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Sunday, 30 October 2016

HC Surgical Specialists Limited

HC Surgical Specialists Limited ("HC Surgical" or "the Company") is offering 30m placement shares at $0.27 each for a listing on Catalist and there is no public tranche. The offer will close on 1 Nov 2016 at 12pm and commence trading on 3 Nov 2016 at 9am. The market cap is S$39.5m based on the IPO price.

The Company is a medical services group primarily engaged in the provision of endoscopic procedures, including gastroscopies, colonscopies and colorectal procedures in Singapore. Actually you can literally "see what they do" from the Company's logo isn't it? I haven't seen a Company that adopts a digestive system as its logo before... imagine if it is a men's health clinic listing next? lol.


HC Surgical is controlled by both Dr. Heah Sieu Min (43.73%) and Dr. Chia Kok Hoong (23.75%) post the issuance.

Holding Structure

Financial Performance

Assuming the service agreement is in place for FY2016 and excluding the listing expenses, the adjusted profit and EPS based on the post IPO shares will be $2.93m and 2 cents respectively. This translate into a listing PER of around 13.5x. 

The Company also provided a pro-forma statement given the restructuring that took place and under that scenario, EPS improved by 21%. Assuming EPS for FY2016 improved to Singapore 2.42 cents, the listing PER will be around 11x

Use of proceeds


The Company intends to pay at least 70% of its profit after tax as dividends for FY2017, FY2018 and FY2019. Assuming EPS is 2 cents, it translates into a yield of 5.1%, which is very decent.

What I like about the Company
  • Listing at an attractive valuation vis-a-vis its peers
  • Strong alignment of interest between founders and investors
  • Attractive healthcare sector that is still "in favor" on SGX
  • Public shares are probably placed to friends and family and tightly controlled
  • Good doctors - Both received many "service awards" and Dr. Chia, in particular, was awarded the Courage Fund Award for SARS cases in 2003
  • The two founding doctors didn't pay themselves huge salary but have in place a profit sharing structure that is tied to the profit generated
  • Stable cash flow generative business with no debt
  • Dividend paying company 
Some of my concerns
  • Key man risk - what if the two surgeons are no longer around? Can the brand continue to survive without them?
  • Too much control held by 2 men. While this is fine for the short run (and unless they are looking for a trade sale at a much higher valuation), it may not be healthy for the long run
  • There will be many post IPO acquisitions as it is the fastest way to grow, execution will be key in integrating good surgeons into the system and failure to retain these talents will disrupt the business. It is probably not easy to manage a team of high ego surgeons? 
  • Singapore market is quite small and competitive unless they expand overseas. While the Company has signed a MOU with Vietnam, it is not easy to remit money "out of Vietnam" 
  • Too much focus on stomach and colon? Hopefully their "logo" will not restrict their expansion of services into other areas.
  • It is quite rare to see that there are no lawyers or accountants on the board, they may want to add more diversity to its board

Singapore O&G launched its IPO back in 30 May 2015 and has done very well since. The "3 chillis" write up is here.  It is currently trading at FY2016 PE of 22x and FY2017 PE of 18.7x. The table is summarized below. I didn't even use Raffles Medical Group or Q&M as they are now trading at 33x and 38x PE respectively.

HC Surgical is attractively priced vis-a-vis its peers. 

Assuming EPS grow by 20% in FY2017 (i am guessing), it will translate into a EPS of 2.4 cents. 

Based on the PE multiple of 20x-25x (being conservatively here), it would translate into a fair value range of 48 cents to 60 cents

This Company is attractively priced and managed by doctors with a heart. They could have definitely asked for a higher valuation. It's a 3 chillis for me.

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