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August 19, 2020

Parkway Pantai: Good Brand with Limited Upside

BY Warut Promboon

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( 19 mins)
Summary
Asset Class Credit
Quality High yield
Geography Singapore/ Malaysia
Sector Healthcare
Credit rating NR
Report date 3-AUG-20

We initiate our coverage of Parkway Pantai Limited (Parkway Pantai), a wholly-owned subsidiary of IHH Healthcare Bhd of which major shareholders include A3-rated Japanese conglomerate Mitsui & Co and Khazanah Nasional Bhd, Malaysia’s sovereign wealth fund.

1Q20 operating numbers were down and we expect April and May to be worse hit by the COVID19 lockdowns (which began in March). Non-urgent procedures had been postponed while supply chains were disrupted. We believe Singapore and Malaysia have seen their worst, while the worst is not yet over for India, Indonesia, and the Philippines. Other Asian countries like HK, Australia, and Japan are seeing higher COVID19 daily infections after reopening of their borders. 

Medical tourists account for only 1/4 of Parkway Pantai’s Singapore revenue (with Indonesians accounting for the bulk of these medical tourists) and 6% for its Malaysia revenue. Semi-electives procedures have already picked up, according to management, despite borders still being closed. Elective procedures are also likely to return soon as there are no major communal spreads of virus in both Singapore and Malaysia, Parkway Pantai’s two key markets. We predict continuation of startup losses, albeit smaller, in Greater China. The possibility of finding a vaccine, hopefully by 1H2021 according to the WHO, may however spell some hope to the end of the havoc caused by the pandemic, but it may still take up till end-2021 or even 2022 to ensure sufficient supply to meet global demand.

We do not doubt Parkway Pantai’s ability to call PARKPT 4.25% Perp (7/22c) due in July 2022 on its financials and shareholders’ backing. The higher reset coupon should incentivize the Company to call, in our view. Based on 4.73% YTM at time of writing, PARKPT 4.25% Perp (7/22c) traded between a “B+” and a “BB-“credit, in our judgment. PARKPT 4.25% Perp deserves at least a “BB” rating, in our view,  on its financials and shareholders’ support which we believe will give the Perp at least a 73-bp upside. While there is an upside to be had, a high-yield perp such as PARKPT 4.25% Perp (7/22c) with a 4.7% yield to call should warrant a NEUTRAL recommendation, in our judgment. 

Bond Valuation

We initiate our coverage of Parkway Pantai’s USD-denominated PARKPT 4.25% Senior Perpetual (7/22c). The reset coupon of PARKPT 4.25% 7/22c at 5-year US Treasury + 4.43% (if the Perpetual is not redeemed on 27-July-22) tells us that the coupon would be raised above the current 4.25%. Thus, we expect the perpetual to be called on 27-July-22 as Parkway Pantai is likely to reissue a new perpetual or bond under the current low interest rate environment and possibly secure a lower interest step-up on top of the 5-year US Treasury yield, currently at a low of 0.29%. 

With global major economies plunging into recession this year because of COVID19, we believe global interest rates will stay low for the next 12 -18 months as the COVID19 situation in the US has not improved but worsened with record daily infections, while countries which have reopened like Hong Kong, Australia, and Japan are now seeing a second wave of COVID19 infections. Any interest rate reversal by the FED is therefore highly unlikely in the next 12-18 months as the economic damage done by COVID19 is far greater than the Global Financial Crisis in 2007/2008 and as bad as the Great Depression in the 1930s since practically every sector of the economy is not spared in the current pandemic.  

As PARKPT 4.25% 7/22c ranks pari passu equally with all other unsecured obligations (other than subordinated obligations, if any), we do not see the requirement to factor-in a senior unsecured premium of a perpetual, based on market convention. 

PARKPT 4.25% Perp (7/22c) at 4.73% yield-to-call in USD at time of writing traded at between a “B+” and “BB-“ of Singapore healthcare USD yield benchmark, according to IHS Markit (EXHIBIT 1). Thomson Medical is the closest comparison to Parkway Pantai in terms of its hospital operations in Singapore and Malaysia. The SGD TMGSP complex, are, in our view, a “BB-“credit (refer to our report dated 22 May 2020), and traded at  4.2% YTM for a two year tenor at the time of this writing Adjusting for basis swap of ~25bp, the adjusted YTMs of TMGSP 7/22s works out to 3.95%. With the superiority of Parkway Pantai’s hospital brand franchise, PARKPT 4.25% Perp (7/22c) deserves at least a “BB” rating, in our view. This translates to a YTC of at least 3.75% (with two years left to call) versus a 4.73% YTC at time of writing, representing a 98bp upside.

EXHIBIT 2 shows Singapore Healthcare USD yield curve for “BB+”, “BB” and “BB-” vis-a-vis Moody’s “A1” rated Singapore Telecoms (equivalent to S&P’s “A+” rating) STSP 7.375% 12/31s at 2.07% YTM and Baht denominated S&P A-rated Bangkok Chain Hospital (NGKO 2.55% 6/22s) and TRIS AA-rated Thailand Bangkok Dusit Hospital (BNMS 4.5% 6/22s), trading at an adjusted YTM of 1.76% and 1.44% respectively, after accounting for a 24bp basis swap in USD.  Against the YTM of 4% for USD Singapore healthcare “BB” credit, with two years left to maturity, there is now a smaller 73bp upside, after the 50bp rise in bid-YTW of PARKPT 4.25% perp over the last two days, at time of writing.

Other bond peers with similar ratings in the healthcare industry include Teva Pharmaceutical (“BB”/”BB-“ rated by S&P/Fitch) TEVA 2.8% 7/23s at 4.0% YTM in USD and Jubilant Pharma (“BB-“rated JUBPSG 10/21s and JUBPSG 3/24s by Fitch (EXHIBIT 1) at YTM of 5.3% and 5.6% respectively. Note that both Jubilant Pharm and Teva Pharmaceuticals have higher total Debt/Capitalization ratios of over 50% while Glenmark Pharmaceutical (“BB” rated by Fitch)’s ratio is lower at 49% as of 31 December 2019, still higher than Parkway Pantai’s 34%. Assuming a conservative “BB”  credit rating, PARKPT 4.25% Perp (7/22c) would trade between 3.75% and 4%, in our view, versus its current YTC of 4.73%, yielding a 73-98 bps upside, at time of writing. We therefore see limited upside in the near term but believe the current carry is attractive for its rating. Hence, we assign a NEUTRAL weighting to the complex.  

Parkway Pantai: Good Brand with Limited Upside 7
EXHIBIT 1: Yield Relative Value of Singapore Healthcare USD bonds
Parkway Pantai: Good Brand with Limited Upside 8
EXHIBIT 2: Yield Relative Value of  USD Singapore Healthcare credits vs A1-rated SingTel and A-rated Thai hospital bonds 

1Q2020 Operations Updates

Medical tourism accounts for 25%, 10%, and 6% of Parkway Pantai’s hospital revenue in Singapore, India, and Malaysia respectively in 2019. The percentages fell to 21% and 5% for Singapore and Malaysia respectively in 1Q20. With the closure of international borders due to COVID19 since March 2020, non-essential medical treatments have been postponed. Parkway Pantai saw a close to 40%-50% fall of its revenue for its semi-elective (30% of cases) and elective (30% of cases) procedures in 1Q20. Urgent procedures, which account for 40% of cases, however, are not affected by COVID-19. Nonetheless, revenue intensity actually went up by 11% and 4% respectively, for Singapore and Malaysia; flat for India despite a decline in in-patient admissions which fell 10%, 4%, and 3% respectively for the three countries in the first quarter.

Revenue from Singapore fell 1% y-o-y in 1Q20 whilst its EBITDA fell 5% y-o-y during the quarter. Malaysia saw a 3% y-o-y fall in revenue and an 8% y-o-y fall in EBITDA in 1Q20 while India’s revenue fell 8% y-o-y but its EBITDA actually went up 1% y-o-y. We can expect 2Q20 numbers to be worse than 1Q20 as April and May were the worst-hit months due to complete lockdowns of borders between Singapore and Malaysia. 

There has been a pickup in semi-elective procedures since June 2020 and we can expect the elective procedures by the locals to return in due time. Management disclosed during its 1Q20 results briefing last month that the breakeven occupancy level for its Singapore and Malaysia hospitals is just below 50%, similar to the other more established hospital operations whose breakeven occupancy rates are in the mid-40s. Breakeven occupancy rate of its Indian hospitals is closer to 55% as they have to employ their own doctors. We therefore can expect India to take a longer time to recover as it has not seen its peak in COVID19 cases. We also do not preclude possible losses in Parkway Pantai’s Indian operations in 2Q20 and 3Q20, but these are unlikely to be material as contribution from the country is still small; only 15% of group EBITDA in 2019, half of that of Malaysia’s contribution.  

Parkway Pantai: Good Brand with Limited Upside 9
EXHIBIT 3: 1Q2020 Performance

The negative revenue impact of COVID19 in 1Q20 was also partially mitigated by Parkway Pantai partnering with the local governments by providing temperature screening at Singapore borders; screening and laboratory testing in Singapore, Malaysia, India, and Hong Kong, and the taking in of COVID19 patients decanted from Singapore public hospitals and non-COVID19 patients from public hospitals in Malaysia and Hong Kong. Nonetheless, margins from these are certainly much lower than what the hospitals can generate in pre-COVID19 times as evidenced by the fall in EBITDA in 1Q20.

In May 2020, the group also rolled out telemedicine across its key markets to serve its clientele. Parkway Pantai’s recent minority stake in the Singapore-based telehealth company Doctor Anywhere will also provide immediate synergistic benefits for the group as patients can receive virtual consultations with a doctor anytime, anywhere during the current COVID19 crisis, and have their prescribed medications delivered to their doorsteps without the patient leaving his home.

Our prediction beyond 2020 

POSITIVE DEVELOPMENTS

We are positive on Parkway Pantai’s medium to long-term earnings prospects despite current short-term hiccups caused by COVID19 as demand of Parkway Pantai’s healthcare services will stage a strong rebound and resume after the COVID19 pandemic is over, possibly by 1H2021. For the next five years, management has projected its Singapore healthcare revenue to grow between 5%-8% p.a., its Malaysian revenue at 3%-9% p.a., while its Greater China healthcare services are projected to grow at a faster rate of 15% – 28% p.a., and India Fortis at 11%-15% p.a..

Singapore contributed close to 40% to group revenue in 2019 and generated the highest EBITDA for the group (EXHIBITS 7 & 10). According to management’s estimate, Parkway Pantai has a 60% market share of medical tourism in Singapore. Foreign patients account for 25% of Parkway Pantai’s total in-patient revenue before COVID19. Although the number has fallen to around 21% in 1Q20 due to border closures, we believe these foreign patients will return once the border restrictions are lifted, possibly in 3 to 6 months’ time. In the meantime, we should see the number of semi-elective and electives procedures returning for the domestic patients which still account for the bulk of Parkway Pantai’s in-patient admissions. 

Singapore’s aging population and greater awareness to seek earlier diagnosis to enable preventive care portend well for Parkway Pantai as we see higher demand for lifestyle-related illnesses such as cancer, stroke, diabetes, and high blood pressure. In addition, although Singapore’s competitiveness has eroded through the years due to the strong Singapore dollar and its higher operating costs compared to Malaysia, Thailand, and India (EXHIBIT 4), the island continues to attract deep-pocketed medical tourists for more complex treatments like oncology, ophthalmology, organ transplants, and neurological surgeries.

Parkway Pantai: Good Brand with Limited Upside 10
EXHIBIT 4: Savings compared to other major medical tourism markets

Malaysia is fast gaining its reputation as a choice destination for foreign patients seeking cost effective medical treatments (EXHIBIT 4). Although ranked 3rd after India in terms of revenue contribution to the group, its EBITDA margins have been steady at between 27%-29% in the past four years (EXHIBITS 7 & 10), much higher than Parkway Pantai’s Indian hospitals. Regional demand for its new state-of-art cancer center (launched in mid-2019) to provide end-to-end cancer treatment services with the latest cutting-edge technology will be strong once medical tourism picks up again when borders are reopened. 

We expect Parkway Pantai to benefit from the growing demand for quality healthcare treatments from the region as it builds up its healthcare capability in Malaysia. The latest prized acquisition – Prince Court Medical Centre, a 277- bed private hospital strategically located in the “Golden Triangle” of Kuala Lumpur, offering wide-ranging services for cancer, gastrointestinal diseases, intervention cardiology, invitro-fertilization, nephrology, occupational health, orthopedic, and rehabilitation medicine – acquired from IHH major shareholder Kazanah Nasional Bhd for cash MR1.02bn in 1Q20 will be earnings accretive immediately.  Pantai Hospital Ayer Keroh, in Malacca, will also open its 140-bed capacity new medical block in 2020 as the hospital has been running at near full capacity for the past few years. 

India’s low-cost treatment, advanced facilities, and availability of highly skilled doctors have also made it another popular location for medical tourism. It is estimated that India’s medical tourism is worth INR 63bn (SGD1bn) and will account for 20% of global market share by 2020. India is currently Parkway Pantai’s second-largest overseas market, contributing 31% to group revenue in 2019 after Singapore (EXHIBIT 7). Although India’s EBITDA margins have improved significantly from single digits to 11% in 2019 after the acquisition of Fortis Healthcare Ltd (Fortis) in 2018, these are still lower than the rest of Parkway Pantai’s hospital operations as staff cost account for 36% of its revenue since they have to employ their own doctors.

Greater China has seen its EBITDA losses narrowed to SGD60m in FY19, from above SGD80m in FY17, due to the steady ramp up of operations in 1H19. Although the HK protests which escalated in 2H19 resulted in deferrals of non-urgent procedures at Gleneagles HK, operations and services have so far been stable. Operations at the 350-bed capacity Gleneagles Chengdu, which soft-opened in late October 2019, will be ramped up using a phased bed approach as more procedures and services are introduced. Although contributions from the Chengdu hospital is still small, the recent influx of foreign investments into the 5th-largest city (8m population) in China and the presence of Sichuan University’s West China Medical Centre (ranked 3rd in China for medical education) will ensure strong demand for its medical services and supply of medical talent for Gleneagles Chengdu to tap on.  

Demand for private healthcare services in China has been picking up, not just from the high-income segment but also the middle-income. The opening of Gleneagles Shanghai, a 450-bed capacity multi-specialty hospital, co-developed with Shanghai Hongxin Medical Investment, has been delayed till 2021 due to COVID19. We remain positive on the potential demand for quality private healthcare services in major cities like Shanghai where the per capita disposable income is 7X that of China’s urban per capita disposable income. Shanghai, the financial center of China, has also seen its per capita disposable income growing at a 5-year compounded growth rate of 7% p.a. to nearly 70,000 yuan in 2019. According to a research report published in July 2020 by Statistica, the Shanghai population is forecast to grow from 26m in 2019 to 34m in 2035, a whopping 30% increase! Parkway Pantai’s foray into China, a country that boasts of the highest number of billionaires after the US in the world, is therefore a timely move in our view, and we are positive that the group will reap dividends from this investment in the long run.

NEGATIVE DEVELOPMENTS

A Qualified Opinion has been issued for the statutory audit of associate Fortis for the financial year ended 31 March 2018.  Acquired in November 2018 for USD584m, the 31% associate is facing a number of investigations by the Securities and Exchange Board of India and the Serious Fraud Investigation Office and Ministry of Corporate Affairs of India regarding internal fraudulent activities resulting from the diversion of funds to the  former shareholders of Fortis. Fortis is working to recover the alleged misappropriated sum of INR4bn or SGD76m from its former controlling shareholders and another sum amounting to INR4.5bn or SGD84m on some illegal transfers to companies belonging to the former shareholders.  

Based on the investigations to-date, all identifiable adjustments have been identified and recorded in Fortis financial accounts prior to the acquisition by Parkway Pantai. Nonetheless, the acquisition of Fortis, India’s second largest hospital chain, is seen as a strategic fit for Parkway Pantai to have immediate access to the underserved healthcare Indian market and its potential as the next booming tourism market for the group, after Singapore and Malaysia. 

Financial  Performance

Parkway Pantai’s revenue grew by a compounded growth rate of 16% p.a. in the past 5 years, thanks to its Fortis acquisition in India in November 2018, and its expansion into HK in March 2017 and China in 2019. Revenue growth in its home markets like Singapore and Malaysia have also been good, albeit at a lower 6% to 7% p.a. compounded growth, on the back of a 3%-4% p.a. compound growth in in-patient admissions over the last 5 years. This translates to a healthy 4%-5% p.a. compounded growth in revenue per in-patient admission.  

In 2019, the group’s revenue and EBITDA increased by some 40% in 2019 (EXHIBIT 11) due to strong contributions from Fortis in India and maiden contributions from China. Revenues from Singapore and Malaysia operations were up 10% and 15% respectively. Revenue and EBITDA for the group however slipped 9% and 23% respectively in 1Q20 due to COVID19. We can expect to see greater impact of the border lockdowns filtering through in 2Q20 as 1Q20 saw only a month’s impact of the lockdown. Nonetheless, we do not expect the group to post operating losses in 2020 as the group is beginning to see the resumption of semi-elective procedures from June. Elective procedures are likely to resume soon as daily new COVID19 cases have fallen and community cases have stayed low for the past few months.  

Parkway Pantai’s financial ratios have been healthy (EXHIBIT 5), in our view. Total Debt-to-Capitalization ratio stayed below 40% for the past five years while its Total Debt-to-Capitalization (excluding MI and intangibles) ratio of 53% in 2019 has fallen from 60% a year ago, also low compared to industry players (EXHIBIT 6).  Its high liquidity, interest coverage and cash conversion ratios also point to its strong operating cashflows. Despite negative cashflow in 2019, Parkway Pantai’s war chest of SGD1.4bn (as of end-2019) should be more than sufficient to meet its annual capex requirement. Its parent IHH Healthcare has projected MYR1.5bn (SGD500m) capex for the entire IHH group over the next 3 years, the bulk of which we believe will be for Parkway Pantai.

Parkway Pantai: Good Brand with Limited Upside 11
EXHIBIT 5: Key Financial Ratios

Peer comparison

EXHIBIT 6 shows that Parkway Pantai stands out in terms of its profitability and leverage ratios compared to its parent IHH and local peers like Thomson Medical (TMG) and Raffles Medical Group (RMG), and Malaysia-listed KPJ Healthcare Bhd (KPJ). The Company has consistently maintained high EBITDA margins, at above 20% for the past five years.  Although Parkway Pantai’s EBITDA margin may dip below 20% in 2020, it is likely to be temporary. We are projecting its EBITDA to rebound back above 20% in 2022 once the elective procedures resume and operations are back to normal.

In terms of debt servicing ability, its EBITDA/interest coverage is 2-3x more than its parent IHH and its competitors TMG and KPL. Parkway Pantai is also not overly geared compared to its peers. For example, its total Debt–to-Capitalization ratio stood at only 34% in 2019 compared to 86% for TMG and over 50% for KPJ, Teva Pharmaceutical (“BB-” rated by Fitch)  and Glenmark Pharmaceutical(“BB” rated by Fitch). Parkway Pantai’s gross debt is about 3X its EBITDA, similar to IHH and KPJ, but much lower than TMG’s 10x.

Parkway Pantai’s cash conversion ratio of -381 days, is amongst the highest in the industry, just after RMG and much higher than its parent IHH and competitors TMG and KPJ. (EXHIBIT 6). This explains for its strong cash position as it takes more than a year to pay the contracted services of its specialists and doctors. 

Parkway Pantai: Good Brand with Limited Upside 12
EXHIBIT 6: Peer Financial Ratio Comparison

Background

Parkway Pantai, incorporated in Singapore, is one of Asia’s largest integrated private healthcare groups with a network of 29 hospitals throughout the region, including Malaysia, Singapore, India, Greater China, and Brunei. It is a wholly-owned subsidiary of Singapore and KL-listed IHH Healthcare Bhd whose major shareholders include A3-rated Japanese conglomerate Mitsui & Co which has a 33% stake, and Khazanah Nasional, Malaysia’s sovereign wealth fund (26% stake). Its “Mount Elizabeth”, “Gleneagles”, “Parkway” and “Pantai” brands are among the most prestigious in Asia. 

Other than the hospital chains, Parkway also operates a chain of clinics under the Parkway Shenton and Shenton Family Medical comprising a network of over 360 panel GP clinics across Singapore.  Parkway Pantai is Malaysia’s second largest private healthcare provider, based on the number of licensed beds. The group also operates ancillary healthcare services such as Pantai Integrated Rehab and Pantai Premier Pathology. 

Parkway Pantai also has a 31.17% stake in Fortis Healthcare, a leading integrated private healthcare provider in India which operates a network of 27 hospitals and 415 diagnostic centres in India, Dubai, and Sri Lanka. Fortis  Healthcare is the second-largest healthcare player in India and is listed on the National Stock Exchange of India Ltd and the Bombay Stock Exchange. In addition, Parkway Pantai has a 50/50 JV with Apollo Hospitals Ltd which operate Apollo Gleneagles Hospitals in Kolkata; a 62.13% stake in Continental Hospitals and a 73.87% stake in Gleneagles Global Hospitals in India. Parkway Pantai also holds a 35.62% stake in Parkway Life REITS, one of Asia’s largest healthcare REITS by asset size.

*We would like to thank Ms. Look Peck Liang for her contribution in this report*

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