RM UNDERPERFORM

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1 KPJ RM UNDERPERFORM Anand Pathmakanthan anand.pathmakanthan@clsa.com September 2014 Malaysia Healthcare Reuters Bloomberg KPJH.KL KPJ MK Priced on 30 September 2014 KLSE 1, M hi/lo RM4.13/ M price target RM4.00 ±% potential +3% Shares in issue 1,145.0m Free float (est.) 28.0% Market cap US$1,211m 3M average daily volume RM5.2m (US$1.6m) Foreign s'holding 10.1% Major shareholders Johor Corp 45.7% EPF 12.6% Stock performance (%) 1M 3M 12M Absolute (2.1) Relative (6.2) Abs (US$) (2.6) 12.5 (3.6) Oct-12 Apr-13 Oct-13 Apr-14 KP J (LHS) Source: Bloomberg (RM ) (% ) Rel to Comp (RH S) Healthier but still challenged Outperforming 1H14 results were underpinned by better-than-expected occupancy at new hospitals (5 in two years) and improved cost control measures. While our company visit confirms consolidation of its overseas investment drive and potential resolution of overhanging legal suit, a fat newbuild pipeline (c.30% increase in bed capacity by 2016) comes with execution and gearing pressures that pose downside risk to margins. We revise earnings, TP higher and raise rating to U-PF; however, IHH is our preferred healthcare play for stronger earnings growth, balance sheet. Malaysia: aggressive hospital build-out KPJ currently has 25 hospitals in its network in Malaysia, with 9 more in the pipeline through to 2018; the latter includes the new flagship 390-bed Bandar Dato Onn (to open 2H15) which will be competing with a better-positioned IHH (via Gleneagles Medini) for Singaporean patients. While maturing older capacity is a support, we nonetheless expect 1H14 margin outperformance to moderate going forward on start-up costs drag, especially as much of the new capacity is in less developed areas with a correspondingly longer break-even. Overseas assets, legal case: positive expectations Having accumulated an operationally and geographically disparate portfolio of overseas hospital assets over the last few years, management has no plans for further acquisitions but will instead focus on ensuring existing investments maintain their current trend towards self-sustenance. The RM70mn Penawar legal suit award against KPJ is being appealed to the Federal Court after having been overturned by the Court of Appeal; case management is set for Oct 7 th ; we believe this legal overhang has a good chance of being dismissed. Balance sheet: some room to manoeuvre With current tranche of gestating hospitals unlikely to be ready for injection into 49%-owned Al- Aqar healthcare REIT until at least 2016 (last injection was in 2012) and having just completed a rights issue, KPJ is looking at a debt issue and/or sale of HQ building to fund planned capex. Gross gearing ratio is expected to remain <125% cap but higher interest charges will weigh. Revising earnings, TP higher; raised to U-PF In line with a significant re-rating of the Asian healthcare sector, we raise applicable EV/EBITDA multiple from 13.3x to 15.2x (maintain 20% discount to peer average for execution risk), with 8-13% earnings revision driven by better-than-expected occupancy (revenue) and cost-containment (margin). Financials Year to 31 December 12A 13A 14CL 15CL 16CL Revenue (RMm) 2,096 2,332 2,614 3,048 3,579 Rev forecast change (%) Net profit (RMm) NP forecast change (%) EPS (sen) CL/consensus (15) (EPS%) EPS growth (% YoY) (12.1) (41.3) (5.8) PE (x) Dividend yield (%) ROE (%) Net debt/equity (%) Upgrade earnings & recommendation Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com

2 After a flurry of overseas asset acquisitions over the last few years, KPJ is capping further forays with the Bangladeshi management agreement to be a negligible drag / distraction KPJ has been active in acquiring overseas hospital assets over the last few years, kicking off with Australia-based Jeta Gardens in 2011 and followed up by investments in Indonesian and Thai hospitals over (see chart below). However, weak returns and need to focus management resources on aggressive domestic expansions means KPJ s overseas strategy is now in consolidation mode, with new ventures unlikely. Rising operating scale in Australia and a change in strategy in Indonesia i.e. to focus on the premium market (less volume but better margins, a strategy better suited for a market where doctors are a scarce commodity) are leading to narrowing losses, with the ultimate aim being for these assets to be self-sustaining. KPJ has, since April 2014, begun accepting outpatients for its hospital operation in Bangladesh i.e. the 250-bed Sheikh Fazilatunnesa specialist hospital in Dhaka. To recap, KPJ does not own this hospital its construction was paid for by the Bangladeshi government with the aim of reversing the outflow of patients and medical staff to neighbouring countries, principally India. KPJ will operate the hospital, being responsible for managing opex and sourcing medical staff, rent-free for 10 years. KPJ s underlying capital commitment is a modest RM10mn, with the hospital expected to incur the usual gestation stage losses albeit modest and on a declining trend once inpatients begin to be accepted into Figure 1 KPJ: corporate structure, Company Focus is on Malaysian expansion, with 9 new hospitals (+43% bed capacity) in the pipeline Growth going forward will be focused on new hospital capacity in Malaysia, with the underlying target being to open 2 hospitals a year up to The group currently has 9 hospitals in the pipeline (all having secured zoning permission), which will take total number of hospitals in Malaysia from 25 currently, to 34 i.e. c.43% growth in hospital bed capacity. In managing gestation costs (hospitals can take anywhere from 18mths to 5 years for PBT breakeven), management is looking for better-than-expected occupancy from mature (e.g. Damansara, Ampang) and recently-completed hospitals (Klang, Pasir Gudang, KK, Rawang and Muar) to mitigate for margin drag from new capacity, many of which are ex-urban and hence likely to require a longer payback period notwithstanding a progressive ramping up of capacity. 30 September 2014 anand.pathmakanthan@clsa.com 2

3 Figure 2 KPJ: list of hospitals (existing + under construction) 1 Region Malaysia: existing hospitals Location Bed capacity Comments: Central KPJ Ampang Puteri Specialist Hospital Selangor KPJ Damansara Specialist Hospital Selangor KPJ Selangor Specialist Hospital Selangor KPJ Tawakkal Specialist Hospital Kuala Lumpur KPJ Kajang Specialist Hospital Selangor Sentosa Medical Centre Kuala Lumpur KPJ Rawang Specialist Hospital Selangor 160 Acquired April KPJ Klang Specialist Hospital Selangor 220 Opened May Northern 1424 KPJ Ipoh Specialist Hospital Perak KPJ Penang Specialist Hospital Penang Taiping Medical Centre Perak Kedah Medical Centre Kedah Sri Manjung Specialist Centre Perak 30 Acquired in May Southern 680 KPJ Johor Specialist Hospital Johor KPJ Puteri Specialist Hospital Johor KPJ Seremban Specialist Hospital Negeri Sembilan Kluang Utama Specialist Hospital Johor KPJ Muar Specialist Hospital Johor 120 Opened in 2Q14 19 KPJ Pasir Gudang Specialist Hospital Johor 136 Opened May East Coast 827 KPJ Perdana Specialist Hospital Kelantan Kuantan Specialist Hospital Pahang East Malaysia Kuching Specialist Hospital Sarawak Damai Specialist Hospital Sabah KPJ Sabah Specialist Hospital Sabah 250 Opened Jan Sibu Specialist Medical Centre Sarawak 50 CURRENT MALAYSIA BEDS (Capacity): 3539 Total licensed beds: c.2,800 Malaysia: hospitals under construction Location Bed capacity (open in phases) 26 KPJ Pahang Specialist Hospital Pahang 188 Expected completion 4Q14 27 KPJ Perlis Specialist Hospital Perlis 90 Expected completion 2Q15 28 KPJ Bandar Dato' Onn Specialist Hospital Iskandar, Johor 390 Expected completion 4Q15 29 KPJ Miri International Specialist Hostpial Sarawak 120 Expected completion 2Q16 30 KPJ Klang Bayu Emas Selangor 172 Expected completion in 4Q16 31 KPJ Nilai - planning stage Negeri Sembilan 240 Expected completion in 4Q16 32 KPJ UTM - planning stage Johor KPJ Port Dickson - planning stage Negeri Sembilan 90 Expected completion in 3Q17 34 KPJ Melaka - planning stage Melaka MALAYSIA BEDS IN PIPELINE (Capacity): beds in confirmed pipeline (% of existing beds) 43% Ex-Malaysia hospital operations Location Bed capacity (open in phases) 30 September 2014 anand.pathmakanthan@clsa.com 3

4 Indonesia, Company RS Medika Permata Hijau Indonesia (Jakarta) 92 Acquired 80% stake in 2012 RS Medika Bumi Serpong Damai Indonesia (Jakarta) 56 Acquired 80% stake in 2012 Sheikh Fazilatunnesa Hospital Bangladesh (Dhaka) TOTAL BEDS (Group Capacity): 3937 Other ex-malaysia healthcare investments Jeta Gardens retirement and aged care resort Australia (Brisbane) 108 (+ 72) beds / 31 villas 10-yr lease; started operating the hospital from 2Q14 Acquired 51% stake Nov 2011 Vejthani Hospital Thailand (Bangkok) 262 Acquired 23% stake in 2013 Gestations costs to see mitigation from mature hospitals, progressive ramp-up Looking to grow into the premium healthcare space where possible Like peer IHH, KPJ will be looking to expand bed capacity at some of its larger and mature urban hospitals, a much lower-risk growth strategy than greenfield investments given more certain demand dynamics and established staffing base KPJ Ampang is adding a new wing to be built atop the adjacent car park whilst KPJ Damansara is looking at relocation options within the same upmarket Taman Tun area given limited space to expand at its current site. For newbuilds, KPJ will be mitigating gestation costs by adopting a progressive ramp-up model i.e. only half the land at the site will be built on initially, with the other half for expansion once full capacity is reached. KPJ s relative mass-market focus (vs. premium-branded peer IHH) not only means less pricing power (i.e. lower margins) but leaves it more vulnerable to consumers facing income pressures and hence potentially being forced to down trade to public sector services, the latter currently account for 70% of the national healthcare sector. To mitigate, KPJ is planning to upgrade the medical and warding facilities at its larger, mature hospitals e.g. Damansara as and when they embark upon capacity additions / relocations. KPJ s rapid growth means it currently has a c.25% market share of private sector bed capacity Figure 3 Malaysia: healthcare industry snapshot (2013), various sources Australian and Indonesian operations on a recovery trend; no new capex Losses at its Australian and Indonesian operations are showing a narrowing trend Jeta Gardens is starting to reach critical mass with an increase in its accommodation capacity (aged care places) whilst one of the Indonesia 30 September 2014 anand.pathmakanthan@clsa.com 4

5 hospitals (Permata Hijau) is now profitable. No further significant capital is expected to be deployed to either investment (the Thai associate is profitable notwithstanding the 1H14 political disturbances in Bangkok). Figure 4 Figure 5 Jeta Gardens investment Financials June 2014 RM' RM' RM'000 Revenue 17,099 27,971 30,783 (Loss) Before Tax (1,329) (6,064) (5,006) Facilities June Aged-Care Facility * Retirement Villas Apartments Unit Occupancy Rate 96.0% 96.4% 96.0% *Completion date March 2015;, Company KPJ: Indonesia hospitals Financials Group Indonesia June 2014 RM' RM' RM'000 Revenue 21,047 35,545 22,134 (Loss) Before Tax (1,430) (6,955) (9,779) RS Permata Hijau Jun No. of Bed Occupancy rate 58.80% 50.36% 54.90% RS Bumi Serpong Damai Jun No. of Bed Occupancy rate 56.0% 36.9% 54.9%, Company KPJ uses asset injections into associate Al- Aqar healthcare REIT to moderate capex strain Potential funding options going forward include a sukuk and/or sale of the HQ building Balance sheet management is a key focus currently given aggressive capacity expansion in the pipeline against an already high gearing level (2Q14: 100% gross gearing ratio, 74% net gearing ratio). Historically, KPJ owns all its hospitals through development to maturity, which is a major strain on the balance sheet; once the hospital is profitable on a sustainable basis, it is sold to Al- Aqar Healthcare REIT in which KPJ has a 49% associate stake. The last injection of hospital assets into Al- Aqar was in 2012; of the five hospitals undergoing gestation currently, Klang was injected into the REIT in 2012 (early due to balance sheet strain) whilst the other four are only expected to be ready for injection in In the interim, there is the possibility that KPJ Healthcare University College, the group s education arm focusing on healthcare courses (currently intake is 2,000 students per year, to rise to 7,000 by 2018), may be made ready for injection into the REIT. KPJ had already raised equity funding in 2013 via a rights issue (44mn shares at RM2.80 each). Management is looking at other funding options including: A c.rm1.5bn debt sukuk issue with the proceeds partly to repay debt coming due as well as to provide funding for the newbuilds in the pipeline post-issue gross gearing ratio is expected to be close to the group s internal limit of 125%. Current blended financing cost for the group is c %; the sukuk is expected to be priced in the 5-6% range, depending on whether it is rated (a favourable rating would bring the financing cost closer to the 5% level); and/or Sale of the headquarters building (Menara 238, Jalan Tun Razak) which has a total net lettable area of 490,000 sq. ft.. Recall that KPJ completed the purchase of the building from Danaharta in 1H14, for a total consideration of RM206mn (of which RM160mn is via a loan). The building is currently on 25% occupied but KPJ has received a firm commitment from the Royal Malaysian Police to take up the rest of the space in the building; once they have done so, KPJ will look to dispose of the building with the proceeds to be used to reduce debt. 30 September 2014 anand.pathmakanthan@clsa.com 5

6 Figure 6 Al- Aqar Healthcare REIT: summary of portfolio Segmental Performance Property Value Revenue Net Property Income Malaysia 85.5% 82.6% 81.8% Indonesia 4.9% 6.8% 7.1% Australia 9.6% 10.6% 11.1% Assets as at 31 December 2013 Purchase Consideration (RM'000) 2013 Market Value (RM'000) KPJ Ampang Puteri Specialist Hospital 120, ,000 KPJ Damansara Specialist Hospital 105, ,000 KPJ Johor Specialist Hospital *106, ,300 KPJ Selangor Specialist Hospital 58,000 63,400 Puteri Specialist Hospital 37,000 39,300 KPJ Ipoh Specialist Hospital 66,000 70,200 KPJ Perdana Specialist Hospital 40,700 44,500 Kuantan Specialist Hospital 19,250 21,300 KPJ Kajang Specialist Hospital 39,060 45,700 Kedah Medical Centre 45,654 51,500 Sentosa Medical Centre 24,180 27,700 KPJ Seremban Specialist Hospital 50,100 59,700 Taiping Medical Centre 8,800 9,800 KPJ Healthcare University College, Nilai 16,500 19,200 KPJ Tawakkal Specialist Hospital *109, ,000 Damai Specialist Hospital 13,300 15,200 Tawakkal Health Centre 37,000 43,100 KPJ College, Bukit Mertajam 14,100 15,900 KPJ Penang Specialist Hospital 53,600 62,300 Selesa Tower 87, ,700 Kluang Utama Specialist Hospital 3,500 4,200 KPJ Klang Specialist Hospital 93,000 97,400 Rumah Sakit Bumi Serpong Damai 50,270 51,600 Rumah Sakit Medika Permata Hijau 21,140 21,700 Jeta Gardens Aged Care Facility and Retirement Village 131, ,785 Total 1,351,134 1,483,685, Company FY13-16CL revenue CAGR of 16% on new bed capacity additions Earnings outlook KPJ is forecast to deliver FY13-16CL revenue CAGR of 16%, underpinned by significant additions in bed capacity (coming from both new hospitals as well as incremental bed additions at existing hospitals) over the next three years as compared to the previous two. Local patients will remain the key driver as KPJ has yet to ramp up its medical tourism marketing and initiatives given lack of bed capacity at the moment, while 8% of total patients are foreigners, they collectively contribute only 5% of revenues with the bulk being Indonesians seeking low revenue-intensity services such as a second opinion or health screening. Further, with consultant charges regulated (must be within an MOH-mandated band), doctors naturally prefer to see local cases which are stickier and generate follow-up consultations. Despite new capacity additions in the pipeline, management is aiming to sustain 1H14 operating margin (at c.7.5%) going forward via improved scale economies and cost control (as underscored by better-than-expected 1H14 30 September 2014 anand.pathmakanthan@clsa.com 6

7 Margins recovered in 1H14 but likely to trend lower over 15-16CL on new hospital start-up losses especially re the group s new flagship Bandar Dato Onn hospital which is competing with IHH and will be unable to access a key Singaporean client base (i.e. Medisave) performance) as well as maturing older hospitals mitigating for gestation losses at newbuilds. However, we nonetheless factor in some margin erosion over the next 2 years. For one, start-up costs will feature heavily given five fairly large hospitals will be opening their doors (including new flagship hospital Bandar Dato Onn in Iskandar, Johor), with staffing (typically averaging 4 per bed) to be ramped up well in advance to satisfy regulator Ministry of Health. Secondly, many of the new hospitals are in less developed areas which means a longer lead time for capacity uptake. Thirdly, the Bandar Dato Onn hospital, the biggest thus far in KPJ s stable with 390 beds (1 st phase: 150 beds to be available in 2H15), has fairly high execution risk given it is meant to specialise in medical tourism and aged care with a view to attracting higher-margin Singaporean patients. However, unlike competing peer IHH which is able to have its hospitals in Singapore reference patients paying with Medisave (the CPF-based savings scheme for healthcare needs) to its soon-to-be-launched Gleneagles Medini hospital (300 beds; 1H15 opening). KPJ will have to rely on Singaporean patients paying cash or having appropriate private healthcare insurance. Figure 7 KPJ: number of bed additions vs. EBITDA margin trend FY12 FY13 14CL 15CL 16CL Number of new beds (Malaysia) EBITDA margin 11.9% 9.1% 10.8% 10.7% 10.6% EBIT margin 8.1% 5.7% 7.1% 6.9% 6.7% Figure 8 KPJ: key operating drivers / assumptions Key assumptions FY12 FY13 14CL 15CL 16CL Number of hospitals (Malaysia) Number of beds 2,566 2,714 2,994 3,344 3,814 Occupancy rate 74% 74% 69% 68% 66% Number of inpatients 248, , , , ,880 Growth 3.2% 5.3% 2.9% 9.5% 11.3% Number of outpatients 2,402,291 2,475,371 2,802,985 3,130,655 3,570,669 Revenue mix (inpatient/outpatient) 70:30 70:30 70:30 70:30 70:30 Average revenue/inpatient (RM) 5,749 6,128 6,496 6,899 7,244 Growth 7% 7% 6% 6% 5% Average revenue/outpatient (RM) Average length of stay per inpatient (days) , COmpany 30 September 2014 anand.pathmakanthan@clsa.com 7

8 KPJ has made no provisions for the Penawar legal suit; none are anticipated KPJ is valued on a SOTPbasis at RM4.00 per share or 33x 15CL earnings Dividend payout to remain around historical levels (45-50%); modest share buyback in action For healthcare sector exposure, prefer IHH for broadly more attractive fundamentals On a more positive note, we do not expect KPJ to make any significant provisions related to the outstanding legal case brought against it in the Penawar suit filed in May To recap, the major shareholders of Hospital Penawar (in which KPJ has a 30% stake) are suing KPJ for operating a rival hospital (Pasir Gudang) in close proximity. As it stands, the RM70mn awarded to the plaintiffs by the High Court was overturned in a 3-0 ruling by the Court of Appeal; the case management for the Federal Court appeal is set for 7 th October (next Tuesday) and the unanimous Court of Appeal ruling is a key positive in KPJ s favour. Management is looking to resolve the issue by selling its 30% minority stake in Hospital Penawar to the major shareholders. Valuations We value KPJ on a sum-of-the-parts (SOTP) with the core healthcare-related operating divisions valued on 15.2x 2015 EV/Ebitda multiple (previously 13.3x; the regional healthcare sector has re-rated significantly since our May 2013 update), a 20% discount to peer average of around 19x to reflect the potential for negative earnings surprises over the next 2-3 years stemming from a combination of start-up costs for its new Malaysian hospitals (especially flagship Bandar Dato Onn in 2015), sustained albeit narrowing drag from its loss-making overseas operations as well as potential occupancy rate shortfalls for new bed capacity as highly-geared Malaysian consumers adjust spending broadly lower in response to rising cost of living pressures with regards the latter, KPJ s middle-income patient base appears more vulnerable to down-trading to public services as compared to the relatively resilient upper-income customer base of IHH s Pantai and Gleneagles hospital brands. The TP includes the value of its stakes in unlisted Vejthani Hospital (23% stake; valued at cost), its HQ building on Jalan Tun Razak (whollyowned) and Bursa-listed Al- Aqar REIT (49% stake; valued at market price). Dividend payout is expected to remain relatively modest going forward given capex demands we expect payout to be sustained in the 45-50% range, in line with historical average. Further, KPJ currently has a relatively active (i.e. almost daily albeit with modest volume) share buyback programme ongoing as at mid-2014, a total of 4.4mn shares (vs. existing share base of 1027mn shares and a fully diluted share base of 1145mn shares) had been bought back at an average buy-back price of RM3.26 per share. Purchases have continued into 3Q14 as at early Sept, total treasury shares had increased to 12.1mn. We believe the accumulation may be precursor for a new ESOS scheme (the last one was a 5-year ESOS programme in conjunction with KPJ s listing in 1994) aimed at retaining increasingly competed healthcare talent. Our preferred exposure in the healthcare sector remains IHH which i) boasts premium brands and an internationally diversified revenue base (KPJ is almost wholly-concentrated in Malaysia where there is downside risk to private healthcare spending stemming from disposable incomes being under significant pressure from subsidy cuts and inflation) with much greater broad capacity to cater for high-intensity medical tourism; ii) has exhibited a more stable margin profile with EBITDA margins already more than twice that generated by KPJ and expected to trend incrementally higher going forward; iii) has much more balance sheet slack (net gearing <10% if excluding consolidated 36%-owned PLife REIT debt) to quickly take advantage of new strategic growth opportunities (such as the acquisition of Radlink in Singapore in September 2014 for SGD137mn or c.rm350mn); and iv) boasts a stronger 28% FY13-16CL EPS Cagr vs. KPJ s FY13-16CL EPS Cagr of 16%. 30 September 2014 anand.pathmakanthan@clsa.com 8

9 Looking fairly-valued around current levels resolution of legal suit a potential near-term catalyst Figure 9 KPJ: target price (TP) derivation Sum-of-the-parts (SOTP) valuation Target EV/EBITDA multiple % discount to peer average (c.19x) EV (RMmn) 4,936 On FY15 EBITDA Net debt (RMmn) 1,004 At end-2014 Minority interest (RMmn) 99 At end-2014 Equity value (RMmn) 3,834 EV - net debt - minority Value per share (operations): mn fully-diluted share base HQ building value per share: 0.18 Valued at RM206mn cost Vejthani Hospital value per share: % stake at cost Al-'Aqar stake value per share: % stake at market value KPJ 1 Yr target price (RM) x FY15 earnings Upside: 2.3% Dividend yield is c.1.3% Figure 10 Figure 11 KPJ: price to core earnings ratio KPJ: EV to EBITDA ratio sd31.6x avg20.9x sd17.7x avg12.0x sd10.2x sd6.4x 5.3 Oct09 Oct10 Oct11 Oct12 Oct Oct09 Oct10 Oct11 Oct12 Oct13 Figure 12 KPJ: peer valuation comparison Market cap PE (X) PB (X) EV/EBITDA (X) ROE (%) EPS Growth (%) Company Ticker (US$mil) CY14 CY15 CY14 CY15 CY14 CY15 CY14 CY15 CY14 CY15 Aier Eye Hsptl-A CH Topchoice Medi-A CH Zhejiang D.A.-A CH nm nm Apollo Hospitals APHS IN Fortis Healthcare FORH IN KPJ Healthcare KPJ MK 1, IHH Healthcare IHH MK 12, Raffles Medical RFMD SP Q&M Dental Group QNM SP nm nm Bangkok Dusit Md BGH TB Bumrungrad Hospital BH TB Bangkok Chain Hospital BCH TB Asian peer wgt avg excl. A shares* Asian peer wgt avg* Asean peer wgt average Note: Fortis Healthcare not included in the computation of the PE and EV/EBITDA weighted averages;, Bloomberg 30 September 2014 anand.pathmakanthan@clsa.com 9

10 Valuation details We derive the TP through a Sum of Parts methodology. The core healthcarerelated operating divisions are valued on 15.2x 2015 EV/Ebitda multiple, a 20% discount to peer average to reflect potential negative earnings surprises over the next 2-3 years stemming from a combination of start-up costs for its new Malaysian hospitals, drag from its loss-making overseas operations as well as potential demand drag as highly-geared Malaysian consumers adjust spending broadly lower in response to rising cost of living pressures. The TP includes the value of its stakes in unlisted Vejthani Hospital (23% stake; valued at cost), its HQ building on Jalan Tun Razak (wholly-owned) and listed Al- Aqar REIT (49% stake; valued at market price). Investment risks Upside risks include i) wage inflation moderation from an influx of healthcare professionals in the wake of the sharp increase in tertiary education capacity in medicine and nursing over the last 5-6 years; and ii) faster-than-expected breakeven for recently-opened hospitals given a robust demand backdrop. Downside risks include i) inability to secure doctors and supporting healthcare professionals; ii) wage inflation due to staff shortages and pinching by other expanding healthcare chains; iii) extended gestation period for new hospitals, especially for greenfield projects in new catchment areas; and iv) overpaying for new acquisitions or expansions in particular, overseas acquisitions have been a net drag on group profitability. Further, while a legal suit against KPJ for RM70.5mn was set aside by the Court of Appeal in Dec 2013, the plaintiffs have since filed an appeal with the Federal Court with case management set for 7th October, 2014 no provisions have been made in relation to this suit. 30 September 2014 anand.pathmakanthan@clsa.com 10

11 Revenue and earnings growth (FY13-16CL EPS CAGR of 13%) to accelerate over as new hospitals come on-stream while older hospitals mature Turning free cashflow positive only in 2016 on combination of earnings jump + moderating capex Debt levels to increase in tandem with hospital (fixed asset) investments; sale of assets to REIT would moderate gearing but nothing imminent EBITDA margin to be flat over the next few years, as margin upside from maturing older hospitals is mitigated by gestation drag from newbuilds Summary financials Year to 31 December 2012A 2013A 2014CL 2015CL 2016CL Summary P&L forecast (RMm) Revenue 2,096 2,332 2,614 3,048 3,579 Op Ebitda Op Ebit Interest income Interest expense (24) (38) (54) (58) (60) Other items Profit before tax Taxation (50) (39) (49) (54) (61) Minorities/Pref divs (9) (9) (11) (12) (14) Net profit Summary cashflow forecast (RMm) Operating profit Operating adjustments (5) Depreciation/amortisation Working capital changes 2 (50) (2) (5) (2) Net interest/taxes/other (44) (46) (102) (111) (121) Net operating cashflow Capital expenditure (371) (307) (350) (300) (200) Free cashflow (170) (186) (171) (90) 58 Acq/inv/disposals (56) (87) (261) (1) (1) Int, invt & associate div 19 (9) Net investing cashflow (408) (403) (599) (292) (194) Increase in loans Dividends (75) (52) (62) (69) (87) Net equity raised/other Net financing cashflow (37) Incr/(decr) in net cash (51) 114 (79) (51) 27 Exch rate movements Opening cash Closing cash Summary balance sheet forecast (RMm) Cash & equivalents Debtors Inventories Other current assets Fixed assets 909 1,206 1,460 1,643 1,702 Intangible assets Other term assets Total assets 2,250 2,806 3,265 3,530 3,770 Short-term debt Creditors Other current liabs Long-term debt/cbs ,093 1,193 1,243 Provisions/other LT liabs Minorities/other equity Shareholder funds 1,036 1,090 1,268 1,340 1,413 Total liabs & equity 2,250 2,806 3,265 3,530 3,770 Ratio analysis Revenue growth (% YoY) Ebitda growth (% YoY) 8.6 (15.3) Ebitda margin (%) Net profit margin (%) Dividend payout (%) Effective tax rate (%) Ebitda/net int exp (x) Net debt/equity (%) ROE (%) ROIC (%) EVA /IC (%) September 2014 anand.pathmakanthan@clsa.com 11

12 Companies mentioned KPJ (KPJ MK - RM UNDERPERFORM) Recommendation history of KPJ Healthcare Bhd KPJ MK Stock price (RM) Anand Pathmakanthan Other analysts No coverage BUY U-PF N-R O-PF SELL Date Rec Target Date Rec Target 21 May 2014 SELL May 2013 SELL Mar 2014 SELL Dec 2012 U-PF Nov 2013 SELL Nov 2012 Dropped Coverage 02 Sep 2013 SELL Mar 2012 BUY 3.80 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14 Research subscriptions To change your report distribution requirements, please contact your CLSA sales representative or us at cib@clsa.com. You can also fine-tune your Research Alert preferences at Key to CLSA/CAST investment rankings: BUY: Total stock return (including dividends) expected to exceed 20%; O-PF: Total expected return below 20% but exceeding market return; U-PF: Total expected return positive but below market return; SELL: Total expected return to be negative. For relative performance, we benchmark the 12-month total forecast return (including dividends) for the stock against the 12-month forecast return (including dividends) for the market on which the stock trades. We define as Double Baggers stocks we expect to yield 100% or more (including dividends) within three years CLSA Limited (for research compiled by non-taiwan analyst(s)) and/or Credit Agricole Securities Taiwan Co., Ltd (for research compiled by Taiwan analyst(s)). Note: In the interests of timeliness, this document has not been edited. The analyst/s who compiled this publication/communication hereby state/s and confirm/s that the contents hereof truly reflect his/her/their views and opinions on the subject matter and that the analyst/s has/have not been placed under any undue influence, intervention or pressure by any person/s in compiling such publication/communication. CLSA group of companies (excluding CLSA Americas, LLC) ( CLSA ), Credit Agricole Securities Taiwan Co., Ltd. ( CA Taiwan ), CLSA/CA Taiwan's analysts and/or their associates do and from time to time seek to establish business or financial relationships with companies covered in their research reports. As a result, investors should be aware that CLSA and/or such individuals may have one or more conflicts of interests that could affect the objectivity of this report. Regulations or market practice of some jurisdictions/markets prescribe certain disclosures to be made for certain actual, potential or perceived conflicts of interests relating to research reports and such details are available at Disclosures therein include the position of CLSA, CLSA Americas, LLC and CA Taiwan only and do not reflect those of CITIC Securities International Company Limited, Credit Agricole Corporate & Investment Bank and/or their respective affiliates. If investors have any difficulty accessing this website, please contact webadmin@clsa.com or If you require disclosure information on previous dates, please contact compliance_hk@clsa.com IMPORTANT: The content of this report is subject to and should be read in conjunction with the disclaimer and CLSA's Legal and Regulatory Notices as set out at a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group (18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone ) and/or CA Taiwan Compliance (27/F, 95, Section 2 Dun Hua South Road, Taipei 10682, Taiwan, telephone ). 01/01/ September 2014 anand.pathmakanthan@clsa.com 12