■ IHH’s 60:40 500-bed Gleneagles Hong Kong (completion early-2017) will be the next Singapore success story and a significant earnings contributor in five years.
■ Singapore has ~920 beds (16% of bed capacity) but forms 45% of group net profit.
■ Management sees medical costs in Hong Kong being 30-50% higher than Singapore, but with similar normalised EBITDAR margins (c.30%). We agree.
■ HK’s ageing population, wealth and acute bed shortage will support higher prices.
■ Our SOP TP rises to S$2.52. Organic core market growth is the appetiser. HK will be the main course, with China/India being the dessert.
Singapore’s success to be replicated in Hong Kong
Excluding IHH’s international operations, Singapore only contributes ~920 beds or 16% of total bed capacity. However, Singapore made up 45% of 1H15 core net profit. The similarities in terms of demographics and economic prosperity between Singapore and Hong Kong lead us to believe that the 500-bed Gleneagles HK will form a significant portion of group earnings going forward.
Hong Kong’s population is older than Singapore
15% of Hong Kong’s population is above 65 years old (compared to 11% in Singapore). The significance of an elderly population should not be discounted, as on average, a person aged 65 and above has a 42% probability of being admitted into a hospital and is 5x more likely to be hospitalised than one aged between 15 and 64. Case intensity is also higher among the elderly. In this respect, the demographics in Hong Kong should translate to heightened demand for healthcare.
Wealth and pent-up demand should drive patient volumes
The affluence of the Hong Kong population also augurs well for premium private healthcare demand. Adjusting for purchasing power, per capita income in Hong Kong is among the highest in Asia and 42-44% above the OECD average.
Severe bed shortage situation in Hong Kong is two-fold
On one hand, total bed capacity in Hong Kong has stayed stagnant (-0.3% CAGR over 2003-14). On the other hand, its population has been rapidly ageing and growing (0.7% CAGR over 2003-14). In numbers, one Hong Kong bed sees an average of 62 inpatients p.a. (this is 40% higher than the average of 44 inpatients in Singapore). Put together, stress on bed supply and pent-up demand should translate to higher medical costs.
Maintain Add with 23% EPS CAGR over FY14-17
IHH is a premium healthcare brand and our top hospital pick. It is currently trading at an undeserved discount to RFMD and other single country operators. We raise FY16-17 EPS by 5% on a stronger S$ and raise our SOP-based target price to S$2.52, as we roll forward to CY17 and turn upbeat on Hong Kong. A strong S$ provides further support. We expect longer-term catalysts to come from China/India via greenfield/brownfield acquisitions. (Read Report)
Source : CIMB Research