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Bangkok Dusit Medical Services

2Q14F: Positive on better EBITDA margin BUY

Bangkok Dusit Medical Services Plc (BGH)

- 2Q14F core profit expected at Bt1.5bn, up 23% YoY but down 28% QoQ; Positive is on YoY wider EBITDA margin

- 2H14 expected to continue strong at 27% YoY

- Despite YTD surge in share price, valuation in terms of PE to earnings growth (PEG) is still at a discount to regional average

Positive on earnings uptrend. Maintain BUY. YTD, BGH's share price has surged by 48% and outperformed the SET by 25%. We believe this is brought by the return of earnings to an uptrend upon a better EBITDA margin, made possible by cost controls. The visible result of the cost controls is expected to show up in a YoY widening in EBITDA margin in 2Q14, giving the quarter's earnings a good boost. We expect the strong earnings momentum to continue in 2H14 at 27% YoY as it meets our full-year forecast. Despite the surge in share price, in our view, valuation is still attractive against the regional average, with 2015 PEG at 1.6x compared to a regional average of 2.0x. BGH is our top pick in healthcare service sector. We maintain BUY with TP at Bt19/share.

2Q14F: core profit at Bt1.5bn, up 23% YoY, down 28% QoQ (seasonality). The YoY core earnings growth is underwritten by: 1) 10% revenue growth YoY (down 6% QoQ), supplied by 4% YoY growth in revenue intensity, 3% YoY growth from a price increase and 3% YoY increase in patient volume and 2) EBITDA margin at 21.4%, up from 20% in 2Q13 (but down from 26% in 1Q14). The YoY widening in EBITDA margin is evidence of the success of its cost control program (freeze on staffing, individual job expansion and rotation and lower marketing expense), put in action in 4Q13.

2H14 to continue growing 27% to meet our 2014F. BGH said revenue growth from 1-15 July was slow at 6% YoY, mainly due to fewer international patients (30% of BGH's total revenues), eroded by both martial law and Ramadan (28 June-27 July). As the political status is now calm and Ramadan over, international patients should return by late 3Q14. We are maintaining our 2014 full-year forecast of core earnings of Bt7.3bn, implying strong core earnings growth of 27% YoY in 2H14.

Six new hospitals in 2H14. BGH now has 31 hospitals in operation. According to recent guidance, it plans to open six hospitals in 2H14, and those will bring the usual losses. However, we expect the negative impact on earnings to be less as these new hospitals will be opened gradually and the higher expenses will be held in check by the cost control program in existing hospitals

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