Thailand healthcareHEALTH CARE & PHARMACEUTICALS EQUITY RESEARCH Go for the king of thronesPositive outlook driven by both foreign and domestic patient revenue growth January 9, 2013 Initiate with Bullish view; foreign patients remain key growth driver We expect foreign patient revenues to keep growing, driven by higher revenue per patient and admission as Thailand moves into higher acuity treatments, while keeping pace with regional price hikes. Thailand remains an attractive destination with a pricing discount of 20-30% to Singapore. Volume growth will also contribute as economic growth in surrounding countries has led to citizens of these countries seeking higher quality healthcare in destinations such as Thailand. With a collective population of 300mn, this pool of potentia l patients is sizeable and growing. Domestic demand provides a new growth driver At the same ti me, we expect structu rally highe r domestic de mand driven by higher demand from a rising middle class. National statistics show that middle class patients are 4% more likely to choose private healthcare than their lower-income peers. Our analysis shows that hospitals catering to the middle class are seeing y-y revenue growth of ~15-20%. Mid-market and upcountry as the next frontier of growth In the growing domestic healthcare market, we believe that the mid-market segment offers higher growth potential, while upcountry areas outside of Bangkok will be the next frontier of growth geographi cally. This ties in with our Thailand strategist’s view that we will see a higher rate of income growth and urbanisation outside of Bangkok. A tale of consolidation, segmentation and M&A M&A has and will likely continue to be a driver of growth and share prices, with Bangkok Dusit leading the way, having spent over THB20bn in the past 10 years. The market w ill consolidat e and at the same time be further segmented as industry participants seek to secure positions of control. Bangkok Dusit our preferred pick In the listed space, we prefer Bangkok Dusit (BGH TB, Buy) over Bumrungrad (BH TB, Neutral). We believe that BGH, the market leader, will be a key beneficiary of both domestic and foreign patient revenue growth through its wide cross-nation hospita l network and multiple hospital brands across both the mid- and high-end segments. This contrasts with BH which focuses only on the high-end segment in Bangkok. Valuations not cheap, but look justified We believe the Thailand healthcare sector deserves a premium to regional peers as it has the highest growth profile in the region. We apply EV/EBTIDA multiples of 16.3x for BGH and 15.6x for BH, which represent premiums of 10% and 5% to the peer average forward EV/EBITDA, respectively. The higher premiu m for BGH is due to its strategic leadership position, through its significant shareholdin gs in major competing hospital groups such as BH, and market l eader status. Anchor themes Continue d growth in medical tourism, coupled with structurally stronger domestic demand coming from the rising middle class, will underpin growth in Thailand's healthcare sector. Nomura vs consensus For FY13F earnings, we are 6% above consensus for Bangkok Dusit and 1% below consensus for Bumrungrad. Research analysts Thailand Healthcare & Pharmaceuticals Wen Jie Chan - NSL [email protected]+65 6433 6965 Jit Soon Lim, CFA - NSL [email protected]+65 6433 6969 See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
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Positive on sector, Bangkok Dusit our preferred choice
We initiate on Bangkok Dusit (BGH TB) with a Buy rating and target price of THB134.5.
We also initiate on Bumrungrad (BH TB) with a Neutral rating and target price of
THB80.5.
In this game of thrones, as multiple family-backed hospital operators manoeuvre tocontrol strategic leadership, we prefer Bangkok Dusit (Buy) over Bumrungrad (Neutral).
We believe BGH has successfully manoeuvred itself into a position of strategic control
via its shareholdings in major competing hospital groups and through its wide hub-and-
spoke hospital network. We also prefer BGH for its exposure to the domestic market,
particularly in the mid-market and upcountry segments, which offer a more stable growth
profile and offset the volatility of the medical tourist segment. With a PEG of 1.57x
relative to BH’s 2.0x, BGH is also the cheaper way to take a view on the Thailand
healthcare sector.
We expect BGH to continue delivering the growth story driven by: i) strong stable growth
of its mid-market and upcountry hospitals; ii) continued performance of it international
patient business against the backdrop of a stable political environment; with iii) capacity
growth through hospital expansions and acquisitions.
5 key themes
We identify 5 key themes that underpin our outlook for the sector.
• Continued growth in international patient revenues
• Rise of the middle class to drive structurally stronger demand for private healthcare
• Mid-market segment as the next growth segment
• Upcountry areas outside of Bangkok as the next frontier of growth
• Further consolidation and segmentation of market and continued M&A activities
International patient revenues to continue increasing and be a key earnings driver
Pricing still attractive relative to other medical tourist locationsWe believe that medical tourists will continue to patronise Thailand hospitals because
they remain affordable on a relative basis even as they get increasingly more expensive
on an absolute basis. We believe there is room to continue raising prices in line with
other markets such as Singapore without compromising on the relative affordability of
Thailand hospitals.
Ability to scale the value chain will allow more revenue per patient
Over the past 10 years, Thailand’s healthcare landscape has changed as the leading
hospitals have progressed to offer higher acuity treatments such as cancer and cardiac
related treatments. We expect this trend to persist and allow Thailand hospitals to
continue growing revenues by extracting more revenue per patient.
Surrounding source markets for medical tourists sizeable and continues to grow
Surrounding countries such as Bangladesh and the north ASEAN countries offer huge
prospects as source countries for medical tourists. Economic growth in these markets is
increasing demand for healthcare, which when coupled with an inadequate domestic
healthcare system, pushes people to seek treatment in medical destinations such as
Thailand. Together, their population size exceeds 300mn, larger than Indonesia, the 4th
most populous country in the world.
Expat population continues to grow
International patients also include the expat population in Thailand and the surrounding
countries. We don’t have hard data to quantify the growth rate, but continued foreign
direct investment into the market as expected by market observers should lead to a
Potential to surprise on the upside, but a double-edged sword
Due to the volatility in international patient flow, there is potential for the numbers to
surprise on the upside and lead to outperformance in the results. Conversely, the same
case can be made on the downside.
Structurally stronger domestic demand as annual income crosses US$3,000
threshold
The Thailand private healthcare market is enjoying strong structural growth driven largely
by higher income levels inducing patients to seek higher quality care in private hospitals.
Although not a definitive measure, we believe that patients have a significantly higherpropensity to shift from public to private healthcare as they cross the US$3,000 annual
income threshold. We estimate that a significant proportion of the population will soon
cross this threshold and thus represent a sizeable market for private healthcare
providers.
Sweet spot #1: Mid-market
In the growing domestic healthcare market, we believe there are some segments which
provide more attractive growth potential than others. Branding-wise, we believe that the
mid-market segment offers more patient growth potential relative to the high end as
patients who shift from public to private healthcare will naturally transit into the mid-
market segment rather than leapfrog into the premium healthcare space. As the mid-
market segment primarily services the domestic market, we see it as less exposed to the
vagaries of medical tourist arrivals.Sweet spot #2: Upcountry
Geographically, we believe that areas outside of Bangkok (e.g. Central and East regions)
will see higher growth in domestic private healthcare demand due to higher economic
and population growth rates. This ties in with our Thailand strategist’s view that we will
see a higher rate of income growth and urbanisation outside of Bangkok (see pages 18-
19 in the report, Thailand Outlook 2013)
A tale of consolidation, segmentation and M&A
We expect the Thailand healthcare industry to be able to accommodate only 2-3 large
private players eventually, which is the experience in other markets such as Singapore
and Malaysia. As such, we expect the large hospital groups to gain market share at the
expense of smaller players who will either be bought out or be forced out of business.
We also see further segmentation of the market, in terms of pricing and branding, as
industry participants seek to secure positions of control. We believe the acquisition of
Health Network, a mid-market brand, by Bangkok Dusit, and Bangkok Chain’s opening of
World Medical Centre, a premium hospital that offers a less pricey proposition to the
incumbents, are proof of further market segmentation.
M&A has and will likely continue to be a driver of growth and share price. Admittedly,
there is a lack of large acquisitions which will move the needle. Nonetheless, there are
still a few with 2 or 3 campuses available.
Limited supply of qualified healthcare professional – a keygrowth constraint
The key growth constraint lies with the limited supply of qualified healthcare
professionals. Although the labour pool is expanding faster than population growth, it is
not growing fast enough to meet the increased healthcare demand as income levels rise.
We think it is close to impossible to expand the labour pool fast enough without
compromising the quality of these professionals.
Being able to attract, incentivise and retain these scarce resources will therefore be a
critical successful factor. Having the appropriate compensation structure will be crucial.
Correspondingly, the right siting and pricing of care is essential as the labour cost will
dictate the pricing level and, correspondingly, the market positioning and operational
Positive on sector, Bangkok Dusit ourpreferred choiceWe initiate on Bangkok Dusit with a Buy rating and TP of THB134.5. We also initiate on
Bumrungrad with a Neutral rating and TP of THB80.5.
We are positive on the Thailand private healthcare market. In the listed private
healthcare space, we prefer Bangkok Dusit (Buy) over Bumrungrad (Neutral) as we
believe the group has successfully manoeuvred itself into a position of strategic control
via its shareholdings in major competing hospital groups and through its wide hub-and-spoke hospital network. With a PEG of 1.57x relative to BH’s 2.0x, BGH is also the
cheaper way to take a view on the Thailand healthcare sector.
Bangkok Dusit currently trades at 28.6/24.1x FY12/13F P/E and 16.0/14.2x FY12/13F
EV/EBITDA. Bumrungrad similarly trades at 26.7x/23.5x FY12/13F P/E and 16.4/15.2x
FY12/13F EV/EBITDA. These valuations are at a slight premium above peers.
Fig. 1: Peer valuation comparison
Source: Bloomberg, Nomura research. Note: Pricing as of 7 January 2013, ROE for BH and BGH are adjusted for one-off exceptional items.
Valuations
We believe that the Thailand healthcare names should trade at a premium to peers as
the Thailand healthcare sector has the highest growth profile in the ASEAN region, on
our estimates. The Thailand healthcare sector is a structurally more attractive market,
than let’s say Singapore, because growth in the middle income population will likely drive
structurally higher demand for private healthcare. The market in Thailand is arguably
also less developed and more fragmented and thus provides more profit opportunities
from further segmentation and consolidation of the market. At the same time, it also has
a well established medical tourism market and as such, provides a proxy to one of the
key themes in the Asean healthcare space.
As such, we apply an EV/EBITDA multiple of 16.3x for Bangkok Dusit and 15.6x for
Bangkok Dusit, representing premiums of 10% and 5% to the peer average forward
EV/EBITDA, respectively. We attribute a higher premium to Bangkok Dusit due to its
position as the market leader and what we deem as a strategic leadership position.
We cross-check our valuations using various methodologies (DCF, EV/EBITDA) and in
general, found support for our target prices.
Rating Bloomberg Ticker
Mkt Cap
(US$ mn) Price
P/E (x)
2012E
P/E (x)
2013E
P/B (x)
2012E
P/B (x)
2013E
EV/EBITDA (x)
2012E
EV/EBITDA (x)
2013E
ROE (%)
2012E
Div yield (%)
2012E
Div yield (%)
2013E
3yr EPS
CAGR (fw)Singapore
Raffles Medical Group NEUTRAL RFMD SP Equity 1,239 2.8 27.2 23.6 3.9 3.4 19.6 16.4 15.4 1.4 1.4 14.7
Five major themesWe identify 5 key themes that underpin our outlook for the sector.
• Continued growth in international patient revenues
• Rise of the middle class to drive structurally stronger demand for private healthcare
• Mid-market segment as the next growth segment
• Upcountry areas outside of Bangkok as the next frontier of growth
• Further consolidation and segmentation of market, with M&A as a driver
Continued growth in international patient revenues
Pricing still attractive relative to other medical tourist locations, able to raise
prices in pace with other markets
We believe that medical tourists will continue to patronise Thailand hospitals because
they remain affordable on a relative basis even as they get increasingly more expensive
on an absolute basis. We believe there is room to continue raising prices in line with
other markets such as Singapore without compromising the relative affordability of
Thailand hospitals.
Thailand hospitals are priced at a 20-30% discount to Singapore hospitals across major
procedures, based on data from Patients Beyond Borders. A comparison ofrevenue/patient day with IHH’s Singapore hospitals demonstrates a similar price
differential.
Thailand hospitals are priced in line with Malaysia hospitals for major procedures, based
on the same data set from Patients Beyond Borders. A comparison of revenues/patient
day with IHH’s Malaysia hospital indicates a significantly higher premium for Thailand
hospitals but this might be due to hospital specific factors such as patient mix and
treatment mix.
Fig. 12: Major procedures: comparative costs (as of Aug 2011)
Source: Patient Beyond Borders
Fig. 13: Comparison across hospitals in the region
Thailand hospitals are at a significant discount to Singapore hospitals
Source: Company data, Nomura researchNote: 2010 is the best year for comparison across hospitals as BGH’s 2011 number is distorted by acquisitions of mid-market hospitals; BH is the best comparison with SG hospitals as it is a stand-alone hospital operating at the top end of thepremium market; Thailand revenues include share of doctor’s fee that accrues to the doctors, and as such Rev ppdnumbers are slightly inflated by 10-15% relative to other regional peers
Procedure US Cost Costa Rica India Malaysia Mexico Singapore
Ability to scale the value chain will allow more revenue per patient
Over the past 10 years, Thailand’s healthcare landscape has changed as the leading
hospitals have progressed to offer higher acuity treatments such as cancer and cardiac
related treatments. We expect this trend to persist and allow Thailand hospitals to
continue growing revenues by extracting more revenue per patient.
The scale in which Thailand hospitals are moving into higher acuity treatments cannot be
understated – the scale of their operations is multiple-folds that of Singapore. To put
things in perspective, Bumrungrad’s Heart Centre alone has more doctors than all IHH’s
Singapore hospitals combined (68 vs 51 cardiology specialists).Going forward, we expect to see the establishment of more Centres of Excellence in high
acuity treatments. For instance, Bangkok Dusit’s Wattanosoth Hospital recently opened
a Cancer Centre in May 2012, while a new Heart Centre was opened by Bangkok Heart
Hospital in the very same month. Anecdotally, we also hear of groups of specialists
coming out to open up stand-alone centres specialising in cancer and cardiac-related
treatments
Surrounding source markets for medical tourists sizeable and continues to grow
Surrounding countries such as Bangladesh and the north ASEAN countries offer huge
prospects as source countries for medical tourists. Economic growth in these markets is
increasing demand for healthcare, which when coupled with an inadequate domestic
healthcare system, pushes people to seek treatment in medical destinations such as
Thailand. Together, their population size exceeds 300mn, larger than Indonesia, the 4thmost populous country in the world.
The Middle East market will continue to be a key contributor as Middle Eastern travellers
continue to seek healthcare beyond their borders, funded by the public coffers and
income supported by high oil prices. We have not factored Indonesia as a key source
market for Thailand as we expect Indonesia to continue being the key source markets for
Malaysia and Singapore due to proximity and familiarity.
Fig. 14: Source countries
Source: CEIC, World Bank, UN,
*Growth rate based on 2010
Expat population continues to grow
International patients also include the expat population in Thailand and the surroundingcountries. We don’t have hard data to quantify the growth rate, but continued foreign
direct investment into the market as expected by market observers should lead to a
growing expat population in the region.
Potential to surprise on the upside, but a double-edged sword
Due to the volatility in international patient flow, there is potential for the numbers to
surprise on the upside and lead to outperformance in the results. Conversely, the same
case can be made on the downside. BH, which derives more than 50% of its revenues
from international patients, is most leveraged to the flow of international patients.
Rise of the middle class to drive structurally stronger demandfor private healthcare
The Thailand private healthcare market is enjoying strong structural growth driven largely
by higher income levels inducing patients to seek higher quality care in private hospitals.
Although not a definitive measure, we believe that patients have a significantly higher
propensity to consume private healthcare as they cross the US$3,000 annual income
threshold. We estimate that a significant proportion of the population will soon cross this
threshold. Our economist estimates that 7mn people (~10% of the Thai population) will
enter the middle-class segment between 2009 and 2014, making ~40% of the Thaipopulation ‘middle class’. The recent increase in minimum wages – up an average 40%
to THB300 a day – will also help boost the growth of the rising middle class.
Fig. 15: Growth in middle-class population
Source: Nomura Global Economics
Fig. 16: Healthcare expenditure growth
Source: MoPH, Nomura research
Average annual income in Thailand
Source: CEIC, Nomura research
Public hospital capacity tight, spillover demand will benefit private operators
A casual observation of the data shows that the growth in public healthcare expenditure
accelerated as average income levels approaches US$3,000. As they cross the
US$3,000 level, we expect to see demand shift towards private healthcare as people are
now more willing to spend on higher quality care and due to the inability of public
hospitals to cope with the public patient load, given that utilisation levels are essentially
close to maximum operational capacity (82% as at 2009; National Statistical Office).
Data show that people prefer private over public as they become part of themiddle-income population
Data from the National Statistical Office (NSO) show that increasing affluence favours
the selection of the private healthcare provider when ill. We observe that a middle-class
patient is 4% more likely to consume private healthcare than its lower-income peers.
With the rise in income level and increase in minimum wage, we expect the middle-class
population to grow strongly. As such, this would be positive for private healthcare
consumption.
2009 Ranking Million peopleChange f rom2004 to2009
Change from2009 to 2014
No.1 China Urban 263.9 197.0
Rural na 108.8
No.2 Indonesia 48.8 99.3
No.3 Korea 3.1 2.0
No.4 Thailand 11.9 7.0
No.5 India Urban na 121.6
Rural na 82.1
No.6 Taiwan 0.2 0.4
No.7 Malaysia 6.6 5.7
No.8 Philippines 17.3 27.4
No.9 Hong Kong 0.0 0.3
No.10 Singapore 0.2 0.4
No.11 Vietnam na 26.5
As ia ex-Japan 380.0 678.5
Japan 0.0 -1.0
0
100
200
300
400
500
600
700
2001 2002 2003 2004 2005 2006 2007 2008
Overall Ex pe nd itu re P ri vat e Ex pe nd itu re P ub lic Expenditure
Fig. 17: Healthcare facility selection when ill (as of 2009)
Source: National Statistical Office, Nomura research
Sweet spot #1: Mid-market
Strong revenue growth profile; higher domestic volume growth potential than
premium market
Within the growing domestic healthcare industry, we believe there are some segmentswhich provide more attractive growth potential than others. Positioning-wise, we believe
that the mid-market segment offers more patient growth potential over the long term as
patients who shift from public to private healthcare will naturally transit into the mid-
market segment rather than leapfrog into the premium healthcare space.
In Bangkok, we see the mid-market hospitals demonstrate a strong consistent revenue
growth profile, driven by higher patient loads. This contrasts with the higher-end
hospitals, which are seeing no to low growth in domestic patient loads. BGH, with its
mid-market brands – Paolo and Phyathai – is well exposed to this segment.
Less volatile relative to international patient load
As the mid-market segment primarily services the domestic market, we see it as less
exposed to the vagaries of medical tourist arrivals which saw volatility during the periods
of political turmoil and flooding. Foreign patient growth is subject to the economicconditions of source countries, expat population growth in Thailand, political conditions
and in more recent years, weather conditions. We have seen many years of no or
negative growth as a result of these factors.
Higher margins relative to premium hospitals
The mid-market offers higher margins than the premium hospitals. We believe this could
be due to higher operating leverage of these hospitals and a different remuneration
structure that allow operators to capture greater value per transaction.
Geographically, we believe that areas outside of Bangkok will see higher growth in
domestic private patient load than Bangkok due to higher economic and population
growth rates. This ties in with our Thailand strategist’s view that we will see a higher rate
of income growth and urbanisation outside of Bangkok (see pages 18-19 in the report,
Thailand Outlook 2013).
We expect upcountry growth to be more assured and stable than in Bangkok as the
growth upcountry will likely be driven more by domestic consumption and less by
medical tourism, which tends to be volatile. Our view is supported by data from BGH’s
upcountry hospitals which show that upcountry hospitals have outperformed Bangkok
hospitals in recent history.
Fig. 19: Top-performing upcountry hospitals vs Bangkok hospitals under the BGH group: % y-y revenue growth
Upcountry offers higher and more stable growth on average
Source: Company data, Nomura research
Local patient growth faster in upcountry regions
In coming to our conclusion, we break Thailand into 7 regions and rank each region by
looking at various metrics such as growth (population and GDP per growth), willingness
to pay for private healthcare (GDP per capita and population density) and ease of
coverage (number of provinces as a measure of geographical spread). With higher
population and economic growth, we see that the Central and Eastern regions offer
better growth prospects for local patient load than Bangkok. BGH, with 5 hospitals in the
Eastern region, is well exposed to this segment.
Upcountry growth to be higher than mid-market BKK
Due to differential in earning power, we expect the bulk of upcountry hospitals to operate
in the mid-market segment or at most, the lower end of the premium market. Due to
higher population and economic growth in upcountry markets, we expect upcountry
hospitals to generally show higher revenue growth than mid-market hospitals in BKK.
International patient growth key to patient load growth in BKK
We expect international patient growth to be the saving grace for patient load growth of
private operators in BKK, aside from growth in the mid-market segment. The historical
numbers paint a slow growth picture, with foreign patient load growing at a CAGR of only2.4% across 2005-11 for Bumrungrad. However, the more recent 2011 numbers show
an increase of 9% y-y. 9M12 numbers for Bumrungrad also paint a hopeful picture with
Role of the governmentThe role of the government in healthcare provision is significant. We explore four key
areas – public sector competition, substitution effect, public-private partnerships and
M&A regulations.
Public sector competition
Interestingly, competition to private operators may come in the form of public hospitals
moving into the premium segment. We already saw Siriraj Piyamaharikarun Hospital(SiPH), a state hospital, open its doors in early 2012 to provide premium services. Other
state hospitals such as Chulalongkorn Hospital and Mahidol Hospital are also reportedly
catering to the premium segment.
We visited the premium wings of these state hospitals in 3Q12 and walked away with the
impression that they are not of sufficient threat. This is because supply is still tight and
even these public hospitals are not fully ramped up due to staff shortages – an irony
since these are university hospitals and should theoretically have better access to the
necessary manpower resources.
Substitution effect
Expansions of public healthcare schemes, in terms of more subsidies and more medicalcoverage, have led to greater healthcare coverage for the people. Arguably, affordable
public healthcare is a strong substitute for private healthcare.
Greater subsidies and further medical coverage may see patients shifting from private to
public hospitals. However, with public capacity stretched, we do not think that is likely.
Furthermore, the costs of maintaining these schemes are getting increasingly more
expensive. The healthcare budget has grown consistently across time and is making up
an ever-increasing proportion of the national budget. As such, significant expansion of
these schemes is unlikely, in our view.
Fig. 26: Growing health budget
Source: Bureau of the Budget, Nomura research
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
‐
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
MoPH Budget (THB mn) MoPH Budget % of National Budget
To address the shortage of public capacity, greater private involvement in public
healthcare schemes has been actively sought. However, success has been mixed,
depending on the scheme. For instance, private hospitals are largely reluctant to join the
Universal Coverage Scheme due to problems of overcrowding and social problems,
according to industry observers. As Dr Rienthong Nanna, director of Mongkutwattana
Private Hospital, points out, joining the scheme greatly taxed the hospital’s resources
due to a massive increase in patient load and social problems such as abandonment of
patients by their families.
Margins from treatments were also reportedly low as Dr Rienthong highlights that the
hospital “only managed to survive” from providing its services. This is despite higher
capitation rates. In 2010, Kasemrad Hospital and its two network hospitals along with
Srivichai Hospital left the Universal Coverage Scheme, effectively reducing capacity of
medical treatments for 200,000 patients under the scheme. Currently, only 29 private
hospitals are participating in the universal healthcare scheme.
Fig. 27: Capitation rates for Universal Coverage Scheme
Source: NHSO, Nomura research
Anti-monopoly laws
We might potentially see greater regulation which may slow the rate of M&A.
According to a Bangkok Post article (Hospital merger raises eyebrow , 15 March 2012),
Santichai Santawanpas, deputy director-general of the Internal Trade Department, said
the private healthcare sector might need to be closely watched. He cited a public hearing
held at the end of Feb 2012 in which criteria on mergers and acquisitions were called for.While the Trade Competition Act has been in force since 1999, it merely requires that
businesses with a post-merger market share larger than 25% of the industry total or
sales in excess of THB1bn seek prior approval from a board established under the act.
During the 12 years since the Trade Competition Act's implementation, 77 cases
concerning market dominance have been submitted to the ministry. According to same
Bangkok Post article, no enterprise has yet been penalised under the act because of the
Industry outlook: A case for privatehealthcare in ThailandDemographic changes such as growing population and more importantly, an ageing
population, together with a sedentary lifestyle associated with urbanization, will likely
lead to greater incidence of disease and greater demand for healthcare. We also see an
increasing trend of acute diseases such as cardiovascular diseases which should drive
intensity of care up.
We believe private healthcare demand will be a key beneficiary as total healthcaredemand increases. Increasing income levels translate to an increased ability to pay for
private healthcare. More importantly, it has been shown that an increase in income leads
to greater propensity to consume private healthcare.
Even as healthcare demand increases, increase in healthcare capacity has been limited.
In particular, the increase in public healthcare capacity has been non-existent given
government budget limitations and the high investment cost to build new hospitals.
Public supply is tight with public capacity operating at high occupancy rates of >80%.
This provides an opportunity for private healthcare providers to capture market share
from their public counterparts and we have seen private capacity occupancy increase
across time.
Private healthcare demand is growing…
Population growth, urbanisation and increasing trend of acute diseases
Demand for healthcare will likely increase with population growth. In 2010, Thailand had
an urbanisation rate of 34% and a population of 69.12 million. Total population growth
rate has declined to 0.6% in 2010, from 1.19% in 2000. However, due to the effects of
rural-urban migration and higher standards of living, the urban population has grown at a
higher CAGR of 1.8% from 2001 to 2010. The National Economic and Social
Development Boad (NESDB) has since projected the urban population to account for
47.2% of the total population by 2027.
Urbanites are more likely to lead sedentary lifestyles and have a higher probability of
contracting chronic diseases. We have observed an increasing trend of acute diseases
such as cardiovascular diseases which should drive intensity of care up.
The private healthcare industry, which is mainly concentrated in urban areas, is poised to
benefit most from the effects of urbanisation as it will have access to a larger potential
Limited supply of qualified healthcareprofessionals – a key growth constraintThe key growth constraint, we believe, lies with the limited supply of qualified healthcare
professionals. According to data from the government, the nursing population grew at a
CAGR of 1% over 2002-09, while the doctor population grew at a CAGR of 4% over
2003-09. Although the labour pool is expanding faster than population growth, it is not
growing fast enough to meet the increased healthcare demand as income levels rise.
The doctors and nurses per 1,000 population ratios in Thailand remain among the lowestin the region. We think it is close to impossible to expand the labour pool fast enough
without compromising the quality of these professionals.
Being able to attract, incentivise and retain these scarce resources will therefore be a
critical successful factor, in our view. Having the appropriate compensation structure will
be crucial. Correspondingly, the right siting and pricing of care is essential as the labour
cost will dictate the pricing level and, correspondingly, the market positioning and
operational model of the business.
The financial implication, at the minimum, will be rising wages, which will be a drag on
earnings and margins. We believe this will primarily be offset through growing volumes,
operating leverage and higher prices driven by higher intensity of care. General price
increases will be limited, in our view, due to the presence of cheap, heavily subsidised
public healthcare. Tight cost control through economies of scale and higher productivitythrough the use of technology and further systems integration will also help combat
against the cost pressure of rising wages.
Fig. 38: # of doctors graduating
Source: Bureau of Policy and Planning, Medical Council (Thailand), Nomura research
Fig. 39: # of nurses graduating
Source: Nursing Council of Thailand, Nomura research
Fig. 40: Doctors and nurses per 1,000 population across the region
Bangkok Dusit currently has presence across various market segments. Its core brands
– Bangkok Hospital, Samitivej and BNH – ply to the high end and international patients
seeking high acuity tertiary/super tertiary care. Both its Phyathai and Paolo brands cater
to the mid-market segment, with Phyathai doing more high acuity cases than Paolo.
Separately, Bumrungrad occupies the high-end, high acuity market, while Bangkok
Chain occupies the mid-market tertiary space.
We expect the space to be segmented further. For instance, Bangkok Chain’s WorldMedical Centre seeks to occupy a gap in the market with its tertiary offering at a slightly
less pricey price point to cater to above-average income patients. Bangkok Chain may
also look to move downwards to establish a hospital catering solely to social security
patients.
Fig. 45: Market positioning
Source: Bangkok Dusit, Nomura research
Strategy – Outgrow, out-last, out-manoeuvre
Bangkok Dusit’s strategy is one of capacity and geographical expansion via M&A, with
newbuilds as the fallback option in lieu of any suitable targets. This increased network of
hospitals will be organised via a hub-and-spoke structure to achieve the right siting and
sizing of care. The increased scale of the organisation will naturally yield economies of
scale, even as the group seeks to claw back margins through vertical integration.
Bumrungrad’s strategy juxtaposes that of Bangkok Dusit’s, as it fortifies itself with its
focus on Bangkok and expansion through growth of its current campus. The primary
strategy is to drive greater asset intensity of current assets and to leverage the existing
client base in the main campus for further expansion.
The name of the game for Bangkok Chain, in our view, is further segmentation of the
market, as it seeks to out-manoeuvre the competition. It seeks to enter into new market
segments through newbuilds and possibly via M&A, too. Driving asset efficiency remains
another key strategy.
Fig. 46: Comparison of major healthcare groups
Source: Nomura research
Note: Bangkok Dusit growth and margins excludes effect of Health Network acquisition; Bangkok Dusit has 2 more hospitals outside of Thailand in Cambodia.
Fig. 47: Bangkok Dusit expansion plans
Source: Company data, Nomura research
Bangkok Dusit Bumrungrad Bangkok Chain
Assets
# of licensed beds in Thailand 5,137 538 1,530
# of hospitals in Thailand 26 1 6
# of Centre of Excellence 6 35
Average # beds/hospital 198 538 255
# of doctors 957 - 345 full time, 612 part time 1200 - 300 full time, 900 part time
# of nurses 932 - 787 full time, 145 part time 900
Brands
BH: Bangkok Hospital,SA: Samithvej,
BNH: BNH HospitalPM: Paolo Memorial,
PH: Pyathai BH: BumrungradKasemrad
WMC - World Medical Centre
Geographical presence All regions, except North-East, Central BKK BKK & vicinity, Central, North
Positioning
Pricing High: BH, SA, BNHUpper-mid: PM, PH High Mid
Geography Nationwide presence Bangkok focused Spread out
Intensity of care High High Mid
Target clientele Mid-high end patients High end patients Public/Mid-income patient
Foreign patient load (% of total revenue) 26% 59% -
Key earnings driversWe believe the key revenue driver for Bangkok Dusit and Bumrungrad will be higher
patient acuity, driven by increasing specialisation. Between the two, we expect patient
intensity growth to be relatively slower for Bangkok Dusit, as average treatment intensity
growth is diluted by its mid-market brands.
However, this will likely be offset by stronger volume growth for Bangkok Dusit, driven by
capacity expansion and mid-market private healthcare demand growth on the back of
increasing income levels and tightness in public capacity. Bumrungrad should continue
to see decent volume growth as it expands capacity in its main campus, although it may
be constrained by tight capacity in certain segments (eg, checkups, rehab).
General price increases should be in line with the industry average of 3-4%. Arguably,
there could be higher pricing power going forward as a result of market consolidation.
On the cost front, both hospital groups will likely experience wage cost pressures but
should still see expanding margins. We expect an expansion in Bangkok Dusit’s EBITDA
margins thanks to higher acuity treatments, economies of scale and operating leverage
with some drag from sub-optimal utilisation levels of new capacity. We expect
Bumrungrad’s EBITDA margins to expand faster due to higher operating intensity and
greater increase in patient acuity, although offset by start-up costs arising from its 2nd
campus on Soi 1 which is slated to start operations in 2015F.
Based on our forecasts, we expect Bumrungrad to experience similar growth on an
EBITDA level. However, slower growth in depreciation cost, a decrease in finance
expenses at Bangkok Dusit and recognition of Bumrungrad’s results as share of income
from associates will likely eventually result in a higher growth rate for Bangkok Dusit’s
bottom line.
For BGH, we expect the group to demonstrate a consistent earnings growth profile of 18-
19% pa across the forecast period, on the back of: i) revenue growth of ~13% pa, ii)
EBITDA margin expansion of 0.2-0.3pp per year on economies of scale, iii) a lower rate
of increase in depreciation, iv) a decline in finance cost, and v) lower tax rates in
FY12/13F. Our estimates are most sensitive to changes in cost assumptions.
For BH, we expect growth to sustain in the mid-teens across the forecast period, on the
base case of continued growth in international patients against the backdrop of a stablepolitical and weather climate. Our FY13F net profit growth forecast drops sharply from
FY12F, as FY12F will be boosted by associate income from Bangkok Chain, which was
sold in FY12F. Our FY15F net profit growth forecast will come in stronger y-y for
Bumrungrad due to contribution from its campus extension on Sukhumvit Soi 1.
We have not assumed a high level of foreign patient growth. Foreign patient growth is
subject to the economic conditions of source countries, expat population growth in
Thailand, political conditions and in more recent years, weather conditions. We have
seen many years of no or negative growth as a result of these factors. With all these
factors still in play, we believe that investors will be better served by assuming thosefactors in their base-case scenario. As such, we have assumed that growth for high-end
BKK-focused hospitals will come primarily from an increase in patient acuity and price
hikes, with a moderate foreign patient load growth. A higher-than-expected foreign
patient load represents potential upside.
Greater operating leverage
Higher-than-expected operating leverage due to higher utilisation, faster increase in
patient acuity and better cost management would be an upside to our numbers.
More M&A action
On a fundamental level, we would expect more M&A action to lead to further industry
consolidation and arguably stronger pricing power. It could also allow for a higher growth
rate and be accretive to shareholders at the right price. Valuations would also likely
continue to be supported if M&A activity level remains high.
Staffing constraints relieved
Favourable government policies that reduce the foreign doctor/nurses import
requirement would be an immediate positive in containing wage costs and relieve the
labour constraints.
Stronger-than-expected economic growthStronger-than-expected economic growth would likely see increased FDI and possibly,
an increased number of expats in Thailand – a positive for foreign patient load. Arguably,
mid-market volumes and pricing would also grow faster on the back of stronger income
Appendix: Public healthcare schemesThailand has 4 main public insurance schemes that cover 97.4% of the total population.
They are the Civil Servant Medical Benefit Scheme (CSMBS), Social Security Scheme
(SSS), Worker Compensation Scheme (WCS) and Universal Coverage Scheme (UCS).
Fig. 52: Summary of public healthcare schemes
Source: Nomura research
Scheme Universal Coverage Scheme
(UCS)
Social Security Scheme (SSS) Worker Compensation Scheme
(WCS)
Civil Servant Medical Benefit
Scheme (CSMBS)
Background
Eligibility Every Thai National not in otherpublic schemes
Private Sector employees (Mustbe above 15)
All civil se rvants and dependantsincluding pensioners
Objective Focus on health promotion andprevention as well as curative careEmphasize role of primary healthcare and ration use of effectiveand efficient integrated servicesFoster proper referrals to hospitalsEnsure subsisides on publicspending are pro-poor and that allcitizens are protected against thefinancial risks of obtaininghealthcare
Subsidies for non-work relatedhealth problems
Compensation for work relatedhealth problems
Provide fringe benefit withoutcontribution in compensation for agenerally low salary scale
The Civil Servant Medical Benefit Scheme covers all civil servants and their dependants,
including pensioners, which make up approximately 9% of the population. It was first
established in 1980 through the Royal Decree on Civil Servant Medical Benefit Scheme.
Under the CSMBS, the insured are entitled to a comprehensive healthcare coverage
package without the need for out-of-pocket expenditure. They have a free choice of
visiting any public healthcare provider and can only visit private healthcare operators
through referrals albeit with restricted reimbursements.
The scheme is funded through general tax revenues and the Ministry of Finance is the
designated purchaser for the healthcare services provided. Public payments to providers
are done through direct disbursement to the hospital for outpatient services, whereas for
inpatient services the diagnosis related group (DRG) payment system is used.
Social Security Scheme & Worker Compensation Scheme
The Social Security Scheme (SSS) and Worker Compensation Scheme (WCS) cover all
private sector employees above the age of 15 years, excluding dependants, which make
up approximately 16% of the population. The former was established through the 1990
Social Security Act, while the latter through the 1972 Worker’s Compensation Act.
The key difference between the SSS and WCS lies within their scope of coverage. TheSSS provides subsidies for non-work-related health problems, while the WCS
compensates for work-related health issues.
Under the SSS, workers are entitled to a comprehensive healthcare coverage package,
excluding prevention and health promotion services, and have free choice amongst
entitled or affiliated hospitals (both public and private) without out-of-pocket contribution.
Private providers can also be sought but co-payment is required from the individual. The
SSS is funded through a tri-party contribution of 1.5% employee’s payroll from the
government, employer and employee. The Social Security Office is in charge of
managing this fund and purchasing healthcare services. Public payments to providers
are done through capitation for most services and fee scheduling for selected
treatments.
Under the WCS, workers are compensated for any work-sustained health problems andhave free choice of both public and private healthcare providers. Public payments to
provider for treatments up to THB30,000 will be covered by the worker compensation
fund through fee for service payments. Employers are liable to cover expenses up to
THB50,000 and this may increase to THB200,000 for certain severe conditions. Any
additional expenses will be incurred by the individual. The worker compensation fund,
similarly managed by the SSO, is financed through employer’s contribution of 0.2-2.0%
of the employee’s payroll, depending on job risk category.
Universal Coverage Scheme
The Universal Coverage Scheme covers all Thai nationals that do not belong to any
other public schemes, which make up approximately 76% of the population. It was firstinitiated by the Thai Rak Thai party under the “30 baht treats all disease” slogan. After
winning the election, then Prime Minister Thaksin Shinawatra quickly established the
medical scheme by starting its launch in 6 provinces in April 2001 and then nationwide
by April 2002. In 2006, co-payment was abolished by Prime Minister Surayad
Chulanont’s government.
Under the UCS, the insured is entitled to a comprehensive healthcare package
(excluding mental illnesses, cosmetic surgery, infertility), without the need for out-of-
pocket expenditure, although co-payment is required for medication not included in the
National List of Essential Drugs. Choice of healthcare provider is limited to the
designated Contracting Unit for Primary care (CUP), usually a district public health
centre. Patients must first seek primary treatment at their designated CUP and
3-Dec-04Ramkhamhaeng HospitalPublic Company Limited 7.04% Cash
21-Dec-04
Samitivej PCL,Bangkok Hatyai Hospital Co.Ltd;
Bangkok Phuket Hospital Co.Ltd
Offering 126.5mn new shares (BGHshares worth ~ THB8.30)
2BGH for 1 SVH (THB10 par value,shares worth ~THB17.02)
1BGH for 1.48 Bangkok Phuket
Hospital (THB5 par value)
1BGH for 1.66 Bangkok Hat Yai
Hospital (THB5 par value) Shares Acquire remaining stakes in Samitivej PCL, Bangkok Hatyai HospitalCo. Ltd and Bangkok Phuket Hospital Co. Ltd
1-Apr-05 BNH Medical Center Co Ltd 13.00%
2006
Bangkok Hospital Pattaya;Bangkok Hospital Rayong;Wattanawech;Bangkok Hospital Trat
Bangkok Hospital Pattaya: THB35.84,(par THB10)
Bangkok Hospital Rayong: THB12.07(par THB10)
Wattanawech:
THB26.98 (par THB10)
Bangkok Hospital Trat: THB5.02 (parTHB5)
Dusit par value THB1 Shares
Made a bid offer for Bangkok Hospital Pattaya Company Limited,Bangkok Hospital Rayong Company Limited, Vatthanavej Company
Limited (Bangkok Hospital Chanthaburi) and Bangkok Hospital TratCompany Limited
Increased holdings in the 4 companies to 97.1%, 100%, 99.5%, 99.6%
28-Jun-05
Bangkok HopsitalRatchasima Company
Limited 79.70% 273.03 765 Cash 300 bed hospital in Amphoe Muang, Nakhon Ratchasima Province17-Sep-06 Prasit Patana PLC 15.76% 870 Cash Acquired from Bank of Ayudhya
21-Nov-07
Ramkhamhaeng HospitalPublic Company Limited 7.20% 0.86 THB480 414 Cash Had to make a mandatory tender offer
2008
Ramkhamhaeng HospitalPublic Company Limited 12.06% 1.45 THB480 694 Cash Bid offer at THB480/sh from 4 Jan 08 to 7 Feb 08
With significant stakes in the 2nd and 4th largest players, Bumrungrad and
Ramkhamhaeng, any attempts to takeover these two companies by other parties will
most likely be blocked by Bangkok Dusit and allow the group to stay ahead of the
competition. On the other hand, any attempts by Bangkok Dusit to take over these
companies can be effectively blocked by the controlling shareholders and their allies.
Game-changing events
We believe there are three potential game-changing events that could change the
current dynamics:
• Changes in shareholders’ relationships. This is particularly the case for Bangkok
Dusit, as Bangkok Dusit’s controlling shareholder currently has the lowest shareholding
percentage of its company, and in turn control, compared to controlling shareholders of
BH and Bangkok Chain. This was due to the introduction of the Thongtang family as a
new shareholder in exchange for the acquisition of Health Network. The transaction
arguably put the founding family in a less favourable position. We note that we have
seen the founding family increase its stake in the company in recent times.
• Bangkok Chain. The identity of the overseas investor(s) who bought out the 24.99%stake is unknown. If the investor(s) is a foreign strategic operator, this could introduce a
new element of foreign competition in the Thailand healthcare market. On the other
hand, if the investor(s) is purely financial, we can expect Bangkok Dusit to be back on
the market as a potential M&A target. An acquisition by Bangkok Dusit is not
unimaginable, as we understand that the latter scenario is the more likely one.
• Ramkhamhaeng – the swing factor – gets acquired or engages in certain corporate
actions that elevates its position to become a credible competitor in this game of
thrones (eg, acquisition of other hospitals) or to ally with the other market followers to
Key company data: See page 2 for company data and detailed price/index chart.
Bangkok Dusit BGH.BK BGH TB
HEALTH CARE & PHARMACEUTICALSEQUITY RESEARCH
Back the king of thrones
The rise of the empire
January 9, 2013
Rating Starts at
Buy
arget price
Starts at THB 134.50
Closing price
January 7, 2013 THB 114.00
Potential upside +18%
Action: Buy the growth, strategic control included
We initiate on Bangkok Dusit with 18% implied upside to our TP, given astrong growth outlook, driven by i) strong stable growth of its mid-marketand upcountry hospitals; ii) continued performance of its international
patient business against the backdrop of a stable political environment;and iii) capacity growth through hospital expansions and acquisitions.
We also like the group for its position of strategic control via its stakes inmajor competing hospital groups and through its market leader positionthat is reinforced by scale expansion via a hub and spoke model.
Catalyst: Key beneficiary of M&A activityBGH is able to block any attempted industry consolidation and benefit witha sizeable payoff even if one goes through, thanks to significant stakes inthe 2nd and 4th largest healthcare operators. Separately, recent changesin its shareholder structure may make it more susceptible to a takeover.
Valuations/riskThe stock currently trades at 28.6/24.1x FY12/13F P/E and 16.0x/14.2xFY12/13F EV/EBITDA, which is at the high-end of its historical tradingband. We think the stock deserves to trade higher relative to historicals asthe group has since transformed into a much larger entity and diversifiedaway from the international patient market into the mid-market, upcountrysegments which have a more stable high growth profile.
Key risks: 1) lower-than-expected international patient load; 2) substitutionfrom public sector; 3) staff shortages and higher wage bills, 4) regulations;5) slower economic growth leading to lower patient load growth.
31 Dec FY11 FY12F FY13F FY14F
Currency (THB) Actual Old New Old New Old New
Revenue (mn) 37,308 45,885 51,450 57,709
Reported net profit (mn) 4,386 7,961 7,304 8,579
Normalised net profit (mn) 4,386 6,166 7,304 8,579
Mid-market and upcountry segments offer strong stablegrowth
Structurally higher domestic private healthcare demand due to growing middle
class
We like the exposure to the mid-market and upcountry segments due to the strong and
stable growth profile of these segments. We expect the domestic private healthcare
market to enjoy strong structural growth driven largely by a growing middle class
population which is proven to have a higher propensity for private healthcare.
Mid-market sweet spot for patients shifting from public to private healthcare
In the growing domestic healthcare market, we believe the mid-market segment offers
more patient growth potential relative to the high-end as patients who shift from public to
private healthcare will naturally transit into the mid market segment rather than leapfrog
into the premium healthcare space.
Higher growth in upcountry due to higher population and economic growth
Geographically, we believe that areas outside of Bangkok – particularly the Central and
Eastern regions – will see higher growth in domestic private healthcare demand due to
higher economic and population growth rates in these areas relative to BKK. BGH is well
exposed to the upcountry market, with 15 hospitals outside of greater Bangkok and a
third of that in the Eastern region.
More stable growth profile As the mid market segment and upcountry primarily service the domestic market, we see
it as less exposed to the vagaries of medical tourist arrivals.
Fig. 64: Top performers in BGH’s stable of hospitals: y-y % revenue growth
Upcountry - stable high growth, BKK mid-mkt - in line with high-end but more stable, BKK high-end - volatile
Source: Company data, Nomura research
High end international patient revenues to continue growing
We expect foreign patients revenues – a key revenue driver – to continue growing as i)
BGH hospitals remain relatively affordable in the region; ii) they are moving into higher
acuity treatments; iii) surrounding source markets for medical tourists are sizeable andgrowing; iv) the regional expat community is expanding. The growth momentum looks
intact, based on 9MFY12 results.
Track record of growing foreign patient revenues
The company has demonstrated the ability to consistently grow its foreign patient
revenues across time, through organic and inorganic means.
The outpatient segment has registered volume growth annually, while inpatient volume
growth has always been positive with the exception of FY09 due to the poor economic
climate and political instability in Thailand.
The group has also been able to grow revenue intensity consistently across FY03 –
FY07. Even though the company no longer provides revenue intensity data specific to
Reinforcing #1 position by scaling upthrough a hub and spoke strategy Already the market leader, Bangkok Dusit’s strategy is one of capacity and geographical
expansion via M&A, with newbuilds as the fallback option in lieu of any suitable targets.
This increased network of hospitals will be organised via a hub-and-spoke structure to
achieve the right-siting and right-sizing of care. The increased scale of the organization
will naturally yield economies of scale, even as the group seeks to claw back margins
through vertical integration.The general plan is to establish regional hubs, with each regional hub hospital positioned
to be the highest-end hospital in the region. With key regional hubs in Phuket and
Chonburi (Pattaya) and their headquarters in Bangkok, they are now moving into the
Northern region with their planned Bangkok Hospital in Chiangmai. They have also
recently established a new subsidiary in Udon Thani with the intention to establish
another regional hub for the North-Eastern region. With our view that the upcountry
segment is a sweet spot to be in going forward, we view this strategy favourably.
With significant stakes in the 2nd and 4th largest players, Bumrungrad and
Ramkhamhaeng, we think any attempts to takeover these two companies by other
parties will most likely be blocked by Bangkok Dusit and allow the group to stay ahead of
the competition. On the other hand, any successful attempt would most likely be done atrich valuations, which would see Bangkok Dusit receiving a steep payout. As such, we
think Bangkok Dusit would be in a heads-I-win-tails-I-win-too position in any M&A
situation.
Is Bangkok Dusit more susceptible to a takeover now?
A recent disposal of its entire shareholding by Pongsak Viddayakorn (and affiliates), the
co-founder of Bangkok Dusit, hints of a change in the power structure within the
shareholder roster and the boardroom.
Though the founding family has strengthened its own position by purchasing part of the
shares sold, the recent transaction has meant that they have lost a reliable ally in
Pongsak Viddayakorn and their overall control has weakened. More shares have foundtheir way to other investors who may be keen to sell out if the right price comes along.
To put things in perspective, 10.7% of the entire issued share base may have fallen into
unfriendly/unfamiliar hands.
In total 17.12% of the total issued shares of BGH was sold into the market, with 6.4%
going to the Prasarttong-Osoth family and affiliated entities, thus boosting their combined
stake to 30.7% (from 24.3%). The Thongtang family remains the second largest
General price increases should be in line with the industry average of 3 – 4%. Arguably,
there could be higher pricing power going forward as a result of market consolidation.
Performance across segments
Across service segments, we expect the inpatient segment to demonstrate both strong
volume growth and pricing power across the high-end and mid-market hospitals. We
expect the same for the high-end outpatient segment. However, we estimate that the
mid-market outpatient volume tends to see a greater trade-off against pricing, though
they remain generally price inelastic (i.e. a 1% hike in price lead to a <1% drop involume).
Across brands and geographies, we expect the upcountry hospitals to generally
demonstrate the strongest revenue growth consistently, followed by mid-market Bangkok
hospitals. Across time, the high-end Bangkok hospitals will perform in line or poorer than
mid-market Bangkok hospitals, in our view. However, they have the potential to perform
significantly above trend and above the other mid-market/upcountry hospitals, subject to
international patient flows.
Fig. 78: Top performers: y-y % revenue growth
Upcountry - stable high growth, BKK mid-mkt - in line with high-end but more stable, BKK high-end - volatile
Source: Company data, Nomura research
Fig. 79: Top hospitals by revenue and EBITDA contribution
Phyathai cluster and Bangkok Phuket seeing fastest expansion in EBITDA margins, the former likely driven by price increases on the outpatient segment,by our estimates. Samitivej cluster's margins expanding slower or shrinking
Source: Company data, Nomura research,
^ BMC comprises of Bangkok Hospital, Bangkok Heart Hospital, Wattanosoth Hospital; *PYT includes PYT1, PYT2, PYT3, PYTS; ** SVH includes SVH, SNH, SHH
We have not assumed a high level of foreign patient growth. Foreign patient growth is
subjected to the economic conditions of source countries, expat population growth in
Thailand, the political conditions and in more recent years, the weather conditions. We
have seen many years of no or negative growth as a result of these factors. With all
these factors still in play, we believe that investors will be better served by assumingthose factors in their base case scenario. As such, we have assumed that growth for
high-end BKK-focused hospital will come primarily from increases in patient acuity and
price hikes, with a moderate foreign patient load growth. A higher than expected foreign
patient load represents potential upside.
Greater operating leverage
Higher than expected operating leverage would push earnings growth above
expectations. Better cost management, through higher productivity, will be a key swing
factor, as labour is the key constraint.
Greater operating leverage could also be achieved through higher utilisation, which could
be driven by higher than expected volume growth or a slower rate of expansion and agreater rate of asset intensification. A stronger rate of increase in patient acuity could
also lead to the same effect.
More M&A action
Bite-size acquisitions of brownfield hospitals would help bring incremental growth and
provide upside to our numbers. We think acquisitions of large scale hospital groups,
such as the Ramkhamhaeng group or the Bangkok Chain group could help the stock re-
rate further. We wouldn’t discount the possibility of an aggressive takeover of Bangkok
Dusit, in which case, a takeover premium would cause the stock to re-rate.
Staffing constraint relievedFavourable government policies that reduce the foreign doctor/nurses import
requirement would be an immediate positive in containing wage cost and relieving the
labour constraint.
Stronger than expected economic growth
Stronger than expected economic growth would see increased FDI and possibly, an
increased number of expats in Thailand – a positive for the foreign patient load.
Arguably, mid-market volumes and pricing would also grow faster on the back of
stronger income growth driven by stronger economic growth.
Key company data: See page 2 for company data and detailed price/index chart.
Bumrungrad BH.BK BH TB
HEALTH CARE & PHARMACEUTICALSEQUITY RESEARCH
Like the company, not the price
Hold on to it
January 9, 2013
Rating Starts at
Neutral
arget price
Starts at THB 80.50
Closing price
January 7, 2013 THB 76.25
Potential upside +5.6%
Action: Like the company, but not the price
We initiate with a Neutral rating and implied upside of 6% to our TP. We
like the company, with its strong brand name and well-run franchise. Byfocusing on Bangkok and through expansion of its current campus, growth
will continue to be achieved through greater asset intensity.However, valuations look rich at this level. The stock is trading at the high-
end of both its 2-year & 5-year historical P/E bands. Despite the growthprofile, we struggle to justify further significant multiple expansion on thebasis of fundamentals to warrant a Buy call.
Catalyst: Higher than expected foreign patient loadForeign patient loads tend to be more volatile than domestic demand and
could surprise on the upside. Foreign patient numbers could exceed
expectations if the weather and political climate prove favourable in2013F. With foreign patients making up 50% of its patient load, the groupis heavily exposed to the international patient segment.
Valuations/RisksBumrungrad trades at a 26.7x/23.5x FY12/13F P/E and 16.4/15.2x
FY12/13F EV/EBITDA. These valuations are at the high end of its 5 yearranges of 10.1-26.8x and 7.1-16.1x, respectively. We value Bumrungrad
on 15.6x EV/EBITDA, at a 5% premium to regional peers on the basis ofhigher growth profile compared to regional peers. We cross-check ourvaluations against various methodologies.
Key risks: 1) lower than expected international patient load; 2) lower thanexpected repricing ability; 3) staff shortages and higher wage bills.
31 Dec FY11 FY12F FY13F FY14F
Currency (THB) Actual Old New Old New Old New
Revenue (mn) 11,276 12,979 14,568 16,357
Reported net profit (mn) 1,588 2,722 2,360 2,667
Normalised net profit (mn) 1,588 2,083 2,360 2,667
About BumrungradBumrungrad is a stand-alone hospital in Bangkok catering to the premium market. This is
a stark contrast to its competitor BGH, which runs a network of 29 hospitals across
Thailand and across different price segments.
BH’s management is focused on driving revenue intensity, rather than aggressive
capacity expansion. As such, BH’s volume growth is slower relative to BGH, though this
is compensated by higher growth in revenue intensity. BH’s adjusted FY12F EBITDA
margins (31.6%) are also one of the highest in the region and higher than BGH’s(29.6%), due to its focus on driving higher asset intensity and efficiency from its stand-
alone hospital.
BH obtains more than 50% of its revenues from foreign patients, higher than BGH’s
26%, and is the most leveraged to the flow of international patients amongst all the listed
…But not the priceHowever, valuations are looking rich at this level. Bumrungrad trades at 26.7x/23.5x
FY12/13F P/Es and 16.4/15.2x FY12/13F EV/EBITDA. These valuations are at the high
end of its 5-year ranges of 10.1-26.8x and 7.1-16.1x, respectively.
Despite already applying an EV/EBITDA multiple that is higher relative to both peers and
historical experience, we struggle to justify further significant multiple expansion on the
basis of fundamentals to warrant a Buy rating.
We value BGH on a 15.6x FY13F EV/EBTIDA multiple, which is premised on a 5%discount to BGH. Even though BH has historically traded at a premium to BGH on both a
P/E and EV/EBITDA basis, this premium has narrowed and turned into a discount over
the past 2 years. We think this trend will continue as BGH continues to maintain strategic
control and gain market share in Thailand. As such, we have applied a 5% discount to
BGH which we think is appropriate and in line with recent experience.
This EV/EBITDA multiple represents a 5% premium to regional peers, which is
consistent with our view that it has a stronger growth profile than regional peers. BH is
growing at a PAT CAGR of 18.9% across FY12F – FY14F, while the average growth rate
for regional peers is 15.7%.
As a sensitivity analysis, if the discount is removed, our TP would increase 4.3% to
THB84.0. If a premium of 5% is applied, our TP would further increase to THB88.25.
Fortifying in BangkokBumrungrad’s strategy juxtaposes that of Bangkok Dusit’s, as it fortifies its position within
Bangkok where they think they have an advantage due to their existing client base. The
primary strategy is to drive greater asset intensity of current assets and to leverage the
existing client base in the main campus for further expansion. We expect management to
further segment the premium market, with the main campus serving the highest acuity
patients and its other facilities serving slightly lower acuity patients within the premium
segment.
Expanding capacity
The company has recently purchased 2 plots of land – on Petchburi Road and on
Sukhumvit Soi 1 – around its existing campus to provide the space to expand i ts
operations beyond the current facilities, at which they estimate to run out of space by
2017F.
Campus extension
Sukhumvit Soi 1 is just next to the existing campus (on Sumkhumvit Soi 3) and is a
natural extension of its existing campus. The general thrust, as we understand, is to
relieve the constraints seen in specific segments such as checkup and rehab. The
extension will probably see these segments moved to the new extension and free up
space for more beds and higher acuity care in the main campus.
2nd
campus
The women’s and children practice in the current campus will be spun out into the new
campus to be built on Petchburi Road. This will free up space in the current campus for
higher acuity treatments, while providing a baseload for the new campus.
The new campus may potentially have a slightly different positioning from the existing
one, with a focus on lower acuity treatments and a slightly less premium proposition to
appeal to a different segment, in our view. The company is currently doing a study which
we expect to be completed mid-2013.
Acquisitions
The group has expressed interest in moving into a less premium offering, in the segment
which Samitvej and BNH operates. Location wise, we think Bangkok remains thepreferred location, with established tourism centres such as Pattaya and Phuket being a
possibility too.
The preferred approach for execution will be via acquisition of an existing franchise as a
greenfield project will take too long to construct and ramp up, particularly since it will not
be able to leverage off BH’s existing client base to reduce the ramp up period.
Continued growth in international patientrevenuesWe expect international patients to continue visiting Thailand for treatment and
Bumrungrad, being the premier treatment destination in Thailand with >50% of revenues
coming from foreign patients, will be the key beneficiary of this growth trend.
Pricing still attractive relative to other medical touristlocations
We believe that medical tourists will continue to patronize Bumrungrad, and Thai
hospitals in general, because it remains affordable on a relative basis even as they get
increasingly more expensive on an absolute basis. We believe there is room to continue
raising prices in line with other markets such as Singapore without compromising on the
relative affordability of Thai hospitals.
Thai hospitals are priced at 20-30% discounts to Singapore across major procedures,
based on data from Patients Beyond Borders. A comparison of Bumrungrad’s
revenue/patient day with IHH’s Singapore hospitals demonstrates a similar price
differential.
Thai hospitals are priced in line with Malaysian hospitals for major procedures, based on
the same data set from Patients Beyond Borders. A comparison of Bumrungrad’s
revenues/patient day with IHH’s Malaysian hospital indicates a significantly higher
premium for Thai hospitals but this might be due to hospital specific factors such as
patient mix and treatment mix.
Fig. 106: Major Procedures: Comparative Costs (as of Aug 2011)
Source: Patient Beyond Borders
Fig. 107: Comparison across hospitals in the region
Thai hospitals are at a significant discount to Singapore
Source: Company data, Nomura research; N.B. 2010 is the best year for comparison across hospitals as BGH’s 2011number is distorted by acquisitions of mid-market hospitals; BH is the best comparison with SG hospitals as it is a stand-alone hospitals operating at the top end of the premium market
Procedure US Cost Costa Rica India Malaysia Mexico Singapore
Surrounding source markets for medical tourists sizeable andcontinues to grow
Surrounding countries such as Bangladesh and the north ASEAN countries offer huge
prospects as source countries for medical tourists. To put things in perspective,
Myanmar is already one of the top 5 contributors of foreign patient revenues for BH.
Economic growth in these markets is increasing demand for healthcare, which whencoupled with an inadequate domestic healthcare system, pushes people to seek
treatment in medical destinations such as Thailand. Together, their population size
exceeds 300mn, larger than Indonesia, the 4th most populous country in the world.
The Middle East market will continue to be a key contributor as Middle Eastern travelers
continue to seek healthcare beyond their borders, funded by the public coffers and
income supported by high oil prices. We have not factored Indonesia as a key source
market for Thailand as we expect Indonesia to continue being the key source markets for
Malaysia and Singapore due to proximity and familiarity.
Fig. 108: Source countries
Source: CEIC, World Bank, UN,
*Growth rate based on 2010
Expat population continues to grow
International patients also include the expat population in Thailand and the surrounding
countries. Although we don’t have hard data to quantify the growth rate, continued
foreign direct investment into the market should lead to a growing expat population in the
region.
Potential to surprise on the upside but a double-edged sword
Due to the volatility in international patient flows, there is potential for the numbers to
surprise on the upside and lead to outperformance in the results. Conversely, the same
case can be made on the downside. BH, which derives more than 50% of its revenues
from international patients, is most leveraged to the flow of international patients.
The key revenue drivers for Bumrungrad will be higher patient acuity (higher
revenue/admission), driven by increasing specialization and longer average length ofstay. Bumrungrad should continue to see decent volume growth as it expands capacity
in its main campus, though it may be constrained by tight capacity in certain segments
(e.g. checkups, rehab).
General price increases should be in l ine with the industry average of 3-4%.
Performance across segments
We expect both the inpatient and outpatient segments to demonstrate volume growth,
with higher volume growth in the outpatient segment, as per historical experience.
Capacity limitations are an issue, though the addition of new outpatient facilities and
beds over the next few years should help alleviate some of the pressure – a 37%
increase in examination rooms (80) and 20% increase in beds (44 ICU + 61 ward).Nonetheless, we might continue to see some bottlenecks in certain segments –
checkups, rehab – as flagged by management.
We expect any volume growth constraints to be compensated via higher pricing which
would help balance demand with supply. As demand in the premium market is relatively
price inelastic, this might be a positive. We expect revenue/admission to grow at 9.5%
p.a. in the inpatient segment driven by higher acuity and longer average length of stay.
Outpatient revenue/visit is forecasted to grow at 8% p.a. in our base case, which is in
line with historical experience. Our basis is largely premised on the performance in FY11
and FY12 under a stable operating environment and assuming that such a benign
environment persists going forward.
Costs and Margins
On the cost front, BH will experience wage cost pressures but should still see expanding
margins. We expect Bumrungrad’s EBITDA margins to expand due to higher operating
intensity and greater increase in patient acuity, though offset by start-up costs arising
from its 2nd campus on Soi 1 which is slated to start operations in 2015F.
Sensitivity Analysis
Our estimates are most sensitive to changes in cost assumptions. The opening of new
clinics and more beds within the main campus will help to extract more revenues from
the existing fixed assets such as operating theatres, with limited increase in fixed costs.
The leverage effect arising from that could surprise on the upside.
We have not assumed a high level of foreign patient growth. Foreign patient growth is
subjected to the economic conditions of source countries, expat population growth in
Thailand, the political conditions and in more recent years, the weather conditions. We
have seen many years of no or negative growth as a result of these factors. With all
these factors still in play, we believe that investors will be better served by assumingthose factors in their base case scenario. As such, we have assumed that growth for
BGH will come primarily from increase in patient acuity and price hikes, with a moderate
foreign patient load growth. A higher than expected foreign patient load represents
potential upside.
Greater operating leverage
Higher than expected operating leverage due to higher utilisation, faster increases in
patient acuity and better cost management will be an upside to our numbers. More
specifically, the opening of new clinics and more beds within the main campus will help
to extract more revenues from the existing fixed assets such as operating theatres, with
limited amount increase in fixed cost. The leverage effect arising from that could surprise
on the upside.
M&A action
If management succeeds in acquiring a brownfield hospital, this could potentially super-
charge earnings growth in the immediate period, especially since management has a
A lower than expected international patient load would have a significant impact on
earnings as this patient group is the most profitable of the lot and constitutes a major
proportion of revenues (59% of FY11 revenues). A lower than expected international
patient load could be due to local events such as political instability and natural disasters
or due to the loss of competitiveness relative to other medical destinations.
For the past few years, Thailand has been plagued by political instability and severe
flooding during the monsoon season (in the 2nd half of the year). Such events affect the
continuity of businesses and operating performance of hospital operators have been
tangibly and negatively affected. One could argue that these events are anomalies but
the frequency of such events poses a risk that an uncertain environment is more likely a
new normal rather than an aberration.
Lower than expected re-pricing ability
Furthermore, with each price hike, Thailand and in turn BH, faces the risk of losing its
proposition as an affordable healthcare destination for foreign patients, with competition
coming from lower cost locations such as India. It remains to be seen if they cansuccessfully reposition themselves and scale the value chain to perform higher
acuity/intensity treatments. It also remains to be seen if they can continue to increase
prices year after year. An inabili ty to do so would be detrimental to the growth prospects
of BH.
Staff shortages and higher wage bills
There is a shortage of healthcare professionals and this drives up staff costs. The
inability to secure the necessary labour supply at a commercially profitable price and to
deploy them at the desired locations will place a constraint on BH’s growth plans.
Valuation Methodology We have applied a 16.3x EV/EBTIDA multiple to FY13F EBITDA, a 10% premium to peers’ averageforward EV/EBITDA, on the basis of a higher growth profile than regional peers.
Risks that may impede the achievement of the target price Key risks: 1) lower than expected international patient load; 2)substitution from public sector; 3) staff shortages and higher wage bills, 4) regulations; 5) slower economic growth leading tolower patient load growth.
Valuation Methodology We apply a 15.6x EV/EBITDA to FY13F EBITDA, a 5% premium to regional peers, on the basis of ahigher growth profile for Bumrungrad, and a 5% discount to BGH, the market leader.
Risks that may impede the achievement of the target price Key risks: 1) lower than expected international patient load; 2)lower than expected repricing ability; 3) staff shortages and higher wage bills.
Rating and target price changes
Issuer Ticker Old stock rating New stock rating Old target price New target price
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