Health Management International - Maybank Kim Eng 2016-09-26: Site visit Established hospitals

Health Management Int'l (HMI SP) - Maybank Kim Eng 2016-09-26: Site visit Established hospitals HEALTH MANAGEMENT INTL LTD 588.SI Q & M DENTAL GROUP (S) LIMITED QC7.SI RAFFLES MEDICAL GROUP LTD BSL.SI

Health Management Int'l (HMI SP) - Site visit Established hospitals

Hospital visit to HMI and peers 

  • We conducted a site visit with our institutional clients to HMI’s Regency Hospital in Johor and its Mahkota Hospital in Malacca. 
  • Along the way, we visited the peer hospitals nearby, including IHH’s Gleneagles Medini and KPJ’s Johor Specialist Hospitals. Clients were impressed by the layout, unique operating model and expansion plans at both HMI’s hospitals. 
  • Key sector takeaways: 
    1. Singapore patients are still less receptive to cheaper healthcare in Malaysia due to quality concerns; 
    2. There is a shortage of skilled specialist doctors in Johor due to government policy restricting foreign doctors; 
    3. Many Johor patients continue to seek treatment in Singapore and KL. 
  • Singapore’s healthcare industry should remain robust from steady domestic and premium foreign demand. 
  • Top picks in the sector are Raffles Medical (RFMD SP; BUY; TP SGD1.84) and Q&M Dental (QNM SP; BUY; TP SGD1.08).

Replicating Singapore’s model in Malaysia 

  • The CEO of both hospitals hosted and showed us various key divisions, highlighting the unique independent practice model which allows specialist doctors to own and operate their clinics within the hospitals.
  • This has worked well in attracting and retaining top doctors. The layouts of HMI’s hospitals were well organised and comparable to Singapore’s private hospitals. HMI’s crown jewel Mahkota, which has notable medical tourism patients, stood out in particular with many sub-specialties.

More room for expansions, 29% discount to peers 

  • We witnessed the plot of land next to Regency, which will be used for a new hospital building with construction to start in 2017. Completion is expected in mid-2019, which could at least double Regency’s capacity.
  • For Mahkota, we observed ample capacity that could be freed up by relocating back office departments out of the hospital. HMI currently trades at a forward PER of 30x vs the peer group average of 42x, implying a 29% discount. Our forward PER was derived based on management’s target of at least 10% YoY EPS growth.
  • HMI currently competes mainly with two major listed hospital players in Malaysia, KPJ (KPJ MK; HOLD) and IHH (IHH MK; HOLD). 
  • Despite its double digit 3Y EPS CAGR and higher ROE, HMI trades at 3/51% PER discount to KPJ and IHH for FY16E. Both peers are trading at PER’s of 31x and 61x FY16, respectively. These two peers are expected to grow at 3-yr EPS CAGR’s of 12/13% vs HMI’s at least 10%, based on management’s target. Also, both peers generate FY16E ROE’s of 4/10% vs HMI’s 15%.

Top picks: Raffles Medical and Q&M 

Raffles Medical is expected to perform better in 2H16 from:

  • Ramp up of Orchard Medical Centre. Started in Jun 2016, the project is ramping up nicely and is expected to turn profitable within the next 2 quarters;
  • Rental income from new Holland Village Mall. Completed in Mar 2016, tenant demand for the project has been encouraging. 60% of the space has been committed as of Jul 2016. We expect rental revenue of SGD2.8m from six months contributions in 2016;
  • Seasonally stronger 4Q from the utilisation of medical benefits and claiming of various tax incentives.

Catalysts for Q&M:

  • Spinoffs of its two Chinese subsidiaries are expected to be complete by end-2016, which will provide capital for its subsidiaries to execute more expansion projects;
  • More expansions. Q&M has completed four acquisitions in 2016 and is exploring more expansion opportunities. Its first China acquisition this year, Shenzhen New Perfect, was announced in Jun 2016.

Health Management Int'l: Not Rated, Target Price N/A.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-09-26
Maybank Kim Eng SGX Stock Analyst Report NOT RATED Maintain NOT RATED 99998 Same 99998.000
BUY Maintain BUY 1.08 Same 1.08
BUY Maintain BUY 1.84 Same 1.84