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Bangkok Chain Hospital

Deep discount with earnings recovery

Bangkok Chain Hospital Plc (BCH)

BCH share price has risen by 13% YTD and beat SET return in response to an earnings turnaround this year as losses from its first high-end hospital (WMC) ease. Even after the YTD increase, we expect the rise to continue in view of the huge 27percent fall in price over the past year, implying positives are not fully priced in. We also see current valuation as attractive. BCH is trading at 21x 14PE, a 21% discount to regional peer average. Excluding losses from WMC, BCH's 2014PE will slim to 17x, a 36% discount to regional peer average. We BUY with DCF TP at Bt9.0.

WMC: About-face from drag to driver. BCH's 2013 net profit was Bt585mn, down 36% YoY. At fault was the slower than expected ramp up of World Medical Center (WMC), its new higher end hospital. We estimate WMC turned in losses of Bt300mn, equivalent to 51% of BCH's 2013 net profit. This year, operations at WMC will continue to improve and this will be reflected in earnings. Operationally, after the hospital upped its marketing with promotional and health packages, average visits more than doubled to 120/day in 4Q13 from 50/day in 2Q13. After a year of this marketing, we expect average visits to rise to 200/day, lifting revenues and lowering net loss to Bt180mn, nearly half 2013's net loss of Bt300mn.

1Q14F to be final quarter for YoY drop. WMC is a new hospital with no established clientele. As a new hospital, revenues were low but costs high since it still had to be fully staffed. Thus, from its opening in March, it pulled BCH into a YoY fall in net profit for the whole year. With anticipation of better operation at WMC, we believe BCH's earnings will start to trend up again as the lower losses at WMC means there will be no more YoY drops after 1Q14.

Recent acquisition - Navanakorn - beginning to contribute small profit. BCH is operating nine hospitals with ~1,900 beds including six Kasemraj hospitals (middle income), WMC (high income) plus 50% in a two-for-one deal, Navanakorn General Hospital (i.e. Navanakorn) with facilities in Pathum Thani and in Ayutthaya. The six Kasemraj hospitals and the two Navanakorn hospitals are all on the social security scheme (SC) but Navanakorn reported a total net loss of Bt50mn in 2013 as it had little experience in treating SC patients. Since early this year BCH has become involved in Navanakorn's day-to-day operations and its long experience in the SC program plus improved cost control through its hospital network (pharmaceuticals and medical supply purchases) are helping and the hospital was able to report a small profit in Jan-Feb. We expect this to ease market concerns on earnings pressure.

Attractive valuation - Deep discount to regional peers. YTD, BCH's share price has risen 13% YTD and outperformed the SET in response to an earnings turnaround this year as WMC pulls itself up to lower losses. Even though the share has risen YTD, looking at the past twelve months shows a large 27percent fall, implying positives have not been fully priced in, and the current valuation is attractive. BCH is trading at 21x 2014PE, a 21% discount to regional peer average of 27x. Excluding losses from WMC, BCH's 2014PE comes down to 17x, a 36% discount to regional peer average.




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