PP 7767/09/2010(025354)

17 June 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
17 June 2010
MARKET DATELINE

KPJ Healthcare Share Price

Fair Value
:
:
RM3.29
RM4.25
Brighter Prospects Ahead Recom : Outperform
(Maintained)

Table 1: Investment Statistics ( KPJ; 5878 ) Bloomberg Ticker: KPJ MK

FYE Dec Revenue Net Profit EPS Growth PER C.EPS* P/NTA Net gearing ROE GDY
(RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%)
1,456.4 110.9 21.0 29.5 15.7 - 3.4 0.4 17.5 3.6
2009a
1,675.5 126.9 24.0 14.1 13.7 21.0 2.7 0.3 16.7 4.3
2010f
1,861.3 140.5 26.6 10.7 12.4 23.0 2.2 0.3 15.6 4.9
2011f
2,065.4 157.6 29.8 12.2 11.0 26.0 1.8 0.2 14.9 5.5
2012f
Main Market Listing /Trustee Stock/Syariah Approved Stock By The SC * Consensus based on IBES Estimates

Revenue growth drivers. For FY09, KPJ recorded a revenue growth of Issued Capital (m shares) 529.6
14.9% yoy largely due to higher contribution from all of its business Market Cap (RMm) 1,742.5
segments. Moving forward, we believe KPJs revenue growth drivers include: Daily Trading Vol (m shs) 1.1
o The opening of at least two new hospitals p.a.; 52wk Price Range (RM) 1.16-3.39
o Expansion of its existing hospitals; Major Shareholders: (%)
o Enhancing its presence in medical tourism; and Johor Corporation 50.2
Kumpulan Waqaf An-Nur 8.8
o Higher utilisation rate per patient.
Lembaga Tabung Haji 5.1
Capex of RM200m p.a.. We understand that KPJ is investing RM200m to
build three new hospitals, purchasing of new medical equipment and FYE Dec FY10 FY11 FY12
expanding its existing hospitals nationwide this year. The construction works EPS chg (%) 9.7 14.3 8.2
for its three new hospitals which are located in Bandar Baru Klang, Pasir Var to Cons (%) 14.2 15.5 14.6

Gudang and Muar have already started and are due for completion by end of
PE Band Chart
2011. We believe this is in line with the managements targets to open at
least two new hospitals p.a. either through greenfield projects or acquisition PER = 11x
of established hospitals, which would likely be in East Malaysia, East Coast or PER = 9x
PER = 7x
Iskandar region.
Stronger foothold in medical tourism. In FY09, over 15,000 foreigners
received treatment at its hospitals and in the 1QFY10, KPJ received more
than 5,000 foreigners of which 2,800 were Indonesians. Although KPJs focus
on positioning itself as a community healthcare provider still remains, the
company realises that there is sizeable growth potential in medical tourism. Relative Performance To FBM KLCI
However, management mentioned that any significant contribution from
medical tourism would only come in 3-5 years time. Currently, medical KPJ Healthcare
tourism accounts for less than 10% of total group revenue.
Forecasts. We have revised up our FY10-12 earnings forecasts by 9.7-
14.3% largely to reflect the upward change in our revenue assumptions, and
lower effective tax rate and MI assumptions.
FBM KLCI
Risks. The risks to KPJs earnings include lower-than-expected patient
numbers, which could be due to slower-than-expected economic recovery
and serious disease outbreaks (such as SARS or swine flu) in Malaysia as
well as slower-than-expected turnaround in loss-making hospitals.

Investment case. Besides the earnings revision above, our indicative fair
value has been raised to RM4.25 (from RM3.50) based on target FY11 PER of
16x (10% discount to regional peers average) as we roll forward our
valuation year (from FY10). We believe the M&A activity in the healthcare
sector recently supports our view that there is significant growth potential for
the sector in the region. We continue to like KPJ for its leading position and its
expansion plans in Malaysias growing healthcare market. We reiterate our Yap Huey Chiang
(603) 92802179
Outperform call on the stock.
yap.huey.chiang@rhb.com.my
Please read important disclosures at the end of this report.

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 17 June 2010

Key Takeaways From Visit

Revenue growth drivers. For FY09, KPJ recorded a revenue growth of 14.9% yoy largely due to higher
contribution from all of its business segments. Moving forward, we believe KPJs revenue growth drivers include:
o The opening of at least two new hospitals p.a.;
o Expansion of its existing hospitals;
o Enhancing its presence in medical tourism; and
o Higher utilisation rate per patient.

Chart 2. Number of outpatients and inpatients from 2004-

Chart 1. Breakdown of KPJs revenue from 2004-2009
2009

RM ( ' 0 00 )
600 Number of patients
2500000

500
2000000

400
1500000

300
1000000

200
500000

100
0
2004 2005 2006 2007 2008 2009
0
2004 2005 2006 2007 2008 2009 No of outpatients No of inpatients
Hospit al income Consult at ion income Sale of pharm, medical & sur gical pr oduct s Lab t est f ees Ot her hospit al income

Source: Company data, RHBRI

Capex of RM200m p.a.. We understand that KPJ is investing RM200m to build three new hospitals, purchasing
of new medical equipment and expanding its existing hospitals nationwide this year. The construction works for
its three new hospitals which are located in Bandar Baru Klang, Pasir Gudang and Muar have already started and
are due for completion by end of 2011. Meanwhile, the greenfield Tanjung Lumpur, Kuantan hospital is set to
start operations in 2012. We believe this is in line with the managements targets to open at least two new
hospitals p.a. either through greenfield projects or acquisition of established hospitals, which would likely be in
East Malaysia, East Coast or Iskandar region.

Updates on expansion of its existing hospitals. Management mentioned that the recently-opened Penang
Specialist hospital in Aug 09 to replace Bukit Mertajam Specialist Hospital, is doing well. The hospital is currently
running at a maximum occupancy rate (vs. average occupancy rate of 65-70% for KPJs other hospitals). It has
the capacity of slightly more than 200 beds and management is looking to add more beds progressively.
Meanwhile, KPJs replacement Tawakal Specialist hospital, is set to be opened next month, with a capacity of
about 200 beds while the old hospital building (which has 140 beds) would be used as a day care centre,
covering a number of services including dialysis, eye/dental care and day surgeries. KPJ is also looking at
expanding the capacity of its top performing hospitals i.e. Ampang Puteri and Damansara Specialist by 100 beds
(or +46% to be completed by 2012) and 60 beds (or +44% to be completed by end 2011) respectively.

Stronger foothold in medical tourism. In FY09, over 15,000 foreigners received treatment at its hospitals
(vs. 18,000 in FY08) and in 1QFY10, KPJ received more than 5,000 foreigners of which 2,800 were Indonesians.
Although KPJs focus on positioning itself as a community healthcare provider still remains, the company realises
that there is sizeable growth potential in medical tourism. KPJ has identified four hospitals, namely Damansara
Specialist, Ampang Puteri Specialist, Ipoh Specialist and Johor Specialist, as the flagship hospitals for its medical
tourism segment, and as highlighted above the company is looking to expand the capacity of its top performing
hospitals i.e. Ampang Puteri and Damansara Specialist. We understand that these extensions would include
more premium wards to push for the medical tourism business. Management mentioned that any significant
contribution from the medical tourism would only come in 3-5 years time. Currently, medical tourism only
accounts for less than 10% of total group revenue.

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 17 June 2010

Expecting higher utilisation rate per patient. KPJ saw the utilisation rate per patient improved to 67% in
FY09 from 59% in FY08 and explained that the higher uptake of medical insurance policies in Malaysia as well as
greater health awareness has led to stronger revenue/patient and this is expected to remain strong moving
forward. We note that the company is beginning to invest in new state-of-the-art equipment in its Klang Valley
hospitals where there is demand for higher-end services. We believe as Malaysia moves to a higher income
level, supported by growth in the credit business (i.e. clients with their own or companies health insurance
plans), demand for these higher-end healthcare services should rise accordingly, which will bolster KPJs profit
margins.

Risks

Risks to our view. The risks to KPJs earnings include lower-than-expected patient numbers, which could be
due to slower-than-expected economic recovery and serious disease outbreaks (such as SARS or swine flu) in
Malaysia as well as slower-than-expected turnaround in loss-making hospitals.

Forecasts and Recommendation

Forecasts raised. We have revised up our FY10-12 revenue projections by 4.6-4.7% following the upward
change in FY10-12 assumptions for number of outpatients and inpatients by 1.4-1.5% respectively, and higher
utilisation rate per patient of 68-73% (vs. 64-70% previously). At the same time we have lowered our FY10-12
effective tax rate assumption to 25% p.a. (vs. FY10-12 effective tax rate of 25-27% previously) and lowered our
FY10-12 MI contribution by 6.7-7.3% to factor in the lower minority interest following the full acquisition of
Penang Specialist Hospital in May 10. Consequently, our FY10-12 earnings forecasts have been raised by 9.7-
14.3% p.a. respectively.

Higher fair value. Besides the earnings revision above, our indicative fair value has been raised to RM4.25
(from RM3.50) based on target FY11 PER of 16x (10% discount to regional peers average) as we roll forward
our valuation year (from FY10). KPJs share price has outperformed the FBM KLCI by 22% YTD and by 7.7%
since we upgraded the stock on 7 Jun. Furthermore, the M&A activity in the healthcare sector recently, which
includes Khazanah Nasionals proposed partial general offer for Singapore-listed Parkway Holdings shares and
the takeover bids for Australia-listed Healthscope by private equity groups and US-based healthcare companies,
has resulted in valuations moving higher. This supports our view that there is significant growth potential for the
healthcare sector in the region. We continue to like KPJ for its leading position and its expansion plans in
Malaysias growing healthcare market. We reiterate our Outperform call on the stock.

Table 2. Earnings Forecasts Table 3. Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 1,456.4 1,675.5 1,861.3 2,065.4 No. of hospitals 21 23 25

Turnover growth (%) 14.9 15.0 11.1 11.0 No. of beds 2,363 2,646 2,911
No of in-patients 237,943 259,358 282,700
Gross Profit 419.1 485.9 539.8 599.0 No. of out-patients 2,275,469 2,411,998 2,556,717
EV/bed (in RM) 97,326 86,898 78,998
EBITDA 188.3 217.0 241.7 264.5 EBITDA/bed (in RM) 91,846 91,330 90,891
Source: Company data, RHBRI estimates
EBITDA margin (%) 12.9 13.0 13.0 12.8

Depreciation (46.5) (48.6) (55.1) (52.9)

Net Interest (16.7) (14.1) (13.6) (13.8)
Associates 18.9 28.8 30.7 30.7

Pretax Profit 143.9 183.1 203.7 228.5

Tax (29.2) (45.8) (50.9) (57.1)
Minorities (3.9) (10.5) (12.3) (13.8)
Net Profit 110.9 126.9 140.5 157.6
Source: Company data, RHBRI estimates

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 17 June 2010

Chart 1: KPJ Technical View Point

The share price of KPJ has been trading at above
the UTL since Aug 2009.

In a consolidation phase in Jan 2010, the stock

combed along the UTL before triggering a smooth
recovery leg to a high of RM3.10 in Apr.

However, a stiff profit-taking momentum had

pressed the stock towards the UTL support region
near RM2.70 RM2.88, which was slightly off the
supportive UTL near RM2.88.

But, as it managed to sustain at above RM2.70, it

launched a technical rebound in late May and
recaptured the UTL, before removing the key
hurdle of RM3.10 in early Jun.

It registered its third positive candle in a row

yesterday, with an upbeat momentum reading on
the board, to suggest further upside potential to
the RM3.60 target resistance level from the
previous consolidation phase from Apr to May
2010.

In case of a sudden reemergence of profit-taking

pressure, the stock may retract to the 10-day SMA
near RM3.13 and the UTL near RM3.00, before it
could threaten the current uptrend, in our view.

IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over
a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

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Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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