NH Sigh


Market Scorecard

The main focus on Thursday was the government’s updated take for a local National Health Initiative (NHI). The government’s goals are noble but not realistic. Most people would agree that there are two things people should have access to regardless of their income bracket. Children should have access to quality education, and people should have access to quality basic healthcare. As it stands, we simply do not have the money to implement NHI.

There are many things that a taxpayer base can endure, increasing taxes further and limiting healthcare options is probably one step too far. South Africa already has a high tax burden, which stings a bit more when you watch the state capture enquiry and see how the money is being wasted. Increasing taxes further will more than likely result in an increase of non-compliance. So far, middle-class and high-income families have been able to sidestep poorly run government entities by using private sector alternatives. Now, telling someone that they will have to rely on the state for healthcare, it doesn’t fill people with confidence.

Looking at things from the perspective of healthcare professionals, it doesn’t look much better. If you are a specialist, who has spent over a decade studying and working crazy hours to become qualified, you will no longer be able to charge what you want; your fee will be regulated. Is the government trying to speed up the brain drain locally? For most of our client base, the idea is to live locally and save internationally. This NHI move justifies saving globally; it makes it just that little bit harder to live locally.

On Thursday the JSE All-share closed up 0.56%, and on Friday the S&P 500 closed down 0.66%, and the Nasdaq closed down 1.00%.

Company Corner


Byron’s Beats

On Thursday MTN released results for the 6-month period ending 30 June 2019. Here are the highlights.

Within that revenue number, voice increased by 4.5%, data increased by 19.8%, digital revenue (added services such as music) dropped 42.5%, and fintech increased by 40.7%.

Revenue per region painted an interesting story. South Africa was tough, reflecting the economy. Nigeria showed big improvements after a very rocky patch. Those 2 regions are nearly equal in size, contributing 61.6% of total revenues for the group. Having said that, Nigeria is a lot more profitable than South Africa, due to large 4G and 5G capex locally.

In Nigeria the group is very excited about their banking license. I do worry that somehow the government will clamp down if they do too well out of it. At least now, with a part of the business listed in Nigeria, interests are aligned. As Charlie Munger always says, never underestimate incentives.

Other than South Africa and Iran, all their regions are growing nicely. The company is going through a much better patch. There is still a lot of political risk but that also means less competition and better margins.

The stock was up initially but ended down 2.9%. MTN also wrote off R211m of a R400m payment owed to them by Cell C. The media jumped on this news understandably assuming that Cell C is in huge trouble. Cell C hit back stating that they are up to date with the payments. Either way, this cannot be good news for Cell C.

We still believe this is a long term hold in a sector that just has to grow as Africa craves connection.

Our 10c Worth


One thing, from Paul

Shares of Discovery fell 8.5% on Thursday to R115.47, its lowest level in a year. It’s high was R186 in March 2018. This is upsetting and cause for concern.

Discovery’s five major businesses (in the order of their importance) are the South African life insurer, the South African medical aid administrator, the UK insurer Vitality, the joint venture with Ping An in China and the global Vitality mortality improvement projects.

The threat to the medical aid administration (the second one on the list) posed by the ANC Government’s latest healthcare proposals was the reason for the price fall last week.

The private healthcare industry in this country is funded by medical aids and co-payments, and supplied by doctors, specialists and hospitals. It only really arose after the 1990s, in response to the deterioration of the state hospital sector in this country. It now serves about 9 million people, who are mostly middle-class and employed in the formal sector. Aggregate medical aid premiums in South Africa are approaching R180 billion per year. The schemes have built up reserves of around R60 billion. Discovery is the largest medical aid in the country by far, serving nearly 3 million people.

The ANC Government’s latest brainwave is called the National Health Initiative (NHI), and if it is ever implemented, will basically nationalise private healthcare in South Africa. Instead of fixing the state system, which is riddled with corruption, mismanagement and poor medical outcomes, the ANC Government seems determined to ruin the part of our healthcare system that works well. Remember that the state healthcare system is already expensive by developing country standards and funded by taxpayer contributions.

The ANC Government have used the pretence that private medical aid members are unhappy about co-payments and rising costs of private care, to allege that it would be best if they were to grab those medical aid reserves, and snatch those premiums into the tax system. They seek to control and regulate every aspect of the industry. This is a significant attack on individual liberty in this country.

Here is my interaction with a journalist last week on the topic of the NHI.

Journalist: Could price fixing – setting prices of hospital charges and doctors prices and giving the health minister huge power over private healthcare (he can make all sorts of regulations on this) affect the share prices of private hospital groups and administrators and their general business?

Paul: Absolutely. It’s ridiculous to give the minister any discretion over pricing at all. The current system allows the market to set prices, in a well-balanced struggle between medical-aids and hospital groups. There is no doubt that price fixing will very negatively affect the margins and share prices of both hospital groups and the medical aid scheme administrators. We have already seen their share prices slumping in recent days.

Journalist: Could NHI or proposed ideas mean more emigration of high net worth individuals and highly skilled ones such as doctors?

Paul: Without doubt. This proposal crosses a major line. Forcing individuals to send their private medical savings to a Government run slush fund is akin to banning private schools or private security. High net worth individuals may not leave, but they will probably encourage their children to do so. If the NHI caps what health sector professionals can charge there is no doubt that some of our most talented medical specialists will leave the profession, probably for other countries. I also suspect that if there is no prospect of becoming a highly-paid private specialist one day, many ambitious youngsters will choose to not study medicine.

Journalist: Can SA middle class afford more taxes and when they are told they must join the queue of healthcare with state?

Paul: South African personal income tax levels and marginal rates are already too high, by international standards. Worse still, the inefficiencies of the South African state means that what is collected is not well spent. Taxes are already rising, to pay for the shameful bungling and wastage at State Owned Enterprises. This is very demoralising. If employers are compelled by law to replace the current medical aid contributions (and tax deductions) with payroll taxes sent to the state, there will be considerable resistance. I’m not sure what form that will take, but it could get messy. The really rich will pay those payroll taxes, and then insure themselves privately on top of that at their own expense. They may well seek specialist medical care outside South Africa. I’m not optimistic that these proposals will be blocked by the Constitutional Court. That court has been reluctant in the past to stand in the way of a democratically elected government imposing new taxes.

Journalist: Will skills and investment stay in a country where there is not quality healthcare for the rich? I mean, could a German CEO come and stay in Dainfern or similar and work in a local branch of a company, if he doesn’t have the quality of healthcare he would get now in the Northern suburbs of Jo’burg? Is bad health a country risk?

Paul: Yes. There is no doubt that South Africa’s world class private healthcare is an attraction for investors, executives and visitors. If the ANC government ruins that, this will not be a country that is well-regarded internationally.

We await Discovery’s public response to the NHI proposals. It’s likely that they will take a cautious stance.


Michael’s Musings

As consumers become more environmentally conscious, the private sector is changing to stay relevant with their customers. Have a look at this great initiative from Alibaba’s Alipay – How Alipay Users Planted 100m Trees in China.

In this case, the company is helping the planet by planting trees and by encouraging consumers to leave a smaller carbon footprint. The upside for Alipay is that consumers need to use the Alipay app to qualify for all these benefits. It is a win-win-win; consumers feel good, the environment is helped, and Alibaba retains clients.

Linkfest, Lap it up


As society changes, so do our needs around housing – Are these fireproof, hurricane-proof geodesic domes the post-climate change house of the future?.

Here is one of nature’s way of defending itself against climate change – Red-colored ‘watermelon snow’ found at Yosemite National Park.

Vestact Out and About

This week on Blunders: The ANC Government’s healthcare proposals are unacceptable; Trump is getting his wall, but it’s in Zimbabwe; Blunders 2020 swimsuit edition – Blunders: Episode 151

Signing off

It is a bit of a slow day globally with some Asian markets closed for public holidays, and there is very little economic data out today. The Rands seems to have settled into trading above the $/R15 level, it is currently at $/R15.29. The JSE All-share is higher this morning.

Sent to you by Team Vestact.

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