IHH’s 2Q19 core PATAMI of RM229.4m (+14.1% QoQ, +27.9% YoY) brought 1H19 core PATAMI to RM430.4m (+6.6%). We deem the results to be inline as we expect a stronger 2H due to seasonality (2H18 accounted for c.60% of full year earnings). YTD revenue improved thanks to the continuous ramp up of GHK and Acibadem Altunizade and newly acquired Amanjaya and Fortis. 2 hospitals in China are on track to open in end of FY19 and FY20. We maintain our forecasts and SOP based TP of RM6.02. Maintain HOLD.

Within expectations. 2Q19 revenue of RM3,645.3m translated into core PATAMI of RM229.4m (+14.1% QoQ, +27.9% YoY), which brought 1H19 sum to RM430.4m (+6.6% YoY). The results accounted for 40% of ours and consensus full year forecasts. We deem the results to be inline as we can expect a stronger 2H due to seasonality (2H18 accounted for c.60% of full year earnings).

QoQ. Revenue of RM3,645.3m was relatively flat (+0.1%) while EBITA decreased slightly (-1.5%) due to high base back in 1Q19. However core PATAMI increased by 14.1% due to decreased operating expenses (-12.4%) as well as finance costs (- 17.2%). Singapore and Malaysia’s inpatient admissions increased (+3.1% and +0.7% respectively) followed by increased in revenue per inpatient (+1.1% and +3.2% respectively). India’s inpatient admissions increased (+1.9%) whilst slightly offset by a decrease in revenue per inpatient (-2.3%) due to lower complexity cases undertaken during the quarter.

YoY. Revenue improved by 37.1% YoY on the back of sustained organic growth from existing operations and the continuous ramp up of GHK and Acibadem Altunizade (both opened in 2017), as well as new contributions from Amanjaya (October 2018) and Fortis (November 2018). On constant currency terms and excluding the impact from MFRS16, revenue and EBITDA grew 38% and 31% respectively while core PATAMI improved by 27.9% to RM229.4m.

YTD. Revenue of RM7,288.0m grew by 32.2% contributed by the continuous ramp up of GHK and Acibadem Altunizade and newly acquired Amanjaya and Fortis. Consequently, EBITDA grew 37.1% to RM1,558.9m backed by improved revenue intensity in Singapore, Malaysia and Acibadem (+7.0%, +6.9% and +7.9% respectively). By eliminating impact from MFRS16, revenue and EBITDA increased 38% and 30% respectively. Core PATAMI showed increment of 6.6% YoY on the back of stronger operational performance and lower foreign exchange loss (-92%; from -RM26.8m in 1H18 to -RM1.9m in 1H19). Gleneagles Hong Kong Hospital’s start-up losses narrowed from -RM94.5m in 1H18 to -RM60.1m 1H19, as a result of operating leverage.

North Asia. Hong Kong’s Gleneagles Hospital’s EBITDA losses is expected to narrow further in 2H19 (2Q19: -RM60.13m from 2Q18: -RM69.04m) as it continues to ramp up its operations barring any fallout from the recent demonstrations. On the other hand, Gleneagles Chengdu Hospital is on track to open in late FY19, whereas Gleneagles Shanghai Hospital is set to open in late FY20.

Forecast. Maintain.

Maintain HOLD, TP: RM6.02. Maintain HOLD and TP of RM6.02. Our TP implies FY10-20 EV/EBITDA of 18.3x-16.3x. Whilst we like IHH for its exposure to key gateway markets and astute management; earnings delivery in FY19-20 will be highly dependent on the pace of them improving their increased exposures to India and Turkey.

Source: Hong Leong Investment Bank Research - 3 Sept 2019