Bangkok Dusit Med Service

Bangkok Dusit Med Service Plc (BGH)
Although the new hospitals BGH plans to add to its network will put pressure on its earnings growth over the next few years, we believe those investments are necessary for BGH to cement its leadership.
Thus, we are not too concerned about any short-term hiccups. As we take into account start-up costs for these new hospitals, we revise down our earnings forecasts by 7-10% for CY13-15. As such, our target price is cut from THB192 (based on 34x CY14 P/E, an 8% discount to its 2006 peak) to THB161, now based on 31x CY14, which is 2 s.d. above its 5-year historical average. BGH is still our top pick in the sector. Maintain Outperform. We believe decent earnings outlook will catalyse its share prices.
50 hospitals by 2014
BGH plans to add 20 hospitals to bring its network to 50 by 2014. We believe some will be M&A while the remaining will be greenfield. And since most of its new hospitals are small with about 150 beds, the start-up costs may not be as scary as they sound. These ‘spoke’ hospitals will help refer more serious cases to its main ‘hub’ hospitals in Bangkok, which should boost their utilisation. Therefore, we believe the expansion is sensible.  
New hospitals need three years to break even
We believe that it will take about three years for a greenfield hospital to break even at the bottom line level. With a strong brand name and solid network, BGH’s new hospitals could surprise on the upside.
And given its robust network, BGH can finance its expansion and shoulder these burdens without difficulty. As such, we still expect BGH to deliver a respectable 15% EPS CAGR over the next three years, albeit down from 19% previously.  
Improving patient traffic
Investors are concerned about whether the economic slowdown will affect hospital traffic. BGH saw its topline rise 11% in 2Q13, which was reasonable. The management mentioned that July revenues grew more slowly at 9% yoy before bouncing back to rise 13-14% in August, which is a good sign as 3Q is normally a high season for Thai hospitals because it is the rainy season.