Healthcare

Healthcare

 

The Thai healthcare sector index surged 30% in 2015 vs. a 14% dip for the SET Index and we expect the rally to continue: this sector is a safe haven for investors, with solid earnings amidst a cautious economic view for 2016. Our top pick is BDMS, backed by strong earnings growth and growth opportunities in the AEC. 

 

4Q15F preview. Of its sector, we expect BH to report the strongest earnings growth both YoY and QoQ at Bt873mn, up 30% YoY and 5% QoQ, backed by improvement from its low base last year and an exceptionally weak 3Q15 on concerns of MERS and the bomb at Erawan Shrine. BDMS’ core earnings are expected to be flat YoY, with growth at existing hospitals offset by losses from newly-opened hospitals, with an 11% decline QoQ on seasonality. We expect BCH’s core earnings to drop YoY due to losses at new hospitals (open in mid-2015) with a seasonal fall QoQ.  

 

Accelerating earnings growth in 2016. The healthcare sector is poised to deliver 16% YoY core earnings growth this year, accelerating from 10% YoY in 2015. BCH: We expect it to report the strongest core earnings growth at 25% YoY in 2016 after three years of contractions, largely from a steady easing in losses at World Medical Center (WMC), its high-end hospital. BDMS: We expect earnings to jump 17% YoY in 2016 (from the limp 2% YoY in 2015) backed by growing revenue and wider EBITDA margin supported by strong operations at its 28 existing hospitals, operational ramp-up at 14 newly-opened hospitals (less than two years in operation) and less drag from new investment - it plans to open only one new hospital in 2016. BH: After the outstanding 31% YoY growth in 2015 due to improving operations (and off the low base from the political tension), we expect core earnings growth to return to normal at 13% YoY. 

 

AEC is a growth opportunity for BDMS. BDMS has solid growth opportunities from the startup of the ASEAN Economic Community (AEC) with rising demand for more advanced healthcare in the region, particularly from CLMV countries. It already operates two hospitals in Cambodia and has hospitals in Thailand near borders: Bangkok Hospital Udon (in the northeast, adjoining Laos) and Bangkok Hospital Chiang Mai (in the north, near Myanmar). In 9M15, revenue from patients from Myanmar was only 1.9% of BDMS’ total revenue vs. 9% for BH – indicating ample room to grow. 

 

BDMS and BH: TPs increase as we roll over to end-2016. We roll over TPs for BDMS and BH to end-2016 from mid-2016. This raises BDMS’ TP to Bt25/share (from Bt23/share) and BH’s TP to Bt190/share (from Bt175/share). We already moved BCH’s TP to end-2016 (Bt10/share).  

 

Maintain positive view for the sector. BDMS is top pick. The Thai healthcare sector index surged 30% in 2015 (+50% for BH, +30% for BDMS and +15% for BCH) vs. a 14% dip for the SET Index. We expect this resilient sector to continue to outperform, however, as it provides a safe haven with solid growth – healthcare is a necessity - despite the cautious view towards the economy in 2016. BDMS is our top pick. Its valuation is not cheap, trading at 2.3x 2016PE-to-earnings growth, higher than the 2.1x regional average, but we see the premium valuation as deserved given its healthy earnings and bright prospects over the long haul, with a large and widespread network that will serve healthcare demand in Thailand and in its neighbors.