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-income cash patient and social security patient segments 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, slower-than-expected ramp-up for 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 strong market position 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 any new debt-funded investment projects. The debt to capitalization ratio should not exceed around 50% in order for BCH to maintain its credit quality.
BCH’s credit ratings could be upgraded should profitability and financial leverage improve significantly on sustainable basis. In contrast, the rating downside case may occur if BCH’s operating performance drops significantly 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 2016, BCH’s major shareholder was 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” (KV). Each hospital targets a different segment: WMC aims to service high-income cash patients and international patients, KH targets middle-income cash and social security patients, and KV 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.
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 10%-11% over the past five years. During the first six months of 2016, 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 2015, BCH reported a 9% year-on-year (y-o-y) rise in revenue to Bt5,766 million. The rise was driven not only by increases in patient volume, but also price increase. However, BCH’s operating margin (operating income before depreciation and amortization as a percentage of sales) declined to 24.0% in 2015 from 25.3% in 2014. The softening operating margin was due mainly to rises in losses from doubtful accounts receivable due from the Social Security Fund, and a slower-than-expected ramp-up for the operating performance of WMC. WMC opened in March 2013. It is still in the start-up phase and will need more time to reach the break-even point. WMC recorded a net loss of Bt232 million in 2015. As a result, BCH’s net profit margin also declined from 9.8% in 2014 to 9.1% in 2015.
During the first six months of 2016, revenue rose to Bt3,072 million, a 14% y-o-y rise. BCH’s operating margin has gradually improved to 25.5% in 2015, compared with 22.1% over the same period of the prior year. This improvement was mainly driven by a recovery in operating performance of WMC as well as a drop in losses from doubtful accounts receivable due from the Social Security Fund. WMC reported a net loss of Bt96 million for the first six months of 2016, notably lower than the net loss of Bt136 million for the first six months of 2015. As the loss at WMC narrowed, BCH’s net profit margin improved to 10.1% from 7.2% over the same period of the prior year. BCH’s management team expects WMC will break even in 2017. In TRIS Rating’s baseline scenario, BCH’s operating margin is forecast to be at around 25% per annum during the next three years.
BCH’s total debt level has risen considerably during the past four years as it expanded. Total debt rose from Bt2,075 million in 2012 to Bt4,488 million at the end of June 2016. The debt to capitalization ratio increased from 33.93% at the end of 2012 to 47.01% at the end of June 2016. Going forward, BCH plans capital expenditures of Bt500-Bt900 million in total over the next three years, lower than capital expenditures in 2012-2015, which ranged from Bt600-Bt2,000 million annually. As a result of the drop in capital expenditures, financial leverage will gradually improve. BCH’s liquidity will also gradually improve. In the first six months of 2016, BCH’s earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio was 8.84 times, while the fund from operation (FFO) to total debt ratio was 30.07% (annualized, based on the trailing 12 months). Cash on hand at the end of June 2016 was Bt435 million, while BCH’s FFO is expected to be around Bt1,300-Bt1,600 million per annum. Its total debt due over the next 12 months is Bt1,662 million.
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