IHH Healthcare - DBS Research 2018-03-21: One Belt, One Road, One Healthcare

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IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare - One Belt, One Road, One Healthcare

• Greenfield pipeline on track; Gleneagles HK on the verge of breakeven, pipeline China hospitals on track.
• Acquisition mode in 2018 to leapfrog its expansion plans, especially in India and/or China.
• Consolidation in Turkey to manage geopolitical risks.
• Positive on long-term growth plans; potential near-term gestation from new hospitals and potential acquisitions.

Maintain BUY, Target Price of RM6.81. 

• We maintain our BUY rating and Target Price of RM6.81 on IHH Healthcare (IHH). We remain positive on IHH’s growth plans, with a pipeline of new hospitals in China and turnaround in its India operations. 
• The key catalysts are:
  1. shorter-than-expected gestation period for Gleneagles HK and other new hospitals,
  2. better-than-expected organic performance, 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 growth phase, a view the market may not be convinced of just yet. 
• With start-up losses continues to moderate from 2Q17 onwards coupled with encouraging signs from tie-ups with insurance companies, Gleneagles HK losses could drop 7% y-o-y in FY18 (from a lower base in FY17), ceteris paribus.

Potential Catalysts: Shorter gestation period for new hospitals / organic growth / new brownfield or greenfield hospitals.

Greenfield pipeline on track; acquisition mode to leapfrog its expansion. 

• IHH’s greenfield pipeline remains on track with Gleneagles HK on the verge of breakeven and new hospitals coming online in China from 2019 onwards. With major capex now taking a breather, IHH is now looking at making acquisitions to leapfrog its expansion plans towards its “One Belt, One Road, One Healthcare” vision with its US$2bn multicurrency MTN warchest. 
• Management looking to consolidate its growth in Turkey to manage geopolitical risks.

Valuation

• We maintain our BUY rating with a Target Price of RM6.81, based on SOP valuation methodology.

Key Risks to Our View

1. Economic slowdown;
2. lower-than-expected performance, especially in new markets;
3. government policy changes; and 
4. ipotential acquisitions that may moderate earnings growth in the near term.

WHAT’S NEW - One Belt, One Road, One Healthcare 

One Belt, One Road, One Healthcare: 

• We brought management of IHH Healthcare (IHH) on a week-long sold-out non-deal roadshow (NDR) in North America (US and Canada), focusing on its FY17 results and potential growth outlook. IHH’s management shared its long-term vision, which can be summarised by the phrase ‘One Belt, One Road, One Healthcare’. 
• Looking at the new markets which IHH is targeting, HK / China, India, IndoChina and Turkey / Eastern Europe, complements its long-term vision to bring advanced medical technology and treatment from developed countries to emerging countries in the medical sector. This is specifically for a targeted segment of the market (top-tier) as it rides on the ageing population and rising affluence demographics of these emerging countries. 
• Strong potential growth from these emerging markets will be supported by existing stronghold markets such as Singapore and Malaysia.
• The feedback from investors was largely positive with most investors believing in management’s capabilities and agreeing that IHH has the least execution risks with regard to its growth plans. Interestingly, some investors think its share price is looking more attractive given its future growth plans.

Maintain BUY rating, Target Price of RM6.81: 

• We maintain our BUY rating with a Target Price of RM6.81, believing in the ramp-up in Gleneagles HK that could offset some start-up losses in China and lead IHH into its next phase of growth. 
• With potential acquisitions looming in the near future and thus, potential integration costs may moderate earnings growth in the near term, these acquisitions could give a turbo-boost to IHH’s expansions and bring it to greater heights in the medium to long-term.
• Given its historical track record, we remain positive on IHH’s growth plans and medium-term outlook as it rides out its near-term gestation period for new hospitals and potential acquisitions.

We discuss key points / themes discussed during the roadshow.

Greenfield expansions on track: 

• In the past few of years, IHH has been focused on greenfield expansions in both new and existing markets. The opening of Gleneagles HK marks its first foray into China, followed by a pipeline of hospitals – Gleneagles Chengdu (2019), Gleneagles Shanghai (2020) and Gleneagles Nanjing (2020). In Turkey, Acibadem Altunizade, its newest and largest hospital is expected to be anchored to handle the complex cases in Turkey, Bulgaria and Eastern Europe.
• Following the successful opening of Gleneagles HK and Acibadem Altunizade, all eyes were on the ramp-up of the hospitals.

Gleneagles HK on the verge of EBITDA breakeven 

• Despite the longer-than-expected breakeven period for Gleneagles HK, management continues to see good traction, especially now that the collaboration with insurance companies has been finalised. Post the signing of the collaboration, Gleneagles HK saw inpatient volumes growing at an average of 20% to 25% m-o-m, a positive sign in our opinion, albeit from a low base.
• Unlike the ramp-up of Mount Elizabeth Novena Hospital previously and in most new hospitals, Gleneagles HK continues to undertake more complex surgeries and have performed over 400 surgeries to-date and on average performed 15 surgeries in a day. This has been partially reflected in the average revenue per inpatient admission (APRIA) of close to RM30k, slightly below that of Singapore’s APRIA.
• Gleneagles HK continues to open new services with the latest being the opening of obstetrician and gynaecology division after obtaining the licence in the beginning of 2018 and have since delivered three babies. However, we do note that the number of obstetrics bed is capped at 16 beds, according to the terms and conditions of the tender. Other new services includes PET MRI services, radiotherapy, oncology centre, dialysis centre and three more specialist outpatient centres such as orthopaedic, skin and laser, dermatology and haematology. With most of the services and insurance tie-up are now in place, management expects the pick-up to improve and the numbers should see more positive signs in the next 2-3 quarters.
• In FY17, Gleneagles HK incurred a total EBITDA loss of RM284m. Conservatively, based on management’s guidance of 2-year time period to reach EBITDA breakeven (in 1Q19) and assuming a straight-line decline in quarterly EBITDA losses, the lower losses in FY18 is estimated to be approximately 7% of the group’s EBITDA, ceteris paribus. If IHH is successful to achieve breakeven earlier than the expected 2-year time period, FY18F y-o-y EBITDA growth could be higher than 7%, ceteris paribus.

Progress on Gleneagles Chengdu and Gleneagles Shanghai on track! 

• Progress on Gleneagles Chengdu and Gleneagles Shanghai are on track with Gleneagles Chengdu now being fitted out and construction for Gleneagles Shanghai is progressing well targeting to complete by 2019. The team used to setup Gleneagles HK has been moved to Chengdu in anticipation of its opening. 
• With Gleneagles HK acting as the gateway for China and the Pearl River Delta (southern China), Gleneagles Chengdu will be the hub for Northwest China (Xi’anChongqing-Chengdu link) and Gleneagles Shanghai will be the centre for Yangtze River Delta.

Acibadem Altunizade and consolidation in Turkey 

• The less mentioned, Acibadem Altunizade was another sizeable hospital which opened in 2017. The ramp-up of Acibadem Altunizade remains on track acting as a hub with referrals of complex cases from two other smaller hospitals, Acibadem Kadikoy and Acibadem Kozyatagi hospitals.
• On a blended basis, 9M17 EBITDA decreased RM46.7m (4Q17 / FY17 decline in EBITDA was not disclosed). While the drag on EBITDA is of a lesser extent compared to Gleneagles HK, if it successfully breakeven within one year (by Mar 2018, as per the other hospitals in Turkey), could potentially add 2%-3% y-o-y EBITDA growth.
• Following the geopolitical and forex risks, management has decided to consolidate its Turkey expansions now that Acibadem Altunizade is open. This allows IHH to better manage its cash flow, storing up firepower for future usage and gives them the opportunity to reap the growth potential of the new hospitals without being diluted by more opening of new hospitals.

Acquisition mode in 2018 to boost its expansion: 

• With capex taking a breather in the next couple of years, as two major hospitals opened last year and next major opening only in 2020; Gleneagles Shanghai, management believes it is timely to enter into an acquisition mode this year to boost its presence and expansion plans in India and China. While greenfield expansion drives growth at a steady pace, acquisitions can speed up its growth trajectory. 
• In addition, management has built a warchest with the establishment of US$2bn multi-currency MTN and the issuance of US$0.5bn at 4.25% to 4.37% interests in anticipation of an attractive potential takeover target.
• Shortly post-NDR, the Economic Times reported IHH could be interested in Fortis Healthcare again after walking out on the negotiations last year. We do not rule out the possibility due to
  1. Fortis Healthcare’s share price has fallen some 23% since the previous negotiations,
  2. IHH has secured a warchest of US$2bn multi-currency MTN and issued US$500m perpetual securities in 2017, and
  3. management in acquisition mode for 2018. 
  Further comments in the report Singapore Healthcare: Second time lucky?.
• Today, DealStreatAsia reported that IHH had submitted a bid to buy a controlling stake in India’s Medanta and again potentially competing with Temasek. While Medanta has qualities which complements to IHH’s expansion strategy in India (location in Gurgaon, North India and known for cardiac, liver and kidney transplant), we believe the key to a potential deal depends on the acquisition price and whether IHH is able to obtain control. Further comments in the report IHH Healthcare: Double down in India? 

Bringing state-of-the-art medical technology and forefront medical treatment to remain competitive: 

• Apart from acquiring brownfield acquisitions, management is also interested in bringing state-of-the-art medical technology and forefront medical treatment to remain competitive to serve the top 5%-10% of the population who can afford top-notch medical services in Asia, especially emerging giants such as China, India, Indonesia and IndoChina. 
• Management has plans to acquire the brand name, know-how and / or technology in developed markets such as the UK. IHH will be able to value-add through its network of hospitals in emerging countries, offering potential growth in these entities to outside its geographical scope.

Organic growth opportunities via intensity in case mix 

• One of the questions asked was whether organic growth in existing markets such as Singapore and Malaysia have reached a plateau with its dominance in market share and the stability of these markets. Management believes that there are still growth opportunities in Singapore and Malaysia via the intensity in case mix. This is largely led by
  1. an ageing population that increases the volume of chronic diseases, and 
  2. rising affluence that enlarges its target market (those who could afford its services). 
• As such, there is still room to expand its EBITDA margin to 30% to 37%, in line with the margins of a mature hospital.

Rachel Lih Rui TAN DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2018-03-21

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 6.810 Same 6.810