Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BGH)

Hong Kong NDR: Positive on strong prospects. We hosted an NDR for BGH on 3-4
September to meet investors in Hong Kong. Investor interest focused on the strong
operations in 2H12 and future expansion, mainly upcountry. Management’s
presentation confirmed our view on BGH’s healthy prospects. We see BGH as well
positioned, with its broad network placing it to capture demand throughout Thailand
and also to gain from the birth of the AEC in 2015. We maintain our BUY call on BGH
with mid-2013 TP at Bt115.

Highlights from NDR:
Strong momentum continues. Management guided that operations continue
strong in 3Q12, with revenues up ~15-16% in July-August vs. 16% organic growth in
1H12. The third quarter is normally the high period for BGH, backed by higher
patient volume, both local and international, driven by the flu season during
Thailand’s rainy season plus the onset of the tourism season.

Improving profitability. Investors were concerned about the decline in EBITDA
margin (23.4% in 2Q12 from 25.9% in 1Q12). Management explained that this came
from higher staff expenses as it raised remuneration for specialty nurses to keep
them, particularly once AEC comes into being, since pay scale in other countries
such as Singapore is higher (~15%). Lower cost pressure and margin improvement
should be seen going forward since the gap between it and Singapore has
narrowed after BGH raised the compensation for its nurses.

Benefits from a large hospital network. In the longer-term, BGH targets
organic revenue growth of 12% p.a. from patient volume growth and increasing
revenue per patient – offshoots of its large hospital network. BGH sees room to
increase patient volume from patient referrals among hospitals in the group and
revenue per patient will increase from specialized physician recruitment and the
creation of a cooperative specialty care network within the group, for example,
heart, cancer and spine centers.

Future expansion will focus on upcountry. We felt investors were positive
toward BGH’s expansion plans that focus primarily outside Bangkok, since health
demand is always present and expanding in-country carries less risk than abroad.
Management guided that future expansion will focus on the north and northeast
as BGH has little exposure there – and these areas border Myanmar, Laos,
Cambodia and Vietnam, all potential markets after AEC comes into being. If it does
venture outside Thailand, it will focus on Myanmar, Laos and Vietnam, and
expansion will be conservative, i.e. management contracts, small clinics and JV. To
date it has yet to solidify overseas expansion.

Medical staff shortage not great concern. Investors were concerned about a
shortage of medical staff, specifically doctors and nurses. BGH agreed that this is a
concern, but not serious since BGH strives to offer competitive compensation for
its medical staff. BGH’s large hospital network that provides the entire gamut of
medical care from primary to tertiary also gives doctors a greater opportunity to
meet a variety of cases and broaden their expertise in their chosen fields.