TRIS Rating has assigned the rating of “A-” to the proposed issue of up to Bt1,500 million in senior unsecured debentures of Bangkok Chain Hospital PLC (BCH). At the same time, TRIS Rating has affirmed the company and current senior secured 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 its operation in existing hospitals. 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 social security coverage (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 50%-55% in order for BCH to maintain its ratings at the current level.
BCH’s credit ratings could be upgraded should the company significantly improve 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 weakening 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 11 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 SC scheme. Currently, the revenue contributions of the self-pay and SC groups were approximately 65% and 35% respectively.
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 nine 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 nine months of 2015, revenue rose to Bt4,160 million, a 5% 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 23.1% in the first nine months of 2015, from 26.7% in 2013. The weaker operating margin was attributable to rise in operating costs, and the weak operating performance of 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 Bt190 million in the first nine months of 2015. Despite encountering loss performance in WMC during the first nine months of 2015, WMC’s performance is likely to improve in near future. 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 Bt4,598 million at the end of September 2015. The debt to capitalization ratio increased from 33.54% at the end of 2012 to 49.27% at the end of September 2015. Going forward, TRIS Rating expects BCH will spend around Bt2,500million 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 nine months of 2015, BCH’s earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio was 8.37 times, while the fund from operation (FFO) to total debt ratio was 24.56% (annualized, based on the trailing 12 months). Cash on hand at the end of September 2015 was Bt302 million while BCH’s FFO is expected to be around Bt 1,103 million at the end of 2015. Its total debt due over the next 12 months is Bt800 million.
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