AmInvestment retains Hold on IHH after China expansion

Shanghai New Hongqiao International Medical Centre.

KUALA LUMPUR: AmInvestment is retaining its  Hold call for IHH Healthcare Bhd with an unchanged sum-of-parts based fair value of RM7.20 a  share. 

It commented on Thursday IHH is opening a second tertiary hospital in China following a land contract signed between its JV and the land authority of Shanghai. 

IHH unit Parkway Pantai Ltd and Shanghai Hongxin Medical Investment Holdings Co Ltd –through a JV company – have entered into a land contract to develop a 450-bed tertiary hospital in Shanghai New Hongqiao International Medical Centre.

The new hospital – named ParkwayHealth Shanghai International Hospital – will be built on a 35,754 sqm site, with a lease of 50 years. Parkway Pantai holds 70% of the JV, which has a registered capital of RMB455mil (RM279mil).

“This marks IHH’s second major step in expanding its China footprint. Recall that IHH had earlier teamed up with a local party (70:30) to operate a 48,000 sqm tertiary hospital in Chengdu,” it said. 

IHH is currently operating nine clinics in Shanghai, Beijing and Suzhou and a clinic in HK. It is also constructing the 500-bed Gleneagles HK – slated to open in early 2017. 

IHH is expected to fund its remaining share of the two projects – RM560mil for ParkwayHealth Shanghai and RM390mil for ParkwayHealth Chengdu.

“We are not worried given IHH’s strong cash flow and cash balance of RM2bil; we have already factored in the intended capex in our model. 

 “Overall, we are positive on IHH’s expansion plans China; its strong branding and track record puts it in a good position to tap into the market, for which the health expenditure is expected to grow 11.8% annually. 

“The strong healthcare growth will be supported by higher consumer income and healthcare reforms. No changes to our numbers as the hospitals (both Chengdu and Shanghai) will likely only contribute positively to the group’s bottomline after the usual three to four years gestation period. 

“Maintain Hold; while it is fairly valued, we like IHH for its diversified footprint and better margins. It is currently trading at 51 times price-to-earnings – close to our implied target PE of 57 times and on par with its three-year average,” it said.