Following a strong set of results in 3QFY22 supported by healthy patient volume growth, KPJ will focus on improving and sustaining its average revenue per inpatient going forward, as the average bill size has reported a slight decline due to the return of elective cases that are generally lower in value. This will be achieved via (i) treating more medical tourists, as well as (ii) hiring more consultants for sub-specialties. On a side note, its recently launched KPJ DSH2 has also been steadily gaining traction, with activities gradually picking up over the month of Sep and Oct. We make no changes to our earnings forecast, maintain BUY on KPJ with an unchanged SOP-derived TP of RM1.27.

We Attended KPJ’s 3Q22 Results Briefing With the Following Key Takeaways:

Results recap. KPJ achieved its highest ever quarterly revenue in 3Q22, reporting a topline of RM809.2m (+16% YoY). This was supported by a strong increase in patient volume (Inpatient: +59% YoY); Outpatients: +13% YoY) as well as number of surgeries performed (+22% YoY) post pandemic. Up till mid-Nov, patient volumes have also continue to trend upwards, recording healthy growth. Average revenue per inpatient, however, has dipped by 17% in 3Q22 to RM6,458 as patients return to seek treatment for elective cases that are generally lower in value. With revenue intensity gradually easing from its peak, KPJ will be focusing on improving inpatient volumes and surgeries performed in order to improve the overall operational efficiency to protect margins. Additionally, the Group also intends to hire more consultants for sub specialties and capitalise on medical discipline and service offerings that could help sustain revenue per inpatient at current levels or improve it further to c.RM7,000.

Encouraging start for KPJ DSH2. Having launched on 1 Sept, management indicated that business activities in KPJ DSH2 (Damansara Specialist Hospital 2) has been steadily gaining traction in the months of Sep-Oct, and has generated RM800- 900k worth of revenue in a mere two months. This new hospital is expected to breakeven at EBITDA-level within 3 years and management aims to fill 50% of KPJ DSH2’s capacity with foreign patients. To attract more medical tourists, KPJ will be (i) establishing more centre of excellences, and (ii) partnering with more international insurance panels. In the pipeline currently, a Cardiac & Neuro centre is targeted to open in CY23, Orthopedics & Traumatology Centre in CY24 and a Gastroenterology & Endoscopy Centre in CY25. Encouragingly, KPJ DSH2 has also gotten decanting contract for neurology cases from the government, which would help to ramp up the occupancy rate of KPJ DSH2.

A focus on medical tourism. Since the reopening of international borders, KPJ has made medical tourism a key focus to expedite recovery post pandemic. Thus far the Group has generated RM93.1m worth of revenue from healthcare tourism in 9M22, which is a 53% growth vs SPLY. In terms of foreign patient volume, it is worth noting that the 9M22 volume has recovered close to CY19 levels, despite international borders still remain closed in 1Q22. We would also like to highlight that treating foreign patients is a good way to boost revenue intensity as hospitals are allowed to charge foreign patients 20% more (industry practice) than the charges stipulated in the 13th

Fee Schedule.

Forecast. Remain Unchanged.

Maintain BUY, with TP of RM1.27. Maintain BUY on KPJ with an unchanged SOP derived TP of RM1.27. Our BUY call is premised on (i) its exposure to a defensive sector, as well as (ii) strong rebound of local and foreign patient volume.

Source: Hong Leong Investment Bank Research - 29 Nov 2022