28 April 2016 Corporate Update IHH Healthcare Berhad Promising secular growth despite near-term challenges Maintain NEUTRAL Unchanged Target Price (TP): RM7.10 INVESTMENT HIGHLIGHTS Singapore to continue as the main revenue contributor Turkey remains a strong home market North Asia is the way forward India as the next promising market Looking beyond 2020 Maintain NEUTRAL with unchanged TP of RM7.10 Singapore to continue as the main revenue contributor. As of FY15, Pantai Parkway Life Singapore (PPL Singapore) is both the main contributor to revenue and PATAMI of IHH. PPL Singapore contributes about 38% of the group s overall revenue and 51% of the group s total PATAMI. We are expecting PPL Singapore to continue being the main contributor for both revenue and PATAMI in the medium term with the gradual opening of new wards in Mount Elizabeth Novena. Additionally, the group is trying to leverage on Singapore s growing ageing population which is known to drive the increase in complex cases. We are expecting these cases which are high in revenue intensities to occur more in Singapore due to its demographic condition. Furthermore, Singapore also has supportive national insurance policies, i.e. Medisave, Medishield Life and Integrated Shield Plan (ISP), which allows the utilisation of a person s cumulative insurance premium to partly fund the treatments in private hospitals. Turkey remains a strong home market. Despite being affected by the weak Turkish Lira (TRY), Turkey remains a strong home market for IHH in our opinion. Both inpatient admissions and revenue intensities recorded in Turkey has been on an increasing trend for the past two years, albeit marginally. However, in FY15 Acibadem s new hospitals recorded a 91%yoy increase in revenue, the highest amongst IHH s home markets. Going forward, we think the contribution coming from Turkey s Acibadem will continue to increase due to: (i) openings of new hospitals, (ii) high number of local participation (Turkey has 80m population), (iii) its strategic location (in between the Asian and European continents), and (iv) other self-sustaining services that are beyond its hospitals and outpatient clinics such as: Acibadem Project Management, Acibadem Insurance, Acibadem Mobile, Acibadem University, A Plus and Acibadem Labmed. Refer to Chart 1. RETURN STATS Price (27 April 16) Target Price RM6.64 RM7.10 Expected Share Price Return +7.00% Expected Dividend Yield +0.80% Expected Total Return +7.8% STOCK INFO KLCI Bursa / Bloomberg Board / Sector Syariah Compliant 1692.34 5225 / IHH MK Main / Trading Services YES Issued shares (mil) 8,224.20 Par Value (RM) 1.00 Market cap. (RM m) 54,608.60 Price over NA 2.43 52-wk price Range RM5.32 RM6.75 Beta (against KLCI) 0.90 3-mth Avg Daily Vol 7.26m 3-mth Avg Daily Value Major Shareholders (%) RM47.5m Khazanah Nasional Bhd 43.13 Mitsui & Co Ltd 20.06 EPF 8.84 MIDF RESEARCH is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures
Chart 1: Acibadem s ecosystem Source: Company North Asia is the way forward. In early 2017, IHH will be opening its long-awaited Gleneagles Hong Kong (GHK). The hospital will be a 500-bedded medical facility in collaboration with the University of Hong Kong. The hospital will be offering packaged rate for 250 of its beds and normal rates for the remaining 250 beds. The reception towards the hospital has been positive as Hong Kong has been experiencing shortage of beds and GHK will be the first new hospital in Hong Kong after 30 years. In addition, GHK will also be offering financial counselling for its patients upon admission and the general pricing for its services is expected to be at 30-50% premium from its current pricing in Singapore. This is also due to the higher cost associated with operating in Hong Kong. Going forward, IHH is planning to expand its presence in North Asia by narrowing its strategy and targeting the four most populous regions in China. To date, IHH is operating a primary care network with 10 clinics in Shanghai and it has also recently announced a JV in Chengdu with Perennial International Health and Medical Hub Chengdu, for a 350- bedded hospital to be called ParkwayHealth Chengdu. The management is expecting the hospital to be completed end- 2017. Meanwhile, the company continues to look for opportunities in other regions, i.e. northern and southern regions, to further strengthen their presence in North Asia and capitalize on China s affluent and high density population. Refer to Chart 2 below. Chart 2: IHH s North Asia strategy 2
India as the next promising market. The acquisition of Global and Continental Hospitals back in 2015 has opened an even bigger door for IHH into the world s second most populous country. Though prior to the two acquisitions, IHH has a 10.8% stake in Apollo Hospitals with an ongoing JV to build Gleneagles Khubchandani, these hospitals are and will be providing the general core health services. This is in contrast to Global and Continental Hospitals that are more skewed towards organ transplants and upper gastrointestinal cases respectively. Looking ahead, we are expecting IHH to most likely acquire more hospitals in India in order for it to strengthen its presence and complement its newly acquired hospitals. This is mainly due to the fact that the period it takes to build a hospital from scratch in India, takes longer than acquiring existing hospitals. In addition, we are also expecting IHH to bring its expertise in providing general core health services and synergies (in terms of procurement and financial management) to complement Global and Continental s specialties to create an all-round healthcare service operator. Leveraging on the large population and lack of quality private healthcare in the country, management is expecting a combined 10% revenue contribution from both North Asia and India in the medium term. Table 1: IHH s licensed bed pipelines 2016 Licensed bed pipeline (units) Gleneagles Medini 24 Mount Elizabeth Novena 30 Acibadem Sistina Skopje 81 Total 135 2017 onwards Gleneagles Hong Kong 500 Gleneagles Khubchandani India* 450 ParkwayHealth Chengdu 350 Acibadem Altunizade 325 Acibadem Maslak 200 Pantai Ayer Keroh 160 Continental Hospital India 100 Total 2,085 *Tentative Looking beyond 2020. The group has also started to look beyond 2020 with its focus turning to Indo-China countries that are expected to experience increase in wealth and healthcare awareness which we are expecting to drive the demand for private healthcare services in the region. As the Indo-China countries began to embark on improving the quality of their healthcare services, we opine that private healthcare providers such as IHH will tend to benefit from the region s long-term income growth potential by tapping into these markets as the countries experience gradual increase in middle class population. Furthermore, the steady increase in expatriates and foreign tourists stemming from gradual liberalisation of the economies and increased tourism interests will assist in driving the demand further for private healthcare services. Recall that IHH announced back in January its foray into Myanmar with an USD70m, 250-bed hospital to be called Parkway Yangon. IHH will have a 52% JV stake via Andaman Alliance Healthcare Limited in the hospital and it will be based on a build-operate-transfer model. The hospital will be located in downtown Yangon on a 4.3 acres plot of land leased for 50 years with an option of two 10-years extensions. The hospital is expected to open in 2020. 3
But challenges persist. Despite the positive long term outlook for IHH, we are still wary on the challenges that it currently faces in all the markets they are in. Malaysia for example, has been affected by the double whammy coming from the implementation of goods and services tax (GST) back in April 2015 and Ringgit s volatility which resulted in a prolonged soft consumer sentiment. As for Turkey, the continued weak performance of TRY and geo-political instability might limit Acibadem from realising its full revenue potential. Not forgetting the increasing costs across all markets which range from medical consumables, medicines, and cost of personnel and so on due to inflationary pressures. Earnings forecast. As we are adopting a cautiously optimistic view on the operating environment this year, we are making no changes to our earnings forecasts for FY16-17 at this juncture. Nonetheless, our forecasts represent a 11-13% increase in revenue and 21-23% increase in earnings for FY16-17 which is consistent with its: (i) double digit growth since IPO, (ii) expected continued challenging macroeconomic environment, and (iii) expected number of beds in the pipeline. The key risks to our earnings are: i) volatility in the currency market, ii) lower than expected inpatient admissions and revenue per patient, and iii) increasing cost of operations in its key home markets. Chart 3: IHH historical yearly revenue Chart 4: IHH s historical yearly core PATAMI CAGR: 14% Maintain NEUTRAL with an unchanged Target Price (TP) of RM7.10. We are reiterating our NEUTRAL recommendation on IHH with an unchanged DCF-based TP of RM7.10 per share (TG: 4.5%, WACC: 9.0%). We think that despite the resilient demand and growth for healthcare services in its three home markets, FY16 will remain a challenging year given the volatility in the currency market, increasing competition for healthcare personnel in its home markets and higher minimum wages in Turkey. We opine that the re-rating catalysts for the stock are: (i) faster gestation period for its newly opened hospitals, and (ii) higher contribution from North Asia and Indian hospitals. 4
Chart 5: IHH s quarterly inpatient admissions Chart 6: IHH s quarterly revenue per inpatient INVESTMENT STATISTICS FYE Dec (RM 'm) FY12 FY13 FY14 FY15 FY16F FY17F Revenue 6,962 6,756 7,344 8,431 9,398 10,664 EBITDA 1,561 1,767 1,914 2,077 2,359 3,033 Core PATAMI 619 649 782 899 1,087 1,339 Basic EPS (sen) 8.9 7.8 9.2 11.1 13.2 16.3 PATAMI growth (%) 65.8 4.8 20.6 15.0 20.8 23.2 PER (x) 74.9 85.1 72.2 59.8 50.3 40.7 Dividend per share (sen) - 2.0 3.0 3.0 5.0 6.0 Dividend yield (%) - 0.3 0.5 0.5 0.8 0.9 Source: Company, Forecasts by MIDFR DAILY PRICE CHART Noor Athila Mohd Razali noor.athila@midf.com.my 03-2772 1679 5
MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. SELL TRADING SELL Total return is expected to be <15% over the next 12 months. Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months. 6