Hospitals│Malaysia
December 4, 2013
COMPANY NOTE
KPJ Healthcare
KPJ MK / KPJH.KL
Market Cap
Avg Daily Turnover
Free Float
Current
RM6.08
Target
RM5.70
US$1,237m
US$1.85m
47.9%
Prev. Target
RM3,979m
RM5.93m
654.2 m shares
Up/Downside
SHORT TERM (3 MTH)
LONG TERM
N/A
-6.3%
Conviction|
|
A pricey remedy
Notes from the Field
Being the largest private hospital group in Malaysia, KPJ Healthcare
is a good proxy for the country's rising healthcare spending.
Furthermore, the group's aggressive expansion of its hospital network
will improve its competitive position.
————————————————————————————————————————
SAW Xiao Jun
T (60) 3 2084 9203
E xiaojun.saw@cimb.com
Ivy NG Lee Fang, CFA
T (60) 3 2084 9697
E ivy.ng@cimb.com
Company Visit
Channel Check
Expert Opinion
Customer Views
————————————————————————————————————————
Malaysia's largest private
healthcare provider
‘‘
We still have many
projects in Malaysia which
require big investments so our
focus and priority for growth is
still in Malaysia.
– Amiruddin Abdul Satar, Managing Director
Price Close
117
7.3
111
6.8
105
6.3
99
5.8
93
5.3
15
87
Vol m
10
5
Mar-13
Jun-13
Sep-13
Source: Bloomberg
52-week share price range
6.08
7.36
5.56
5.70
Current
Target
KPJ operates 23 hospitals with about
2,716 beds in Malaysia. It is a prime
beneficiary of the rising healthcare
spending in the country, driven by an
ageing population and rising incomes.
KPJ has laid out an aggressive
expansion plan that aims to add two
hospitals to its portfolio every year. In
the pipeline are eight hospital
projects which are expected to start
operations in 2014-2016. Once they
are fully operational, these hospitals
will raise its bed capacity by 60%
from the end-2012 level. KPJ's
expansion will also create entry
barriers for its competitors due to the
government’s zoning policy which
sets a limit of one private hospital for
every 40km radius.
Unexciting earnings growth
However, KPJ's near-term earnings
will be dented by start-up losses from
new hospitals. Also, we expect the
new hospitals to charge lower patient
fees as KPJ is moving into less
affluent locations. Furthermore, the
cost of living is likely to rise due to
subsidy cuts and GST implementation,
which reduces the affordability of
private healthcare. All this could push
its new hospitals' gestation period
beyond the typical 3-5 years that they
took to turn profitable. We project a
3.5% net profit CAGR in FY13-16,
lower than FY09-12’s 8.1%.
High valuations increase
downside risk
KPJ’s 33.3x CY15 P/E is the highest in
our ASEAN hospital coverage. We
rate it an Underperform given its
earnings weakness and potentially
longer-than-expected gestation for its
new hospitals. Its share price is also
vulnerable to a rise in interest rate
and market risk premium. A 0.5% pt
rise in cost of equity would lower our
SOP by 16%.
Financial Summary
Relative to FBMKLCI (RHS)
7.8
Dec-12
However, its near-term earnings will
be dented by start-up losses from its
new hospitals. This, coupled with its
rich valuations against the regional
peers, is why we begin coverage with
an Underperform call. Our target
price of RM5.70 is based on SOP
valuation. We prefer BGH and Raffles
Medical Group for exposure to
ASEAN hospitals.
Revenue (RMm)
Operating EBITDA (RMm)
Net Profit (RMm)
Core EPS (RM)
Core EPS Growth
FD Core P/E (x)
DPS (RM)
Dividend Yield
EV/EBITDA (x)
P/FCFE (x)
Net Gearing
P/BV (x)
ROE
% Change In Core EPS Estimates
CIMB/consensus EPS (x)
Dec-11A
1,909
228.8
143.7
0.26
21.5%
26.05
0.15
2.42%
14.06
50.2
19.2%
3.98
17.3%
Dec-12A
2,096
248.5
140.0
0.24
(9.0%)
28.92
0.12
1.89%
14.23
NA
35.4%
3.79
14.5%
Dec-13F
2,221
223.9
104.9
0.16
(32.2%)
38.08
0.07
1.15%
18.03
NA
45.6%
3.64
9.9%
1.44
Dec-14F
2,387
264.7
118.1
0.18
12.6%
33.80
0.08
1.32%
15.63
301.9
51.4%
3.43
10.6%
Dec-15F
2,627
290.7
120.1
0.19
1.6%
33.26
0.08
1.32%
14.47
51.1
54.2%
3.24
10.2%
0.91
0.82
SOURCE: CIMB, COMPANY REPORTS
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT.
Designed by Eight, Powered by EFA
KPJ Healthcare
December 4, 2013
PEER COMPARISON
Research Coverage
Bloomberg Code
RFMD SP
KPJ MK
IHH SP
BH TB
BGH TB
BCH TB
Raffles Medical Group
KPJ Healthcare
IHH Healthcare
Bumrungrad Hospital
Bangkok Dusit Med Service
Bangkok Chain Hospital
Market
SG
MY
SG
TH
TH
TH
Recommendation
ADD
UNDERPERFORM
HOLD
UNDERPERFORM
OUTPERFORM
OUTPERFORM
Rolling P/BV (x)
Rolling FD P/E (x)
8
50
45
40
35
30
25
20
15
10
5
0
7
6
5
4
3
2
1
0
Jan-09
Jan-10
Jan-11
Raffles Medical Group
IHH Healthcare
Bangkok Dusit Med Service
Jan-12
Jan-13
Jan-09
KPJ Healthcare
Bumrungrad Hospital
Bangkok Chain Hospital
Mkt Cap US$m
1,382
1,237
10,216
2,037
6,304
511
Jan-10
Jan-11
Price
3.13
6.08
1.58
90.0
131.0
6.60
Jan-12
Raffles Medical Group
IHH Healthcare
Bangkok Dusit Med Service
Peer Aggregate: P/BV vs ROE
Target Price
3.81
5.70
1.72
94.0
154.0
7.20
Upside
21.7%
-6.3%
9.2%
4.4%
17.6%
9.1%
Jan-13
KPJ Healthcare
Bumrungrad Hospital
Bangkok Chain Hospital
Peer Aggregate: FD P/E vs FD EPS Growth
4.5
35%
45
160%
4.0
31%
40
136%
3.5
27%
35
111%
3.0
23%
30
87%
2.5
19%
25
62%
2.0
16%
20
38%
1.5
12%
15
13%
1.0
8%
10
-11%
0.5
4%
5
-36%
0.0
0%
0
Jan-09
Jan-10
Jan-11
Rolling P/BV (x) (lhs)
Jan-12
Jan-13
Jan-14
Jan-09
ROE (See Footnote) (rhs)
-60%
Jan-10
Jan-11
Jan-12
FD P/E (x) (See Footnote) (lhs)
Jan-13
Jan-14
FD EPS Growth (See Footnote) (rhs)
Valuation
Raffles Medical Group
KPJ Healthcare
IHH Healthcare
Bumrungrad Hospital
Bangkok Dusit Med Service
Bangkok Chain Hospital
FD P/E (x) (See Footnote)
Dec-12
Dec-13
29.54
25.72
28.92
38.08
39.86
58.76
37.48
31.38
31.40
31.06
14.47
23.37
Dec-14
20.53
33.80
35.25
27.90
26.52
20.82
Dec-12
4.35
3.79
1.89
7.83
5.43
3.63
P/BV (x)
Dec-13
3.94
3.64
1.85
6.82
5.03
3.76
Dec-14
3.46
3.43
1.80
5.96
4.54
3.45
Dec-12
21.45
14.23
21.37
21.34
21.53
10.91
EV/EBITDA (x)
Dec-13
18.63
18.03
22.03
18.03
21.48
16.17
Dec-14
15.01
15.63
16.41
16.31
20.37
15.54
Dec-14
17.9%
10.6%
5.2%
27.1%
18.0%
17.3%
Dividend Yield
Dec-12
Dec-13
1.44%
1.44%
1.89%
1.15%
0.34%
0.68%
2.00%
1.89%
1.08%
1.92%
6.52%
2.31%
Dec-14
1.44%
1.32%
1.13%
2.13%
1.78%
2.40%
Growth and Returns
Raffles Medical Group
KPJ Healthcare
IHH Healthcare
Bumrungrad Hospital
Bangkok Dusit Med Service
Bangkok Chain Hospital
FD EPS Growth
Dec-12
10.2%
-9.9%
26.7%
31.0%
40.2%
24.0%
(See Footnote)
Dec-13
Dec-14
14.9%
25.2%
-24.1%
12.7%
-32.2%
66.7%
19.4%
12.4%
1.1%
17.1%
-38.1%
12.2%
ROE (See Footnote)
Dec-12
Dec-13
15.6%
16.0%
14.5%
9.9%
5.1%
3.2%
27.5%
27.6%
17.7%
16.8%
26.6%
15.8%
SOURCE: CIMB, COMPANY REPORTS
Calculations are performed using EFA™ Monthly Interpolated Annualisation and Aggregation algorithms to December year ends
2
KPJ Healthcare
December 4, 2013
BY THE NUMBERS
Share price info
Share px perf. (%)
1M
3M
Relative
-1.1
-10.8
Absolute
-0.3
-5
Major shareholders
12M
-10.4
3.1
% held
Johor Corporation
45.0
EPF
12.6
Waqaf An-Nur Corporation
7.1
P/BV vs ROE
FD Core P/E vs FD Core EPS Growth
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
20%
18%
16%
13%
11%
9%
7%
4%
2%
0%
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Rolling P/BV (x) (lhs)
40
35
30
25
20
15
10
5
0
30%
23%
15%
8%
0%
-8%
-15%
-23%
-30%
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
ROE (See Footnote) (rhs)
Rolling FD Core P/E (x) (lhs)
FD Core EPS Growth (rhs)
Profit & Loss
New hospitals and expansion
of bed capacity will boost
KPJ's revenue.
(RMm)
Total Net Revenues
Gross Profit
Operating EBITDA
Depreciation And Amortisation
Operating EBIT
Total Financial Income/(Expense)
Total Pretax Income/(Loss) from Assoc.
Total Non-Operating Income/(Expense)
Profit Before Tax (pre-EI)
Exceptional Items
Pre-tax Profit
Taxation
Exceptional Income - post-tax
Profit After Tax
Minority Interests
Preferred Dividends
FX Gain/(Loss) - post tax
Other Adjustments - post-tax
Net Profit
Recurring Net Profit
Fully Diluted Recurring Net Profit
Dec-11A
1,909
602
229
(70)
159
(9)
55
0
205
0
205
(50)
Dec-12A
2,096
656
248
(78)
171
(11)
37
0
197
0
197
(50)
Dec-13F
2,221
647
224
(108)
116
(13)
35
0
137
0
137
(29)
Dec-14F
2,387
705
265
(128)
137
(17)
36
0
157
0
157
(34)
Dec-15F
2,627
770
291
(147)
143
(21)
37
0
160
0
160
(34)
154
(11)
147
(7)
109
(4)
123
(5)
126
(6)
144
144
144
140
140
140
105
105
105
118
118
119
120
120
121
Cash Flow
The group plans to spend
about RM300m-350m a year
on expansion and
maintenance capex
(RMm)
EBITDA
Cash Flow from Invt. & Assoc.
Change In Working Capital
(Incr)/Decr in Total Provisions
Other Non-Cash (Income)/Expense
Other Operating Cashflow
Net Interest (Paid)/Received
Tax Paid
Cashflow From Operations
Capex
Disposals Of FAs/subsidiaries
Acq. Of Subsidiaries/investments
Other Investing Cashflow
Cash Flow From Investing
Debt Raised/(repaid)
Proceeds From Issue Of Shares
Shares Repurchased
Dividends Paid
Preferred Dividends
Other Financing Cashflow
Cash Flow From Financing
Total Cash Generated
Free Cashflow To Equity
Free Cashflow To Firm
Dec-11A
228.8
29.5
Dec-12A
248.5
1.5
Dec-13F
223.9
Dec-14F
264.7
Dec-15F
290.7
19.5
6.2
14.0
0.5
(9.1)
(34.3)
215.4
(138.8)
52.5
(99.2)
26.5
(159.0)
18.2
42.6
0.0
(63.5)
(5.0)
12.5
(56.5)
201.0
(370.8)
103.7
(159.7)
19.1
(407.8)
127.0
104.0
0.0
(75.0)
0.0
(13.3)
(28.9)
201.2
(300.0)
0.0
0.0
27.2
(272.8)
0.0
0.0
0.0
(62.0)
0.0
(16.6)
(33.5)
220.8
(300.0)
0.0
0.0
28.0
(272.0)
64.5
0.0
0.0
(52.3)
0.0
(20.9)
(34.2)
249.6
(300.0)
0.0
0.0
28.8
(271.2)
100.0
0.0
0.0
(52.3)
(2.6)
53.7
74.6
75.7
156.0
(50.8)
(79.8)
(206.8)
(62.0)
(133.7)
(71.7)
(44.7)
12.2
(39.0)
13.3
(20.0)
47.7
26.1
78.4
15.5
SOURCE: CIMB, COMPANY REPORTS
3
KPJ Healthcare
December 4, 2013
BY THE NUMBERS
Balance Sheet
61% or RM359m of KPJ's
total debt is due for
repayment after 2017.
(RMm)
Total Cash And Equivalents
Total Debtors
Inventories
Total Other Current Assets
Total Current Assets
Fixed Assets
Total Investments
Intangible Assets
Total Other Non-Current Assets
Total Non-current Assets
Short-term Debt
Current Portion of Long-Term Debt
Total Creditors
Other Current Liabilities
Total Current Liabilities
Total Long-term Debt
Hybrid Debt - Debt Component
Total Other Non-Current Liabilities
Total Non-current Liabilities
Total Provisions
Total Liabilities
Shareholders' Equity
Minority Interests
Total Equity
Dec-11A
252
305
47
9
612
633
425
168
121
1,347
141
Dec-12A
201
325
58
11
595
909
532
177
36
1,655
207
Dec-13F
68
344
61
11
484
1,101
540
177
36
1,854
207
Dec-14F
29
370
66
11
476
1,273
549
177
36
2,035
207
Dec-15F
55
407
72
11
546
1,426
557
177
36
2,196
207
380
77
598
302
404
91
701
385
442
94
743
385
472
99
778
450
521
106
834
550
15
317
47
962
893
104
997
16
401
44
1,146
1,036
68
1,103
16
402
44
1,189
1,079
71
1,150
18
468
44
1,290
1,145
76
1,221
19
569
44
1,448
1,212
82
1,294
Dec-11A
15.4%
12.5%
12.0%
(0.33)
1.53
8.08
24.6%
44.2%
57.65
12.38
95.41
15.1%
12.1%
Dec-12A
9.8%
8.6%
11.9%
(0.60)
1.60
7.23
25.4%
53.6%
54.97
13.30
99.67
15.5%
11.3%
Dec-13F
5.9%
(9.9%)
10.1%
(0.81)
1.67
4.28
21.0%
59.1%
55.01
13.74
98.09
8.5%
7.3%
Dec-14F
7.5%
18.2%
11.1%
(0.97)
1.77
4.39
21.4%
44.3%
54.62
13.72
99.15
8.6%
8.2%
Dec-15F
10.1%
9.8%
11.1%
(1.09)
1.88
3.87
21.4%
43.5%
54.01
13.53
97.65
7.9%
8.0%
Dec-11A
0.2
N/A
N/A
N/A
2,526.0
N/A
N/A
Dec-12A
0.2
N/A
N/A
N/A
2,596.0
N/A
N/A
Dec-13F
0.3
N/A
N/A
N/A
2,766.0
N/A
N/A
Dec-14F
0.3
N/A
N/A
N/A
2,940.0
N/A
N/A
Dec-15F
0.3
N/A
N/A
N/A
3,372.0
N/A
N/A
Key Ratios
Revenue Growth
Operating EBITDA Growth
Operating EBITDA Margin
Net Cash Per Share (RM)
BVPS (RM)
Gross Interest Cover
Effective Tax Rate
Net Dividend Payout Ratio
Accounts Receivables Days
Inventory Days
Accounts Payables Days
ROIC (%)
ROCE (%)
Key Drivers
No. Of Patient Admissions (m P.a.)
Revenue Per Patient Bed (RM)
Occupancy Rate Of Beds (%)
Average Length Of Stay (days)
Beds Opened (units)
Bed Turnover A Year (x)
% of fgn patients to patient load
SOURCE: CIMB, COMPANY REPORTS
4
KPJ Healthcare
December 4, 2013
A pricey remedy
Table of Contents
1. BACKGROUND
p.5
2. OUTLOOK
p.6
3. RISKS
p.12
4. FINANCIALS
p.13
5. VALUATION AND RECOMMENDATION
p.16
1. BACKGROUND
1.1 Leader in Malaysia's private healthcare
KPJ Healthcare is the undisputed leader in Malaysia's private healthcare space.
It is the largest private hospital group in Malaysia by bed capacity and number
of hospitals. It operates 2,716 beds in 23 hospitals in Malaysia.
Figure 1: KPJ is the largest private hospital operator in
Malaysia by number of hospitals
Figure 2: KPJ is the largest private hospital operator in
Malaysia by bed capacity
No. of hospital in Malaysia
No. of beds in Malaysia
25
3,000
Title:
Source:
2,500
20
Please fill in the values above to have them entered in your rep
2,000
15
1,500
10
1,000
500
5
-
-
KPJ
KPJ
Parkway
Pantai
Columbia
Asia
TDM
Ramsay
Sime Darby
Health
Mgmt
Intl.
‘‘
– Amiruddin Abdul Satar, Managing Director
Ramsay
Sime Darby
Columbia
Asia
Health
Mgmt
Intl.
TDM
*Estimates
SOURCES: CIMB, COMPANY REPORTS, FROST & SULLIVAN
The total of 10
[hospital] projects will be worth
RM1bn. But each hospital will
have a different value depending
on the size and location.
Parkway
Pantai
SOURCES: CIMB, COMPANY REPORTS, FROST & SULLIVAN
The group opened its first hospital, KPJ Johor Specialist, in Johor Bahru in
1981. Over the past three decades, it built its network of hospitals via a series of
acquisitions and greenfield expansion. KPJ has a regional footprint, admittedly
small, through its two hospitals in Indonesia (150 beds), an aged care facility in
Australia and a 23.4% stake in a 236-bed private hospital in Thailand. The
group recently ventured into Bangladesh where it will lease and operate a
250-bed private hospital for 10 years.
The group holds a 49% stake in the Malaysia-listed Al-Aqar REIT (AQAR MK)
which owns some of KPJ's healthcare-related properties. Since Al-Aqar's listing
in 2006, 24 out of 29 KPJ's properties have been injected into Al-Aqar.
Figure 3: KPJ has injected 24 properties into Al-Aqar REIT
1st Injection (2006) RM481m
2nd Injection (2008) RM170m
3rd Injection (2010) RM292m
4th Injection (2011/2012) RM139m
5th Injection (2011) RM132m
-KPJ Ampang Puteri Specialist
-KPJ Perdana Specialist
-KPJ Seremban Specialist
-KPJ Klang Specialist
-Jeta Garden, Brisbane
-KPJ Ipoh Specialist
-KPJ Kajang Specialist
-Bukit Mertajam Specialist
-Kluang Utama Specialist
-KPJ Damansara Specialist
-Sentosa Medical Centre
-Taiping Medical Centre
-RS Medika Permata Hijau
-Puteri Specialist
-Kuantan Specialist
-KPJ Penang Specialist
-Rumah Sakit Medika Bumi
-KPJ Johor Specialist
-Kedah Medical Centre
-Damai Specialist
-KPJ Selangor Specialist
Australia
Serpong Damai
-Tawakal Hospital
-KPJ Tawakkal Specialist
-KPJ Healthcare University College
Buildings owned by KPJ (Exclude properties in uncompleted hospital projects)
-Sri Manjung Specialist Centre
-Kuching Specialist
-KPJ Pasir Gudang Specialist
-Sabah Medical Centre
-Sibu Specialist Medical Centre
SOURCES: CIMB, COMPANY REPORTS
5
KPJ Healthcare
December 4, 2013
KPJ also has an education arm, KPJ University College which offers tertiary
courses in nursing, medicine, pharmacy, health sciences, business management
and behavioural sciences.
Figure 4: Breakdown of KPJ’s revenue in 2012
Figure 5: Breakdown of KPJ’s PBT in 2012
(RM m)
Indonesia
hospitals
RM22m
1%
Australia - aged
care facility
RM31m
2%
Malaysia
hospitals
RM1,872m
89%
240
31.9 Title:(9.8)
220
0.2
(5.0)
200
182.9
(3.3)
196.9
Others
PBT
Source:
180
160
Others
RM171m
8%
140
120
100
Malaysia
hospitals
Share of Al- Indonesia Thailand
Australia
Aqar REIT hospitals
hospital (aged care
profit
(associate)
facility)
SOURCES: CIMB, COMPANY REPORTS
SOURCES: CIMB, COMPANY REPORTS
1.2 Shareholding structure
The Johor state government is the largest shareholder of KPJ with a 45% stake
held by its investment vehicle, Johor Corporation. Employees Provident Fund
(EPF) is the second-largest shareholder with a 13% stake, followed by Waqaf
An-Nur Corporation Bhd (7%). Waqaf An-Nur is a charitable foundation owned
by the Johor state government.
2. OUTLOOK
KPJ has good long-term growth prospects, thanks to the rising healthcare
spending in Malaysia and the aggressive expansion plans that it has laid out.
However, KPJ is expanding its hospital network into less affluent locations
where it will charge lower patient fees relative to its hospitals in the more
affluent cities. The group also faces strong competition from heavily-subsidised
government hospitals, which limit KPJ's ability to raise prices for its services.
We take a closer look at KPJ's prospects in the following sections.
2.1 Rising healthcare expenditure in Malaysia
Malaysia spent about RM37.5bn on healthcare in 2011. This translates into a
per capita spending of RM1,304 or US$426, based on a population of 28.8m.
This is only a fraction (12%) of the average US$3,469 per capita spending in
OECD countries. The lower healthcare spending in Malaysia can be explained
by its lower per capita income and younger population (Figures 6 and 7).
However, we think that this is set to change as the country's population starts to
age and rising incomes allow greater access to healthcare services.
6
KPJ Healthcare
December 4, 2013
Figure 6: Healthcare expenditure per capita vs. GDP per capita
in Malaysia, OECD and selected ASEAN countries (2011)
Figure 7: Healthcare expenditure per capita vs. % of population
aged ≥ 65 in Malaysia, OECD and selected ASEAN countries
(2011)
(Healthcare expenditure per capita - US$)
(Healthcare expenditure per capita - US$)
9,000
Title:
9,000
US
Source:
8,000
8,000
7,000
7,000
6,000
US
Please fill in the values above to have them entered in your rep
6,000
Switzerland
Norway
5,000
5,000
4,000 Other OECD countries*
Luxumbourg
4,000
3,000
3,000
2,000
Thailand
1,000
1,000
Other OECD countries*
-
Malaysia
Indonesia
20,000
40,000
60,000
Singapore
2,000
Singapore
80,000
100,000
Malaysia
0%
120,000
Thailand
Indonesia
5%
10%
15%
20%
25%
% of population aged ≥ 65
(GDP per capita - US$)
*Singapore is not part of OECD. Exclude Australia, Japan, Mexico, and Turkey as data is not
available
SOURCES: CIMB, OECD, WORLD BANK, MOH MALAYSIA
*Singapore is not part of OECD. Exclude Australia, Japan, Mexico, and Turkey as data is not
available
SOURCES: CIMB, OECD, WORLD BANK, MOH MALAYSIA
KPJ will gain from higher healthcare spending as it is the largest private
hospital group in the country with the widest hospital network among the
private players. Unlike its peers which operate mostly in the Klang Valley,
Penang and Johor Bahru where population density and income levels are
higher than the rest of the country, KPJ has a sizeable exposure to other less
affluent towns. About half of KPJ's existing hospitals are located outside these
three major cities. This allows KPJ to benefit from the rising healthcare
demand in both cities and the less-affluent towns.
Figure 8: Distribution of private hospitals in Malaysia by
location
Figure 9: Distribution of KPJ's existing hospitals in Malaysia by
location
Title:
Source:
Klang Valley, 31%
Please fill in the values above to have them entered in your rep
Others, 37%
Klang Valley, 45%
Others, 52%
Penang, 4%
Johor Bahru, 7%
Penang, 11%
Johor Bahru, 13%
*Based on APHM member hospitals as of Aug 2013
SOURCES: CIMB, COMPANY REPORTS
SOURCES: CIMB, COMPANY REPORTS
2.2 Aggressive expansion plans
KPJ's earnings growth is also supported by its ambitious expansion plan which
targets at least two new hospitals every year. It is currently building eight
hospitals with a total capacity of 1,500 beds. These projects are expected to be
completed over the next three years and could boost its current bed capacity of
2,716 by 55% when all the new capacity comes onstream. The total cost for
these projects is estimated to hit RM1bn.
7
KPJ Healthcare
December 4, 2013
Private hospitals in Malaysia are regulated by the Ministry of Health (MOH)
and MOH's approval is needed to build new private hospitals. We gathered that
MOH only approves new private hospitals if the location is at least 20km away
from the nearest private hospital. As most private hospitals are located in cities,
KPJ's expansion into other locations will give it the first-mover advantage,
creating barriers of entry for other private hospitals.
Figure 10: KPJ has 8 new hospitals in its pipeline
Project
Total capacity
Estimated completion
Sabah
250
4Q 2013
Tg Lumpur (Pahang)
160
2015
90
2015
Perlis
Bandar Dato Onn (Johor)
390
2016
Muar (Johor)
120
4Q 2013
Rawang (Selangor)
159
4Q 2013
K/Bayuemas (Selangor)
200
2016
Miri (Sarawak)
120
2016
Total
1,489
SOURCES: CIMB, COMPANY REPORTS
2.3 New hospitals may have lower profitability
While adding new hospitals is the key driver for future earnings growth, KPJ
needs to charge lower patient fees in the new hospitals as it is moving into less
affluent locations. This may lower its overall profit margin and result in longer
gestation periods for its new hospitals.
Currently, 11 of KPJ's 23 existing hospitals in Malaysia are located in the Klang
Valley, Penang and Johor Bahru. We expect the group's future expansion to
focus on other less affluent locations given the increasingly saturated private
healthcare market in big cities. According to Association of Private Hospitals of
Malaysia (APHM), 63% of its member hospitals are located in big cities like
Klang Valley, Penang and Johor Bahru (Aug 2013). APHM's members
accounted for about 85% of private hospital bed capacity in Malaysia.
Figure 11: Distribution of KPJ's existing hospitals in Malaysia
by location
Figure 12: Distribution of KPJ's new hospital projects by
location
Title:
Source:
Klang Valley
25%
Klang Valley, 31%
Please fill in the values above to have them entered in your rep
Others, 52%
Others
63%
Penang, 4%
Johor Bahru
12%
Johor Bahru, 13%
SOURCES: CIMB, COMPANY REPORTS
SOURCES: CIMB, COMPANY REPORTS
Most new hospitals are unprofitable in their early days of business due to low
patient volumes and huge start-up costs. KPJ typically takes around 3-5 years
to turn around its new hospitals. However, the group may need a longer
gestation period moving forward as it charges lower patient fees in the smaller
towns. This could result in the group taking a longer time to recoup its
8
KPJ Healthcare
December 4, 2013
investment. A longer payback would translate into a lower effective return on
investments and slower earnings growth. We estimate that every 1% pt drop in
its long-term ROE would reduce its earnings growth rate by 0.5% p.a.
Figure 13: Comparison of room rates and health screening packages offered at
selected KPJ hospitals at various locations
Room rate - single room (lowest available rate)
Hospital
Location
Ampang Puteri
Ampang, KL
Room rate
RM380
KPJ Damansara Specialist
Petaling Jaya, Selangor
RM230
KPJ Kajang Specialist
Kajang, Selangor
RM200
KPJ Penang Specialist
Bukit Mertajam, Penang
RM250
KPJ Johor Specialist
Johor Bahru, Johor
RM180
Puteri Specialist
Johor Bahru, Johor
RM300
KPJ Seremban Specialist
Seremban, Negeri Sembilan
RM200
Kuantan Specialist Hospital
Kuantan, Pahang
RM115
Perdana Specialist
Kota Bharu, Kelantan
RM150
Taiping Medical Centre
Taiping, Perak
RM150
Prices of general health screening packages
Hospital
Location
KPJ Ampang Puteri
Ampang, KL
RM265 - RM975
Fees
KPJ Damansara Specialist
Petaling Jaya, Selangor
RM280 - RM760
KPJ Kajang Specialist
Kajang, Selangor
RM255 - RM650
KPJ Seremban Specialist
Seremban, Negeri Sembilan
RM320 - RM776
KPJ Johor Specialist
Johor Bahru, Johor
RM440 - RM710
Puteri Specialist
Johor Bahru, Johor
RM285 - RM570
KPJ Penang Specialist
Bukit Mertajam, Penang
RM265 - RM888
Kuantan Specialist Hospital
Kuantan, Pahang
RM219 - RM849
Perdana Specialist
Kota Bharu, Kelantan
RM320 - RM350
Taiping Medical Centre
Taiping, Perak
RM165 - RM520
SOURCES: CIMB, COMPANY REPORTS
2.4 Strong competition from government hospitals
KPJ faces strong competition from government hospitals. Although
government hospitals have crowded wards and long clinic queuing times, the
government provides almost-free healthcare to the public. In 2011, MOH spent
RM9.5bn on the provision of medical and pharmaceutical services but collected
only RM267m or 3% of it from sales and services revenue (see Figure 14).
Figure 14: Malaysia provides almost-free public healthcare services
MOH's expenditure (medical and pharmaceutical services)
(MOH expenditure and revenue - RM m)
MOH's revenue from sales and services
12,000
9,544
10,000
8,234
7,956
8,000
6,000
4,000
2,000
2009
267
250
234
2010
2011
SOURCES: CIMB, MOH
The government is the largest healthcare provider in Malaysia. It runs 147
hospitals and 73% of hospital beds in the country. This, plus the low patient
9
KPJ Healthcare
December 4, 2013
fees charged, is the key reason why government hospitals are the preferred
choice for the majority of Malaysians seeking healthcare services. Government
hospitals accounted for 72% of hospital admissions and 86% of outpatient
attendance at hospitals in the country last year.
Figure 15: Government hospitals accounted for 86% of total
outpatient attendance at hospitals in 2012
(Outpatient attendance
at hospitals - in '000)
25,000
Government hospitals
Figure 16: Government hospitals accounted for 72% of total
hospital admissions in 2012
(Admissions - in '000)
Private hospitals
Government hospitals
Private hospitals
Title:
Source:
4,000
3,500
20,000
Please fill in the values above to have them entered in your rep
3,000
2,500
15,000
2,000
10,000
1,500
1,000
5,000
500
0
0
2010
2011
2012
2010
2011
SOURCES: CIMB, MOH
2012
SOURCES: CIMB, MOH
The government will continue to subsidise public healthcare to keep its price
low, in our view, as the majority of the population rely on the government for
healthcare services. Government hospitals are a major source of competition
for private hospitals as private hospitals need to keep their prices competitive
to attract patients from the government hospitals. We believe this is a key
reason why Malaysian private hospitals have lower profit margins and return
on investments than their peers in Thailand and Singapore.
Figure 17: Private hospitals in Malaysia have lower ROE than
their peers in Thailand and Singapore
Figure 18: Private hospitals in Malaysia have lower ROA than
their peers in Thailand and Singapore
(Return on avg equity- FY12)
(Return on avg assets - FY12)
30%
20%
18%
25%
Title:
Source:
16%
14%
20%
Please fill in the values above to have them entered in your rep
12%
15%
10%
8%
10%
6%
4%
5%
2%
0%
0%
Sime Darby
TDM *
Healthcare*# (healthcare
division)
KPJ
Raffles
Medical
Group
Bangkok
Bangkok Bumrungrad
Dusit
Chain
Hospital
Med Service Hospital
Sime Darby
TDM *
Healthcare*# (healthcare
division)
KPJ
Raffles
Medical
Group
Bangkok
Bangkok Bumrungrad
Dusit
Chain
Hospital
Med Service Hospital
*Estimates
#Sime Darby Healthcare was acquired by Ramsay Sime Darby in June 2013
*Estimates
#Sime Darby Healthcare was acquired by Ramsay Sime Darby in June 2013
SOURCES: CIMB, COMPANY REPORTS
SOURCES: CIMB, COMPANY REPORTS
2.5 Overseas expansion for longer term earnings growth
KPJ has a small regional footprint. It owns two hospitals in Indonesia, an aged
care facility in Australia and a 23.4% stake in a hospital in Thailand. It recently
ventured into Bangladesh where it will lease and operate a hospital for 10 years.
10
KPJ Healthcare
December 4, 2013
The group's operations in Indonesia and Australia are currently unprofitable as
they are still going through their gestation period. Its investment in Thailand
accounted for only 1.5% of its 1H13 pretax profit while its Bangladesh venture
will begin operations in mid-2014.
The group is eager to grow its overseas business but the main priority for
expansion remains in Malaysia in the medium term. We understand that the
overseas ventures are part of its longer-term strategic plan for business
expansion when the private healthcare market in Malaysia matures. As such,
we do not expect significant contributions from its overseas operations for at
least the next five years.
2.6 Recent corporate development
KPJ recently proposed to purchase a 36-storey office tower for RM206m. The
acquisition will be 80% funded by borrowings and 20% funded by internal cash
flows. We estimate that it will raise KPJ's net interest expense by RM9.5m a
year (5% borrowing cost and 3% deposit rate). However, the group plans to
utilise more space at its hospitals by relocating non-revenue generating services
at its hospitals to the new office tower. It will also lease out some of the office
space for rental income. These should offset the impact of higher interest
expense on its earnings.
2.7 SWOT analysis
Figure 19: SWOT analysis
Strengths
Weaknesses
Economies of scale
Lower profitability than its regional peers
Established brand name
Mixed track record in overseas expansion
Ability to attract good quality employees
Opportunities
Threats
Tap the rising healthcare expenditure in Malaysia
Changes in regulations
Diversify into aged-care and rehabilitation services Shortage of specialist doctors in Malaysia
Grow earnings through medical tourism
Higher cost of living may hurt private healthcare demand
Expand into overseas markets for earnings growth
SOURCES: CIMB, COMPANY REPORTS
Strengths
KPJ is the largest private hospital group in Malaysia by bed capacity and
number of hospitals. This allows the group to achieve better economies of scale
through operating efficiencies compared to its peers, such as in procurement of
drugs and maintenance of hospital facilities. This helps to lower its operating
costs.
The group has an established brand name in Malaysia, thanks to its long
operating history and large hospital network. Two of its hospitals are accredited
by Joint Commission International (JCI), an internationally recognised
accreditation agency for quality, safety and efficiency of healthcare providers.
These two hospitals are among the 12 KPJ hospitals that are accredited by
Malaysian Society for Quality in Health (MSQH). Accreditations give potential
patients confidence in its hospitals.
We believe that KPJ has the ability to attract good doctors and hospital
personnel. KPJ employs about 16% of Malaysia’s specialist doctors and 10% of
its nurses. The group offers an ongoing post-graduate training programme for
its staff at its education arm, KPJ Healthcare University College (KPJHUC),
which helps to attract aspiring medical staff to work with the group. KPJHUC's
students who are sponsored by the group are also required to work with KPJ for
several years, providing a steady supply of medical staff to its hospitals.
Weaknesses
While KPJ is one of the most profitable private hospital groups in Malaysia, it
has a lower profit margin and return on investment than its peers in Thailand
and Singapore. We believe this is mainly because 1) compared to its regional
11
KPJ Healthcare
December 4, 2013
peers, KPJ faces stiffer competition from government hospitals which offer
heavily subsidised public healthcare, 2) Malaysia imposes price caps on
selected medical procedures, and 3) KPJ has a lower profit contribution from
medical tourists (see Section 4 - Financials for an analysis of KPJ's profitability
vs its regional peers on page 13). A lower return on investment could result in
slower earnings growth than its regional peers.
KPJ has a mixed track record in overseas expansion. Out of the four overseas
countries (Indonesia, Thailand, Australia and Bangladesh) where it has a
presence, only Thailand is contributing to its bottomline. We believe that the
group faces a steep learning curve in its overseas expansion.
Opportunities
An ageing population and rising incomes are expected to increase the demand
for healthcare services in Malaysia. This makes a case for the group to expand
its business to tap the rising healthcare spending in the country.
Rising demand for healthcare services also presents opportunities for the group
to diversify into aged-care and rehabilitation services that complement its
existing hospital business.
The government is heavily promoting Malaysia's private healthcare services
globally in a bid to develop the country’s medical tourism industry. The group
can grow its earnings by attracting more medical tourists to its hospitals.
KPJ's overseas markets provide an additional avenue for earnings growth.
Healthcare demand in these countries (Indonesia, Thailand and Bangladesh) is
set to grow faster than in Malaysia due to stronger growth in per capita
incomes.
Threats
The healthcare industry in Malaysia is highly regulated. Changes in regulations
may affect the group's earnings. For instance, fees for certain medical
procedures are capped while healthcare personnel such as doctors and
pharmacists are required to serve in the government sector for 2-4 years before
they can practise in the private sector. A downward revision of the cap on
medical procedure fees may reduce the group's revenue while a longer
compulsory service period for doctors and pharmacists may adversely affect the
group's operations, which could lead to lower profitability.
Malaysia is facing a shortage of specialist doctors, according to MOH. The lack
of specialist doctors may delay KPJ's new hospital projects as it needs to recruit
sufficient specialists before its hospitals can begin operation. Shortage of
doctors may also give doctors more bargaining power and demand a bigger
slice of the hospital revenue. This would lead to lower profits for the group.
KPJ targets patients in the middle-to high-income bracket. The rising cost of
living due to the government's scale-back of subsidies and Goods and Services
Tax (GST) implementation may reduce their purchasing power. This could
encourage them to delay going to private hospitals for non-critical healthcare
services such as check-ups. Less affluent patients may turn to public healthcare
for treatment should the cost of private healthcare become unaffordable due to
a rise in the cost of living. This would reduce KPJ's patient volume and its
earnings.
3. RISKS
3.1 Regulatory changes
The healthcare industry in Malaysia is highly regulated. Apart from the cap on
medical procedure fees and compulsory services by doctors and pharmacists,
the government also regulates the industry through licensing and taxation.
A private hospital must satisfy a long list of criteria in order to obtain the
operational licence from MOH. KPJ's new hospital projects and renewal of
12
KPJ Healthcare
December 4, 2013
existing licences may be delayed if MOH applies stricter criteria for hospital
licences.
Malaysia will implement the GST on 1 Apr 2015. While healthcare services are
generally exempted from GST, it is unclear whether the exemption applies to all
products sold and services provided by KPJ. "Healthcare" has a broad
definition and the government is carrying out a study to list out the
GST-exempt items. Demand for products and services which are not exempted
from GST could drop once the new tax system takes place. This could adversely
affect KPJ's earnings.
3.2 Long gestation period for new hospitals
KPJ's new hospitals typically take about 3-5 years before they start to
contribute profits. As the group expands into the less-affluent locations, its new
hospitals may take a longer time to break even as these hospitals charge lower
fees than KPJ’s hospitals in the wealthier cities. Hospital start-up costs are not
capitalised and a longer-than-expected gestation period would affect the
group's earnings.
3.3 Litigation
KPJ is appealing against a court judgement that ordered it to pay RM70.5m to
the major shareholders of Hospital Penawar in which KPJ holds a 30% stake.
The major shareholders of Hospital Penawar, the plaintiff, have filed a lawsuit
against KPJ for breaching a non-compete clause in the joint-venture agreement
between them and KPJ. The plaintiff claimed that KPJ has breached the
agreement as it built a new hospital in Pasir Gudang which is about a kilometre
away from Hospital Penawar. Should KPJ fail to win the appeal, it would have
to pay RM70.5m (11 sen per share) to the plaintiff as compensation.
4. FINANCIALS
4.1 Lower profitability relative to its regional peers
Despite being one of the most profitable private hospital groups in Malaysia,
KPJ’s profit margins and return on investment metrics are lower than its
counterparts in Thailand and Singapore
Figure 20: Private hospitals in Malaysia have lower ROEs than
their peers in Thailand and Singapore
Figure 21: Private hospitals in Malaysia have lower ROAs than
their peers in Thailand and Singapore
(Return on avg equity- FY12)
(Return on avg assets - FY12)
30%
20%
18%
25%
Title:
Source:
16%
14%
20%
Please fill in the values above to have them entered in your rep
12%
15%
10%
8%
10%
6%
4%
5%
2%
0%
0%
Sime Darby
TDM*
Healthcare*# Healthcare
KPJ
Raffles
Medical
Group
Bangkok
Bangkok Bumrungrad
Dusit
Chain
Hospital
Med Service Hospital
Sime Darby
TDM*
Healthcare*# Healthcare
KPJ
Raffles
Medical
Group
Bangkok
Bangkok Bumrungrad
Dusit
Chain
Hospital
Med Service Hospital
*Estimates
#Sime Darby Healthcare was acquired by Ramsay Sime Darby in June 2013
*Estimates
#Sime Darby Healthcare was acquired by Ramsay Sime Darby in June 2013
SOURCES: CIMB, COMPANY REPORTS
SOURCES: CIMB, COMPANY REPORTS
We think that there are two explanations for this 1) private hospitals in
Malaysia face stronger competition from government hospitals, and 2) there is
less demand for hospital services in Malaysia than in Thailand and Singapore.
13
KPJ Healthcare
December 4, 2013
Both Malaysia and Thailand provide almost-free healthcare services through
government hospitals. But Thailand faces a more severe shortage of doctors
which encourages Thai patients to turn to private hospitals for faster medical
attention. The ratio of doctors to patients is 1:758 in Malaysia but in Thailand,
it is 1:2,893. On the other hand, Singapore generally does not provide free
healthcare. Patients at its government hospitals are required to co-pay part of
their medical expenses on top of the government subsidies and pay more if they
earn higher incomes. This reduces the trade-off between more expensive
patient fees and faster medical attention at the private hospitals, encouraging
those who can afford private healthcare to seek treatment at private hospitals.
We also believe there is less demand for hospital services in Malaysia due to its
younger population. Only 5% of Malaysians are aged 65 or above. This is lower
than Thailand's 9% and Singapore's 10%. On top of that, demand for hospital
services in Thailand and Singapore is boosted by their strong medical tourism
industries. Strong demand for hospital services, in our view, explains why
private hospitals in Thailand and Singapore are more profitable than in
Malaysia.
(See Appendix 6.1 for more details on the healthcare systems in Thailand and
Singapore)
4.2 Near-term earnings dragged down by start-up losses
We project KPJ's revenue to grow between 6% and 14% p.a. in FY13-16, driven
mainly by the opening of new hospitals. The group added two hospitals this
year and expects to open eight more by 2016. These new hospitals are expected
to add 1,500 beds to KPJ's network once they are fully operational. This will
increase its end-2012 bed capacity by 60%.
However, new hospitals are likely to incur losses in the first few years of
operations due to small patient volume and high overheads. KPJ's new
hospitals typically take 3-5 years before they contribute profits.
We expect the group to achieve a lower net profit in FY13-15 than in FY12 as a
result of the start-up losses from its new hospitals. We have factored in a 3-year
gestation period for the new hospitals.
Figure 22: We expect lower profit for the group in FY13-15 due to start-up losses at
its new hospitals
(Net profit - RM m)
150
140
130
120
110
100
90
80
70
60
2011
2012
2013F
2014F
2015F
SOURCES: CIMB, COMPANY REPORTS
4.3 Review of 3Q13 results
KPJ's net profit slumped 42% yoy to RM19.4m in 3Q13 due mainly to losses at
its three newly-opened hospitals – KPJ Klang Specialist, KPJ Pasir Gudang
Specialist and RS Medika Bumi Serpong Damai. We understand that the
operating costs at its Malaysian hospitals were also higher than a year ago due
to the minimum wage policy that was implemented on 1 Jan 2013. This eroded
14
KPJ Healthcare
December 4, 2013
its operating profit margin to 4.8% in 3Q13 from 8.4% in 3Q12. We expect its
profit margin to improve modestly in 4Q13 as the fourth quarter is traditionally
a strong quarter. We project a net profit of RM35.1m for 4Q13.
4.4 Balance sheet strength
KPJ has a net debt-to-equity ratio of 35%, based on its FY12 audited accounts.
This is higher than the average net debt ratio of 13% of regional hospitals under
our coverage. We gather that the group is comfortable with its current
borrowing level and is willing to increase its gearing to 100% of its equity to
finance its capex.
Figure 23: KPJ has the second highest net debt to equity ratio among the ASEAN
hospitals under our coverage
50%
41%
40%
35%
29%
30%
20%
10%
5%
0%
-10%
-13%
-20%
-21%
-30%
Bangkok Dusit Med
Service
KPJ Healthcare
Bangkok Chain
Hospital
IHH Healthcare
Bumrungrad
Hospital
Raffles Medical
Group
SOURCES: CIMB, COMPANY REPORTS
4.5 High capex planned
KPJ is planning to build 10 new hospitals in the next five years at an estimated
cost of RM1bn (40% of its end-Sep 2013 total assets value). It has obtained
MOH's approval for eight new hospital projects and is looking to add another
two to meet its expansion target of 10 new hospitals.
The group plans to spend about RM300m-350m p.a. on expansion and
maintenance capex. We project that most of KPJ's operating cash flows in the
next few years will be channelled to its expansion projects.
Figure 24: We expect KPJ's capex to exceed its operating cash flows in FY13-15
Cash flows generated from operations and associates
(RM m)
Capex spending
450
400
350
300
250
200
150
100
50
2010
2011
2012
2013F
2014F
2015F
SOURCES: CIMB, COMPANY REPORTS
15
KPJ Healthcare
December 4, 2013
4.6 Recent corporate exercises
KPJ has proposed a 1-for-2 bonus issue and a 1-for-15 rights issue with
detachable warrants on the basis of two new warrants for every one rights share
subscribed. The group has set an indicative price of RM2.80 per rights share
and could raise RM123m if the rights are fully subscribed. Proceeds from the
rights issue will be used to fund its expansion and working capital, and to repay
its borrowings.
Figure 25: Utilisation of rights issue
Utilisation
Amount (RM m)
Timeframe
Business expansion
80.0
Within 36 months
Repayment of borrowings
35.0
Within 12 months
Estimated expenses for the corporate exercise
Working capital
Total
1.8
Within 3 months
6.3*
Within 12 months
123.1*
*Assuming all existing 70,000 treasury shares are resold and the full exercise of outstanding warrants
SOURCES: CIMB, COMPANY REPORTS
Assuming that all outstanding warrants are exercised and the rights issue is
fully taken up, KPJ's shares outstanding will increase from 654.4m currently to
1,023.2m. Should the new warrants be fully converted at the indicative exercise
price of RM4.77, it could dilute our FY14-15 EPS by 8-9%.
5. VALUATION AND RECOMMENDATION
5.1 What drove KPJ's stock return since 2009?
KPJ's share price has done extremely well in the past few years. Investors who
invested in KPJ in Jan 2009 would have pocketed a total return of 676% today,
out of which 613% would have come from capital gains and 63% from
dividends.
Figure 26: Breakdown of return from KPJ stock since 2009
800%
600%
676%
63%
700%
565%
48%
500%
400%
300%
200%
100%
Capital gain from holding KPJ Capital gain from warrant
stock
issued
Dividend income*
Total return
*Assuming dividends were not reinvested
SOURCES: CIMB, COMPANY REPORTS
KPJ has seen considerable P/E expansion from 5x in Jan 2009 to more than
30x today. This explains much of its share price appreciation. Interestingly, its
P/E ratio rose simultaneously with the fall in interest rates, market risk
premium and cost of equity (see Figure 27). They are related as a lower
discount rate raised the present value (PV) of KPJ's future earnings and hence
its P/E ratio. On top of that, lower discount rates increased KPJ's P/E ratio
more than the P/E for the broader market because KPJ had stronger earnings
growth prospects. Another way to look at this is to project the present values of
16
KPJ Healthcare
December 4, 2013
KPJ and the stock market based on their expected future cash flows and
terminal values. Terminal value forms a bigger part of KPJ's PV than the stock
market as KPJ's earnings are expected to grow at a faster rate. This makes its
valuation more sensitive to changes in discount rate compared to the broader
stock market.
Figure 27: KPJ's P/E ratio rose simultaneously with the falling cost of equity
(x)
40.0
KPJ's historical P/E (LHS)
KPJ's forward P/E (LHS)
Risk free rate + market risk premium (RHS)
15%
35.0
14%
30.0
13%
25.0
12%
20.0
11%
15.0
10%
10.0
9%
5.0
-
8%
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
SOURCES: CIMB, BLOOMBERG
5.2 SOP valuation
We believe that sum-of-parts (SOP) is the most appropriate valuation method
for KPJ as it allows us to apply the appropriate valuation method to each of its
key assets.
KPJ's hospital network in Malaysia is its most valuable asset. We estimate that
this division should be worth RM3.26bn based on its DCF value (cost of equity:
8.3%; long term earnings growth rate: 6.1%). We have not factored in any rise
in interest rates or market risk premium in our cost of equity assumption.
We value its 49% stake in Al-Aqar REIT based on AL-Aqar's market cap of
RM926m. This adds RM454m to KPJ's SOP.
We assign a P/BV of 1x to its other assets and come to a total value of
RM136.5m. These assets include two hospitals in Indonesia, an aged care
facility in Australia and minority stakes in two private hospitals in Malaysia and
one in Thailand.
We deduct the net debt at the holding company level from the total value of the
group's divisions and add the potential cash proceeds from exercise of warrants
to derive its SOP value of RM3.76bn. This translates into RM5.70 per share
based on its 659.5m fully enlarged share base.
Figure 28: SOP Valuation
Assets
Method
Malaysia hospitals
DCF (r = 8.3%, g = 6.1%)
Indonesia hospitals
1x BV
Al-aqar REIT
Current market Cap
Other associates
1x BV
Net debt at holding company
SOP valuations
Value (RM m)
3,257.1
12.7
453.7
136.3
(118.1)
3,741.7
Proceeds from conversion of warrants
Total value
14.5
3,756.2
No. of fully diluted shares (m)
Target price (RM per share)
659.5
5.70
SOURCES: CIMB, COMPANY REPORTS
17
KPJ Healthcare
December 4, 2013
5.3 Valuations are vulnerable to a rise in cost of equity
KPJ's hospitals in Malaysia form 87% of our SOP. A higher cost of equity would
lower its valuations, just as the falling cost of equity since 2009 had boosted its
P/E ratio. We are expecting a higher interest rate in 2H14 as the central bank
will seek to curb inflationary risk. This, plus the eventual taper of quantitative
easing by US Federal Reserve, may push up the market risk premium and raise
KPJ's cost of equity. A 0.5% pt rise in KPJ's cost of equity would cut our SOP
value by 16% to RM3.15bn or RM4.78 per share.
5.4 High valuations increase downside risk
We like KPJ for its leading position in the Malaysia private healthcare space.
The group is well positioned to tap the growing healthcare spending in the
country. Its expansion into smaller towns will also help to create barriers of
entry for its competitors due to the zoning policy which limits one private
hospital for every 40km radius.
However, its EPS growth may slow in the next few years as a result of start-up
losses from the new hospitals. KPJ's new hospitals may also have lower
profitability than the existing ones as it is expanding into less-affluent
neighbourhoods where it charges lower patient fees. We project an EPS CAGR
of 0.1% for the group in 2013-2016. This is lower that its 10.7% EPS CAGR in
2007-2012 (the EPS CAGR is derived after adjusting for stock splits, bonus
issues and dilution from exercise of warrants.)
The stock appears to be fully valued given its weak near-term earnings growth
outlook. Its CY15 P/E of 33.3x is also higher than all Thailand hospital stocks
under our coverage despite the latter’s stronger earnings growth potential. We
rate KPJ an Underperform, with the de-rating catalysts being its earnings
weakness and potentially longer-than-expected gestation periods for its new
hospitals. Its valuations are vulnerable to a rise in interest rates and market risk
premium. We would be more bullish on the group should its new hospitals turn
around faster than expected.
Figure 29: Sector comparisons
Company
Hovid Bhd
KPJ Healthcare
Malaysia average
IHH Healthcare
Raffles Medical Group
Singapore average
Bangkok Chain Hospital
Bangkok Dusit Med Service
Bumrungrad Hospital
Thailand average
Primary Health Care
Ramsay Health Care
Sonic Healthcare
Australia average
Regional average
Bloomberg
Ticker
Recom.
Price Target Price
Market Cap
(US$ m)
HOV MK
KPJ MK
Outperform
Underperform
(local curr)
0.34
6.08
(local curr)
0.43
5.70
IHH SP
RFMD SP
Hold
Add
1.58
3.13
1.72
3.81
10,216
1,382
BCH TB
BGH TB
BH TB
Outperform
Outperform
Underperform
6.60
131.0
90.0
7.20
154.0
94.0
511
6,304
2,037
PRY AU
RHC AU
SHL AU
Outperform
Neutral
Outperform
4.89
39.50
16.35
5.71
38.44
16.91
2,254
7,285
5,977
81
1,237
Core P/E (x)
CY2013 CY2014
12.6
11.8
37.5
33.3
25.0
22.5
58.8
35.2
25.8
20.5
42.3
27.9
23.4
20.8
31.1
26.5
26.4
23.5
27.0
23.6
15.7
14.2
25.8
23.1
17.7
15.5
19.7
17.6
27.5
22.5
3-year EPS
CAGR (%)
14.0%
-6.1%
4.0%
17.7%
16.3%
17.0%
0.5%
13.6%
15.5%
9.9%
6.2%
11.7%
18.0%
11.9%
10.7%
P/BV (x)
CY2013 CY2014
1.60
1.47
3.64
3.43
2.62
2.45
1.85
1.80
3.94
3.46
2.89
2.63
3.76
3.45
5.03
4.54
6.82
5.96
5.21
4.65
0.91
0.88
4.94
4.50
2.19
2.09
2.68
2.49
3.47
3.16
Dividend
Yield (%)
CY2013
2.9%
1.2%
2.0%
0.7%
1.4%
1.1%
2.3%
1.9%
1.9%
2.0%
3.8%
1.9%
4.1%
3.3%
2.2%
SOURCES: CIMB, COMPANY REPORTS
18
KPJ Healthcare
December 4, 2013
6. APPENDIX
6.1 Why private hospitals in Malaysia have lower profitability
than their peers in Thailand and Singapore
Thailand
In Thailand, hospital services are predominantly provided by the government
at almost no charge. However, the Thai healthcare system is strained by a
shortage of doctors which is, in terms of the doctors-to-population ratio, more
than four times as severe as the shortage of doctors in Malaysia. Thailand has
about 3 doctors for every 10,000 persons but Malaysia has 13 doctors for the
same number of people. This could mean longer waiting times at Thai
government hospitals, leading to stronger demand for private healthcare which
offers faster medical attention.
On top of that, there is greater demand for healthcare in Thailand than in
Malaysia due to Thailand’s older population. About 9% of Thais are aged 65 or
above while only 5% of Malaysians are in the same age bracket. Furthermore,
private healthcare demand in Thailand is boosted by a highly successful
medical tourism industry. In 2012, 2.5m international patients (equivalent to
4% of Thailand’s population) went to Thailand for healthcare services. On the
other hand, only 0.7m (2% of Malaysia’s population) travelled to Malaysia.
A strained public healthcare system and stronger demand for hospital services
are, in our view, the key reasons why private hospitals in Thailand are more
profitable than the ones in Malaysia.
Singapore
Singapore has a higher hospital beds-to-population ratio than Malaysia (2.7
beds per 1,000 population in Singapore vs. 1.8 beds in Malaysia, according to
WHO). But government hospitals' bed occupancy in Singapore (average of 85%
in 2012) is higher than in Malaysia (avg of 69% in 2011). There is greater
demand for hospital beds in Singapore, again, due to its older population. 10%
of Singaporeans fall in the 65 and above age group compared with only 5% of
Malaysians.
Singapore has a different public healthcare system from Malaysia. Patients at
Singapore government hospitals are required to co-pay part of their medical
expenses on top of the government subsidies and pay more if they earn higher
incomes or demand a higher level of service such as an upgrade of ward.
Although this is intended to prevent abuse of public healthcare facilities, it
narrows the difference between patient fees charged in government hospitals
and private hospitals. The difference will be even narrower for the wealthy than
for the poor due to a lower healthcare subsidy entitlement for patients with
higher incomes. We believe this encourages patients who can afford private
healthcare to seek treatment at the private hospitals.
Just as in Thailand, demand for private hospital services in Singapore is also
boosted by a successful medical tourism industry. Frost & Sullivan estimates
that around 461,000 medical travellers sought for healthcare services in
Singapore hospitals in 2011. Although this is less than the 671,727 medical
travellers who came to Malaysia in the same year, the number of medical
travellers works out to 9% of Singapore's total population but only 2% of
Malaysia's.
Other possible factors which explain the higher profitability of private hospitals
in Singapore than in Malaysia include disparity in income levels, insurance
coverage and health awareness. However, we believe the key difference between
Singapore and Malaysia is the degree of competition that the government
hospitals have introduced to the private players. The co-payment system at
Singapore government hospitals has reduced the trade-off between faster
medical attention and more expensive patient fees at the private hospitals.
Higher purchasing power would mean that the trade-off is even smaller for
Singaporeans than for Malaysians.
19
KPJ Healthcare
December 4, 2013
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December 4, 2013
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of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds and associated securities and/or derivative securities
and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The
delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement
of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order
in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc.
Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated
investors as defined in the laws and regulations of such jurisdictions.
Spitzer Chart for stock being researched ( 2 year data )
Price Close
7.9
7.4
6.9
6.4
5.9
5.4
4.9
4.4
3.9
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
Distribution of stock ratings and investment banking clients for quarter ended on 31 October 2013
1251 companies under coverage for quarter ended on 31 October 2013
Rating Distribution (%)
Investment Banking clients (%)
Outperform/Buy/Trading Buy/Add
49.8%
7.1%
Neutral/Hold
34.0%
5.7%
Underperform/Sell/Trading Sell/Reduce
16.2%
4.6%
Recommendation Framework #1 *
Stock
Sector
OUTPERFORM: The stock's total return is expected to exceed a relevant
OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is
benchmark's total return by 5% or more over the next 12 months.
expected to outperform the relevant primary market index over the next 12 months.
NEUTRAL: The stock's total return is expected to be within +/-5% of a relevant
NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected
benchmark's total return.
to perform in line with the relevant primary market index over the next 12 months.
UNDERPERFORM: The stock's total return is expected to be below a relevant
UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is
benchmark's total return by 5% or more over the next 12 months.
expected to underperform the relevant primary market index over the next 12 months.
TRADING BUY: The stock's total return is expected to exceed a relevant
TRADING BUY: The industry, as defined by the analyst's coverage universe, is
benchmark's total return by 5% or more over the next 3 months.
expected to outperform the relevant primary market index over the next 3 months.
TRADING SELL: The stock's total return is expected to be below a relevant
TRADING SELL: The industry, as defined by the analyst's coverage universe, is
benchmark's total return by 5% or more over the next 3 months.
expected to underperform the relevant primary market index over the next 3 months.
* This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand, Jakarta Stock Exchange, Australian Securities
Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside
the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.
CIMB Research Pte Ltd (Co. Reg. No. 198701620M)
22
KPJ Healthcare
December 4, 2013
Recommendation Framework #2 **
Stock
Sector
OUTPERFORM: Expected positive total returns of 10% or more over the next 12
OVERWEIGHT: The industry, as defined by the analyst's coverage universe, has a
months.
high number of stocks that are expected to have total returns of +10% or better over
the next 12 months.
NEUTRAL: Expected total returns of between -10% and +10% over the next 12
NEUTRAL: The industry, as defined by the analyst's coverage universe, has either (i)
months.
an equal number of stocks that are expected to have total returns of +10% (or better)
or -10% (or worse), or (ii) stocks that are predominantly expected to have total returns
that will range from +10% to -10%; both over the next 12 months.
UNDERPERFORM: Expected negative total returns of 10% or more over the next 12
UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, has a
months.
high number of stocks that are expected to have total returns of -10% or worse over
the next 12 months.
TRADING BUY: Expected positive total returns of 10% or more over the next 3
TRADING BUY: The industry, as defined by the analyst's coverage universe, has a
months.
high number of stocks that are expected to have total returns of +10% or better over
the next 3 months.
TRADING SELL: Expected negative total returns of 10% or more over the next 3
TRADING SELL: The industry, as defined by the analyst's coverage universe, has a
months.
high number of stocks that are expected to have total returns of -10% or worse over
the next 3 months.
** This framework only applies to stocks listed on the Korea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted
for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.
Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (IOD) in 2012.
AAV – not available, ADVANC - Excellent, AEONTS – Good, AMATA - Very Good, ANAN – not available, AOT - Excellent, AP - Very Good, BANPU - Excellent , BAY - Excellent ,
BBL - Excellent, BCH – not available, BCP - Excellent, BEC - Very Good, BGH - not available, BJC – Very Good, BH - Very Good, BIGC - Very Good, BTS - Excellent, CCET Good, CENTEL – Very Good, CK - Very Good, CPALL - Very Good, CPF - Very Good, CPN - Excellent, DELTA - Very Good, DTAC - Very Good, EGCO – Excellent, ERW –
Excellent, GLOBAL - Good, GLOW - Very Good, GRAMMY – Excellent, HANA - Very Good, HEMRAJ - Excellent, HMPRO - Very Good, INTUCH – Very Good, ITD – Very Good,
IVL - Very Good, JAS – Very Good, KAMART – not available, KBANK - Excellent, KK – Excellent, KTB - Excellent, LH - Very Good, LPN - Excellent, MAJOR - Good, MAKRO –
Very Good, MCOT - Excellent, MINT - Very Good, PS - Excellent, PSL - Excellent, PTT - Excellent, PTTGC - Excellent, PTTEP - Excellent, QH - Excellent, RATCH - Excellent,
ROBINS - Excellent, RS – Excellent, SAMART – Excellent, SC – Excellent, SCB - Excellent, SCC - Excellent, SCCC - Very Good, SIRI - Good, SPALI - Very Good, SRICHA – not
available, SSI – not available, STA - Good, STEC - Very Good, TCAP - Very Good, THAI - Excellent, THCOM – Very Good, TICON – Very Good, TISCO - Excellent, TMB Excellent, TOP - Excellent, TRUE - Very Good, TTW – Very Good, TUF - Very Good, VGI – not available, WORK – Good.
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