IHH is poised for further inroads in Hong Kong with its 500-bed multispecialty tertiary Gleneagles Hong Kong Hospital (GHK) having recently commenced operations on 21 March 2017. Revisiting Hong Kong’s dualtrack healthcare system, we find that there remains an imbalance between the public and private sector with the onus on the former due to the government’s heavy subsidization and uncompromising quality of healthcare services offered vis-à-vis the latter. Notwithstanding this, we are hopeful on GHK’s debut in Hong Kong’s private sector with: 1) demand for healthcare services expected to be driven by Hong Kong’s ageing population, 2) the government taking strides to achieve a balanced and sustainable dual-track healthcare system, and 3) its distinctive qualities. Our TP for IHH is maintained at RM6.40 per share. Maintain Hold.

Hong Kong’s Imbalanced Dual-track Healthcare System

For the uninitiated, Hong Kong operates a dual-track healthcare system. This means that like most other countries, healthcare services are provided by both the public and private sector. In Hong Kong, the onus on delivering healthcare services has conventionally been on the public sector due to its affordability and uncompromised quality of healthcare services offered vis-à-vis the private sector. We note that the Hong Kong government subsidizes over 95% of the actual cost of healthcare services at public hospitals regardless of each patient’s financial capacity. Whereas, at private hospitals, while offering the luxury of personalised choices, expediency, and better facilities, charges are costlier and often purported to lack comprehensive price transparency, leaving patients at risk of shocking bills. That said, high patronage to and occupancy rates at public hospitals are not unusual. As at 2015, Hong Kong’s public hospitals provided 81% of inpatient healthcare services and commanded 90% of hospital infrastructure (beds).

Hong Kong’s Ageing Population to Drive Demand for Healthcare Services

Our findings reveal that Hong Kong’s population is progressively ageing with its demographics characterized by declining birth rates and increasing life expectancy. As a matter of fact, Hong Kong is amongst the countries in the world with the longest life expectancy at 84 years versus the world average of 71 years in 2014. According to Hong Kong’s Census and Statistics Department, it projects the proportion of Hong Kong’s population aged 65 and above to increase rapidly in the coming years, doubling from 15% in 2014 to 30% in 2034 as baby boomers, who are those born in the late 1950s and early 1960s, enter old age. In view of this demographic trend, we opine that it is plausible to expect stronger growth in demand for healthcare services, especially for more specialised healthcare services (i.e. at the tertiary and quaternary level) as with ageing there are increased risks of developing chronic diseases. Supporting our view, as we reflect on the breakdown of inpatients at Hong Kong’s public hospitals by age group (see Figure 3), there appears to be a gradual shift in composition from the younger (<45 years) towards the older age group (>64 years).

Government Taking Strides to Facilitate Flow to the Private Sector

While noting that the public sector represents the core delivery channel for healthcare services, we also note that the Hong Kong government has been taking strides to facilitate flow to the private sector to relieve its growing financial burden. The most prominent of late was its request in September 2016 for private hospitals to provide patients budget estimates for 24 types of non emergency operations on a voluntary basis in efforts to enhance price transparency which, for long had been a key deterrent for visits to private hospitals. Positively, we find that all 12 of Hong Kong’s private hospitals have been accommodative to the government’s request and are now voluntarily publicising budget estimates for major chargeable items on their websites. Above all, while it is premature to quantify the impact of the positive measure recently undertaken by the private sector, we believe that the increased pricing transparency would be supportive in drawing patients from public sector.

GHK: A Private Hospital with Distinctive Qualities

Delving in on the 500-bed GHK, we expect its operations to weigh on near term earnings as it undergoes a gestation phase but do not discount the prospect for a quicker turnaround towards the shorter end of the average of 1 to 2 years at the EBITDA level. Our view is premised on several distinctive qualities. Firstly, with GHK being the latest entrant into the private sector, it is well-equipped with new, modern and state-of-the-art medical equipment and facilities. We believe this would give it an upper hand against its private sector peers and appeal to the segment of the population that are accustomed to private hospitals. Note that prior to GHK, Hong Kong’s latest private hospital, Union Hospital, was established more than two decades ago in 1994. Meanwhile, the upcoming hospital in the private sector, The Chinese University of Hong Kong Medical Centre, is only expected to be commissioned in 2020. Secondly, in the interest of helping patients make financially informed decisions prior to admission, GHK will be offering fee advisory services and at least 51% of its inpatient bed days will be provided at packaged rates which are fixedprice and all-inclusive in nature. By all-inclusive, it implies that complications like re-operation and ICU care within the prescribed length of stay are covered. For a start, GHK will first be offering 54 medical packages on common clinical conditions with long waiting times but management alluded that it intends to progressively triple it to 150 medical packages to cater to more critical cases like cancer and cardiovascular diseases. In terms of financials, while guidance on profitability is scarce, our ballpark estimates suggests that GHK could potentially contribute revenue in range of RM410-480mn per annum to or 6-7% of IHH’s overall revenue. Our estimates are deduced on the assumption of occupancy rates at 60-70%, an average length of stay at 2 nights, and conservatively, the cheapest of the group’s medical packages, at HK$13,180 (RM7,513), which is for an endoscopic procedure. Currently, the priciest medical package, at HK$186,846 (RM106,502), is for an orthopaedic procedure.

Impact

We make no changes to our forecasts.

Valuation & Recommendation

Our SOTP derived TP for IHH is maintained at RM6.40 per share. Akin to our hopeful sentiment on GHK, we continue to expect similar prospects from the underlying business of the group’s home markets. However, in the near term, we continue to be wary of downside risk from the persisting weakness of emerging market currencies against the USD which could potentially weigh on margins. Maintain Hold.

Source: TA Research - 4 Apr 2017