IHH Healthcare took a hit during the pandemic as patients postponed surgeries and medical tourism — a key revenue source for some hospitals — vanished.
With Covid-19 no longer a global medical emergency, new group CEO Dr Prem Nair expects IHH’s business to rebound swiftly as shown by its 3QFY2023 ended September 2023 results.
“This is a fundamentally sound company,” says Nair in an interview with The Edge Singapore. IHH, which operates over 80 hospitals and clinics across 10 countries, is able to enjoy operational improvements almost across the board, he adds.
Nair, who has been in the healthcare industry in various roles for 38 years, wants to generate new growth. His predecessor, Dr Kelvin Loh, had planned to divest IHH’s underperforming businesses in China. However, after Nair visited the four clinics in Shanghai and saw their operations, he has decided not to go ahead with the divestment and would instead commit more resources to them.
Nair says this was because China opened up from the pandemic a bit later compared to other major markets and expats, who had made up a significant patient base for the clinics before the pandemic, have yet to return in strength although the overall scene is “very bustling”, he says.
Nair figures that with some consolidation and rebranding, IHH can make the Chinese business work. After all, China is a market that cannot be ignored by global companies and IHH needs to think long-term. “I think we can revive our China business. We are committed to that,” adds Nair.
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Brownfield expansion
In the most recent 3QFY2023, IHH’s Greater China business comprising China and Hong Kong made up around 5.6% of total revenue, with Europe (including Turkey) and Singapore as leading markets. In 3QFY2023, IHH’s group-wide revenue of RMB5.8 billion ($1.08 billion) included its hospital operations and Parkway Life REIT, of which IHH is the sponsor.
IHH attributed the revenue growth to higher patient volumes across all markets. As it generated higher revenue intensity, earnings more than doubled to RM532.1 million in the same period, which puts it back to the levels seen before the pandemic. However, over the past 12 months, its Singapore shares were down 5.5% to close at $1.71 on Jan 24 while its Malaysian shares were up 2.9% to close at RM6.07 on the same day, valuing the company at RM53.46 billion or $15.06 billion.
Nair has identified several growth avenues for IHH’s hospital business. Firstly, given how healthcare demand is a long-term growth trend, IHH plans to increase the number of beds in its hospitals across various hospitals by a third, or 3,800, by 2028.
Nair notes that IHH’s occupancy rate exceeds an “impressive” 70% on average for a private hospital player, with some Malaysian hospitals nearing full capacity. “We have several existing facilities that are bursting. Our patients are complaining that they cannot get beds and appointments so we have to increase our capacity,” says Nair.
For IHH, expanding capacity does not simply mean buying an empty plot of land and building a hospital. Rather, Nair is looking to free up space that was set aside to cater for expansion needs. These tend to exist around various clusters such as intensive care units, operating theatres, emergency rooms and radiology departments. “The idea is brownfield expansion or what I like to call same-store growth,” says Nair, borrowing the retail industry parlance.
Another advantage of brownfield growth is speed as new buildings can take up to five years to be completed. According to Nair, brownfield space is available across its facilities in Malaysia, India, Turkey, Russia and India.
As described in IHH’s 3QFY2023 presentation, the biggest increase by number will be in India, with more than 1,800 additional beds planned, or 36%, on top of just over 5,000 now. For Turkey and Europe, IHH plans to add around 580 beds to bring the total to 3,400. Hong Kong, where IHH has a relatively modest 271 beds, is eyeing a 55% expansion to add around 150 beds.
Meanwhile Malaysia, where the company has extensive operations, will see an increase of 45%, or 1,275 beds, bringing the total to 4,123. Most recently on Jan 24, IHH signed an MOU with Pelaburan Hartanah Berhad to develop a new medical block adjacent to the current Gleneagles Hospital Kuala Lumpur complex. IHH will then leased the building from PHB for an initial period of 20 years. After the expansion, Gleneagles Hospital Kuala Lumpur is expected to be one of the largest private hospitals in Malaysia by 2027 with over 700 beds.
The new purpose-built medical block for Gleneagles Hospital Kuala Lumpur, to be completed by 2027, is envisioned to encompass 470,000 sq ft gross floor area with over 260 beds, subject to regulatory approvals.
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There is no planned bed increase though for Singapore, one of IHH’s largest markets with its four hospitals. Besides space constraints, further growth here might nudge IHH too close to the comfort of anti-competition hawks, says Nair.
Lab and diagnostic expansions
Secondly, IHH plans to expand into other facets of the healthcare ecosystem, including the laboratory and diagnostics business. It is particularly keen on the ambulatory and primary care spaces too, says Nair.
In Singapore, this is broadly in line with the government’s Healthier SG initiative, which aims to help all Singaporeans achieve healthier lives in the coming years by adopting a more proactive, pre-emptive approach.
One initiative is for each family to have a regular clinic they go to for preventive care before a medical condition turns chronic. “With an ageing population and high costs of hospital care, we cannot afford to admit people into hospitals for their treatment. Many treatments can be safely and cost-effectively done outside the hospital. So, we can move them to the ambulatory care centres (ACC),” says Nair.
IHH plans to establish IHH Laboratories by merging its two major labs in Singapore and Malaysia. Previously, the labs mainly supported the hospitals and clinics in their respective countries. With the merger, the combined entity will perform higher complexity tests with higher margins. The group also plans to open another reference lab in Turkey.
A third way to extract more growth out of existing resources is its so-called “cluster strategy”, which is a continuation of what IHH already has in place. As many of its hospitals in Singapore and Malaysia are located close to one another, resources can be shared and deployed more flexibly, generating higher revenues without increasing costs or reducing capital efficiency. IHH has plans to “open” another cluster in East Malaysia following its latest acquisition of a hospital in Sarawak. Nair also sees similar opportunities in markets like India.
Market forecast
Analysts are overall upbeat on IHH’s prospects. In their respective reports issued following the 3QFY2023 results, MIDF Research, BIMB Securities Research, and HLIB Research have “buy” calls on the stock while CGS-CIMB Research has an “add” and Research by Kenanga has an “outperform” call. The research houses have target prices ranging from RM7.00 (Kenanga) to RM7.70 (CGS-CIMB).
HLIB’s Sophia Chua is positive that the group has greenfield and brownfield strategies for growth in its various markets. The group’s growth strategy addresses the immediate healthcare needs in specific regions and serves as a foundation for IHH’s sustained growth, says Chua. “We continue to favour IHH as it stands resilient in a defensive sector and positioned to benefit from global megatrends such as the ageing population,” she says.
CGS-CIMB’s Tay Wee Kuang sees room for ebitda expansion with a strong underlying demand for the group’s healthcare services. Paired with the group’s expansion plans across the healthcare continuum in Singapore and Malaysia, Tay expects IHH to reach his core patmi estimate of RM1.78 billion in FY2023 and 17.6% EPS growth in FY2024, driven by organic expansion. He says the group has re-evaluated its China strategy since Nair took the helm, adding: “We note that this is a shift from its plans to divest its China operations previously and would likely lead to drawn-out gestational losses, albeit at a minimal impact to the group as a whole, in our view.”
Kenanga, on the other hand, expects IHH’s revenue per inpatient to grow by 10%–15% y-o-y in FY2023, inpatient throughput growth of 10%–15% and bed occupancy rate (BOR) of 60%–73% for its hospitals in Malaysia, Singapore, India and Turkey. “We believe the key growth factor for its inpatient throughput and BOR will be the return of elective surgeries and medical travel, the addition of new beds (previously constrained by staff shortages) and the first full-year contribution from Ataşehir hospital in Acibadem,” says analyst Raymond Choo.
Separately, UOB Kay Hian is less optimistic as it has kept its “hold” recommendation and RM6.40 target price. “While valuations appear decent relative to its historical valuations, it is not as attractive versus other similarly-profiled large defensive stocks. While its operations are defensive, certain regions where IHH operates can be tumultuous. Furthermore, valuations have factored in an earnings recovery in 2024,” says analyst Philip Wong.
