Revenue correlates with GDP. Parkway has the largest exposure to the private healthcare sector in Singapore. Its Singapore hospital operations contributed 53% of its FY07 revenue and we estimate a slight drop to 51% in FY09F. With economies falling into a deeper than expected recession, we believe that Parkway's earnings will be affected. The Asian Financial Crisis in 1997 and the 2001 recession caused both an economic and healthcare slump in Singapore. With dire 2009 GDP projection declines of -2% to -5%, we expect challenging times ahead for Parkway.

Bad time to gear up. The Novena Hospital project, currently viewed as an expensive venture, will continue to be a weight for Parkway. Its medical suite sale business model is unique in Singapore's healthcare system. While originally optimistic of good sales for its medical suites to offset development costs, the dire economy has altered expectations significantly. Our base case estimates medical suite selling price of S$3150psf, translating to total income of about S$738m. Netting off the land and estimated construction cost of S$1.28b and S$500m respectively, the estimated eventual cost of Novena Hospital is about S$1b. FY08F net gearing is forecasted to be ~0.43x.

Lethargic medical travellers. The destruction of wealth was felt in all segments of society. With a decline in net worth, medical tourists are likely to put off discretionary procedures or to opt for a cheaper location. We are also anticipating the large middle class segment to cut back significantly and for some to even look to subsidised public healthcare for the time being. We are expecting foreign patients to slow, thus impacting Parkway's high revenue per patient segment.

Muted 2009 at best, initiate with HOLD. We are initiating coverage on Parkway with a HOLD rating. Our fair value for its healthcare business is based on a PER type valuation as we believe that the share price will be driven by earnings. Parkway has traded in a large PER band, ranging from 15-20x in 2002 to 30-45x in 2007 on expectation of the spinning off of its hospital assets into a REIT that would translate to special return of capital to its shareholders. The magnitude of return of capital was not substantial.

We peg Parkway to its lower trading band of 16x FY09 EPS to cater to the muted earnings outlook. Adding S$0.14 (pegged at current market value) to our fair value for its 35.5% holding of ParkwayLife REIT, our SOTP fair value amounts to S$1.15. We will become buyers as it approaches S$1.00 (trough valuation).