Bangkok Dusit Medical Services BDMS

Bangkok Dusit Medical Services Plc (BDM)

We maintain our BUY call on BDMS with TP at Bt24/share. It is reporting improving operations with stronger revenue growth in Jul - Aug compared to 2Q15. When AEC opens, BDMS has solid growth opportunities with its hospitals in strategic locations such as Chiang Mai, Udon Thani and Cambodia. It is also looking at investment in Myanmar. BDMS is trading at 1.7x 2016PE-to-earnings growth, lower than the regional peer average of 1.8x.

Stronger revenue growth in Jul - Aug. In a conversation with the company, BDMS reports an increase in revenue at existing hospitals of ~7% YoY during Jul - Aug, with YoY growth higher than the 5% YoY seen in 1H15. The chief factor behind the improvement is better operations at hospitals in Bangkok (~60% of revenue) and hospitals in tourist destinations in the eastern region, at Pattaya, Rayong and Trad. It is good news that existing hospitals are seeing better operations as this will help dilute the losses at newly-opened hospitals. Including revenue from newly-opened hospitals (less than two years in operation), BDMS' total revenue grew ~12% YoY in July - Aug, in line with its revenue target.

50 hospitals in 2016-17. BDMS is operating 41 hospitals. It expects to consolidate the recent acquisition of Muangraj Hospital in Ratchaburi in 4Q15 - and this hospital is already in the black so will not be a drag on BDMS' overall operations. BDMS is also developing two greenfield projects: Paolo Rangsit Hospital in Bangkok in 2016 and Jomtien Hospital in Pattaya in 2017. BDMS maintains its long-term goal of 50 hospitals in its network in 2016-17, implying six hospitals still coming.

Growth opportunity from AEC. BDMS has solid growth opportunities from the startup of AEC in December 2015. It already operates two hospitals in Cambodia and hospitals near the border: Bangkok Hospital Udon (in the northeast, adjoining Laos) and Bangkok Hospital Chiang Mai (in the north, adjoining Myanmar). According to a local newspaper, BDMS is studying the acquisition of hospitals in potential markets such as Myanmar and China to get in on the anticipated demand for good quality healthcare. We are positive toward that strategy as a hospital in Myanmar could act as a referral center for its hospitals in Thailand, i.e. Bangkok Hospital Chiang Mai. In 1H15, revenue from patients from Myanmar contributed 2.5% of BDMS' total revenue vs. 9percent for BH - a low amount, indicating ample room to grow.

Maintain BUY with TP of Bt24/share. We maintain our BUY call on BDMS, our top pick in the healthcare sector, with TP of Bt24/share. We believe BDMS' earnings marked bottom in 2Q15 and expect better earnings ahead, backed by a better Thai economy after the government inserts some stimulus and the solid growth opportunities from AEC implementation. BDMS' share is trading at 1.7x 2016PE-to-earnings growth, an attractive level compared to the 1.8x regional peer average and 3.0x for direct peer BH.

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