Bangkok Chain Hospital

Bangkok Chain Hospital Plc (BCH)

Of all stocks we cover in the healthcare sector, BCH has plunged the
sharpest – down 43% from peak - and has underperformed the market
by 20% over the past six months, pressured by downgrades because of
large losses from newly opened World Medical Center. With WMC
improving, we believe share price and earnings are at bottom. Its
laggard performance implies that the market has not yet priced in the
strong recovery expected in 2014 with growth of 30% YoY. We BUY with
a mid-2014 TP of Bt9.0/share

Shift into higher segment has caused huge loss. BCH’s earnings have suffered
from losses at The World Medical Center (WMC), just opened in March this year. WMC
is on Chaeng Wattana Rd, ideally situated to bring in expatriates and higher end
patients. This is BCH’s first step into higher segment from its traditional mid- to lowend
patients and those under the government-managed care schemes including Social
Security (SC) and Universal Coverage (UC). Its lack of experience in the high end has led
to a slow operational ramp-up for WMC, which contributed a huge loss estimated at
~Bt200mn, equivalent to 44% of BCH’s 9M13 net profit.
WMC showing signs of improvement. While WMC’s operations were in the red in
9M13, on a quarterly basis, things are looking better. Average visits increased to
~120/day in 3Q13 from ~50/day in 2Q13, responding to a greater promotional effort
that included health packages. BCH is obtaining more corporate insurance contracts to
feed in more patient volume and expects this to produce fruit in 2014. It expects WMC
to be in the black in 2015, more optimistic than our 2018.
Near-term expansion will focus on its expertise. BCH’s future expansion will focus
on the mid- to low-income earners, in which its expertise is most developed. It will
introduce a new brand, Karoonvej Hospital, targeting SC patients. The investment cost
for Karoonvej will be low at Bt1.6mn/bed vs. Bt7.0mn at WMC, since the environment
does not need to be luxurious nor does it need the more advanced medical equipment.
BCH plans to have four Karoonvej branded hospitals starting in 2015. It also plans to
build a second WMC in Pattaya once the first WMC is profitable. We note, however,
there will be some concern when it does start this second WMC project.

Passed bottom, looking at strength in 2014. BCH’s share price has fallen the most from peak at 43% and underperformed the market by 20% over the past six months in
response to the disappointing 1H13, which was followed by earnings downgrades by
the street. We believe the round of downgrades is ending, as BCH’s earnings passed
the bottom in 2Q13 and WMC is showing improvement. In our view, the laggard
performance implies that the market has not yet priced in BCH’s strong earnings
recovery in 2014 at 30% YoY. We BUY on BCH with a mid-2014 TP at Bt9.0/share:
Bt8.0/share for the six Kasemraj hospitals and Bt1.0/share for WMC.