Bangkok Chain Hospital

Bangkok Chain Hospital Plc (BCH)

Although BCH’s share price has surged by 20% YTD, its 2016 EV/EBITDA is still a 19% discount to a regional peer average. This suggests the market has not fully factored in the earnings turnaround with projected earnings growth of 26% in 2016, largely from lower losses at the World Medical Center (WMC). We roll valuation over to mid-2017, which raises TP to Bt14/share (from end-2016 TP of Bt12/share). BCH is our top pick in the healthcare service sector. 

 

Positive tone: WMC operations strengthening. At yesterday’s analyst meeting, the tone overall was positive especially with regards to operational improvement at WMC. Management reports revenue at WMC of Bt101mn in 1Q16, jumping 62% YoY, with just a small loss (we estimate Bt40mn). Key growth was a rising number of patients from Oman after WMC entered into a contract with the Oman government to refer patients from Oman to WMC in late 2015. WMC is working to capture more international patients, a high-yield segment, and management views WMC’s strength is its competitive price and high quality of care. In May, WMC coordinated with the Qatar government to refer patients from Qatar to WMC and set up a representative office on Sukhumvit Road (Soi Nana) to attract international patients. WMC plans to collaborate with a hospital in South Korea to promote plastic surgery. These developments suggest operations will strengthen even further at WMC in 2H16. WMC is making the turn from a drag to driver and we estimate losses will be sliced to Bt163mn in 2016 from Bt234mn in 2015 and project it to get into the black in 2018.

 

Medical services prices raised to offset higher staff cost. With no price hike since

 

2014, as of June, BCH plans to increase medical services prices by 5-10%, applied to pharmaceuticals, medical supplies and laboratory services, to offset the rise in staff costs. We do not expect significant margin pressure since the price increase is on a selective basis, not across the board. We estimate BCH’s EBITDA margin at 26% in 2016, improving from 25.5% in 2015, reflecting better operations at WMC. 

 

Expansion. Expansion in 2017-18 will be focused on mid- to low-income earners, its main area of expertise, and investment will be small. In 3Q17, BCH will upgrade Kasemrad Sriburin Poly Clinic at Maesai, Chiang Rai to a 30-bed hospital (capex Bt10mn). In 2018, it will open Kasemrad Ramkhamhaeng with 139 beds in January (capex Bt500mn) and Kasemrad Chiang Khong Hospital with 30 beds (capex Bt60mn). Beyond 2018, BCH plans to open two new hospitals: 1) a 120-bed secondary care hospital in Sri-Mahapho district, Prachinburi province and 2) a 100-bed secondary care hospital in Aranyaprathet district, Sakaew province. These two hospitals will also target patients from Cambodia. 

 

Strong earnings growth but valuation discount. Top pick in the sector. BCH is our top pick in the healthcare services sector. Although share price has surged 20% YTD, it is trading at 18x 2016 EV/EBITDA, a 19% discount to regional peer average. This discounted valuation suggests the market has not fully factored in the earnings turnaround with 26% earnings growth in 2016. We raise our TP to Bt14/share as we roll-over valuation to mid-2017 (from end-2016 TP of Bt12/share).