12 nursing homes in Japan. We took some trouble unravelling these legacy issues,&rdquo Yet recounts.

 

Restructuring OUE Healthcare

 

The previous shareholders and management of IHC had credit facilities from Crest Capital. The facilities comprised a standby facility of up to $20 million and the Geelong facility of $11.5 million. The facilities were secured by IHC Medical Re, which in turn owned three properties in Australia, and personal guarantees.

 

&ldquo The previous management had a dispute with Crest and Crest refused to return the standby facilities. The money was lent to IHC to buy its own shares and that was prohibited. We managed to void the standby facility and we managed to get some funds back from the disposal of the Australian properties,&rdquo Yet recalls.

 

OUEH had a separate dispute regarding a piece of land and a building in New District, Wuxi, China. In 2013, IHC acquired a 74.97% stake in a company that owned a China-based entity which held the Wuxi New District Phoenix Hospital.

 

According to OUEH&rsquo s FY2022 financial statement, in 2017, Weixin Hospital Investment Management (Shanghai), a company controlled by David Lin, sought a court order for the shares in the Wuxi hospital to be transferred to Weixin. The Shanghai courts ruled in favour of Lin. In 2018, OUE Healthcare commenced arbitration proceedings in Singapore against Lin. On Jan 7, 2019, a final arbitration was awarded against Lin.

 

Subsequently, OUEH obtained a judgement in terms of the arbitration award on November 28, 2019. Getting the judgement enforced in China took another two years. In 2019, the company started recognition and enforcement proceedings in Hong Kong, Taiwan and Shanghai against Lin to enforce the award. Finally, on Dec 31, 2022, OUEH obtained permission from the respective authorities concerned to enforce the award in Hong Kong, Taiwan and Shanghai.

 

During the litigation period against Lin, Yet had other problems to solve. For one, IHC was deeply indebted. It had multi-currency term notes (MTN) which carried double-digit interest rates. The covenants were triggered and the MTN holders had to be repaid.

 

&ldquo OUE put in a $165 million shareholders loan to pay the MTNs that were defaulted. In 2021, we converted the OUE loans together with accrued interest which totalled $190 million into perpetual convertible securities, which is a show of support from our controlling shareholder,&rdquo Yet describes.

 

New businesses

 

While the restructuring was underway, Yet had to look for operating businesses. In January 2018, the company formed a joint venture with China Merchants Group. The joint venture CM Lippo acquired a plot of land that is being developed into Prince Bay Hospital, Shenzhen, China. The hospital will be ready in 2024.

 

&ldquo This is an asset-heavy model where we jointly develop and operate a Grade-2 general hospital,&rdquo Yet says.

 

The second model is the asset-light model. On May 15, OUE Healthcare opened the O& G hospital in Changshu, near Suzhou, China. Here, the company leases the hospital from China Merchants Group and operates the hospital. Separately, OUEH owns 70% stake of the operating company that operates Wuxi Lippo Xi Nan Hospital.

 

&ldquo Hospitals are not usually profitable from their first day of operations. We look at the total investment of the land, the building, medical equipment, working capital losses that we have before and after operations. We have some financial models where when the hospital matures, the revenue should be the sum of the investments,&rdquo Yet reasons.

 

&ldquo In Changshu, we don&rsquo t own the asset. It&rsquo s not the best place for real asset investment. But I still put in money, I do the fit-outs, and bear the upfront working capital losses, and we also use the same numbers to size up the future performance,&rdquo Yet says.

 

In 2018, OUEH also formed a joint venture with First Myanmar Investments to own and operate three hospitals, one medical centre and two clinics in Myanmar. These entities have yet to contribute to OUEH&rsquo s revenue stream.

 

In June 2022, OUEH&rsquo s joint venture company with OUE established a medical partnership with three medical specialist groups of 11 doctors in Singapore, including two leading Respiratory Specialist Practices as well as a Cardiothoracic Surgery Practice.

 

A sponsor&rsquo s role

 

All these businesses are adding revenue to OUEH, but the largest contributor remains First REIT. In FY2022, China contributed $4.76 million to revenues, compared with $70.2 million from Indonesia, $20.5 million from Singapore and $15.5 million from Japan.

 

Outside of China, the contributions are mainly from First REIT, which owns three nursing homes in Singapore, 14 in Japan, 11 hospitals in Indonesia, 2 integrated hospitals & malls, 1 integrated hospital & hotel, and 1 hotel & country club, also in Indonesia.

 

In the S-REIT model, sponsors, who own the manager and a stake in the REIT, are meant to support the REIT in providing it with a pipeline and the financial help for the REIT to acquire assets. Here is where OUEH and First REIT appear to diverge.

 

In a continuation of its 2.0 growth strategy, announced in early 2022, First REIT plans to continue its pivot to developed markets, reshaping its portfolio for capital efficient growth, coupled with divesting non-core assets. These would include the mall, hotels and country club in Indonesia. In 2022, First REIT divested Siloam Hospitals Surabaya for $40.9 million, at a 143% premium to its acquisition price.

 

In a recent interview, Victor Tan, CEO of First REIT&rsquo s manager, had said his goal is to continue expanding into developed markets to more than 50% of its AUM. As at March 31, Japanese nursing homes comprised 25.1% of AUM, and Singapore 2.8% of AUM. OUEH does not have any assets in Singapore and Japan to form a pipeline. Its focus is on operations in China and Myanmar.

 

OUEH took a look at the government land sale for assisted living in Parry Avenue, launched for sale by URA and the Ministry of Health. The land lease was for 60 years. The tenders were from Evia Real Estate, Allium Healthcare Holdings, Yuan Ching Development, YK Realty, Pre 20 and United Medicare Development.

 

The Singapore nursing homes are providing First REIT with an NPI yield of 8%, Tan said. With borrowing costs upwards of 4%, First REIT would need a yield on cost of 10% to 11%.

 

How does First REIT&rsquo s strategy align with OUEH&rsquo s which is expanding into developing and frontier markets? Yet indicates that OUEH took a look at Parry Avenue. &ldquo We need to balance between the real estate part and the service part of things,&rdquo he says. Margins for operating nursing homes in Singapore can be challenging.

 

&ldquo We do the business and operations, and First REIT holds the real estate. First REIT has certain requirements and I must generate a sustainable P& L to sign a master lease. It&rsquo s a strategic partnership. We can come in to help them to size the business of the tenant. The biggest worry is the tenant. The tenant&rsquo s credibility and business viability has an impact on the sustainability of the rental,&rdquo Yet says. &ldquo China assets are not in the best tax regime to put into a REIT,&rdquo he adds.

 

The advantage of holding First REIT for OUEH is its liquidity. &ldquo We hold the units, which is definitely more liquid than the bulkiness in real assets. We have been using these units to some extent with the banks. I think it has been a very useful exercise,&rdquo Yet says.