Health Management International – No pain, no gain May 15, 2019 451

PSR Recommendation: BUY Status: Maintained
Target Price: S$0.73

The Positives

+ Revenue rose on the back of resilient patient load growth and increasing average patient bill sizes. Patient load grew 1.3% YoY to 116.2k patients, driven by both inpatient (+2.6% YoY) and outpatient (+1.1%YoY) growth from Mahkota (Mahkota Medical Centre, Melaka) and Regency (Regency Specialist Hospital, Johor). Average inpatient and outpatient bill size rose 4.9% and 5.3% YoY respectively. The continuous growth in patient load and larger bill sizes were due to the expansion of specialist offerings, further developments of HMI’s Centres of Excellence (COE), investments in specialised medical technology and recruitment of more specialists and sub-specialists. Increasingly complex and acute cases will contribute to revenue intensity. Meanwhile, local and foreign patient load mix remained unchanged YoY at 77:33. We expect patient traffic to continue its steady growth as the COEs attract referrals and marketing efforts boost awareness. 

 + Bed occupancy rose to 61% from 59% a year ago despite the total number of operational beds remaining the same at 437. HMI continues to increase its bed capacity with the new extension block at Regency, which begun construction last quarter. Regency’s bed count will increase by 380 beds upon completion in 2021, with the potential to expand to 500 beds by utilising shell spaces set aside.


The Negative

– Starmed’s gestation costs to weigh down PATMI in the next 2 to 3 years. Core PATMI of RM13.0mn fell 15.4% YoY. Excluding the Starmed’s gestation costs, 3Q19’s core PATMI would have increased by 10.0% YoY, indicating a RM4.0mn net loss from Starmed in 3Q19 (2Q19: RM2.9mn). Top line contribution from Starmed is immaterial at this point. Starmed’s net loss this quarter includes the depreciation (inclusive of new property purchases in Jan 2019) and finance costs of six levels of Starmed. Hence, we expect this quarter’s net profit impact from Starmed to be more indicative of moving forward. We raise our EBIT loss assumptions on Starmed to RM 6-9mn for the first three years of operation, resulting in lower EBITDA for FY19e and FY20e by 3.3% and 5.8% respectively.



We remain positive on the outlook for HMI due to its resilient hospital operations and growth trajectory to meet the growing demand.


Mahkota (Malaysia, Melaka)

Mahkota’s Cancer Centre will be launching Tomotherapy services and it will be the only hospital in South of Kuala Lumpur that offers this cancer treatment. Progressive upgrading and refurbishing of older wards will continue to maintain a new and consistently upgraded facility for the patients. Undertaking preliminary assessments to expand Mahkota. 


Regency (Malaysia, Johor)

Construction of the new extension block begun last quarter. Upon its targeted commissioning in 2021, Regency will become a 380-bed tertiary hospital, with the potential to expand capacity to 500 beds.

Regency’s new competitors. (i) KPJ Bandar Dato Onn (Johor): started operations and located 10 minutes away from Regency. (ii) Columbia Asia South Key (Johor): expected to open within next few months. Mainly a secondary care hospital and does not have the full set-up that Regency does. Regency will face increasing competition for specialists, staff and patients but there is currently no impact from both competitors as both hospitals are still in the early stages of operation. HMI’s strategy is to expand faster, develop their Centre of Excellences and recruit more specialists.


StarMed Specialist Centre (Singapore)

Starmed currently has 30 accredited specialists. Average bill size is below the private healthcare average and the affordability is due to lower overheads costs associated with a smaller set-up and lower staff costs. In comparison to a hospital, Starmed does not need to maintain an emergency wing nor operate for 24 hours because its patients usually undergo minimally invasive procedures that do not require overnight stays.


Primary Care – Plus Medical Holdings Pte Ltd (Singapore)

Plus targets to have more than 40 primary care clinics in Singapore in 3 years. HMI invested an initial S$4.2mn for a 28% stake in a chain of 16 primary care clinics in Singapore on 15 Mar 2019. HMI’s stake may increase over time, subject to further requests for funding and satisfaction of certain conditions.


Investment Action

Maintain BUY with a lower DCF-derived TP of S$0.73 (previously S$0.77). Our lower target price was due to the incorporation gestation costs of RM6-9mn EBIT loss for the first three years of Starmed’s operation. Despite the suppression of earnings in the near term due to gestation costs, we maintain our view that HMI will benefit from the socioeconomic tailwinds arising from Malaysia’s (i) public and private initiatives to improve infrastructure and regional connectivity; (ii) increasing domestic insurance take-up rate; (iii) favourable demographics; and (iv) cost competitive pricing compared to regional peers. Potential risks include (i) greater competition; (ii) disadvantageous regulatory changes; and (iii) longer than expected gestation period.

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About the author

Profile photo of Tin Min Ying

Tin Min Ying
Research Analyst
Phillip Securities Research Pte Ltd

Min Ying covers the Banking and Finance sectors. She has experience in external audit and corporate tax roles.

She graduated with a Bachelor of Accountancy with a major in Finance from SMU.

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