TRIS Rating has assigned the 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 and current senior debenture ratings of BCH at “A-”. The outlook remains “stable”. The proceeds from the new bond issuance will be used to repay BCH’s existing bank loan and to support the operation of its new hospital, World Medical Center (WMC). The ratings reflect the company’s leading position in mid- to lower-income patient segment of the healthcare service industry, its diversified revenue base, and experienced management team. The ratings also take into consideration its rising leverage and declining profit margin during the start-up period of WMC, the intense competition in the healthcare industry, its exposure to regulatory risk, 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 social security coverage (SC) segments, and be able to gradually reduce the losses from WMC. At the same time, the company is expected to employ a cautious financial policy for its future investment projects in order to maintain its credit quality. The debt to capitalization ratio should be kept below 50%.
BCH owns and operates six general hospitals under the name “Kasemrad Hospital” and one newly opened hospital: WMC. Five hospitals are located in Bangkok and vicinity, while one is in Chiangrai province and one is in Saraburi province. After ending its participation in the universal coverage (UC) system in 2010, BCH’s revenues are now derived from two patient groups: self-pay and the SC scheme BCH has a strong market position as one of the leading private hospitals which participates in the SC 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. In addition, its diverse sources of revenue help stabilize its operations. Participation in the SC scheme helps offset overhead expenses with recurring income. Participation also sustains the utilization levels for BCH’s capital-intensive facilities. For the first six months of 2013, the revenue contributions from the self-pay and SC groups were approximately 65% and 35% of BCH’s total revenue, respectively.
BCH officially launched its seventh hospital, World Medical Center (WMC), in January 2013, with an initial capacity of 150 beds. The full capacity of WMC is 320 beds. WMC aims to capture high-income patients in the rapidly growing Chaengwattana area. With a limited track record and limited brand recognition in the new segment, BCH faces a challenge to leverage its current market strength in the middle-income and SC segments to the higher-end segments. For the first six months of 2013, WMC recorded a net loss of Bt138.7 million. According to BCH’s management team, WMC is expected to break even in 2014.
In 2012, BCH reported a 14% year-on-year (y-o-y) growth in revenue to Bt4,466 million. The rise was due mainly to the growth in revenue from both self-pay and SC patients. Profitability has also improved, after BCH exited the low-margin UC scheme and because of effective cost controls. BCH’s operating margin increased from 30% in 2010 to 34% in 2012.
For the first six months of 2013, BCH’s seven hospitals generated revenue of Bt2,232 million, a 4% y-o-y rise. However, BCH’s net profit decreased by 36% y-o-y, from Bt444 million for the first half of 2012 to Bt284 million for the first half of 2013. The drop was due mainly to losses in WMC. The cost burden of WMC pressured the company’s overall profit margin. The operating margin for the first six months of 2013 dropped to 25.4% from 34.1% in 2012.
During the past two years, the company’s debt level rose substantially driven higher by the WMC project. Total debt rose from Bt1,133 million in 2011 to Bt2,745 million at the end of June 2013. The debt to capitalization ratio increased to 39.0% at the end of June 2013, from 23.9% at the end of 2011. However, BCH’s liquidity status remains acceptable at the current rating level. In the first half of 2013, BCH’s liquidity status, as measured by the earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio, was satisfactory. The ratio was 8.6 times, while the funds from operations (FFO) to total debt ratio was 38.8% (annualized, based on trailing 12 months).
Going forward, the company plans to open a new hospital targeting SC patients and invest more in WMC. As a result, leverage may increase from the current level. However, the company is expected to keep its debt to capitalization ratio below 50%. In addition, its operating performance is expected to gradually improve and the company should be able to service its debt obligations without difficulty.
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