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Chularat Hospital Group (CHG TB) Summary

Core Content Overview

Chularat Hospital Group (CHG) is a Thai healthcare company operating in the health care sector with a current share price of THB12.50 and a target price of THB11.50, representing a -8% discount. The company has a market capitalization of USD418M and an average daily trading volume of USD0.5M. The overall outlook for CHG is HOLD, as its valuation is considered slightly expensive compared to its intrinsic value.

Main Points and Key Information

1. Financial Performance and Valuation

• 1Q14 Net Profit: THB124m, up 37% YoY.
• Hospital Revenue Growth: 27% YoY, driven by increased patients under government schemes and new specialty centers.
• Valuation Metrics:
  • Core P/E: 30.8x for 2014E, 27.3x for 2015E.
  • P/BV: 5.0x for 2014E, 4.6x for 2015E.
  • PEG: 2.5x for 2014F.
• DCF Valuation: Based on 8.5% WACC and 3% terminal growth, fair value is THB11.50, implying a 27.4x PER for 2014F.
• Share Price Performance:
  • YTD: +29%
  • MTD: +5%
  • Outperformed regional and global peers by 14% and 20% respectively.

2. Impact of Political Events

• The coup and curfew had limited impact on CHG due to:
  • Focus on factory workers and social security patients, who are less sensitive to political events.
  • Hospital locations in Samut Prakarn, Chachoengsao, Chonburi, Prajinburi, and eastern Bangkok, away from political hotspots.

3. Strategic Initiatives

• Key Strategies:
  • Increase cash patient share to 60% in 3 years and 70% in 5 years.
  • Implement cost control.
  • Introduce new specialty centers (Heart, Stroke, Cancer, Hand and Microsurgery).
  • Aggressive expansion plan during 2014–2017.
• Capacity Expansion:
  • Total investment of THB950m for 2014–2016.
  • New 150-bed hospital in Prachinburi.
  • Expected total capacity to increase from 386 beds to 722 beds by 2017.
  • OPD capacity to double from 87 rooms to 170 rooms.

4. Revenue Drivers

• Social Security and Universal Healthcare account for ~50% of total hospital revenue.
• Industrial Estate Workers: CHG has hospitals near ten industrial estates, including Gateway, Bangpoo, and Amata Industrial Estates, serving over 500,000 workers.
• New Specialty Centers are expected to attract more cash patients with higher profit margins.

5. Balance Sheet and Financial Flexibility

• Net Cash Position: Strong balance sheet with THB464m cash as of 1Q14.
• Net Debt to EBITDA: Declined from -0.3x in 2012 to -0.8x in 1Q14.
• Financial Leverage: Low, allowing for capacity expansion and potential acquisitions.

6. Share Price and Market Position

• Removed from SET100: May lead to higher price volatility and reduced institutional interest.
• Peer Comparison:
  • PER: CHG is 4.8% lower than Thai peers and 9.8% lower than regional peers.
  • PBV: CHG is 3.8x for 2014F, lower than Thai peers.
  • EV/EBITDA: 14.7x for 2016E, lower than regional and global peers.
• Dividend Yield: 2.4% for 2014, expected to rise to 1.5% in 2016.
• ROAE/ROAA: 29.1% and 21.6% in 1Q14, indicating strong profitability.

7. Analyst Recommendations

• Consensus Recommendation: HOLD.
• Buy Recommendations: Declined from 75% in 1Q14 to 43% in June14.
• Valuation Concerns: Current price may be slightly overvalued, with short-term catalysts already priced in.

Key Risks and Considerations

• Earnings Dilution: Due to fast-paced capacity expansion and high startup costs.
• Short-term Volatility: Removal from SET100 may lead to increased price swings.
• Valuation: CHG's current PER is 4.8% and 9.8% lower than Thai and regional peers, respectively, but price outperforms regional and global peers.
• Entry Point: Suggested at THB10 if a correction occurs.

Future Outlook

• Capacity Growth: Expected to double over the next three years.
• Occupancy and Utilization: May slightly drop from 88% in 1Q13 to 68% and 66% respectively by 2017.
• Long-term Growth: Strong structural growth due to expansion, specialty centers, and increased social security coverage.

Summary of Key Financial Metrics

Conclusion

Chularat Hospital Group is a strong long-term growth player in the Thai healthcare sector, with a diversified patient base and aggressive expansion plans. However, its current valuation is slightly expensive, and short-term catalysts have already been factored into the share price. The removal from SET100 may affect liquidity and volume. Investors should consider entry points at THB10 if a correction occurs, and maintain a HOLD stance due to valuation concerns rather than fundamental strengths.