CFA Institute Research Challenge Hosted by CFA Society Thailand Chulalongkorn University
The CFA Institute Research Challenge is a global competition that tests the equity research and valuation, investment report writing, and presentation skills of university students. The following report was submitted by a team of university students as part of this annual educational initiative and should not be considered a professional report.
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 an officer or a director The author(s), or a member of their household, does not serve 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. 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. Ticker: BDMS TB Equity Chulalongkorn University, Thailand Exchange: SET Bangkok Dusit Medical Services (BDMS) Industry: Services Valuation Date: January 18th 2019 Sector: Health Care Services Subsector: Hospital
LUXURY GOODS ON FLASH SALES BDMS Price per 40 share (THB)
35 33.5 Upside: +42%
30 28.2 Base: +19% BUY 25 20.5 Downside: -13% 20 Share Price (THB) 23.6
15 Target Price (THB) 28.2
10 Upside (%) 19.3% 1/1/16 1/1/17 1/1/18 1/1/19 +12 M
SUMMARY: In the middle of global market uncertainties with ongoing trade wars and dubious investors, BDMS can offer investors a safe haven because of its largest healthcare network in Thailand (46 Trading data hospitals under five diversified brands), domestic driven revenue (70% contribution) and defensive healthcare characteristics. 52w Low (THB) 20.7
HIGHLIGHTS 52w High (THB) 28.0 Avg. daily vol. We issued a BUY Recommendation with a one-year target price of THB 28.2 per share, which implied (3 months) (mm) 41.0 35.8x 2019E normalized P/E and 22.3x EV/EBITDA. We believed that this valuation is justified by 1) Secured number of promising patient growth from its comprehensive footprints in the expanding market 2) Free float (%) 53.48% Ability to command price above the inflation 3) Potentiality of high expected dividend payout
All the favorable trends captured by one company BDMS is expected to sustain patient growth of 5.37% per annum for at least five years forward Summary of Market (2018E-2023E). The volume is promised because of the strong growing demand and BDMS’ Ticker BDMS.TB comprehensive supply. Rising in private hospitals demand is driven by several megatrends: 1) Aging society, boosting healthcare needs and payment per bill 2) Health insurance, widening BDMS’ target Stock Exchange SET market 3) Medical tourism, creating borderless growth. Looking closer into the sector, we found that Number of shares BDMS is the only healthcare provider in the market with full exposure to these trends. This is because of (bn) 15.7 the company’s comprehensive geographical footprints, completed ranges of services, and diversified Market Cap (bn patient bases. In short, BDMS will benefit the most from the expanding healthcare market. THB) 369.8 P/E (TTM) 37.44 Willingness to pay for the best treatments fueled price growth Enterprise Value Since the introduction of Center of Excellence (CoE) in 2015, BDMS has been able to command price 4- (bn THB) 420.7 6% above the inflation rate. This proves that advanced equipment, complex cases and network referral EV/EBITDA (TTM) 22.1 system enable the company to intensify spending per head even more than the normal medical price hikes. Dividend (THB) 0.36 We are convinced that the price growth patterns will continue. However, to manage the risk of not yet Dividend Yield (%) 1.5% finalized price-cap regulations, we incorporated the most probable government actions in our target price. Moreover, we tried to plug in the worst scheme that could make smaller companies bankrupt, and the result indicates that downside risk is limited to 13.3%.
Ended shopping period leads to strong cash flow generation and higher payout Valuation result The stock market might be misled by slower organic topline growth, yet free-cash-flow is expected to DCF 28.2 rebound from being negative in 2017 and can sustained growth of 14.8% CAGR 2018E-2023E. Strong Implied 2019 P/E 35.8x cash is generated from the army of 29 mature hospitals that require no further investment, topping up with Implied 2018 17 ramping up hospitals expected to finish in 2019E. When the ramping up hospitals mature, EBITDA EV/EBITDA 22.3x margin is expected to expand from 21.3% in 2017 to 25.3% in 2023E. The excess cash generated is WACC 7.3% expected to be paid out as dividend. Therefore, dividend payout will increase up to 80% in 2023E
Short-term market panic creates an opportunity to buy The stock price priced in short-term events is too pessimistic, and not reflecting its long-term growth potentials. As a result, our valuation skewed three times more to the upside than the downside. Our target price is derived from discounted free-cash-flow method, using 7.3% WACC and 2.4% Terminal growth rate.
Key financials and ratios Unit: THB (m) Historical Projected Fiscal Years Ending December 31 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Revenues from operation 68,844 72,772 80,606 88,938 96,239 103,875 111,871 120,616 EBITDA 14,726 15,477 18,117 21,181 23,386 25,660 27,963 30,524 Net Profit 8,387 10,216 10,682 17,185 14,111 15,580 18,670 20,222 Normalized Net Profit 8,220 8,021 10,682 12,485 14,111 15,580 18,670 20,222 EPS (THB) 0.54 0.66 0.68 1.08 0.89 0.98 1.17 1.27 Normalized EPS (THB) 0.53 0.52 0.68 0.79 0.89 0.98 1.17 1.27 DPS (THB) 0.29 0.36 0.37 0.59 0.48 0.69 0.88 1.02 ROE (%) 14.5% 12.9% 15.2% 15.3% 15.4% 16.0% 18.2% 18.9% ROA (%) 7.9% 7.0% 8.4% 9.5% 10.5% 11.2% 12.9% 13.5%
BUSINESS DESCRIPTION Bangkok Dusit Medical Services Public Company Limited (BDMS) is the largest private hospital group in term of revenue in Thailand and the fifth largest market capitalization in the world ranked. It is originated in Thailand since 1969 and listed in Thailand Stock Exchange in 1991. BDMS and its subsidiaries operate middle-high hospital businesses (96% of Revenues) and non-hospital businesses (4% of Revenues) that support hospital operation The Largest Private Hospital Network in Thailand (96% of Revenues) Through aggressive M&As and greenfield investments, BDMS enlarged its hospital network from 18 hospitals in 2010 to reach its goal of 50 hospitals by 2020. BDMS is the largest private hospital network in Thailand and also has presences in Cambodia, with 46 hospitals and 8,015 beds in 2018. BDMS has a well-diversified portfolio under 6 hospital brands (Figure1, Appendix 2). Each brand has different target patients and different levels of medical advancement. Bangkok Hospital Group – a premier super tertiary care hospital across Thailand Samitivej Hospital Group – a super tertiary care hospital BNH Hospital – a luxury basic tertiary care Phyathai Hospital Group – a middle-income basic tertiary care Paolo Memorial Hospital Group – a middle-income basic tertiary care Royal Hospital Group – a super tertiary care hospital in Cambodia BDMS is a sole market leader in Thailand with 30% market share in terms of private hospitals’ revenue and 23% market share in terms of bed capacities. The second player ranked after BDMS has only 7.8% revenue market share, and others are just small players. Horizontal Continuum Healthcare Services: Ranging from preventive treatments, curative treatments to post rehabilitation, BDMS has established a full continuum of healthcare services, allowing it to expand patient bases from healthy people to rehabilitation patients. (Appendix 3) - Wellness Center – preventive and early detection enable BDMS to tap into a new market of non-illness people - Chiva Transitional Care – offer rehabilitation after hospital surgical enable BDMS to charge more revenue per patient - Non-hospital businesses (4% of Revenues) – support hospital business which are 1.) ANB, sterile water bag manufacturer and distributor, 2.) Medic Pharma, generic drug manufacturer and 3.) Save Drug, pharmaceutical store. ANB Sterile Water Bag revenue increases as IPD volume increases. Vertical Well-Diversified Income class and Nationality of Patients Before 2011, BDMS only offered premier healthcare services. The big step of BDMS was happened in 2011 where BDMS announced to acquire Health Network (8 Phyathai and Paolo hospitals) enabling BDMS to tap into middle-income segment. Thai patients are themajor contributors,with 70% of total revenue (Figure 2). International patients contribute to 30% of total revenue in which most contributed countries are Japan 2.1%, China 1.7%, Cambodia 1.6%, Myanmar 1.6% and USA 1.5%. This indicated that BDMS has 20% well-diversified international patients as it consists of more than 20 nations in the international patient portion. Hub & Spoke and Center of Excellence (CoE) BDMS has 3 types of hospitals based on the medical sophistication and target patients; Super Tertiary, Basic Tertiary and Secondary. BDMS captures a diversified patient segments and geographical reaches in major cities through Hub & Spoke model. Hub and Spoke is a model where a series of secondary-care Spokes hospitals refer patients who need higher specialized treatments to a central Hub. Hub and Spoke model enables BDMS to share resources such as doctors, nurses, knowledge and health equipment within its network. BDMS went further to improve some Hub hospitals to highest quality of hospital advancement resulting in 10 Center of Excellence (CoE). In 9M18, 10 CoE contributed 49% of total revenues(Figure 2). Due to case complexity, expertise specialists and state-of-art equipment, CoE attracts international patients Figure 4: Three market position who need advanced treatment and enables the company to command higher price than Spoke. CoE can raise 25-30% EBITDA comparing to 20-25% of Spoke hospital. Network expansion under Hub & Spoke model enables strong patient volume growth, while CoE boosts revenue intensity. (Figure 3) BUSINESS STRATEGIES 1)Center of Excellence: The company aims to increase international patient portion to 50% of revenue in 10 CoE. Currently, Bangkok Pattaya is the only CoE that can reach 55% international patients resulting in the highest EBITDA margin of 30% among all 46 hospitals. With CoE leads, the company expects overall EBITDA margin to reach target of 25% within 5 years. 2)Open in 3 market position: BDMS penetrated in potential regional cities with 3 market positions ensuring that BDMS can capture all segments in that cities. BDMS greenfield-invested its own Bangkok brand as premier tertiary care hospital, while acquiring recognized local secondary care hospitals as Sources: Company data supportive low-cost hospital. BDMS even went further to capture the segment where patients buy drugs in pharmacy stores instead of going to doctor by opening Save Drug Pharmacy Stores. (Figure 4) 3)Exclusive Insurance Package only to BDMS: Given 50 hospitals network across Thailand, BDMS is the only player that can partner with 3 insurance companies to establish an exclusive insurance only to BDMS hospital network. Given 29% revenue from insurance patient, this year marked the first time BDMS shifted its focus to penetrate insurance patients in full strength. 4)Ping An Good Doctor (PAGD): BDMS signed contract with China’s biggest online medical platform and agreed to exchange their resources and treatment package offerings. BDMS will gain exposure to 228 million registered users in PAGD platform. As Thailand is currently recognized for tourism, but not recognized for its medical advancement among Chinese people, we expected PAGD to increase eyeballs and awareness toward Thailand Medical hub, and thus increasing BDMS’s current 2% revenue from the Chinese.
CFA INSTITUTE RESEARCH CHALLENGE 2019
INDUSTRY OVERVIEW & COMPETITIVE POSITIONING Macro-Economic Analysis: Macro conditions reveals BDMS competitive position Healthcare Industry and its outstanding inflation hedge nature: While other industries may be able to pass on the effects of rising inflation through their goods and services price, healthcare sector has proven to take a further step by increasing their charge at the rate higher than the inflation. The high level of price is justified by the excellency in service, which BDMS roots to be in one of the strongest positions in Thai’s healthcare market.
The rising of professional wages put little pressure on margin The competition for medical personas is expected to get more intense due to the low medical supply. Thailand only has 5 doctors per 10,000 population, which is below the global average. Competition for medical personas will occur and potentially push up wages. As a result, the departure of professional people from a field for another field usually for the better pay, called the brain drain incident, will continue. The effects on private hospitals, especially for BDMS, will be minimal. The high positioning private hospital will not concern much since they can attract doctor through their ability to pay more, reputations, qualities, facilities and high spending international patients bases. The figure 5 shows that the number of doctors that work for private hospital grows at a doctors’ growth.
. INDUSTRY ANALYSIS: The influx of demand guarantees healthcare’s prosperity Domestic High healthcare spending from the aging population and other supporting trends According to United Nation, Asia is the home to 60% of the world aged population. The figure 6 demonstrates the number of populations by age group over time where Thailand population appears to be eaten up by aging people. Among other age groups declination, the elders are the only group increasing and this trend expected to continue in the future. Moreover, the spending profile of healthcare is the top expenditure for aged people. Figure 7 shows percentage points in household spending of heads aged 75- and-over. Along with the aging trend, non-communicable diseases (NCD) also are eating up the population. According to Ministry of Public Health (MOPH), while NCD patients grow around 7% over the past 10 years, total Thai population growth over the same period grows at 0.42%. This indicates that the number of people who get the diseases is growing faster than the total population. The impacts of these trends to the providers will be assisted by the increase in access to healthcare from the surge of Thailand urbanization. Pushing the burden of public healthcare financial cracks to private health insurance Thailand Universal Healthcare Coverage (UHC) is highly praised to be one of the most successful UHC in the world. In 2015, 98.5% of Thai population had public health coverage. According to WHO, government spending on health has increased from 12% in 2000 to 16% of total government spending since 2002 (Figure 8). It is highly doubted how long will the government sustain UHC with Thailand thin tax base as public health schemes are over reliant on general taxation as the main source of funding. Due to 26.5% Thai aging population by 2030, it would not only increase government healthcare spending but also decrease in tax revenue from the retirees. Thai government is aware of its financial cracks and began to push the burden of rising healthcare demand toward private health insurance by issuing 15,000-baht tax benefit for those who have private insurance. Office of Insurance Commission department is also pushing micro-insurance which is insurance with low premiums and low coverage in order to capture middle to low income population, relaxing government’s burden in UHC. In 2015, there is only 6% of Thai population holding private health insurance indicating room to grow. The trend is also evidenced by the rising insurance premium of 16.8% CAGR (2013-2017) (Figure 9). With aging population and rising medical price, patients would seek third-parties to minimize the health expenses
Insurance patients became the larger portion of BDMS revenue Private insurance contract with hospital does not pressure the hospital’s profit margin as the discounted price given to insurance companies is outran by the higher number of insurance patients. We believe insurance would sustain loyalty and reduce volatility in demand resulting in an increase in patient volume which is proven by a significant rise in BDMS revenue contribution from insurance which grew from 16% in 2012 to 29% in 9M18. BDMS went further to fully expose itself to insurance trends by introduce exclusive health-insurance packages only to BDMS network.
International Thailand is one of the pioneers in being the medical hub providers. The country’s low medical treatment cost relative to its quality and beautiful attractions has been attracting international patients for decades. The prospect of Thai medical tourism industry is expected to continue flourishing from the country’s attractive characteristics. The factors contributing for the market growth are the following: Price: High spending per head relatively to Thai patients Comparing to Thai patients, international patients spending per head is higher. One reason is from the rising of inflation, pushing the price of medical services up. Another is from geographical factors. Foreign patients have to travel a long distance to receive a treatment. Consequently, their average day of stay is longer. (Figure 10) With BDMS high international patients base, the hospital will strongly benefit from the long-stay foreigner. The high expenditure from long staying is assisted by the expansion of middle-income segment in emerging country
Sources: Ministry of Public Health (MOPH) CFA INSTITUTE RESEARCH CHALLENGE 2019 Volume: Rising demand for quality healthcare and preventive treatment Figure 10: Average length of stay (days) Through many drivers from both economic and demographic factors such as higher aging population, non- communicable diseases (NCDs), and the rising trend of experiential travels, we expected to see the surging International Total of global population seeking for quality healthcare services. The key growth is China, where it holds a billion population. In 2015, the country was set free from the one-child policy implemented since 1979. The demand for maternity treatment from the Chinese couples who seek to have their second child is expected to continue, given the Chinese government attempt to push women’s fertility rate from 1.6 to the rate of 2.1 0 1 2 3 4 life birth per person. Source: Company Data Apart from people seeking for quality healthcare, preventive treatment is the new trend. We are witnessing Figure 11: Competitive Advantage a shift in healthcare industry from curative-based to a more preventative one. New generation are more wellness-conscious which push the industry to adopt a new model. BDMS wellness center will be a strategic flagship in capturing new patient base from this trend. The preventive modules allow hospitals to expand its customer base beyond the unwell patients to the healthy group. COMPETITIVE POSITIONING (Appendix 4) Thailand is renowned for its healthcare services due to competitive advantages the country has (Figure11). Zooming in, private sector casts a huge influence on the country’s healthcare sector (Figure12,14). Among private players, BDMS is currently the largest private hospital operator in Thailand in terms of revenue from patient services and market capitalization. The acquiring of Paolo and Phyathai hospitals, which added middle-income customers to their high-income patient base, was a significant step which enable the firm to take the leading position. The competitive edges the company has is in the following areas: (Appendix 20) Source: Ministry of Foreign Affairs
The governing healthcare network of Thailand through its extensive presence: Figure 12: Thailand’s healthcare supply BDMS is the most comprehensive healthcare network in Thailand with compatibility to accept every type of payment made by the customers (figure 13). It is also the biggest Thai private hospital who targets both middle income and high-income customer bases (more than 350,000THB/year/household) which contribute up to 36% of total Thai population. The high-income patients are captured through Bangkok and Samitivej brands and the middle-income patients are captured through Paolo and Phyathai brands. The hospital has also attracted a lot of international patients (Figure 15). Furthermore, in terms of geographical wise, the network also has presence in every regions of Thailand. Through the Hub and Spoke model, BDMS can decentralize its specializations and its fix costs, which are doctors and advanced equipment to every region in Thailand. At the same time, it also gains and locks in the number of patients through the patient referral system. As a result, BDMS gains benefit from the economy of scale. Figure 13: Customers by payment Other than expanding network geographically, BDMS also grows along the continuum of healthcare value chain, ranging from a drug manufacturer, laboratories to the end of the chain as pharmaceutical stores. In terms of the hospitals, it also provides a complete range of services, ranging from preventive, curative to rehabilitation. In short, the strength of the network, diversified brands and completed range of services offered enable the firm to access to all types of customers, capturing all the influx demand driven by various mega trends. In contrast, the other players in the market must choose only a few segments to capture. For example, BH who can attract foreign patients, has only one campus in Thailand with already high utilization rate, thus BH has to focus on only international patient segment, not the others. Other large network with assorted brands such as BCH, CHG and VIBHA are much smaller than BDMS and very newly established, thus has Figure 14: Private hospitals market share to focus on capturing one segment at a time. share of beds in private hospitals market Extreme capacity awaits to capture every emerging trend Area Market Share BDMS has a share of 23% from total private hospital beds. The company has gained its extreme capacity Bangkok 16% through Merger and Acquisitions. (Figure 16) The available capacities implied BDMS extensive potential to Central 17% capture influx of patients from the emerging trends, while other company will face a limit capacity. BDMS, South 21% with 46 hospitals and 8,015 structured beds, has about 3.7 times more bed capacities to receive patients Northeast 10% than BCH, the second largest medical provider. Given the prime positionings BDMS has together with the North 4% largest capacities, the firm can better capture trends than the peers, which can be concluded in the following Total 15% table: Source: Company data
Figure 15: Foreigner revenue
PR9 BDMS BH
(%) Revenue from foreigner 15% 30% 64%
Source : Company Data
Figure 16: Number of structured beds
8,015
2,178 1,372 916 580 495 353 166 208 CFA INSTITUTE RESEARCH BDMS BH BCH CHG THG RJH PR9 VIBHA NTV CHALLENGE 2019 Source : Company Data Figure 17: BDMS’ strategies and trends
INVESTMENT SUMMARY • Specialized hospitals e.g. Bangkok Heart hospital Investment Thesis Aging Society • Wellness center We issue a BUY recommendation on Bangkok Dusit Medical Services (BDMS) with a target price of THB • Chiva transitional care 28.21 per share, which implies 35.8x 2019E normalized P/E and 22.3x EV/EBITDA. We believe that this hospital valuation is justified by 1) Promising increase in number of patients without further M&As 2) Consistent price growth above the inflation rate 3) Strong ability to generate cash flow indicating high dividend payout. On top of these favorable factors, current market panic gives the opportunity to buy • Exclusive partnership with Insurance leading insurance companies with high upside magnitude and limited downside risk. • Large and diversified network
Investment Drivers Market leader in the expanding industry With strategies in line with the industry trends (Figure 17) together with the largest capacity on hands, Medical • Center of Excellent (CoE) BDMS can gain more market share and get the most benefits out of the enlarging healthcare industry. From tourism • Partnership with Ping an our market-sizing analysis, we firmly believe that 5.37% CAGR (2018E-2023E) volume growth for the next Doctor five years is achievable. (Figure 18) The growth will be driven by: i. Aging Society, which will boost not only demand for healthcare, but also spending per head. Non- Source: Company Data, Team Analysis communicable diseases that came with age (Hearth, High blood, Obesity, diabetes) require continuous treatments and thus higher spending per head. BDMS has made sure that their hospitals are top of the Figure 18: Forecasted # OPD patients mind for these diseases, translating into an expected gain in market share of the aging people overtime. Millions 14.0 ii. Health Insurance, market expected to grow at a CAGR of 4% over 2018E-2021E. The market growth 13.3 14.0 12.7 12.1 is encouraged by all stakeholders: 1) The government needs to lessen health scheme burdens 2) 11.4 12.0 10.8 Insurance companies aim to increase health insurance penetration among Thai people 3) Insurers 9.9 10.1 9.3 need third parties to support health care expenses and also to enjoy tax benefits incentivized by the 10.0 government 4) Hospitals desire to increase utilization rate. Being the largest network grants BDMS 8.0
high bargaining power over the insurance companies, therefore enable the firm to implement unique 6.0 strategies, for example, exclusive partnership with 3 leading insurance companies in Thailand. 4.0 Therefore, we expect 18% increase in market share over the next 5 years, translated into 1.8 million more insurance patients in 2023E. (Appendix 5) 2.0 iii. Medical tourism is expected to grow at 9.0% per annum for the next 5 years. BDMS is one of the 0.0 only two hospitals ranked as top 10 world leaders (Another one is BH). Unlike other hospitals, BDMS has well-diversified patient nationalities (30 nations each contributes at most 2%); therefore, the number of patients can be maintained disregarding one country’s changes in politic or economic. Center of Excellences(CoE) attract the tourists who seek high quality healthcare at relatively lower price Base patients International patients compared to other countries. Upon fully established CoE, BDMS moved to prepare itself for the Thai insurance patients wellness market, which lately became a global driver for medical tourism. The company also Source: Company Data, Team Analysis implemented strategies to attract more tourists, such as partnership with the largest medical application in China, Ping-an Good Doctor. With all of these in place, BDMS will be able to defend or even increase Figure 19: Price growth Vs Inflation its market share despite the intensified competitive rivalry in the medical tourism market. This is further 7.00% confirmed by 3Q18 13% international revenue growth QoQ. (Appendix 6) 5.75% 5.41% Price-per-visit growth above the inflation rate 6.00% 5.00% BDMS can command price growth above inflation because 1) Medical spending is price inelastic, therefore 3.64% 4.00% private hospitals can pass the rising inflation to patients. 2) Historical data proved that since establishing 2.75% 3.00% 2.20% 1.90% CoE in 2015, BDMS can maintain an average of 5% price growth above the inflation rate. (Figure 19) 2.00% 0.70% 1.00% 0.20% BDMS tolerance to price-cap regulations 0.00% -0.96%-0.90% The Thai Commerce Ministry has proposed to include drugs and medicine, lab and X-ray and medical -1.00% treatment services on the controlled goods and services list in order to lessen Thai people expenses. The -2.00% 2013FY 2014FY 2015FY 2016FY 2017FY result of the cabinet approval has not been finalized. However, the market panicked and priced in too Inflation Rate pessimistically. In contrast, we believe that the price cap impact will be limited because of the following Topup growth reasons: 1) Drastic differences in cost and revenue structure among private hospitals make it too difficult Source: Company Data, Team estimates to determine the fair returns for every healthcare providers 2) Lower margin will translate into a lower quality of services, contradicted to Thailand strategic 10-years plan (2016-2025) to become medical hub of Asia 3) Unsuccessful attempt to regulate medical cost in other countries: India, Singapore, Hong Kong and Malaysia.(Appendix 7) However, to manage the risk, we factored the price-cap regulation in both our base case and worst case (Figure 20). Based on other countries, there are four possible methods of regulations but only two with the chance to success. We are convinced that there is a high chance for price cap regulation to be delayed as the committee need to satisfy every parties involved (Base case) than to immediately shrink every players’ profit margin. (Worst case)
Strong free cash flow generation indicates future dividend Despite slower growth in topline as the M&As period has passed, BDMS expected to achieve free cash flow growth of 14.8% CAGR (2018E-2023E) over the next five years. EBITDA margin is expected to continuously improved, not only from 17 ramping up hospitals turning mature but also 10 CoE hospitals with the ability to generate higher than average EBITDA margin. This higher EBITDA is then translated in to a huge free cash flow as the company has already passed its investment phase. The large amount of excess cash is expected to be paid out as dividend, which we expected the payout ratio to be improved overtime and reach 80% in 2023E.
Sources: Company data, Team estimates
CFA INSTITUTE RESEARCH CHALLENGE 2019
Current fall in price provided an opportunity to buy the stock with high upside gain Over the past few months, stock price has factored in short-term events too pessimistic i.e. the ongoing lawsuits and the uncertainty of price-cap regulations, as a result, price fell by 8% CAGR over the period. Based on our analysis, we firmly believed that the current market price does not reflect its long-term growth potential. Therefore, this is an exceptional chance to buy the stock with 4 times upside potential more than the downside. VALUATION DCF analysis We believe that DCF is the most appropriate method to value BDMS by including value driven factors to Figure 22: Estimated medical tourists reflect all the future potentials for BDMS. The model allows us to apply the economic factors, industry factors 6.8 7.1 6.6 and business strategies including its plan for CAPEX. We forecasted BDMS financial performance for 10 7.00 6.1 6.4 5.9 5.6 years up until 2028E to explore its true performance after shifting from M&A strategy to organic growth 6.00 5.0 strategy by ramping-up its capacity and its ability to catch the medical trends in the regional level. The 5.00 4.4 4.0 intrinsic value from DCF method is THB 28.2 per share. 4.00 3.5
3.00 Operating revenue 2.00 3.7 The major source of income for BDMS is revenue from hospital operation which accounted for more than 3.2 3.4 2.6 2.9 1.00 1.9 2.3 1.4 1.7 90 percent of operating revenue. The projected revenue was divided into two main sections which are 0.8 1.2 mature and ramping-up hospitals. 0.00 The mature hospital revenue was driven by I. Quantity which are the number of IPD and OPD patients and ii. Price charged which is driven by price growth percentage i. Top down approach is used to forecast the number of patients. Source:Sources: Euromonitor, Ministry of Public Team HealthAnalysis (MOPH , Team analysis) In order to quantify the impact of each trend (Appendix 8), we categorized patients into 3 groups: 1) Thai insurance patients 2) International patients 3)The rest of the patients, called base patients. (Figure 21) Figure 23: Peers’ revenue per OPD visits For each group of patients, the absolute size of the market is forecasted (by accountable third parties as 7,579 well as team analysis) and BDMS expected penetration rate (by actual market share and expected 8,000 impact of the strategies) For the health insurance patients, we expected a gradual increase in market 7,000 share overtime. Without any strategies implemented, the company has 34% market share in the 6,000 insurance market. Therefore, with strategies, we expect BDMS to gain market share overtime and reach 5,000 Average 3,017 52% market share in 2023E. For international patients, current market share is expected to be 4,000 3,219 3,310 2,800 2,514 3,000 maintained. We are being conservative about the international patients because of many emerging 2,2302,428 players both from Thailand and from other countries (Figure 22). The base patients are predicted to 2,000 1,512 1,560 increase at the same rate as aging society. 1,000 ii. With regard to price, actual price is forecasted to grow at the rate of inflation topped up with - forecasted premium growth. Despite 5-year average (2013-2017) of 2.98% and 1.97% higher than inflation for IPD and OPD respectively, we incorporated risk of price-cap regulations by gradually decrease the growth rate to only Source: Company Data, Team Analysis 1% on top of the inflation by 2023E. The assumptions that BDMS price will not be abruptly discounted are 1) Willingness to pay for specializations and advance equipment of CoE hospitals could not be benchmarked with peers’ treatments and services. 2) Current high marked up portion for medicine is Figure 24: Thai private hospital revenue partly from other services that can be separately shown on the bill (e.g. pharmacy services). Moreover, private hospitals can offset margin cut by intensifying other services that are not under the Other, 9% regulations. 3) BDMS current price charged is at an average level among peers, therefore the Room, 6% Food, 2% Drug and ceiling setting from government will be minimal impact to BDMS (Figure 23) Moreover, to justify the medicine, downside risk, we ran a sensitivity analysis with an objective to find the worst point before return on 37% invested capital is less than the cost of capital.. We also sensitized ROIC on different percentages price Doctor fee, 19% cut on different portions of domestic revenue. The last point before ROIC turned to be less than Medical treatment WACC (7.3%) is 11% price cut on 64% of domestic revenue (Appendix 10). Based on National Statistical services, 12%
of Thailand, 64% portion of revenue includes all items proposed to be on the price-controlled lists: drugs Lab and X- and medicine (37%), lab and X-ray (15%) and Medical treatment services (12%) (Figure 24). We use ray, 15% only domestic revenue portion because price control objective is to lessen Thai people medical expenses Revenue portion not under price regulation Possible revenue portion under price regulation Ramping-up hospitals revenue was forecasted to increase by the average growth rate of ramping-up hospitals in the past i.e. the revenue of ramping-up hospitals will grow approximately 20% in the fourth year Source: NSO of full-year operation. This is due to the fact that ramping-up hospitals have different nature of revenue growth comparing to the mature ones. In 2017, there were 17 hospitals in this category, and most of them Figure 25: Revenue and EBITDA Margin would be mature within 2019 according to the management guidance that the hospitals will finish ramping- up period around the fifth year. Then, the ramping up hospital would become mature, and they would be THB Thousands 150 25%25% driven by the aforementioned factors.. 24%24%25% 22% 22% 21%21% 121 25.0% 112 120 104 EBITDA margin 96 20.0% 89 We forecasted that the EBITDA margin will be improved from 1) Ability to markup higher price of COE 90 81 69 73 hospitals 2) The mature of ramping up hospitals 3)Slower growth rate of fixed cost compared to top-line 64 15.0% 60 growth. First, CoE hospitals can command higher price charged to the patients at 4-5 percent higher than 10.0% previous years due to the increased complexity of diseases. Second, most of the ramping up hospitals which 30 current low EBITDA margin of 10 percent will be mature in 2019 and they can significantly boost up EBITDA 5.0% margin of the whole group by 1.2 and 1.3 percent in 2018 and 2019 respectively. Third, we estimated that - 0.0% the growth rate of fixed cost will be around 5 percent per year which is slower than revenue growth rate and lead to higher EBITDA margin. This is because we estimated that around 30-35 percent of total operating cost is fixed cost, and employee expense are accounted for the largest portion as most of the staffs are full- Operating revenue time employees. As a result, this growth rate of fixed cost should be similar to the rate of salaries’ increase. EBITDA margin Source: Team Analysis CFA INSTITUTE RESEARCH CHALLENGE 2019 We also factored in potential impact from doctor shortage that can raise cost and squeeze parts of our margin; however, the favorable factors would outrun the impact of this issue. (Figure 25)
CAPEX BDMS is expected to continuously utilize its existing asset with minimal future CAPEX investment. During the next three years, capital expenditure was forecasted to be around THB 8 billion This growth CAPEX was driven by an investment in building its portfolio to reach 50 hospitals by 2020E. After that, we expect the decline in CAPEX/Sales as most of the expenditure will be used mainly for maintenance and converting existing capacity to be additional available beds which will lead to a significant increase in Free Cash Flow. (Figure 26)
Terminal Growth: At the end of forecasted horizon of 10 years, the number of beds is almost fully utilized. Therefore, future topline growth will reflect only the price growth which we conservatively use Thailand target inflation rate of 2.4% Figure 27 WACC Calculation WACC:
We estimated WACC (Figure 27) to be 7.3% from cost of equity at 8.6% and cost of debt at WACC Calculation 3%.Cost of equity is derived from CAPM model, using risk free rate of 2.42%, from10-Year Government 10Y Thai Government Bond 2.42% Bond yield, while equity beta was calculated from unlevered industry peers’ beta average levered by BDMS’s target D/E. Cost of debt is derived from the firm’s historical effective interest. The weight of WACC is 0.25x Market Risk Premium 10.3% D/E, derived from other mature company in Thai healthcare sector (Appendix 15) Beta 0.63 Cost of Equity 8.60% Risks to intrinsic value Pre-tax Cost of Debt 3.00% Scenario Analysis (Appendix 9) After-tax Cost of Debt 2.45% We conducted three main scenarios to observe the impact from the deviation of factors which directly affect Tax Rate 18.4% out valuation which are the number of patients and price charged to the customers. Here are the details of Target D/E 0.25 each scenario: WACC 7.3% Base case: Gradually decline in price charged growth with the number of patients forecasted on a conservative basis Source: Team Analysis Worst case: Price charged to customers was immediately cut from the uncertain price-cap regulation and Figure 28: Monte Carlo the number of patients is the same as the base case. Best case: The firm is not impacted by price cap regulation and the number of patients is in the most 11% 18% 71% favorable situation, reflects the high growth of Q3
Monte Carlo simulation To assess the probability of the outcome, we performed 20,000 times of Monte Carlo simulation based on the3 scenarios mentioned above. The simulation showed that 80.4% of the simulation suggested a buy recommendation. (figure 28)
FINANCIAL ANALYSIS Sustained top line growth is expected (Figure 29) Top-line revenue is derived from two main parts: 96% from the hospital businesses and another 4% from non-hospital businesses. For hospital operation revenue, in the past, the company can generate double digits’ inorganic growth of 12.1% 2011-2017CAGR YoY in top-line revenue due to aggressive acquisition Sources Team analysis activities since 2011. However, upon BDMS almost reach its goal of 50 hospitals, the scenario is about to Figure 29: Main Revenue change. From now on, it would be purely organic growth from the hospital operation. A cut off point to single digit top-line revenue growth was shown in 2016, where the company opened new hospitals at a much (Unit: THB Million) 150000 Total Revenue 8.0% slower rate than before. As huge expansion cycle has passed, it is time for BDMS to fully reap benefits % Rev/Patients Growth from what it had invested. We expect to see an organic revenue growth of 8.4% CAGR from 80.6 billion % Patients Growth 6.0%
Baht in 2018E to 120.6 billion Baht in 2023E. The organic growth will come from two parts 1) Increased 100000 revenue from the mature hospitals are from an increase in the number of patients at a rate of 5.37% 4.0%
CAGR (2018E-2023E) and the intensified price charged 2) A gradual increase in revenue from new 2.0% hospitals, as they have passed the adoption phase. 50000 The influx patient volume will drive utilization up to 75.2% of 7,028 available beds in 2023E from 67.6% of 0.0% 6,022 available beds in 2018E. For non-hospital businesses, which represented 4% of the total revenue, has grown at 7% CAGR over the past 5 years. 0 -2.0% Variable-majority cost structure (Figure 30) Source: Company Data, Team Analysis The most concerning expenses are doctor fees and staff salaries which represented 50% of the total expenses in 2017 due to the nature of businesses and aggressive network expansion. Currently, there is a rise in the remuneration packages due to the shortage of doctors which pose a pressure on medical Figure 30 Cost Breakdown service providers However, doctor salary is a variable cost which is paid according to doctor’s working hours. In other words, there would be no doctor cost if there is no patient. Therefore, the hospitals have a Rental Others Employe safeguard toward loss-making. The staff wages are related to the administration portion which can also be expense 21% e 2% controlled, evidenced from a slower growth rate than the total operating income growth... However, we do Advertisi expenses not expect to see much cost improvement from the synergies of the hospital network in the future except ng 28% expense for 1) Medicine cost, represented 13% of the total revenue, which could be achieved from the higher 1% negotiation power over the suppliers as the medicines are ordered in bulk from the central purchasing Depreciation power.,. 2) Financing cost, represented 2.1% of the total revenue, as the headquarter can borrow at a lower Cost of Doctor and amortisation drugs fee rate due to its high creditability. The money then allocates to each subsidiary. The cost synergy from the 8% and 25% centralized back office such as accounting departments has only a minimal impact. suppl…
Source: Company CFA INSTITUTE RESEARCH Data CHALLENGE 2019 We do not expect to see cost improvement from doctor/staff salaries or from drugs as they are cost of Figure 31: Margins quality that BDMS needs to pay. High quality healthcare service is the key for BDMS to capture middle-to- high income patients who come for advanced medical treatments. 30-35% of BDMS’s operating costs are(Unit: THB Million) 30.0% 20000 fixed in nature, leaving 65-70% to be variable costs. The cost structure implies a low operating leverage 25.0% and a high margin resilience in any downturns. We expect this cost structure to continue 15000 20.0%
15.0% Margin rising after ramping-up (Figure 31) 10000 EBITDA margins were flat at 21%-22% in 2014-2017 due to a pressure from the negative EBITDA margin 10.0% 5000 of 17 new hospitals opened later than 2014. We expect the EBITDA margin to improve to 23.8% in 2019E 5.0% and 25.3% in 2023E. The key drivers for the margin improvement are 1) 17 new hospitals turning mature 0 0.0% and 2) High medical fees commanded from the 10 centers of excellences. Regarding the new hospitals, there is a huge difference in EBITDA margin between the mature and the new hospitals. The mature hospitals’ average margin is 20%, while that of the new hospitals is 10% From company’s past experiences, Net Income % EBITDA Margin new hospital would take 2-3 years to breakeven in EBITDA level. The improved 23% EBITDA margin in % Net Profit Margin 9M18 is a proof that 17 new hospitals opened since 2014 is gradually entering mature phrase in 2018, and Source: Company Data, Team Analysis thus turning profitable and resulted in a higher margin of the total group. BDMS’s normalized profit has risen at only 7% CAGR during the past 5 years due to the pressure from the new hospitals. However, as Figure 32: DuPont Analysis we expect to see the improvement in EBITDA margin after most hospitals become mature in 2019E, we ROE expect net income to grow at a double-digit rate of 13.6% CAGR from 2018E to 2023E. Additionally, we projected that BDMS should be able to step up to 26.3% EBITDA margin in 10 years which is considered 20.0% 200.0% 18.0% 180.0% to be low compared to the current EBITDA margin of peers, 28% from BCH and 33% from BH This indicates 16.0% 160.0% the potential upside for BDMS to increase its margin to BCH and BH level. Recently, BDMS sold all of 14.0% 140.0% 12.0% 120.0% RAM’s stock which will increase net income for 2019 by 4.7 billion Baht. The proceeds from the transaction 10.0% 100.0% will be used to pay out debt, thus lower interest expense is expected to offset the decrease in a stream of 8.0% 80.0% 6.0% 60.0% income from RAM investment 4.0% 40.0% 2.0% 20.0% Better ROE from an improvement of ROA and profit margin (Figure 32) 0.0% 0.0% The M&A activities had caused a reduction in ROA from 8.59% to 6.99% in 2011 and 2017 respectively. ROE % Net Profit Margin The rapid expansion of asset base had reflected in 16% CAGR (2011-2017) of PPE. This heavy Total Asset Turnover Financial Leverage investment in fixed asset then pushed up the total asset by 13.3% CAGR(2011-2017). Historically, BDMS Source: Company Data, Team Analysis had equally financed their acquisitions by debt and equity. After the end of M&A activities in 2017, it is now the beginning of ROA improvement period. The current Figure 33: Liquidity and Dividend ROA is 6.99%. We expected that the ratio will further improve to 13.5% by 2023E. BDMS will now enjoy DPS the increase in net profit margin, from the current of 13.3% to 16.8% in 2023E, and the increase in total 1.2 160.0% asset turnover from the current of 0.64x to 0.76x in 2023E . As a result,ROE is expected to increase from 140.0% 1 12.9% in 2017 to 18.9% in 2023E. Regarding the Financial leverage ratio, we expected that the ratio will 120.0% 0.8 decrease over the forecasted horizon. The current 1.74x D/E will gradually decrease to 1.39x by 2023E 100.0% from the continuous repayment of debt. The repayment of debt also allows an improvement in the interest 0.6 80.0% coverage ratio. The 5x interest coverage ratio in 2017 is expected to shoot up to 29.2x in 2023E. 60.0% Baht/Share 0.4 Better liquidity ready to enjoy dividend (Figure 33) 40.0% 0.2 BDMS current ratio had been staying around 1.0x or lower for the past 5 years. The reason of such low 20.0% number was that the hospital had been investing a lot in fixed asset. However, we expected that the ratio 0 0.0% 2018E 2019E 2020E 2021E 2022E 2023E will be improved to 1.35x by 2023E. Such improvement could occur because of the increasing cashflow Dividend per Share Dividend Payout Ratio from operation and the decreasing demand to use cash in investing activity. In shorts, the liquidity status is forecasted to be improved significantly. Current Ratio The improvement in cash on hand will further generate BDMS ability to payout dividend. The dividend Source: Company Data, Team Analysis payout ratio was 54.6% in 2017. We expected that the hospital will start raising their payout ratio in 2021 Figure 34: Cash Flow Improvement to 70% after all their project in pipelines is finished. Strong free cash flow indicates higher dividend payout (Figure 34) (Unit: THB Million) 30000 0.25 Despite a slower growth of the topline, margin is expected to improve, and CAPEX is expected to 25000 decrease. In short, cash flow from operating will be higher and cash flow from investing will be significant 0.20 lower, as a result, free cash flow is expected to grow at a double-digit rate of 14.8% CAGR (2018E- 20000 2023E). Regarding cash flow from operation, 15% of CFO/Revenue in 2017 will grow to 21% by 2023E. 0.15 15000 Regarding the investing cash flow, BDMS has just received a huge inflow over 12.8 M THB from the 0.10 selling of its stake in Ramkamheang hospital (RAM). The improvement in cash on hands indicates BDMS 10000 0.05 ability to payout dividend. The dividend payout ratio was 54.6% in 2017, and we expected the ratio to 5000 gradually increase to 70% after all their project in pipelines has finished. Liquidity ratio is also expected to 0 0.00 be improved from the current 1.0x to 1.35x in 2023E. 2018E 2019E 2020E 2021E 2022E 2023E
CFO FCFF CORPORATE GOVERNANCE CFO/Revenue FCFF/Revenue Shareholding Structure (Figure 35) Source: Company Data, Team Analysis The hospital has over 15,668 Million shares outstanding with only convertible bonds due in 2019 Figure 35: Shareholders as a dilutive security. The network mainly governs by two family, which are Prasarttong-Osoth family (23.5%), led by Mr.Prasert, and Thongtang family(7.65%),which joined after the acquisition of Health Network PCL(Paolo and Phyathai). Both are in Executives position. Prasarttong-Osoth family is the Prasarttong-Osoth controlling party because of their biggest shares and Mr.Prasert’s position as the group CEO, not to include Family their indirect influence through the 60% holding of Bangkok Airways which is the hospital third major 23.3% shareholder. On the other hand, Thongtang family roots for Phyathai hospital as it was their original position before the merger and acquisition between the two networks. Institutional investors also cast a huge influence, holding over 13.69% of total shares. 7.5% 61.9% Thongtang Family 7.3% Others Bangkok CFA INSTITUTE RESEARCH Airways
CHALLENGE 2019 Source: Company data Structure (Figure 36, Appendix 22) The management structure is as shown in figure 35. Governed by Board of Directors (BoD), five committees were set up to specialize in the concerned area. Figure 36: Management structure
Executives committees The management team is led by Mr. Prasert with his 23 consecutive years of services as the CEO. Note that his daughter, Miss Poramaporn also serve as a director. Mr.Prasert has a strong medical professionals backgrounds, graduating from Thailand top institution, Siriraj Medical School. His leadership is proven through the more than 40 years of BDMS operation , through major economic downturns. The diverse profile of management team between medical and business expertise has assured a versatility of the company. We strongly believe in the management skills of the teams, which are proven through the delivery of double digits top line growth over the past decades. Our concern is that 3/5 of management team including Mr.Prasert as a CEO also hold a position of BoD. This could raise an issue regarding the independence of BoD member
Board of Directors (BoD) Source: Company data The Board of Directors is comprised of 13 members, 8 of those being Executive Directors and 5 Independent Directors. This composition between independent and nondependent is decent. Among that, Miss Poramaporn, Mr. Prasert daughter, is the only woman in the board. Most of the board graduated as Medical Doctor, while the others composed of members with finance and law competencies. Regarding the compensation, the board complies to the same remuneration standard with regular employees. The company’s corporate governance is rated as ‘Very good’ according to CG scoring and ‘Good’ according to the OECD Principles of corporate governance framework.
Corporate Social Responsibility (CSR) and Corporate Ethics BDMS commits to develop healthcare services while making a positive contribution to society. The company issues sustainability report to communicate this commitment annually. The charitable projects BDMS conducted range from community services concerning environmental issue to healthcare foundation for underprivileged. Regarding to Corporate Ethics, the legal issue against the firm was brought up from ‘the Life Privilege Club ‘that BDMS has established. A group of the club’s members have sued the hospital and its 14 board of directors for ending the programmed without the members’ consent. BDMS’s reason for termination is that the programmed is classified as an ‘Insurance’, which the firm does not have authority to execute. The members have won the lawsuit in the court of instance and the court of appeal. The case is currently in the hand of Supreme court, waiting for the final verdict to be issued.
INVESTMENT RISKS Market Risk Figure 38: Debt level of Thai household M1: Economic volatility The downturn of economic can affect purchasing power of the patients. As shown in the figure, the high 219,50 level of household debt (Figure 38) will cause the patients to become more price sensitive. Some might 250,000 5 178,99 turn to a cheaper option such as public hospital. This factor is significant to BDMS because the hospital 200,000 4 positioned itself in middle to high pricing income segment. However, the over-utilization of the public providers will leave the patients with no choice. Private hospital will continue serving as an alternative for 150,000 this issue. 100,000 Financial Risk F1: Foreign currency exchange volatility 50,000 Since foreigners contribute substantial amount of revenue to BDMS, the economic status of their country 0 must be concerned as it impacts the number of patients coming to Thailand. Moreover, the volatility of Whole Kingdom Bangkok foreign currency which affect the competitive pricing against oversea health care providers must also be metropolitan considered. To lessen the risk, BDMS tries to maintain a balance between domestic and foreign patients Income Debt as well as hedge the currency by allotting loans in US Dollar for foreign subsidiaries. Source: NSO report F2: Goodwill impairment BDMS has huge Goodwill due to its aggressive acquisition activities since 2011. Goodwill impairment may arise when there is deterioration in the capabilities of acquired assets to generate cash flow or fair value of goodwill is below its book value. If the goodwill amount gets written down after the acquisition, it could indicate that the acquired assets are not working out as planned or the company overpaid to acquire Figure 39: Medical tourism profile another business. Under Thai IFRS, the company requires to annually test for goodwill impairment. F3: Interest rates volatility risk 70 BDMS has liabilities with floating rate which is subjected to fluctuation from changes of interest rate which 60 the interest rate is currently in the up-trend. However, BDMS has a policy to hedge the risk by using interest 50 rate swaps. 40 Business Risk 30 B1: Reliance on one particular country for foreign patients 20 Foreign patients cast a significant influence on Thai private hospital business. However, Thailand has 10
shown the lowest reliance on specific nations comparing to other medical hub countries. The figure shows 0 Percent Percent of Medical Tourists
the reliance each country has on their top three customers. Thailand has well diversified and least from Top Countries, 3 2014 dependency on one country, giving the nation high cushion for downturns. This is the opposite from Malaysia where most of their medical tourists only come from Indonesia. (Figure 39) B2: Emerging of medical hub in other area Source : Frost and Sullivan s healthcare industry becomes more attractive, other countries are startingstarts to establish themselves as medical hub. The most threatening risk is the new medical hub in the Middle East, as their nation has always been Thailand’s top customer. However, we strongly believe that Thailand can still secure its CFA INSTITUTE RESEARCH CHALLENGE 2019 leading position as the country has strong domestic players. As the Middle East is still new to the field, a lot of time and further investment are still needed to be made. We do not expect to see the Middle East becoming our main rival in this foreseeable future. B3: Unsuccessful ramp-up new hospitals and missed expectation wellness center project New hospitals might take longer than company estimation of 5 years to breakeven. BDMS is aware of that such risk s might result in negative EBITDA, and thus pressure EBITDA margin. BDMS minimized the effect by gradually opening new available beds by phrase. For first phrase, BDMS would open only 50 available beds from 150 registered beds in order to reduce costto lower cost avoiding negative EBITDA. As Wellness Center might make a huge loss in first three operating years dragging down profitability, the company applied the same strategies to gradually open 7 clinics department between 3-year period. B4: Higher than expected compensation from Life Privilege Club legal issues BDMS is currently being sued for discontinue the “Life Privilege Club”, a program with a small amount of charges to members who paid membership fees in advance for a lifelong membership. The legal case is currently going on Supreme Court as BDMS lost in both Trial Court and Appeal Court. In 2016, the company have recorded the liabilities THB 964 million based on the compensation expected to be paid to the members in 2017. Only 182 of 334 members accepted the compensation, while 123 members filed numerous complaints against the company requesting either continuation of the program or THB 100 million per person compensation. The company currently estimates only THB 486 million compensation, whereas compensation could rise to THB 1.23 billion if members win the legal case B5: Government Price Regulation The stricter and new regulations with the draft Patient Protection Act aiming to protect patient who received damages from services without having to prove wrongdoing as well as the possibility of setting up ta patient protection fund may affect BDMS’s operation. However, the company follows several standards to ensure the quality of service as well as monitors the risks to lessen the future effect of changing in laws. B6: Political Risk The foreign patient’s flow and confidence are highly affected from political uncertainty which is out of BDMS’s control. From experience, political unrest in 4Q13 only affected hospitals in tourist attraction such as Bangkok and Phuket. Political risk is uncontrollable, but with BDMS well established network coverage it managed to gain from domestic patients in regional area. Figure 37 summarized all the risks in a risk metrics, ranking them by impact and probability.
POTENTIAL UPSIDE E-health adoption For healthcare industry, a continuously improvement for the providers is a must. The medical services providers are competing for patients through their quality and advancement in treatment. Technology and information technology have been introduced to the global healthcare market to improve the efficiency in healthcare delivery. Patient data will be analyzed and managed for a better treatment solution. We are now entering ‘e-health’ era where digitalizing the health system will be mandatory for competition in future. The providers who possess the most data is the most advantaged. Southeast Asia is still in adopting phase , especially Thailand. Given this situation, BDMS is the most prepared and suitable one for technological advancement. The hospital already shows their initiative since 2015 by implementing IOT and AI system to collect patient’s information daily from all their 50 hospitals (Figure 40). With the large network and the largely available free cash flow, BDMS could easily step into the leading position in Southeast Asia healthcare’s industry. Overseas Expansion BDMS has been concentrated in expanding their network domestically over the past years. Apart from the domestic expansion, the hospital also owns a subsidiary named ‘Royal Angkor International Hospital (RAH)’ (2007), located in downtown Siem Reap. RAH is the first Indochina regional hospital affiliated with Bangkok Hospital Medical Center, serving as the first step of the network stepping out of Thailand. Given the company high level of free cash flow, overseas Merger and Acquisition activities could be done without any financial constraints. The opportunities do not merely locate in Cambodia. BDMS also holds patients base in other neighbor countries. There is no announcement regarding overseas expansion now, but the company regularly show their presence abroad through advertisement and other promoting activities.
Figure 40: BDMS and future trends
Area of Change Present (2015) Future Outlook (2025) BDMS Information Flow Focus on data collection, one-way Flows between stakeholders Implementation communication will be integrated into 2-way of AI and mode Internet of things Clinical Outcomes Physician/Provider-centric model The patient-centric model Analyzed the collected data to find best solution for patients Treatment Focus Reactive care, treating illness Proactive care, prevention and Wellness wellness center Source: Frost and Sullivan, Team analysis
CFA INSTITUTE RESEARCH CHALLENGE 2019
Available bed: refers to the actual number of beds that is physically available for usage in hospitals Average daily inpatient census (ADC): average number of inpatients present Appendix 1: Glossary Center of Excellence (CoE): selected hospital under BDMS network who met the four criteria of: i) Patient care – utilizing a system of clinical pathways in order to provide world class treatment to patients ii) Academics – providing ongoing academic knowledge and training to medical staff iii) Research and publication – conducting and publishing medical research iv)Affiliation – ongoing exchange of knowledge with other medical institutions
Inpatient Departments (IPD): refers to the areas of the hospital where patients are accommodated after being admitted, based on doctors/specialist’s assessment
Joint Commission International (JCI): According to JCI’s website, JCI is part of a global enterprise of dynamic, nonprofit organizations that address all dimensions of accreditation, quality care, and patient safety. Accreditation of JCI equals receiving the gold standard in global health care.
Noncommunicable diseases (NCD): according to WHO, it is also known as chronic diseases, where it is not passing from person to person. NCDs include most heart diseases, most cancers, diabetes, and etc.
Out Patient Departments (OPD): caters to a population of patients who arrive, complete their appointment, and then leave the Outpatient Clinic or Department. Emergency Room/Accident & Emergency, and Ambulatory Care Services are also considered part of the OPD population
Structure bed: also known as registered bed. It refers to the maximum number of beds that the operator can holds. The current available number of beds always lesser than or equal to the number of structured beds.
Appendix 2: Business Description
Brand Portfolio Number of Locations Types Hub or Spoke Targeted patients beds
21 hospitals Headquarter in Super Tertiary CoE and Hub Thai and International 3,602 beds Bangkok and Main Cities
Upcountry Basic Tertiary Spoke Middle-income Thai Thailand and International 6 hospitals Bangkok & Vicinity Basic Tertiary CoE and Hub Thai and International 1,288 beds
5 hospitals Bangkok & Vicinity Basic Tertiary CoE and Hub Middle-income Thai 1,241 beds patients
6 hospitals Bangkok & Vicinity Secondary Care Spoke Middle-income Thai 1,008 beds patients & Social Security
1 hospital Bangkok Luxury Basic Spoke High Income 144 beds Tertiary
Recognized Local Hospital acquired 5 hospitals Upcountry Secondary Care Spoke Middle Income Thai by BDMS 598 beds Thailand patients & Social Security
2 hospitals Cambodia Basic Tertiary CoE and Hub Cambodian Patients 130 beds care in Cambodia
CFA INSTITUTE RESEARCH CHALLENGE 2019
Appendix 3: Business Description (cont.)
CFA INSTITUTE RESEARCH CHALLENGE 2019
Korea, Japan Middle East Appendix 4: Competitive Advantage Pre 2008 Post 2008Current Current
India, Thailand, Malaysia, Singapore
Thailand was among the fist players of being a medical hub player. The following 4 countries (Malaysia, India, Singapore, South Korea) were chosen to discuss given similar characteristic and patient bases with Thailand
Malaysia Thailand India Singapore South Korea Revenue share* 2.2% 48.9% 31.3% 11.7% 5.8%
Main players IHH, KPJ BDMS, BH, BCH Apollo Hospitals, Raffles Medical Asan Medical health care Fortis Healthcare, Group Center
Number of JCI 13 65 21 21 32 Competitive edge Low cost, Low cost relatively to Low cost High quality High quality, Multi-cultural quality, spa high availability diversity destination, supportive of medical Stable politic government policies, supply, Cosmetic states surgery Beds (per 100,000 pp.) 2 2.2 1 2 10.3 Key concerns high Political unrest Low medical High cost, Highest cost, dependency personal supply, Lack of Late market on High crime rate, vacation spot entry Indonesian underdeveloped patients health infrastructure
*Source: Team analysis, Frost and Sullivan, JCI.org, *revenue Information as of 2014, OECD report
Thailand has biggest customer based indicated by highest revenue share among other four players. Moreover, the country possesses highest JCI accredited hospital. The only big concern Thailand has is the political unrest where it happens infrequently.
Key competitor analysis:
IHH: Its key strategy focuses on expanding footprint globally. The company has presence in 9 countries globally and its main markets are Malaysia, Singapore, Turkey, India and Hong Kong. With its strong international footprint and brand reputation, IHH is considered BDMS’s main competitors in terms of foreign patients. However, due to Thailand’s favorable factors and increasing medical tourism, IHH presence would not obstruct BDMS growth.
KPJ: KPJ is a leading healthcare provider in Malaysia with its regional footprint in Malaysia, Indonesia, Bangladesh, Australia and one hospital in Thailand. The company invested heavily in internet of things and innovation to create breakthrough in the country. Despite the foothold in Thailand as well as other countries, Malaysia remains their main focus in expansion.
Bumrungrad (BH): BDMS is currently holding 25% of BH. Bumrungrad. BH targets international patient and Thai upper class, therefore the hospital charge premium price, 3.5 times more than BDMS per IPD admission resulting in a high EBITDA margin of 35%. As 75% of the patient is self-paid, therefore BH will not benefit from insurance. It also has capacity limitation with only 546 available beds. BH revenue largely depends on international patients, especially Middle East, who contributed 24% of total revenue. BH has opened premium wellness center in Bangkrajao. The company still have new capex to spend in the pipeline, largely for renovation.
Bangkok Chain Hospital (BCH): One of the large network hospitals with 11 hospitals under 3 brands. One hospital targeted high income and international patient. The other 10 target middle income and social security. 34% of its total revenues came from social security, making the company one of the biggest social security hospitals.
Apollo: Apollo is the largest hospital network, the largest pharmacy chain as well as one of the top three insurance providers in the private healthcare sector in India. Apollo has international standard with lower price compared to BDMS. The key constraint is Apollo unsettling internal issue: IHH will exit Apollo Gleneagles, an 50-50 joint venture between IHH and Apollo as a result of IHH purchase stake in rival, Fortis. Therefore, Apollo will have to raise finance to fund the acquisition of IHH’s stake.
Fortis: Fortis is the second largest healthcare delivery service provider in India, currently present in India, Dubai, Mauritius and Sri Lanka. One of its hospitals also ranked No.2 for most advanced hospitals in the world. Due to its international standard and upgraded capacity, Fortis has put emphasized on medical tourists. During 2018, 31% of the company was acquired by IHH, which is now the single largest stakeholder
Raffles: A Singapore leading private hospital. The company currently presents in five countries: Singapore, China, Japan, Vietnam and Cambodia. Company strategy is to expand more footprints in China and securing its leading position against fast-growing companies like Thomson medical group and Healthway Medical. Raffles and BDMS may have overlapping target customers, however, due to the same standard yet higher cost than BDMS, BDMS will remain invincible for the foresee future.
CFA INSTITUTE RESEARCH CHALLENGE 2019
AppendixAbsolute Investment number of the Thesis market 5 : Quantifying InsuranceImpact of insurance Trends market on BDMS
Estimated insurance patients
Total Thai Health % insurers of Total population BDMS Insurance patients Population Insurers Thai population 7,000 2013 64,622,853 3,492,808 5.40% 6,000 2014 64,872,060 3,966,472 6.11% 5,000 3,415
Thousands 3,423 2015 65,103,952 4,440,135 6.82% 3,487 3,538 2016 65,322,096 5,013,616 7.68% 4,000 3,638 3,724 2017 65,521,468 5,661,167 8.64% 3,311 3,000 3,010 2018E 65,700,220 5,889,683 8.96% 2,786 2019E 65,859,298 6,124,254 9.30% 2,000 2,664 3,716 3,188 3,446 2020E 65,997,229 6,365,084 9.64% 2,586 2,878 1,000 1,937 2,251 2021E 66,114,389 6,611,202 10.00% 1,430 1,702 829 1,180 2022E 66,210,758 6,861,293 10.36% - 2023E 66,284,938 7,114,680 10.73% 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E
The health insurance market is expected to grow at 3.85% CAGR of Without any strategies implemented, BDMS can capture 34% of the 2018E-2023E. The insurance penetration rate will grow gradually, total health insurers. Therefore, with BDMS being the only one from only 8.64% of total population in 2017 to 10.73%% in 2023E, implement insurance strategies and the company’s capacity ready translated into 7.12 million people with insurance. to support new patients, we firmly believe that the company will be able to increase market share of the growing health insurers, translating into 10.54% CAGR (2018E-2023E) in insurance patients,
in line with QoQ 23% growth from insurance revenue.
Rationale of the market expansion BDMS strategies to capture insurance trends
Insurance sales booth @BDMS hospitals
As Thai society is aging, non-communicable diseases (NCDs) such as heart, cancer, As BDMS has largest private hospital network in Thailand, all insurance diabetes and high blood pressure will be major threats for seniors and require large companies desire to partner with BDMS. In the end of 2017, BDMS budgets to treat continuously. The public healthcare system is over reliant on general announced to penetrate insurance patients in full strength by launching taxation as the main source of funding. This puts the national healthcare insurance exclusive insurance package only to BDMS network with 3 big insurance scheme at risk as health expenditure is increasing due to aging diseases, while companies. government tax revenue is decreasing due to lower tax from retirees. Government is aware of its financial cracks and began to push the burden toward private health 1.Viriyah Insurance: targeted middle income insurer with more than THB insurance. We believe private Health Insurance will be successful in Thailand as it benefits all 4 stakeholders. 30,000 monthly income. 323 hospitals have been covered in this package, but insurers would get 10% increase in coverage if patients choose to go to 50 1.Government – Lessen Government’s Universal health scheme burden. hospitals under BDMS network. Insurance premiums vary on coverage and 2.Insurance Company – Private Health Insurance is currently in early stage as there aging. The highest and lowest monthly premiums are between THB 5000 - only 8.64% Thai citizen having private health insurance in 2017, while there is 40% 300. Thai citizen having life insurance and more than 70% having non-life insurance. Viriyah insurance, the market leader in Non-life insurance, decided to jump in Health insurance 2. Muang Thai Life Insurance: Exclusive insurance only to BDMS network market last year. Life insurance companies began to launch more sophisticated insurance packages which combined both life and health insurance. 3. Allianz Ayudhya Insurance: Targeted high-class insurers with more than 3.Insurer – Get 15,000-Baht Tax break on insurance premium. Having third-parties THB 300,000 monthly income. Beyond Platinum package offer highest THB to absorb rising medical cost. Pay less for better services. 100 million insurance coverage per year. 4.Hospital –Insurance would sustain loyalty and reduce volatility in patient volume between year.
CFA INSTITUTE RESEARCH CHALLENGE 2019
Absolute number of the market Impact of medical tourism market on BDMS
AppendixTourist MedicalInvestment Thesis 6 : Quantifying Medical Tourism Trends inbound tourists Estimated medical tourist patients (X) (Y) Total inbound tourist and number of 10,000 2007 14.4 1.42 60 medical tourism( Million) 9,000 BDMS medical tourists 8,000 50 52.0 2012 22.3 2.53 R^2 = 0.99 48.8 45.8 7,000 42.8 2017 35.4 4.0 40 39.9 Thousands 37.4 35.4 6,000 2018E 35.4 4.6 30 5,000 2019E 39.9 4.9 22.4 20 4,000 2020E 42.8 5.2 14.4 6.0 6.3 3,000 4.0 4.6 4.9 5.2 5.6 10 2.0 1.4 2.5 2021E 45.8 5.6 2,000 0 1,000 2022E 48.8 5.9 2007 2012 2017 2018F 2019F 2020F 2021F 2022F 2023F 1,147 1,223 1,303 1,390 726 774 830 888 947 1,009 1,075 - 2023E 51.9 6.3 Total inbound tourist Medical tourism
Due to the limited data, we could not find the actual number of medical tourisms.
However, we found a linear relationship between the number of inbound tourists and the There are many emerging players come into the market such as Bangkok medical travelers. We conducted a regression analysis of number of medical tourists on Chain’s world medical center, yet with BDMS outstanding expertise and
number of total inbound tourist over the past 10 years and got R^2=0.99. Given the being one of the two hospital listed as global destinations for medical forecasted number of inbound tourists from Euromonitor, we project volume of medical services (another one is BH) together with new strategies implemented, tourist will keep growing at 7% CAGR, same pace as inbound tourist we believe that BDMS can definitely defend its market position.
The other qualitative and quantitation data is then used to justify that Thailand’s medical tourism market will still be expansion
Rationale of the market expansion
1.RISING OF WELLNESS TOURSIM AND PREVENTIVE TREND From 2015-2017, the wellness economy grew 6.4% annually, nearly twice as fast as global economic growth (3.6%). We started to see a shift from current curative treatment to preventive module. Thailand ranked at 4th in term of Market size in Asia Pacific. Given key growing sectors of the market is all relevant to Thailand and the country low living cost, we strongly believe that wellness market in Thailand will continue growing in the future.
Abandon of one child 2.SURGING GLOBAL DEMAND FOR QUALITY HEALTHCARE The rising demand of quality healthcare comes from many key drivers from fundamental economic and demographic factors. Countries around the world is experiencing an aging phenomenon. Apart from this inevitable fate, other supporting factors such as the NCDs, urbanization, expansion of middle to affluent income group, and specific factors of each countries will together push the healthcare market even more.
CHINA: Abandon of one child policy & uneven distribution of local supply
The demand for healthcare is rising form aging population and affluent class Moreover, the abandon of one child policy gives more push to this demand. With this bombardment, the popular healthcare facilities (Class III) often drowned by herd of people while grassroots facilities (Class I) are underutilization. Amid of the situation, the rich are finding a way out.
Total fertility rate and one-child policy 3%
Abandon of one child 3% Targeted: 2.1%
2% 2% Abandon of one child 1%
1%
0%
MIDDLE EAST(ME): Gradually slow down The growth of UAE inbound arrivals has been slow, showing nearly zero percent over 2017-2018. This has come from the country internal factor. The Middle East government has stopped subsidized middle east patients to seek healthcare abroad, Instead, the focus is shifted to the development of local healthcare facilities to diversify itself from declining oil industry. GCC nations currently have 37 mega hospital; projects expected to add over 23,000 beds by 2020.Yet, we expect the inbound of ME patients to not show a sharp drop due to the key restraints of local healthcare facilities because of: i) Government deficit budget from meltdown of oil price: with 70% healthcare expenditure being financed by the government, the sector’s development is expected to slow down ii) Expensive cost and limited expertise: Cost back home is too high, yet the expertise only limited to reconstructive and wellness procedure
CFA INSTITUTE RESEARCH CHALLENGE 2019
Appendix Investment Thesis 7 : Price Cap Medical Price Regulation Impact on Private Hospital Case Study
Hong Kong
India Medical Inflation: 6.2%
Medical Inflation: 9% Current regulation: No price cap. All 11 private hospitals signed up to show estimates fee in Current regulation: Since front to increase price transparency. 2017, Direct Price Ceiling, 70% price cut in Knee implants and 40% price cut Malaysia in stents Medical inflation: 15.3%
Result: Overall procedure Current regulation: Direct cost has not come down, Price ceiling. Since 2006, only despite implants and stents Doctor consultation fee price Thailand price cut as private hospital ceiling between RM10 and increase price elsewhere Medical RM35. instead. Private hospital Inflaion:8.5% such as Apollo could offset impact of price cap in 1 year. Result: Proposal to raise Singapore doctor consultation fees by RM30 to RM125 due to high Medical Inflation: 10% cost of living in 2018. Despite Current regulation: No price cap. In 2017, price cap effort, other cost in
benchmark fees for 222 common surgical procedures private hospital are rising that acts as appropriated reference left for patient decision. Malaysia medical inflation is increasing in double digit.
Government Delayed or long time to Direct Price Ceiling Mark-up Control One Price prescription drug Possible Solutions implement
To solve the same medicine price Set the same fixed Determine how profit margin mark- inequality in each channel, It would take long time to maximum ceiling price for ups can be applied vary on private government can push patients to discuss and find the right all private hospital despite hospital cost structure. For Approaches request prescription from private approaches that satisfy all the different cost example, lower mark-up for higher- hospital doctor and buy drug stakeholders. structures and conditions. priced products. 2 outside. 5 % From India case study, it is Because it is the fairest method for By law, patients are already allowed Medical price ceiling has Possibility unsuccessful attempt as all stakeholders to determine to request for prescription. As each been proposed since 2013, private hospital responded appropriated mark-up regarding hospital has different cost structure, but Sontirat Sontijirawong, Why it could be aggressively and publicly to different conditions and cost same medicine could have different the ministry of commerce, implemented? increase price elsewhere structure in each hospital. cost. It could be implemented has just enforced it recently despite government immediately to solve different cost due to his running for a regulation. structure problem and establish one coming Thailand election. price.
CFA INSTITUTE RESEARCH CHALLENGE 2019
Objective: To justify the number of patients expected in 2018E-2028E Scenario Worst Base Best Appendix Investment Thesis 8 : Quantifying Methods Method: We first calculate the absolute size of the market and the penetration rate of BDMS. Quantity Base Base Best Then we forecast the market growth and the ability of BDMS to gain market share overtime. Quantity Quantity Quantity The number is based on BDMS OPD patients then multiply by fixed conversion rate to find IPD Price Worst Base Best patients, and thus total patients. Price Price Price
Scenario: Because quantity can be estimated with high certainty, there are base case which reflects as if the whole year performs worse than 3Q19 performance (normally 4Q19 performance decline from 3Q19) and the best case assumed the company can maintain its 3Q19 performance for the whole year. Regarding the price, due to high uncertainties about regulations, we estimate price scheme in 3 scenarios: worst, base and best.
Step 1: Categorization
We categorized the number of patients by 2 methods: 1. By nationality (International and Thai patients) and 2. By payment method (Insurance and others). Under the assumption the number of patients related with number of OPD visits, we can derive the number of Thai and international patients. From the assumption that each patient pays at the same average bill, we use insurance percentage of revenue as a proxy of patient volume pay by insurance. Because the effect of strategies related to insurance only attract Thai patient, we want to find the Thai insurance patient, therefore we deducted the total number of insurance patients by half of international patients (Management guides that half of the international patients are expats who paid by the insurance). As a result, we can categorize the number of OPD patients into 3 groups: 1) International patients 2) Thai Insurance patients and 3) The others, which we name the base patients. Total OPD Patients Step 2 : Forecast Base patients
As the diseases increase with the age, the aging society will drive the demand for health care. Base Thai Insurance International Patients Patients Patients BDMS with its unique position is considered to be one of the best choices of health care providers, therefore directly benefit from the shifting of population. This is further confirmed by 93% correlation between number of BDMS OPD patients and total Thailand population aged more than 60 years old. Therefore, we calculated the current penetration rate of BDMS by divided the number of elder people by the base number of OPD patients. The forecasted number of elder populations is given by Thai government (1) then we hold constant the penetration rate for conservative stand point to the growing market of aging people.
STEP3 : Forecast insurance patients STEP4 : Forecast Medical tourist Estimated market size of future health insurers Estimated market size of future health insurers
According to Ministry of Tourisms and Sports, approximately 11% of total inbound Aging trend also boost demand of health insurance. This is further confirmed by 99.7% correlation between number of Total Thai health insurers and Total Thai tourists are medical tourists. The medical tourists therefore forecasted to be 11% of total tourist market estimated. (2) As a result, the medical market is expected to grow people aged more than 60 years old. As there is no data forecast the number of health insurers, we forecasted the absolute market of Thai health insurers by % at a CAGR of 7% (2018E-2023E), our forecast is on conservative basis compared to the allied research given 15% CAGR on the medical tourism market. We then growth of elder people. The historical penetration rate is the proportion of BDMS’s Thai insurance patient of total Thai health insurers. The penetration rate categorized international patients into medical tourist and expat (50:50 from company is further forecast based on each scenario. data). The penetration rate of medical tourists is the proportion of BDMS’s medical tourist patient of total medical tourists fly into Thailand. The penetration rate is later forecast by scenarios. The expat patients have been constant at 2% of total Thai tourists, and forecasted according to the historical data.
X BDMS Capture rate of Thai health insurers X BDMS Capture rate of Medical tourists in Thailand
Thai insurers penetration rate Medical tourists penetration rate 57% 60% 55% 56% 22% 21.06% 55% 51% 50% 21% 48% 52% 46% 45% 50% 20% 42% 45% 40% 18.61%18.75% 38% 18.29% 19% 18.0% 40% 34% 34% 17.65% 17.6% 32% 18% 35% 30% 17% 30% 24% 25% 20% 2013 2014 2015 2016 2017 2018E2019E2020E2021E2022E2023E Base Case Best Case Base Case Best Case Base Case Best Case
Worst / Base Case Best Case BDMS Penetration 2018E : 38% 2018E : 40% rate (BDMS Thai 2023E : 52% 2023E : 57% insurance patient / BDMS penetration rate 2018E-2028E : 17.6% 2018E-2023E : 18.0% Total health (BDMS Thai insurers) international patient / Total medical tourists) Number of BDMS 3.72 Million People 4.07 Million People Thai Insurance Number of international 1.73 Million People 1.75 Million People patient by 2023E patient by 2023E Scenarios BDMS’s thai insurance For the best scenario, Scenarios Maintain current market Increase market share to patient per day normally we assume BDMS share for medical tourist 18% to reflect as if the faded down in quarter4, we can maintain 9M18 and expats, which 3Q19 performance assumed the whole year performance for the resulted in 20,000 maintains for the whole performance 2018 to be whole year. The people less than the year. We conservatively less than 9M18 indication. penetration rate in best case. projected the market Therefore, the penetration 2018 is 40%, which is share to maintain rate in 2018 is expected to 6% increase in market afterward due to volatile CFA INSTITUTE RESEARCH CHALLENGE 2019 external factors of other improved only 4%. The share. countries. base case patient is 10% less than the best case in 2023E
Price growth aboveAppendix price inflation willInvestment continued. The abilityThesis to command 9 : Pri pricece is Forecasted derived from 1) Global norms of medical inflation that is always higher than normal inflation 2) CoE hospitals provide price intensity. Management guided that CoE can command 4%-5% price growth, while non-CoE can command 2%-3% price growth. CoE revenue contributed to 49% CoE of total revenue. price Medical intencity Historical data shows that most of the time, 5 out of 6 years (2012-2017) that the company Inflation can continued price increase above inflation rate. Moreover, since CoE has established in 2015-2017, price growth is guaranteed to be on average 4.93% on top of each year inflation. Inflation
Management guide of price growth 4%- in 2018E OPD 5.0% 5% In excess Inflation Price of inflaiton growth 4.0% 2%- 2012 3.00% 14.93% 11.93% 3.0% 3% 2013 2.20% 4.95% 2.75%
2.0% 2014 1.90% 0.94% -0.96%
1.0% 2015 -0.90% 4.85% 5.75% 0.9% 0.9% 0.0% 2016 0.20% 3.84% 3.64% CoE Non-CoE 7.00% 2017 0.70% 6.11% 5.41% Estimated6.1% price growth for Base Case 6.00% 4.8% 5.00% For base case scenario, we assume that the price scheme will control at 3.8% 3.9% 4.00% 3.4% the margin, which indicate that the process will take a long time to review 2.8% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 2.6% 2.4% item by item in order to get fair outcomes for every parties which is the 3.00% 1.8% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 1.4% goal stated by the committee. Therefore, the price growth should decline 2.00% 1.1% 0.7% 0.9% 0.9% over time. On the other hands, the long process will allow the company 1.00% 0.2% to adjust its other part of revenue to maintain margin and thus maintain 0.00% -0.9% at the certain level of price growth. For conservative basis, we expect the 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E -1.00% price growth to slow down and only maintain at 1% above inflation rate, contrast to average 5% for the past 3 years. -2.00% Inflation OPD price growth
8.00% Estimated price growth for worst case 6.1% 6.00% 4.8% 3.8% 3.9% For worst case scenario, we assume the most unlikely price 4.00% scheme to occur which is to regulate price by an absolute number 1.8% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% disregard the cost or investment of each hospital. For magnitude, 1.1% 1.4% 2.00% 0.7% 0.9% 0.9% we assume the worst scenario possible which is the last point that 0.2% the company ROIC is still more than WACC, which is 64% portion 0.00% -0.9% 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E (every category that could be regulated) of domestic revenue to -2.00% be cut by 11% blended. As a result, price is to be cut down for approximately 5% and then grow at the same % of inflation -4.9% -4.00% afterward.
-6.00% Inflation OPD Price growth
7.00% Estimated price growth for best case 6.1% 6.00% 4.8% 5.00% Best case scenario demonstrates the normal price adjustment, 3.8% 3.9% 3.8% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 3.4% that could happen if the committee does not pass the medical 4.00% 3.1% 2.9% price cap regulations on 22 January 2019, the company can 3.00% 1.8% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% adjust other part of revenue to compensate for the total loss, or 2.00% 1.4% the impact can be passed on to suppliers. However, we are 0.9% 0.9% 1.1% 0.7% conservatively forecasted and maintained at 2% above inflation. 1.00% 0.2%
0.00% -0.9% -1.00%
-2.00%
Inflation OPD price growth
CFA INSTITUTE RESEARCH CHALLENGE 2019 Key assumptions
5. Nationality: price cap regulation is proposed to help Thai low to middle income on healthcare cost, therefore the regulation will be imposed on only domestic portion of BDMS which is average 70% of Thai Private hospital revenue structures total revenue 6. Revenue breakdown: There is no disclosure on revenue breakdown from the company, therefore, Other, 9% Possible revenue portion under price regulation we used data from National Statistical data of Thailand (NSO) (1) survey of 64 private hospitals in Room, 6% Food, 2% Thailand as benchmark. Revenue portion not under price regulation Drug and 7. The portion of revenue proposed to be regulated on margin are 1) Drug and medicine, already on medicine, 37% Doctor fee, the control list but not yet effectively controlled 2) Lab and X-ray 3) Medical treatment services. 19% Therefore, the proportion of revenue regulated can be ranged from 37%, 52% and up to 64%. Lab and X-ray, 8. Price cut: As we confirmed with suppliers’ company that cost of medicine purchased by private 15% hospitals is higher than that of public hospitals and there are other additional costs such as storage Medical treatment services, 12% cost that is higher than public hospitals, therefore, we run the sensitivity analysis of BDMS actual data of 2017 and 39% price cut on 20% portion of domestic revenue is the maximum cut that BDMS ROIC will not less than WACC (7.3%)
1. Medicine suppliers currently sell The company could take Complex nature of private higher price to private hospital. BDMS was aware of a risk in policy time to adjust strategies in hospital cost structure Government have to set price changing. The company price without hurting its would allow the company regulation at all dispensing channel established “Save Drug” pharmacy margin. From India hospital to increase price to enable lowest price to patients. store across Thailand to absorb Apollo case study, Apollo’s BDMS Mitigation elsewhere regardless of 2.BDMS could increase other such risk and maintain to gain margin dropped due to medicine, medical devices prices that are not regulated. market share from medicine impact of price cut, but it and medical services price 3. Decreasing in price would revenue if patients request for takes 1 year to offset the cap. definitely lead to increasing in prescription. impact and return patient volume. profitable.
Appendix 10 : Quantifying Price Regulation Impact
2017 ROIC sensitivity
Source: National Statistical data of Thailand(NSO)
Worst case scenario
Objective: we run sensitivity on actual data 2017 to derive the worst-case scenario possible if the price cut scheme is implemented. As the government aimed to find fair price for every company, therefore price cut must be at the level that ROIC still higher than WACC (7.3%) which is highlighted in the green area.
Result: Worst case is that 64% (Drug and medicine, Lab and X-ray and medical treatment services) of domestic revenue is under price cut of 11%
Market View and 2019E sensitivity Our model indicated that the market incorporates 9% price cut on 64% of domestic revenue, which almost hit the point that the company bankrupt. We think that the market is being too pessimistic. Sensitivity on EPS shows that every 11% price cut on 36% of total revenue resulted in approximate 20% discounted on EPS.
CFA INSTITUTE RESEARCH CHALLENGE 2019 2019E EPS sensitivity
Income statement Appendix Valuation 11 : Income Statement and Common -si ze Unit: THB (m) Historical Projected Fiscal Years Ending December 31 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E Revenue Revenues from hospital operations 65,237 69,123 76,635 84,624 91,624 98,944 106,611 114,997 123,959 132,840 142,248 151,431 161,797 Revenue from sales of goods 2,667 2,810 3,040 3,285 3,502 3,729 3,965 4,223 4,497 4,770 5,058 5,339 5,655 Others 940 840 931 1,028 1,113 1,202 1,295 1,397 1,506 1,613 1,728 1,839 1,965 Operating Revenue 68,844 72,772 80,606 88,938 96,239 103,875 111,871 120,616 129,962 139,224 149,033 158,610 169,417 Cost of hospital operations 45,277 47,975 51,942 56,590 61,074 65,815 69,234 74,706 80,335 85,505 91,429 97,540 104,218 Gross profit 23,567 24,797 28,664 32,348 35,165 38,060 42,637 45,910 49,627 53,719 57,605 61,069 65,199 Administrative expenses 13,644 14,488 15,780 16,989 18,105 19,309 20,178 21,552 22,954 24,251 25,663 27,214 28,878 Operating Profit 9,923 10,309 12,884 15,358 17,060 18,751 22,459 24,359 26,672 29,467 31,942 33,855 36,321 Interest income 52 52 35 37 52 88 129 147 196 221 236 290 346 Dividend income 21 16 16 16 17 17 18 18 18 19 19 20 20 Share of income from investments in associates 1,370 1,417 1,675 1,178 1,250 1,278 1,307 1,337 1,368 1,399 1,431 1,463 1,497 EBIT 11,367 11,794 14,610 16,589 18,378 20,134 23,914 25,861 28,255 31,106 33,628 35,629 38,184 Finance cost (881) (1,535) (1,082) (853) (648) (604) (599) (643) (643) (643) (896) (1,006) (1,154) EBT 10,486 10,258 13,528 15,737 17,730 19,530 23,315 25,217 27,611 30,462 32,732 34,623 37,030 Income tax expense (1,880) (1,878) (2,487) (2,893) (3,260) (3,590) (4,286) (4,636) (5,076) (5,600) (6,018) (6,365) (6,808) Minority Interest (385) (359) (359) (359) (359) (359) (359) (359) (359) (359) (359) (359) (359) Normalized NI 8,220 8,021 10,682 12,485 14,111 15,580 18,670 20,222 22,176 24,503 26,355 27,899 29,864 Non-recurring items 167 2,195 - 4,700 ------Profit attribute to Equity holders 8,387 10,216 10,682 17,185 14,111 15,580 18,670 20,222 22,176 24,503 26,355 27,899 29,864
Number of shares outstanding 15,491 15,491 15,666 15,892 15,892 15,892 15,892 15,892 15,892 15,892 15,892 15,892 15,892 Common-size Income statement Unit: THB (m) Historical Projected Fiscal Years Ending December 31 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E Revenue Revenues from hospital operations 94.8% 95.0% 95.1% 95.2% 95.2% 95.3% 95.3% 95.3% 95.4% 95.4% 95.4% 95.5% 95.5% Revenue from sales of goods 3.9% 3.9% 3.8% 3.7% 3.6% 3.6% 3.5% 3.5% 3.5% 3.4% 3.4% 3.4% 3.3% Others 1.4% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2% Operating Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of hospital operations 65.8% 65.9% 64.4% 63.6% 63.5% 63.4% 61.9% 61.9% 61.8% 61.4% 61.3% 61.5% 61.5% Gross profit 34.2% 34.1% 35.6% 36.4% 36.5% 36.6% 38.1% 38.1% 38.2% 38.6% 38.7% 38.5% 38.5% Administrative expenses 19.8% 19.9% 19.6% 19.1% 18.8% 18.6% 18.0% 17.9% 17.7% 17.4% 17.2% 17.2% 17.0% Operating Profit 14.4% 14.2% 16.0% 17.3% 17.7% 18.1% 20.1% 20.2% 20.5% 21.2% 21.4% 21.3% 21.4% Interest income 0.1% 0.1% 0.0% 0.0% 0.1% 0.1% 0.1% 0.1% 0.2% 0.2% 0.2% 0.2% 0.2% Dividend income 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Share of income from investments in associates 2.0% 1.9% 2.1% 1.3% 1.3% 1.2% 1.2% 1.1% 1.1% 1.0% 1.0% 0.9% 0.9% EBIT 16.5% 16.2% 18.1% 18.7% 19.1% 19.4% 21.4% 21.4% 21.7% 22.3% 22.6% 22.5% 22.5% Finance cost -1.3% -2.1% -1.3% -1.0% -0.7% -0.6% -0.5% -0.5% -0.5% -0.5% -0.6% -0.6% -0.7% EBT 15.2% 14.1% 16.8% 17.7% 18.4% 18.8% 20.8% 20.9% 21.2% 21.9% 22.0% 21.8% 21.9% Income tax expense -2.7% -2.6% -3.1% -3.3% -3.4% -3.5% -3.8% -3.8% -3.9% -4.0% -4.0% -4.0% -4.0% Minority Interest -0.6% -0.5% -0.4% -0.4% -0.4% -0.3% -0.3% -0.3% -0.3% -0.3% -0.2% -0.2% -0.2% Normalized NI 11.9% 11.0% 13.3% 14.0% 14.7% 15.0% 16.7% 16.8% 17.1% 17.6% 17.7% 17.6% 17.6% Non-recurring items 0.2% 3.0% 0.0% 5.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Profit attribute to Equity holders 12.2% 14.0% 13.3% 19.3% 14.7% 15.0% 16.7% 16.8% 17.1% 17.6% 17.7% 17.6% 17.6%
CFA INSTITUTE RESEARCH CHALLENGE 2019 Appendix Valuation 12 : Balance Sheet and Common-size
Balance sheet Unit: THB (m) Historical Projected Fiscal Years Ending December 31 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E Asset Cash and cash equivalents 4,217 5,091 2,489 2,603 3,913 7,088 10,646 12,198 16,426 18,551 19,909 24,596 29,405 Short-term investments 548 572 572 572 572 572 572 572 572 572 572 572 572 Trade and other receivables 6,257 6,940 7,743 8,543 9,244 9,978 10,746 11,586 12,483 13,373 14,315 15,235 16,273 Inventories 1,516 1,735 1,879 2,047 2,209 2,381 2,504 2,702 2,906 3,093 3,307 3,528 3,770 Other current assets 57 21 23 26 28 30 32 35 38 40 43 46 49 Total current assets 12,595 14,359 12,706 13,790 15,966 20,048 24,500 27,092 32,425 35,628 38,146 43,977 50,069
Investments in associates 16,401 15,807 23,423 18,912 20,162 21,440 22,747 24,084 25,452 26,851 28,281 29,745 31,242 Property, premises and equipment 56,461 71,559 73,218 77,469 79,875 78,863 79,756 80,477 81,018 82,208 83,322 84,274 85,260 Goodwill 16,932 17,539 17,539 17,539 17,539 17,539 17,539 17,539 17,539 17,539 17,539 17,539 17,539 Intangible assets 1,188 1,237 1,307 1,450 1,454 1,269 1,057 814 800 748 807 866 928 Other non-current assets 3,437 2,125 2,125 2,125 2,125 2,125 2,125 2,125 2,125 2,125 2,125 2,125 2,125 Total non-current assets 94,419 108,268 117,611 117,495 121,154 121,235 123,224 125,039 126,933 129,471 132,074 134,548 137,093 107,015 122,627 130,317 131,285 137,120 141,283 147,724 152,131 159,358 165,099 170,220 178,525 187,162 Total assets Liabilities Short-term loans from financial institutions 1,579 72 3,302 ------Trade and other payables 4,400 4,750 5,473 5,963 6,435 6,935 7,295 7,871 8,465 9,009 9,633 10,277 10,981 Accrued expenses 4,912 5,223 5,655 6,161 6,649 7,165 7,537 8,133 8,746 9,309 9,954 10,619 11,346 Current portion of long-term liabilities 4,296 1,485 1,485 1,485 1,485 1,485 1,485 1,485 1,485 1,485 1,485 1,485 1,485 Income tax payable 700 706 764 833 899 969 1,019 1,099 1,182 1,258 1,345 1,435 1,534 Other current liabilities 1,991 1,181 1,218 1,261 1,303 1,347 1,379 1,430 1,482 1,531 1,586 1,643 1,705 Total current liabilities 17,877 13,417 17,898 15,703 16,771 17,901 18,715 20,019 21,361 22,592 24,004 25,460 27,051
Long-term loans from financial institutions 3,453 9,335 7,335 2,335 5,335 3,335 7,035 10,735 14,435 18,135 21,835 25,535 29,235 Debentures 12,589 19,585 19,585 19,585 14,585 14,585 11,485 6,485 4,985 2,985 - - - Convertible debentures - liability component 9,874 8,774 5,086 ------Other non-current liabilities 4,916 5,644 5,644 5,644 5,644 5,644 5,644 5,644 5,644 5,644 5,644 5,644 5,644 Total non-current liabilities 30,832 43,338 37,650 27,564 25,564 23,564 24,164 22,864 25,064 26,764 27,480 31,180 34,880 48,710 56,756 55,547 43,267 42,335 41,465 42,880 42,883 46,425 49,357 51,483 56,640 61,931 Total liabilities Shareholders' equity Share capital 1,549 1,549 1,567 1,589 1,589 1,589 1,589 1,589 1,589 1,589 1,589 1,589 1,589 Premium on ordinary shares 20,482 20,573 24,662 29,962 29,962 29,962 29,962 29,962 29,962 29,962 29,962 29,962 29,962 Difference from shareholding restructure 305 305 305 305 305 305 305 305 305 305 305 305 305 Surplus investment over book value of subsidiaries (2,680) (2,683) (2,683) (2,683) (2,683) (2,683) (2,683) (2,683) (2,683) (2,683) (2,683) (2,683) (2,683) Retained earnings 29,239 34,490 39,341 47,145 53,553 58,227 62,894 66,939 70,265 72,716 75,351 78,141 81,127 Other components of shareholders' equity 6,824 8,837 8,419 8,183 8,183 8,183 8,183 8,183 8,183 8,183 8,183 8,183 8,183 Equity attributable to owners of the Company 55,719 63,071 71,611 84,500 90,908 95,582 100,250 104,294 107,620 110,071 112,706 115,496 118,482 Non - controlling interests of the subsidiaries 2,586 2,800 3,159 3,518 3,877 4,236 4,595 4,954 5,313 5,672 6,031 6,390 6,749 Total shareholders' equity 58,305 65,871 74,770 88,018 94,785 99,818 104,844 109,248 112,933 115,742 118,737 121,886 125,231 Total liabilities and shareholders' equity 107,015 122,627 130,317 131,285 137,120 141,283 147,724 152,131 159,358 165,099 170,220 178,525 187,162
Common-size Balance sheet Unit: THB (m) Historical Projected Fiscal Years Ending December 31 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E Asset Cash and cash equivalents 3.9% 4.2% 1.9% 2.0% 2.9% 5.0% 7.2% 8.0% 10.3% 11.2% 11.7% 13.8% 15.7% Short-term investments 0.5% 0.5% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.3% 0.3% 0.3% 0.3% Trade and other receivables 5.8% 5.7% 5.9% 6.5% 6.7% 7.1% 7.3% 7.6% 7.8% 8.1% 8.4% 8.5% 8.7% Inventories 1.4% 1.4% 1.4% 1.6% 1.6% 1.7% 1.7% 1.8% 1.8% 1.9% 1.9% 2.0% 2.0% Other current assets 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total current assets 11.8% 11.7% 9.7% 10.5% 11.6% 14.2% 16.6% 17.8% 20.3% 21.6% 22.4% 24.6% 26.8%
Investments in associates 15.3% 12.9% 18.0% 14.4% 14.7% 15.2% 15.4% 15.8% 16.0% 16.3% 16.6% 16.7% 16.7% Property, premises and equipment 52.8% 58.4% 56.2% 59.0% 58.3% 55.8% 54.0% 52.9% 50.8% 49.8% 48.9% 47.2% 45.6% Goodwill 15.8% 14.3% 13.5% 13.4% 12.8% 12.4% 11.9% 11.5% 11.0% 10.6% 10.3% 9.8% 9.4% Intangible assets 1.1% 1.0% 1.0% 1.1% 1.1% 0.9% 0.7% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% Other non-current assets 3.2% 1.7% 1.6% 1.6% 1.5% 1.5% 1.4% 1.4% 1.3% 1.3% 1.2% 1.2% 1.1% Total non-current assets 88.2% 88.3% 90.3% 89.5% 88.4% 85.8% 83.4% 82.2% 79.7% 78.4% 77.6% 75.4% 73.2% Total assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Liabilities Short-term loans from financial institutions 1.5% 0.1% 2.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Trade and other payables 4.1% 3.9% 4.2% 4.5% 4.7% 4.9% 4.9% 5.2% 5.3% 5.5% 5.7% 5.8% 5.9% Accrued expenses 4.6% 4.3% 4.3% 4.7% 4.8% 5.1% 5.1% 5.3% 5.5% 5.6% 5.8% 5.9% 6.1% Current portion of long-term liabilities 4.0% 1.2% 1.1% 1.1% 1.1% 1.1% 1.0% 1.0% 0.9% 0.9% 0.9% 0.8% 0.8% Income tax payable 0.7% 0.6% 0.6% 0.6% 0.7% 0.7% 0.7% 0.7% 0.7% 0.8% 0.8% 0.8% 0.8% Other current liabilities 1.9% 1.0% 0.9% 1.0% 1.0% 1.0% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% Total current liabilities 16.7% 10.9% 13.7% 12.0% 12.2% 12.7% 12.7% 13.2% 13.4% 13.7% 14.1% 14.3% 14.5%
Long-term loans from financial institutions 3.2% 7.6% 5.6% 1.8% 3.9% 2.4% 4.8% 7.1% 9.1% 11.0% 12.8% 14.3% 15.6% Debentures 11.8% 16.0% 15.0% 14.9% 10.6% 10.3% 7.8% 4.3% 3.1% 1.8% 0.0% 0.0% 0.0% Convertible debentures - liability component 9.2% 7.2% 3.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other non-current liabilities 4.6% 4.6% 4.3% 4.3% 4.1% 4.0% 3.8% 3.7% 3.5% 3.4% 3.3% 3.2% 3.0% Total non-current liabilities 28.8% 35.3% 28.9% 21.0% 18.6% 16.7% 16.4% 15.0% 15.7% 16.2% 16.1% 17.5% 18.6% Total liabilities 45.5% 46.3% 42.6% 33.0% 30.9% 29.3% 29.0% 28.2% 29.1% 29.9% 30.2% 31.7% 33.1%
Shareholders' equity Share capital 1.4% 1.3% 1.2% 1.2% 1.2% 1.1% 1.1% 1.0% 1.0% 1.0% 0.9% 0.9% 0.8% Premium on ordinary shares 19.1% 16.8% 18.9% 22.8% 21.9% 21.2% 20.3% 19.7% 18.8% 18.1% 17.6% 16.8% 16.0% Difference from shareholding restructure 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% Surplus investment over book value of subsidiaries -2.5% -2.2% -2.1% -2.0% -2.0% -1.9% -1.8% -1.8% -1.7% -1.6% -1.6% -1.5% -1.4% Retained earnings 27.3% 28.1% 30.2% 35.9% 39.1% 41.2% 42.6% 44.0% 44.1% 44.0% 44.3% 43.8% 43.3% Other components of shareholders' equity 6.4% 7.2% 6.5% 6.2% 6.0% 5.8% 5.5% 5.4% 5.1% 5.0% 4.8% 4.6% 4.4% Equity attributable to owners of the Company 52.1% 51.4% 55.0% 64.4% 66.3% 67.7% 67.9% 68.6% 67.5% 66.7% 66.2% 64.7% 63.3% Non - controlling interests of the subsidiaries 2.4% 2.3% 2.4% 2.7% 2.8% 3.0% 3.1% 3.3% 3.3% 3.4% 3.5% 3.6% 3.6% Total shareholders' equity 54.5% 53.7% 57.4% 67.0% 69.1% 70.7% 71.0% 71.8% 70.9% 70.1% 69.8% 68.3% 66.9% Total liabilities and shareholders' equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
CFA INSTITUTE RESEARCH CHALLENGE 2019
Appendix Valuation 13: Cash Flow Statement Cash Flow Statement Unit: THB (m) Projected Fiscal Years Ending December 31 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E Operating activities Net Income 10,682 17,185 14,111 15,580 18,670 20,222 22,176 24,503 26,355 27,899 29,864 Depreciation 4,971 5,480 5,915 6,453 4,998 5,607 6,255 6,068 6,635 7,276 7,782 Amortization 261 342 412 457 506 558 354 414 328 351 375 Share of income from investments in associates (1,675) (1,178) (1,250) (1,278) (1,307) (1,337) (1,368) (1,399) (1,431) (1,463) (1,497) Working Capital 302 137 203 223 (79) 263 237 153 252 313 308 Dividend and Interest Income (51) (53) (68) (105) (147) (165) (214) (239) (256) (310) (366) Minority Interest 359 359 359 359 359 359 359 359 359 359 359 Others 3 3 3 3 3 3 3 3 3 3 3
Cash flow from operating activities 14,853 17,574 19,684 21,691 23,001 25,511 27,801 29,861 32,246 34,427 36,828 Investing activities CAPEX (NET CAPEX) (6,633) (9,734) (8,324) (5,444) (5,894) (6,331) (6,798) (7,261) (7,752) (8,230) (8,771) Increase in Intangible Assets (331) (486) (415) (272) (294) (316) (339) (362) (387) (411) (438) Dividend and Interest Income 51 53 68 105 147 165 214 239 256 310 366 Others (5,941) 10,389 ------Cash flow from investing activities (12,853) 223 (8,670) (5,610) (6,041) (6,481) (6,923) (7,384) (7,883) (8,331) (8,842) Financing activities Borrowing/(Repayment) of short-term loans 3,230 (3,302) ------Borrowing/(Repayment) of long-term loans (2,000) (5,000) 3,000 (2,000) 3,700 3,700 3,700 3,700 3,700 3,700 3,700 Borrowing/(Repayment) of debenture - - (5,000) - (3,100) (5,000) (1,500) (2,000) (2,985) - - Borrowing/(Repayment) of convertible debenture ------Equity financing ------Dividend payment (5,831) (9,381) (7,703) (10,906) (14,002) (16,178) (18,850) (22,053) (23,720) (25,109) (26,877) Cash flow from financing activities (4,601) (17,684) (9,703) (12,906) (13,402) (17,478) (16,650) (20,353) (23,004) (21,409) (23,177) Net Change in Cash (2,602) 113 1,311 3,174 3,558 1,551 4,229 2,124 1,359 4,687 4,809 Beginning Cash Balance 5,091 2,489 2,603 3,913 7,088 10,646 12,198 16,426 18,551 19,909 24,596 Ending Cash Balance 2,489 2,603 3,913 7,088 10,646 12,198 16,426 18,551 19,909 24,596 29,405
Appendix Valuation 14: Ratio
Financial Ratios
2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Activity ratio Inventory Turnover (x) 29.9 27.6 27.6 27.6 27.6 27.6 27.6 27.6 Receivables Turnover (x) 11.0 10.5 10.4 10.4 10.4 10.4 10.4 10.4 Payables Turnover (x) 10.3 10.1 9.5 9.5 9.5 9.5 9.5 9.5 Total Asset Turnover (x) 0.7 0.6 0.6 0.7 0.7 0.7 0.8 0.8 Fixed Asset Turnover (x) 1.3 1.1 1.1 1.2 1.2 1.3 1.4 1.5 Days of Inventory On Hand (DOH) 12.2 13.2 13.2 13.2 13.2 13.2 13.2 13.2 Days of Sales Outstanding (DSO) 33.2 34.8 35.1 35.1 35.1 35.1 35.1 35.1 No. of Days of Payables 35.5 36.1 38.5 38.5 38.5 38.5 38.5 38.5 Liquidity ratio Current Ratio (x) 0.7 1.1 0.7 0.9 1.0 1.1 1.3 1.4 Quick Ratio (x) 0.6 0.9 0.6 0.7 0.8 1.0 1.2 1.2 Cash Ratio (x) 0.3 0.4 0.2 0.2 0.3 0.4 0.6 0.6 Cash Conversion Cycle (Days) 10 12 10 10 10 10 10 10 0.7 1.1 0.7 0.9 1.0 1.1 1.3 1.4 Solvency ratio Debt to Asset Ratio 0.31 0.32 0.29 0.18 0.16 0.14 0.14 0.13 Debt to Capital Ratio 0.36 0.37 0.33 0.21 0.19 0.17 0.16 0.15 Debt to Equity Ratio 0.57 0.60 0.50 0.27 0.23 0.20 0.20 0.18 Financial Leverage Ratio (x) 1.84 1.86 1.74 1.49 1.45 1.42 1.41 1.39 Interest Coverage (x) 12.9 7.7 13.5 19.5 28.4 33.3 39.9 40.2 Profitability ratio Gross Profit Margin (GPM) (%) 34.2% 34.1% 35.6% 36.4% 36.5% 36.6% 38.1% 38.1% EBITDA Margin (%) 21.4% 21.3% 22.5% 23.8% 24.3% 24.7% 25.0% 25.3% Operating Profit Margin (%) 14.4% 14.2% 16.0% 17.3% 17.7% 18.1% 20.1% 20.2% EBIT Margin(%) 16.5% 16.2% 18.1% 18.7% 19.1% 19.4% 21.4% 21.4% Pretax Margin (%) 15.2% 14.1% 16.8% 17.7% 18.4% 18.8% 20.8% 20.9% Net Profit Margin (NPM) (%) 11.9% 11.0% 13.3% 14.0% 14.7% 15.0% 16.7% 16.8% Return on Asset (ROA) (%) 7.9% 7.0% 8.4% 9.5% 10.5% 11.2% 12.9% 13.5% Return on Equity (ROE) (%) 14.5% 12.9% 15.2% 15.3% 15.4% 16.0% 18.2% 18.9% Valuation ratio Basic EPS (THB) 0.54 0.66 0.68 1.08 0.89 0.98 1.17 1.27 Dividends Per Share (THB) 0.29 0.36 0.37 0.59 0.48 0.69 0.88 1.02 Dividend Payout Ratio (%) 53.6% 54.6% 54.6% 54.6% 54.6% 70.0% 75.0% 80.0% Book Value Per Share (THB) 3.76 4.25 4.77 5.54 5.96 6.28 6.60 6.87 Cash Flow Per Share (THB) 0.80 0.71 0.95 1.11 1.24 1.36 1.45 1.61
CFA INSTITUTE RESEARCH CHALLENGE 2019
Hospitals Total capitalization Debt / Total capitalization Market Based on mkt Based on Company cap BV Total debt cap BV Based on mkt cap Based on BV Appendix Valuation 15: WACC and Terminal Value BANGKOK DUSIT MED SERVICE 391,724 72,029 36,068 427,792 108,097 8.43% 33.4%
Peers BANGKOK CHAIN HOSPITAL PCL 38,653 6,102 4,651 43,304 10,753 10.7% 43.3% CHULARAT HOSPITAL PCL 20,240 3,662 1,221 21,461 4,884 5.69% 25.0% BUMRUNGRAD HOSPITAL PCL 136,277 17,749 3,677 139,953 21,426 2.63% 17.2% THONBURI HEALTHCARE GROUP PC 29,505 8,886 5,862 35,366 14,747 16.6% 39.7% VIBHAVADI MEDICAL CENTER PCL 26,399 9,463 4,737 31,135 14,199 15.2% 33.4% SIKARIN PUBLIC CO LTD 7,997 3,697 1,201 9,198 4,898 13.1% 24.5% MAHACHAI HOSPITAL PCL 2,896 2,972 2,258 5,154 5,230 43.8% 43.2% RATCHAPHRUEK HOSPITAL PCL 2,675 1,274 204 2,879 1,478 7.08% 13.8% AIKCHOL HOSPITAL PUBLIC CO 2,623 1,527 - 2,623 1,527 0.00% 0.00% WATTANA KARNPAET PUB CO LTD 653 348 70 723 418 9.74% 16.8% IHH HEALTHCARE BHD 370,316 193,189 54,676 424,992 247,865 12.9% 22.1% APOLLO HOSPITALS ENTERPRISE 82,757 18,197 16,543 99,300 34,741 16.7% 47.6% UNIVERSAL HEALTH SERVICES-B 350,941 175,945 130,091 481,032 306,036 27.0% 42.5% MITRA KELUARGA KARYASEHAT TB 52,403 9,228 43 52,446 9,271 0.08% 0.47% RAFFLES MEDICAL GROUP LTD 46,110 18,435 2,262 48,372 20,697 4.68% 10.9%
Mean 12.4% 25.4% Median 10.7% 24.5%
Hospitals Debt / equity Levered Beta Unlevered Beta Tax Rate Based on Based on 3-year weekly Based on mkt Based on Company mkt cap BV Beta cap BV 2018 Country BANGKOK DUSIT MED SERVICE 9.21% 50.1% 0.57 0.53 0.41 20.0% THAILAND
Peers BANGKOK CHAIN HOSPITAL PCL 12.0% 76.2% 0.80 0.73 0.49 20.0% THAILAND CHULARAT HOSPITAL PCL 6.03% 33.4% 0.97 0.92 0.76 20.0% THAILAND BUMRUNGRAD HOSPITAL PCL 2.70% 20.7% 0.85 0.83 0.73 20.0% THAILAND THONBURI HEALTHCARE GROUP PC 19.9% 66.0% 0.68 0.58 0.44 20.0% THAILAND VIBHAVADI MEDICAL CENTER PCL 17.9% 50.1% 0.89 0.78 0.64 20.0% THAILAND SIKARIN PUBLIC CO LTD 15.0% 32.5% 0.57 0.51 0.45 20.0% THAILAND MAHACHAI HOSPITAL PCL 78.0% 76.0% 0.54 0.33 0.33 20.0% THAILAND RATCHAPHRUEK HOSPITAL PCL 7.62% 16.0% 0.60 0.57 0.53 20.0% THAILAND AIKCHOL HOSPITAL PUBLIC CO 0.00% 0.00% 0.48 0.48 0.48 20.0% THAILAND WATTANA KARNPAET PUB CO LTD 10.8% 20.2% 0.56 0.52 0.49 20.0% THAILAND IHH HEALTHCARE BHD 14.8% 28.3% 0.60 0.54 0.50 24.0% MALAYSIA APOLLO HOSPITALS ENTERPRISE 20.0% 90.9% 0.73 0.64 0.45 30.0% INDIA UNIVERSAL HEALTH SERVICES-B 37.1% 73.9% 0.78 0.64 0.54 40.0% UNITED STATES MITRA KELUARGA KARYASEHAT TB 0.08% 0.47% 0.76 0.76 0.76 25.0% INDONESIA RAFFLES MEDICAL GROUP LTD 4.91% 12.3% 0.65 0.62 0.59 17.0% SINGAPORE
Mean 16.5% 39.8% 69.7% 63.0% 54.5% Median 12.0% 32.5% 67.7% 62.4% 49.7%
CFA INSTITUTE RESEARCH CHALLENGE 2019
Convertible bonds Status outstanding (THB mm) Number of Shares (mm) Appendix Valuation 16: Basic Diluted Share Schedule 18-Sep-14 Issued 10,000 15,490.96 18-Sep-17 Early redemption -1560 - 2Q18 Conversion -1547 +73.51 3Q18 Conversion -2129 +101.16 2019 Conversion -4764 +266 Outstanding - 0 (2019) 15,892.00
Appendix Valuation 17 : Relative Valuation Hospitals Relative Comparable Firm
Mkt Cap EV EV/EBITDA P/E Divide nd Name Country THB mm THB mm TTM 2019E 2020E TTM 2019E 2020E P/FCF Yield
BANGKOK DUSIT MED SERVICE Thailand 368,220 400,824 22.8x 22.8x 20.7x 37.2x 36.8x 33.0x 47.2x 1.53%
Peers
BANGKOK CHAIN HOSPITAL PCL Thailand 40,149 44,963 20.0x 19.5x 17.4x 36.5x 36.3x 31.7x 94.4x 1.43%
CHULARAT HOSPITAL PCL Thailand 20,020 20,895 19.4x 18.9x 17.2x 30.9x 28.9x 27.2x 105.3x 1.76%
BUMRUNGRAD HOSPITAL PCL Thailand 132,633 127,576 20.5x 20.5x 19.2x 32.3x 31.7x 30.7x 37.1x 1.54%
RATCHAPHRUEK HOSPITAL PCL Thailand 2,697 2,794 27.6x 27.1x 19.0x 41.2x 49.4x 49.4x n.a. 2.23%
IHH HEALTHCARE BHD Malaysia 388,952 422,377 23.0x 21.0x 18.0x 354.0x 67.1x 47.1x 65.0x 0.53%
APOLLO HOSPITALS ENTERPRISE India 82,945 97,728 26.8x 21.2x 17.8x 156.7x 63.1x 42.6x n.a. 0.38%
UNIVERSAL HEALTH SERVICES-B United States 371,361 501,390 8.84x 8.90x 8.53x 13.5x 13.3x 12.6x 19.0x 0.32%
MITRA KELUARGA KARYASEHAT TB Indonesia 56,209 54,243 26.1x 26.0x 23.9x 38.9x 38.4x 36.0x 486.8x n.a.
RAFFLES MEDICAL GROUP LTD Singapore 48,741 48,953 21.5x 21.3x 21.1x 28.8x 30.3x 35.9x 28.8x 1.96%
THONBURI HEALTHCARE GROUP PC Thailand 29,281 34,705 n.a. 33.1x 24.2x 45.5x 60.1x 42.5x n.a. 1.22%
VIBHAVADI MEDICAL CENTER PCL Thailand 26,927 33,686 20.7x n.a. n.a. 32.0x n.a. n.a. 29.7x 1.76%
SIKARIN PUBLIC CO LTD Thailand 7,957 9,104 13.6x n.a. n.a. 33.8x n.a. n.a. 41.1x 1.25%
MAHACHAI HOSPITAL PCL Thailand 2,896 5,018 13.1x n.a. n.a. 16.9x n.a. n.a. n.a. 2.27%
AIKCHOL HOSPITAL PUBLIC CO Thailand 2,474 1,896 7.75x n.a. n.a. 15.9x n.a. n.a. 16.0x 2.67%
WATTANA KARNPAET PUB CO LTD Thailand 653 698 11.1x n.a. n.a. 22.3x n.a. n.a. n.a. 1.07%
Mean 18.6x 21.8x 18.6x 59.9x 41.8x 35.6x
Median 20.2x 21.1x 18.5x 32.3x 37.4x 36.0x Appendix Valuation 18 : P/E Band
P/E Band
50.0 +2SD
45.0 P/E Ratio Valuation Model for 2019E +1SD BDMS EPS 2020E 0.89 40.0 Peer P/E Average 2020E 35.6 Mean Intrinsic Value at the end of 2019E 31.7 35.0
30.0 -1SD
25.0 -2SD 4-Jan-14 4-Jan-15 4-Jan-16 4-Jan-17 4-Jan-18 4-Jan-19 CFA INSTITUTE RESEARCH CHALLENGE 2019
EV/EBITDA Band 30.00 +2SD Appendix Valuation 19 : EV/EVITDA Band 28.00 +1SD 26.00
24.00 Mean
22.00 -1SD
20.00 -2SD 18.00 16.00 4-Jan-14 4-Jan-15 4-Jan-16 4-Jan-17 4-Jan-18 4-Jan-19
Appendix Business 20 : SWOT
Appendix Industry: Porter’s 5 force
Appendix Business 21 : Porter’s Five Forces
CFA INSTITUTE RESEARCH CHALLENGE 2019
Appendix 22: Corporate Governance
Based on the Institutional Shareholder Services (ISS) Framework
CFA INSTITUTE RESEARCH CHALLENGE 2019
% Price charged % change in number of patients change Appendix 23 : Sensitivity 28.2 -10.00% -5.00% 0.00% 5.00% 10.00% -5.0% 20.4 22.9 25.5 28.0 30.5 -2.5% 21.6 24.2 26.8 29.4 32.0 0.0% 22.8 25.5 28.2 30.8 33.5 2.5% 24.0 26.8 29.5 32.2 34.9 5.0% 25.2 28.0 30.8 33.6 36.4
Terminal Growth WACC 28.2 8.3% 7.8% 7.3% 6.8% 6.3% 2.0% 21.9 24.1 26.5 29.9 33.8 2.2% 22.4 24.8 27.3 30.9 35.2 2.4% 23.0 25.5 28.2 32.1 36.6 2.6% 23.6 26.2 29.1 33.3 38.3 3.0% 24.9 27.9 31.2 36.1 42.1
CFA INSTITUTE RESEARCH CHALLENGE 2019 Source
(1) Bangkok Dusit Medical Services Public Company Limited (2018, 10 15). Investor Relations. Retrieved 10 20, 2018, from http://investor.bangkokhospital.com/en/downloads/presentations- and-webcasts (2) Bangkok Dusit Medical Services Public Company Limited (2018, 10 15). BDMS Reports Financial Result from 2012-2018. (3) World Health Organization (WHO) (2018). Health financing profile Thailand (2017) (4) National Statistic Office of Thailand (NSO) (2018). The Private Hospital Survey (2012) (2017). (5) National Statistic Office of Thailand (NSO) (2018). The 2017 Household Socio-Economic Survey Whole Kingdom. (6) National Statistic Office of Thailand (NSO) (2018). Sanitation and Services Survey (2017). (7) Strategy and Planning Division. Ministry of Public Health (MOPH) (2018). Public Health Reports (2017). (8) Asia Pacific Observatory on Health Systems and Policies (2018). The Kingdom of Thailand Health System Review (2015). (9) Bumrungrad Hospital Public Company Limited (2018). Investor Relations. Retrieved 10 20, 2018, from http://investor.bumrungrad.com (10) Frost & Sullivan Research (2018). Global Healthcare Industry Outlook (2018). (11) Frost & Sullivan Research (2018). South East Asia Healthcare Market Trends and Opportunities (2016) (12) Frost & Sullivan Research (2018). Profiling of the Top 50 Healthcare Services Providers in APAC (2017). (13) Frost & Sullivan Research (2018). Asia-Pacific Medical Tourism Outlook (2017). (14) Bangkok Chain Hosptial Public Company Limited (2018). Investor Relations. Retrieved 10 20, 2018, from http://www.bangkokchainhospital.com/en/investor/financial/presentation (15) National Economic and Social Development Board (NESDB) (2018). Population Projections for Thailand (2010-2040) (2013). (16) Euromonitor (2018). Global Medical Tourism (2016). (17) Joint Commission International (2018). Retrived from https://www.jointcommissioninternational.org. (18) United Nation (2018). World Population Ageing Report (2015).
CFA INSTITUTE RESEARCH CHALLENGE 2019