IHH Healthcare Bhd - CIMB Research 2017-11-28: 3Q17 HongKong Still The Relative Underperformer

IHH Healthcare Bhd - CIMB Research 2017-11-28: 3Q17 HK Still The Relative Underperformer IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare Bhd - 3Q17 HK Still The Relative Underperformer

  • IHH’s 3Q17 core net profit of RM125m (-42.4% yoy) was a miss against our/consensus expectations, largely due to RM69m start-up costs at Gleneagles HK.
  • Singapore saw continual patient load growth (especially foreign patients), and Malaysia benefitted from higher average revenue intensity.
  • IHH is on track to open its first China hospital in Chengdu in late 2018/2019, but initial operating expenses should not be alarming, in our view.
  • Recent US$500m senior perps issuance could come in handy for potential M&As.
  • Maintain Add, with lower FY17-19F forecasts and TP.

3Q17 core net profit was a miss 

  • IHH’s 3Q17 topline of RM2801m (+14.7% yoy) met our/consensus expectations, led by continued demand and ramp-up at Parkway Pantai (+13.8% yoy) and Acibadem (+17.5% yoy). However, EBITDA was eroded by start-up costs from Gleneagles HK, which resulted in a 42.4% yoy drop in core net profit. 
  • 9M17 core net profit only formed 49%/47% of our/consensus full-year numbers.

Malaysia and Singapore, boleh! 

  • IHH continues to record a double-digit yoy improvement in average revenue per inpatient admission for both its Singapore and Malaysia operations, thanks to its strong appeal to foreign patients (particularly from Indonesia and Indo-China), and focus on developing more centres of excellence (COEs). 
  • We are unfazed by the muted inpatient volume growth in Singapore (+1.1% yoy) and Malaysia (-2.2% yoy), which we attribute to the occurrence of more public holidays in a seasonally-weak 3Q17.

HK and India operations still underperforming 

  • While Gleneagles HK (opened in Mar 17) was still loss-making, we note that its EBITDA loss narrowed to RM69m in 3Q17, from 2Q17’s RM72m loss. 
  • We remain positive on its continual ramp-up in operations (esp. more complex procedures) and mom growth in patient load, but think it will reach EBITDA breakeven in FY19F (instead of FY18F prev).
  • India also recorded a small, negative EBITDA of RM2.6m (vs. 2Q17’s positive RM4.5m) after incurring some inter-company management fees.

China to become the fifth foothold market 

  • IHH remains on track in its China expansion plans, starting with Chengdu, Nanjing and Shanghai in late 2018-2020. Its 350-bed capacity Chengdu hospital will first open with 80-100 beds and an estimated 40-50 doctors. 
  • We expect some pre-opening expenses from 2H18 onwards, but do not think that this will be extensive given the ‘asset-light’ model and 49% ownership. We also note that its recent issuance of US$500m perps is a sizeable war chest for the group to pursue more aggressive M&As in the near-term.

Add call intact, with a lower SOP-based target price 

  • We lower our FY17-19F EPS by 6.8-19.6%, after adjusting for higher operating expenses from Gleneagles HK, higher financing charges and the recent issuance of US$500m senior perps at 4.25%. 
  • Our SOP-based target price falls slightly to RM6.36. 
  • While multiple expansion plans may weigh on near-term profitability, we continue to like the stock for its established track record and global presence. 
  • Potential M&As are a key catalyst, while downside risk could stem from poor overseas execution.

NGOH Yi Sin CIMB Research | http://research.itradecimb.com/ 2017-11-28
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 6.36 Down 6.990