HEALTH MANAGEMENT INT'L: Net profit CAGR of 39.0% over FY17-20E

Daiwa Capital Markets has initiated coverage of Health Management International

Analyst: Jame Osman

Initiation: well positioned for sustainable growth
350 makhota medical center HMI's hospital in Malacca: Makhota Medical Center. Photo: Company• Hospitals in Johor and Malacca could see structural patient load growth
• We forecast a net profit CAGR of 39.0% over FY17-20E
• Initiating coverage with a Buy (1) call and DCF-based TP of SGD0.78

Investment case: We initiate coverage of Health Management International (HMI), an established healthcare services provider which owns and operates 2 hospitals in Malacca and Johor, Malaysia, with a Buy (1) rating.

We forecast an adjusted net profit CAGR of 39.0% over the FY17-20E period for HMI, mainly as we expect healthy patient volume growth (5.4% CAGR over the same period) – as its hospitals add sub-specialties and expand its range of outpatient services – to drive revenue growth and margin improvement in the near term.

Chins8.17 (L-R): CEO Chin Wei Jia and CFO Chin Wei Yao. Their mother, Dr Gan See Khem, is HMI's executive chairman. NextInsight file photo. In Malacca, tourist arrivals should continue to be strong, while in Johor, rapid property development and economic expansion should support demand for healthcare services. In addition, both states have been identified as medical tourism hubs by the Malaysia government.

HMI
Share price: 63 c	Target: 78 c

With significant infrastructure development in these 2 states (eg, Melaka Gateway, Iskandar Malaysia, Kuala Lumpur-Singapore High Speed Rail projects) in the next few years, we believe HMI is well positioned to capture the structural growth in demand for healthcare services in the medium to longer term as demographics shift.

Management has already made plans to expand the capacity of its Regency hospital to 500 beds (from 218 currently) by FY21, in anticipation of the completion of some of these major projects.

Following the acquisition of the non-controlling interests in both its hospitals in March 2017, we believe management has shifted its focus to inorganic expansion opportunities outside of Malaysia.

Given the company’s solid operational track record, coupled with a recent strategic share placement to Temasek-owned Heliconia in November 2017, we believe HMI could seek to acquire inefficiently run healthcare assets at reasonable valuations in developing markets, with the objective of turning around the business. We have not factored the impact of any M&A potential into our forecasts.

Catalysts: We see the following near-term catalysts for the shares:
JameOsman4.16

Jame Osman, Daiwa analyst.1) announcement of an attractive acquisition,
2) stronger-than-expected patient volume growth, and
3) acceleration in tourist arrivals or stronger economic growth indicators in Malacca and Johor.

Valuation: We adopt a DCF-based approach to value HMI’s shares, deriving a 12-month target price of SGD0.78. We value HMI with the
following inputs: a WACC of 9.1%, comprising a 6% equity-risk premium, risk-free rate of 4.0% and a terminal FCF growth rate of 3.0%.

Risks: The main risks to our call include:
1) an inability to attract quality doctors onto its platform, and
2) unfavourable regulatory and policy developments.

HEALTH MANAGEMENT INT'L: Net profit CAGR of 39.0% over FY17-20E

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