We Overweight the healthcare service sector, whose long-term growth is underpinned by an increase in bed capacity of 22% (from 2023 to 2027 onward). The EEC area is the focus of bed expansion: healthcare demand is poised to grow in tandem with economic activities and bed supply is low. Our top pick is BDMS, whose earnings are healthy both short-term and long-term and valuation is undemanding.
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Healthcare – Expansion to drive long-term growth; Healthy earnings makes BDMS our top pick
Capacity expansion to drive long-term growth. For hospitals under coverage (BCH, BDMS, BH, CHG and RJH), bed capacity will grow 22%, from 12,715 beds in 2023 to 15,553 beds in the long term (2027 onward). This growth in capacity will come from expansion of existing facilities, greenfield projects and new specialized centers, including a cancer center and a wellness center. The EEC area is a prime target for bed expansion: it is an area where economic activities are growing, which will raise demand for healthcare, and because bed supply is low, we do not expect competition to exert a material impact. BH is the exception, as it is expanding to Phuket, where we expect it to be challenged by competition as BDMS already has a strong presence there.
SC service: Short-term overhang on RW>2 payment in 2H24. In 2H24, we view operations and earnings for private hospitals participating in SC services face an overhang from a potential budget shortfall for high-cost care (RW>2). Some, such as BCH, are conservatively lowering the rate they use to record SC payment for high-cost care (RW>2) from Bt12,000/RW to Bt7,200/RW in 4Q24, which will cut revenue and core earnings both YoY and QoQ. Currently, CHG and RJH are not changing their booking of revenue in 4Q24. Assuming a lower rate used to record SC payment, we estimate 5-6% earnings downside for CHG and RJH. We see limited impact on BDMS as SC services account for only ~2% of its revenue, below RJH at 51% of revenue, BCH at 33% and CHG at 29%.
Overweight the healthcare service sector: BDMS is our pick. We estimate the sector’s core earnings CAGR for 2024-26 at 7%. We like BDMS for: 1) strong short-term earnings, with 3Q24 poised to be a new high, 2) healthy long-term earnings, with core earnings CAGR estimated at 8% for 2024-26, above sector average and 3) undemanding valuation: in 3Q24TD, BDMS’s share price has risen 12%, in line with the SET’s increase. However, it is trading at 29x 2024 PE, which is nearly -2SD of its historical average.
In 3Q24TD, the prices of SC service plays show a 5% rise in CHG’s share price, 1% in BCH and RJH has fallen by 6%, all unperforming the SET and peers BDMS and BH, dragged down by the overhang on SC service. Resolution of the high-cost care (RW>2) payment between the private hospitals and the Social Security Office will be a catalyst, expected in 4Q24. Of the SC service plays, we like BCH: 1) it has a stronger earnings growth profile among the SC plays, with 13% core earnings CAGR in 2024-26, 2) less earnings downside and 3) BCH is trading at 29x 2024PE, nearly -1SD of its historical average.
Risks include unpredictable events, global economic slowdown and geopolitical risk that would interrupt patient traffic, slow ramping up of new facilities, intense competition, workforce shortage and regulatory risk. For the healthcare service sector, we see ESG risk as patient safety (S): BCH, BDMS, BH, CHG and RJH all have adopted a variety of quality assurance systems to provide continuous patient care.