KPJ Rawang is a 160 bed specialist hospital located in the northern corridor of Selangor. It achieved EBITDA breakeven within 3 years, namely due to its (i) strategic location, (ii) lack of competition, (iii) pent up demand and (iv) organic growth in tandem with population boom in northern Selangor. Maintain our forecast and SOP based TP of RM1.27. Maintain BUY.

We had the opportunity to visit KPJ Rawang and were hosted by the group’s senior management. The following are some of the key takeaways:

Background. KPJ Rawang first opened its doors in 2014 with 30 operating beds at the initial phase. It is a 160 bed capacity specialist hospital and is a typical success story within the private hospital space. KPJ Rawang turned profitable as at early- 2018, driven by several overarching factors, namely: location, lack of competition, pent up demand and organic growth in tandem with population boom in northern Selangor.

No competition. There exist no other private hospitals between Ipoh and Rawang and as such, all population catchments between Slim River/Tanjung Malim are fair game for KPJ Rawang. Their next closest competitor being UITM Sg. Buloh specialist hospital (30 beds) is c. 25 km away. KPJ is also blessed with a population catchment of c.1.3m people within a 30km radius.

Staff turnover. Typically staff turnover is a source of concern for many private hospitals. However this is not the case KPJ Rawang as the doctors and nurses are Rawang locals and many are from sister hospitals (thus are familiar with the KPJ operational process). The fact that there is no competition for their nurses in the area also aids in staff retention.

Operating metrics. Since opening its doors in 2014, KPJ Rawang has shown a tremendous 4 year CAGR of 40%-42 for both inpatient and outpatient traffic. The management expects that FY18 will see a leap in patient traffic, 27% YoY (IP) and 55% YoY (OP) driven by operational and patient flow maturity.

Capacity constraint. Occupancy rates have approached above 75% level as at FY17 marking a signal for the hospital to expand. Management is toying with the idea of building a new block after acquiring an adjacent piece of land. An alternative is more viable and will result in a faster ramp up period. This will be done by leasing the existing mall across KPJ Rawang and shifting all the outpatient outfits there and converting the existing structures into a pure inpatient centre. This is expected to garner an additional c.200 beds.

Proton. A catalyst for KPJ Rawang in the near term will be the ultimate relocation of Proton’s Shah Alam factory to Tanjung Malim which has been touted to be completed by 2022-23. This move is expected to shift c.20,000 workers from the Shah Alam plant. We expect the population boom in Tanjung Malim will continue to drive KPJ Rawang’s earnings in absence of a competitor and will justify her expansion plans.

Forecast. Unchanged.

Maintain BUY, TP: RM1.27. Maintain our SOP based TP of RM1.27. Our TP implies FY19-20 EV/EBITDA of 12.7x-11.9x. We like KPJ as it offers investors exposure to a pure Malaysian hospital play. We can expect a seasonally stronger 2H18 in tandem with KPJ’s historical trend.

Source: Hong Leong Investment Bank Research - 3 Oct 2018