News/ Comments

• IHH Healthcare’s wholly-owned subsidiary Parkway Group Healthcare Ltd (PGH) has entered into a share purchase and subscription agreement with Taikang Insurance Group (TIG), to divest 29.9% equity stake in PCH Holdings Pte Ltd, the holding entity for IHH’s Mainland China portfolio of primary care clinics and Greenfield hospital projects to TK Healthcare Investment Ltd.

• The divestment of the shares in PCH to TK Healthcare Investment Ltd for a total cash consideration of approximately RMB1.1bn (RM689.6m) will be effected through a combination of a secondary sale of PGH’s shares in PCH and an allotment of shares by PCH to Taikang.

• The primary proceeds of the divestment will be employed for working capital and growth strategies of PCH. We don’t expect the divestment to have any material impact to the group in the near term.

• We are positive on the divestment as this partnership would enable IHH to solidify its presence in the China market with a recognized and established partner to further grow its footprint. TIG’s core operations include insurance, asset management and elderly care/assisted living, as such this partnership has clear synergistic motives.

• The tie up with TIG has in essence, secured a large base of customers for IHH’s operations in China through the referral and coverage of TIG’s existing clients at PCH’s clinics and hospitals.

• A check on their website reveals that TIG has served collectively 167m customers in China across its 3 core business lines. Furthermore, their insurance arm boasts 4200 agency networks with the mobility of 400,000 agents on the ground. IHH and TIG will also be jointly funding future projects in proportion to their shareholdings in future.

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 / competitive / 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 (see Figure #1).

Source: Hong Leong Investment Bank Research - 14 Nov 2016