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Bangkok Dusit Medical

More margin pressure expected

Bangkok Dusit Medical Plc (BGH)

- We took BGH's management on a non-deal roadshow

is clear clients like BGH's long-term expansion story, while their key concer

about the pressure on its margins in the near term. Management guided lower

expected revenue growth and EBITDA margin in 2013

revising down EPS by 10-20% in 2013-18E and cut our DCF

Bt182). We like BGH's long-term strategy but downgrade BGH to Neutral from

Outperform as uncertainty over its earnings outlook is likely to remain a share price

overhang.

Impact

- Revenue. BGH targets 11% revenue growth in 2013

Meanwhile, they expect revenue growth of 14-16% p.a. in 2014

additional income from new hospitals). This is lower than our previo

of 24% in 2014 and 21% in 2015. We cut revenues by 7

revenue growth of 16% and 18%, respectively,

- EBITDA margin. In 2H13, we expect EBITDA margin to come in lower than we

previously expected as the company continues recruiting new nurses to prepare for

new hospitals and from the extra SG&A cost from existing hospitals (repair and

maintenance). We cut EBITDA margin to 20% in 2013 and 21% in 2014

22% in our previous forecast for 2013-15).

- Net profit growth. Given the impact from advance costs incurred in 2013, w

lowered our estimated adjusted profit growth to 7% YoY in

years, we estimate earnings growth will improve when revenues from the new

hospital are factored in. We expect a 3yr CAGR EPS of 20% p.a in 2

p.a. in 2017-19.

Earnings and target price revision

- We lower EPS by 10-20% in 2013-18 and cut our DCF

Price catalyst

- 12-month price target: Bt145 based on a DCF methodology.

- Catalyst: Management guidance for 3Q13 statistics on Oct 30

Action and recommendation

- We like BGH's long-term strategy of expanding hospitals in key provinces (strong

demand and low supply). First mover advantage is important to capture structural

growth. However, BGH is trading on valuations that are not attractive at a high PER

of 30x in 2014E and 26x in 2015E vs. 5yr CAGR EPS growth of 26% in 2014-18E.

We downgrade BGH to Neutral from Outperform. Our revised estimates for 2013

9-15% below consensus. We are looking for a downgrade cycle to provide a better

entry point into what we still see as an attractive long-term growth story.


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