Is this sector that defensive in nature in the current downturn? Our conclusion is that it is only so for those who operates and offer their services with the benefit of owning or leasing their respective flagship hospitals.

Raffles Medical Group (RMG) has full control of its Raffles Hospital after it purchases a remaining 50% stake it does not already own back in mid-2007. This has allows the group to better allocate space to suit its own usage and has produced tremendous operating efficiency.

As a result, RMG was the star in the healthcare sector in the quarterly reporting that has just passed. Its results came in strong as it managed to deliver higher operating margins in this environment. We have upgraded the stock to Outperform after the results.

Parkway Holdings, not surprisingly, reported lower patient admissions but made that up with a 6% growth in net revenue per patient. We still kept our Outperform rating on the stock.

We now prefer Raffles Medical Group to Parkway Holdings for the bigger market cap Healthcare counters.

Thomson Medical Centre is doing well and has continued to deliver consistent earnings growth over the last few years. The group has continued to resist the idea of monetizing its flagship hospital. The lower rental charges to specialists has enticed the exodus of private O&G specialists to practice in TMC, and has been instrumental in driving up the group patients load, both in-patients and out-patients admissions.

Non hospital healthcare providers are having a bad run. Pacific Healthcare turned in a net loss of S$11.8m for FY08, largely due to a S$13.3m write down on its investment in the Singapore Heart Stroke and Cancer Centre, the result of an on-going shareholder dispute with its joint venture partner. Healthway Medical Corp has posted a 13.4% in its 4Q08 earnings, despite a 52.8% jump in revenue to $$24.4m, as cost soared.

Those healthcare providers not owning any hospitals are finding it tough not because of their patients quality or inability to get patients load. We think that they lack the massive economics of scale on the operating level.

Most of these non-hospital operators lack massive procurement advantage in term of pharmaceutical and equipment purchase. Size of medical and administrative staffs is smaller for these operators, and they are dependant on terms set out by the real-estates owners.

Our pick in the sector: Parkway Holdings (TP: S$2.30); Raffles Medical Group (TP: S$0.88).