Health Management Int Ltd - Visit to flagship Mahkota Medical Centre (OCBC)

Not Rated

Current Price: S$0.093

Visit to HMI's Malacca hospital. We recently visited Health Management International's (HMI) flagship Mahkota Medical Centre (MMC) in Malacca, Malaysia. MMC is licensed to run 356 beds, of which 280 are operational now. The hospital is well-equipped with a wide range of advanced medical and diagnostics equipment. We believe the group is well-positioned to leverage on rising medical tourism trends in the region and government initiatives to develop this industry.

Bottom-line boosted by fair value gains. HMI reported a PATMI of RM2.0m in FY11, representing a reversal of a net loss of RM2.9m suffered in FY10. Nevertheless, we note that this was boosted by fair value gains of RM6.8m on its investment properties, without which the group would have remained in the red. This was due to continued gestation losses at its Regency Specialist Hospital (RSH) in Johor, which started operations in Nov 2008 (soft launch).

But operating statistics encouraging. Notwithstanding this, operating statistics of the group look encouraging, and we believe there are ample opportunities for the group to grow, barring any unforeseen circumstances. Total patient loads rose 15.3% in FY11, while occupancy rates for MMC and RSH increased from 56% and 16% in FY10 to 62% and 32% in FY11 respectively. This helped to contribute to an overall revenue growth of 23.5% to RM173.9m in FY11. Moving forward, management highlighted that they would be seeking to recruit more specialists and doctors and to expand its medical specialties, especially at RSH.

RSH breakeven could be positive turning point. MMC was in the red when HMI acquired it, but has since turned it around into a full-fledged hospital with profitable operations. We believe the experience and expertise garnered would provide a strong platform for management to execute well at RSH. Hospitals typically take three to five years to achieve breakeven, hence we opine that this could happen at end FY12 or more likely in early FY13. Given the positive outlook on Malaysia's healthcare scene, RSH's growth prospects could be compelling once it manages to turnaround, in our opinion, given the importance of operating leverage in the healthcare industry. HMI is trading at 1.57x FY11 P/NTA, below its 5-year historical average P/NTA of 1.72x. HMI also trades at a smaller premium to its book value vis-à-vis its more profitable peers such as Raffles Medical Group [BUY; FV: S$2.50] and KPJ Healthcare. This suggests that investors could be incentivised to pay a higher premium for HMI's shares once it turns profitable and earnings begin to gain traction. We do not have a rating on HMI.

Healthcare sector a key focus of Malaysian government. The Malaysian government has identified the healthcare sector as one of its key pillars of growth under the Malaysian Economic Transformation Plan (ETP). Under the ETP, the government plans to increase the healthcare sector's contribution to its GNI from RM15.2b in 2009 to RM50.5b by 2020. Within this space, the government is targeting for Malaysia's medical tourists to reach 1.9m in 2020, contributing RM9.6b in revenue.

Room for further growth… MMC achieved a bed occupancy rate of 62% in FY11 (versus 56% in FY10), based on a midnight census which means that day surgery patients are not included in the occupancy rate computations. The CEO of MMC highlighted to us that an occupancy rate of 65% is optimal, while reaching 70% is an indication to open up new beds. We believe that MMC is well poised to capture the burgeoning medical tourism trend in the region, given its growing brand name and advanced infrastructure and equipment. 24% of MMC's patients are made up of foreigners (mostly Indonesians). We understand that Indonesian patients historically have spent ~50% more than local patients at MMC, and management expects its Indonesian patient population to grow faster than its local patient population. The group also has space to roll out more beds, as it has set aside a floor which can be converted into another ward which can accommodate up to 40 extra beds. Moreover, there are two additional plots of land adjacent to MMC which can be used to build extension buildings in the future.

…although risks exist. Despite the robust growth potential, there is currently a shortage of healthcare personnel in Malaysia. Moreover, competitive pressures are intensifying, both locally and regionally. Current weak macroeconomic conditions could also dampen the sentiment of consumers to travel overseas for treatment and/or lead to the postponement of elective surgeries. In a report released by the Malaysian government regarding its ETP, it was highlighted that the healthcare markets in Singapore and Thailand have not only shown faster historical growth, but have also weathered the economic downturn better. We believe this resilience in the Singapore healthcare sector as compared to its Malaysian counterparts can be attributed to two main factors: 1) the strong branding to position itself as Asia's medical tourism hub; and 2) the relatively higher inelasticity of demand for Singapore's healthcare services due to a higher-end target segment and the ability to offer more sophisticated medical procedures.