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 Sector: Health Care Services Valuation Date: January 18th 2019 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.