TRIS Rating has affirmed the company and 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 middle- to lower-income patient segment of the healthcare service industry as well as its diverse source of revenue. These strengths are partially offset by a rise in leverage as BCH expands weak operating performance at World Medical Center (WMC), and intense competition in the healthcare service 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’s credit ratings could be upgraded should the company significantly improves its profitability and financial leverage on sustainable basis. In contrast, the rating downside case may occur if BCH’s operating performance significantly drops from the current level, leading to noticeably weaker profitability and less liquidity for a sustainable period. An aggressive debt-funded investment and weak persistent cash flow protection are also the negative factors for BCH’s credit ratings.
BCH was established in 1993 and listed on the Stock Exchange of Thailand (SET) in 2004. As of May 2015, BCH’s major shareholder is the Harnpanich family, holding approximately 50% of the company’s total shares. Currently, BCH owns and operates eleven hospitals and two polyclinics. Six hospitals are operated under the name “Kasemrad Hospital” (KH), one hospital under the WMC brand, and four hospitals under a new brand, “Karunvej Hospital” (KRV). Each hospital targets a different segment: WMC aims to service high-income cash patients, KH targets middle-income cash patients, and KRV focuses on patients enrolled in the social security coverage (SC) scheme. Currently, the revenue contributions of the self-pay and SC groups were approximately 65% and 35% respectively.
In April 2015, BCH acquired the asset of Sotaravej Company Limited, which operates the private hospital in Chachoengsao province. The company established a new subsidiary to acquire the asset, namely Sothorn Vejchakit Co., Ltd. with registered capital of Bt350 million. The company held 76% in the new subsidiary. The hospital was renamed Kasemrad Chachoengsao. The acquisition cost was Bt400 million. The revenue contribution from this hospital is still minimal.
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 persons registered for the SC scheme, has ranged from 9%-11% over the past five years. During the first six months of 2015, 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 2014, BCH reported a 13% year-on-year (y-o-y) rise in revenue to Bt5,301 million. During the first six months of 2015, revenue rose to Bt2,684 million, a 4% y-o-y rise. However, BCH’s operating margin (operating income before depreciation and amortization as a percentage of sales) declined to 25.3% in 2014 and 22.1% in the first half of 2015, from 26.7% in 2013. The weaker operating margin was attributable to rises in operating costs as BCH expanded, and the weak operating performance of WMC. BCH’s net profit margin also declined from 12.4% in 2013 to 9.8% in 2014 and 7.2% in the first six months of 2015. The drops were 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 Bt287 million in 2014, and a net loss of Bt136 million in the first six months of 2015. BCH’s management team expects WMC will break even in 2016. In TRIS Rating’s baseline scenario, BCH’s operating margin will range from 23%-24% per annum during the next three years.
BCH’s total debt level rose considerably during the past three years as it expanded. Total debt rose from Bt2,051 million in 2012 to Bt4,513 million at the end of June 2015. The debt to capitalization ratio increased from 33.54% at the end of 2012 to 48.66% at the end of June 2015. Going forward, BCH’s total planned capital expenditures will be around Bt2,500 million 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 2015, BCH’s earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio was 7.85 times, while the fund from operation (FFO) to total debt ratio was 24.63% (annualized, based on the trailing 12 months). Cash on hand at the end of June 2015 was Bt360 million while BCH’s FFO is expected to be around Bt1,081 million at the end of 2015. Its total debt due over the next 12 months is Bt800 million.
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