TRIS Rating has assigned a rating of “A-” to the proposed issue of up to Bt1,800 million in senior debentures of Bangkok Chain Hospital PLC (BCH). At the same time, TRIS Rating has affirmed the company rating of BCH at “A-” with “stable” outlook. The proceeds from the bond issuance will be used to repay BCH’s existing bank loan and support its business expansion. The ratings reflect the company’s leading position in mid- to lower-income patient segment of the healthcare service industry, its diversified revenue base, experienced management team, and efficient management of costs. The ratings also take into consideration the intense competition in the healthcare industry, plus BCH’s exposure to the regulatory risks and the execution risks inherent in its future expansion plans. The “stable” outlook reflects the expectation that BCH will continue to maintain its market strength in the middle-income and managed care segments and be able to operate World Medical Center (WMC), smoothly. At the same time, the company is expected to employ a cautious financial policy for its future investment projects. The rating is very solid within the current category and should remain relatively strong, despite the downside risks from the opening of WMC and its business expansion efforts.
BCH owns and operates six general hospitals under the name “Kasemrad Hospital”. Four hospitals are located in Bangkok and vicinity, while one is in Chiangrai province and one is in Saraburi province. BCH ended its participation in the universal coverage (UC) system in 2010. Since exiting the UC system, BCH’s revenues are now derived from two patient groups: self-pay and the social security coverage scheme (SC). In 2011, the revenue contributions from the self-pay and SC groups were approximately 70% and 30%, respectively. BCH has a strong market position as one of the leading private hospitals which participates in the managed care scheme. Its SC market share in Bangkok, in terms of the number of the persons registered for the SC scheme, has ranged from 9%-11% over the past five years. The sizable base of registered SC participants gives the company economies of scale. BCH also has diverse sources of revenue, which help stabilize its operations. Participation in the public healthcare schemes helps offset overhead expenses with recurring income. Participation also sustains the utilization levels for BCH’s capital-intensive facilities. BCH’s efforts to control costs have been highly effective as evidenced by its relatively high and stable margins over the past five years.
In January 2012, the social security medical payment scheme for inpatients was changed. Reimbursements for complicated treatments are now based on a diagnosis-related group (DRG) weight system, which is a favorable change for BCH. The company has the chance to earn more income for complicated treatments and will receive more patient transfers from other hospitals. However, the public healthcare system in Thailand is not fully mature and may undergo several reformations in the foreseeable future. BCH, therefore, remains highly exposed to regulatory risks. Nonetheless, TRIS Rating believes that the management team is adept and can handle the regulatory challenges so as to sustain its competitive position.
BCH delayed the launch of its seventh hospital, WMC, to the first quarter of 2013 from mid 2012. The severe flood in late 2011 slowed the construction process. WMC aims to capture high-income patients in the Chaengwattana area, an area which is rapidly expanding. WMC will add another 150 beds to BCH’s total capacity during the first year of its operation. Capacity will gradually increase and reach the full capacity of approximately 320 beds in 2016. However, BCH faces a challenge as it tries to move from its current market strength in the middle-income and managed care segments to higher-end markets. BCH has limited track record and brand recognition in the new segments.
BCH’s financial profile remains strong and better than industry peers, despite BCH being affected by the flood crisis in late 2011. Two of BCH hospitals, Kasemrad Bangkhae and Kasemrad Rattanathibeth, were inundated for one and two months, respectively. BCH’s insurance policies covered the property damage, but not the business interruptions. Because of the flood, together with the exit from the UC scheme, BCH’s total revenue declined by 10.7% to Bt3,903 million in 2011. However, for the first nine months of 2012, the self-pay group grew to comprise a large portion of revenue. BCH also recorded more revenue from the new SC payment scheme. Revenue reached Bt3,291 million for the first nine months of 2012, a rise of 7.8% year-on-year (y-o-y). Profitability has improved slightly after pulling out of the low-margin UC scheme. BCH’s operating margin increased from 30% in 2010 to 32.3% in 2011 and to 34.6% for the first nine months of 2012.
BCH’s balance sheet status remains healthy despite a rise in leverage. The debt to capitalization increased from 23.9% in 2011 to 32.7% at the end of September 2012, as BCH invested more in the WMC project. The leverage ratio is expected to rise further from expansion projects in Chiang Rai province and Sukapiban 3. However, the company’s ability to service its debt obligations remains strong. Its ratio of funds from operations (FFO) to total debt was healthy at 45.24% (non-annualized) in the first nine months of 2012, while the earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio was as high as 28.99 times. The proceeds from the new debenture issue of will be used mainly to repay its long-term loan from a bank. Thus, its leverage will not change from the current level.
Looking forward, the opening of WMC may hurt the overall financial performance of BCH for the next few years as the company has to absorb the initial expenses of the new hospital. Nevertheless, TRIS Rating believes that BCH’s healthy financial profile will be able to support the start-up of its new hospital.
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