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Bangkok Dusit Medical Services

Issuing Bt10bn CB but minimal dilution BUY

Bangkok Dusit Medical Services Plc (BGH)

-Issuing convertible bonds (CB) not exceeding Bt10bn to fund expansion

- Raising capital 5% as reserve for conversion and general mandate

- Our calculations show little impact on earnings and little dilution

News: BGH announced that it will issue convertible bonds (CB), raise capital and lift

the foreign limit to 25% (from 20%).


- CB. The CB will be no more than Bt10bn or equivalent in other currencies and

allocated to foreign investors, with a term of not more than five years. The details

of coupon rate, final conversion price and conversion ratio will be determined after

the transaction is approved by shareholders at a meeting on August 5, 2014. The

conversion price will not be below Bt16.51/share (90% of average price May 28-

June 17). BGH expects to complete the offering this year.

- Capital increase. The company will also increase capital by issuing 774mn new

shares (par Bt0.1/share). Up to 542mn of these will be reserved for the exercise of

the CB, or 3.5% of current paid-up shares. The remaining 232mn shares (1.5% of

current paid-up shares) will be set aside for a general mandate. In the meantime,

the previous general mandate approved by shareholders in April 2014 is cancelled.

Note: A general mandate is a capital increase process where shareholders approve

the number of shares and allotment types at a shareholders meeting far in

advance. This gives the board of directors the authority to decide on the details

when it is ready to undertake the capital increase.

- Increase foreign limit to 25percent from 20% to give room for the increase in shares

brought by the conversion of the convertible bond in the future.

insignificant increase in interest expense. We believe BGH is laying the

groundwork for future investment, ready to get in on any opportunity that will

enhance its long-term growth path. BGH says that if it does not see an attractive

investment opportunity, it will use the funds from the CB to repay debt. Our

assessment suggests a 3-5% impact on net profit in 2015 from incremental interest

expenses, assuming 3-5% coupon rate, no investment and it keeps the entire Bt10bn

CB on its balance sheet. The impact falls to 1-2% if BGH uses the funds to repay debt.

Even with the CB, BGH's financial health is strong at 0.7x interest-bearing debt to

equity (up from 0.5x).

Only 5% dilution effect. If all CBs are converted and the shares under the general

mandate are used, there will be just 5% dilution, which would mean a negligible

change to our TP. It is also unlikely to be immediate if the conversion price is a

premium to market price. We maintain our positive view on BGH with earnings

returning to an uptrend, driven by improving EBITDA margin. Its long-term earnings

growth path is promising, undergirded by its large hospital network that encompasses

all types of medical services and patient groups.

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