IHH Healthcare - Champ in ramping up leverage

Still a case of increased inpatient volumes and intensity 
1Q15 revenue was up 14% yoy, with increased operating leverage driving core net profit up to RM228m (+32% yoy). In addition to stronger inpatient volumes (+0.3% to 7.2% yoy in 1Q15), average revenue per inpatient in Acibadem and Malaysia saw healthy growth of 10.4% and 13.8% yoy, respectively, as there were price increases to compensate for cost inflation. Dousing these positives was the waning medical tourism in Singapore, where management noted that Indonesian patient volumes were falling. However, this was partially offset by the rising number of patients from non-traditional markets such as the Middle East. In contrast, Thai hospitals have seen mid-to high-teens growth in foreign patient revenues. 

Marginal negative impact of currency on Acibadem in 1Q15 
The strong numbers from Acibadem demonstrated the group’s ability to ramp up operating leverage at new hospitals. Acibadem’s 1Q15 revenue grew 15% yoy, and EBITDA grew 27% to RM148.2m. Ex-currency, 1Q15 EBITDA grew 29% yoy. The strong growth was largely attributed to Acibadem Atakent Hospital (opened in 1Q14), which reduced its start-up EBITDA losses from RM9.9m in 1Q14 to RM0.8m in 1Q15. 

Reiterate Add 
The increases in nurses’ salaries and benefits caused staff costs to rise to 40% of sales (average over FY13-14 was 38%). This is an industry-wide pressure, as we continue to see a short supply of nurses. The mitigating factor is IHH’s operating leverage, as the group builds up capacity and improves its case mix. We are hopeful that the group will continue to ramp up operations at the hospitals opened in the past 2-3 years. To illustrate the significance of these hospitals to the group, Mount Elizabeth Novena’s (Novena) revenue increased by 34% yoy in 1Q15, and EBITDA rose by 73%. Novena currently operates ~180 beds and expects to add another 30 beds in 2Q15. Maintain Add.