Chularat Hospital

Chularat Hospital Plc (CHG) 

 

Investment thesis

We initiate coverage on CHG with a BUY rating, at a YE16 DCF-derived target price of Bt2.50/share based on WACC of 9.9% and a terminal growth rate of 2.0%. Not only is it in a favorable sector (it is earnings resilient and delivers high-quality healthcare), we prefer CHG for its superior earnings growth for FY16-18. New capacity will unlock CHG’s volume growth from 2016 onwards. Its core earnings growth for 2016 will strongly outperform the SET and hospitals under our coverage (with 25% profit growth versus the SET’s 11%, 14% for BDMS and 17% for BH). ROE is rising from 20% for FY15 to 23% for FY16. It deserves a long-term re-rated valuation to reflect its earnings growth outperformance, and trades at FY16 PER of 30.1x, below 33.1x of BDMS, 40.3x of BH and 30.7x of the global healthcare mean.

New capacity will drive superior profit growth profile

CHG will step into a new era for its earnings growth profile in FY16 and onwards, spurred by the full-year benefit of its capacity expansion, which will be mostly completed by YE15. We modeled profit CAGR for F16-18 of 24% followed 17% for FY13-15. Regarding its total capacity expansion scheme of 42% for IPD beds and 46% for OPD diagnostic rooms, we have a pro-rata ranking for capacity additions: IPD to increase by 13% for FY15 and 18% for FY16, OPD by 19% for FY15 and 23% for FY16.

A 6% upside (Bt0.15/share) of DCF-value accretion from 304 Inter 

Our model and target price have yet to price in the new hospital, CHG 304 International (a new 150-IPD-bed and 20-OPD-room facility). If CHG 304 reaches a commercial run in 2018, revenue upside is 3% to our forecast for FY18 and 4% for FY19. The DCF-value creation is Bt0.15/share or a 6% upside to our YE16 target price.  

Captive demand is secured from social welfare system

Its business model is well balanced between 50% in A-class revenue and 50% from the social welfare system (Social Security Scheme [SSO] and National Healthcare Security System, [NHSO]). CHG has secured registered SSO members (343,700 people at the end of June and potential growth up to 450K of capacity) and the referral cases form the NHSO. Historical evidence indicates that the company saw strong profit growth during periods of political turmoil. 

Debt-free state to prop higher dividend payout and/or acquisitions 

With net cash, there are potential upsides for the dividend payout rate and new acquisition opportunities. Despite its at least 50% payout rate policy, the actual proved higher at 72% for FY13 and 69% for FY14—with three payments per year. Assuming a 70% payout rate in our model, DPS forecast is Bt0.045 for FY16 (a 2.3% yield). If the payout rate were 75%, DPS would rise to Bt0.048 for FY16 (a 2.5% yield).  Besides, CHG is looking for new acquisitions to aid its earnings growth in the long term.