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4Q13F: Politics, economy - a small negative

Healthcare

- Some damage from weak economy and political uncertainty in 4Q13F

- Expect 12percent sectoral earnings growth in 2014; BCH strongest growth

- Top of the list: BCH and BGH

4Q13F: Some impact from weak economy and political uncertainty. Talks with all three healthcare service providers under our coverage (BCH, BGH and BH) revealed they are seeing some negatives from the weaker economy and political uncertainty in Bangkok, as Thai patients are likely to postpone non-serious medical treatment and international patients have been warned about coming to Thailand. This slowed revenue growth in 4Q13, especially in December, compared to 9M13.

BH is 4Q13F earnings play. Our 4Q13F earnings preview suggests BH will deliver the strongest YoY core earnings growth, in the main from an increase in prices that offset the lower patient volume; plus it does not have the cost pressure from new investments as do BGH and BCH. On a QoQ basis, sectoral earnings are expected to decline from seasonality (Figure 1). In our 4Q13F preview, we see little downside to BGH's 2013 earnings forecast from higher costs and we therefore leave it unchanged.

12percent sectoral earnings growth in 2014, BCH strongest. For 2014, we are estimating 12percent sectoral earnings growth. We believe the impact on healthcare service providers' operations from the weaker economy and political muddle will be limited, supported by the fact that for the most part, medical care is a necessity rather than a luxury. In the sector, we expect BCH to deliver the strongest earnings growth at 30% YoY in 2014 driven by growth in existing hospitals and lower loss contribution from its new high-end hospital, the World Medical Center (WMC), as operations there become stronger.

BH most exposed to lengthy political situation. Politics has taken center stage in Bangkok since November 2013 and resolution of the situation is uncertain. In our view, the longer it lasts, the worse it will be for BH, since all its revenues are derived from its one and only hospital - in the heart of Bangkok - while for BCH and BGH, revenues from Bangkok and vicinity account for 80% and 65% of revenues, respectively.

Top picks are BCH and BGH. We like BCH on its earnings turnaround this year while its share price has underperformed the market by 18% over the past six months indicting the positive is not yet priced in. For BGH, we believe the concerns about the rise in cost from the aggressive expansion and unexciting earnings in 2014 has been factored in, as its share has underperformed the market and BH, its direct peer, by 8% and 31%, respectively over the past six months. We maintain a positive view on BGH's earnings uptrend in the longer horizon, grounded in its large hospital network that will put it where demand is. For BH, we see a short-term trading opportunity on its strong 4Q13F results. Sector risks: More severe and prolonged political deadline and higher costs than expected from new investment.




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