Bangkok Dusit: Competition In Bangkok And Start-Up Losses Are Key Near-Term Headwinds

Summary

  • Bangkok Dusit is facing headwinds such as increased competition in the Bangkok market and start-up losses from its new wellness center and high-end hospital.
  • The upgrading of selected hospitals to Centers Of Excellence and the increased penetration of the insurance payer segment are medium-term growth drivers for Bangkok Dusit.
  • Bangkok Dusit trades at 39.9 times consensus forward next twelve months P/E and 24.7 times consensus forward next twelve months EV/EBITDA.
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Elevator Pitch

Thailand-listed healthcare services company Bangkok Dusit Medical Services (OTCPK:BDULF) (OTCPK:BDUUF) (OTCPK:BDUUY) [BDMS:TB] currently trades at 39.9 times consensus forward next twelve months P/E and 24.7 times consensus forward next twelve months EV/EBITDA. In comparison, the stock's historical five-year average forward P/E and EV/EBITDA were approximately 40 times and 25 times, respectively. The stock offers a consensus forward FY2020 dividend yield of 1.5%.

I assign a "Neutral" rating to Bangkok Dusit. Increased competition in the Bangkok market and losses from its new wellness center and high-end hospital are likely to be a drag on the company's earnings in the near term. On the other hand, Bangkok Dusit's Centers Of Excellence and the increased penetration of the insurance payer segment are expected to be key medium- to long-term growth drivers for the company.

Readers are advised to trade in Bangkok Dusit shares listed on the Stock Exchange of Thailand with the ticker BDMS:TB where average daily trading value for the past three months exceeds $20 million and market capitalization is more than $13 billion. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers, Fidelity, Charles Schwab, or local brokers operating in their respective domestic markets.

Company Description

Started in 1972, Bangkok Dusit is the largest private hospital operator in Thailand with respect to revenue and bed capacity, and it is also among the top five private hospital operators globally in terms of market capitalization. Bangkok Dusit owns 48 hospitals with a total capacity of 8,300 beds operated under six brands, namely Bangkok Hospital, Samitivej Hospital, Phyathai Hospital, Paolo Hospital, BNH Hospital and Royal Hospital.

List Of Bangkok Dusit's Hospitals

Source: Bangkok Dusit December 2019 Investor Presentation

Bangkok Dusit's 9M2019 Revenue Breakdown In Terms Of Patient Mix

Source: Bangkok Dusit December 2019 Investor Presentation

Increased Competition Expected In Bangkok Due To New Supply

Demand-supply dynamics for the overall Thailand healthcare market have been favorable historically, as per the chart below. Healthcare demand is driven by an ageing population in Thailand where 17% or 11 million people are aged 60 and above, with the proportion of senior citizens as a percentage of total population in Thailand expected to grow to 20% and 32% by 2021 and 2040, respectively. Furthermore, healthcare expenditure as a percentage of GDP is low at 3.8% in 2018, versus the global average healthcare expenditure as a percentage of GDP of about 10%.

Thailand Healthcare Demand And Supply

Source: Bangkok Dusit December 2019 Investor Presentation

However, increased hospital supply is expected in Bangkok, Thailand's capital, which is potentially negative for Bangkok Dusit. The Bangkok market accounts for approximately 46% of Bangkok Dusit's registered beds as of end-June 2019. As per the chart below, Bangkok was already facing oversupply in 2018 with a ratio of 51 hospital beds per 10,000 people, compared with 23 hospital beds per 10,000 people for Thailand as a whole.

Supply Of Hospital Beds In Thailand By Region In 2018

Source: Maybank Research Report Titled "Thailand Healthcare 2020: Alive and kicking" Dated December 20, 2019

Starting in 2020, several new hospitals are expected to be opened in Bangkok, including private hospitals, Vimutti Hospital, Med Park and TPP Healthcare Hospital, and public hospitals, Piyamaharajkarun Hospital and Chulalongkorn Bhumisiri Hospital. Going forward, Bangkok Dusit could potentially lose patients to these new competitors; the company had an estimated 16% market share of the Bangkok in terms of the number of beds. The risk of stiffer competition is partly mitigated by Bangkok Dusit's upcountry exposure (54% of Bangkok Dusit's registered beds as of end-June 2019 are located in markets outside of Bangkok), and a longer time taken for new entrants to establish their reputation and gain the trust of patients.

New Wellness Center And High-End Hospital Are A Drag On Profits

Bangkok Dusit's core net profit for 9M2019, excluding a Bt6.1 billion gain relating to a divestment of a 38% stake in Ramkhamhaeng Hospital Public Company Limited, declined -2% YoY to Bt7,680 million, despite a +7% YoY growth in patient revenue to Bt59,323 million over the same period. Start-up losses associated with Bangkok Dusit's new wellness center (BDMS Wellness Center) and a new high-end hospital (Bangkok International Hospital), which opened in June and July 2019, respectively, were a drag on the company's profitability.

BDMS Wellness Center comprises of the BDMS Wellness Clinic and the Mövenpick BDMS Wellness Resort. The company believes that as Thai people become more health conscious, they will focus more on wellness and preventive care. BDMS Wellness Clinic was established with the aim of becoming Asia's first premier preventative care facility, with seven centers of preventive care excellence, namely Cardioscience Clinic, Neuroscience Clinic, Musculoskeletal and Sports Clinic, Regenerative Clinic, Digestive Wellness Clinic, Fertility Clinic and Dental Clinic. In the medium to long term, the BDMS Wellness Clinic should contribute to an expansion in Bangkok Dusit's overall profit margins, as revenue contribution from premium wellness services such as IVF (In-Vitro Fertilization) fertility services increases over time.

BDMS Wellness Resort, directly connected to BDMS Wellness Clinic, is positioned as a luxury wellness resort in Bangkok with a capacity of 290 rooms catering to clients seeking comfort and recuperation. BDMS Wellness Resort, well connected via train stations and within walking distance from key shopping centers in Bangkok, also offers restaurants and cafes serving healthy food using organic ingredients.

Bangkok Dusit also opened a new hospital, the 172-bed Bangkok International Hospital, which specializes in neurological, orthopedic and spine care, in July 2019. On the positive side of things, Bangkok Dusit is nearing the end of its planned hospital network expansion, operating 48 hospitals now as compared to its 50-hospital target. The company has only two new hospitals as part of its project pipeline, the 233-bed Jomtien Hospital (located in south-east Thailand in the Chonburi province focused on middle-income patients) and the 100-bed Samitivej International Children Hospital expected to open in 2020 and 2023-2024, respectively.

Upgrading Of Selected Hospitals To Become Centers Of Excellence

Apart from the new BDMS Wellness Center which plans to capitalize on growing health consciousness and demand for wellness and preventive care, another key cornerstone of Bangkok Dusit's strategy is its upgrading of 10 selected hospitals to become what it refers to as Centers Of Excellence focused on tertiary care. The Centers Of Excellence have developed and established a reputation for expertise in specific clinical areas like cardiovascular, neurology, and orthopedics.

These Centers of Excellence have affiliations with other world-class medical institutions, and their high standards are also recognized via accreditation by international agencies like the Joint Commission International and the Commission on Accreditation of Medical Transport Systems among others. There are key performance indicators that these Centers of Excellence seek to achieve, such as ensuring that the time lag between visit and operation not exceeding four hours for trauma cases. In addition, the clinical outcomes of the Centers of Excellence are benchmarked against the top programs globally.

Bangkok Dusit's Centers of Excellence are specifically targeted at international patients, with a target of a 50-50 split between domestic and foreign patients. In comparison, international patients contributed 31% of the company's 9M2019 revenue. For the first nine months of FY2019, the Centers of Excellence accounted for 50% of Bangkok Dusit's revenue, but a higher 55% of the company's EBITDA. This implies superior profitability for Bangkok Dusit's Centers of Excellence compared with the other hospitals in the company's network.

Location Of Bangkok Dusit's 10 Centers of Excellence

Source: Bangkok Dusit December 2019 Investor Presentation

New Partnerships To Penetrate Insurance Payer Segment Are Another Driver Of Growth

Bangkok Dusit's insurance payer segment (patients with health insurance coverage) as a percentage of total patient revenue (more than half of patients pay for their own bills without any insurance coverage) grew from 17% in 2013 to 31% in 9M2019. The company has set a target for the insurance payer segment to contribute 35% of its patient revenue in a few years' time.

Bangkok Dusit has entered into new partnerships to drive further growth for the insurance payer segment. In May 2018, the company collaborated with insurance company, Allianz Ayudhya Assurance, to introduce My First Class @BDMS, a health insurance rider offering healthcare coverage at its hospitals. My First Class @BDMS is targeted at expatriates and Thai people in the upper-income segment with annual premiums ranging from Bt37,271 to Bt318,756.

In February 2019, Bangkok Dusit partnered with Viriyah Insurance to launch a new healthcare insurance program (exclusive to the company's hospitals) referred to as The Viriyah Insurance Program 3 (Delight). This is targeted at the middle income population with annual insurance premiums in the Bt17,664-Bt75,780 range. The Viriyah Insurance Program 3 (Delight) has both outpatient coverage (a maximum of Bt1,000 per visit for up to three visits per year) and inpatient hospitalization coverage (covering the doctor consultation fee in full and covering injury, sickness and accidents).

According to data from the Thai Life Assurance Association, insurance premiums relating to health and rider policies grew by +10% YoY in Thailand for 1H2019, despite a -6% YoY decline in total insurance premiums in Thailand over the same period. Leveraging on partnerships with insurance companies, Bangkok Dusit has the potential to further increase revenue contribution from the insurance payer segment going forward.

Valuation

Bangkok Dusit trades at 27.5 times trailing twelve months P/E and 39.9 times consensus forward next twelve months P/E based on its share price of Bt25.50 as of January 13, 2020. The stock's forward P/E is on par with its five-year historical average forward P/E of approximately 40 times.

Bangkok Dusit is also valued by the market at 25.4 times trailing twelve months EV/EBITDA and 24.7 times consensus forward next twelve months EV/EBITDA. In comparison, the stock's historical five-year average forward EV/EBITDA was approximately 25 times.

The stock offers consensus forward FY2019 and FY2020 dividend yields of approximately 1.6% and 1.5%, respectively.

Variant View

The key risk factors for Bangkok Dusit are slower-than-expected patient growth, higher-than-expected losses for the new wellness center and the high-end hospital, higher-than-expected operating expenses and capital expenditures relating to new Centers of Excellence, a longer-than-expected time taken to increase penetration of the insurance payer segment, and regulatory changes that have a negative impact on the Thai healthcare sector and Bangkok Dusit.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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