News/ Comments

• Recent statistics released by the Turkish tourism ministry highlights the plight of the industry which has been rocked by a string of terror attacks and a coup attempt.

• The broad general trend highlights that inbound tourism has declined in 1H16 (see Figure #1). This trend is expected to follow suit into 3Q16 which is historically the busiest period as it coincides with summer holidays in Europe. As we zoom down into sector specifics, 1H16 also recorded a yoy decrease of 18.7% in medical tourist (see Figure #2).

• Acibadem contributed 34% and 11% to the group’s revenue and PATAMI, respectively in 1HF16. Foreign patients account for approximately 8% of Acibadem’s revenues or circa 3% of group revenues.

• Despite the murky medical tourism outlook in Turkey, we continue to expect minimal impact on IHH’s earnings from this evolution of events. We also have reason to believe that Turkey is the main beneficiary of the regional instability as healthcare infrastructures in the region is destroyed, patients seeking treatment in the affected localities will flock to Turkey due to (i) it being a Muslim country, and (ii) Lira depreciation and cost effectiveness makes it an attractive destination. Yoy the Lira has depreciated circa 6% against the USD.

• While concerns regarding regional stability will continue to affect sentiments in the near term, long term prospects remain on solid foundations. Domestic patient growth in Turkey is still intact. In 2Q16, in-patient admissions grew by 15.6% yoy.

• We are still positive on the long term prospects of medical tourism for Acibadem, as the services rendered in Turkey are at a significant discount to treatments on offer in Western Europe, which is a key target market (see Figure #3).

• That aside, we continue to expect IHH to experience some margin pressure in the coming quarters as the group ramps up the opening of 500 beds in Gleneagles Hong Kong and Acibadem Altunizade for early 2017.

Catalysts

• Strategic geographic footprint in key gateway markets ready to take on the ageing and over stretched capacity of hospitals and tertiary healthcare services in Western Europe and East Asia. Growing population and rise in affluence in domestic markets will support demand for high quality healthcare.

Risks

• Regulatory / Political / FOREX risks;

• Higher staff cost; and

• Inability to unlock synergies of the enlarged entity.

Forecasts

• Unchanged.

Rating

HOLD TP: RM6.23

• Whilst we like IHH for its exposure to key gateway markets, good management and strong reputation, earnings delivery in the near term will be hampered by higher pre-operational costs as the new hospitals are likely to take time to mature.

Valuation

• Reiterate our HOLD call and unchanged SOP-derived TP of RM6.23 .

Source: Hong Leong Investment Bank Research - 13 Oct 2016