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Friday, December 23, 2016

Brokers Report: IHH Healthcare - Growing The China Footprint



Retain HOLD  with unchanged target price (TP) of RM6.32






News/ Comments


  • IHH Healthcare’s indirect wholly-owned subsidiary, M&P Investments Pte Ltd recently received the “Business License” from Chengdu Administration of Industry & Commerce for the establishment of a 70% owned Sino-foreign Equity Company named ParkwayHealth Chengdu Hospital Limited. The remaining 30% equity stake is owned by their local partner, Shanghai Broad Ocean Investments Co. Ltd. The license is valid for 20 years commencing 12 December 2016.
  • ParkwayHealth Chengdu was established with a registered capital of RMB300m (RM192m) of which IHH’s investment via M&P is a cash subscription of RMB210m (RM134.6m).
  • The principal activities of ParkwayHealth Chengdu are provision of specialized care and services such as obstetrics & gynecology, pediatrics, orthopedics, ophthalmology, respiratory, gastroenterology, oncology, cardiology and geriatrics.
  • Last year M&P along with Broad Ocean had entered into an agreement with Perennial Real Estate Holdings Ltd to lease 48ksqm within the Perennial International Health and Medical Hub to operate a 350 bed multidisciplinary hospital.
  • We are positive on the investment as this partnership will further solidify the group’s presence as an international healthcare provider in Greater China with their first tertiary facility in the Western Region.
  • Chengdu is located within the Sichuan province, which has a population of circa 81m people. The hospital is expected to commence operation in 1H18.
  • Financial Impact: We don’t expect the investment to have any material impact to the group in the near term. As end of 3Q16, the group has a cash war chest of RM2.0bn and gearing is at a comfortable 0.21x. The investment is less than 1% of their cash balance.
  • The group is on course to open 850 beds in China (HK by end 1H17and Chengdu by 1H18) which is expected to boost their earnings in the midterm. Nonetheless, we still expect the group to face higher pre-operating expenses/losses and staff costs during gestation period. We expect IHH to continue its strategic investment within China as the government liberalizes its medical sector.


Catalysts


  • Strategic geographic footprint in key gateway markets. Ageing population profile and rise in affluence in key markets will support demand for high quality healthcare.


Risks


  • Regulatory / competitive / FOREX risks; #bull# Higher staff cost; and
  • Inability to unlock synergies of the enlarged entity.


Forecasts


  • Unchanged.


Rating


HOLD  TP: RM6.32
  • Whilst we like IHH for its exposure to key gateway markets, good management and strong reputation, earnings delivery in the near term will be hampered by higher pre-operational costs as the new hospitals are likely to take time to mature.


Valuation


  • Reiterate HOLD call with unchanged SOP-derived TP of RM6.32 .



Source: Hong Leong Investment Bank Research - 23 December 2016

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