• IHH Healthcare's 2Q20 core PATMI loss of RM84.2m was due to lower revenue across all markets and loss of operating leverage (EBITDA margin -10.8% pts).
• With improving occupancy and reported net profit in Jun, we believe the worst is over for the group.
• Reiterate ADD on IHH Healthcare, with a lower Target Price and EPS.
• Catalysts: faster easing of travel restrictions, successful vaccine development and execution of its refreshed strategy.

IHH Healthcare's 2Q20 Net Loss a Miss; the Worst Was Probably Over in Apr-May

• IHH Healthcare sank into core PATMI loss of RM84.2m in 2Q20 (vs. RM240.1m core PATMI in 2Q19). 1H20 core PATMI formed only 15%/16% of our/consensus expectations. 2Q20 topline fell 30% y-o-y on the back of movement controls, travel restrictions and postponement of elective procedures, which led to y-o-y lower inpatient volumes across IHH Healthcare's various markets: MY (-43%), SG (-34%), Acibadem (-34%) and India (-46%).
• Overall EBITDA margin shrank by 10.8% pts in 2Q; SG’s was least impacted due to government support (+12% EBITDA margin boost), which is expected to taper off from 3Q20F, while India saw the worst margin decline due to negligible foreign patient revenue and the highest drop in inpatient admissions.

Steady Recovery in Patient Volumes Across All Markets in Jun

• In Jun, IHH Healthcare saw a rebound in local patient volumes and resumption of elective surgeries as countries reopened; occupancies across the network also recovered to 40-60% (vs. pre-Covid level of 65-70%), which underpinned its profit turnaround. We expect such positive momentum to sustain into 2H20F.
• Medical tourism remains curtailed in most places, except Acibadem, which benefitted from an earlier lifting of travel restrictions. Gleneagles HK reported q-o-q stable inpatient volume and EBITDA loss.

Other Mitigating Initiatives in the Near Term

• Apart from diversifying its service offerings (e.g. telemedicine, treatment of COVID-19 patients, diagnostic testing), which contributed 8-15% of 2Q20 revenue, the group has also undertaken cost and capital controls, including deferring 30% of its annual capex to after 2020, managing interest costs and FX exposure, and tapping on local government aid.
• IHH Healthcare continues to focus on its refreshed strategy, which saw the rebranding of Fortis to Parkway and pursuing its metro cluster strategy for more efficient growth (final approvals for Prince Court acquisition secured on 14 Aug, to be completed by end-Sep).

Reiterate ADD on Sustained Recovery From Jun Onwards

• We cut our FY20-22F EPS by 7.3-25.2% to reflect lower patient footfall and slower return of foreign patients; our SOP-based Target Price falls to RM6.10.
• Reiterate ADD as IHH Healthcare currently trades at 17.5x FY21F EV/EBITDA, more than 1 s.d. below its 5-year historical mean.
• IHH Healthcare's balance sheet remains strong with a slightly higher net gearing of 0.19x as of end 1H20.
• Downside risks to our Add rating: protracted economic recovery and overhang from d IHH/Fortis court proceedings.

Source: CGS-CIMB Research - 27 Aug 2020