Results

1H14 turnover of RM3.62bn was translated into core net profit of RM363.9m, accounting for 52.0% of HLIB’s full year forecast, but shy of consensus estimates by 5.8%, if annualized.

Deviations

Within expectations.

Dividend

None (2Q13: none).

Highlights

Inpatient admission volume: grew healthily yoy in all three key markets, with SG, MY and Turkey gained 11.5%, 13.0% and 8.0%, respectively. Sequentially, they expanded by 8.3%, 6.5% and 0.7% qoq, respectively. However, we expect these figures to decline in both SG and MY due to seasonality in conjunction of Ramadhan and Hungry Ghost festivals.

Average revenue per inpatient admission: intensity strengthened yoy in SG and MY by 0.7% and 8.6%, respectively while Turkeys’ waned by -1.9%. Sequentially, MY’s intensity was the only one expanded with 3.0% qoq, SG and Turkey’s weakened by 6.2% and 3.1% qoq, respectively.  

IHH is confident that emerging markets will continue to enjoy higher growth in demand for quality private healthcare driven by (1) demographics of home markets; (2) faster growing upper and middle class; and (3) increased medical travelers from non-traditional markets to medical hubs.

Top line growth will be sustained by opening new facilities and increase capacity to support increasing demand.

Challenges include inflationary impact on staff costs, rentals and other operating expenses and start-up costs of newly commissioned hospitals. IHH plans to mitigate them by increasing mix of higher revenue intensity cases, price adjustments and improve operating leverage, especially from improved margins of the 3 new hospitals opened in 2012.

Expect emerging markets to operate in an environment of volatile FOREX. IHH to mitigate by borrowing in the functional currency of the borrowing entity or by borrowing in the same currency as its foreign operations (ie. hedge of net investments).

Catalysts

Global population growth, ageing demographics, more affluent community, proliferation of medical tourism, overwhelming healthcare demand.

Risks

Regulatory / competitive / FOREX risks, increase in staff cost and unable to unlock the synergies of the enlarged entity.

Forecasts

Unchanged.

Rating

SELL, TP: RM3.72 

Positives –

• strong brand name, booming of medical tourism, high demand for quality healthcare services, continuous expansions and complemented by education arm.

Negatives –

• high staff cost and retention of reputational medical practitioners.

Valuation

Reiterate SELL with unchanged SOP-derived TP of RM3.72 (see Figure #4) as share price has run ahead of fundamentals.

Source:Hong Leong Investment Bank Research - 29 Aug 2014