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1Q14F: BGH to post strongest growth QoQ

1Q14F: BGH to post strongest growth QoQ

BGH is in the spotlight in 1Q14F, expected to show the strongest QoQ net profit growth; a positive is a lower YoY contraction of EBITDA margin

Magnitude of YoY drop in net profit for BCH is expected to narrow

BH to be weakest with decline both YoY and QoQ, hit by political tension

Buy BCH and BGH

1Q14F: BGH to report the strongest QoQ net profit growth. Our 1Q14F preview suggests YoY net profit drop for all healthcare stocks under our coverage (BCH, BGH and BH). However, we highlight BGH as we expect it to report the strongest QoQ net profit growth.

- BGH: Positive sign in EBITDA margin. We expect BGH to report net profit of Bt1.8bn, down 6% YoY but up 30% QoQ, the sharpest rise QoQ in the sector. Behind this is: 1) Bt13bn hospital revenue (+11% YoY and 5% QoQ) and 2) EBITDA margin at 25%. This is down 0.8ppts YoY (but up 3.1ppts QoQ), which is good news as the cost control program, in place since 4Q13, has reduced the YoY contraction from

-3.4ppts in 2Q13, -3.3ppts in 3Q13 and -1.4ppts in 4Q13.

- BCH: YoY net profit drop easing back. We estimate BCH net profit of Bt146mn, down 18% YoY but up 10% QoQ. This is contributed by: 1) Bt1.3bn hospital revenues, up 15% YoY and 7% QoQ, driven by growing revenues at existing hospitals plus consolidation of hospitals acquired last year - Karunvej Pathumthani and Ayudthaya; 2) loss from World Medical Center Hospital (WMC) at Bt80mn vs. loss at Bt50mn in 1Q13 - but this was because WMC opened in the last month of the quarter in 1Q13, thus contributed losses in just the one month. The steady easing in the YoY fall in net profit is encouraging and we expect 1Q14 to be the final quarter for a YoY drop, as WMC losses will be lower than the prior year.

- BH: Weakest in the sector. BH will report the weakest performance, with net profit of Bt583mn, down 5% YoY and 7% QoQ, mainly from weak revenues. We estimate BH's hospital revenue at Bt3.5bn, flat YoY and down 5% QoQ. This was largely from a fall in patient volume as BH has only the one hospital in Bangkok in which politics figured largely in the first quarter.

BUY BCH and BGH. We like BCH because of its earnings turnaround story this year as WMC continues to improve. Although BCH's share price has increased 21% YTD, we see valuation as attractive. BCH is trading at 23x PE 2014 PE or a 15% discount to the average of regional peers. Excluding expected losses from WMC, BCH's 2014 PE comes down to 19x, a 31% discount to regional peer average.

BGH's share price has increased 26% YTD and it is trading at 34x 2014 PE which is above the regional peer average. However, we see the demanding valuation as short-term and due to the pressure on earnings in 2014 from its expansion that will result in long-term gains. Looking ahead to 2015 when the expansion pays off, we expect BGH to shine with 23% net profit growth and a fall in 2015 PE to 27x with 2015 PEG of 1.6x vs. 1.7x for IHH (the largest hospital chain in the region).




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