Chularat Hospital: More heart surgery cases to boost margins
More heart surgery cases to boost margins As heart surgery cases are considered high intensity, they provide higher gross margins for CHG. Therefore, even though CHG suffered from lower inpatient revenues in FY20, it still achieved higher gross margin in FY20 as shown below. Note that the ramp-up of CHG’s two greenfield hospitals, Chularat 304 and Chularat Ruampat (RPC) which were opened in 2018, also improved margins in FY20, in our view.
As Thailand is facing the third wave of Covid-19 outbreak, we expect CHG to have more referral cases from public hospitals in Samutprakarn and nearby provinces.
Thus, we expect its gross margin to continue to improve. Also, as we do not expect CHG to open new hospitals over the next couple of years, its gross margin is unlikely to be dragged down by new hospitals and its SG&A expense ratio is likely to trend down.
CHG also benefits from more Covid-19 tests We believe it would help lift CHG’s FY21F core profit by 3% CHG’s management mentioned that on the back of the third wave of the Covid19 outbreak, it now conducts more than 1,500 polymerase chain reaction (PCR) tests per day. Note that CHG provides Covid-19 tests at its three hospitals – Chularat 3, Chularat 9 and Chularat 11. We estimate that CHG would conduct about 65k tests in 2Q21F.
With THB2,300/test, we expect CHG to generate around THB150m revenues from these tests, which we believe would form about 10% of its 2Q21F revenues. With 25% EBITDA margin, we expect these Covid-19 tests to generate THB30m net profit for CHG in 2Q21F or about 14% of its 2Q21F core net profit. However, if there are no additional Covid-19 test revenues in 2H21F, we expect the net profit contribution from Covid-19 tests in 2Q21F to be about 3% of its FY21F core net profit.
Contribution from Covid-19 tests for other hospitals Up until recently, most high-end hospitals did not want to conduct Covid-19 tests for the fear of having to treat Covid-19 patients at their hospitals. This is because the government states that if a person is tested positive, the hospital that conducted the Covid-19 test will have to treat the patient, the cost of which can be reimbursed from the National Health Security Office (NHSO), while the patient will not have to pay for the treatment nor the test. However, if he has insurance coverage, the hospital can also get reimbursed by the insurance company.
Most hospitals are concerned that the reimbursement from the NHSO would not be sufficient to cover their costs. As such, many hospitals try to limit the number of Covid-19 tests that they perform, while some do not conduct any Covid-19 tests at all. However, now the government has set up many field hospitals to provide treatment for Covid-19 patients with not-so-serious conditions and private or public hospitals can refer their Covid-19 patients if they do not have sufficient beds.
As such, we believe many private hospitals, especially Bangkok Dusit Medical Services (BDMS), are now more active in this area since revenues from Covid-19 tests can help offset lost revenues from declining normal patient traffic as many potential patients are likely to postpone their elective cases unless it is absolutely necessary.
Meanwhile, the latest wave of Covid-19 in Thailand is likely to deter the return of foreign patients, in our view, which is likely to hurt BDMS and Bumrungrad Hospital (BH) the most as foreign patient revenues formed 30% of FY19 total revenue for the former and 67% for the latter. As such, we believe that the net effect of the Covid-19 test revenues is negligible for other hospitals, except for BCH and CHG.
1Q21F results preview We estimate 1Q21F core net profit rose 15% yoy but fell 16% qoq We believe CHG’s revenues grew 7% yoy in 1Q21F on the back of Covid-19 tests and more NHSO referral cases. Its gross margin was likely 30.0% in 1Q21F vs. 29.3% in 1Q20 and 33.8% in 4Q20. Meanwhile, SG&A as a percentage of revenues should have been 11.0% in 1Q21F vs. 13.0% in 1Q20 and 13.7% in 4Q20. As such, we expect CHG to report THB213m core net profit in 1Q21F, +15% yoy but -16% qoq.
Earnings revisions Raise core net profit forecasts by 6-7% yoy in FY21-23F To reflect more revenues from referral cases and Covid-19 tests, we have revised up our core net profit forecasts by 6-7% for FY21-23F. As such, we expect CHG’s core net profit to rise 15% yoy in FY21F, and 4% yoy in FY22F.
Fund flows and foreign holdings CHG has seen the biggest foreign inflows in the sector YTD YTD, CHG has seen the biggest foreign inflows into its shares compared with other hospital stocks, despite witnessing the heaviest foreign selling MTD in the sector. We believe foreign investors took profit in the counter as CHG was up more than 20% YTD. With its strong quarterly outlook, we believe that any correction in its share price would offer a good buying opportunity. CHG’s foreign holding rose from 14.2% at end-20 to 16.0% as at 16 Apr 21, while foreign holding in the healthcare sector fell from 21.0% at end-20 to 19.6% as at 16 Apr 21.
Valuation and recommendation Reiterate Add with a higher THB3.42 target price Following our earnings upgrade, our target price for CHG rises to THB3.42, still based on 35.5x FY22F P/E, which is 0.25 s.d. below its 5-year mean, from THB3.16 (35.5x, -0.5 s.d.) previously. We believe that strong quarterly earnings growth will catalyse its share price while a new wave of Covid-19 outbreak in the provinces where its hospitals are located is a downside risk to our call. We reiterate our Add call and CHG remains our top pick in the sector.
– By CIMB Bank Research