SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Malaysia Initiating Coverage 30 November 2011 PP16832/01/2012 (029059) KPJ Healthcare Niche specialist with regional dreams Initiate coverage with BUY and target price of RM5.10. KPJ is well- positioned to benefit from the fast-growing healthcare sector in Malaysia. This sector has been identified as one of the 12 key pillars in the country‟s Economic Transformation Programme and is expected to contribute USD10.4b to the Gross National Income by 2020. As a defensive play, KPJ also offers limited revenue downside given its domestic dominance and a wide array of positive demand factors. Entrenched market leader. KPJ operates 20 private hospitals in Malaysia, the largest network among local private hospital operators, and has a 19% share of total private hospital beds. As the leader of the domestic market, it stands to reap the greatest benefits from the rising healthcare needs of the local population. Limited revenue downside. The ever-growing demand for private healthcare services in Malaysia limits the downside risk to revenue for KPJ. This relatively inelastic demand is underpinned by structural factors such as the increased number of elderly people, growing population, higher per capita income and strain on public-sector healthcare system. New hospitals, new foreign patients. KPJ plans to add 1-2 hospitals each year in its efforts to expand its hospital network. By end-2013, KPJ could have added up to five new hospitals, and expanded its bed capacity by up to 35%. We also expect the company to compete more aggressively for foreign patients in the medical tourism sector. Its education business could also serve as another thrust for growth. Cheapest valuation, highest dividend yield. KPJ is the cheapest hospital stock vis-à-vis its regional peers, trading at FY12F PER of 18.1x vs the peer average of 22.3x. Nevertheless, it offers the highest yield at 2.4% net. We expect revenue growth of 13-18% over FY11-13 as its hospital network expands and it becomes a bigger player in medical tourism. Corresponding net profit would grow by 8-19% over the same period. Initiate coverage with BUY and TP of RM5.10, based on 22x PER on FY12F fully diluted EPS, pegged to peer average. KPJ Healthcare Bhd– Summary Earnings Table Source: Company, Kim Eng FYE Dec (RM m) FY2009 FY2010 FY2011F FY2012F FY2013F Revenue 1,456.4 1,654.6 1,867.0 2,118.7 2,495.9 EBITDA 186.9 203.0 241.8 302.6 366.0 Recurring Net Profit 110.9 118.9 128.7 153.2 180.2 Recurring Basic EPS (Sen) 21.7 22.6 21.9 26.1 30.7 Recurring Diluted EPS (Sen) 21.7 20.3 19.5 23.2 27.3 EPS growth (%) 29.5% 4.3% -2.8% 19.0% 17.7% Net DPS (Sen) 7.5 11.3 10.0 11.3 13.2 PER (x) - diluted 19.3 20.6 21.4 18.0 15.3 EV/EBITDA (x) 14.0 12.9 10.8 8.6 7.1 Net Div Yield (%) 1.8% 2.7% 2.4% 2.7% 3.2% P/BV (x) 3.4 3.0 2.9 2.5 2.2 Net Gearing (%) 35.6% 26.3% 16.9% 19.7% 16.5% ROE (%) 18.3% 17.0% 15.8% 16.7% 17.2% ROA (%) 8.4% 7.8% 7.4% 8.0% 8.3% Consensus Net Profit (RM m) n.a. n.a. 128.6 157.0 177.0 Buy (new) Share price: RM4.18 Target price: RM5.10 (new) Yeak Chee Keong, CFA [email protected](65) 6433 5730 Wong Chew Hann, CA [email protected](603) 2297 8686 Stock Information Description : The largest private hospital operator in Malaysia. It also runs 2 hospitals in Indonesia. Ticker: KPJ MK Shares Issued (m): 580.6 Market Cap (RM m): 2,426.8 3-mth Avg Daily Volume (m): 0.89 KLCI: 1,444.72 Free float (%): 23.0 Major Shareholders: % Johor Corp 41.0 EPF 13.4 Nomura Asset Management 8.7 Skim Amanah Saham 8.7 Kumpulan Waqaf 8.0 Key Indicators ROE – annualised (%) 14.5% Net cash (RM m): (187.1) NTA/shr (RM): 1.64 Interest cover (x): 8.7 Historical Chart 0.0 1.0 2.0 3.0 4.0 5.0 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 KPJ MK Equity Performance: 52-week High/Low RM4.72/RM3.67 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) (1.2) (9.1) 9.7 12.7 12.4 Relative (%) 6.3 6.6 26.5 27.6 28.1
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SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS
Malaysia
17 October 2011
PP16832/01/2012 (029059)
Initiating Coverage 30 November 2011
PP16832/01/2012 (029059)
KPJ Healthcare Niche specialist with regional dreams
Initiate coverage with BUY and target price of RM5.10. KPJ is well-
positioned to benefit from the fast-growing healthcare sector in
Malaysia. This sector has been identified as one of the 12 key pillars in
the country‟s Economic Transformation Programme and is expected to
contribute USD10.4b to the Gross National Income by 2020. As a
defensive play, KPJ also offers limited revenue downside given its
domestic dominance and a wide array of positive demand factors.
Entrenched market leader. KPJ operates 20 private hospitals in
Malaysia, the largest network among local private hospital operators,
and has a 19% share of total private hospital beds. As the leader of the
domestic market, it stands to reap the greatest benefits from the rising
healthcare needs of the local population.
Limited revenue downside. The ever-growing demand for private
healthcare services in Malaysia limits the downside risk to revenue for
KPJ. This relatively inelastic demand is underpinned by structural
factors such as the increased number of elderly people, growing
population, higher per capita income and strain on public-sector
healthcare system.
New hospitals, new foreign patients. KPJ plans to add 1-2 hospitals
each year in its efforts to expand its hospital network. By end-2013,
KPJ could have added up to five new hospitals, and expanded its bed
capacity by up to 35%. We also expect the company to compete more
aggressively for foreign patients in the medical tourism sector. Its
education business could also serve as another thrust for growth.
Cheapest valuation, highest dividend yield. KPJ is the cheapest
hospital stock vis-à-vis its regional peers, trading at FY12F PER of
18.1x vs the peer average of 22.3x. Nevertheless, it offers the highest
yield at 2.4% net. We expect revenue growth of 13-18% over FY11-13
as its hospital network expands and it becomes a bigger player in
medical tourism. Corresponding net profit would grow by 8-19% over
the same period. Initiate coverage with BUY and TP of RM5.10, based
on 22x PER on FY12F fully diluted EPS, pegged to peer average.
KPJ Healthcare Bhd– Summary Earnings Table Source: Company, Kim Eng
Accreditation required to be competitive. The Joint Commission
International (JCI) accreditation is arguably the gold standard for
international credentialling. Although individual countries have their own
accreditation systems, such as the Malaysian Society for Quality in
Health (MSQH) in Malaysia, possessing a JCI accreditation will find
favour with more international tourists. We understand that two of KPJ‟s
hospitals are in the process of seeking the JCI accreditation. However,
most of its hospitals already have the MSQH accreditation.
Hospitals appointed for health tourism. The MHTC has appointed
several hospitals (Table 3) to participate in attracting foreign patients to
the country. 11 of KPJ‟s current portfolio of 20 hospitals are in the
MHTC list. Hospitals owned by Parkway Pantai, Columbia, Prince Court
and Sime Darby all have the JCI accreditation.
30 November 2011 Page 8 of 22
KPJ Healthcare 17 October 2011
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Table 3: Cost comparison of selected medica procedures
Private hospital No. of
beds
Quality certification*
1 Assunta Hospital, Selangor 344 ISO, MSQH
2 Columbia Asia Hospital, Bukit Rimau, Selangor 84
3 Gleneagles Hospital Kuala Lumpur, Wilayah Persekutuan - Kuala Lumpur 330 JCI, ISO, MSQH
4 Gleneagles Medical Centre, Pulau Pinang 227 MSQH
5 Hospital Fatimah, Perak 223 ISO, MSQH
6 HSC Medical Center, Wilayah Persekutuan - Kuala Lumpur 7
7 Island Hospital, Pulau Pinang 7
8 KPJ Ampang Puteri Specialist Hospital, Selangor 230 ISO
9 KPJ Damansara Specialist Hospital, Selangor 250 MSQH
10 KPJ Ipoh Specialist Hospital, Perak 260 ISO, MSQH
11 KPJ Johor Specialist Hospital, Johor 206 ISO, MSQH
12 KPJ Kajang Specialist Hospital, Selangor 118
13 KPJ Penang Specialist Hospital, Pulau Pinang 236
14 KPJ Selangor Specialist Hospital, Selangor 173 MSQH
15 Lam Wah Ee Hospital, Pulau Pinang 422 ISO, MSQH
16 LohGuanLye Specialists Centre, Pulau Pinang 265 ISO, MSQH
17 Mahkota Medical Centre, Melaka 365 ISO, MSQH
18 Mawar Renal Medical Centre, Negeri Sembilan 78
19 Mount Miriam Cancer Hospital, Pulau Pinang 40 ISO
20 National Heart Institute (IJN), Wilayah Persekutuan - Kuala Lumpur 270 JCI, ISO, MSQH
21 NCI Cancer Hospital, Negeri Sembilan 0 ISO
22 Normah Medical Specialist Centre, Sarawak 130 MSQH
23 Pantai Hospital Ayer Keroh, Melaka 250
24 Pantai Hospital Ipoh, Perak 121
25 Pantai Hospital Kuala Lumpur, Wilayah Persekutuan - Kuala Lumpur 332 JCI
26 Pantai Hospital Penang, Pulau Pinang 180 ISO, MSQH
27 Penang Adventist Hospital, Pulau Pinang 216 JCI, MSQH
28 Prince Court Medical Centre, Wilayah Persekutuan - Kuala Lumpur 300 JCI, MSQH
29 Puteri Specialist Hospital, Johor 102
30 Putra Specialist Hospital, Melaka 225 ISO
31 Sabah Medical Centre, Sabah 95
32 Sentosa Medical Centre, Wilayah Persekutuan - Kuala Lumpur 135 ISO
33 Sime Darby Medical Centre Subang Jaya, Selangor 393 JCI, ISO, MSQH
34 Sunway Medical Centre, Selangor 240 ISO, MSQH
35 Taman Desa Medical Centre, Wilayah Persekutuan - Kuala Lumpur 128
36 Tawakal Hospital, Wilayah Persekutuan - Kuala Lumpur 158 ISO, MSQH
37 Timberland Medical Centre, Sarawak 72
38 Tropicana Medical Centre, Selangor 70 ISO
39 Tun Hussein Onn National Eye Hospital (THONEH), Selangor 46
40 Tung Shin Hospital, Wilayah Persekutuan - Kuala Lumpur 247 ISO
41 UM Specialist Centre, Wilayah Persekutuan - Kuala Lumpur 60
Private healthcare facilities in Malaysia are required to be licensed under the Private Healthcare Facilities and Services Act 1998. Joint Commission International (JCI) and Malaysian Society for Quality in Health (MSQH) are two accreditations that many of the private hospitals
have. Both are recognised members of the International Accreditation Federation Council (IAFC), a body under the umbrella of the International Society for Quality Healthcare (ISQuA). These accreditations ensure a minimum level of quality. Source: Association of Private Hospitals
30 November 2011 Page 9 of 22
KPJ Healthcare 17 October 2011
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Positive structural factors
Population growth and demographic shift. Malaysia‟s total
population stood at about 28.3m in 2010, having grown at an annual
rate of 2.0% in the past decade. Longer life spans also resulted in a
larger number of people aged 65 and above. As at last year, they
accounted for about 4.7% of the total population and are still growing.
This demographic shift will underpin the factors fuelling the ever-
increasing need for healthcare services.
Rising national income. In the meantime, Malaysians are getting
wealthier as income levels rise in tandem with the country‟s progress.
Better education, longer life span and a desire for a better lifestyle also
make them more willing to spend on healthcare. As evidence, per
capita expenditure on health has increased along with higher income
levels over the years.
Admission rates on the rise. Rising admission figures from data
released by the MOH support our notion. Inpatients and outpatients are
growing in both the public and private sectors. However, the statistics
also show that admission figures in the private sector are growing at a
much higher rate than in the public sector.
Figure 6: Population growth Figure 17: Ageing population
Source: Department of Statistics, Malaysia Source: Ministry of Health, Malaysia
Figure 8: Rising GNI per capita Figure 9: Rising per capita expenditure on health
Source: World Health Organisation Source: World Health Organisation
Source: Ministry of Health, Malaysia Source: Ministry of Health, Malaysia
Leader in the domestic market
Largest private hospital network. KPJ is the market leader in private-
sector healthcare in Malaysia. It has the largest network of private
hospitals, comprising 20 hospitals and 2,505 beds. As at 2010, it
accounted for 19% of the total private hospital beds and about 26% of
private inpatient admissions in Malaysia. In terms of average ward
charges, it ranks slightly below Pantai Group‟s hospitals but we suspect
that Pantai may have relatively higher revenue intensity due to its focus
on medical tourism and more complex medical procedures. KPJ, on the
other hand, concentrates more on community-based hospital services.
The company also runs two hospitals in Indonesia with 140 beds.
Figure 12: Share of private hospital beds Figure 13: Average single-bedded ward charges
Source: Company websites, Kim Eng Source: Company websites, Kim Eng
Revenue-sharing business model. Under KPJ‟s model, doctors can
use the KPJ brand name while engaging in their own private practice.
They are free to charge their own fees but must pay an undisclosed
percentage of the fees to KPJ. In return, KPJ provides the medical
facilities as well as necessary services, such as a centralised
dispensing, billing and collection system.
Domestic focus but can scale up foreign patient base. KPJ‟s market
is predominantly domestic in nature with foreign patients accounting for
less than 10% of revenue share in FY10. The network of community
hospitals that it operates is its niche market and shields it from the
vagaries of the medical tourism market, particularly in an economic
downturn. Nevertheless, KPJ‟s small base of foreign patients means
the potential for scaling up business in this segment is huge. The
company is actively participating in government-led initiatives to attract
more foreign patients.
30 November 2011 Page 11 of 22
KPJ Healthcare 17 October 2011
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Hospital expansion on the cards. KPJ is operating at high occupancy
rate of about 70-75% and will need to expand its capacity to cope with
the increasing demand in the sector. It intends to add 1-2 hospitals
each year to its network. Since 2005 when it had only 15 hospitals, it
has established another five by last year to take the number of hospitals
to 20. In the pipeline, there are already plans for seven more new
hospitals, one replacement hospital and an expansion plan for the
existing Penang Specialist hospital. By end-2013, we could see its
hospital bed capacity expand by up to 35%. We believe its revenue
intensity would also rise in tandem with the opening of more sub-
specialist hospitals/centres of excellence. Going by its past cash flow
trends, it may not be necessary for KPJ to raise much money to fund
these expansion plans. For one, its operating cash flow is robust.
Secondly, there would be cash generated from the sale of its hospitals
to Al-„Aqar REIT. Finally, the company currently has a cash position of
RM219.4m as at end-9M11.
Table 4: Hospital expansion plans
Hospital name/Location No. of beds
Estimated Completion Remarks
Bandar Baru Klang Specialist Hospital 200 End-2011 Muar 120 2012 Pasir Gudang 120 2012
New Sabah Medical Centre 250 2012 Replacement Tanjung Lumpur, Kuantan 180 2013 70:30 JV with Pasdec Corp KPJ Perlis Specialist Hospital 90 End-2013 60:40 JV with Yayasan Islam Perlis
Bandar Datuk Onn 400 2014-2015 Specialist hospital in Klang n.a. 2015 Acquired 1.8 acres of land for construction Penang Specialist hospital n.a. End 2014 Expansion of existing hospital
Source: Company
Entering the Australian retirement market. In September last year,
KPJ announced plans to venture into Australia‟s retirement/aged care
market through an agreement to buy a 51% stake in Jeta Gardens
Waterford Trust (JGWT) for cash consideration of RM19m. JGWT owns
and operates a 64-acre retirement village called Jeta Gardens, in
Waterford, Queensland, Australia. The retirement village includes a
108-bedded aged care facility, 23 retirement villas and 32 apartments
located between Brisbane and the Gold Coast.
At the same time, Al-„Aqar REIT announced the acquisition of the
assets owned by JGWT, which include 14.75ha of properties, for
RM134.9m. JGWT was still running a loss in FY Jun09, with a net loss
of A$3.1m and net liabilities of A$1.8m as it was probably in a gestation
period, having only started operating 3-4 years ago. The injection of
these assets into the REIT could turn it around as losses were mainly
due to high financial charges from borrowings incurred in starting the
business.
Education arm a second thrust for growth. KPJ also has a
healthcare education arm through KPJ International University College
of Nursing and Health Sciences (KPJIUC). KPJUC‟s main campus is
located in Nilai, Negeri Sembilan and has branches in Johor Bahru and
Bukit Mertajam. The institution was awarded university college status in
July this year. The college and hospitals play complementary roles –
the former supporting the clinical staff KPJ requires and the latter
providing the training ground for the undergraduates. KPJ intends to
spend about RM$120m to expand the college in two phases. It is
targeting 5,000 students in three years‟ and 10,000 in five years from
about 2,500 currently.
30 November 2011 Page 12 of 22
KPJ Healthcare 17 October 2011
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Risks
Competition from other hospitals. KPJ faces competition from other
hospitals with established networks. Its two largest rivals are Pantai
Group and Columbia Asia. There are also many other small players in
the market. It would also face more competition from regional players
as it begins to compete for foreign patients.
Liberalisation of the healthcare sector. Healthcare is one of the three
services sector (the others being education and professional services)
which is heading towards liberalization to raise its overall
competitiveness. Some of the recommendations announced in the
government‟s Strategic Reform Initiatives in July 2011 are the removal
of restrictions to foreign equity participation in setting up specialised
private hospitals if they meet a minimum number of beds and the
relaxation of entry restrictions for foreign specialists such as doctors
and dentists.
Shortage of healthcare professionals. Malaysia faces a shortage of
doctors and nurses. Expanding the capacity of a hospital or building
new ones would require a corresponding increase in the number of
doctors and nurses to operate it. In the event that KPJ fails to engage
such professionals to support its expansion plans, it may not be able to
achieve optimal operation. Conversely, if it fails to retain such
professionals and an exodus occurs, its operations would also be
affected.
Price pressure by insurance companies. The insurance industry in
Malaysia has grown bigger and more established. This has enhanced
its bargaining power in negotiations for more discounts for medical
procedures and treatments. This development could negatively affect
pricing.
Delay in expansion plans. We expect KPJ to pursue its expansion
plans to continue to grow its hospital network, which would in turn lead
to an overall increase in patient volume and revenue. Any delay in
expansion would retard the pace of growth that we have assumed. Cost
overrun for building new hospitals poses further risk.
30 November 2011 Page 13 of 22
KPJ Healthcare 17 October 2011
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Financials
Double-digit revenue growth. KPJ reports its revenue under four
major segments as illustrated in Figure 19. Last year, the bulk of the
revenue came from Malaysia with less than 1% from Indonesia. Over
FY06-10, revenue grew by strong double-digit CAGR of 19% as patient
volume swelled on hospital network expansion and increase in revenue
intensity. Future base revenue growth would be driven by the
expansion of hospital network via acquisitions or building new hospitals,
thereby increasing revenue intensity and foreign patient numbers.
Figure 14: Revenue and profit history Figure 15: FY10 segmental revenue, (RM’000)
BV = Book Value FV = Fair Value PEG = PE Ratio To Growth
CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio
Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter
CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset
DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity DPS = Dividend Per Share
NTA = Net Tangible Asset ROSF = Return On Shareholders‟ Funds
EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital
EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year
EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date
EV = Enterprise Value PBT = Profit Before Tax
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ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on
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30 November 2011 Page 22 of 22
KPJ Healthcare 17 October 2011
Page 1 of 2
APPENDIX 1
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liable for the contents of this report, with such liability being limited to the extent (if any) as permitted by law.
As of 30 November 2011, KERPL does not have an interest in the said company/companies.
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