Excerpts from UOB Kay Hian's report

Analysts: Thai Wei Ying & Andrew Chow, CFA

WHAT’S NEW
Chins8.17(L-R): CEO Chin Wei Jia and CFO Chin Wei Yao. Their mother, Dr Gan See Khem, is HMI's executive chairman. Photo by Tok Chong Yap • We hosted the management of Health Management International (HMI) at a non-deal roadshow (NDR) in KL recently. This report highlights the key takeaways from the NDR.

INVESTMENT HIGHLIGHTS

Patient load growth riding on strong medical tourism outlook. We are excited about Malaysia’s medical tourism outlook, which is bolstered by favourable ringgit as well as government initiatives. We note that Malaysia Healthcare Tourism Council has been very actively promoting Malaysia as a medical tourism hub through measures such as digital marketing and collaboration with private hospitals. More recently, HMI has seen foreign patient load growth exceed that of local patients, where foreign patients currently represent around 23% of total patient volume. This bodes well for revenue growth, given revenue intensity for foreign patients are typically higher on more complex procedures (on average, foreign patients spend 1.5 times more than local patients).

• Mahkota may be over two decades old but still has a lot more room for growth. We note Mahkota was originally built as a 630-bed hospital. With current capacity only at 267 beds, we believe there is still ample room for organic expansion. Going forward, we expect management to continue adding more wards by shifting out non-clinical administrative services and maximising revenue generating clinical area.

Furthermore, Mahkota still has available landbank which could be potentially developed for hospital extension and complementary services in the medium term.


mahkota7.17Mahkota Hospital in Malacca. Photo by Tok Chong Yap



• More growth at Regency, Johor still largely underserved. Questions were raised on the hospital capacity expansion coming on-stream, such as the two new KPJ hospitals as well as Thomson Iskandar (target completion 2020). However, we are not overly concerned, given Johor is still underserved with a 1.6 bed-to population ratio (below Malaysia’s average 1.9). Furthermore, it typically takes a new hospital approximately 2-3 years to ramp up, which gives Regency, with 8 years of operating history, a strong lead in terms of comprehensiveness and reputation. Separately, the new hospital extension at Regency will likely commission in FY21. Following this, Regency will become a 380-bed tertiary hospital with capacity to expand to 500 beds. Construction cost is projected at RM160m, and we estimate 75% of cost to be debt funded.

VALUATION/RECOMMENDATION

• Maintain BUY and DCF-based target price of S$0.83. Our target price is based on the following factors: 
a) explicit 2018-22F free cash flow forecast, 
b) terminal growth of 2.5% (in line with Malaysia’s 10-year long-term inflation rate), and 
c) WACC of 7.0%. 

HMI

Share price: 
63.5 c

Target: 
83 c


HMI is currently trading at 27x FY18F PE, a 16% discount to peers’ 35x. We do not think such a discount is warranted, given our strong FY18-20 EPS CAGR forecast of 22% vs peers’ 14%, buoyed by expansion plans as well as strong medical tourism prospects in Malaysia
.

• Foreign patients still mainly Indonesians, but not ruling out growth from other markets. Indonesian patients currently represent around 80% of the group’s foreign patient load, which is not surprising given cultural affinity as well as geographical proximity. Nevertheless, we are not ruling out growth from other markets. According to Deputy Health Minister Datuk Seri Dr Hilmi, China, Myanmar, Vietnam and India have been identified as vital markets for Malaysia’s medical tourism, and the government is collaborating closely with private hospitals in implementing marketing plans to these regions. Furthermore, we note that AirAsia is expected to commence direct flights to Jakarta, Vietnam and Guangzhou from Malacca in October.

• Potential overseas opportunities in the pipeline? In our view, we see potential for more investment opportunities or strategic collaborations going forward. Collaborations could constitute clinical exchanges with other doctors or hospitals. In terms of geography, we believe these opportunities would most likely be in regions where the group is most familiar with, which includes Malaysia, Singapore or even Indonesia.

• Liquidity concerns? An issue raised is the low trading liquidity on HMI. We share these concerns but we think that there could be several ways that management could eventually address these concerns, including the option of offering scrip dividends to shareholders rather than cash or a stock split.

EARNINGS REVISION/RISK
• No change to earnings. We project a 3-year FY18-20F EPS CAGR of 21.5%.

Full report here. 


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