IHH Healthcare Berhad TP: RM6.65 (+10.8%) 1QFY17 Weighed by Pre-operating & Start-up Costs

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1 A Member of the TA Group MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: RESULTS UPDATE Monday, May 22, 2017 FBM KLCI: 1, Sector: Healthcare IHH Healthcare Berhad TP: RM6.65 (+10.8%) 1QFY17 Weighed by Pre-operating & Start-up Costs THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Last Traded: RM6.00 Wilson Loo Tel: wilsonloo@ta.com.my HOLD Review IHH s 1QFY17 net profit increased by 99.6% YoY to RM470.0mn. However, excluding chunky exceptional items amounting to RM268.3mn, core net profit (CNP) declined by 15.3% YoY to RM201.8mn. Exceptional items include the gain on disposal of a 6.07% stake in Apollo Hospital Enterprise Limited (Apollo Hospitals) of RM313.4mn and exchange loss on net borrowings of RM94.1mn. CNP was below ours and consensus s expectations at 17.6% and 18.4% respectively primarily due to higher than expected pre-operating and start-up costs from the new Gleneagles Hong Kong Hospital. Overall, the group s underlying growth momentum sustained with revenue growing by 8.5% YoY to RM2.7bn. This was driven mainly by organic growth in home markets (Singapore, Turkey, Malaysia, India) followed by acquisitions, namely that of Tokuda Group and City Clinic group in June At the bottom line however, EBITDA and CNP respectively declined by 8.3% YoY to RM565.6mn and 15.3% YoY to RM201.8mn primarily due to the increase in costs associated with the new Gleneagles Hong Kong Hospital and Acibadem Altunizade Hospital. Meanwhile, the group s financial standing remained robust with net gearing easing QoQ from 0.21x to 0.18x with support from the disposal of 6.07% stake in Apollo Hospitals. Parkway Pantai: In constant currency terms, 1QFY17 s revenue grew by 5% YoY while EBITDA declined by 13% YoY. The higher revenue was driven by both increased inpatients admissions (Singapore +4.1% YoY, Malaysia +3.1% YoY, India +14.1% YoY) and revenue per patient (Singapore +2.9% YoY, Malaysia +10.8% YoY, India +1.8% YoY). Operations at newer hospitals like Mount Elizabeth Novena Hospital, Pantai Hospital Manjung, Gleneagles Kota Kinabalu Hospital and Gleneagles Medini Hospital continued to grow. Meanwhile, pre-operating costs from the new Gleneagles Hong Kong which amounted to RM81.1mn contributed to the 4.6%-points YoY erosion in EBITDA margins to 21.0%. Acibadem Holdings: In constant currency terms, 1QFY17 s revenue and EBITDA respectively increased by 30% YoY and 10% YoY. The robust top line performance was attributed to more complex cases undertaken, the increase in foreign patients, the continuous ramp up of Acibadem Atakent University Hospital and Acibadem Taksim Hospital as well as the acquisition of Tokuda Group and City Clinic Group. Inpatients admissions and revenue per patient both grew by 33.8% YoY and 4.0% YoY. EBITDA margins however declined by 2.9%-points YoY to 16.0% due to preoperating losses of RM5.2mn from the new Acibadem Altunizade Hospital, higher operating costs and rental expenses, and the Turkish Lira s depreciation against the USD and Euro. QoQ, growth in inpatient admissions and revenue per patient was observed across home markets (Singapore, Malaysia, Turkey, India) CNP however declined by 9.3% QoQ to RM201.8mn due to incremental depreciation, amortisation and finance costs associated with the new Gleneagles Hong Kong Hospital and Acibadem Altunizade Hospital. Share Information Bloomberg Code IHH MK Bursa Name IHH Stock Code 5225 Listing Main Market Share Cap (mn) 8,231.7 Market Cap (RM'mn) 49,417.6 Par Value (RM) wk Hi/Lo (RM) 6.73/ mth Avg Daily Vol (000' shrs) 5,976.6 Estimated Free Float (%) 18.4 Beta 0.8 Major Shareholders (%) Khazanah Nasional Bhd Mitsui & Co Ltd EPF Central Depository Pte Ltd Forecast Revision FY17 FY18 Forecast Revision (%) (25.9) (8.6) Net profit (RM'mn) ,349.5 Consensus 1, ,302.0 TA/Consensus (%) Previous Rating Hold (Maintained) Financial Indicators FY17 FY18 Net gearing (x) CFPS (RM) Price/CFPS (x) ROA (%) ROE (%) NTA/Share (RM) Price/NTA (x) Scorecard % of FY vs TA 17.6 Below vs Consensus 18.4 Below Share Performance Price chg (%) IHH FBMKLCI 1 mth (1.3) mth (3.2) mth (6.5) mth (7.6) 8.6 (12-Mth) Share Price relative to the FBM KLCI Source: Bloomberg Page 1 of 5

2 Impact TA Securities Our FY17/FY18/FY19 earnings estimates are reduced by 25.9%/8.6%/6.1% upon accounting for the higher costs under Parkway Pantai and disposal of 4.78% stake in Apollo Hospitals. Updates, Outlook & Briefing Highlights The group announced that the group had on 18 May 2017 disposed of its remaining 4.78% stake in Apollo Hospitals for a total cash consideration of INR8.2bn (RM555.1mn) to multiple institutional shareholders. The extraordinary gain of RM245.6mn translates into a return on investment of 80.4%. We are positive and not surprised on the group s exit given its lack of control and influence in Apollo Hospitals. The disposal marks consolidation and rationalization of the group s investments in India. We estimate the disposal proceeds to ease the group s net gearing from 0.18x to 0.16x and contribute positively to earnings, albeit marginally by circa 1% from the corresponding increase in interest income. Management remains optimistic on the sustained growth in demand for private healthcare services in its home and growth markets. To capitalize on this, apart from focusing on organic growth fuelled by its stream of expansion projects in Malaysia (+360 beds), Turkey (+510 beds) and China (+870 beds), management is concurrently exploring strategic brownfield acquisitions. With regards to Gleneagles Hong Kong Hospital, which recently commenced operations on 21 March 2017, management alluded that operations have been going smoothly with the hospital experiencing increasing frequency of day procedures as well as utilisation of its operating theatres. Further, the 600 visiting consultants on top of the permanent hires has been a key draw to the hospital. Greater traction is expected ahead, particularly when the hospital s engagement with insurers begin in June To ride through a challenging operating environment in 2017, focus remains on efforts to control cost pressures and improving operational efficiencies. Also mindful of the group s vulnerability to foreign exchange movements, especially by Acibadem, management alluded that it is currently exploring de-risking options. Valuation & Recommendation Our TP is revised to RM6.65/share (from RM6.40/share) upon rolling forward our valuations to CY18. This translates to an implied EV/BITDA and PE multiple of 19.2x and 40.6x. Reiterate Hold. Figure 1: Forward PER Figure 2: Forward EV/EBITDA x Jan-13-1SD: 43.9x Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Average: 51.8x Apr-15 Jul-15 Oct-15 Jan-16 +1SD: 59.8x Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 x Jan-13-1SD: 19.2x Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 +1SD: 25.5x Average: 22.3x Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Source: Bloomberg, TA Securities Source: Bloomberg, TA Securities Page 2 of 5

3 Table 1: SOTP Valuation (RM mn ) Method Multiple Value Stake Singapore EV/EBITDA 25 28, % Malaysia EV/EBITDA 20 9, % Turkey EV/EBITDA 22 20,767 60% International EV/EBITDA na 60,075 Less: Net debt/(cash) 808 Less: MI 8,307 Add: MI Net debt 1,274 52,233 PLife REIT Consensus 1,795 36% IMU Health P/E % Total equity value 54,944 Shares outstanding (mn') 8,236 TP RM6.65 Table 2: Earnings Summary (RM mn ) FYE Dec FY15 FY16 FY17F FY18F FY19F Revenue 8,455 10,022 12,198 14,064 16,326 EBITDA 2,219 2,189 2,428 3,078 3,611 Depreciation and amortisation EBIT 1,529 1,389 1,508 2,130 2,626 Net finance cost Associates & JV PBT 1, ,887 2,010 2,561 Income tax expense MI Net profit (-MI) ,283 1,350 1,631 Core net profit (-MI) ,350 1,631 EPS (sen) EPS growth (%) Core EPS growth (%) DPS (sen) Dividend yield (%) Core PER (x) Table 3: Peer Comparison Company Price TP Recomm. Country Mkt Cap EPS Growth (%) PER (x) EV/EBITDA (x) ROE (%) Dividend Yield (MYR mn) CY17 CY18 CY17 CY18 CY17 CY18 CY17 CY18 CY17 CY18 IHH Healthcare Bhd RM6.00 RM6.65 Hold Global 49, Ramsay Healthcare Ltd AUD N.R. N.R. Australia 45, Primary Healthcare Ltd AUD 3.74 N.R. N.R. Australia 6, Phoenix Healthcare Group Co Ltd HKD N.R. N.R. Hong Kong 8, Harmonicare Medical Holdings Ltd HKD 3.83 N.R. N.R. Hong Kong 1, Apollo Hospitals Enterprise Ltd INR 1,261 N.R. N.R. India 11, Fortis Healthcare Ltd INR 204 N.R. N.R. India 7, Mitra Keluarga Karyasehat Tbk PT IDR 2,210 N.R. N.R. Indonesia 10, Siloam International Hospitals Tbk PT IDR 12,000 N.R. N.R. Indonesia 5, KPJ Healthcare Bhd RM4.15 RM4.60 Buy Malaysia 4, Ryman Healthcare Ltd NZD 8.49 N.R. N.R. New Zld. 12, Bangkok Dusit Med Service THB N.R. N.R. Thailand 35, Bumrungrad Hospital Rub Co THB N.R. N.R. Thailand 16, Vibhavadi Medical Centre PCL THB 2.76 N.R. N.R. Thailand 4, Bangkok Chain Hospital PCL THB N.R. N.R. Thailand 3, Chularat Hospital PCL THB 2.26 N.R. N.R. Thailand 3, Weighted Average 29, Weighted Average Small Mkt Cap (<RM10bn) 5, Weighted Average Large Mkt Cap (>RM10bn) 35, Page 3 of 5

4 Table 4: FY16 Results Analysis (RM mn ) FYE Dec 1QFY16 4QFY16 1QFY17 QoQ YoY % % Revenue 2, , , Parkway Pantai 1, , , Acibadem Holdings IMU Health Plife REIT Others EBITDA Parkway Pantai Acibadem Holdings IMU Health Plife REIT Depreciation Amortisation Forex Finance income Finance costs Associates JV Others nm PBT Tax MI Net profit , Core net profit Profitability ratios (%) %-points %-points EBITDA margin Parkway Pantai Acibadem Holdings IMU Health Plife REIT PBT margin Tax rate Net profit Core net profit Operating statistics Inpatient traffic % % - Singapore 18,094 18,174 18, Malaysia 49,026 47,318 50, Turkey 39,296 50,470 52, India 14,033 15,838 16, Revenue per patient % % - Singapore (SGD) 9,113 9,074 9, Malaysia (RM) 5,583 6,151 6, Turkey (TL) 7,321 6,949 7, India (INR) 119, , , Page 4 of 5

5 (THIS PAGE IS INTENTIONALLY LEFT BLANK) Stock Recommendation Guideline BUY : Total return within the next 12 months exceeds required rate of return by 5%-point. HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point. SELL : Total return is lower than the required rate of return. Not Rated: The company is not under coverage. The report is for information only. Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium. Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD(14948-M) (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 5 of 5