Results

• Slightly Below Expectations - 1QFY16 revenue of RM2.5bn was translated into core earnings of RM238.3m, making up 23% and 22% of HLIB and consensus expectations, respectively.

Deviations

• Due to the start-up losses from new hospitals as well as preopening expenses incurred in preparation for Gleneagles Hong Kong (set to open next year; 1Q17).

Dividend

• None.

Highlights

• Due to its stronger presence in India (acquisition of Global Hospitals), IHH now includes India as its fourth home market.

• Higher inpatient admission volume: A solid growth for 3 home markets – SG, MY and Turkey which grew 10.9%, 9.6% and 16.9% yoy. India, on the other hand, was flattish, increasing 0.6% yoy. Higher growth in SG was due to greater number of local patients.

• Higher average revenue per inpatient admission: All of its home market – SG, MY, Turkey and India charted higher growth of 0.3%, 3.2%, 8.0% and 6.4% yoy. This is mainly on the back of more complex cases coupled with price adjustment to combat the higher costs.

• We believe earnings would be slightly slower in Turkey due to the higher staff costs resulting from Turkish government’s implementation of higher minimum wages effective 1st January 2016 coupled with geopolitical issues in Turkey. The group stated that it would mitigate the higher costs by increasing productivity and producing quality patient service.

• IHH’s expansion plans are underway, with most of the projects targeted to complete in FY17. The group is expecting to increase approximately 1100 beds in FY17. We believe the group would be able to capture more demand for premium healthcare services domestically and internationally.

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

• No changes to our forecasts as we expect stronger earnings in the subsequent quarters.

Rating

HOLD TP: RM6.23

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 our HOLD call and unchanged SOP-derived TP of RM6.23 (see Figure #6).

Source: Hong Leong Investment Bank Research - 27 May 2016