IHH Healthcare - DBS Research 2017-06-14: On “Glen-eagles” Wings We’ll Fly

SGinvestors.io

IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare - On “Glen-eagles” Wings We’ll Fly

• Early positive signs raise optimism on Gleneagles HK 
• Gleneagles HK received demand for complex cases 
• Competitive package pricing; attractive to insurance partners 
• VIP room occupied two months into operations

We maintain our BUY rating and TP at RM7.15. 

• We remain positive on IHH’s growth plans, with a pipeline of new hospitals in China and turnaround in India. The key catalysts for the stock are 
  1. positive performance and shorter-than-expected gestation period from Gleneagles HK and the other new hospitals, 
  2. better-than-expected organic performance despite macroeconomic slowdown, and 
  3. positive developments in new markets, such as India.

Where we differ. 

Gleneagles Hong Kong leads IHH’s ‘Growth 2.0’. 

• We believe Gleneagles HK, which opened in Mar 2017, will lead IHH into its next phase of growth, a view which the market may not be all convinced just yet. With early positive signs, we believe start-up losses from Gleneagles HK could start to moderate from 2H17 as revenue picks up.

Potential catalysts:

• Shorter gestation period for new hospitals / organic growth / new brownfield or greenfield hospitals.

Early positive signs raise optimism on Gleneagles HK. 

• We understand there are some early positive signs though these have yet to be translated into numbers; 
  1. Received demand for more complex cases; 
  2. first to implement competitive package pricing which can potentially be attractive to insurance partners; 
  3. VIP room was already occupied two months into operations; and 
  4. targets 1k consultants (now 600) and 45 HKU doctors (now 30).

On “Glen-eagles” wings we’ll fly 

• The long awaited Gleneagles Hong Kong Hospital (Gleneagles HK) officially opened its doors on 21 Mar 2017. We have previously been positive on the prospects of Gleneagles HK as the first new private hospital in more than two decades and given the pent-up demand for more hospital facilities / beds.
• We believe that Gleneagles HK will lead IHH into its next phase of growth (IHH Healthcare: Recreating the magic in Hong Kong).

Gleneagles HK to drive EBITDA growth in the medium term, similar to Mt E Novena in FY13 to FY15. 

• While it may be too early for the hospital to present significant outperformance at this point, we liken Gleneagles HK to the ramp-up of Mount Elizabeth Novena Hospital (Mt E Novena) in Singapore. Since the latter opened in July 2012, it has largely driven IHH’s EBITDA growth from FY13 to FY15 despite contributing 1% to 6% of the group’s FY13 to FY15 EBITDA. Mt E Novena achieved EBITDA positive within a year and saw strong EBITDA growth in FY13 after the hospital’s preliminary costs were offset by the increase in revenue.
• Based on historical price trends, the re-rating of share prices appears to be positively correlated with EBITDA growth. We believe Gleneagles HK would be one of the major hospitals to drive IHH’s EBITDA growth in the medium term as it leads IHH’s expansion into China. While start-up costs may escalate in the short term, we expect to see some significant revenue growth to offset initial operating losses from 2H17 onwards.
• Our estimates assume Gleneagles HK to achieve EBITDA positive by FY18E and to contribute approximately 1% to 2% in FY18E to FY19E conservatively, reversing from a loss of 3% and 2% losses in FY16A and FY17E (9% in 1Q17).
• The second growth driver could be led by Acibadem’s largest hospital, Altunizade Hospital which had opened in Mar 2017, barring any major depreciation of the Turkish lira.

Seeing is believing – a visit to Gleneagles HK. 

• Given the great anticipation on its opening, we organised a site visit to the newly opened 500-bed hospital in May 2017 and has garnered strong interests from investors.
• At first impression, the entrance to the hospital was impressive with receptionists ever-ready to receive visitors / customers / patients. While the hospital has its unique curves, there were “touches” from Mount Elizabeth Novena Hospital. One of which was highlighted by management recently that the air freshener used had the same scent as Mount Elizabeth Novena Hospital which differentiates itself from ordinary hospitals.
• With the hospital now open, we understand that there are some early positive signs though these have yet to be translated into numbers.

1) Demand for more complex cases, contrary to experiences in most new hospitals. 

• One of the more positive key takeaways was we understand that there was demand for more complex cases, contrary to what new hospitals would typically experience in the early stages of operation. 
• While the hospital has conducted some complicated procedures to-date, management remains cautious on the acceptance of these cases and stresses that the evaluation of the risks involved would be key priority at the moment.

2) First to implement competitive package pricing in Hong Kong; attractive for insurance. 

• Gleneagles HK is the first private hospital to implement all-inclusive fixed package pricing, in compliance with one of the terms required by the government as part of its effort to encourage pricing transparency for medical services in Hong Kong. At the moment, Gleneagles HK has rolled out package pricing for 54 procedures ranging from HK$13k to HK$190k with a target to increase to 150 packages progressively.
• We believe the package pricing could be attractive for insurance companies as this gives them visibility and to a certain extent certainty in medical costs. We understand that the roll-out of its partnerships with insurance companies would commence from 2H17 which could draw a greater number of patients.
• Most of the questions asked during the site visit were on the implementation of package pricing as this is a relatively new concept in Hong Kong. The package fee is offered to patients based on the recommendation of doctors following an assessment on the level of risks (additional charges apply to medium risks and package prices are not applicable for high risks cases) and is only applicable for standard rooms only.
• While it is not easy to compare the package prices with fees charges by other private hospitals as the services or the complexity of the procedures included may differ, a rough comparison of common and simple procedures (including cataract, gastroscopy, knee arthroscopic, hysterectomy and ovarian cystectomy) showed that the package rates offered by Gleneagles HK are largely below the average rates charged by private hospitals in Hong Kong island (lowest priced procedure at Gleneagles HK ie the highest average rates charged by its peers to Gleneagles HK price is 1.43x) with a few procedures were at a premium (0.73x average rates to Gleneagles HK price). 
• In comparison with the average rates (for single bed) at Mt E Novena and Mount Elizabeth hospitals in Singapore, Gleneagles HK’s rates appear to be at much lower prices (indexed to Gleneagles prices, at the higher end of the range is 2.96x to 3.38x) with only a few procedures were at higher rates. At first glance, the package fee appears competitive relative to its peers in Hong Kong and Singapore, which could draw more interests / demand. However, we could not generalise on the profitability of the package as i) there may be additional charges depending on the risk level of the cases, and ii) while this may be true for common and simple procedures, it is harder to determine for more complex procedures.

3) Attractive room rates to draw patients; VIP suite was occupied. 

• As part of IHH’s service to provide comfort and privacy to its patients, Gleneagles HK only has private (single bed) and standard (double bed) rooms. While approximately 50% of the bed capacity are in standard rooms (to cater for the 51% of inpatient days at packaged rates as agreed upon with the regulators), there are various types of private rooms which ranges from a handful of VIP suites, Junior suites (six suites), premium single and single rooms. The room rates ranges from HK$1,150 (SGD207) for standard rooms to HK$8,000 (S$1,440) for Junior suites. 
• While the standard room rates are at very attractive rates compared to the average double bed room rates offered by private hospitals in Hong Kong island (4% to 23% lower), the private rooms are quite comparable to the average rates. The competitive pricing serves as tool to attract patients while treatment prices remain comparable to market rates. The room rates at Gleneagles HK are comparable to the room rates charged at Mt E Novena and Mount Elizabeth Hospitals in Singapore.
• In addition, it was encouraging to note that the VIP room was already occupied during our visit.

4) Signed 600 consultants and 30 HKU doctors seconded upon opening; target 1000 consultants and 45 HKU doctors. 

• On the opening of the hospital, Gleneagles HK has signed on 600 consultants with a target to increase to 1000 consultants, more than 400 nurses and 50 onsite doctors. As part of its collaboration with the Li Ka Shing Faculty of Medicine of The University of Hong Kong (HKU), Gleneagles HK expects to have 45 Head of Departments from HKU to be seconded as full-time doctors at the hospital. To-date, 30 HKU doctors have been seconded. 
• On the doctors’ directory board displayed at the hospital lobby, 23 specialties were listed (out of 35 specialties offered) with 68 identified doctors, of which 38 are from HKU. The specialties include cardiology, clinical oncology, neurology, and orthopaedics and traumatology. The list includes some renowned names such as Professor Hextan Ngan YuenSheung, head of HKU’s obstetrics and gynaecology department, and private neurosurgeon Dr Dawson Fong To Sang.

5) State of the art equipment. 

• As the first new hospital in more than two decades, Gleneagles HK has the advantage to equip its hospital with state of the art equipment and facilities including PET CT, nuclear medicine and operating theatres. 
• In addition, it has 13 operating theatres, the largest among the private hospitals in Hong Kong island, and is the second private hospital to have an Accident & Emergency department.

6) Close proximity to new Ocean Park MTR station; onestop to Admiralty MTR station. 

• The hospital is less than five minutes’ walk (tried and tested) to the newly open Ocean Park MTR station, which is one stop away from the Admiralty MTR station. As such, it takes less than 10 minutes from Gleneagles HK to the Admiralty MTR station. The hospital offers a free shuttle bus service to the Ocean Park MTR station at 20 minutes interval for easy access to its visitors.

Front runner for Fortis Healthcare… good in the long-term; cautious in the short-term? 

• We continue to remain positive on Gleneagles HK and IHH’s expansion plans in the medium term. With two large hospitals now opened (Gleneagles HK and Acibadem Altunizade) and another two hospitals in the pipeline in China (Chengdu and Shanghai), we believe IHH is heading on a growth path in the medium term.
• However, the recent news on IHH is said to be the sole contender for Fortis Healthcare may raise some concerns in the near term. 
• While Fortis Healthcare has a strong platform of hospitals across India with a good footing in North India will be an attractive platform for IHH to expand in the country, if successful, we believe potential integration costs post acquisition may once again moderate its near-term growth potential. 

Fortis Healthcare has only turned marginally positive on the bottomline in FY16/FY17. 

• Fortis Healthcare’s FY17 earnings at INR4.9m (RM327k), is less than 1% of IHH’s FY17E net profit. Revenue and EBITDA is 27% and 14% of IHH’s FY17E estimates.
• According to media, TPG’s offer in Jan17 estimated the total valuation for Fortis Healthcare (including its diagnostic business, SRL) was Rs16.5k crores (RM11bn) which implies a 35x FY17A EV/EBITDA. IHH’s proceeds from the sale of its stake in Apollo was Rs1.9k crores (RM1.3bn; 12% of Fortis’ valuation as of above).

Valuation

Maintain BUY, TP at RM7.15. 

• We maintain our BUY rating and TP at RM7.15. The key potential catalysts are: 
  1. positive performance and shorter-than-expected gestation period from Gleneagles HK and the other new hospitals, 
  2. better-than-expected performance from existing operations despite the economic slowdown, and 
  3. positive developments in new markets, such as India.

Key Risks to Our View

1. Economic slowdown; 
2. lower-than-expected performance, especially in new markets; 
3. government policy changes; and 
4. potential acquisition of Fortis Healthcare could be positive in the long term but may moderate earnings growth in the near term.

Rachel Lih Rui Tan DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2017-06-14

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 7.150 Same 7.150