TRIS Rating has affirmed the company and the senior unsecured debenture ratings of Bangkok Chain Hospital PLC (BCH) at “A-” with “stable” outlook. The ratings reflect the company’s strong position in the mid- to lower-income patient segment of the healthcare services industry and BCH’s diverse source of revenue. These strengths are partially offset by rising leverage as BCH expands, weak operating performance at World Medical Center (WMC), and intense competition in the healthcare services industry. In addition, BCH is exposed to regulatory risk and the execution risks inherent in its future expansion plans. The “stable” outlook is based on the expectation that BCH will maintain its market strength in the middle-income and SC segments, and that WMC’s operating results will improve gradually. At the same time, the company is expected to employ a cautious financial policy for its new debt-funded investment projects. The debt to capitalization ratio should be kept at around 50% in order for BCH to maintain its credit quality.
BCH was established in 1993 and listed on the Stock Exchange of Thailand (SET) in 2004. Its major shareholder is Harnpanich family, holding approximately 50% of the company’s total shares. Currently, BCH owns and operates nine hospitals and two polyclinics. Five hospitals are operated under the name “Kasemrad Hospital” (KH), one hospital under the WMC brand, and three hospitals under a new brand, “Karunvej Hospital” (KRV). Each hospital targets a different segment: WMC aims to service high-income patients, KH targets middle-income patients, and KRV focuses on patients enrolled in the social security coverage (SC) scheme.
In November 2013, BCH acquired 50% of Navanakorn Medicare Co., Ltd. (Nava), which operates one hospital in Pathumthani province and another in Ayudhya province. The acquisition cost was Bt225 million. BCH renamed the hospitals KRV Pathumthani Hospital and KRV Ayudhya Hospital. In addition, BCH renamed one KH branch, changing the name “KH Sukhapibal 3” to “KRV Sukhapibal 3”. The hospital was renamed because KRV Sukhapibal 3 will provide services for SC patients. In August 2014, BCH increased its shareholding in Nava from 50.00% to 69.85%.
BCH ended its participation in the universal coverage (UC) system in 2010. BCH’s revenues are now derived from two patient groups: self-pay patients and patients covered by the SC. The revenue contributions of the self-pay and SC groups were approximately 65% and 35% respectively of BCH’s total revenue in 2013.
BCH is one of the leading private hospitals participating in the SC scheme. Its market share of SC patients 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. During the first six months of 2014, BCH’s market share among SC patients in Bangkok remained strong at 11%. The sizable base of registered SC participants gives BCH significant economies of scale and helps it maintain high utilization levels at its capital-intensive facilities.
In 2013, BCH reported a 5% year-on-year (y-o-y) rise in revenue to Bt4,702 million. During the first six months of 2014, revenue rose to Bt2,571 million, a 15% y-o-y rise. The growth came because BCH treated more self-pay and SC patients. However, BCH’s operating margin (operating income before depreciation and amortization as a percentage of sales) declined to 26.7% in 2013 and 25.3% in the first half of 2014, from 34.1% in 2012. The weaker operating margin was attributable to rises in operating costs as BCH expanded, and the weak operating results at WMC. BCH’s net profit margin also declined from 20.4% in 2012 to 12.4% in 2013 and 9.7% in the first six months of 2014. The drop was due mainly to losses at WMC. WMC opened in March 2013. It is still in the start-up phase and will need time until it reaches the break-even point. WMC recorded a net loss of Bt290 million in 2013, and a net loss of Bt144 million in the first six months of 2014. BCH’s management team expects WMC will break even in 2015. In TRIS Rating’s view, WMC’s weak performance will depress BCH’s margin during the next two years. In TRIS Rating’s baseline scenario, BCH’s operating margin will range from 20%-24% per annum during the next three years.
BCH’s total debt level rose considerably during the past two years as it expanded. Total debt rose from Bt2,051 million in 2012 to Bt3,959 million at the end of June 2014. The debt to capitalization ratio increased from 33.54% at the end of 2012 to 46.71% at the end of June 2014. Going forward, BCH plans capital expenditures of around Bt2,000 million in total over the next three years. As a result, leverage may increase from the current level. However, BCH’s liquidity remains acceptable at the current rating level. In the first six months of 2014, BCH’s liquidity was satisfactory, as measured by the earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio. The ratio was 8.76 times, while the funds from operations (FFO) to total debt ratio was 29.41% (annualized, based on the trailing 12 months).
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