Healthcare

BGH tops as value play on high potential upside

Healthcare sector

- 2013 to show healthy core growth of 21%

- BGH tops the list on strong earnings growth and long-term upside

- Our assessment suggests 7-36% potential earnings upside for BGH in 2013-17 if its ROA improves to match BH's

Still positive on long-term upward trend for Thai healthcare. We maintain our positive view that demand for healthcare services in Thailand will continue to grow over the long term. Two primary underlying factors are: 1) an increasing elderly population that will increase patient volume and 2) increasing charges from higher revenue intensity as patients demand more sophisticated medical care. Confirmation of a rise in overall medical billings is provided by higher per-head capitation by Thailand's health schemes. This year all hospitals under the Ministry of Public Health plan to raise medical charges, and revenue per patient at private hospitals is rising.

Healthy growth in 2013: BGH is top pick. 2013 looks to be another healthy year for the Thai healthcare service sector with 21% core earnings growth. Though this is far below the 43% in 2012, that was an exceptional year that included a low base off the 2011 floods plus the corporate tax cut to 23percent from 30%. BGH is our top pick in the sector, grounded in its outstanding earnings growth prospects and the sound fundamentals provided by its broad hospital network that blankets the country. There is also potential upside to BGH earnings from a better return on assets (ROA). This ratio is lower than peers, indicating more room to grow. BGH's valuation is not rich, as it is trading at 1.3x PEG vs. 1.6x for regional peers.

BGH - A value play with potential upside. We see long-term potential earnings upside for BGH driven by improving asset utilization. Aggressive acquisitions in the past have given BGH a larger asset base, resulting in a relatively low ROA at 9.2% in 2012 compared to 13.2percent for direct peer BH. We already expect BGH's ROA to go up going forward from better asset utilization through medical equipment sharing and patient referral among hospitals, but to ascertain the possible upside to earnings should ROA improve more than we anticipate, we have run a scenario using BH as a benchmark since its operations are at an optimal level as a standalone hospital with a long track record. Our workout suggests 7-36% earnings upside for BGH in 2013-17 if its asset utilization improves to bring ROA to the same level as BH's. (Figure 3)

TP changes. Our TPs change as we change our valuation method to discounted cash flow (DCF) from PE multiple to reflect the long-term prospects. This gives a new TP of Bt180 for BGH (up from Bt135), Bt13 for BCH (up from Bt10.3) and Bt88 for BH (up from Bt76). We maintain Buy on BGH, Neutral on BCH and SELL on BH. (Figure 5)

1Q13F preview. Normally, the first quarter is a good quarter for the Thai healthcare service sector. This year, BGH will be alone in reaping the full benefit of the growing industry and deliver record earnings while peers BH and BCH face company-specific drags. BH will find it difficult to report YoY earnings growth as it has no equity income from BCH (10% of net profit in 1Q12) and has about reached its bed capacity limits. BCH's earnings will be pulled down by start-up costs and higher depreciation from its new hospital, The World Medical Center (WMC).