Healthcare sector

Healthcare sector

BGH and BCH at record core earnings in 3Q12. BGH and BCH reported their highest
ever core earnings in 3Q12, upheld by raising patient volume - both domestic and
international - from Thailand’s flu season and the onset of the tourism season. BH’s
core earnings growth was less than peers as capacity limitations caused it to miss out
on the strong demand, particularly in IPD, as bed utilization hit a tight level of 80%. In
4Q12, we expect earnings of all three hospitals to continue to grow YoY with strong
operations and off last year’s flood-brought low base; QoQ will slip on seasonality.
BGH to be the best in 1Q13. We estimate healthy sectoral earnings growth of 47% in
2012 and 17% in 2013. BGH is a major growth contributor, delivering earnings growth
of 53% in 2012 and 21% in 2013. In 1Q13, we estimate BGH to deliver the strongest
earnings – possibly another peak - while peers’ earnings will be relatively weaker than
BGH. BH has no equity income from BCH after the sale of its holding and is in addition
facing capacity limitations; BCH’s earnings will be pulled down by the January 2013
opening of its new hospital, The World Medical Center (WMC).
Available capacity offers room for earnings growth. Given strong demand, we
see the player holding the trump card as the one with available capacity. BH is limited
by its 78% average bed utilization rate in 9M12 vs. 68% for BGH. In 2013, BGH will add
25% to its bed capacity in Bangkok Medical Center, its flagship in Soi Soonvijai which
offers tertiary service, bringing beds to 600 in 2013 from 480 in 2012. More available
capacity allows BGH to get in on the strong demand. For BH, however, capacity
limitations will remain an obstacle for earnings growth in 2013 since its plan to add
100 beds to its current 484 beds, or a 21% increase, will not take place until 2014 as it
first needs to move some departments out from the hospital.
Less opportunity for acquisition, looking at greenfield and expansion. Talks
with hospital management revealed that they are now looking at expansion along the
line of greenfield or expansion of existing facilities, since opportunities for mergers
and/or acquisitions have become scarce upon the sector’s premium valuation. We feel
most positive toward BGH’s expansion plan as its new facilities will break into upper
ASEAN countries (Myanmar, Laos, Cambodia and Vietnam), markets that have ample
room to grow, particularly after AEC starts. BGH is building hospitals near the border:
Bangkok Hospital Udon (in the northeast, adjoining Laos) and Bangkok Hospital Chiang
Mai (in the north, adjoining Myanmar). BH’s expansion mainly focuses on Bangkok. BCH
is shifting into a higher segment through its new hospital, “World Medical Center
(WMC)” on Chang Wattana that will open in January 2013.
Strongest organic growth wins: BGH is top. The sector has underperformed the
market by 3% QTD and, of our coverage, BH’s price performance is the worst at -9%
relative to SET vs. +2% for BGH and -6% for BCH. We think the market is weighting
factors such as inorganic growth through new acquisitions more heavily – but we do
not see this as happening. In 2013, we expect the market to switch and turn its
attention instead to organic growth. This will put BGH in the spotlight, with the
strongest earnings growth plus attractive valuation, trading at +0.5SD historical PE,
lower than peers’ high level, implying room for further re-rating.