Results

• 9M14 turnover of RM5.4bn was translated into core net profit of RM540.8m, accounting for 77.5% of HLIB’s full year forecast, but shy of consensus estimates by 7.1%, if annualised.

Deviations

• Within expectations.

Dividend

• None (3Q13: None).

Highlights

Inpatient admission volume (3Q14): grew healthily yoy in all three key markets , with SG, MY and Turkey gained 12.1%, 10.2% and 10.5%, respectively. However, growth was rather flat qoq, with SG being the only one recording a marginal positive growth of 1.5%. MY and Turkey contracted by 3.7% (due to seasonality in conjunction with Ramadhan and Hungry Ghost festivals) and 5.2% (due to summer months which usually have less medical cases), respectively.

Average revenue per inpatient admission: intensity strengthened yoy in all three home markets with SG, MY and Turkey increasing by 2.5%, 7.8% and 1.7%, respectively, driven by more complex cases. Sequentially, revenue intensity also improved in all abovementioned markets by 2.8%, 1.4% and 4.8%, respectively.

IHH is poised to capitalise on the growing demand for quality private healthcare in emerging markets, which are driven by (1) demographics of home markets; (2) faster growing upper and middle class; and (3) increased medical travel ers from non-traditional markets to medical hubs.

Revenue growth will be backed by increasing capacity from new facilities which captures increasing demand.

Challenges faced are inflationary impact on staff costs, rentals and other operating expenses and s tart-up costs of newly commissioned hospitals. Mitigation plans include an improved operating leverage (especially from improved margins of the 3 new hospitals opened in 2012), increased mix of higher revenue intensity cases and price adjustments.

IHH expects an environment of volatile FOREX in the emerging markets. The plan to minimise currency risk is by borrowing in the functional currency of the borrowing entity or by borrowing in the s ame currency as its foreign operations (i.e. hedge of net investments).

Catalysts

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

Risks

• Regulatory / competitive / FOREX risks, increase in staff cost and unable to unlock 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 as share price has run ahead of fundamentals.

Source: Hong Leong Investment Bank Research - 26 Nov 2014