Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BGH)
-3Q13 normalized profit to drop 5%yoy from rising expense on new hospital openings
BGH’s 3Q13 service revenue is projected to grow 11%qoq and 10.5%yoy due to
seasonal effect; outpatient volume would increase 4%yoy (+3%yoy for Thai
outpatients, +9%yoy for international outpatients), and inpatient volume would
rise 2%yoy (+1%yoy for Thai inpatients, +8%yoy for international outpatients).
Moreover, 3Q13 average income per treatment (outpatient) is predicted to grow
by 6%yoy, and average income per day (inpatient) is predicted to rise by
8%yoy. However, cost of service and SG&A are projected to increase at much
higher rate than income: 12.4%yoy and 22.7%yoy, respectively, due to
preparation on medical teams and personnel for the 20 new hospitals that would
be opened in few years, additional expense on renovation of Samitivej
Sukhumvit Hospital and Samitivej Srinakarin Hospital in order to meet JCI
standard, of which the reaccreditation is needed every four years, and expense
on renovation of two hospitals in order to request JCI accreditation. In 3Q12,
B286m additional share of profit from was recognized, mainly from the affiliated
company (BH recognized extraordinary income from investment selling in
affiliated BCH). Thus, BGH's 3Q13 net profit is projected to contract by
18.6%yoy to B1.637bn; normalized income expected to fall 5.1%yoy.
- 20 new hospitals planned, to hinder profitability
Currently, BGH has 31 affiliated hospitals (including Ratanavej Hospital
Phitsanulok acquired in 2012). BGH plans to open 20 new hospitals, which would
be opened from 2014 on. Clear opening plans of nine hospitals have been made;
six hospitals will be opened in 2014, and three will be opened in 2014.
Breakeven time of a new hospital is at least two years. First-year EBITDA margin
is expected to be negative, second-year EBITDA margin might be slight negative
or breakeven, and third-year EBITDA margin is expected to be positive. Though
there is no new hospital opened in 2013, there has been impact from increasing
expense on medical teams and personnel preparation, which we have included in
earnings forecast. Thus, FY2013 normalized income is projected to grow only
8.8% from FY2012, and rise only 9.5% in FY2014. However, the expense might
be higher than expected, and decelerating purchasing power might press BGH's
revenue below the target and the forecast.
- To prosper in long run. Lower profitability in first two years. “HOLD”
The aggressive branch expansion to prepare for AEC liberalization in 2015 is a
long-term benefit. However, as a breakeven time of a new hospital is two or
three years, the expansion will suppress the company’s profitability in the next
few years. Moreover, the earnings results may not reach the target. Although
the fair value implies 17.6% upside from the current share price, we reiterate
“HOLD”.