GEM Healthcare following a year of consolidation

Capital investments into GEM healthcare

The GEM healthcare services industry was active with mergers and acquisitions and sizeable greenfield investments in 2015. We expect further consolidation, in particular in the EMEA region. India, SE Asia, Middle East and CEE markets do indeed remain active. Asian and South African chains are digesting their acquisitions in MENA and Europe while IHH is leading fresh investment activity both in Indo-China and EMEA.

Industry growth fueled by capex and acquisitions 

The GEM healthcare service providers look set to allocate significant capital to grow capacity in the next three years. The total capital expenditures by 7 companies we monitor across GEMs should top $4 billion in the next three years. The sector revenues should grow at an average 21% CAGR thru 2018. One should expect somewhat lower growth rates being maintained well into 2020s as capital investments will probably peak in 2017. The South East Asia, India, MENA and CEE lead the growth in emerging markets healthcare, in that order.

Yet another powerful trend is the increasing consolidation. Mergers and acquisitions activity is indeed growing in tandem with capex to an extend we have not seen in emerging markets healthcare space before. We expect further consolidation, in particular the EMEA region. India, SE Asia, Middle East and CEE markets do indeed remain active. South African chains are digesting their acquisitions in MENA and Europe while IHH Healthcare Berhad is leading investment activity both in Indo-China. 

India (+6,450 private sector beds thru 2018)

India is a bright spot attracting interest from global healthcare providers. Capital investments into Indian healthcare industry are likely to remain strong for the foreseeable future. IHH Group and Life Healthcare should each reach or exceed 3000 bed capacity in India by 2020 from less than 1000 beds in 2015. At this pace, India will become a core market for IHH along with Malaysia, Turkey, and Singapore. Indeed, IHH's capacity in Indian healthcare industry is likely to come close to the Group's presence in Turkey and Malaysia. IHH acquired majority stakes in Continental Hospitals (51.0%) with bed capacity of 750 and Global Hospitals (73.4%), both in India. Global has 1,100 bed capacity, which IHH plans to raise to 1,900 within the next five years. There is indeed significant backlog of projects IHH plans to execute on including several major hospitals due for completion by 2017. 

As for Life Healthcare, the situation is no different. Having successfully completed its take-over in Poland, Life is now spending both money and management time in India adding more capacity. India should start contributing more to Life's group financials from this year onwards. Life acquired the 340-bed capacity Max Pushpanjali in 2015. Once Max Saket and Saket City investments are complete and the planned upgrades become fully operational, Life's capacity in India will top South Africa and Namibia, its home markets by as early as 2018.

Malaysia (+1,090 private sector beds thru 2018)

IHH Healthcare Berhad is among the leading chains investing in Malaysia. IHH operates in Malaysia through its affiliate Parkway Pantai Limited (“Parkway Pantai”). Parkway Pantai Limited, is in fact one of Asia's largest integrated private healthcare groups with a network of 31 hospitals and more than 6,000 licensed beds in the Continents, including Singapore, Malaysia, India, China, Brunei and United Arab Emirates. In Malaysia, IHH Berhad owns and operates 10 Pantai and 4 Gleneagles hospitals. The Group also runs ancillary healthcare services including Pantai Integrated Rehab and Pantai Premier Pathology across Malaysia. The Group's recent projects in Malaysia includes 100-bed capacity Gleneagles Kuala Lumpur (expansion project completed in 2015), Parkway Pantai (300-bed greenfield, 2017 completion), Pantai Ayer Keroh (160-bed expansion, 2017 completion), Pantai Klang (80-bed expansion, 2018 completion), Pantai Kuala Lumpur (120-bed expansion, 2018), and Gleneagles Medini (310-bed greenfield, 2018). Once these investment are completed, IHH will have more than 1,300 additional beds in Malaysia by 2018. 

Turkey (+2,000 private sector beds thru 2018)

IHH Group’s greenfield, brownfield and expansion investments continued throughout 2015. Acibadem Holdings, IHH Group's affiliate in Turkey, added sizeable capacity in Istanbul and Western Anatolia. The group has undertaken major projects on both sides of Istanbul including a comprehensive university hospital. These investments were funded entirely by Acibadem Holdings. IHH management is guiding patient volumes in Turkey to grow as new capacity comes on stream. Bodrum and Atakent Hospitals will continue to ramp up their operations. The construction of cancer care center at Bodrum and the expansion of Sistina Skopje Hospital in Macedonia are now complete. Zekeriyakoy Medical Centre commenced operations in April 2015 and is predominantly used as a referral center to Maslak. Taksim Hospital, a brownfield project, also commenced operations last year.

MENA

Mediclinic International is upgrading its investment in Al Noor to solidify market presence in the Gulf region. Mediclinic's increasing exposure to MENA could trigger further activity potentially involving other Gulf providers such as VPS and NMC. Both VPS and NMC were in fact interested in bidding for Al Noor until as late as November last year. Mediclinic-Al Noor merger is prone to challenge NMC's market position in the Gulf region. NMC is adding significant capacity of its own to its existing network, both greenfield and expansion. NPC indeed grew its bed capacity to 470 as at June 2015 (+52% year-on-year). The 2015 opening include 250-bed capacity NMC Royal Hospital, the company's largest. This added to the specialty hospitals which started operations earlier in 2015, namely Bright point Royal Women, DIP General Hospitals, Al Ain Medical Centre and MBZC Day Surgery. The management expects the bed count to more than double (YoY) and reach 855 by 1Q16 the latest. 

China

IHH Berhad has become more active investing in both Mainland China and Hong Kong. Parkway Pantai has announced two major investment projects, one in the Mainland and another in Hong Kong. Parkway health Chengdu in China hospital is projected to start operations in 2017. This is a 350-bed capacity hospital. Gleneagles Hong Kong where IHH has contributed 60% equity is a 500-bed capacity hospital in Hong Kong due for completion in 2017. The Gleneagles Hong Kong is projected to cost RM 1,809M (circa $413M).

Myanmar

The government in Myanmar is actively promoting private sector investments in healthcare. Following the steps taken by the government to attract foreign investments, IHH Group has announced a major greenfield project in Myanmar. The 250-bed capacity Parkway Yangon hospital project in Yangon is expected to cost $70M. The project will be overseen and managed thru Parkway Healthcare Indo-China, IHH's wholly-owned affiliate in the region and operated by a joint venture consortium of 4 companies led by Parkway (52.0% stake). Physicians from Mount Elizabeth Hospital, one of the major hospitals in Parkway Pantai network, are expected to help start the operation in the new hospital and actively engage with specialists in Myanmar and outreach to the broader population through disease prevention and health promotion activities. The hospital is Parkway's and hence IHH Group's first in Myanmar. Yangon facility should add approximately 3% to IHH Group's overall bed capacity. 

M&A valuations versus trading values

Acquisition values

India. IHH paid INR 12.8 billion (circa RM 820 million or US$ 187 million) in a 100% cash transaction to acquire 73.4% stake in Global Hospitals in India. The transaction valued Global's equity at $232K per operational bed or 3.5x on EV/Sales. We do not have a comparable EV/EBITDA multiple for this acquisition.

Malaysia. The project cost based valuations in Malaysia are similar. We indeed estimate the average cost of IHH's capacity expansion and greenfield investments in Malaysia at EV $201K per bed. The EV/Bed based valuation range in the seven Pantai projects in Malaysia is from $67K to $304K. 

Turkey. Acibadem's investments in Turkey has an average project cost of $270K on EV to bed capacity. The costliest project appears to be Kartal Hospital in broader Istanbul region: $555K. The valuation range for the 6 recent Turkish projects is $98K to $555K. Most Acibadem projects cost between $250K and $350K on EV/bed.

UAE. The valuation for Al Noor's equity as implied by Mediclinic's acquisition was circa 17x on EV/EBITDA or 3.8x on EV/Sales.

Myanmar. In comparison, the cost of greenfield investments in Yangon is consistent with $280K per operational bed.

Trading multiples

Compare these acquisition multiples to current trading averages across GEMs: EV/Sales of 3.3x and EV/EBITDA of 15.5x. The 2015 EV/EBITDA multiples range from 5.4x (Lokman Hekim) to 27.3x (IHH Group). Others are currently trading at the following multiples on EV/EBITDA: Mediclinic International (20.1x), Al Noor (17.9x), NMC (16.4x), and Life Health (10.4x).