We expect resiliency in IHH’s patient volume growth to continue, underpinned by (i) opening of additional beds in the pipeline, (ii) shift in patient behaviour, and (iii) growing foreign patient volumes. A boost in patient volume is also expected once the staffing constraints have been addressed. Separately, IHH highlighted that the disposal of Gleneagles Chengdu is expected to conclude in the next couple of months and the Group is also open to explore the options available for Gleneagles Shanghai. We are keeping our earnings forecast unchanged. Maintain BUY on IHH with an unchanged SOP-derived TP of RM7.75.

Expecting healthy patient volume growth. In 3Q22, Malaysia (+57%) and India (+6%) operations chalked in strong patient volume growth supported by the return of non-elective cases. Singapore’s 4% decline in patient volume was due to (i) high base effect as it treated more Covid-19 patients in 3Q21, and (ii) bed closures, while Turkiye and Europe operations’ 1% drop was due to seasonality factors. Moving forward, IHH expects patient growth to be resilient, partly underpinned by the opening of new beds and a shift in patient behaviour (patients growing more comfortable to seek treatment in hospitals for more minor cases). The capacity growth will come from: (i) Pantai Klang and Pantai Penang’s planned expansion (+600 to 700 beds), (ii) recent acquisition of Orthopedia (+52 beds), (iii) recent opening of Acibadem Atasehir (+280 beds), and (iv) Fortis’ planned opening of c.1500 beds in the next 3 years. IHH also does not rule out the possibility of acquiring smaller earnings accretive assets to grow bed counts inorganically.

Shortage of nurses. Part of the decline in Singapore’s patient volume was due to reduced capacity, as some beds were closed due to staffing constraints. To resolve this issue, IHH has accelerated its recruitment process to bring in extra manpower and expects to bring in several hundreds of nurses in the coming 3 to 6 months’ time. IHH will also be redesigning job scopes to reduce the burden on licensed nurses, they can concentrate on acute nursing work. Should this be resolved, management believes that it could potentially lead to a volume growth of c.10%.

Reviewing assets in China. IHH announced that it has entered into an equity transfer agreement with Perennial Health to dispose its 49% in Gleneagles Chengdu, in a bid to minimise ongoing losses. The disposal is expected to conclude in the next couple of months and will divulge more details in due course. In view of the challenging operating environment in China, management indicated that IHH will also be open to explore the options available for Gleneagles Shanghai.

Medical tourism. Following the reopening of international borders in its key markets, IHH’s hospital operations have continued to see a recovery in medical tourist volumes. In terms of percentage of foreign patient contribution to revenue, both India and Turkiye has recovered back to pre-Covid levels, accounting for 8-10% and 15% of the respective markets’ revenue. Both Malaysia and Singapore has recovered close to pre-Covid levels at 4% and 25% currently. Apart from its traditional markets, IHH will continue to attract more foreign patients by targeting patients from second -tier cities, while at the same time deepening its clinical capabilities.

Forecast. Remain Unchanged.

Maintain BUY, TP: RM7.75. Reiterate BUY on IHH, with an unchanged SOP-derived TP of RM7.75. We continue to like IHH for its (i) refreshed strategy that will support the Group’s sustainable growth, and (ii) strong market position in the key geographies it operates in.

Source: Hong Leong Investment Bank Research - 1 Dec 2022