CFA Institute Research Challenge
Hosted by CFA Society of Thailand Chulalongkorn University
CFA Institute Research Challenge 9 Dec 2013 Team 01 Student Research [Health Care Services Sector] This report is published for educational purposes only by students competing in the CFAInstitute Research Challenge. BUMRUNGRAD HOSPITAL PCL
Date: December 9, 2014 Ticker: SET:BH Recommendation: BUY
Exchange rate USD/THB: 32.14 Price: THB 90.0 (USD 2.8) Price Target: THB 105.7 (USD 3.3)
Forecast Summary 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E Total revenue (THBmm) 10,020.9 11,388.9 14,135.0 15,040.2 17,678.9 20,562.6 23,937.0 27,691.5 31,222.7 EBIT (THBmm) 1,834.0 2,283.6 3,598.0 3,593.6 4,203.2 4,877.8 5,485.0 5,236.4 6,204.8 EBITDA (THBmm) 1,834.0 2,283.6 3,598.0 4,408.1 5,168.5 5,971.7 6,791.7 6,713.5 7,832.3 Net Income 1,258.5 1,588.0 2,666.7 2,686.0 3,173.7 3,713.4 4,199.1 4,049.8 4,824.6 Earnings per Share (THB) 1.73 2.18 3.66 3.10 3.66 4.28 4.84 4.67 5.56 Dividend per Share (THB) 0.85 0.90 1.10 1.55 1.83 2.14 2.42 2.33 2.78 Return on Assets (%) 14.2% 14.0% 18.2% 16.2% 17.3% 18.1% 18.9% 16.7% 18.2% Return on Equity (%) 21.8% 24.8% 35.3% 29.7% 30.2% 30.3% 29.5% 24.9% 26.1% Source: Company data, team estimates Highlight Market profile
52-week price range (THB) 70.5 – 95.0 Upside potential; Valuation indicates buying opportunity: We are optimistic about future earnings 30-day average daily performance of BH as it continues to benefit from an increase in demand and growth in medical price. 45.5 Moreover, the decent long-term growth is anticipated to stem from ongoing capacity expansion, which will turnover (THBmm) allow the company to accommodate the growing number of patients, especially international patients. With Market Capitalization 65,570.5 the aforementioned factors, we believe this is a good opportunity to BUY with the target price of THB 105.7 (THBmm) (USD 3.3) representing 19.2% upside potential. Market Capitalization (USD) 2,040.2 Healthy financial position: We believe BH will be able to generate sufficient free cash flow of over THB Shares outstanding 3.0 mm to cover its capital expenditure and future dividend payment. BH will achieve strong EPS growth 728.6 (million shares) over the forecasted period of 16.1% CAGR with ROA equal to 22.8% in 2022.
Free float (%) 31.1% Defensive stock with sustainable business model: BH is less vulnerable to economic volatility because Institutional holding (%) 41.0% people value healthcare as their primary concern. Positioning as a premium multi-specialty hospital, BH is able to charge premium and enjoy higher EBITDA margin of 25.6% comparing to peers at 21.1% from BV per share (THB) 12.3 international patients who seeks quality treatment with competitive price and wealthy domestic patients who 2013E ROE 29.70% are less price sensitive. In 2012, the ROE was also among the highest standing at 35.3% comparing to local peer average of 17.2%. Current P/BV 7.3x
Current P/E 28.5x Main risk issues include upside and downside risks: The global and Thai economy, intense competition in Dividend yield 2.1% the premium healthcare sector and shortage of professional staffs are key downside risk. Changes in complexity of disease and epidemic and changes in government regulation may also post additional risk. Major Shareholders % hold Price index Bangkok Dusit Medical Service 23.90% 220 14.70% Bangkok Life Assurance PCL BH +99.5% Sinnsuptawee Asset 8.70% 190 SET50 Management 160 +71.6% UOB Kay Hian (Hong Kong) 8.40% BNP Paribas Securities Services 3.70% 130 SET Health Luxembourg +28.7% Wattanasophonpanit Co., Ltd. 3.50% 100 Thai NVDR Co., Ltd. 2.80% 70 Sophonpanit Family 2.40% Dec 2011 Jun 2012 Dec 2012 Jun 2013 Dec 2013
Source: Bloomberg, accessed December 9, 2013
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Business Description
Established in 1980, BumrungradHospital Public Company Limited (“BH”) is currently Southeast Asia’s largest single campus private hospital by revenue. Positioning itself as a premium global healthcare player, BH targets both domestic patients who are in middle to upper class and international patients through medical tourism, corporate contracts, insurance companies and referral offices. The Company was the first Asian hospital accredited by Joint Commission International (JCI), an organization that reviews and accredits a hospital for patient safety and quality improvement. In 2012, the company has a market share of private hospital sector of 15% by revenue (figure 1).
In addition to hospital operations, BH has 4 wholly-owned subsidiaries as follows: • Vitallife provides preventive care services targeted at health-conscious individuals • Asia Global Health (AGH) invests in regional healthcare-related businesses • Asia Global Research conducts clinical research in Southeast Asia • Ruenmongkol owns land for future business expansions The Company also has two associated companies, which are Bumrungrad International (focusing on hospital ownership and management) and CDE Trading (developing software for healthcare business). In 2012, the aforementioned subsidiaries and affiliated companies contributed roughly 10.0% of total revenue.
BH’s three main strengths: World-class medical service - Since the key to attract customers is to have the best doctors, the Company acquires only top medical professions to provide the best medical service. Additionally, to emphasize more on the service quality, BH also focuses on medical technology investment. International presence and Brand Equity – Bumrungrad has established strong brand equity on international level which has become one of its main competitive advantages as reflected in its 9th place of the world best quality hospital. Figure 1: Market share by revenue Strategic location – BH is located at the heart of Bangkok, which makes it easily accessible for both domestic and international patients.
One campus: Unlike other private hospitals in Thailand which grow through consolidation, BH operation concentrates on only one campus on Sukhumvit road, which allows the Company to better manage the hospital and control quality. However, due to current high utilization rate of over 70%, which is higher than that of the industry average of 60%, the Company’s growth potential is constrained by the one-campus capacity. Yet, the Company plans to overcome such constraint by building a second campus on Petchburi road.
Medical tourism – one of the key customer groups: Apart from servicing domestic patients, BH is the first and one of the biggest two private hospitals in Thailand to service medical tourists treating more than 500,000 international patients annually (figure 2). The top revenue contributions by non-Thai nationalities remain to be SET, team analysis from the United Arab Emirates, Myanmar, Oman, and USA. Facilities and services offered to medical tourists Source: Company include International Medical Coordination Center that deals specifically with medical traveller’s needs, 109 interpreters in a range of languages, an airport transfer desk at arrival areas in Suvarnabhumi International Airport Parameters Value and two residential facilities with serviced apartments for patients and family members.
Four strategic pillars:BH will be able to achieve its strategic goal of increasing patient capacity and enhancing Risk-free rate 4.1% operational efficiency by focusing on their core strategies as follows: Figure 2: Revenue breakdowns by Focusing on high intensity treatment –To maximize earnings, BH focuses on providing high- patient nationalities intensity/specialized treatments. The service yields higher margins than typical primary and secondary services Market risk premium 8.0% that are widely provided in other hospitals. Continuous service quality improvement – To support aforementioned strategy, talent acquisition and Levered beta 0.88 retention as well as technologies are essential. Attractive remunerations that are higher than comparable hospitals are the key to attract and retain talents. BH’s effort and investment in cutting-edge technologies earned it the title “the World’s Smartest Hospital”. Adjusted beta 0.92 Building international network - To enhance international presence, the Company has been creating extensive network internationally by setting up referral office in 15 countries to support transfers of potential customers. It plans to further expand the network in targeted countries within 8 hours flight reach. Cost of equity (ke) 11.4% Capacity expansion – BH conservatively set a goal to increase number of patients by 40.0% by 2020. The Source: Company data company has acquired lands in Bangkok to support this expansion. In addition, an acquisition of international hospital to enhance its international presence is under consideration.
Shareholding structure: The Company’s shareholding structure remains relatively stable. The current major shareholders include Bangkok Dusit Medical Service Public Company Limited (“BGH”) holding 23.9% of the Company’s stocks, following by Bangkok Insurance PCL holding 14.7%. However, it is important to note that the company currently has convertible bonds worth THB 550.0 million held by Bangkok Bank that are deeply in the money causing up to 19.0% shares dilution after conversion.
Industry Overview and Competitive Positioning
Healthcare service industry comprises of public sector andprivate sector sharing a market in a proportion of 81% and 19% respectively. The level of medical care can be divided mainly into primary, secondary and tertiary care depending on the complexity of the disease. Healthcare service industry in Thailand is very fragmented and bounded by several barriers to entry: capital intensity, specialization, and government regulations leading to
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excess profit for players in the market. Despite the availability of clinics, Thai people prefer to go to hospital even to cure minor illness.
Future growth driven by stimulus policies and improved economy Figure 3: Improving health care In 2011, the healthcare sector experienced a considerable growth of 13.9% as a result from various government access stimulus packages launched such as minimum wage increase and rice-pledging policy, which leaded to an increase in disposable income and consumption. However, the growth has slowed in 2013 from the economic recession and political instability in the country. Looking forward in 2014, we expect the industry to continue to grow driven by governmental expansionary policy such as THB 2.2 trillion budget to stimulate economy.
Demand spill over from Universal Healthcare Coverage The launching of the 30-baht universal healthcare coverage scheme in Thailand since 2002 has resulted in a significant drop in the number of people who have no access to medical service from 7.3% to less than 0.5% in 2012 (figure 3). As the coverage is only provided by public hospitals, the bed occupancy rate of such has increased tremendously, causing people with higher income level to move to private hospitals. The surge in overall demand has led to a lucrative private healthcare sector.
Source: National Health Security Office Plenty of room to grow in Thai healthcare industry Thailand’s healthcare spending as a percentage of GDP stands at 4.1% compared to an average of 9.7% of developed countries (figure 4) excluding the United States, where spending is excessive. This implies that the Figure 4: Large room to grow for growth potential of healthcare sector is still far from its ceiling. Thai healthcare expenditure has also been health care sector growing at the compounded annual growth rate (“CAGR”) of 14.9% from 2005-2011 comparing to an average CAGR of 9.3% of developed markets. Average = 9.7% Positive long-term demographic prospect Aging population –Thai society is now moving fast towards aging population. Currently, people whose age is 65 or higher are accounted for 9% of the population (6 million people). The number is expected to reach 14% (10 million people) by 2025 (appendix 9). As elderly are prone to illness,demand for healthcare will surge considerably. The additional 4 million elderly alone implies more thana double in healthcare expenditure per capita according to the regression on healthcare expenditure per capita relative to the percentage of elderly (65 years or higher) in several countries (figure 5). Rising income – With a high correlation of 98.5%, expected GDP growth could be used as a proxy for the growth in healthcare expenditure (appendix 9). Thai real GDP per capita has been growing at the 2003 – 2012 CAGR of approximately 3.1% while private consumption has experienced a slightly higher growth of 3.3% Source: World Bank, WHO (appendix 9) indicating a tendency for Thais to spend more out of their pocket as their income increases. However, it should be noted that addressable market size for private hospitals is limited. Research suggests that Figure 5: Regression on health care the actual number of Thais who could afford private healthcare is approximately 9% of the total population. The expenditure and aging population estimation was based on individual with monthly income of THB 20,000 or higher. Regardless, the potential for further growth still exists. By 2020 the percentage of people having income higher than THB 20,000 is forecasted Unit: USD to reach 12% (appendix 9). Urbanization - A significant number of Thais are moving away from rural area to seek better opportunities. It is expected that 38.0% of the population in Thailand will live in urban areas in 2020 comparing to the current approximation of 34.0%. A higher density of population in urban areas has resulted in an over demand for Correlation = 91.9% healthcare in urban area, presenting an opportunity for private hospital’s future investment.
ASEAN Economic Community (AEC): opportunity for growth With a total population of over 600 million people and the low healthcare penetration rate in ASEAN, the upcoming regional economic integration in 2015 offers a great opportunity for Thai healthcare sector. Thailand is now ranked 2nd among emerging markets in ASEAN after Malaysia in terms of healthcare spending per capita. Thai healthcare has been growing at almost the same pace as the ASEAN average from 2005-2011. However, as an ASEAN medical hub, Thailand could further benefit from its strategic location among other ASEAN countries by capturing more demand directly from the free flow of human resource and indirectly from the probable economic future growth. In the long-term, Thai hospital sector posts a higher growth potential among peers (figure 6). Source: World Bank Recovery in medical tourism In the past several years, Thailand has been one of the most popular countries for medical tourism. With supports Figure 6: AEC Countries from the government in positioning Thailand as a “Medical Hub”, there have been an increasing number of international patients from around the globe especially from the Middle East. The rise in medical tourism has a significant impact on Thai healthcare industry; however,this group of customers are mostly captured bythe two market leaders, BH and BGH in which 61.0% and 28.0% of their total revenue derives from international patients consecutively.
Three main factors drivingmedical tourism in Thailand are as follows: Competitive price - The price of medical treatment is much lower comparing to the developed countries due to the much lower labor cost. The average price of such service in Thailand is approximately 86.7% lower than the price in the United States and 66.2% lower than the United Kingdom. Source: ASEAN High quality - Thailand has a high quality in medical service and technology as well as international experienced doctors with overseas board certification including from the US and UK. Tourist arrivals – Being a top tourism destination helps Thailand to attract more international patients. Despite the ongoing political instability, the number of tourist arrivals has almost doubled from 11.5 million in 2005 to 22.3 million in 2012. Tourism is currently accounted for over 6.0% of the total GDP.
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Thailand had experienced a strong growth in medical tourism from 2004-2007 as seen in the growth in Figure 7: Growing number of international healthcare revenue of the two market leaders, BH and BGH, presenting a combined CAGR of 36%. patient beds However, the growth had slowed down to 5.7% in 2008-2010 due to the global economic crisis and has just recovered to 21.1% in 2011-2012. We forecasted that Thailand should be able to maintain its position as the ASEAN leader in medical tourism and the growth in this sector should continue in 2014-2015 when the political unrest in Thailand resolves and the US economy recovers. The OECD has forecasted the 2014 and 2015 US GDP growth to be 2.9% and 3.4% respectively, a recovery from an expected GDP growth of 1.7-1.8% in 2013.
Medical facilities have followed the higher demand in healthcare After years of stagnation, following the higher demand in healthcare, supply of medical service as a portion of total patient beds have picked up a growth of 14.1% in 2010 according to the most recent data from the Ministry of Public Health (MOPH) figure 7. Based on our estimation, the growth should have continued at a slightly slower pace of around 3.5-5.5% per year up to 2013 and continues at similar rate due to on-going expansion plans of many hospitals. The latest data showed that the number of patient beds per 1,000 people in Thailand is approximately 2.1, lagging behind that of most developed countries of 3.5. However, the number of patient beds Source: MOPH, team analysis per 1,000 people in Bangkok alone is comparable to those developed countries as it could range between 2.9 -3.2 (figure 8).
Figure 8: Number of patient beds Shortage in nurses and doctors per 1,000 population Despite the fact that Bangkok has around 2 times higher than the national average in term of medical profession Average: 2.9 per 1,000 populations, Thailand has a relatively low number of medical professions. Currently, the healthcare industry as a whole is also facing shortage in medical profession which is a result from the outflow of human resources such as doctors and the high employee turnover of nurses. Along with the higher minimum wages, we expected to see a higher expense in this area.
High margin in private hospital from self-produced medical supplies Many private hospitals use self-produced medical supplies where they could charge high margin since the government policy only regulates the price on the healthcare services of hospital. The margin could be as high as 30-200% where as that of public hospital is only 15-30%. It also reflects in a 66.0% growth in cost of healthcare in private hospital in comparison with only 11% for public hospital.
Source: MOPH, World Bank, WHO Multi-specialty hospital with innovation BH has over 30 specialty clinics to offer total solution for healthcare. The multi-specialty clinics complement its strategy to focus on high intensity diseases, which in turn gives it higher margin. The specializations in such diseases also attract both international and domestic patients to BH. Vitallife Wellness Center, one of BH’s subsidiaries, was the first Anti-Aging Center in Asia and was accredited by the World Council on Clinical Accreditation Award. With various specialty clinics, Bumrungrad brand is widely recognized for providing world-class quality and specialty.
Premium and quality service To differentiate itself from competitors in highly competitive industry, BH positions itself as a premium hospital. It strives to provide the best service quality to patients through talent acquisition of top professions and Figure 9: ROE comparison continuous investment in medical technology. Over THB 500 – 600 million is spent on medical equipment annually comparing with THB 150 million spent by regular hospitals. It was called by MISAsia magazine in 2009 as “the World’s Electronically Smartest Hospital”. In addition, BH is a strategic partner of Microsoft in developing and improving Microsoft Amalga HIS, a hospital information system that improves record keeping. Average ROE 17% High and sustainable margin By focusing on top-tier customers and providing the best service quality, BH can charge a higher premium, hence yielding higher margin on its service. In 2012, EBITDA margin stayed at 25.6% comparing with BGH (its main competitor) at 22.5% and peers at 21.1%; ROE was also among the highest standing at 24.3% comparing with a local peer average of 17.2%. Unlike many hospitals, which could be adversely affected by Thailand’s economic fluctuation and political uncertainty, the effect of such situations on BH’s financial performance is minimal. During the 2008-2009 financial crisis, revenue from hospital operation of BH was still growing at an increasing rate of 5.1% in 2009 which was favorable to Thai GDP of -2.3% and industry average at 4.0%. The reason behind Source: SET, team analysis this could be attributed to its business model, which targets the top 2.0% highest income Thai patients and its emphasis on international patients.
Figure 10: Patient bed statistics Expanding capacity to meet rising demand With a high utilization rate in both inpatient department (IPD) and outpatient department (OPD), the Company Inpatients will enhance its IPD and OPD capacity both in existing facilities and through campus expansion. 80 new diagnostic rooms were opened in 2013, bringing a total number to 292. This resulted in an additional of 500 OPD Licensed beds 538 patients daily. 58 IPD beds were added in 2013, and 18additional IPD beds are expected to be added to the main Beds in operation 487 campus by early 2014; this will increase available beds to 563 beds (a 16% growth). To support long-term growth nd nd Capacity utilization 77.75% in patients, the Company has planned to build the 2 campus on Petchburi Road. The 2 campus will be used for a medical center for women and children and general treatment while serious and special illness treatment will Outpatients be concentrated on the main campus. The construction is expected to start in mid-2014 and complete in 2017. Capacity per day (persons) 4,500 Upon completion, it will add a total of 220 IPD beds and 1,000 OPD daily capacities to BH operations. As a result of the expansion plan, BH’s capacity will increase to 6,000 OPD patients daily and approximately 780 IPD Average outpatients per 3,017 beds. day (persons) Capacity utilization 67.04%
Source: Company data
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Domestic competitors Among various hospital operators, the direct competitor of BH seems to be the Bangkok Dusit Medical Service (BGH), which operates over 32 hospitals under its umbrella, locating in both Bangkok, upcountry and Cambodia. Its hospitals range from upper-end to lower-end. Under BGH, BNH and Samitivej hospitals are the two hospitals, which also target high-end customers. BGH has long known for their aggressive expansion through merger and acquisition. It plans to enlarge the portfolio from 30 to 50 hospitals by 2015. Due to the extensive network of BDMS, it could leverage from referral system within its hospital chain and economies of scale. BGH also owns 23.93% of shares in BH; however, it is not a strategic shareholder. We do not expect a foreseeable takeover of Bumrungrad by BGH due to the potential dilution from convertibles owned by founding family under Bangkok Bank.
Investment Summary
We initiate coverage on Bumrungrad Hospital Public Company Limited (SET:BH) with a buy rating yielding Figure 11: Total Revenue 2012 - target price of THB 105.7 (USD 3.3) that offers a 17.4% upside potential. When including an estimated 2022 dividend of THB1.55 per share (USD 0.05), we anticipate a total return of 19.2%. The target price is justified given the growth potential of BH, which will be driven by increase in demand from domestic and international patients.
Strong demand from growing industry Following the gloomy year in 2013 from the low stimulus from government and political instability, private CAGR = 10.5% healthcare industry will rebound in 2014 benefiting from an increase in both domestic patients and international patients. Factors underlie the growing number of domestic patients are rising income which is supported by government’s stimulus packages. In a long-term, structural change in demography such as aging population and urbanization will further instigate demand for health services. With a low healthcare expenditure to GDP of 4.1%, we believe that healthcare industry has ample room to grow. For medical tourism, we expected a rebound with an improved in global economy. The growth should sustain in the long run considering the high medical treatment Source: Company’s data, team’s estimates quality and competitive pricing as well as huge opportunity in the AEC going forward.
Unleashing revenue growth potentials: BH is in the best position to benefit from aforementioned macroeconomic trend. The increase in general income Figure 12: Net Profit 2012 - 2022 level will enlarge its pool of addressable customers. While, the improvement in global economy and government’s policy to promote Thailand as a medical tourism hub further increase a number of international patients coming to Thailand. Ranked 9th of the world best quality hospital, BH will be able to attract a tremendous number of patients coming to Thailand. Previously caped by its constraint of one single-campus with over 70% utilization rate, potential to growth of BH has changed through expansion strategy to a second campus on Petchburi road. We estimate an additional of 1,500 OPD patients capacity (a 33.3% increase) and approximately 300 additional IPD beds capacity (a 60.0% increase). We forecasted its revenue from hospital operations to grow significantly from THB 12.9 bn in 2012 to THB 41.2 bn in 2022 yielding 12.4% CAGR over the forecasted period. CAGR = 11.2%
Business model supporting sustainable growth and margin With premium positioning, specialization in highly complex treatment, and strong bargaining power, BH has well positioned itself to consistently enjoy a strong bottom-line growth and a high sustainable margin. High intensity disease requires special treatment where quality is patient’s main concern. Therefore, BH’s brand equity and its estimatesSource: Company’s data, team’s estimates strength as a multi-specialty hospital will help it attract patients who seek quality treatments. The high demand has allowed it to charge premium and consistently enjoyed higher return relative to peers. In addition, a lenient regulation on healthcare industry also allows it to relish a sizable margin on medicine of over 100%. BH’s business model allows it to achieve high return on equity of over 24.3% in 2012 compared to a peer average of Figure 13: EPS and DPS 2013 - 2022 17.0%.
Defensive stock Fundamentally, healthcare business is less susceptible to economic downturn, as healthcare is a factor that appeal directly to human safety. Thus, in the time of economic crisis, healthcare spending is among the last portion of spending for a person to reduce. BH’s positioning as a leading premium healthcare provider even further reduces its economic risk. By focusing on international patients and wealthy domestic patients, the Company could ensure more stable flows of revenue than its peers, as its patients are less price sensitive. This make the Company minimally affected by economic downturn. Its defensive theme is appealing under current market uncertainty. BH managed to grow its revenue by 5.4% during the 2009 financial crisis, when Thailand’s GDP contracted by 2.6% and healthcare industry players on average grew at 4.0%.
Healthy financial position and High dividend Source: Company’s data, team’s estimates With a strong revenue generation and sustainable profit margin, we expect BH to be able to generate roughly over THB 3.0 mm of free cash flow over the next 5 years. This amount will be sufficient to cover its capital expenditure incurred from campus expansion and future dividend payment. BH’s dividend yield stands at 2.1%, slightly higher that that of Thai peers. However, BH is in a stronger position in paying out dividend with its liquid financial position and cash generating ability. With dividend payout ratio of 50.0%, we forecasted dividend per share of THB 1.5 in 2013, and we expect the number to increase over the forecasted period without concern regarding dividend payment ability.
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Valuation methods: We derived our target price using discount cash flow (DCF) valuation. We believe that DCF valuation is the most suitable methodology as it can best reflect the growth potential of BH as well as changes in capital structure. We applied pricing multiples of seven regional comparable companies to ensure alignment in price calculated through the use of 2-year forward EV/EBITDA.
Possible investment risks: There are several risks that investors should be aware of and may create adverse influences on BH’s performance. Private health care sector is becoming more competitive as numbers of private hospitals are now developing and providing services to both domestic and medical tourists. Supplies of professional staffs has been and is expected to continue to be key concerns of private health care service providers in Thailand creating potential increase in costs of operations. We identify main risks in Investment Risks section. (Appendix 15)
Figure 14: BH’s share price and news flow since August 2011 Unit: THB BGH upped its stake in QE3 Initial talk about QE BH by 3.0% Announcement tapering
BGH upped its stake in BH by 6.1%
43% EPS Announcement on campus growth expansion
40% EPS BH’s sale of BCH Protest in Bangkok growth
Unit: shares in million
Figure 15: Valuation football field Source: Company data, Bloomberg
Valuation Target price THB 105.7
Based on Bumrungrad Hospital’s business model and growth potential, we have employed Discounted Cash Flow (DCF) analysis to value BH and compared the figures with value obtained from industry and regional peer Current price THB 90 multiples.
DCF valuation
Source: Team estimates We value BH using DCF: Free Cash Flow to Firm (FCFF) analysis. This method is deemed suitable for BH as it allows for potential changes in capital structure of the Company over the forecasted period. We choose the forecasting period of 10 years up until 2022 to incorporate potential growth of the company from its campus expansion in 2017. We have taken into account time required for the new hospital to become fully operational and demand to ramp up. Fair price obtained from this method is THB 106.4.
Cost of capital: Based on CAPM, we have calculated the weighted average cost of capital (WACC) for BH to be 9.3%. We benchmark the risk-free rate with the current 10-year government bond of 4.1%. Stock beta is obtained from a set of comparable companies and adjusted to be 0.92; this reflects less cyclical nature of hospital stock. The cost of equity is estimated to be 11.4%, while the cost of debt stands at 5.0%. Capital structure of the comparable companies is used in calculating WACC, as it will reflect the long-term capital structure of BH.
Terminal growth rate: We project sustainable growth rate (g) for FCFF to be 3% based on an estimate of long- term nominal GDP growth.
Dilution priced in: BH currently has convertible bonds and preferred shares outstanding. The conversion will result in additional shares of 139.0 million (137.4 mn from convertible bonds and 1.7 mn from preferred shares). Total outstanding shares will, as a result, increase from 728.6 million to 867.4 million shares, representing a 19% dilution. As both convertible securities are deeply in-the-money, we have assumed full conversion in our model to price in the possible dilution effect. Consequently, EPS shown will promptly incorporate potential dilution.
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Figure 16: Cost of capital calculation Financial statement projection assumptions
Parameters Value Revenues forecast: Our revenues forecast is driven by 2 factors namely, (1) increasing number of patients and Risk-free rate 4.10% (2) growing revenue per patient. Numbers of both OPD and IPD patients are expected to grow at a rate of 5.0% initially driven by several favorable demographic trends mentioned aforementioned. The admission rate will be Market risk premium 8.00% maintained constant at 2.7%, which is in line with historical average. The increase in demand will be supported Levered beta 0.88 by capacity growth from Petchburi campus expansion. Number of patient growth is forecasted to decline to 1.0% in 2022 to match with long-term population growth. Adjusted beta 0.92
Cost of equity (ke) 11.40% Growth in revenue per patient will be driven by price inflation and increase in disease complexity. With the Cost of debt (kd) 5.00% comparably low medical cost in Thailand and BH’s position as a multi-specialty hospital, we expect BH to be able to achieve an increase in revenue per patient both OPD and IPD of 10.0% annually from 2013 to 2017. This Debt-to-capital 0.28 will come from 5.0% price inflation and 5.0% from increasing complexity of the treatment. We expect revenue WACC 9.30% per patient to ramp up to 2.0% to coincide with long-term inflation rate in 2022 when BH enters stable growth phrase. Source: Team estimates, Bloomberg Fluctuating margin from hospital expansion: We expect gross profit margin from hospital operations to drop by 5.0% in 2017 - 2018 from the current level of 38.0% to 33.0% from the opening of new campus. There will be lag time before BH could fill up an incremental capacity from new buildings causing margin to decline. Nonetheless, as the new campus will be opened in a nearby area under the same brand, we believe it will not be difficult for BH to fill up the additional capacity and enhance utilization rate. The lag time is expected to be Figure 17: Projected FCFF approximately 2 years, after which margins should recover to the current level in 2021.
Growing CAPEX to support expansion: CAPEX constitutes a major part in FCFF calculation. We have followed company guidance upon CAPEX estimation outlining between THB 1.1 – 3.0 billion annually from 2013 - 2018. This CAPEX will cover cost of new campus of THB 10.0 billion as well as other investment in medical equipment and information system of THB 500 – 600 million annually. From 2019 onward, we expected CAPEX to grow along with revenue due to the nature of hospital business, which requires continuous investment on medical equipment and knowhow.
Political impact: To take into account the recent political unrest in Bangkok where BH operation is concentrated. We reduced number of patient growth down by 1% in 2013 to allow for potential decline in Source: Team estimates medical tourists who postponed their medical treatment. However, we expect the impact to be temporary, and the growth should rebound in 2014 when the situation alleviates.
Multiples Valuation
Figure 18: Revenue & growth To perform multiplier valuation, we have selected a set of comparable companies based on similarity in business operation, profitability level (EBITDA margin), and size of market capitalization.
Mkt Cap P/E (x) EV/EBITDA (x) Div Company (US$m) 2013F 2014F 2013F 2014F Yield 2012A Bumrungrad Hospital 2,042 26.9x 23.4x 17.0x 14.8x 2.0% Bangkok Dusit Medical Service 6,266 30.9x 27.1x 20.4x 17.9x 1.4%
Local Bangkok Chain Hospital 487 25.8x 21.7x 15.4x 13.4x 2.2% Chularat Hospital 344 26.5x 22.8x 17.9x 15.5x n.a. IHH Healthcare 9,995 50.5x 39.2x 24.3x 20.4x 0.0% KPJ Healthcare 1,253 36.4x 30.4x 20.9x 17.2x 1.9% Source: Team’s estimates
Raffles Medical Group 1,401 26.8x 24.2x 18.7x 17.0x 1.3% Regional Cordlife Group 255 33.9x 25.1x 26.5x 18.0x 4.0% Median 30.9x 25.1x 20.4x 17.2x 1.9%
Source: Bloomberg, accessed on December 9, 2013 Figure 19: Gross margin & EBITDA margin Forward EV/EBITDA EV/EBITDA multiple is deemed to be more appropriate measure. EV/EBITDA multiple disregards the effect of difference in capital structure and accounting treatment of depreciation and amortization between companies. The 2013 and 2014 median forward EV/EBITDA for peer group are 20.4x and 17.2x respectively. Applying our forecast for EBITDA per share of 2013 and 2014 of THB 5.08 and 5.96, we arrive at a projected price of THB 104.8 and 103.7 respectively.
Low PEG compared to peer group Despite the rise of BH’s P/E ratio over historical period (figure 21), The Company is currently trading a relatively low PEG ratio compared to regional peers. Its current PEG ratio is 1.6x, lower than a peer group average of 2.0x and its direct competitor BGH’s PEG of 1.7x. This implies the current P/E ratio of BH is not high given the growth prospect of BH. In addition, BH is also trading at a discount to market weighted average of peers as presented in appendix 8. Source: Team’s estimates
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Risks to target price Our target price is sensitive to various assumptions used in valuing the business. Therefore, if such assumptions Figure 20: Scenario analysis are inaccurately forecasted, the intrinsic value of the company could potentially deviate from our target price, resulting in a potential undesirable stock performance. Key assumptions affected company performances include Low Base High a growth in number of patients, an increase in revenue per patient, gross profit margin and CAPEX. In addition, DCF model is also sensitive to WACC and terminal growth rate assumptions. We crosschecked DCF model with THB 94.1 105.7 118.8 multiples valuation. However, the multiples valuation itself is subject to risk of comparability and market (USD) ($2.9) ($3.3) ($ 3.7) sentiment. Therefore, to evaluate the potential fluctuation in target price, we have performed sensitivity analysis Source: Team’s estimates by varying the three main assumptions namely patient growth, revenue per patient growth and gross profit margin. We break down the result in 3 scenarios as follows:
Figure 21: Historical P/E band Base Case: The base assumptions for BH are as described previously. The target price based on base assumptions is THB105.7. P/E 30x P/E 28x Best Case: We revised gross margin up by 1.0% annually while increasing annual growth in patient volume by P/E 26x 0.5% and growth in revenue per patient by 0.5%. Price calculated for the best case is THB 118.8. P/E 22x P/E 18x Worst Case: The margin is revised down by 1.0% annually. We decrease annual growth in patient volume by P/E 14x 0.5% and revenue per patient growth by 0.5%. Price calculated for pessimistic case is THB 94.1.
Figure 20 displays prices obtained from scenario analysis
In addition, we have conducted a sensitivity analysis on discount rate (WACC) and terminal growth rate; two main variables, which affect DCF model in appendix 7. Source: Bloomberg, accessed December 12, 2013 As 70% of enterprise value derives from terminal value, which is largely determined by terminal growth rate, Monte Carlo simulation is performed to test the sensitivity of terminal growth rate. The result shows that there Figure 22: Monte-Carlo Analysis is a 3% chance that would trigger a change of our recommendation from buy to sell.
Financial Analysis
Showing strong performance on earnings and financial position, we believe the Company possesses abilities to grow aggressively with high earnings quality as well as stronger financial position. Financial statements and financial ratios are provided on appendix 1-5.
Strong revenue growth driven by aggressive expansion Achieving strong revenue from hospital operations CAGR of 9.9% over 2007 – 2012, we believe that BH has the ability to achieve the top-line 2012 – 2022 CAGR of 12.4% mainly by executing its capacity expansion strategy to service growing number of patients. The plan will result in additional daily capacity of 1,500 OPD patients Sell Hold Buy (33.3% increase) and over 300 active beds for IPD patients (approximately 60.0% increase) over the next five Source: Team’s estimates years. In addition, the revenue growth will be supported by growth in expected average spending per patient due to increasing complexity of illness and inflation. Following the expansion strategy, we estimate the total revenue Figure 23: Normalized Earnings and will be able to reach THB 42.2 billion in 2022, from THB 14.0 billion in 2012. Earnings Growth
Fluctuation in margins; expect long-term improvement We expect fluctuation in EBIT margin, hence net margin, over the forecasted period. This is due to the expansion plan of the Company, which is expected to be completed in 2017 where small drops in margin of approximately 2.0 – 5.0% for hospital operation are expected depressing EBIT margin of BH from 25.6% in 2012 to 21.3% on average from2017 to 2021. This is due to the fact that costs directly related to hospital operations e.g. doctors, nurses, and medical equipment are mainly fixed costs; therefore, with expanded capacity in place, revenue will not be able to sufficiently cover the costs. However, after capacity is filled up, margins are expected to improve reaching 26.8% EBIT margin in 2022.
Strong growth in earnings Despite economic downturn in 2008 and 2009, the Company’s normalized earnings still have been growing at the 2007 - 2012 CAGR of 4.9%. The growth was especially high in the past two years (2011 – 2012) with an average growth of 27.7%; this was due to the growth in top-line driven by both improvements in industry conditions Source: Company data, team estimates aforementioned and profits sharing from Bangkok Chain Hospital (BCH), which was acquired in 2011.
Although we expect fluctuation in margins from the Company’s expansion strategy, we believe that BH will Figure24: DuPont AnalysisSource: achieve strong EPS growth over the forecasted period of 16.1% CAGR (figure 23) indicating a promising earnings outlook of BH. Such aggressive growth is supported by the growth in top line mainly from the capacity expansion as well as improving margins. For the year ended 2022, we forecast that BH’s EPS will reach THB Legend ROE 10.4 with ROA equal to 22.8%. This is a significant increase from the EPS of THB 3.7 and ROA of 18.2% in 2012A 2022E 35.3% 27.5% 2012.
ROA Asset/Equity DuPont Analysis 18.2% 22.8% 1.0x 1.2x Strong improvement in ROA aforementioned is driven mainly by improved EBIT margin, interest burden, and total asset turnover. EBIT margin is forecasted to increase from 25.6% in 2012 to 26.8% in 2022. Total assets Profit/Revenue Revenue/Assets turnover is expected to improve from 1.0x to 1.1x, and interest burden from 0.9x to 1.0x respectively over the 19.0% 21.4% 1.0x 1.1x same period. However, ROE is forecasted to decrease from 35.3% in 2012 to 27.5% in 2022 because of repayment of debt as well as rapid increase in portion of equity driving financial leverage down from 1.9x to Source: Company data, team
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1.2x. Yet, if the Company maintains the current capital structure, the potential increase in financial leverage provide potential upside for ROE. Figure 25: Forecasted cash flow Unit: THBbn Strong cash position and cash generating ability The Company, with more than THB 6.0 bn cash and cash equivalents, has a strong cash position. This is a result of an approximately THB 4.6 bn sale of BCH shares in 2012. This marks an unusual cash position for the Company considering the historical (2007 – 2011) portion of cash to total asset of 6.6% comparing to 38.0% in 2012. Market sentiment was that the Company will invest its cash in acquisitions of hospitals, yet there has been no official announcement from the Company on the use of the proceeds.
In addition, BH also has a strong cash generating ability (figure 25). Apart from 2013 where we expect net outflow of cash, operating cash flow generally will be able to fund both dividend payment and capital expenditure. Furthermore, the earning quality ratio (operating cash flow per EBIT) is expected to remain at an average of 101.2% over the forecasted period showing a good quality of earnings.
Source: Company data, team estimates Strong financial position With substantial increase in cash in 2012, the Company’s liquidity has improved significantly as seen in an increase in current ratio from less than 2.0x to 3.6x. Supported by strong cash generating ability, we expect current ratio to remain on average of 3.1x providing ample resources to service current liabilities. BH’s solvency is expected to improve over the forecasted period. Debt-to-total-capital ratio will decrease significantly from 0.4x in 2012 due to maturity of debenture in 2016, 2018, and 2021. Additionally, the Company’s interest coverage ratio, which currently is at 14.9x is forecasted to increase significantly over the forecasted period as debts are repaid.
However, it is important to note that debt-to-total-capital ratio of the Company has been 0.3x on average from 2007 to 2012. We believe that there is a possibility that BH may try to maintain the capital structure at 0.3x - 0.4x debt-to-total-capital ratio.
Corporate Governance
Realizing the importance of good corporate governance, BH is committed to follow the Principles of Good Governance Guidelines in order to ensure the creditability and confidence for all stakeholders, to manage the business with transparency, and to compete efficiently at the international level. BH’s high quality report on how BH conducts the business is a good indication that BH has put great efforts in improving its relation and involvement of all stakeholders and enhancing transparency. We believe such actions would create additional upside potential for BH, as compared to BH’s major competitors that lack attentions to good corporate governance and corporate social responsibility.
The quality of corporate governance is evaluated using the criteria jointly developed by the Thai IOD and McKinsey & Company Thailand. Currently, BH is evaluated according to 5 criteria categories derived from the Organization of Economic Cooperation and Development (OECD). BH has received a Very Good rating (4 out of 5 scores). The score is relatively high among peers in the industry. For detailed calculation methodology please refer to BH’s corporate governance in appendix 14.
Management Team
Regarding private hospitals in Thailand, medical professions generally manage both business and daily hospital operation. Unlike its competitors, BH has professional business management team with direct experience in hospital management to independently manage its business operation. Having separate operating units allow the Company to improve hospital efficiency while avoiding the drawback of having doctors designing business strategies. However, BH’s board of directors is quite conservative in terms of investments comparing to the main competitor BGH.
Market Sentiment on Future Investment Opportunity
With over THB 6 billion of excessive cash on hand from the sale of BCH shares, we expect BH to invest the proceeds in both domestic and foreign healthcare providers. Through various interviews with local newspaper, management has revealed a plan to invest locally in Phitsanulok province and abroad in Hong Kong and Mongolia. BH is believed to currently be in a negotiation with private hospital in Phitsanulok province. Investment in Phitsanulok would allow BH to expand customer base upcountry and capture high-income individuals living outside Bangkok. For international investment, BH has recently established a holding company in Hong Kong under the name “Life and Longevity”, which will be used to conduct oversea investment. There is a potential investment opportunity in hospital business held by Fortis Group, which currently is operating at loss. On the other hand, BH management has expressed interest in investing in Mongolia, as there have been an increasing number of patients from the country. Underdeveloped healthcare facilities in Mongolia would allow BH to capture first-mover advantage allowing the Company to establish strong foothold in the country. However, as the deals are still under negotiation, we have not factored them in our valuation. Regardless, we believe that the market will respond positively to the projects, as it will accelerate growth of BH’s operations.
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Investment Risks
Probabilities and possible impacts of the following risks are presented in appendix 15
POLITICAL RISK: Thailand’s political instability Thailand’s continual political unrest has an effect on amount of medical tourists, as those tourists are concerned about their security and convenience. Although medical tourism is not as easily affected as the typical tourism industry as there is often an established relationship between patients and the hospital and physicians, the event could cause a postponement or a reduction in the number of patients traveling to Thailand, and could in turn affect revenues from international patients
MARKET RISK: Increasing in complexity of disease and epidemic External factors such as emerging of flu pandemics or new complexity disease (requires high intensity treatment) could have a positive effect to the demand of patients. The epidemic would increase the number of patients getting treatment from the hospital. Also, the more complex of the disease, the more fees the hospital can charge for high intensity treatment. Therefore, this positive risk would enhance company’s earnings.
MARKET RISK: Increase in trade liberalization and M&A trend After Thailand joins AEC in 2015, it will not only promote trade liberalization but also open up the services, capital and labor sectors to regional liberalization. This attracts inflows of foreigners coming to invest in healthcare business in Thailand and also stimulate merger and acquisition trend in healthcare industry. This could be viewed both as an opportunity and a treat for BH. It offers an opportunity for expansion and a treat from competition in private healthcare sector.
ECONOMIC RISK: Global macro and Thai Economy Thailand’s economy could continue to grow from domestic spending and also the economic stimulation from the government’s policies. However, the overview of the world economy is not quite so bright, Euro-crisis and US- crisis might not likely to recover soon. A lot of factors are expected to cause fluctuations in the Thai economy. As more than half of revenue is from international patients, these external factors could have a negative impact on the revenue.
ECONOMIC RISK: Intense competition in the premium healthcare sector Private healthcare sector tends to become more competitive as private hospital in Thailand and the region continue to develop, which poses a threat of losing clients to competitors. BH might need to focus on continuing to recruit doctors of the highest caliber, invest in up-to-date equipment and informational technology as well as continuously improve its quality of care. This could have a negative impact on BH’s profit margin.
OPERATIONAL RISK: Shortage of Professional Staffs Nurses, pharmacists and various technicians with specific technical expertise and knowledge are considered to be important assets of the hospital. An increasing demand from private and public healthcare sectors has resulted in a shortage of professionals’ especially multi-lingual professionals. Moreover, with AEC coming into effect in 2015, there could be an additional treat of Professional Staffs outflow to neighboring countries. The hospital must offer competitive compensation and benefit for its staff in order to attract and maintain high-quality professionals, which as a result increase the operating cost of the hospital.
OPERATIONAL RISK: Legal disputes The risk is connected with the healthcare services provided for patients by hospital staff and physicians that are subjected to litigation risk. Patients are becoming more sensitive to quality of services provided and poor treatments are exposed to high risk of litigation. Even though the company has various policies in place against possible legal lawsuits, litigation would not only hike up expenses related to lawsuits but also destroy the reputation and creditability of the hospital.
OPERATIONAL RISK: Increasing reliance on insurance payment method Unlike the healthcare industry in developed country like the US that a lot of people rely their healthcare expenditure on insurance companies, self-pay method of payment remains the primary method of payment accounting for over 70% of BH total revenue. However, an increasing usage of insurance as a way of healthcare treatment fees increase the bargaining power of insurance companies and could have a negative effect on profits from operations. This is because the insurance companies usually try to minimize healthcare expense by cutting out unnecessary medicines prescription and treatment.
OPERATIONAL RISK: Unable to meet the quality standard With the expansion of 2nd campus, BH is exposed to risk of quality control over its hospital operation. The Company used to be excelled at effectively managing its single campus. However, with the existing of 2 campuses, BH might to be as efficient at operating its service as well as maintaining its service quality standard. This could potentially damage the Company’s reputation and creditability of being a premium healthcare provider. As a result, it could have a negative effect on the earning in the future.
POLITICAL RISK: Changes in government regulation Potential changes in regulation related to hospital operation could lead to stricter rules. The implementation might result in incurring additional costs and necessary investments from higher quality standard if it is required. Moreover, there could be a new regulation on prescription of medicine that limit the ability of the hospital to charge more on medicines. Therefore, it is possible that new regulations would have a negative effect on BH’s financial results.
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Appendices
Appendix 1: Profit and loss statement
Unit: THBmm except per share data 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E Revenues from hospital operations 9,794 11,015 12,856 14,619 17,210 20,032 23,357 27,054 30,510 Costs of hospital operations (6,508) (7,070) (8,232) (9,064) (10,670) (12,420) (14,715) (18,126) (20,136) Gross profit 3,286 3,945 4,624 5,555 6,540 7,612 8,642 8,928 10,373 Administrative expenses (1,679) (2,035) (2,305) (2,383) (2,805) (3,265) (3,737) (4,329) (4,882) Rental income 126 129 131 134 137 139 142 145 148 Others 101 245 1,147 287 332 391 438 492 565 EBIT 1,834 2,284 3,598 3,594 4,203 4,878 5,485 5,236 6,205 Interest expense (68) (189) (241) (236) (236) (236) (236) (174) (174) EBT 1,766 2,094 3,357 3,358 3,967 4,642 5,249 5,062 6,031 Income tax expense (507) (506) (690) (672) (793) (928) (1,050) (1,012) (1,206) Net income 1,258 1,588 2,667 2,686 3,174 3,713 4,199 4,050 4,825 Profit to non-controlling interest - (0) (1) ------Profit to common shareholders 1,258 1,588 2,667 2,686 3,174 3,713 4,199 4,050 4,825 Other key income statement data Revenue growth 8.0% 12.5% 16.7% 13.7% 17.7% 16.4% 16.6% 15.8% 12.8% Earnings growth 0.2% 27.2% 28.2% 32.0% 18.2% 17.0% 13.1% -3.6% 19.1% EBITDA 1,834 2,284 3,598 4,408 5,168 5,972 6,792 6,714 7,832 EPS 1.73 2.18 3.66 3.10 3.66 4.28 4.84 4.67 5.56 Normalized profit to common shareholders 1,248 1,588 2,035 2,686 3,174 3,713 4,199 4,050 4,825 Normalized EPS 1.71 2.18 2.79 3.69 3.66 4.28 4.84 4.67 5.56 Dividend payout ratio 49.2% 41.4% 30.1% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% DPS 0.85 0.90 1.10 1.55 1.83 2.14 2.42 2.33 2.78
Source: Company data, team estimates
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Appendix 2: Statement of financial position
Unit: THBmm 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E Assets Cash and cash equivalent 627 1,261 6,034 5,876 7,285 8,622 7,536 9,252 10,904 Trade accounts receivable - net 958 1,126 1,335 1,463 1,831 2,004 2,468 2,711 3,129 Inventories 218 266 234 348 337 460 484 679 613 Other current assets 51 52 67 90 106 124 145 175 196 Total current assets 1,855 2,704 7,670 7,778 9,559 11,210 10,633 12,818 14,842 Investments in associated companies - net 1,210 4,251 238 238 238 238 238 238 238 Property, plant, and equipment - net 5,785 6,242 7,683 9,038 9,314 9,898 11,719 12,235 12,018 Intangible assets - net 282 256 236 236 236 236 236 236 236 Other non-current assets 20 19 35 35 35 35 35 35 35 Total non-current assets 7,297 10,768 8,192 9,547 9,823 10,407 12,228 12,744 12,527 Total assets 9,152 13,473 15,862 17,325 19,382 21,617 22,860 25,562 27,369 Liabilities & Shareholders' Equities Trade accounts payable 620 603 800 878 1,097 1,202 1,522 1,833 1,894 Current portion of long-term loans 71 - - - - 1,500 - 1,000 - Other current liabilities 1,032 903 1,338 1,374 1,620 1,887 2,206 2,565 2,894 Total current liabilities 1,723 1,506 2,138 2,252 2,717 4,589 3,728 5,399 4,788 Long-term loans 1,359 ------Long-term debentures - 4,955 4,960 4,966 4,972 3,477 3,483 2,488 2,494 Provision for long-term employee benefits - 278 376 376 376 376 376 376 376 Total non-current liabilities 1,359 5,233 5,337 5,342 5,348 3,853 3,859 2,864 2,870 Total liabilities 3,082 6,739 7,474 7,594 8,065 8,442 7,587 8,263 7,658 Ordinary shares & paid-up capital 796 796 796 935 935 935 935 935 935 Convertible bonds treated 550 550 550 ------Retained earnings 4,528 5,115 6,578 7,921 9,507 11,364 13,464 15,489 17,901 Other components of shareholders' equity (23) 55 246 244 244 244 244 244 244 Total shareholders' equity 6,069 6,734 8,388 9,731 11,317 13,174 15,274 17,299 19,711 Total liabilities and shareholders' equity 9,152 13,473 15,862 17,325 19,382 21,617 22,860 25,562 27,369
Source: Company data, team estimates
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Appendix 3: Statement of cash flows
Unit: THBmm 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E Cash Flow from Operating Activities Net income 1,258 1,588 2,667 2,686 3,174 3,713 4,199 4,050 4,825 D&A 596 645 709 815 965 1,094 1,307 1,477 1,627 Change in working capital (290) (16) 9 (152) 92 59 129 202 17 Others 84 (156) (360) ------Total cash from operating acitivites 1,648 2,061 3,025 3,349 4,231 4,866 5,635 5,729 6,469 Cash Flow from Investing Activities Capital expenditure (694) (1,071) (982) (2,170) (1,241) (1,677) (3,128) (1,993) (1,411) Investment in associates/subsidiaries 20 (3,560) 3,436 ------Others 9 686 477 ------Total cash from investing acitivites (665) (3,945) 2,931 (2,170) (1,241) (1,677) (3,128) (1,993) (1,411) Cash Flow from Financing Activities Dividend (620) (912) (912) (1,343) (1,587) (1,857) (2,100) (2,025) (2,412) LT debt repayment (90) 3,424 - - - - (1,500) - (1,000) Others (32) 6 (267) 6 6 6 6 6 6 Total cash from financing activities (742) 2,518 (1,179) (1,337) (1,581) (1,851) (3,594) (2,019) (3,407) Net cash in the year 241 634 4,773 (158) 1,409 1,338 (1,086) 1,716 1,652 Beginning cash 387 627 1,261 6,034 5,876 7,285 8,622 7,536 9,252 Ending cash 627 1,261 6,034 5,876 7,285 8,622 7,536 9,252 10,904
Source: Company data, team estimates
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Appendix 4: Key financial ratios
2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E Activity ratios Receivables turnover 12.0x 10.6x 10.4x 10.4x 10.4x 10.4x 10.4x 10.4x 10.4x Days sales outstanding 30.5 34.5 35.0 34.9 34.9 34.9 35.0 34.9 34.9 Inventories turnover 31.2x 29.2x 33.0x 31.2x 31.2x 31.2x 31.2x 31.2x 31.2x Days inventory on hand 11.7 12.5 11.1 11.7 11.7 11.7 11.7 11.7 11.7 Accounts payable turnover 11.0x 11.6x 11.7x 10.8x 10.8x 10.8x 10.8x 10.8x 10.8x Days of accounts payable 33.2 31.6 31.2 33.8 33.8 33.8 33.9 33.8 33.8 Total assets turnover 1.1x 1.0x 1.0x 0.9x 1.0x 1.0x 1.1x 1.1x 1.2x Fixed assets turnover 1.6x 1.8x 1.8x 1.7x 1.8x 2.0x 2.1x 2.2x 2.5x Working capital turnover 122.3x 14.7x 3.8x 2.6x 2.8x 2.7x 3.1x 3.5x 3.3x Liquidity ratios Current ratio 1.1x 1.8x 3.6x 3.5x 3.5x 2.4x 2.9x 2.4x 3.1x Quick ratio 0.9x 1.6x 3.4x 3.3x 3.4x 2.3x 2.7x 2.2x 2.9x Cash ratio 0.4x 0.8x 2.8x 2.6x 2.7x 1.9x 2.0x 1.7x 2.3x Cash conversion cycle 9.0 15.4 15.0 12.9 12.9 12.9 12.9 12.9 12.9 Solvency ratios Debt-to-equity ratio 0.3x 0.8x 0.7x 0.5x 0.4x 0.4x 0.2x 0.2x 0.1x Debt-to-total capital ratio 0.3x 0.4x 0.4x 0.3x 0.3x 0.3x 0.2x 0.2x 0.1x Financial Leverage 1.5x 2.0x 1.9x 1.8x 1.7x 1.6x 1.5x 1.5x 1.4x Times interest earned 26.9x 12.1x 14.9x 15.2x 17.8x 20.7x 23.2x 30.1x 35.6x Profitability ratios Gross margin 33.5% 35.8% 36.0% 38.0% 38.0% 38.0% 37.0% 33.0% 34.0% EBIT margin 18.2% 20.2% 25.6% 23.9% 23.8% 23.7% 22.9% 18.9% 19.9% Pretax margin 17.6% 18.5% 23.9% 22.3% 22.4% 22.6% 21.9% 18.3% 19.3% Net profit margin 12.5% 14.0% 19.0% 17.9% 18.0% 18.1% 17.5% 14.6% 15.5% Return on asset 14.2% 14.0% 18.2% 16.2% 17.3% 18.1% 18.9% 16.7% 18.2% Return on equity 21.8% 24.8% 35.3% 29.7% 30.2% 30.3% 29.5% 24.9% 26.1% Return on invested capital 23.2% 22.4% 27.5% 25.1% 27.1% 28.3% 29.7% 26.5% 28.9% DuPont Analysis EBIT margin 18.2% 20.2% 25.6% 23.9% 23.8% 23.7% 22.9% 18.9% 19.9% Interest burden 1.0x 0.9x 0.9x 0.9x 0.9x 1.0x 1.0x 1.0x 1.0x Tax burden 0.7x 0.8x 0.8x 0.8x 0.8x 0.8x 0.8x 0.8x 0.8x Net profit margin 12.5% 14.0% 19.0% 17.9% 18.0% 18.1% 17.5% 14.6% 15.5% Total asset turnover 1.1x 1.0x 1.0x 0.9x 1.0x 1.0x 1.1x 1.1x 1.2x Return on asset 14.2% 14.0% 18.2% 16.2% 17.3% 18.1% 18.9% 16.7% 18.2% Financial leverage 1.5x 1.8x 1.9x 1.8x 1.7x 1.7x 1.6x 1.5x 1.4x Return on equity 21.8% 24.8% 35.3% 29.7% 30.2% 30.3% 29.5% 24.9% 26.1%
Source: Company data, team estimates
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Appendix 5: Key financial ratios formula for calculation
Formalar Activity ratios Receivables turnover Revenue / Accounts receivables Days sales outstanding (DSO) 365 / Receivbales turnover Inventories turnover COGS / Inventories Days inventory on hand (DOH) 365 / Inventories turnover Accounts payable turnover COGS / Accounts payables Days of accounts payable 365 / Accounts payables turnover Total assets turnover Revenue / Total assets Fixed assets turnover Revenue / Property, plant, and equipment Working capital turnover Revenue / Working capital Liquidity ratios Current ratio Current assets / Current liabilities Quick ratio (Current assets - Inventory) / Current liabilities Cash ratio Cash / Current liabilities Cash conversion cycle DSO + DOH - Days of accounts payable Solvency ratios Debt-to-equity ratio Total debt / Total shareholders' equity Debt-to-total capital ratio Total debt / Total capital Financial Leverage Total assets / Total shareholders' equity Times interest earned EBIT / Interest expense Profitability ratios Gross margin Gross profit / Revenue EBIT margin EBIT / Revenue Pretax margin EBT / Revenue Net profit margin Net income / Revenue Return on asset Net income / Total assets Return on equity Net income / Total shareholders' equity Return on invested capital Net income / Total capital
Note: all ratios are calculated with average balance of balance-sheet items
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Appendix 5: DCF analysis
DCF Analysis Unit: THBmm 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E Net Income 2,686 3,174 3,713 4,199 4,050 4,825 6,036 7,545 8,166 9,040 Interest expense (1 - marginal tax 189rate) 189 189 189 139 139 103 103 103 3 D&A 815 965 1,094 1,307 1,477 1,627 1,835 2,069 1,738 1,964 Change in WC (152) 92 59 129 202 17 188 112 202 (32) CAPEX (2,170) (1,241) (1,677) (3,128) (1,993) (1,411) (3,244) (3,379) (2,614) (2,447)
FCFF 1,368 3,179 3,378 2,696 3,875 5,198 4,918 6,450 7,595 8,528
Terminal growth rate 3.0% WACC 11.4% Residual value 138,502 PV of residual value 61,632 PV of 10-Year FCFF 28,900 Enterprise Value 90,532 Net debt (1,182) Equity Value 91,714 Number of shares (mn) 728.6 Number of diluted shares (mn) 867.4 Target price (THB) 105.7
Source: Team estimate, Blomberg
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Appendix 6: DCF assumptions
1. Number of patients In forecasting number of patients, we separate patients into two main groups including OPD and IPD patients. Taking into consideration historical growth of OPD patients as well as growth in addressable market size for BH, we apply 5.0% growth in number of OPD patients over 2013 – 2017 period, after which the growth is expected to fall reaching long-term population growth rate of 2.0% in 2022. Number of IPD patients is forecasted as a portion of OPD patients by applying admission rate of 2.7% which is the historical average of the number. Number of patients of both types is then cross-check with the capacity to ensure that utilization rate. By 2022, the utilization rates of OPD and IPD capacity are 73.6% and 72.6% respectively.
2. Average spending per patient Average spending per patient is driven by two main factors including inflation and illness complexity. The historical spending has been growing at the rate of approximately 9.0% for both OPD and IPD spending. The price inflation is expected to be 5.0% over the next five years
3. WACC Risk free rate 10-year Thai government bond Beta Market risk premium Cost of debt Marginal tax rate Current corporate tax rate in Thailand of 20%. We expect the rate to be applied for the foreseeable period. Capital structure
4. Other Income tax Current corporate tax rate in Thailand of 20% Debt repayment We expect the Company to repay debt according to the schedule provided in its annual report. Majority of the debt will be paid off by 2018. Dividend policy Depreciation and Straight-line depreciation with blended useful life of 11.2 years for fixed assets and 16.0 years for intangible amortization assets. The useful life was calculated based on the current useful life (not remaining) of the assets.
Appendix 7: Sensitivity analysis
Long-term growth rate (g) 2.00% 2.50% 3.00% 3.50% 4.00% 10.3% 82.4 85.8 89.7 94.1 99.2 9.8% 88.5 92.5 97.1 102.4 108.6 WACC 9.3% 95.5 100.2 105.7 112.2 119.9 8.8% 103.5 109.2 115.9 123.8 133.4 8.3% 112.8 119.7 128.0 137.9 150.2
Source: Team estimates
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Appendix 8: SWOT Analysis
Source: Team analysis
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Appendix 9: Macroeconomic and industry-wide factors
Portion of public and private beds Stronger growth in health care expenditure
Healthcare expenditure Country CAGR (2005-2011)
Australia 13.3%
United Kingdom 3.2%
Netherlands 8.2%
Japan 6.5%
Canada 10.2%
Korea 8.9%
Average of DM 9.3%
Thailand 14.9%
Source: Company’s data Source: WHO, team’s analysis
Growth in GDP per capita and private consumption Regression on GDP and health care expenditure Unit: USD
Correlation = 98.5%
Source: NESDB, team’s analysis Source: World Bank
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Aging population Urbanization
Source: NSO, team’s analysis Source: NSO, team’s analysis
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Appendix 10: Porter’s five forces analysis of private healthcare industry
Competitive rivalry 5
4
3
2 Bargaining power of Threat of substitutes suppliers 1
0
Bargaining power of Threat of new entrants customers
Final rating: 2.8
Threat of New Entrants 1) very low threat of new hospital operators 2) existence of economies of scales 3) large amount of initial investment required 4) lack of medical staff
Threat of Substitutes 1) limited threat of substitutes 2) local clinics for general illness treatment 3) public hospital with lower price charged 4) alternative medication e.g. acupuncture, traditional Chinese-Thai medication
Competitive rivalry 1) highly competitive industry 2) hospital location 3) increasing in consolidated expansion via merger and acquisition 4) continuing development in terms of quality and service
Bargaining Power of Suppliers 1) medium level of supplier power 2) lower medicine price compared to other countries in a region 3) high power from medical staff, especially doctors
Bargaining Power of Customers 1) limited patient pricing power regardless economic condition 2) increasing in a number of patients in private hospitals 3) price pressure from insurance companies 4) willing to pay if service provided is satisfied
The scale of the interaction: 0 No interaction 1 Insignificant 2 Low 3 Average 4 High 5 Very high
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Appendix 12: Domestic Competitor analysis
Bangkok Dusit Medical Service (BGH) Currently a leader in healthcare industry in Thailand having approximately 50% market share by total revenue with 32 hospitals under its umbrella throughout the country and Cambodia, its private hospital business includes Bangkok Hospital Group, Samitivej Group, BNH Hospital, Payathai Group, Paolo Memorial Hospital Group, and Royal Hospital Group. However, the premium hospital groups viewed as a direct competitor of Bumrungrad Hospital are as follows:
Bangkok Hospital Group Having 19 hospitals operated under its name with almost 2,500 beds capacity in 2012, Bangkok Hospital Group is a leader among private hospitals in Thailand. The target patient groups are those in medium-to-high income segment. Its main campus, located on New Petchburi Road, Bangkok, offers 52 specialty clinics serving a variety of illness treatment for both domestic and international patients. Up until now, it has welcomed international patients from over 150 countries worldwide with the accommodations provided e.g. language translation, flight and hotel booking, visa document preparation, etc.
Samitivej Group (SVH) & BNH Hospital Operating 3 hospitals and clinics located in Bangkok and its vicinity, Samitivej group offers comprehensive multi-specialty tertiary care service for both domestic and international patients. SVH shared about 8.5% of the private hospital industry by revenue and had 825 licensed beds in 2012. For BNH Hospital, it was the first to become a private international hospital in Thailand with 144 beds capacity. As both hospitals are deemed BGH’s subsidiaries, they have the advantage capability to serve both domestic and international patients along with accommodations needed.
Payathai Group, Paolo Memorial Hospital Group, and Royal Hospital Group These groups of hospital chain are positioning themselves to serve medium-income patients; thus, the profit margin contributed to BGH is lower compared to the aforementioned groups. However, they can still serve international patients as they have already been accredited as international hospitals.
Regional competitor Based in Malaysia and currently being the leader in Asia international provider of premium healthcare, IHH Healthcare Berhadv’sis also the world’s second largest listed healthcare operator by market capitalization. IHH generally invests in premium healthcare-related business units serving both home and foreign markets. In 2012, its business units covered over 5,000 beds capacity in 33 hospitals across 9 countries. It also plans to add over 3,700 new pipeline beds in the near future. Thus, its size and scale should enable it to invest in cutting-edge technologies and attract top medical talents, which could result in enhancing its hospital networks to deliver better services to patients.
Source: Company data, BGH, SVH, Payathai, IHH, Team analysis
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Appendix 13: DuPont Analysis
Source: Company data, team analysis
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Appendix 14. Corporate governance and corporate social responsibility
Corporate governance methodology.For measuring overall condition of corporate governance in relation to BH, we are committed to follow the Principles of Good Governance Guidelines developed by Organization for Economic Cooperation and Development (OECD). The Thai Institute of Directors Association (IOD) had conducted overall survey assessing corporate governance practices of listed companies and published in the reports titled “Corporate Governance Report of Thai Listed Companies (CGR). Currently, Thai listed companies are evaluated according to 148 criteria in the following five categories derived from the OECD principles of corporate governance: Each criterion is scored from 1-100. BH’s final BH’s score for each BH’s score after Scoring criteria Weight score was 85. Our team estimation on the score criterion applying weights falls into a “Very Good” rating or 4 logos (out of Rights of Shareholders 85 20% 17 5), which is in line with the result of the score from Equitable Treatment of Shareholders 90 20% 18 IOD. The CGR report from IOD is also publicized. Role of Stakeholders 80 20% 16 Each group attains a different level of recognition denoted by the number of National Corporate Disclosure and Transparency 95 20% 19 Governance Committee Logo, ranging from one to Board Responsibilities 75 20% 15 five. Moreover, according to IOD BH has the SUM: 85 highest rating of corporate governance comparing to peers in the industry. There are important elements that hinder ideal corporate governance in BH as follows: 1. The invitation letter is posted on the website 30 days prior to the meeting date in order to keep shareholders well informed. Moreover, minutes of the meeting will be posted on the website of BH within 14 days after the meeting date, so that shareholders are promptly informed and are able to verify. 2. The company provides a channel for minority shareholders to propose issues deemed important and appropriate to include in the agenda of the company’s annual general meeting of shareholders. 3. BH recognizes its responsibilities toward each stakeholder, for sustainable mutual benefits, which will lead to stability of the business operation. For example, the company has established the Corporate Social Responsibility (CSR) Committee to oversee and guide the Company’s activities undertaken to ensure the Company meet its social responsibilities in all its activities and also collaborate with BH Foundation on the main charity project.
IOD has set the grading criteria in order to categorize companies to show the corporate governance level of each corporation. The “Excellence” rating is assigned to company with the score above 90 points. 80-89 scores would be considered as “Very Good” rating, which is the categories that BH is in. 70-79 is “Good” Rating while 60-69 is “Moderate” and 50-59 is “Acceptable”.
BH’s corporate social responsibility is well recognized. BH is highly committed to improving the quality of the society and being socially responsible toward public, including the environment and neighboring community. BH has conducted many social responsibilities activities in the past year such as 500 Hearts Program for underprivileged cardiology patients with surgeries, Scholarship Programs, Thomson Mobile Clinic, Medical Research Program, Blood Donation and Environmental Policy. BH was awarded CSR excellence award 2013 by the American Chamber of Commerce (ANCHAM). The awards will identify AMCHAM members’ CSR best practices, which demonstrate an understanding of the linkages between business operations and society, and conducting business in a way that creates both long-term economic and social value.
Bumrungrad Hospital was awarded by the American Chamber of Commerce (AMCHAM) for the hospital’s Corporate Social Responsibility programs in 2013. The award recognized Bumrungrad programs such as heart surgeries for underprivileged children, demonstrating how a business can contribute to the community it serves. Receiving the award above from H.E. Kristie Kenney, the U.S. Ambassador to Thailand (left) and Mr. Darren Buckley, Vice President of AMCHAM in Thailand (right), is Mr. Mack Banner, the hospital’s CEO.
Source: Company data
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Appendix 15: Risk Matrix
Economic Operational Industry Risk Market Risk Political Risk Risk Risk
Hi gh
Thailand’s Political Instability
Increase in Trade Intense Competition Shortage of Liberalization and in the Premium Professional Staffs P M&A Trend Healthcare Sector R O M B od A er Increasing in Increase Reliance BI at Unable to meet the Complexity of on Insurance LI e quality standard Disease and Payment Method T Epidemics Y
Fluctuation of Changes in Global and Thai Exchange Rate and Legal Disputes Government Economy Interest Rate Regulation
Lo w
Low Medium High
IMPACT
Source: Team analysis
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Appendix 16: Petchburi campus expansion
Petchaburi project will be a new women and children’s hospital and a complementary outpatient centers such as Physical therapy, Dental, Dialysis and Health screening
Area: 8,200 sq. meters
Construction area: 88,683 sq. m.
Construction period: 2014 - 2017
Stage: Demolition completed. Design and environmental impact assessment in progress
Land bank soi.1 will be used as a parking lot
Source: Company data
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Appendix 17: Monte Carlo simulation on terminal growth rate on DCF model using FCFF
In addition to a sensitivity analysis performed, we conducted a Monte Carlo simulation to determine the effect of variation in terminal growth rate (g) on our target price. As 70% of enterprise value derives from terminal value which is largely affected by terminal growth rate and weighted average cost of capital (WACC), variation in such parameters has a major impact on target price. We have chosen to perform a simulation on g as it is deemed to be a parameter with the most uncertainty.
We simulated 5,000 trials with parameters as follows:
- x-bar : 3.0% based on long-term nominal GDP growth
- σ: 1.0% based on the volatility of GDP growth of developed country
The Monte Carlo Simulation demonstrated that there is only a 3% chance that would trigger a change in our recommendation from buy to sell. However, should the event occur, the downside risk is minimal. On the other hand, the probability of suggesting a buy recommendation stands at 80%, supporting our research conclusion.
SELL HOLD BUY
3% 17% 80%
Project GDP of Thailand
Years 2013 2014 2015 2016 2017 2018 2019 2020 % 3.3 4.8 4.6 4.5 4.4 4.3 4.3 4.3
Source: Company data, IMF, Euromonitor accessed on 17 December 2013, team estimates
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Disclosures:
Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serves as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Ratings guide: Banks rate companies as either a BUY, HOLD or SELL. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society Thailand, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.
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