• FY19 revenue and earnings were below expectation. FY19 revenue more than tripled to S$21mn. CBH turned EBITDA* positive in 2H19.
• The ramp-up from IGM and Philippines post-acquisition and post-renovation respectively was slower than we expected. IGM accounts for 48% of group sales.
• CBH has built an impressive regional footprint of healthcare services across the region including Singapore, Indonesia, Philippines, Malaysia and Hong Kong. The lab test and renal care services in Indonesia are the largest contributor to revenues.
• Maintain BUY with an unchanged target price of S$0.26. Growth in FY20e will be underpinned by acquisition IGM and Dental Focus and recovery in the Philippines. While still loss-making, we expect the company to clock another year of positive EBITDA in FY20e.

The Positives

+ Revenue surged to S$21.5mn.  In just 2 years post IPO in December 2017, CBH has expanded revenues from just S$288k in FY17 to currently S$21.5mn. It has acquired two core assets in Indonesia (lab and renal care), aesthetic clinic and dental facilities in Singapore and a medical centre in Manila. IGM accounted for 48% of FY19 revenue (or S$10.3mn).

+ Turning EBITDA positive.  CBH turned EBITDA positive* in 3Q19 of S$0.38mn. This further grew to S$0.55mn in 4Q19.

*exclude one-offs (fair value adjustments and other non-recurring opex), share option expenses and R&D expenses.

The Negative

– Operational challenges in Indonesia. After acquiring IGM Labs in May19, the ramp-up was delayed in part to contracts still novating to CBH. Another challenge in Indonesia is the long trade debtor days for government reimbursement. Trade receivables in FY19 rose 5-fold to S$10.7mn. After taking over operations, CBH is taking measures to shorten the trade debtor days from the authorities.

Outlook

We expect another year of strong growth for CBH. The largest contribution will come from recent acquisitions – IGM and Dental Focus. Newly opened facilities in Malaysia and the Philippines will be another source. Contribution from Hong Kong is at risk with Covid-19 outbreak disrupting patient flow from China.

Latest developments:

1. Healthcare system (lab and renal care)

• PT Tirta Medika Jaya (TMJ): Renal dialysis facility operator in public hospitals located in Indonesia. It was acquired in Apr18. Presently in 21 hospitals with another 16 to be renovated. Focus is on larger Class A hospitals which can house as many as 100 machines. In comparison, the small Class C and D sometimes fit only 5 to 10 machines. The capital required for a new facility relate to fixtures and fitting and working capital while collecting receivables from the government (which can take from 90 to 120 days). Equipment cost is borne by the vendor. There is a huge growth opportunity ahead as there are 2500 public hospitals in Indonesia, of which 16 are Class A.
• PT Indo Genesis Medika (IGM): Operates laboratories in collaboration with public hospitals in Indonesia (acquired May19). Currently, operating 13 clinical labs. Some of the typical tests are haematology, glucose, cholesterol, urine test, HIV, etc. Future growth will come from adding more hospitals. IGM is only present in 6 of the 16 Class A hospitals in Indonesia. There should be 2 or 3 Class A tenders available. Another area of growth is to add the more complex esoteric test. Clearbridge aims to export this model into CMLV (Cambodia, Myanmar, Laos and Vietnam). Similar to IGM, the model is a revenue share of 70% with the hospital taking the balance. The cost of operations are the consumables used in the lab. Staff cost is borne by the hospital.
• SAM Lab: Move into the higher-margin esoteric test (e.g. oncology). Conventional test margins are too low. Esoteric test will tap on the regional sales network and clinics in Malaysia. In FY19, revenue fell by S$0.17mn.

1. Medical clinics/centres

• Clearbridge Medical Philippines: Post-renovation of the 4-storey facility in Manila in 1H19, patient flow is improving, driven by growth in corporate accounts. Apart from pharmacy sales, other types of services include health screening, vaccination and visiting specialist.
• Clearbridge Medical Group (Hong Kong): The outbreak has resulted in a drop in patients from China. Many patients come to Hong Kong for their HPV Gardasil 9 vaccination (guard against cervical cancer). Some patients are redirected to the Philippines. The recent relaxation of in regulations will allow Hong Kong doctors to administer such vaccinations onshore.
• Dental Focus Group: Acquired the 9 clinics in Aug19. Will look to expand the operations through the acquisition of additional clinics and overseas investments. In emerging markets, GP clinics will be less profitable due to the practice of self-medication. However, dentistry cannot be self-medicated.
• Clearbridge Medical Malaysia: The paediatrics clinic operations is starting to improve with referrals from 12 GP clinic partners.

1. Strategic equity investments in medical technology

• Biolidics (24.8%, with option for another 10.67%): The company collects live cancer cells for further downstream analysis. The direction is to push commercialisation through lab developed test (LDT) regime. Biolidics is working with Sysmex, SAM lab and labs in China for LDT. To push more LDT, specialist (e.g. oncologist) and key opinion leaders need to be convinced of the product.

Investment Actions

Maintain BUY with a target price of S$0.26. The early years of CBH will be spent building its regional footprint. We believe CBH is focused on organic growth of its’ acquisitions through investing into newer facilities, larger economies of scale in operations, cross-sell and introduce more complex services across their regional platform.

Overview of operations:

Healthcare Systems

1. PT Tirta Medika Jaya (TMJ) – Renal care facilities (acquired in April 2018) located in Indonesia that offers renal care services through joint operations with equipment manufacturers and hospitals in Indonesia. The key feature of renal care is its recurrent revenue stream (dialysis is a lifetime treatment). The average utilisation rate of the renal care facilities was around 70%. Each patient requires dialysis around three times a week, 4 hours each treatment. The Group incurs CAPEX of S$60-80k to fit out each renal care centre. The Group currently focuses on ramping up occupancy instead of acquiring more contracts.

2. PT Indo Genesis Medika (IGM) – Provides laboratory services and located in Indonesia (acquired in May 2019). IGM operates laboratories with collaborating public hospitals in Indonesia under Joint Operation (JO) contracts. Currently has 13 clinical laboratories. With an estimated 2,500 hospitals in Indonesia, only 16 are class A, and CBH has Jos with 6 class A hospitals in the most affluent locations.

Medical clinics/ centres

1. Clearbridge Medical, Hong Kong – Single medical clinic in Hong Kong, which achieved rapid patient volume growth in FY18 of >350 patients per month. Patients are mainly from China seeking health screening and vaccinations. CBH expanded collaborations with new local and Chinese agents to introduce more medical tourists from China. Renovation of the new clinic (that is double the size of the current clinic) has been completed in 2Q19 and will be able to cater to more patients.

2. Clearbridge Medica, Malaysia – New Paediatric clinic received MOH license and opened in March 2019. It is located in a new township with affluent middle-class young families. Revenue contribution from 2Q19 onwards. CBH has partnerships with 12 GP clinics and separately, CBH is working with 6 pharmacies to market CBH’s hereditary cancer gene tests.

3. Dental Focus, Singapore – The Group owns a 51% effective interest in 9 dental clinics under the “Dental Focus” brand name with the first right of refusal to acquire another 6 dental clinics and ancillary dental services providers. The acquisition is in line with the Group’s EBITDA-focused business strategy and increases its network of primary healthcare touchpoints. The 9 dental clinics collectively generated approximately S$6.3mn of revenue in the last financial year and are profitable.

4. Clearbridge Medical Group Philippines (CMP) – Medical centre and pharmacy business in the Philippines called Marzan that was acquired in January 2018. CMP’s pharmacy is registered under DSWD to provide drugs at a subsidised rate to patients. CMP revenue may also receive a boost, pending the approval for accreditation by the Department of Health as an approved Overseas Foreign Worker screening facility and other major Health Management Organisations for private corporate clients.