IHH Healthcare (IHH MK) - DBS Research 2017-11-28: Getting There!

IHH Healthcare (IHH MK) : - DBS Vickers 2017-11-28: Getting There! IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare (IHH MK) - Getting There!

  • IHH Healthcare's 9M17 core net profit fell 36% y-o-y due to start-up losses.
  • Encouraging to see 3Q17 core net profit up 45% q-o-q from improvements in existing operations.
  • Gleneagles HK recorded stable losses on higher revenue; Altunizade trio posted a smaller decrease in EBITDA.
  • Gleneagles Chengdu is next in the pipeline; M&A opportunities in India.


3Q17 core net profit improved 45% q-o-q but 9M17 still down due to start-up losses. 

  • 9M17 core net profit fell 36% y-o-y largely due to pre-operation / start-up costs. However, it was encouraging to see that 3Q17 core net profit grew 45% q-o-q to RM125m, mainly led by improvements in existing operations despite the start-up losses. 
  • Headline 9M17 net profit grew 33% y-o-y to RM869m (81% of our FY17F estimates), due to disposal gains of its stakes in Apollo Hospital in 1H17. But 9M17 core profit fell 36% largely due to
    1. pre-operation / start-up losses from the opening of Gleneagles HK (RM219m),
    2. lower EBITDA (- RM46.7m) on a blended basis for 3 hospitals (more details below – comments on Turkey) including the newly opened Acibadem Altunizade Hospital;
    3. higher depreciation and amortisation (+18% y-o-y) expenses as two new hospitals commenced operations in Mar 2017,
    4. higher finance costs (+83% y-o-y), and
    5. forex losses of RM202m vs forex loss of RM91m in 9M16.

3Q17 net profit fell 53% y-o-y to RM82m. 

  • Core profit fell 42% y-o-y to RM125m, largely from start-up losses from the opening of Gleneagles HK (RM69m), lower EBITDA (-RM5m) on a blended basis of 3 hospitals (more details below – comments on Turkey) including the newly opened Acibadem Altunizade Hospital, higher depreciation and amortisation (+24% y-o-y) and finance costs (+31% y-o-y) mainly due to the recent opening of two hospitals; offset by lower forex losses (-5%).
  • Revenue growth from all business units boosted by ramp up in newer hospitals. The group posted 12% y-o-y revenue growth in 9M17 (15% growth on a constant currency basis).
  • All business units posted positive growth, partially boosted by contributions from the ramp-up of Mount Elizabeth Novena Hospital and hospitals which opened in 2015 such as Gleneagles Kota Kinabalu, Gleneagles Medini and Acibadem Taksim, and new hospitals such as Gleneagles HK and Acibadem Altunizade Hospital. 
  • While inpatient admission volumes recorded muted growth in Singapore (+1.1%) and Malaysia (-2.2%), average revenue per inpatient admission improved led by higher revenue intensity.

EBITDA margin showing signs of improvement q-o-q. 

  • 9M17 EBITDA (excluding PLife REIT) fell 4% (-2% on a constant currency basis) largely due to start-up costs while 3Q17 EBITDA grew 3% y-o-y (4% on a constant currency basis), with an improvement in 3Q17 margins to 17.7% from 17% in 2Q17 (4Q16: 18.3%; 3Q16: 21.3%). EBITDA margins (excluding new hospitals) improved marginally to 20.9% from 20% in 2Q17.
  • As we had previously assumed, margins could stabilise or potentially improve gradually (depending on the speed of ramp-up) as start-up losses from Gleneagles HK and Acibadem Altunizade Hospital continue to narrow (more details below – comments on Turkey), assuming ceteris paribus. In the second quarter of operations for these two new hospitals, losses from Gleneagles HK remained relatively stable q-o-q at RM69m in 3Q17 despite revenue growth of 69%. 
  • Expenses were higher as the hospital expanded its range of services. However, for Acibadem Altunizade Hospital, on a blended basis together with 2 other “satellite” hospitals, the decrease in EBITDA narrowed to RM5m in 3Q17 from RM20.1m in 2Q17. 
  • Management is optimistic that the cluster of hospitals could breakeven soon.

SINGAPORE – higher revenue from foreign patients; Mount Elizabeth Novena to fully open by year-end. 

  • In 3Q17, Singapore operations posted revenue growth of 9% on the back of 1% higher inpatient admissions and 12% improvement in Average Revenue per Inpatient Admissions (ARPIA) following higher intensity cases. 
  • Revenue from foreign patients grew 25% y-o-y led by Indonesians coupled with positive trends from Indochina and India. Hence, EBITDA grew 23% y-o-y. On a constant currency basis, revenue rose 7% y-o-y while EBITDA grew 22%. In addition, Mount Elizabeth Novena continues to see occupancy rate above 60% and expects to be fully opened by year-end.
  • In 9M17, revenue rose 8% y-o-y while EBITDA was 15% yo-y higher. EBITDA margin improved to 27.4% vs 25% in 9M16.

MALAYSIA – higher APRIA as a result of more complex cases.

  • Malaysia registered revenue growth of 12% y-o-y in 3Q17 to RM467m, driven by 14% improvement in ARPIA to RM6,509, led by higher revenue intensity despite lower inpatient admission volumes (-2%). The 3 hospitals, namely Pantai Hospital Manjung, Gleneagles Kota Kinabalu Hospital and Gleneagles Medini Hospital continue to ramp up its operations, contributing to the growth in the Malaysian operations.
  • In 9M17, revenue rose 13% y-o-y while EBITDA was 15% yo-y higher. EBITDA margin improved marginally to 28.2% from 27.8% in 9M16.

HONG KONG – rising number of complex cases; implementation of tie-ups with insurance companies.

  • Revenue from Gleneagles HK grew 69% q-o-q to RM24m and ARPIA of c.RM29k was close to Singapore’s ARPIA. The hospital has yet to breakeven, recording a loss at EBITDA level of RM69m, relatively flat q-o-q despite higher revenue.
  • Management is encouraged that the hospital continues to undertake complex surgeries despite guiding for a longer breakeven period of 24 months. Moreover, management continues to see good traction in both inpatient and outpatient volumes especially now that the engagement and tie-up with insurance companies are slowly being implemented.

TURKEY – price increase of 9%.

  • Acibadem’s revenue grew 18% y-o-y in 3Q17 while EBITDA grew 44%. On a constant currency basis, revenue grew 32% y-o-y while EBITDA grew 60% with contributions from Tokuda Group and City Clinic Group in Bulgaria which were acquired in June 2016, and organic growth from the newer hospitals. Inpatient admissions grew 16% while APRIA increased 19% following a 9% increase in prices.
  • EBITDA margins increased by 2.3 ppts y-o-y to 13%, partially due to lower higher start-up losses from the new hospital. On a blended basis, Acibadem Altunizade Hospital together with 2 other existing hospitals, namely Acibadem Kadikoy Hospital and Acibadem Kozyatagi Hospital as part of management’s strategy in positioning Acibadem Altunizade as a high-spec, highly specialised hospital continues to record lower EBITDA, however the decrease has narrowed to RM5m in 3Q17 from RM20m in 2Q17.

INDIA – strong revenue growth but impacted by management fee. 

  • India operations continued to post strong revenue growth of 32% y-o-y in 3Q17, albeit small in terms of percentage contribution to group revenue. This was despite headwinds from pricing caps imposed by the government, hence ARPIA recorded muted growth of 2.1% y-o-y, mitigated by higher inpatient volumes (+18%).
  • However, EBITDA recorded a loss of RM2.6m in 3Q17 due to management fee charges.


  • With the 2 new hospitals, which opened this year, ramping up progressively, management is now planning for the opening of its first hospital in China, Gleneagles Chengdu which is expected to open by 4Q18. For a start, management expects to open 100 beds with 40 to 50 doctors, of which 60% are local doctors mainly from Chengdu and surrounding areas. 
  • Construction works for Gleneagles Shanghai is progressing well, and the hospital is expected to open by 2019 / 2020.
  • On M&A front, management continues to look for opportunities to expand in India and areas where it could continue to improve its technology and adopt new medical treatments.


Maintain BUY, lower TP to RM6.81. 

  • We remain positive on IHH’s growth plans, with a pipeline of new hospitals in China, and a turnaround in India. 
  • Despite the guidance of a longer-than-expected breakeven period for Gleneagles HK of 24 months, we believe the ramp up in Gleneagles HK could offset some start-up losses in China and lead IHH into its next phase of growth. IHH’s medium-term outlook is bright while it rides out its near-term gestation period for the new hospitals. 
  • 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 macroeconomic concerns, and
    3. positive developments in new markets such as India.

Rachel Lih Rui Tan DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2017-11-28
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 6.810 Same 6.810