IHH Healthcare Bhd - CGS-CIMB Research 2019-06-10: Becoming A Pan-Asian Healthcare Provider

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IHH HEALTHCARE BERHAD (SGX:Q0F)

IHH Healthcare Bhd - Becoming A Pan-Asian Healthcare Provider

• GHK’s EBITDA loss is narrowing, with potential breakeven by end-FY19F.
• Phased opening of Gleneagles Chengdu Hospital in late-2019F will better manage gestation costs, the majority of which are slated for FY20F.
• We think IHH HEALTHCARE BERHAD (SGX:Q0F)’s strategic direction is intact amid leadership changes; ADD.

North Asia to become its 5th market

• Since its opening in Mar 2017, IHH Healthcare’s 60%-owned Gleneagles Hong Kong (GHK) Hospital (licensed capacity: 500 beds) has made significant progress in ramping up its inpatient and outpatient load, raising revenue from RM77m in FY17 to RM290m in FY18, and narrowing EBITDA loss from RM287m in FY17 to RM178m in FY18. As of 1Q19, it recorded bed occupancy of 68-70% (based on 150 beds).
• GHK continues to expand its service offerings (screening, psychiatric, cardiac care, oncology, etc.) to attract more mainland Chinese and fee-paying patients. We expect a gradual profitability improvement, with potential EBITDA breakeven by end-FY19F.
• IHH Healthcare’s 70%-owned Gleneagles Chengdu Hospital is currently undergoing retrofit and moving of equipment, with a phased opening of 100 beds scheduled for 4Q19F (for now, it has no plans to cater to China's social health insurance patients). The hospital is strategically located in Perennial International Health and Medical Hub, next to the Chengdu East high-speed railway (HSR) station, helping it to tap into wider healthcare demand from the Southwest China and Sichuan province.
• Staff recruitment is underway; IHH Healthcare targets c.30% foreign doctors and c.70% local doctors for Gleneagles Chengdu Hospital. With the slight delay in opening, we expect the bulk of the start-up costs for the Chengdu hospital to be incurred in FY20F.
• Apart from its network of Parkway Health primary care medical centres, we believe IHH Healthcare’s 60% equity interest in Chengdu Shenton Health Clinic (acquired in Mar 2018 for Rmb12m) will also contribute patient referrals to its hospitals in China. IHH Healthcare's 2nd project in China, a 450-bed hospital in Shanghai, is on track to open in 2H20F.

Strategic direction intact amid leadership changes

• Following the stake sale from Khazanah to Mitsui & Co (8031 JP, now IHH Healthcare’s largest shareholder, with 32.9%) in late-2018, on May 2019, IHH Healthcare announced that its current CEO Dr Tan See Leng will be stepping down once his contract expires on 31 Dec 2019. He will be replaced by Dr Kelvin Loh, who will join the group on 1 Jul 2019.
• Despite the changes to IHH Healthcare's board and management, we believe its vision of becoming a leading healthcare player in Asia is unchanged; near-term priorities for the new leadership are likely to remain:
  1. Fortis restructuring,
  2. Acibadem’s debt optimisation, and
  3. expanding IHH Healthcare’s presence in North Asia.
• A new CEO and CFO have also been appointed at Fortis, which should bring stability to the group and spearhead its earnings turnaround.
• We maintain our ADD call on IHH Healthcare, with an SOP-based Target Price of RM6.37.
• We see its share price re-rating as management delivers on the new hospitals and restructuring plans.
• Downside risks to our call are unfavourable FX and policy changes.

NGOH Yi Sin CGS-CIMB Research | https://research.itradecimb.com/ 2019-06-10

SGX Stock Analyst Report ADD MAINTAIN ADD 6.37 DOWN 6.400