Results

• Below Expectations – 1HFY16 revenue of RM4.95bn was translated into core earnings of RM426.0m, making up 40.6% of HLIB and consensus expectations, respectively.

Deviations

• Due to higher start-up costs from new hospitals as well as pre-opening expenses incurred in preparation for Gleneagles Hong Kong and higher wage inflation.

Highlights

• Higher inpatient admission volume: A mixed growth for 4 home markets – SG, MY, Turkey and India grew 7.5%, - 0.4%,-0.1% and 15.7% yoy. India, on the other hand, was flattish, increasing 0.6% yoy. Higher growth in SG was due to greater number of local patients and medical tourists.

• Higher average revenue per inpatient admission: All of its home market – SG, MY, Turkey and India charted higher growth of 7.8%, 5.5%, 8.9% and 0.4% yoy. This is mainly on the back of more complex cases coupled with price adjustment to account for cost inflation.

• Deterioration in inpatient admissions in Malaysia (-4% qoq) is attributed to overhanging cost of living pressures. Management guided that patients are opting to delay minor surgery, and there is a marked shift in patients to the public hospital system. Nonetheless they expect to see a revival in 1-2-quarters.

• Singapore is seeing a healthy growth of in incoming medical tourists from China, Indochina, Bangladesh and Myanmar in Q2. These are non-traditional markets. In Q2 28% of revenues can be attributed to medical tourists.

• The failed coup attempt has not thwarted Acibadem’s contributions. Management shared that there was an almost immediate recovery in inpatient volumes over a 3 day period. Management guided that local patient growth is stable. We note that the downside stems from a reduction in foreign patient admissions, which has yet to materialize. Nonetheless, we will continue to monitor the developments in Turkey. To note, yesterday marked Turkey’s official entry into the Syrian conflict.

• IHH’s expansion plans are on track with HK being expedited, with most of the projects targeted to complete in FY17. In June the group secured a contract to develop a 450 bed multispecialty tertiary hospital to further strengthen their exposure in China. The hospital is expected to open in 2020.

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

• We adjusted our forecast downwards to take into accounts the higher pre-operating and startup costs incurred by the new hospitals. Our FY16EPS is revised downwards by 7%.

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 – Political risk in Turkey, 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 - 26 Aug 2016