CIMB Securities 2015-08-31: IHH Healthcare - India to be the next core market.


India to be the next core market 

  • India is panning out to be IHH’s next core market, with its latest 73.4% acquisition of Global Hospitals (chain of five hospitals, ~1,100 operational beds) for Rs12.8bn (~RM819bn). Once the acquisition is completed, IHH’s presence in India will expand to ~1,800 beds (Singapore: ~900, Malaysia: ~2,000, Turkey: ~2,000). 
  • Global Hospitals’ and IHH’s India operations are currently loss making (on net basis) but the acquisition means IHH now has a meaningful presence in India. 
  • We share management’s positive view on the Indian healthcare market. 
  • Maintain Add, with higher SOP-based target price of S$2.24 for the acquisition. 

What Happened 

  • On the heels of IHH’s first Indian acquisition (Continental Hospital) in Mar 15, IHH has acquired 73.4% of Global Hospitals for Rs12.8bn (which will be diluted to 64.4% over five years due to employee performance incentives), of which Rs2.65bn is an equity injection, Rs300m-400m will be used to pare down debt and the remainder for capex to increase the number of beds from 1,100 currently to ~1,900 (over five years). The deal is expected to be completed in three months. 

What We Think 

Minimal financial impact now. 

  • We do not expect this deal to contribute significantly to the group’s FY15-17 bottomline. In FY15, Global Hospitals recorded revenue of Rs6.5bn (+25% yoy, ~6% of IHH’s FY14) and average revenue per inpatient of Rs116k (+22% yoy, ~32% of Singapore’s FY14 average inpatient revenue, ~150% of Malaysia’s, ~79% of Turkey’s). We understand that its EBITDA margins are in the low-teens (Singapore: 23%, Malaysia: 32%, Turkey: 19%), and it is currently loss making, with interest costs (FY15 net debt: Rs3.9bn, with effective interest rates of ~15%) being the biggest drag. 

But India will be a core market. 

  • Once the acquisition is completed, India would be IHH’s third-largest market (in terms of beds). On branding, the strategy will be to rebrand its hospitals to Gleneagles, which management believes will help drive medical tourism revenues (currently < 15% of Global Hospitals’ revenue comes from medical tourists). This platform would allow IHH to expand organically in India’s tier 2 cities and does not preclude IHH from future inorganic opportunities, which management will continue to seek. The business model in India is similar to Turkey, where doctors are employees. 

What You Should Do 

  • Reiterate Add. Our SOP-based target price rises to account for the acquisition.

Kenneth NG CFA | Jonathan SEOW | http://research.itradecimb.com/ CIMB Securities 2015-08-31

ADD Maintain ADD 2.24 Up 2.16