Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc   

 

We keep our BUY call on BDMS, backed by its outstanding earnings outlook and low impact from a slip in UAE patients. In the longer term, its centers of excellence will draw more international patients, a high-yield segment, which means better profitability. The conversion of its convertible bond is not a concern since this brings dilution of only 3% and our TP at Bt27/share is already based on the diluted shares.  

 

Positive tone: revenue growing EBITDA margin widening in 2Q16. In April, revenue from hospital operations rose 8-9% YoY, continuing from the 10% YoY growth in 1Q16. EBITDA margin dropped YoY to 23.6% in 1Q16 (from 24.7% in 1Q15) from the opening of a new hospital, Paolo Rangsit, in January and costs related to expansion of Phuket International Hospital in March. BDMS expects EBITDA margin to return to an uptrend with YoY growth in 2Q16: 1) Paolo Rungsit Hospital will turn from a drag to a driver since its operations are very strong and EBITDA is already close to being positive; 2) Positive EBITDA at three newly-opened hospitals (Bangkok Phitsanulok, Bangkok Chiangmai and Samitivej Chonburi) and 3) better operations at hospitals in southern Thailand as Australian patients - a high-yield segment - return.  

 

Insignificant impact from declining UAE patients. BDMS and BH both say patients from the UAE declined in 1Q16 and expect this to continue since the UAE is encouraging its citizens to get medical care at home. We believe this will hit BH more strongly than BDMS since revenue from UAE accounts for 8% of BH’s revenue versus only 2% for BDMS. 

 

Higher quality of care means higher profitability. With an eye to the longer term after it has blanketed the country with its network of hospitals, BDMS plans to place greater emphasis on quality than on expansion, beginning with nine key hospitals in regional hubs, making them “centers of excellence” to serve rising demand for more advanced healthcare in the region, particularly from China and ASEAN countries. BDMS targets revenue contribution from international patients to rise to 40-50% in the future from 31% currently. With a higher contribution from international patients and offering more advanced medical care, we see room for BDMS to improve EBITDA margin. BH can serve as a benchmark for this: in 2015, revenue from international patients accounted for 65% of BH’s revenue and its EBITDA margin was high at 29%.  

 

Maintain BUY with mid-2017 TP at Bt27/share. BDMS’ current market price is higher than the conversion price of its convertible bond at Bt21.045/share. However, we do not feel this will pressure share price much since conversion would bring dilution of only 3%; additionally, our TP at Bt27/share is based on diluted shares. We maintain our BUY rating on BDMS.