Is IHH Healthcare Berhad Worth Investing In?

IHH Healthcare Berhad (“IHH”) is the world’s 2^nd largest listed healthcare operator by market capitalisation. It has more than 10,000 licensed beds in 50 hospitals across 10 countries (primarily in Malaysia, Singapore, Turkey and India).

The company was established in 2010 following the acquisition of Singapore’s Parkway Group and Malaysia’s Pantai Group. In 2012, IHH acquired Acibadem Holdings Group in Turkey and was subsequently dual listed on both the Main Markets of Bursa Malaysia and the Singapore Stock Exchange (“SGX”).

IHH also owns 35.74% of SGX listed Parkway Life REIT.

STOCK SYMBOL

TICKER SYMBOL: KLSE:IHH
MARKET CAP: RM49.5 billion (21 August 2017)
MARKET PRICE / SHARE: RM6.01 (21August 2017)
INDUSTRY: Healthcare

 

THE BUSINESS

IHH is in the healthcare business, the entire spectrum of the healthcare services business from the point of seeing a general practitioner for a simple cold all the way to complex organ transplant operations.

Simply put, IHH is an integrated healthcare provider.

Here’s a brief history on how IHH came to be:

• 1974: Pantai built its 1^st hospital in Kuala Lumpur
• 1987: Parkway acquired Gleneagles Hospital Singapore
• 1990: Pantai debuted on KLSE
• 1991: Acibadem commenced operations in Istanbul
• 1992: International Medical College was founded in Malaysia
• 1999: International Medical College granted university status with own MBSS programme
• 2000: Acibadem listed on ISE, first and only healthcare provider listed in Turkey
• 2004-2005: Parkway’s 31% direct equity swap in Pantai formed 40:60 JV with Khazanah called Pantai Irama Ventures; subsequently, Pantai delisted from Bursa upon completion of Mandatory Offer by Pantai Irama Ventures
• 2007: Parkway’s 3 hospitals entered lease and buyback agreements under PLife REIT (listed on SGX) – today Parkway Trust Management, manager of PLife REIT is wholly owned by IHH
• 2008: Parkway announced plans to build Mount Elizabeth Novena Hospital (completed & operational in 2012)
• 2012: IHH acquired indirect 60% stake in Acibadem Holdings; launched IPO and was listed on Bursa Malaysia and Singapore Exchange
• 2013: Entered greenfield project to build Gleneagles Hong Kong Hospitals (operations began since 2017)
• 2014: Acibadem opened Acibadem Atakent University Hospital
• 2015: Acquired 51% Continental Hospitals and 73.4% Global Hospitals in India; Enters into lease to operate Gleneagles Chengdu Hospital, Western China
• 2016: IHH formalises lease agreement with Perennial for Gleneagles Chengdu Hospital; IHH forms strategic partnership with Taikang Insurance Group to accelerate China growth

And this is how IHH’s structure looks like:

Source: IHH Annual Report 2016

KEY OPPORTUNITIES

1. Thematic Play on Demographic

Let’s take a while to consider the demographical tailwinds:

• Ageing life expectancy
• Growing middle class
• Rising burden of chronic diseases
• Increased awareness and healthcare spending

And other than its current operations in Malaysia, Singapore, Turkey and India, IHH is keen to expand into one of the most populated countries in the world – China.

With IHH’s planned 350 bed hospital in Chengdu, 450-bed hospital in Shanghai and its newly opened 500-bed Hospital in Hong Kong, IHH appears to be on track for its push to make China its fifth key market.

2. Strong Branding

In Asia and Central and Eastern Europe, IHH’s brands are among the most prestigious in the healthcare industry.

IHH’s brands include:

• Mount Elizabeth
• Gleneagles
• Pantai
• Parkway
• Acibadem

If you have lived or worked in either Singapore, Malaysia, India & Turkey, you must have heard of at least one of these names!

3. Strong Ecosystem (Primary to Quaternary)

Basically, if you are looking for a one-stop healthcare provider – look no further.

Source: IHH Annual Report 2016

Primary Care (Seeing your GP): Outpatient treatment of basic illnesses, routine check-ups, vaccination and dental services by physicians, nurses or family doctors

Secondary Care (When its more than just a cold): Specialist consultation, local surgeries, emergency care, laboratory services, diagnostics and Acute Treatment

Tertiary Care (When things get real): Specialist consultative care, advanced treatment or complex surgery and inpatient care

Quaternary Care (When things really escalate): High intensity complex surgeries and organ transplant

Complementary Services (Value added services): Radiology, Rehab, Diagnostic & analytical laboratory testing, emergency assistance & transportation, hospital project management, etc.

And not forgetting Medical Education: In Malaysia (International Medical University & International Medical College) and Singapore (Parkway College)

KEY RISKS

1. Expansion Capex

In the past couple of years, the amount spent on PPE and Acquisition of Subsidiaries/Associates/Businesses were:

• 2016: RM2.4 billion (PPE: RM2.1 billion, Subsidiaries: RM0.3 billion)
• 2015: RM2.1 billion (PPE: RM1.4 billion, Subsidiaries: RM0.7 billion)
• 2014: RM0.9 billion (PPE: RM0.9 billion)
• 2013: RM0.7 billion (PPE: RM0.7 billion)

From the numbers, it seems like IHH has been steadily ramping up their capital expenditures. For 2016, it appeared that IHH had a negative free cash flow position.

However, this is by no means a negative thing. When we look at the bigger picture, you could say that they are investing for the future and together with IHH’s track record, most of us might not want bet against IHH in terms of operational execution.

The only thing that we are highlighting is that if IHH carries on this pace, there might be certain years of negative free cash flow – and that is part and parcel of a company during expansions.

And with IHH’s push to make China its fifth key market (next to Malaysia, Singapore, Turkey and India), we could expect more to come. As it stands, RMB8 billion was earmarked for IHH’s pipeline of hospitals across Greater China.

On another note, IHH’s net debt (Loans, borrowings & bank overdrafts less Cash & equivalents) to equity still looks rather manageable at 0.21x.

2. Increasing Expenses & Ability to Attract Talent

Being in the healthcare business, doctors, specialists and nurses are the backbones of the company’s operations. The ability to continually attract such talent is crucial. Note: this might have been a key push behind the strategic decision of the Group’s education arm.

Next, Staff costs are the single largest line item in the P&L, at RM3.9 bill, it was 39% of FY2016 Revenue. Although not unique to companies in the service line, increasing costs is something to look out for.

VALUATION

For FY2016, IHH reported Shareholders Profit of RM612 million, down from RM934 million. Even with increased top line, IHH incurred higher inventory costs, staff costs and other operating expenses. There might be various reasons for these, however, a key reason might have been due to the opening of IHH’s new facilities.

At a market capitalisation of RM49 billion, IHH traded at a P/E (FY2016) of 80x & P/B (FY2016) of 2.2x. From Google Finance, IHH traded at a P/E (TTM) of 57x. Based on this valuation, the market seems to have high expectations for IHH.

FINANCIALS

Income Statement – Click here

Balance Sheet – Click here

INVESTOR RELATION

IHH Healthcare Berhad
Level 11 Block A, Pantai Hospital Kuala Lumpur, 8 Jalan Bukit Pantai, 59100 Kuala Lumpur, Malaysia

Penelope Koh (Assistant Vice President, Investor Relations)
Email: ir@ihhhealthcare.com

MAJOR SHAREHOLDERS (9 MARCH 2017)

1. Pulau Memutik Ventures Sdn Bhd (Khazanah Nasional Berhad) – 41.12%
2. MBK Healthcare Partners Limited (Mitsui & Co., Ltd) – 18.04%
3. Employees Provident Fund Board – 10.14%

Do You Think IHH Healthcare Is Worth Investing In? Share your thoughts below.

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