IHH expects a pickup in Türkiye after the festive period. It expects a double-digit top line growth in Malaysia, while staff shortages in Singapore are easing. There is also a return of medical tourists in India from the Middle East and Central Asia while its hospital in Hong Kong should turn profitable by end-2023. We maintain our forecasts, TP of RM7.00 and OUTPERFORM call.

Key highlights. We came away from IHH’s post 2QFY23 results briefing feeling positive on its prospects. The key highlights are as follows:

1. Türkiye: The group is not perturbed by the lower contribution from Acibadem in 2QFY23 due to the festive holidays compounded by long weekend holidays as well as presidential election. Viewed as a temporary blip, it expects patients to return in subsequent quarters as already seen starting from July. Its 1HFY23 foreign patient revenue contribution fell to 17%, lower than the 23% in 1HFY22 due to the Türkiye earthquake, festive holidays and presidential elections. 1HFY23 foreign patient volume declined by an estimated 20%. Typically, foreign patients account for 5% of patients but contribute 23-25% of revenue in Turkey. European operation’s contribution for Acibadem fell marginally to 30% from 32%. In Türkiye, 300-bed Acibadem Atasehir Hospital which opened in mid-Sept 2022 experienced a faster-thanexpected ramp-up due to strong medical tourism. All in, Acibadem’s normalised 1HFY23 EBITDA margin fell 3ppts from 24% to 21% (excluding a one-off RM25m donation for Türkiye earthquake). The slight margin erosion was due to the less than optimum patient throughput arising from the reasons explained.

2. Singapore: The staff shortage issue is easing gradually. The group is confident of overcoming the nursing staff shortages with >100 nurses currently in the recruitment pipeline. In May 2023, the Group opened its new Proton Therapy Centre at Mount Elizabeth Hospital in Singapore. The state-of-the art facility is first of its kind among private hospitals in Southeast Asia, providing adult and paediatric patients in Singapore and within the region with access to one of the most advanced forms of precision cancer treatments available. Its 2QFY23 BOR was at 59% vs. 60% in 1QFY23, marginally lower due to nursing shortages which has been easing. However, revenue intensity in Singapore remained robust driven by higher inpatient per revenue (+11% YoY).

3. Malaysia: Due to higher bed occupancy and utilisation, the group expects double-digit growth in 2023 (which we have factored in our forecast), driven by sustained pent-up demand for elective surgeries, from both local and foreign patients. Beyond 2023, growth is expected to be driven by organic growth of an additional 600 beds (+20% to 3.600 beds) over the next three years. Recall, its Malaysia operation reported strong revenue intensity in 2QFY23 underpinned by inpatient admissions (+16% YoY; -3.7% QoQ). It was marginally lower QoQ due to less patients seeking treatment during the festive month and long holidays there with bed occupancy rate (BOR) marginally lower at 69% vs. 72% in 1QFY23 and 61% in 2QFY22.

4. India: The group reiterated that its EBITDA margin in the mid-teens is sustainable in subsequent quarters (which we have factored in our forecast), driven by sustained pent-up demand for elective surgeries, from both local and foreign patients. Indications are pointing towards recovery in medical travel there as the group is seeing patients from Middle East and Central Asia returning. IHH is positive on its acquisition of additional 24.5% stake in GE Medical Associates Private Limited (RGE) which raised IHH’s control in the holding company of Gleneagles Global Hospitals from 73.64% to 98.17%. IHH first invested in the unit in 2015. Since then, it has grown into a chain of six hospitals across Hyderabad, Chennai, Bengaluru, and Mumbai, supported by three feeder centres with a capacity of 1,500 beds. 1HFY23 India operation’s top line and EBITDA grew 15% and 11%, respectively, driven by revenue intensity. Its India operation reported strong revenue intensity in 1HFY23, underpinned by inpatient admissions (+4%) and average revenue per inpatient (+15%) with bed occupancy rate (BOR) rising to 70% vs. 66% in 1HFY22.

5. Hong Kong and Greater China: It expects Gleneagles Hong Kong (GHK) to achieve operating profit by end-2023. Due to better operational efficiencies and overhead absorption rate as a result of gradual ramp-up in opening new beds, GHK's 2QFY23 revenue rose 9% YoY underpinned by higher patient throughput. The group target to open additional 50-100 beds from currently 230 by end-2023. As a testament, GHK EBITDA margins have gradually improved from as low as 2% to 15% in 2QFY23 and it is on track to achieve operating profit in end-2023. Gleneagles HK continued its growth momentum in 2QFY23 with BOR of 67% vs. 58% in 2QFY22. The group continues to remain focused on its de-risking strategy in China. Recall, it has has completed the divestment of its effective 49% stake in Gleneagles Chengdu Hospital Company Limited. Ceteris paribus, the deconsolidation of Gleneagles Chengdu in 2QFY23 is expected to narrow losses and boost the group’s overall bottom line.

6. M&As: It continues to seek earnings-accretive corporate opportunities across Asia and Europe, backed by its healthy balance sheet. It will also focus on improving its return on equity (ROE). Case in point - ROE has improved from 4% to 8% as at June 2023. The Group will continue to improve group synergies and operational efficiencies. On 14 February 2023, the Group expanded into Turkiye’s third largest city of Izmir with the acquisition of 100% of Kent which operates the largest private hospital in Izmir. The Group will expand its footprint to Kuching, Sarawak, upon the completion of the acquisition of Bedrock Healthcare Sdn Bhd in 1HCY24, and plans to scale up the existing 82-bed hospital to a 200-bed hospital with a further investment estimated at RM400m, to serve the local needs in East Malaysia as well as the fast-growing medical tourism market from the region.

Outlook. Looking ahead into 2023, we expect IHH’s revenue per inpatient growth of 10%-15% (vs. 18% in 2022 due to low base effect in 2021), inpatient throughput growth of 10%-15% (vs. 10% in 2022) and bed occupancy rate (BOR) of 60%-73% (vs. 56%-70%% in 2022) for its hospitals in Malaysia, Singapore, India and Türkiye. We believe the key growth factor for its inpatient throughput and BOR will be the return of elective surgeries and medical travel, the addition of new beds (previously constrained by staff shortages) and the first full-year contribution from Ataşehir hospital in Acibadem.

Forecasts. Maintained.

We also keep our SoP-TP of RM7.00 (see Page 4). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (also see Page 4). We continue to like IHH for: (i) the bright prospects of the private healthcare sector in Malaysia underpinned by rising affluence and ageing population; (ii) its pricing power, as the inelastic demand of healthcare provides it with the ability to pass cost through amidst rising inflation, and (iii) its commanding market position in the private healthcare space with presence in Malaysia, Singapore, Türkiye and Greater China. Reiterate OUTPERFORM.

Key risks to our call include: (i) regulatory risk, (ii) risks associated with overseas operations, and (iii) the lack of political will to roll out a national health insurance scheme.

Source: Kenanga Research - 1 Sept 2023