IHH Healthcare - UOB Kay Hian 2016-07-13: Embarking On The Next Stage Of Growth But This Has Been Priced In

IHH Healthcare - UOB Kay Hian 2016-07-13: Embarking On The Next Stage Of Growth But This Has Been Priced In IHH HEALTHCARE BERHAD Q0F.SI 

IHH Healthcare (IHH SP) - Embarking On The Next Stage Of Growth But This Has Been Priced In

  • With three China hospital projects targeted to come on-stream in the next four years, we believe Greater China is well-positioned to become one of the key home markets for IHH
  • While we continue to like IHH for its growth strategy, at 39.3x 2017F PE, which is a premium to regional peers, we believe the market has priced in IHH’s continued expansion in the healthcare segment. 
  • Maintain HOLD with a higher SOTP target price of S$2.31 (previously S$2.09). Entry price: S$2.08.



STOCK IMPACT


ParkwayHealth Shanghai Hospital to open in 2020. 

  • In Jun 16, IHH Healthcare (IHH) announced plans to develop a 450-bed multi-specialty hospital in Shanghai (ParkwayHealth Shanghai International Hospital), which is targeted to open in 2020, where beds will likely come on stream in phases. The hospital is a 70:30 JV between Parkway Pantai (PPL) and Shanghai Hongxin Medical investment holding, and will offer a range of healthcare services, including cardiology, urology and general surgery. 
  • We are of the view that the new hospital will look to target the premium market, focusing on affluent local patients, expatriates and potentially, medical tourists. Location wise, the hospital is situated near transportation hubs such as Hongqiao airport and a high-speed railway station, allowing for easy access as well as high patient traffic. 
  • Meanwhile, the group already has six existing medical centres located across Shanghai, which we believe will be helpful in building a strong patient base and feeding patient flows via cross referrals to the hospital when it comes on stream in 2020.

Gleneagles Hong Kong on track for completion. 

  • Gleneagles HK remains on track to open in Jan 17, where all 500 beds will be opened as per the service agreement. We understand that clinical collaborative partner Hong Kong University will provide Gleneagles HK with up to 45 Chief of Specialty doctors. 
  • In terms of wider doctor recruitment, the group has insofar held two doctor networking/ recruitment events and has already accredited almost 300 doctors to practice at Gleneagles HK. 
  • Pricing wise, taking reference to private hospital Hong Kong Sanatorium & Hospital, we believe average procedures will be c.30-50% higher than in Singapore. 
  • We are positive on the outlook for Gleneagles HK, and reckon it will likely benefit from the hospital bed crunch situation in Hong Kong and possibly follow similar, if not faster growth trajectory than its peers in Singapore, where Mt E Novena turned EBITDA positive in less than a year.

 Greater China to drive next phase of growth. 

  • With Gleneagles HK and Chengdu Hospital coming on-stream by 2017 and Shanghai Hospital by 2020, we believe IHH’s China ventures comes at a very strategic time when the healthcare industry in China is taking off. China’s healthcare industry is well-supported by positive socio-demographic trends, such as rising affluence, growing urbanisation and an ageing population. 
  • According to the Economist Intelligence Unit, by 2020, total population aged above 65 in China is forecasted to reach 176m, compared with 90m in 2000. This signifies a potential upward trajectory in healthcare demand, especially in densely populated urban areas, where IHH’s China hospital operations are located. 
  • Additionally, as urbanisation progresses, disease profile will likely trend towards more complex and elective procedures such as oncology or cardiology, areas where IHH has a strong foothold in.

Strong brand equity to attract clinical talents. 

  • We remain cognisant of the challenges involved in China hospital ventures, with clinical talent acquisitions being one of the biggest challenges for private healthcare operators in the region. 
  • While regulations barring physicians from working at multiple hospital sites have been lifted, social stigma relating to private hospitals such as slower career advancement, prestige and career security still deter some physicians from working in private hospitals. 
  • Nevertheless, we understand that the challenge of talent acquisition may be well managed as IHH’s international brand equity such as Parkway Pantai and Gleneagles could serve as a pull factor for clinical specialists in the country. 
  • Additionally, IHH has built up an established research ecosystem through quality healthcare infrastructures and a strong presence in diverse epidemiology across various centres of excellence, which we believe will be attractive to clinical professionals seeking to develop their medical expertise.

Near-term cost pressure expected. 

  • We reckon that cost pressure will likely remain high, owing to higher staff costs from the impact of wage inflation and higher minimum wage regulation implemented in Turkey. 
  • Implementation of the 6% GST in Malaysia will also be an added pressure on cost of inventories and consumables. 
  • Additionally, start-up costs are also expected to trend higher in 2H16 leading up to the opening of Gleneagles HK. 
  • However, we believe IHH intends to offset the impact of higher cost pressures through higher revenue intensity procedures, cost optimisation and tighter cost control.



EARNINGS REVISION/RISK


No change to earnings estimate. 

  • On our latest estimates, IHH is projected to deliver a 3-year (2016-18F) EPS CAGR of 21.4%.



VALUATION/RECOMMENDATION


Maintain HOLD with a higher target price of S$2.31 (previously S$2.09), based on an SOTP model. 

  • We value IHH’s key businesses in PPL and Acibadem at an EV/EBITDA multiple of 21.8x (previously 20.2x) each, and IMU Health at EV/EBITDA of 13x, all of which are in line with regional industry averages. 
  • While we like IHH for its growth strategy as well as diversified healthcare operations, we believe its current valuation at 39.3x 2017F PE reflects this, whereas IHH is currently trading above the industry’s PE of 34.7x. 
  • Nevertheless, we believe the group’s inroad into new markets – Hong Kong, China and India - will provide growth runway for the next 5-10 years. Entry price is S$2.08.



KEY RISKS

  • 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/ 2016-07-13
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.31 Up 2.09


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