IHH Healthcare - UOB Kay Hian 2016-04-11: Poised For Long-term Growth But Priced In

IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare (IHH SP) - Poised For Long-term Growth But Priced In

As the group continues its aggressive expansion plans, we expect cost pressures to persist and we remain vigilant of execution risks, especially in emerging markets such as India and China.
Nevertheless, we believe IHH is well positioned for growth and project a 20.1% earnings CAGR over 2016-18.

Key highlights from management meeting. We met up with management recently and this report highlights the key takeaways.

Amidst slowing economies as well as fluctuation of regional currencies, we could see growth in Singapore’s medical tourism moderate, as patients defer on elective procedures or opt for local subsidised healthcare.
Going forward, IHH is looking to diversify its medical tourism segment beyond traditional markets (Indonesia: about 50% of medical travellers; Malaysia: about 30%) to Middle Eastern countries (eg Saudi Arabia and United Arab Emirates) as well as the Indochina regions such as Myanmar.
Meanwhile, we believe local inpatient volumes will continue to be support top-line growth, on the back of an ageing population in Singapore, which typically leads to higher and more complex comorbidity (presence of one or more diseases) medical procedures.
Moreover, the bed crunch situation stemming from public hospitals will likely lead to an inpatient spillover effect to private hospitals.

There have been increased efforts from IHH to improve service competencies in Malaysia and Turkey, in order to move up the value chain and bridge capabilities gap between Singapore and these key markets. For example, in late 2015, Acibadem opened an oncology specialty centre of excellence at its Bodrum facility, where the centre will provide service from diagnosis to treatment all under the same roof.
Similarly, in Malaysia, there has been a ramp-up at centres of excellence in areas such as spine, cardiology and oncology. As a result, average revenue per inpatient in both Malaysia (4Q15: +9.7% yoy) and Turkey (4Q15: +8.5% yoy) witnessed an upward trend.

We expect cost pressure to remain high in 2016, arising from the impact of wage inflation as a result of increased competition for trained healthcare personnel as well as higher minimum wage regulation implemented in Turkey with effect from 1 Jan 16.
In addition, we believe the implementation of the 6% GST in Malaysia (since Apr 15) is likely to be an added pressure on cost of inventories and consumables.
Moreover, start-up costs are also expected to trend higher towards the later part of the year leading to the opening of Gleneagles Hong Kong in Jan 17 (projected capex: RM1.6b)

Since its opening in Nov 15, Gleneagles Medini has already seen more than 2,000 patients to date. There are plans to further roll out additional 20-30 beds this year as well as to ramp up marketing efforts to attract Singapore patients across the Causeway.
Currently with 14 hospitals in Malaysia, we believe IHH’s near-term focus will be to expand bed capacity at existing facilities.

In 2015, IHH made significant headway in India through the acquisitions of Continental Hospitals (March 15) as well as Global Hospitals, (Dec 15). Elsewhere, in China, the group is in the process of developing a 350-bed greenfield ParkwayHealth Chengdu Hospital (70:30 controlling stake JV), with completion targeted in 1H17.
IHH is also seeking further greenfield opportunities in the region, specifically in the north and south of China. Meanwhile, the group remains optimistic about the outlook of Gleneagles Hong Kong, which is targeted for completion in Jan 17. Given the hospital bed crunch situation in Hong Kong (which has accelerated IHH’s decision to open all 500 beds) as well as collaboration with Hong Kong University for chief of specialty doctors, we believe Gleneagles Hong Kong will be able to perform in line with industry benchmark (average pricing in HK is about 30-50% higher than Singapore).
All in all, we are upbeat about IHH’s strategy of expanding its geographical footprint to two of the biggest markets in Asia and we project earnings CAGR of 20.1% for 2016F-18F.
In our view, smooth execution as well as continued expansion in these two key markets will provide strong growth avenues and potentially lead to a meaningful shift in earnings composition in the next 5-10 years.

We have trimmed our 2016-17 net profit forecasts by 6-12% to factor in slower growth in inpatient admissions given softer economic outlook, higher operating costs amidst wage inflation and higher inventory cost.
Additionally, we have introduced our 2018 estimates.

Share price well supported but valuations are rich; maintain HOLD and target price of S$2.07 (previously S$1.77) based on our SOTP model.
IHH is currently trading at 49.3x 2016F PE, above the industry’s average of 42.3x. Nevertheless we think the group’s capacity in new markets such as Hong Kong, China and India will provide IHH growth runway for the next 5-10 years.

Key risks include:
1. execution risk,
2. foreign exchange risk,
3. inflationary pressures on operating expenses, and
4. competition.

Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-04-11

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.07 Up 1.77