Results

• Below Expectations – 9MFY16 revenue of RM7.39bn was translated into core earnings of RM643.6m, making up 66.0% of HLIB and 65.1% of 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 expedited to commence operations next year by 1Q17 and higher wage inflation.

Dividend

• None.

Highlights

• 3Q inpatient admission volume: Growth across all 4 home markets – SG, MY, TRY and IND grew 13.6%, 9.0%, 47.9% and 7.1% yoy.

• 3Q average revenue per inpatient admission: MY, and IND charted growth of 10.2% and 5.2% yoy; whilst SG and Try saw decline of -3.0% and -9.7% yoy.

• YTD: Revenue grew 20% yoy attributed to organic growth of existing operations, ramping up of operations of hospitals opened in 2015 and consolidation of recent acquisitions. EBITDA grew 12% yoy mainly driven by topline growth. Core PATAMI decreased 6% yoy due to increased depreciation from new hospitals and higher finance costs.

• Qoq: Revenue and EBITDA decreased by 1% due to a seasonally weaker quarter. Core PATAMI increased 16% due to lower depreciation and profits attributable to minorities in the quarter.

• We continue to expect pre-operating expenses eroding earnings in the near term. To note, Gleneagles HK has 400 nurses, 300 visiting and 50 residential doctors on their books currently. Management guided that based on their recent track record GHK could possibly break even 18 months post commencement of operations.

• Singapore and Turkey have both seen a decrease in the arrival of medical tourists partially offset by rising number of local patients on less complex cases.

• Management reiterated that the proposed divestment to Taikang is not a cash call, but purely strategic. The group hopes to leverage off Taikang’s strong network to expand their footprint into China, especially in tier 2 cities. To note gearing stands at a comfortable 0.21x and with cash holdings of RM2.1bn as at 30 th September.

Catalysts

• Strategic geographic footprint in key gateway markets. Growing population and rise in affluence in domestic markets will support demand for high quality healthcare.

Risks

• Regulatory / competitive / FOREX risks, increase in staff cost and inability to unlock synergies of the enlarged entity.

Forecasts

• We adjust our forecast to account for the higher pre-operating and startup costs incurred by the new hospitals and greater revenue intensity from existing hospitals and recent acquisitions. Our FY16/17/18 EPS is revised by -2%/2%/10%.

Rating

• HOLD ↔ TP: RM6.32

• 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

• Our SOP-derived TP is raised to RM6.32 from RM6.23 post adjustment. Maintain HOLD .

Source: Hong Leong Investment Bank Research - 25 Nov 2016