CFA Institute Research Challenge Hosted by CFA Society of Thailand Chulalongkorn University CFA Institute Research Challenge 9 Dec 2013 Team 01 Student Research [Health Care Services Sector] This report is published for educational purposes only by students competing in the CFAInstitute Research Challenge. BUMRUNGRAD HOSPITAL PCL Date: December 9, 2014 Ticker: SET:BH Recommendation: BUY Exchange rate USD/THB: 32.14 Price: THB 90.0 (USD 2.8) Price Target: THB 105.7 (USD 3.3) Forecast Summary 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E Total revenue (THBmm) 10,020.9 11,388.9 14,135.0 15,040.2 17,678.9 20,562.6 23,937.0 27,691.5 31,222.7 EBIT (THBmm) 1,834.0 2,283.6 3,598.0 3,593.6 4,203.2 4,877.8 5,485.0 5,236.4 6,204.8 EBITDA (THBmm) 1,834.0 2,283.6 3,598.0 4,408.1 5,168.5 5,971.7 6,791.7 6,713.5 7,832.3 Net Income 1,258.5 1,588.0 2,666.7 2,686.0 3,173.7 3,713.4 4,199.1 4,049.8 4,824.6 Earnings per Share (THB) 1.73 2.18 3.66 3.10 3.66 4.28 4.84 4.67 5.56 Dividend per Share (THB) 0.85 0.90 1.10 1.55 1.83 2.14 2.42 2.33 2.78 Return on Assets (%) 14.2% 14.0% 18.2% 16.2% 17.3% 18.1% 18.9% 16.7% 18.2% Return on Equity (%) 21.8% 24.8% 35.3% 29.7% 30.2% 30.3% 29.5% 24.9% 26.1% Source: Company data, team estimates Highlight Market profile 52-week price range (THB) 70.5 – 95.0 Upside potential; Valuation indicates buying opportunity: We are optimistic about future earnings 30-day average daily performance of BH as it continues to benefit from an increase in demand and growth in medical price. 45.5 Moreover, the decent long-term growth is anticipated to stem from ongoing capacity expansion, which will turnover (THBmm) allow the company to accommodate the growing number of patients, especially international patients. With Market Capitalization 65,570.5 the aforementioned factors, we believe this is a good opportunity to BUY with the target price of THB 105.7 (THBmm) (USD 3.3) representing 19.2% upside potential. Market Capitalization (USD) 2,040.2 Healthy financial position: We believe BH will be able to generate sufficient free cash flow of over THB Shares outstanding 3.0 mm to cover its capital expenditure and future dividend payment. BH will achieve strong EPS growth 728.6 (million shares) over the forecasted period of 16.1% CAGR with ROA equal to 22.8% in 2022. Free float (%) 31.1% Defensive stock with sustainable business model: BH is less vulnerable to economic volatility because Institutional holding (%) 41.0% people value healthcare as their primary concern. Positioning as a premium multi-specialty hospital, BH is able to charge premium and enjoy higher EBITDA margin of 25.6% comparing to peers at 21.1% from BV per share (THB) 12.3 international patients who seeks quality treatment with competitive price and wealthy domestic patients who 2013E ROE 29.70% are less price sensitive. In 2012, the ROE was also among the highest standing at 35.3% comparing to local peer average of 17.2%. Current P/BV 7.3x Current P/E 28.5x Main risk issues include upside and downside risks: The global and Thai economy, intense competition in Dividend yield 2.1% the premium healthcare sector and shortage of professional staffs are key downside risk. Changes in complexity of disease and epidemic and changes in government regulation may also post additional risk. Major Shareholders % hold Price index Bangkok Dusit Medical Service 23.90% 220 14.70% Bangkok Life Assurance PCL BH +99.5% Sinnsuptawee Asset 8.70% 190 SET50 Management 160 +71.6% UOB Kay Hian (Hong Kong) 8.40% BNP Paribas Securities Services 3.70% 130 SET Health Luxembourg +28.7% Wattanasophonpanit Co., Ltd. 3.50% 100 Thai NVDR Co., Ltd. 2.80% 70 Sophonpanit Family 2.40% Dec 2011 Jun 2012 Dec 2012 Jun 2013 Dec 2013 Source: Bloomberg, accessed December 9, 2013 2 CFA Institute Research Challenge 9 Dec 2013 Business Description Established in 1980, BumrungradHospital Public Company Limited (“BH”) is currently Southeast Asia’s largest single campus private hospital by revenue. Positioning itself as a premium global healthcare player, BH targets both domestic patients who are in middle to upper class and international patients through medical tourism, corporate contracts, insurance companies and referral offices. The Company was the first Asian hospital accredited by Joint Commission International (JCI), an organization that reviews and accredits a hospital for patient safety and quality improvement. In 2012, the company has a market share of private hospital sector of 15% by revenue (figure 1). In addition to hospital operations, BH has 4 wholly-owned subsidiaries as follows: • Vitallife provides preventive care services targeted at health-conscious individuals • Asia Global Health (AGH) invests in regional healthcare-related businesses • Asia Global Research conducts clinical research in Southeast Asia • Ruenmongkol owns land for future business expansions The Company also has two associated companies, which are Bumrungrad International (focusing on hospital ownership and management) and CDE Trading (developing software for healthcare business). In 2012, the aforementioned subsidiaries and affiliated companies contributed roughly 10.0% of total revenue. BH’s three main strengths: World-class medical service - Since the key to attract customers is to have the best doctors, the Company acquires only top medical professions to provide the best medical service. Additionally, to emphasize more on the service quality, BH also focuses on medical technology investment. International presence and Brand Equity – Bumrungrad has established strong brand equity on international level which has become one of its main competitive advantages as reflected in its 9th place of the world best quality hospital. Figure 1: Market share by revenue Strategic location – BH is located at the heart of Bangkok, which makes it easily accessible for both domestic and international patients. One campus: Unlike other private hospitals in Thailand which grow through consolidation, BH operation concentrates on only one campus on Sukhumvit road, which allows the Company to better manage the hospital and control quality. However, due to current high utilization rate of over 70%, which is higher than that of the industry average of 60%, the Company’s growth potential is constrained by the one-campus capacity. Yet, the Company plans to overcome such constraint by building a second campus on Petchburi road. Medical tourism – one of the key customer groups: Apart from servicing domestic patients, BH is the first and one of the biggest two private hospitals in Thailand to service medical tourists treating more than 500,000 international patients annually (figure 2). The top revenue contributions by non-Thai nationalities remain to be SET, team analysis from the United Arab Emirates, Myanmar, Oman, and USA. Facilities and services offered to medical tourists Source: Company include International Medical Coordination Center that deals specifically with medical traveller’s needs, 109 interpreters in a range of languages, an airport transfer desk at arrival areas in Suvarnabhumi International Airport Parameters Value and two residential facilities with serviced apartments for patients and family members. Four strategic pillars:BH will be able to achieve its strategic goal of increasing patient capacity and enhancing Risk-free rate 4.1% operational efficiency by focusing on their core strategies as follows: Figure 2: Revenue breakdowns by Focusing on high intensity treatment –To maximize earnings, BH focuses on providing high- patient nationalities intensity/specialized treatments. The service yields higher margins than typical primary and secondary services Market risk premium 8.0% that are widely provided in other hospitals. Continuous service quality improvement – To support aforementioned strategy, talent acquisition and Levered beta 0.88 retention as well as technologies are essential. Attractive remunerations that are higher than comparable hospitals are the key to attract and retain talents. BH’s effort and investment in cutting-edge technologies earned it the title “the World’s Smartest Hospital”. Adjusted beta 0.92 Building international network - To enhance international presence, the Company has been creating extensive network internationally by setting up referral office in 15 countries to support transfers of potential customers. It plans to further expand the network in targeted countries within 8 hours flight reach. Cost of equity (ke) 11.4% Capacity expansion – BH conservatively set a goal to increase number of patients by 40.0% by 2020. The Source: Company data company has acquired lands in Bangkok to support this expansion. In addition, an acquisition of international hospital to enhance its international presence is under consideration. Shareholding structure: The Company’s shareholding structure remains relatively stable. The current major shareholders include Bangkok Dusit Medical Service Public Company Limited (“BGH”) holding 23.9% of the Company’s stocks, following by Bangkok Insurance PCL holding 14.7%. However, it is important to note that the company currently has convertible bonds worth THB 550.0 million held by Bangkok Bank that are deeply in the money causing up to 19.0% shares dilution after conversion. Industry Overview and Competitive Positioning Healthcare service industry comprises of public sector andprivate sector sharing a market in a proportion of 81% and 19% respectively. The level of medical care can be divided mainly into primary, secondary and tertiary care depending on the complexity of the disease. Healthcare service industry in Thailand is very fragmented and bounded by several barriers to entry: capital intensity, specialization, and government regulations leading to 3 CFA Institute Research Challenge 9 Dec 2013 excess profit for players in the market.