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IHH Healthcare (IHH) – News Analysis: Exiting China private healthcare industry?

  • Bloomberg reported IHH and its JV partners are mulling over a potential sale of its China investments. 
  • There are currently no confirmation that the deal will materialise.
  • While the divestment could be in tandem with IHH’s pursuit to drive ROE, we question the longer term strategy should they choose to exit over the near-term potential gain in ROE
  • Maintain BUY; TP of RM7.20
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Bloomberg reported that IHH is considering the potential sale of its China unit, Parkway China, that could be valued at as much as US$1b. According to the news article, its JV partners for its China Unit and ParkwayHealth Shanghai Hospital, namely Taikang Insurance Group and Shanghai Hongxin Medical Investment Holdings Co are also weighing in the potential proposal. 

There are currently no confirmation that the deal will materialise. 

Total estimated development cost of the Shanghai hospital is c. US$380m. When Taikang Insurance Group invested in IHH’s China unit, its China unit was estimated to be valued at US$0.5b. Our ballpark estimate of IHH’s China assets (assuming 100% stake in all assets) could have been valued at approximately US$0.6b to US$0.7b then. 

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Our Views
While it may seem that the divestment of asset could be in tandem with IHH’s pursuit to drive ROE, the bigger question to ask is what is IHH’s longer term strategy should they choose to exit the China market and how would IHH redeploy the proceeds from the divestments that could still deliver stronger longer term growth. IHH’s current gearing is still very low at 0.25x.

Admittedly the ramp-up of its China operations has been partially interrupted by the COVID-19 pandemic, hence, delaying the original timeline. Nevertheless, we estimate that gestation losses from its China operations are still small vs the Group’s total EBITDA. Moreover, with Gleneagles HK having achieved breakeven in May21, we expect gestation losses from its China operations could likely narrow as we expect the ramp up of ParkwayHealth Shanghai (expected to open in 2022) to be gradual similar to Gleneagles Chengdu. 

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While we believe that China healthcare industry remains promising with strong structure growth led by growing mass affluence coupled with a silver tsunami trend, we acknowledge that the risk of potential government intervention in the healthcare industry to keep healthcare affordable for the society could be a concern. If we keep in mind of China’s motivation to open private healthcare to foreign operators some years back to complement and reduce the load on its public hospitals, we could expect the risk on private healthcare to be low. 

IHH will be reporting its 3Q2021 results on Monday, 29/11.