Asiri Hospitals Holdings PLC Equity Research · 2016-09-26 · Softlogic Holdings Plc 50% Fenner Merrill Lynch 29% CF Ruffer Pacific Fund 3% Shareholders below 5% 24% Source:CSE,

LOLC SEC Valuation12M Tgt Price (excl.dividend)

Share PriceUpside/(Downside)Risk Level(refer page 26 for recommendation)

Share DetailsBloomberg Ticker ASIR SL

CSE Sector Health Care

GICS Sector Health Care

Market Cap (LKR Mn) 33,750

Issued Quantity (Mn) 1,138

30-day avg T/O (LKR Mn) 2.76

Beta (6 months) 0.95

Investment FundamentalsLKR Bn 12MTrail. 2017(F) 2018(F) 2019(F)

Revenue 10.0 11.7 13.9 19.0

Net Profit 1.5 1.6 2.1 3.2

S/H's Equity 7.0 7.9 9.4 11.8

Total Assets 16.7 18.1 19.9 22.5

ROA (%) 10 9 10 14

ROE (%) 32 23 25 29

Price MultiplesPE (X) 21.71

PBV (X) 5.77

Price to Sales (X) 3.27

Dividend Yield (%) 1.57

Price Behavior

Per Share Details as at 30.06.2016 (LKR)

Earnings per share (trailing 12m) 1.32

Net Asset Value per share 4.97Sales per share (trailing 12m) 8.77

Dividend Per Share (trailing 12m) 0.45

Shareholder Details

Softlogic Holdings Plc 50%

Fenner Merrill Lynch 29%

CF Ruffer Pacific Fund 3%

Shareholders below 5% 24%

Source:CSE, Bloomberg, LOSEC Research

Analyst (s)

Hiruni Perera

[email protected]

26 September 16

Recommendation Guidance, Important Disclosures and Analyst Certification: Page 26

+94 115 880809

Business NatureAsiri Hospital Holdings PLC is the leading private sector

health care provider in Sri Lanka. It mainly owns and

operates four hospitals situated in Colombo and Southern

province while also being the market leader in the diagnostic

segment with a market share of 60%.

Salient Sections of the Report

Positive Outlook for private health industry in Sri Lanka (pg.2)|Higher margins over peers led by diagnostic operations

and group synergies (pg.7)|ASIR leads the pack with wider services (pg.9)|Top line to grow at a CAGR of 27% FY17-19

with increased market share (pg.11)| |Flexibility in raising funds despite the high leverage (pg.13)|Leading brand in the

private healthcare in Sri Lanka (pg.14)Valuation (pg.15)|Sensitivity and Earnings risk comment(pg.16)| Appendices

(pg.17 )

Valuations

ASIR is priced by the secondary market as a growth counter with high multiples of PE

(21.71X) and PBV (5.77X), at a premium to both market and the sector. We have valued the

counter using DCF model using a hurdle rate of 16.62%, a 5% premium to 3-year risk free

rate. Accordingly, we have valued the counter at LKR 33.10, which is at a premium to the

share price, reflecting market is yet to fully account for growth potential of the company. We

give a BUY recommendation to ASIR.

LKR 28.70 LKR 34.20

Medium15%

LKR 33.10

Growth counter in a growing industry

Sri Lanka's per capita health spend is relatively low compared to the average per capita

health spend of upper middle income countries despite the fact that it has better indicators in

the region. In the two tier health system public sector is providing free medication while

private sector is servicing more affordable patients. Accordingly, private health expenditure

is likely to see a CAGR of 11% ahead mainly considering the increasing spending potential

along with the rising per capita income and along with the favorable demographic structure

of the country. ASIR as the market leader in the private health sphere is best positioned to tap

into this opportunity while continuing its bottom line growth.

BUY

Investment Considerations

Positive outlook for private health industry in Sri Lanka: We estimate Sri Lanka's private

health industry to poise for a strong growth driven by expected rise in per capita income.

Accordingly, in our view per capita health spend is estimated to increase at a CAGR of 11% FY

16-FY19 in line with the rising spending potential on GDP forecasts. Price resilient demand,

growth in medical insurance, expanding ageing population and rise in NCDs (Non

Communicable diseases) are expected to further continue to drive the demand for private

health services.

Higher margins over peers led by diagnostic operations and group synergies: ASIR has

been able to maintain an average higher EBITDA margin of 32% compared with the industry

average of 22% while we attribute higher margins mainly on its market leadership in the high

yielding diagnostic segment and due to group synergies.

ASIR leads the pack with wider services: One of the key strength of the group is to provide

patients with a broad spectrum of services utilizing the most advanced medical technology.

As a total healthcare provider the group is specialized in providing integrated medical,

surgical care and diagnostic facilities. Furthermore, continuous investment on the cutting

edge technology can be considered as a key competitive advantage compared with its peers.

Top line to grow at a CAGR of 27% FY17-19 with increased market share: ASIR's

revenue has grown at a CAGR of 15% FY11-FY16 and we expect revenue to grow at a CAGR of

27% FY17-FY19 led by new hospital to be built in Kandy which is expected to contribute to

topline in FY19. Kandy Hospital is expected to be a key strategic driver for the group as it

opens up large market in the country for high quality private health care. Furthermore it will

continue to leverage on its strategic advantages over peers midst of growing industry

prospects.

Flexibility in raising funds despite the high leverage: Despite high debt levels ASIR is in a

better position to access for more funding options to support its expansion plans with its

strategic foreign partnerships.

Leading brand in the private healthcare in Sri Lanka: We believe that strong brand name

in the clinical services that has been built over last 30 years as an one of the key strength to

build its market leadership in the private health industry.

Asiri Hospitals Holdings PLC

Initiation Coverage

Equity Research

15

20

25

30

LK

R

ASIR Share Price ASI movement (adjusted to ASIR base price)

Initiation Coverage: Asiri Hospitals Holdings PLC | 26 September 16

Rise in per capita income to result in more demand for private health providers

Source:CSE, Bloomberg, LOSEC Research

2 | LOLC Securities Limited

Graph 01: Sri Lanka's health spend per capita is above the South

Asian region counterparts (2014)

Graph 02: However SL is positioned at a sweet spot of the S curve

and it actually lags below the health spend

Source: World BankSource: World Bank

Source: World Bank, CBSL, LOLC SEC Estimates

Per capita health spend

to increase at a CAGR of

11% FY16-FY19.

Strong correlation

between per capita GDP

and health spend

Sri Lanka's health spend per capita has seen a rapid growth of 11% CAGR during the last decade and also it remains

above South Asian counterparts (graph 01). However, it lags behind world peers in its income category suggesting

that health spending is poised for a strong growth potential.

Furthermore, stat reveals that there is a strong correlation between income levels and health outlays of the country.

This is due to the fact that demand for health rises as households become richer, in order to extend and improve their

quality of life. With Sri Lanka is expected to steer through the upper middle income stage surpassing the GDP per

capita of USD 4000, we could expect to see a sharp rise in per capita health spend due to its strong correlation.

Accordingly, we project per capita health spend to be increase at a CAGR of 11% FY16-FY19 midst of the rising GDP

giving a strong impetus to the country's health care industry.

Graph 03: We forecast health spend growth to exceed the GDP growth while continuing the past trend

Positive outlook for private health industry in Sri Lanka

Malaysia

Turkey

ChinaThailand

Sri LankaPhilippines

Vietnam

India

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

-1,000 1,000 3,000 5,000 7,000 9,000 11,000 13,000 15,000 17,000

Per

Cap

ita

Hea

lth

Sp

end

(U

SD)

GDP Per Capita (USD)

127

75

3136

57

40

89

0

20

40

60

80

100

120

140

Per

Cap

ita

hea

lth

sp

end

(U

SD)

25 26 27 32 31 33 32 35 3946 51

58 6170 71

8496 93

120127

139154

171

190

211

0

50

100

150

200

250

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016F 2017F 2018F 2019F

718 758 813 841 822 855 838 904 985 1063 1242 1424 1614 2011 2057 2744 3129 3351 3610 3853 3924 4008 4298 4704 5181

Per

Cap

ita

hea

lth

sp

end

(U

SD)

GDP Per Capita (USD)

7% CAGR


Positive outlook for private health industry in Sri Lanka (contd…)

Graph 05: Despite Public sector dominance private sector beds has increased at a rapid phase

Price resilient demand

Graph 06: Health expense as a % GDP has increased to 3.54% from 3.07% irrespective of health price increases

Source: World Bank, CBSL

2 | LOLC Securities Limited 3 | LOLC Securities Limited

Despite the fact that state hospitals dominate the country's health industry with 76,781 beds, number of private

sector hospitals keeps on increasing with increased affordability of patients and due to state sector's failure to meet

the increased demand. Despite rapid increase of private hospital room portfolio, we still see a significant demand

potential in private healthcare.

Despite State sector's

dominance private sector

hospitals keeps on

increasing

* Health Index includes the movement in the health price levels

Private health providers

to benefit from being in a

defensive industry

Source: World Bank

Per Capita health spend

of USD 127 is

significantly less than

per capita health spend

of 516 of upper middle

income countries

indicating the future

growth potential.

Source: Central Bank of Sri Lanka

Graph 04: Per Capita health spend is expected to increase with Sri Lanka steering through the Upper middle income band

Considering the recent trend in the price levels and per capita health expenditure, per capita health spending has

remained and slightly risen irrespective of changes in prices remarking a "price inelastic demand" (less sensitive to

price changes). Health care being a basic need in human life, price inelasticity provides a positive sign for the service

providers indicating that demand will not be adversely affected due to price increases.

37 90127

516

1061

0

200

400

600

800

1000

1200

Low income Countries lower middle incomeCountries

Sri Lanka Upper middle incomeCountries

World

Per

Cap

ita

hea

lth

sp

end

(U

SD)

4784 5596

69,73176781

0

20000

40000

60000

80000

100000

2011 2015

Nu

mb

er o

f b

eds

Private Hospitals Public Hospitals

3.07%

3.54%

200

220

240

260

280

300

320

2000

2500

3000

3500

4000

4500

2010 2011 2012 2013 2014 2015

Per

Cap

ita

Hea

lth

Exp

end

itu

re

GD

P P

er C

apit

a

Per capita non health expenditure (USD) Per capita health expenditure (USD) Health Index



Expected growth in medical insurance

.

Source: World Bank, CBSL


Graph 08: Out of pocket expenditure vs. private

prepaid plans

Graph 9: Insurance penetration levels in Asia (2015)

One of the key limitations to the growth in the private-sector hospitals has been the lack of affordability of people due

to low penetration in health insurance policies. Major part of the private spending is spent by households while

employers contribute 7% where as private insurance contributes about 5% of total private financing. Further when

compared with the upper middle income countries Sri Lanka's health spending financed by private prepaid plans

remains significantly low.

Graph 07: Low private health spending funded by

insurers (2013)

Source: World Health Statistics,2015

But we expect with increased competition in the insurance industry, the penetration levels to improve, especially in

the case of medical insurance schemes, increasing the affordability of patients, thus supporting the upside of the

health industry.

Source: Swiss Re (http://www.sigma-explorer.com/map/WOR/index.php?lob=total&year=2015)

Low health spending

funded through private

prepaid plans compared

to upper middle income

countries.

Sri Lanka remains

underpenetrated

compared to other South

Asian countries.

Growth in medical

insurance to result in

more demand for paid

health services.

Source: Institute for Health Policy

87%

7%5%2%

Households Employers

Insurance Non-profit institutions

74

17

83

4

87

4

0

10

20

30

40

50

60

70

80

90

100

Out-of-pocketexpenditure as % of

private expenditure onhealth

Private prepaidplans as % of private

expenditure on health

%Upper middle income countries Sri Lanka

Lower middle income countries

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

China India Malaysia Thailand Indonesia Philippines Sri Lanka Vietnam

Life Insurance penetration (premium % of GDP) Non life Insurancepenetration(premium % of GDP)



Expanding ageing Population

Graph 10: Rapid growth in SL population 65+ years

Graph 12: Population Pyramid

Source: Economic and Social statistics of Sri Lanka 2015


Source: Sri Lanka Paradigm shifts in population, W.Indralal De Silva Source: World Bank, 2015

Sri Lanka's population is one of the oldest in South Asia and is also one of the fastest ageing populations in the world

being demographically on par with developed countries. The demographic transition of Sri Lanka, is a result of a

sharp decline in the fertility rate, and an increase in life expectancy driven by several decades of investments made

on welfare, education and health. If elderly is defined as age 65 year and above, Sri Lanka has 9.30% of the total

population at the age of 65 and above, while this figure surpasses most of the South Asian regional peers. Further 65+

year portion was only 4.3% in 1981 and by 2012 it has increased to 7.9%. Interestingly by 2041 it is expected to

increase up to 17.1% of the total population.

Sri Lanka's population is

one of the oldest and

fastest ageing population

while being

demographically on par

with developed countries.

Graph 11: Population ages 65 and above (% )

Consequent to the changes in demographic components, the shape of the population pyramid of Sri Lanka is

estimated to change significantly. As indicated by above graphs, in 2015 out of population of 20.9 Mn, 8% was

estimated to be over 65 years and above and this figure is anticipated to increase up to 18% by 2041.

Ageing population is required to be more health conscious and are engaged in more on health check-ups on a regular

basis as a preventive action, implying a growing demand for health care. Accordingly, private health providers in the

country are expected to benefit from this demographic trend as a result of expected increase in demand for inpatient

and outpatient care services as well as laboratory and other support services.

Source: A population projection of Sri Lanka by W. Indralal De Silva

0-4

5-9

10-14

15-19

20-24

25-29

30-34

34-39

40-44

45-49

50-54

55-59

60-64

65- 69

70-74

75 and above

Percent

2015

Female (%) Male (%)

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65- 69

70-74

75 and above

Percent

Female (%) Male (%)

2041

4.97

9.3

5.62 5.895.17 5.55

4.49

10.479.55

26.34

0

5

10

15

20

25

30

4.3

6.3

7.9

10.9

14.5

17.1

0

2

4

6

8

10

12

14

16

18

1981 2001 2012 2021 2031 (F) 2041 (F)

%


Positive outlook for private health industry in Sri Lanka(contd…)

Rise in Non Communicable Diseases (NCDs)

Graph 13: Increasing trend in deaths due to NCDs in line with GDP Graph 14: Cause of deaths by NCDs as a % of total (2012)

Facility/ ASIR NHL CHL LHCL


Source: World Bank

Deaths due to NCDs have

shown an increasing

trend

NCDs have shown an increasing trend while it was found that 71% of all annual deaths are attributed to chronic NCDs

led by Cardiovascular diseases (heart), diabetes, cancer and chronic respiratory diseases. Rise in NCDs can be

attributed to two reasons; particularly due to the ageing population of the country and the dietary and lifestyle

changes in line with the increase in income of people. (At lower income levels, health spending is dominated by

communicable disease and as living standards improve, NCDs account for a larger share of health expenditures)

This is expected to poise an opportunity for health providers since treatment of NCDs involve long hospital stay and

advance medical treatments with higher prices and better margins. For instance, ASIR is the only hospital to have the

PET CT scaner in the country.

Source:Health Ministry and the World Bank

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

0

2,000

4,000

6,000

8,000

10,000

GD

P P

er c

apit

a (U

SD)

Nu

mb

er o

f d

eath

s

Cancer Heart diseases

Diabetes GDP per capita

30

40

50

60

70

80

90

%


Graph 15: 5 year Average Capital Expenditure to sales

Table 01 : Comparison of prices (LKR) of common lab tests with industry peers

Type of the ASIR LHCL CHL NHL

510 820 460 500 573

300 310 290 280 295

1430 1170 1250 1200 1263

310 310 310 300 308

1560 1570 1260 1290 1420


Fasting Blood Sugar

Thyroid Test (TSH)

Complete Blood Count test

Urine Full report

*APHS is the Apollo Hospital India

In this context ASIR has secured its market leadership in diagnostic segment due to lower involvement in overheads

and thereby to offset the downward pressure on margins.

Further in our view ASIR and LHCL has been able to charge slightly higher prices while we attribute slightly higher

prices of ASIR over industry average for its high quality associated with lab reports.

Higher Capex

requirements

The private sector hospitals industry adopts the most advanced medical technology in the world and therefore it is

considered as a capital expenditure intensive industry with an average annual capex stands around 14% of the total

revenue of major private health care providers due to its extensive requirement to upgrade the quality of the

technology and the service. ASIR incurs approximately 500 Mn recurring capex every year to upgrade its facilities.

When average capex to sales figures are compared to Apollo Hospital a leading Hospital in India the figure is slightly

higher than the average Sri Lankan value (15%). This indicates that private health care providers need to incur

extensive capex to maintain sophisticated healthcare facilities which may lead to significant pressure on margins due

to higher overheads.

Industry

avg.

Source: Bloomberg

Source: LOLC SEC Research

Higher margins over peers led by diagnostic operations and group synergies

Diagnostic to be a

captivating option

Cholesterol Test (Lipid profile)

10.00 10.25

27.52

8.25

14.00 14.54

-

5.00

10.00

15.00

20.00

25.00

30.00

ASIR CHL NHL LHCL Industry Avarage APHS

%


Table 02: Comparison of laboratory network with listed peers

ASIR LHCL CHL NHLMain Labs 4 1 1 11

466 620 39 118

8 No 9 No

Graph 16:Lab business generates higher EBITDA Margins for ASIR compared to core business

Graph 17: ASIR stands out on higher EBITDA margins compared to its listed peers


Source: Bloomberg and LOLC SEC Research

ASIR as the leading private medical laboratory operates a network of 8 satellite labs and sample collection centres

throughout the country. Construction of a 11,000 sq.ft new laboratory building in Narahenpita is also expected to

further enhance strengthen its laboratory facilities and the market leadership.

Source: Company websites and annual reports and LOLC SEC Research

Collection Centres

Satellite Labs

Having the largest laboratory network, we expect hospital to spearhead in terms of the operation margins due to its

leadership in the high yielding diagnostics segment. As per graph 17 it has been able to maintain an average 6 year

EBITDA margins of 32% surpassing the industry average (private listed hospitals) of 22% while availability of

laboratory network across the country will enable ASIR to capture the higher demand for diagnostic services leading

to higher volumes performed in the future.

We also believe that group synergies arising from the cost efficiencies within the group to further contribute

positively on the higher margins.

Accordingly, ASIR's EBITDA margins are expected to improve and maintain at 33% level FY 17E-FY18E due to its to

leadership in high profitability diagnostic segment and group synergies while negating the negative impact of higher

capex.

Higher margins over peers led by diagnostic operations and group synergies (contd…)

Diagnostic segment

generate higher returns

compared with core

services.

Source: LOLC SEC Research

Higher EBITDA margins

surpassing the industry

average of 22%.

23%

53%

0%

10%

20%

30%

40%

50%

60%

Core Business Lab business

31.72 30.81

35.6233.51

31.67

27.22

31.1032.82 33.03

29.99

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F

%

ASIR CHLN NHL LHCL Industry Avarage


Table 03: ASIR provides a full range of services utilizing its four state of the art hospitals

Strategic partnership with TPG Growth

Table 04: TPG's some of the investments into global health care sectorInvestment Specialization Country

EnvisionRx Pharmaceutical Services U.S.AEvolent Health Consulting services to health providers U.S.AHealthscope Private health provider AustraliaIMS Health Information and technology for health services U.S.APar Pharmaceuticals Pharmaceutical U.S.AQuintiles Bio Pharmaceutical U.S.ASurgical Care Affiliates Ambulatory surgical care U.S.ASutures India Surgical sutures manufacturer India

8 | LOLC Securities Limited 9| LOLC Securities Limited

Specialized in integrated

medical, surgical and

diagnostic facilities.

Expanding the number of services accompanied by the investment in to state of art technology can be viewed as a key

competitive strategy used by private health providers for increasing their market share. Adopting the same, ASIR

hospitals have now operations spanning the full spectrum of core medical, surgical and diagnostics services based on

the cutting edge technology, creating a competitive advantage over the others.

Central HospitalKey Specialization * Provides a host of

medical and surgical

services with key

strengths lies in medical

investigations,

diagnostics,

gynecological medicine

and pediatrics.

* Positioned as the

leading surgical provider

among private hospitals.

*Currently AMSL has the

only PET scan in the

private sector.

*This features the most advanced

technology and tertiary care.

Cutting edge technology

Source: Company Websites

AMSL

Source: Websites

In order to provide the modern treatments for patients and cater to the growing demand for health care needs, ASIR

on a regular basis upgrades its high tech medical equipment whereas the continues expansion on cutting edge

technology can be considered as one of the top most strength of ASIR.

ASIR leads the pack with wider services accompanied by the State of the art technology

"TPG Growth ", 2nd largest shareholder of ASIR is a US based private equity firm focused on investments in middle

markets. TPG Growth's current and past investments include a mix of iconic and innovative companies ranging tech,

retail and entertainment including Uber, Airbnb, e.l.f. Cosmetics, Angie's Artisan Treats, Fender and SurveyMonkey.

With $8 Bn invested since 2007, TPG's investments in the health ranges from pharmaceutical companies to

technology data providers that are aligning with secular growth trends or building innovative solutions to emerging

challenges.

Accordingly, partnership with TPG will bring the group with global health care know-how which could be leveraged

to capture the greater demand for health services while TPG's representation in ASIR' s board is expected to bring

new and diverse experience to the group.

Asiri Medical

Strategic partnership

with TPG to enhance

health care know how.


Hospital

ASIR

NHL

LHCL

CHL

Source: Company Annual reports and websites, IPS, Investopedia and LOLC SEC Research

*Note- Total Consultants include the number of Government doctors working part time in private hospitals.

Hospital No of beds No of beds Mkt Share2007 2016 2016

ASIR 320 600 88% 11% 740 11

LHCL 350 350 0% 6% 350 6

NHL 325 400 23% 7% 400 7

CHL 155 260 68% 5% 250 5

Other 3986 71%

Total 5596 100% 5939

HHI (Herfindahl-Hirschman Index) value 227

Four Hospital Concentration ratio 29%

9| LOLC Securities Limited 10 | LOLC Securities Limited

Top line to grow at a CAGR of 27% FY17-FY19 with increased market share

Source: Company Annual reports, CBSL and websites, Investopedia

In the private health industry top four listed players namely ASIR, NHL, LCHL and CHL combinely account for a higher

portion of market share in terms of consultants while among the top four ASIR accounts for the highest number of

visiting consultants.

In terms of the inpatient segment of the private hospitals concentration of the top four private hospitals is limited to

29%. However, as a single largest hospital ASIR has a 11% market share in terms of the collective beds and this is

expected to increase up to 12% by 2018 due to a fully- fledged 140 bed hospital in Kandy which is estimated to

commence in 2018 (piling work has been completed already). Further we believe that there are no major expansion

plans by other three hospitals mentioned above to increase their room capacity.

Thus being a chain of private hospitals with wider availability of consultants and being the hospital with the higher

number of bed capacity among the top players, ASIR will be well positioned to cater to the increasing patients' needs

over its competitors while strengthening its top line growth.

Table 05: Concentration in terms of visiting Consultants

Private hospital industry is characterized by oligopolistic market structure which is reflected by the concentration

exists in the industry. In the private health industry listed top 4 players namely Asiri Hospital Holdings PLC (ASIR),

Nawaloka Hospitals PLC (NHL), Durdans Hospitals (CHL) and The Lanka Hospitals (LHCL) have become the key

players which accounts for higher portion of the market share in terms of the consultants.

An oligopolistic market

structure.

Consultants

No of beds

FY 2018(F)

849

400

12%

6%

Table 06: Concentration in terms of the beds (2015)

275

2100*

588

Total

4%

Capacity

growthMarket Share FY 2018(F)

7%


Kandy Hospital- A key strategic investment

Valuation for the hospital

Total Investment 4500

Capex incurred 500

Estimated Capital Expenditure2016/17 20002017/18 2000

Graph 18: Revenue and Occupancy projections for Kandy hospital


Top line to grow at a CAGR of 27% FY17-19 with increased market share (contd…)

Kandy Hospital of ASIR is expected to complete in 2018 with an investment of LKR 4.5 Bn. New facility would be built

up on a land in Kandy. This new hospital will feature state of the art technology and is expected to get benefitted due

to its strategic location. Accordingly, we expect ASIR to attract patients coming from other regions as Kandy is the

Central hub of the country. We believe this will help to further increase the market share over its peers.

ASIR is the only private hospital among the top four listed hospital to expand their presence out of the Colombo.

Although currently there are 10 private hospitals operating in Kandy District and 16 hospitals in Central Province we

believe ASIR to attract a larger patients segment due to its strong brand name augmented with the state of the art

technology. Non- existence of any expansion plans by the major four listed hospitals in Central Province or close by

area is another factor which further strengthens its competitive position. New hospital especially focuses on

Cardiovascular and Cardiothoracic services and some of the services will be the first for the Central Province.

We estimate that out of LKR 4.5 Bn total cost of the hospital, LKR 500 Mn has been incurred and remaining LKR 4 Bn

we have spilt into two equal tranches for our estimation purposes. Further we expect hospital to have 55%

occupancy in the first year and reach up to 70%, leveraging on the benefit of its strategic location.

55%

60%

65%

70% 70% 70%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

1000

2000

3000

4000

5000

6000

7000

2018/19 2019/20 2020/21 2021/22 2022/23 2023/24

Occ

up

ancy

Rat

io

Rev

enu

e (L

KR

Mn

)

Estimated Revenue Estimated Occupancy


Table 07: Competitive Benchmarking

Hospital

ASIR 9952

NHL 5860

CHL 4728

LHCL 5514

Graph 19: Revenue has grown at a 6 year CAGR of 15% FY10-FY16 and expect to grow at CAGR of 27% FY 17-FY18

Graph 20: Central Hospital continued to be the highest contributor to the group revenue


Source: Company Annual reports

Revenue growth (6 year CAGR)

15.14%

12.63%

9.13%

11.81%


Top line to grow at a CAGR of 27% FY17-19 with increased market share

Revenue FY16(LKR Mn)

Among the hospital portfolio of the group Central Hospital is expected to continue its position as the top contributor

to group top line while Asiri Medical's contribution to the group topline is estimated to increase from FY 17 due to the

200 Mn investment in the state-of-the-art laboratory building to be built adjacent to the hospital.


4,9176,097

7,0767,963

8,594

9,952

11,727

13,878

19,038

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 (F) FY 18(F) FY 19 (F)

Rev

enu

e G

row

th

Rev

enu

e (L

KR

)

Revenue Revenue Growth

66%71%

61%

70%

55%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

1000

2000

3000

4000

5000

6000

7000

8000

Asiri Medical AMSL Central Hospital Asiri Hospital Matara Asiri Hospitals Kandy

Occ

up

ancy

Rev

enu

e (L

KR

Mn

)

FY14 FY15 FY16 FY17 FY18 FY19 Current Occupancy


Flexibility in raising funds despite the high leverage

Graph 21: Net debt and Net debt to equity

Graph 22: ASIR has high net debt to equity ratio (gearing) compared to its peers


Among the listed peers ASIR has been high leveraged compared to its peers due to the borrowings taken for

expansion plans.

Despite being high leveraged ASIR is one of the few private hospitals in Sri Lanka to have access to funds from

international financing agencies such as IFC (International Finance Corporation) and accordingly we believe that it

will be easier to raise international financing due to its strategic foreign representation in the board (now TPG and

earlier Actis). Further we believe that leadership of ASIR's chairman being a one of the leading entrepreneurs and

capital market expert will remain as a key strong factor to attract borrowings and equity necessary for expansions.

During the period FY 10 to FY 15, total debt of ASIR depicted an increase of 34% and stood at LKR 7171 whereas

increase in debt was mainly to fund the expansion plans. However, ASIR's net debt declined to LKR 7059 with the

settlement of IFC loan which represented USD in advance due to the fluctuations in the exchange rates.

Source: Bloomberg

ASIR is highly leveraged

compared with its peers

Source: Bloomberg

ASIR to have more

funding flexibility due to

the foreign

representation in the

board.

5355

65416802

6224

8207

7171 7059

0

20

40

60

80

100

120

140

160

3000

4000

5000

6000

7000

8000

9000

FY10 FY11 FY 12 FY13 FY14 FY15 FY16

Net

deb

t to

eq

uit

y (%

)

Net

Deb

t (L

KR

Mn

)

Net debt Net debt to equity

102.83

135.65

122.24

81.10

140.02

99.54 101.33

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16

%

ASIR NHL LHCL CHL


Strong Brand name

Table 08: Listed Health care brands (2016)

Company Rank 2016 Rank 2015

ASIR 35 34 2162

LHCL 59 65 801

NHL 64 55 720

CHL 68 74 576


ASIR lead among other

listed health care brands.

Leading brand in private health industry in Sri Lanka

Source: Brands Annual, 2016

* Brand values are in LKR Mn

We believe that strong health care brand name of ASIR that has been built over last 30 years to be a key

differentiating factor among its rivals. Proving its brand strength, it has taken the lead among the listed Medicare

providers while being ranked at 35th in most valuable brands with a value of LKR 2162 Mn (Brand Annual 2016).

It has also been able to take the reputation global with the WHO and other International research organizations using

the Asiri Laboratory for their projects.

Brand

Value* Brand Rating

A

BBB

ASIR is currently on the track to achieve JCI accreditation for its nursing care and clinical procedures while obtaining

the JCI accreditation will enable to market "The Central" and "Asiri Surgical" in foreign markets and position these

two hospitals at the forefront of medical tourism thrust.

BBB

BB


Valuation

Table 09: Valuation Sensitivity Matrix

15% 16% 17% 18% 19%6.0% 38.60 33.90 30.10 29.00 26.306.5% 40.50 35.40 31.30 27.90 25.207.0% 42.70 37.00 33.10 28.90 26.007.5% 45.20 38.90 34.00 30.00 26.808.0% 48.10 41.00 35.50 31.30 27.80

Source:CSE, Bloomberg, LOLC SEC Estimates

Table 10: Domestic and Regional Peer Comparison

Name PE (x) PBV (X) ROE %

Asiri Hospitals Holdings Plc (Sri Lanka) 231 21.71 5.77 1.57 32.43Lanka Hospital Corp Plc (Sri Lanka) 106 17.26 2.99 1.45 18.05Nawaloka Hospitals Plc (Sri Lanka) 44 32.86 1.62 1.74 5.23Ceylon Hospitals Plc (Sri Lanka) 22 10.56 1.12 3.62 10.93

Nonthavej Hospital Pub Co (Thailand) 175 20.30 4.04 2.95 20.73Sarana Meditama Metropolitan (Indonesia) 248 131.66 4.43 0.25 5.16Chiang Mai Ram Medical Busin (Thailand) 580 50.71 6.46 0.83 14.32Apollo Hospitals Enterprise (India) 2790 56.29 5.39 0.45 9.99Raffles Medical Group Ltd (Singapore) 1958 37.32 4.20 1.31 11.65

Source:CSE, Bloomberg, LOLC SEC Research


Cost of Equity

Market Cap (USD Mn) Dividend

Yield %

We have used the Free Cash Flow to Equity (FCFE) model in deriving the valuation for ASIR. Accordingly, we estimate

total valuation for the company at LKR 37.5 billion. We assumed a cost of equity of 16.62% which is 5% premium to 3

years Sri Lanka Govt Treasury Bond Yield. We have taken a mid-term growth of 11% considering the health industry

potential in Sri Lanka and a free cash flow terminal growth of 7.0% considering the GDP growth of the country.

Accordingly, we value the share at LKR 33.10 which is a 15% upside to the current price of the share. At the current

share price, ASIR is trading at PE of 21.71X and a PBV of 5.77X.

Share price in LKR

Ter

min

al

Gro

wth

Rat

e


Summarized Sensitivity of Assumptions

Graph 23:GDP growth rate of the country: High Graph 24: Cost of Borrowings sensitivity: Meadium

Source: LOLC SEC Estimates Source: LOLC SEC Estimates

Graph 25: Corporate tax sensitivity on health sector: Low Graph 26: Kandy Hospital Occupancy: Meadium

Source:LOLC SEC Estimates Source: LOLC SEC Estimates

Source:CSE, Bloomberg, LOLC SEC Research


Government has been following a laissez-faire policy of light regulations on private health industry allowing

more freedom to health providers without controlling prices other than for consultation and hospital fee

charge on private channelling services. This enables private health providers such as ASIR to increase prices

to a certain extent without affecting demand due to the inelastic nature for health services. However, if

government imposes minimum price regulations this may affect all major private hospitals including ASIR

leading to declined margins. However, at the moment there is no any clear indication as such of establishing

pricing policies for private hospitals.

Earlier, Sri Lankan health industry has been less exposed to certain tax increases as it has been seen as a

necessity by the society. Private hospitals were charged on a discounted corporate tax rate of 12% vis-a-vis

28% charged on other corporates. However, under new Government, corporate tax charged on health

industry increased to 17.5% while VAT on healthcare services which was exempt in Sri Lanka until May 1,

2016, increased to 15% (Later on government officials reported that facilities provided by private hospitals

are fully VAT exempted and Private channelling fees will have no implication from the VAT increase

although private hospitals deny it). However, this indicates the likelihood of further increase of some of tax

rates for health industry resulting in lesser margins for private health providers. However, since health

being considered as a necessity and due to social pressure that might arise on such kind of imposition

likelihood of occurrence can be considered lower.

Group is also exposed to risk associated with patient safety, which is arising from treatments and other

patient care processes which is considered as utmost important area of exposure to any hospital, where as

any failure can lead to reputational, legal as well as financial risk due to payment of losses.

As the industry needs immense capital infusions and due to the brand loyalty associated with the existing

market leaders, new entrants hesitate to enter the market resulting in entry barriers. But in the long run

there is a possibility of new players entering the market. (E.g. Hemas Hospital chain). Further since the

health industry is liberalized, there is a possibility of foreign hospitals commencing operations in Sri Lanka

(ex: Apollo India entered Sri Lanka in 2000) which will lead the industry to become more competitive while

deteriorating market share of ASIR.

Earnings Risk Comment

33.40

33.10

32.70

32.2

32.4

32.6

32.8

33

33.2

33.4

33.6

-1.00% 0.00% 1.00%

LK

R

30.60

33.10

36.10

27.00

28.00

29.00

30.00

31.00

32.00

33.00

34.00

35.00

36.00

37.00

-1.00% 0% 1.00%

LK

R

33.80

33.10

32.40

31.50

32.00

32.50

33.00

33.50

34.00

-1.00% 0% 1.00%

LK

R

31.90

33.10

34.20

30.50

31.00

31.50

32.00

32.50

33.00

33.50

34.00

34.50

-5.00% 0% 5.00%

LK

R


Appendices

Table 11: Return comparison

3 months 9.13 1.71 7.35 6.466 months 22.65 6.35 12.20 30.57YTD 19.58 -6.02 -1.06 14.761 year 36.02 -8.88 -7.71 36.49

Source:CSE, Bloomberg

Graph 27: Share Price Movement

Source: LOLC SEC Estimates

Source:CSE, Bloomberg

Graph 28: PE Chart Graph 29: PBV Chart

Source: LOLC SEC Estimates

Source:CSE, Bloomberg Source:CSE, Bloomberg




Graph 32: CSE PE Chart

Graph 30: Price per Sales

ASI IndexASIR

Graph 31: Dividend Yield

LHCLS&P SL 20

Index

Graph 33: CSE PBV Chart

%

10

15

20

25

30

35

(10,000,000)

10,000,000

30,000,000

50,000,000

70,000,000

Rs

Vo

lum

e

Volume Price

SMAVG (50) SMAVG (100)

0.0025.0050.0075.00

100.00

9/19/13 3/19/14 9/19/14 3/19/15 9/19/15 3/19/16 9/19/16

RSI (14)

9.0

14.0

19.0

24.0

29.0

9/19/13 3/19/14 9/19/14 3/19/15 9/19/15 3/19/16 9/19/16

PE ratio Highest Average Lowest

2.1

3.1

4.1

5.1

6.1

7.1

09/19/13 03/19/14 09/19/14 03/19/15 09/19/15 03/19/16 09/19/16

PBV ratio Highest Average Lowest

1.5

2.0

2.5

3.0

3.5

4.0

9/19/13 3/19/14 9/19/14 3/19/15 9/19/15 3/19/16 9/19/16

Price to Sales ratio Highest Average Lowest

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

09/12/13 03/12/14 09/12/14 03/12/15 09/12/15 03/12/16 09/12/16

ASI PE ratio Highest Average Lowest

1.3

1.4

1.5

1.6

1.7

1.8

9/12/13 3/12/14 9/12/14 3/12/15 9/12/15 3/12/16 9/12/16

ASI PBV ratio Highest Average Lowest

1.0

1.5

2.0

2.5

3.0

3.5

8/11/13 2/11/14 8/11/14 2/11/15 8/11/15 2/11/16 8/11/16

ASIR dividend yield Highest Average Lowest


Table 12: Financial Summary ForecastFigures in LKR Mn (31st March) FY 14 FY 15 FY 16 FY 17 (F) FY 18 (F) FY 19 (F)Income Statement

Revenue 7,963 8,594 9,952 11,727 13,878 19,038

Cost of Revenue -4,073 -4,641 -5,392 -6,353 -7,518 -10,314

Gross Profit 3,889 3,952 4,561 5,374 6,360 8,724

Operating Expenses -2,030 -2,288 -2,591 -2,592 -2,933 -4,143

Operating Income 2,007 1,799 2,142 2,954 3,599 4,754

Pretax Income 1,465 1,743 1,583 2,256 2,880 4,279

Income Tax Expense 169 161 194 338 432 565

Minority Interest 255 166 207 285 364 552

Net Profit att. to shareholders 1,041 1,417 1,182 1,633 2,084 3,161

Balance Sheet Cash & Near Cash Items 192 1,247 904 543 649 3,266

Trade and other debtors 365 374 397 469 555 761

Inventories 355 381 444 523 619 849

Total Current Assets 1,511 5,211 2,423 2,193 2,481 5,534

Total Long-Term Assets 13,834 13,003 14,345 15,920 17,406 16,921

Total Assets 15,345 18,215 16,768 18,113 19,887 22,455

Accounts Payable 305 372 458 509 603 827

Other Short-Term Liabilities 2,801 3,002 2,632 2,097 2,676 2,867

Total Current Liabilities 3,106 3,374 3,090 2,606 3,279 3,694

Total Long-Term Liabilities 6,378 7,636 6,794 7,562 7,204 6,987

Total Liabilities 9,484 11,010 9,884 10,168 10,483 10,681

Share Capital 3,902 3,902 4,748 4,748 4,748 4,748

Retained Earnings & Other Equity 858 2,120 1,184 2,245 3,703 6,074

Total Equity 5,861 7,205 6,883 7,944 9,403 11,774

Total Liabilities & Equity 15,345 18,215 16,768 18,113 19,887 22,455

Cash Flow StatementPre tax Income 1,465 1,743 1,583 2,256 2,880 4,279

Depreciation & Amortization 658 667 700 895 984 955

Changes in Non-Cash Capital -221 1,437 -230 -100 -89 -212

Net Cash From Operations 1,296 3,277 1,735 2,848 3,479 4,591

Capital Expenditure -334 -906 -1,099 -2,500 -2,500 -500

Net Cash From Investing Activities -2,668 -1,590 -179 -2,470 -2,470 -470

Dividends Paid -599 -541 -222 -571 -625 -790

Change in Long Term Borrowings 2,006 879 -850 800 -600 -600

Net Cash from Financing Activities 1,180 241 -2,255 -383 -902 -1,505

Net Changes in Cash -192 1,929 -700 -4 107 2,616




Table 13: Forecast Ratios FY 14 FY 15 FY 16 FY 17 (F) FY 18 (F) FY 19 (F)

Profitability Ratios

GP Margin (%) 49% 46% 46% 46% 46% 46%

NP Margin (%) 13% 16% 12% 14% 15% 17%

ROE (%) 22% 24% 20% 23% 25% 29%

ROA (%) 7% 8% 7% 9% 10% 14%

Earnings per share (LKR) 0.86 1.29 1.36 1.44 1.83 2.78

Dividend per Share (LKR) 0.55 0.50 1.94 0.50 0.55 0.69

Credit Ratios

Total Debt/Common Equity Ratio (%) 176% 139% 134% 117% 95% 68%

Interest Coverage (X) 3.3 3.2 3.7 3.7 4.4 6.2

Total Assets/Total Equity (X) 2.6 2.5 2.4 2.3 2.1 1.9

Net Debt/EBIT (X) 4.1 4.0 3.3 2.6 2.0 0.9

Liquidity Ratios

Current Ratio (X) 0.5 1.5 0.8 0.8 0.8 1.5

Quick Ratio (X) 0.4 1.4 0.6 0.6 0.6 1.3

Asset Turnover Ratio (X) 0.5 0.5 0.6 0.6 0.7 0.8

Net Asset Value per share (LKR) 4.18 5.29 5.21 6.15 7.43 9.51

Growth Ratios

Revenue Growth YOY% 13% 8% 16% 18% 18% 37%

Earnings growth YOY% 52% 36% -17% 38% 28% 52%

Total Assets YOY% -0.08% 18.70% -7.94% 8.02% 9.80% 12.91%

Total Debt YOY% 30.90% 0.27% -5.26% 3.15% -2.44% -7.51%

Investment Ratios

PE Ratio (X) 25.81 15.66 17.66 20.00 15.67 10.33

Price to Book Value (X) 5.13 3.69 4.56 4.67 3.86 3.02

Dividend Yield (%) 2.48% 2.48% 2.08% 1.75% 1.91% 2.42%

Table 14: Dividend Forecast

Frequency Declared date XD Date Type Amount Proportion2009/10 Interim 27/07/2009 6/8/2009 Cash 0.75

2010/11 Interim 6/5/2010 17/05/2010 Cash 0.10

2011/12 First Interim 25/8/2011 6/9/2011 Cash 0.125

Second Interim 2/2/2012 15/02/2015 Cash 0.13

2012/13 Interim 11/3/2013 20/03/2013 Cash 0.50Source:CSE, Bloomberg, LOLC SEC Estimates

2013/14 Interim 13/03/2014 24/03/2014 Cash 0.55

2014/15 Interim 9/3/2015 18/03/2015 Cash 0.50

1/12/2015 10/12/2015 Scrip 1 for 95

2015/16 Interim 5/5/2016 16/05/2016 Cash 0.45

2016/17 ( F) Interim Mar- July 2017 Mar- July 2017 Cash 0.50

2017/18 (F) Interim Mar- July 2017 Mar- July 2017 Cash 0.55

2018/19 (F) Interim Mar- July 2017 Mar- July 2017 Cash 0.69






Company


ASIR has invested to operate the Group’s newest hospital in Kandy. With a 140- bed capacity, the Hospital is to

commence operations in 2018 while the construction of the hospital has commenced.

ASIR is the market leader in the private health care industry in Sri Lanka accounting for total beds of 600 with an

estimated market share of 11% in the bed capacity of private hospitals and with 60% market share in the

diagnostic segment. Out of the 6 listed private health providers in the Colombo Stock Exchange, ASIR is the

largest counter with a total market capitalization of LKR 32.8 Bn and LKR 5.6 Bn equity value.

Being more than 30 years in the healthcare industry in Sri Lanka, ASIR is currently owned by the Softlogic Group

of companies which is one of largest conglomerate operates in Sri Lanka with its investment into retail,

healthcare, financial, ICT, automobile and leisure sectors. ASIR's operations portfolio consists of its four main

hospitals namely, Asiri Medical, AMSL, The Central hospital, Asiri Hospitals Matara (pvt) Ltd and its diagnostic

segment.

The Central Hospital (pvt) Ltd

Added to the Asiri Group of Hospitals in 2010, Central Hospital is a tertiary care hospital which offers a range of

diagnostic, therapeutic and intensive care facilities. With luxurious medical facilities, it consists of 264-bed while

all rooms are equipped with modern comfortable furnishings and fittings in line with patient's needs. As a result

of the continuous investment in the technology Central hospital conducted the first ever Bone Marrow

Transplant in June 2014.

With a bed capacity of 165, AMSL is mainly specialized in offering surgical and scanning services. It is the only

hospital in SL equipped with nuclear medicine (PET Scanner) and 3D X-Ray machine for Dental. AMSL comprises

of a fully -fledged heart centre, modern operating theatres and is also specialized in providing urology services.

During the year of 2014/15, AMSL conducted introduction of several key surgical procedures which also

includes the Bariatric surgery for weight loss. The Hospital’s surgical services include General surgery, Plastic

surgery, Cardiology, ENT (ear, nose, throat) surgery, Oncology and Orthopedics.

Hospitals portfolio

Consisting of 60 bed facility in the Southern province, the hospital offers a range of general and surgical care

facilities. Established in 2007, it acquired Matara Medi House (Pvt) Ltd in 2010 where two hospitals now

function as one entity. Asiri Hospitals Matara is a fully owned subsidiary of the Asiri Group of Hospitals.

Asiri Medical started as a laboratory service provider which is now also operating as a specialist in pediatrics

and maternity, while catering to the other branches as well. The lab business of the total group is operated as a

division of this entity while accounting for 60% of the market share with conducting 13,000 daily lab tests. As

the market leader it has a network of over 400 collection centres (including third party collection centres). In

order to further strengthen ASIR's position in the laboratory segment, an advance laboratory building is to be

built adjacent to the hospital while a facelift is also in progress. This is expected to be completed in 2016 which is

estimated to cost LKR 250 Mn.

Asiri Hospitals Matara (Pvt) Ltd

Asiri Surgical Hospital PLC (AMSL)

Asiri Hospital Kandy (Pvt) Ltd

Asiri Medical Hospital


Timeline


Current group structure

Source: CSE

Incorporation

Incorporation of Digital Health Pvt Ltd

Completion of the sale of land occupied by Asha Central

TPG acquiring shares in ASIRfrom Actis

Introduction of pet/ CT scan by AMSL.

Acquisition of the controlling stake of ASIR by SHL.

ASIR being allotted with shares 2.4 Mn shares of NDB.

Asiri Surgical Hospital PLC (AMSL)

Central Hospital Ltd

Asiri Central Hospital LTD (ASHA)Owns the land in Colombo 07The Company operated as an investment company (Not operational).

Asiri Hospital Matara Asiri Hospital Kandy

Hospital under construction in Kandy

Labs Business

Labs BusinessCore labs business including central and satellite labs

• Division of Asiri Hospital Holdings PLC

Asiri Diagnostic Services Limited (JV in Kandy)

JV for diagnostics in Kandy

33.46% owned by JV partner

Softlogic Holdings PLC50.73%

TPG Growth

28.86%

Public Holding

20.26%

73.6% 99.73% 99.7% 100%

66.54%100%

100%

ASIR

ASIR entered into an agreement with JKH, UAL and Aureos South Asia Fund LLC to participate in a private placement of shares (37.34%) in Central Hospital

Commencement of Lab Operations inASIR

Quoted in the CSE

Commencement of Asiri Surgical Hospital.

Commencement of Central Hospital.

ASIR signed an agreement with the IFC to raise USD 20 Mn.

Issue of ordinaryshares of the company to Actis Investment Holdings SL Limited by way of a private placement.

Delisting of ASHA

ASIR acquiring 37.34% stake in Central Hospital subsequent to the share purchase agreement entered into in 2009 from the JKH, UAL and Aureos South Asia Fund LLC.

ASIR settled in advance the outstanding amount of $ 12.9 Mn from the loan of $ 20 Mn taken from the IFC.

1980 1984 1986 2000 2009 2010 2011 2012 2014 2015 2016


ASIR Shareholding Distribution (as at 30. 06.2016)

Shareholder % Stake

1 Softlogic Holdings PLC 41.09%2 Merrill Lynch Pierce Fenner & Smith-TPG Growth III SF Pte Ltd 28.86%3 Commercial Bank of Ceylon PLC/Softlogic Holdings PLC 4.18%4 BNYM SA/NV-CF Ruffer Investment Fund : CF Ruffer Pacific Fund 3.18%5 HSBC INTL NOM LTD - SSBT- Wasatch International opportunities Fund 2.68%6 Softlogic Holdings PLC A/C No 3 2.30%7 Softlogic Holdings PLC A/C No 2 2.30%8 HSBC International Nominees LTD - Morgan Stanley and Co. INTL PLC - OW 1.25%9 Mr.Chaminda Dilantha Weerasinghe (Deceased) 0.82%

10 Mr. P P Subasinghe 0.70%11 Union Bank of Colombo Ltd/Softlogic Holdings PLC 0.50%12 Asian Alliance Insurance PLC A/C 02 (Life Fund) 0.48%13 Pictet and CIE (Europe) S.A.S/A Ruffer Sicav-Ruffer Global Smaller 0.35%14 CBHK S/A Platinum Broking Company Ltd 0.31%15 Dr. L.D.A.C. Luvis 0.30%16 Dr. W.M.S.Welagedara 0.30%17 Mr. A.U. Maniku 0.27%18 Estate of Mr. Tissa Weerasinghe 0.26%19 Mr. H.J.Dharmadasa 0.25%20 Mr. A H Weerasuriya 0.24%

Other 9.38%Total Shares 100.0%

Source: Annual Report FY15/16 Source: Annual Report FY15/16

Mr. Ashok PathirageDr. Manjula KarunaratneDr. S SelliahMr. G L H PremaratneMr. S A B Rajapaksa Mr. J E HuxtableMr. V NarainMr. Vishal BaliRitesh PandeyA.N Thandani

Source: CSE


Corporate governance structure

Table 15: Independence of the Directors

Non Executive/Independent

Source: CSE

Non ExecutiveNon Executive Director (Alternate)

Graph 36: Composition of EDs and NEDs

Non Executive/Independent

Non Executive Director (Alternate)

Non Executive

30,536,611

ASIR's ultimate control lies with Mr. Ashok Pathirage who acts as the Chairman as well as the Managing Director.

But its operations seem to managed by fairly independent board decisions with a sound board composition (The

Board consists of 8 directors, with a split between 2 executives and 6 non-executive directors, out of whom 4 are

independent). Further ASIR's strong corporate governance structure is reflected with foreign investor appetite

towards the group with strategic investments made earlier by Actis and currently by TPG Growth.

Graph 34: Shareholder structure 1 (as at 31.03.2016)

Non Executive/ IndependentNon Executive/Independent

Executive Director

26,184,018

47,554,473 36,148,930

9,375,000 7,979,090

Executive Director

5,500,000 4,000,000 3,523,601 3,441,720

3,036,050

14,198,551

26,184,018

Graph 35: Shareholder structure 2 (as at 31.03.2016)

5,655,789

3,000,000 2,788,920 2,700,000

No. of shares

467,358,655 328,258,328

1,137,533,596

3,375,000

106,734,842

Individuals12%

Institutions88%

Resident63%

Non-Resident37%

2

4

2EDs

Independent NEDs

Non IndependentNEDs


Key Management (Source: Company Annual Report 2014/15 )

1,030,798,754

Source: Annual Report FY15/16


Note- The Board consists of only two Executive Directors.

Dr. Manjula

Karunaratne

Group Chief Executive

Officer

Dr. Manjula Karunaratne was appointed to the Board of Asiri Hospital Holdings PLC and

Asiri Surgical Hospital PLC in 2006. He also serves on the Boards of Central Hospital Ltd,

Asiri Central Hospital PLC, Asiri Hospital Matara (Pvt) Ltd., Asiri Diagnostics Services (Pvt)

Ltd. and Asiri Hospital Kandy (Pvt) Ltd. He has previously held the positions of Medical

Director, Asiri Hospital Holdings PLC as well as Group Chief Operating Officer and is

currently the Chief Executive Officer of Asiri Hospital Group.

Dr. Karunaratne is a Specialist in Sports/ Orthopedics Medicine. He possesses over 25 years

of professional medical experience both in Sri Lanka and overseas, and is responsible for the

overall medical policy of the Group.

Mr. Pathirage is one of the co-founders of Softlogic and was appointed as Chairman of

Softlogic in 2000. He is also Chairman/ Managing Director of Asiri hospital chain, Softlogic

Capital PLC, Softlogic Finance PLC, Asian Alliance Insurance PLC and Odel PLC which are

listed in addition to the other companies of the Group operating in Leisure & Restaurants,

Retail, Automobile, Insurance and ICT industries. He is also the Deputy Chairman of National

Development Bank PLC and the Chairman of NDB Capital Holdings Limited. Due to his

business acumen and corporate leadership he is one of the top business leaders in the

country.

Mr. Ashok Pathirage

Chairman / Managing

Director

ProfileName of Director


Health industry in Sri Lanka

ASIRASIR SL EQUITY 28.70 32.87 1,510.00 5.07 32.43 10.46 21.26 5.66 1.57

AMSL AMSL SL EQUITY13.00 6.87 414.90 6.66 11.21 8.60 18.57 1.95 3.08

CHL CHLN SL EQUITY99.50 3.21 429.13 88.62 10.93 6.32 10.56 1.12 3.62

LHCL LHCL SL EQUITY69.20 15.48 859.70 23.17 18.05 14.37 17.26 2.99 1.45

NHL NHL SL EQUITY 4.60 6.48 206.00 2.83 5.23 2.08 32.86 1.62 1.74Source: Bloomberg

Indicator Value Health Care ProviderPER 22.08 ASIR

AMSLPBV 4.47 CHL

LHCLDividend Yield 1.69% NHL

SINHSource: LOLC SEC Research

Table 19: Distribution of private hospitals Province 2006 2007 2008 2009 2010 2011 2012 2013 2014Western 46 47 53 54 58 60 63 65 70

Southern 7 7 7 9 10 10 11 12 13

Central 6 6 6 6 7 7 9 15 16

Eastern 4 4 6 6 6 7 10 14 14

Northern 1 1 1 1 5 8 10 11 12

North Western 6 6 8 8 8 9 10 12 12

North Central 0 0 0 0 1 1 3 4 5

Uva 1 1 1 1 2 3 3 5 5

Sabaragamuwa 5 5 5 5 5 5 6 7 8


Bed Capacity

Table 18: # of beds of listed private health providers

Source: LOLC SEC research

Source: IPS, Health Statistics

40050

260165600

Ticker PER PBV

Table 17: Selected "Healthcare" sector

indicators

350

Price(LKR per

Share)

ROA% Dividend Yield %Market Cap (LKR

Bn)

Y/E Net

Profit(LKRMn)

NAV(LKR per

Share)

ROE%Counter

Table 16: Financial performance comparison of listed hospitals operating in private health care industry

Within the past two decades (1995 to 2015) Sri Lanka has reduced its infant mortality rate and under age

5 mortality rate by 51%. Life expectancy at birth has recorded a level of 74 years (2013). In comparison

with the South Asian region currently Sri Lanka has surpassed above health indicators remarking the

sustainable growth in the country's health industry. Further in terms of the per capita total health

expenditure Sri Lanka has recorded a higher amount than the South Asian countries. However since

government has no control over private health care sector pricing strategies (other than for consultation

and hospital fee on private channeling services),private sector providers have freedom to charge premium

prices which would be one of the key reasons behind high per capita health expenditure in Sri Lanka.

Despite the progress in health sector in Sri Lanka, still some of the key challenges exist in the state health

sector which opens up more room for private sector providers to grow in par with the evolving trends.

This is also proven by the increase in the number of private hospitals in the country over the years despite

the Government dominance. Accordingly, we expect private health providers to better capitalize on this

opportunity with a north headed demand.

Sri Lankan healthcare industry is mainly a two tier system with dominant participation of the state health

sector along with supportive participation of private healthcare sector. Private sector largely provides

outpatient services while their inpatient service is much more limited with only 5596 beds compared to

the 76,781 beds in the public sector. Free healthcare policy of Government is targeted on middle to low

income earners since main customer base of private sector is middle to high income earners. As a result,

most of the private health service providers are clustered in urban areas where high and middle earners

are scattered, while state hospitals are spread island wide in order to provide an equivalent service.


SWOT Analysis

Strengths

-Leading brand in the health care industry in Sri Lanka-Market leadership in diagnostic segment and group efficiencies to generate superior margins over peers.-Broad spectrum of services backed by the state of art technology-Partnership with TPG to provide diverse experience to the Board as well as access to TPG’s global network

-Service is limited to Colombo and Matara

Opportunities

-Positive prospects in private health sphere in Sri Lanka-Barriers of market entry to the health industry which limits the low risk of new entrants

Threats

-Competition arising from the other private and government sector hospitals

-Growing concern of shortage of skilled medical personnel in Sri Lanka-Exposure to persistent increase in cost of consumables and pharmaceuticals.

Bargaining power of suppliers- High

Bargaining power of customers- Low

Threat of substitutes- Low

Threat of new entrants- Low

Existing Rivalry- High


Physicians, equipment and pharmaceutical suppliers are the main suppliers of ASIR whereas bargaining power of them

is high. As the healthcare industry is mainly brand name driven, private healthcare providers tend to go for high valued

equipment and pharmaceutical brands in order to maintain quality of their service. Furthermore, since the Sri Lankan

health system is doctor centric rather than the institution centric bargaining power of Physicians is considered as very

high.

There are many competitors in the industry while only handful of them drives the private health industry. Therefore, an

oligopolistic market has been created where there is high competition among the big players. Prices of the industry are

mainly decided by them and they are highly involved in investing in modern technology. Government Hospitals also

could be identified as competitors where they hold the market leadership in inpatient care service.

Ayurvedic healthcare services are the substitutes for the private healthcare services. Due to the non- significant

contribution from the Ayurvedic healthcare service the threat is not material.

As the industry needs immense capital infusion new entrants hesitate to enter the market. Also since most of the

customers are loyal with the service of market leaders, it is difficult for the new entrants to capture the market. But in

the long run there is a possibility of foreign players entering the market.

Healthcare being an essential need and being a doctor centric industry, bargaining power of customers is low.

Customers have to pay any amount that hospitals charge for certain health services, while there are no price ceilings

other than for consultation and hospital fee on private channelling services. Since there are few major private health

providers, bargaining power of customers is low resulting an inelastic nature of demand.

Weaknesses

-High leverage compared with the peers due to its expansion plans

-Unfavorable implication from changes to regulations and various policies affecting the health industry (ex:- Increase in

the corporate tax rate applicable to health industry to 17.5% and increase in the VAT rate to 15%)

Industry Analysis


Recommendation Guidance

BUY – expected return > 10% in excess of benchmark return

SELL – expected return less than benchmark return

HOLD – expected return between 0% and 10% in excess of benchmark return

Investment Horizon: 3 years

12 months target price (12M Tgt Price) is based on the expected capital appreciation of the share excluding dividend.

Benchmark Interest Rate: Average Weighted Fixed Deposit Rate (AWFDR) published by Central Bank of Sri Lanka.

Risk Level Evaluation

High: Maximum price volatility to be up or down more than 50% monthly

Medium: Maximum price volatility to be up or down between 25% - 50% monthly.

Low: Maximum price volatility to be up or down less than 25% monthly.

Risk Level is calculated taking the historical standard deviation measures.

Financial Glossary

EPS = Earnings per Share

ROA = Return on Assets (adjusted net profit/average total assets)

ROE = Return on Equity (adjusted net profit/average total equity)

CAGR = Compound Annual Growth Rate ((End Value/Start Value) ̂(1/number of years) -1)

GP= Gross Profit

EBITDA= Earnings before interest, tax, depreciation and amortization

PBT= Profit before tax

PAT= Profit after tax

NP= Net Profit

PBV= Price to book value ratio

PE= Price to earnings ratio

Illiquidity Risk Premium

Average Time Between Liquidity Events (or Average Turnover) Illiquidity Risk Premium

10 Years 6.0%

5 Years 4.3%

2 Years 2.0%

1 Years 0.9%

1/2 Years 0.7%

0.0%


Illiquidity Risk Premium calculates how much does an investor need to be compensated for the average duration of the investor's possession after making buy/sell

decision of the respective share. Illiquidity Risk Premium has been calculated by considering 6 months CSE Average Daily Turnover and Company Average Daily

Turnover and allocating appropriate illiquidity risk premium as per the following schedule.

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based on overall revenues of LOLC Securities Limited and its holding company (Lanka ORIX Company PLC – LOLC Group), which may include brokerage revenue from transactions

involved with the securities mentioned in this research.


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Asiri Hospitals Holdings PLC Equity Research · 2016-09-26 · Softlogic Holdings Plc 50% Fenner Merrill Lynch 29% CF Ruffer Pacific Fund 3% Shareholders below 5% 24% Source:CSE,

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