In an announcement to Bursa Malaysia, IHH Healthcare is divesting a 29.9% equity stake in PCH Holding Pte Ltd (formerly known as Parkway China Holding Co. Pte. Ltd.) via a combination of secondary sale and proposed shares allotment for a total cash consideration of RM689m. Maintain UNDERPERFORM. Our target price is RM5.59 based on SoP.

Divestment of 29.9% in PCH Holdings via a combination of secondary sale and issuing shares. In an announcement to Bursa Malaysia, IHH Healthcare proposed to divest a 29.9% equity stake in PCH Holding Pte Ltd has entered into a Share Purchase Agreement with Taikang, a wholly-owned subsidiary of Taikang Insurance Group Inc. (TIG), to divest 20,690,131 shares in the capital of its whollyowned subsidiary, PCH to Taikang for a cash of RM182.8m (RMB291m) and simultaneously with the entry by Parkway Group Healthcare Pte Ltd (PGH) and Taikang into the SPA, PCH has on 11 November 2016 entered into a Share Subscription Agreement (the SSA) with Taikang, to allot and issue to Taikang 57,357,343 new shares in the capital of PCH for a cash consideration of RM506.8m (RMB807m) of which will be kept with PCH to fund future expansion activities in China. Upon the completion of the Proposed Transactions, PGH and Taikang will hold 70.1% and 29.9% of the entire issued share capital in PCH, respectively. PCH currently holds a portfolio consisting of clinics and hospitals in China. TIG has three core business lines covering insurance, asset management, and health and elderly care. As at 30 September 2016, TIG has assets under management exceeding RMB1 trillion.

Neutral on this latest corporate development. We are neutral on this latest corporate development by IHH. The divestment will lead to earnings leakage via minority interest. However, the proceeds from the share subscription agreement would allow more funds for future expansion in China. PGH and Taikang will, on the completion of the Proposed Transactions, be jointly responsible for the funding of the projects to be undertaken by PCH going forward. Potential areas of collaboration include referrals and coverage at PCH’s primary care clinics and hospitals for TIG’s clients. Over the longer-term, earnings from this synergistic partnership will more than offset the leakage to minority interest.

Minimal impact to earnings. We are keeping our FY16 and FY17 earnings estimates unchanged since PCH currently operates primary care clinics, which contribute minimal earnings. The other greenfield hospitals like Chengdu and Shanghai are only operational in end 2017 and 2020, respectively.

Outlook. Overall, over the short-to-medium-term on the back of escalating costs pressure as well as a slower-than-expected economic outlook, profit margins could be under pressure. As an indication, EBITDA margin fell from 25% in 1Q16 to 23% in 2Q16 arising from escalating costs. The start-up costs on pre-opening of hospitals, including Gleneagles Hong Kong (expected to commence in 1Q17) are expected to put pressure on cost and margins at least over the shortterm. Elsewhere, the opening of Mumbai Hospital is put on hold pending negotiation with its partner.

Maintain UNDERPERFORM. No changes to our FY16E and FY17E numbers. Our target price is RM5.59 based on SoP. The stock is currently trading at PERs of 53x for FY16E and 47x for FY17E, which appear rich as compared to its average net profit growth prospects of 11% p.a. over FY16 and FY17.

Source: Kenanga Research - 14 Nov 2016