IHH Healthcare Bhd - CIMB Research 2018-01-07: Expanding Opportunities, Consolidating Strengths

IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare Bhd - Expanding Opportunities, Consolidating Strengths

We think the worst could be over for the newly-opened Gleneagles HK, given improving ramp-up and narrowing start-up losses.
Strong Singapore and Malaysia hospital operations provide a sustainable earnings base for the group, underpinned by favourable macro trends.
Expansion in China and India could be IHH’s next growth phase. Maintain ADD.

Revenue intensity and patient volume for IHH’s home operations continue to climb. As of 9M17, Singapore hospitals saw an overall 2.1% increase in inpatient admissions and 7.9% increase in revenue per inpatient admission. Malaysia hospitals recorded 2.2% higher inpatient admissions, and 11.1% yoy growth in revenue per inpatient admission.
The RM30m allocation in Malaysia’s 2018 Budget and additional initiatives to promote medical tourism by the Malaysia Healthcare Travel Council (MHTC) could bode well for the group as well, in our view. Foreign patients currently represent c.30% and 5% of its Singapore and Malaysia patient volumes, respectively.

2017 has largely been a disappointing year for IHH, in terms of both share price and bottom line, as the opening of two large flagship hospitals in Mar 2017 – Gleneagles HK (GHK) and Acibadem Altunizade, weighed on overall profitability. A weaker Turkish lira against the ringgit did not help either.
The bright spot lies in GHK’s narrowing quarterly EBITDA losses, helped by
1. a gradual shift from ‘bread and butter’ services to higher intensity specifications,
2. increasing line-up of insurance providers, and
3. greater awareness in the domestic market.
We expect an EBITDA breakeven in FY19F.

IHH remains on track to penetrate into China, starting with Chengdu (350-bed), Nanjing (70-bed) and Shanghai (450-bed), from late-2018 to 2020. We believe these are long-term growth potentials for the group, as it taps into the growing private healthcare demand of China’s large population.
Pre-opening and start-up costs for these new hospitals are unlikely to be as extensive as those of GHK, due to the phased opening of hospital beds, smaller ownership stakes and more asset-light approach (for Chengdu).
Meanwhile, India is still a small contributor of IHH’s overall earnings (9M17: RM4m).
But the recent issuance of US$500m senior perps (4.25%) could be a war chest to pursue more aggressive inorganic growth in India, especially with more attractive valuations of potential targets, in our view.

We believe the worst could be over for GHK, and expect sequential earnings improvement post 3Q17. Any share price weakness would be an attractive entry point to accumulate the stock.
We cut our FY18-19F EPS on higher financing expenses, but maintain ADD on IHH with a higher SOP-based target price of RM7.06 as we roll forward our valuation to end CY19F.
Better-than-expected earnings delivery of GHK and synergistic M&As are potential stock catalysts.
Downside risks to our Add call include unfavourable currency movements against the ringgit and poor overseas execution.

NGOH Yi Sin CIMB Research | http://research.itradecimb.com/ 2018-01-07

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 7.06 Up 6.360