KPJ’s 29th hospital, namely Damansara Specialist Hospital 2 (DSH2), struck us as state-of-the-art and massive, boasting a lobby with 5-star hotel ambience and an encompassing calming green view. KPJ is hopeful that DSH2 will turn EBITDA-positive by end-2023 and break even by end-2025. It plans to ramp up the bed capacity from 60-123 beds in 2023 to 205-265 beds in 2025. We maintain our forecasts, TP of RM1.16 and OUTPERFORM call.

KPJ organised a site tour cum analyst briefing yesterday. We were hosted by Puan Ariesza Noor (Chief Corporate Officer) and Dato’ Dr Sivamohan (Medical Director) for a tour around the recently opened DSH2. The key takeaways from the visit are as follows:

1. DSH2 struck us as state-of-the-art and massive, boasting a lobby with 5-star hotel ambience and an encompassing calming green view. It was successfully launched in Sept 2022 and is seeing gradual ramp-up in activities with bed occupancy rate of 20-25%. The property sits on a land area of 2.69 acres (117,000 sq ft) with a build-up area of 460,000 sq ft located at Sungai Pencala (near the Empire building) surrounded by affluent residential neighbourhood including Taman Tun Dr. Ismail, Bandar Utama, Mutiara Damansara and Desa Park City which provides a vast captive market. This compact hospital comprises four storeys of basement parking and an 11-storey specialist centre. The development combines two blocks of medical facilities, with a central block sandwiched between them that provides easy navigation and access from the drop-off lobby to the vertical circulation. The 300- bed tertiary care facility has seven centres of excellence namely Cardiovascular, Neuroscience, Orthopedics including spine surgery, Urology, Minimally Invasive Surgery, IVF Fertility Centre and Imaging (Interventional Radiology including Primary Thrombectomy).

2. KPJ is hopeful that DSH2 will turn EBITDA-positive by end-2023 and break even by end-2025. It plans to ramp up the bed capacity from 60-123 beds in 2023 to 205-265 beds in 2025. The strategy is to deploy 50% of capacity towards health tourism coupled with offering high revenue intensity services to reduce the gestation period including elective surgeries like neurosurgery, cardiac surgery, gastroenterology & endoscopy procedures and orthopaedics. Typically, foreign patients or medical tourists pay a 25% premium compared to locals.

3. DSH2 is positioned as KPJ Healthcare’s first smart hospital by taking the lead in digital transformation. Upon successful implementation, the digital transformation is expected to be replicated in the group’s other hospitals. Specifically, KPJ will implement a new Hospital Information System (nHIS), which is a platform that provides data-driven intelligence by utilising analytics and insight using a machine learning engine. At the heart of the system is AI-driven Electronic Medical Records System, coupled with an Internet of Things (IoT) network to enable seamless integration of processes, systems and experiences throughout the facility.

4. As an integral part of a smart hospital, DSH2 is equipped with a system known as MedTech, allowing patients seamless connectivity in healthcare experience, with pre-admission services through to consultation and extending post-treatment once they are discharged. Specifically, MedTech, which provides telemedicine services for first responders and utilises the Smart Vision solution that transmits to the emergency room, enabling physicians to guide the first responders. Overall, the technology allows transmission of all real-time clinical data from the ambulance back to the emergency room physician, so that an accurate diagnosis can be provided.

5. A key distinguishable feature in DSH2 lies in its integrated operation theatre platform. DSH2 utilises the next generation operation theatre (OT) platform called Digital Operating Theatres (OT) known as Buzz™. Essentially, medical practitioners are expected to provide care with their expertise via innovative systems and capabilities in place. Case in point, Buzz, which operates as a network-based central information hub, will be deployed in digital operating theatres, allowing medical images to be utilised optimally. Facilitating this would be Medcom Bridge, which has the ability to transit and digitise operating theatres with its real-time remote monitoring function, allowing doctors to provide remote consultation whenever the need arises.

6. KPJ reiterate the group expects the recovery in demand for its services to extend into coming quarters following a strong return of domestic patients as well as foreign patients. The group is seeing pent-up demand for elective surgeries with both local and foreign patients returning. Looking ahead into 2023, we expect KPJ’s patient throughput to grow 12% (vs. an estimated 26% in 2022 due to the low base effect in 2021) while its BOR at 66% (vs. an estimated 55% in 2022) will be driven by recovery in demand for its services, particularly, non-Covid-related ones including elective surgeries.

We continue to like KPJ for: (i) the low “price elasticity of demand” for healthcare service, which mean players are less vulnerable to high inflation as they could pass on the higher cost, (ii) it being a reopening play, especially for elective surgeries, and (iii) its strong market position locally with the largest network of 29 private hospitals (vs. only 16 of IHH Healthcare’s Malaysia operation in the second place).

We keep our earnings forecasts unchanged. Our TP is RM1.16 based on 27x FY23F EPS, at a 10% discount to the average of its regional peers to reflect KPJ’s smaller market capitalisation. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 6). Reiterate OUTPERFORM.

Key risks to our call are: (i) regulatory risk, (ii) the lack of political will to roll out a national health insurance scheme, and (iii) longer-than-expected gestation period for its newer hospitals.

Source: Kenanga Research - 11 Jan 2023