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In view of a possible budget shortfall in 2024, BCH will conservatively lower its 4Q24 rate for SC revenue record for high-cost care (RW>2), thereby weakening earnings in 4Q24. Even assuming a lower payment for high-cost care, we continue to expect BCH’s earnings to trend up in 2025 with 19% growth backed by capacity expansion and renovations, a hospital upgrade and new services. BCH share price has fallen 21% over the past three months to now trade at 21x 2025PE or -2SD of its historical average, pricing in the negatives. We rate Outperform with a new DCF TP of Bt21/share (down from Bt23/share after the earnings cut).
To proactively lower SC revenue record for high-cost care (RW>2) in 4Q24. The budget shortfall that reduced social security (SC) payments for high-cost care (RW>2) in December 2022 and November-December 2023 hurt operations, leading it to write off revenue in 4Q23 and 2Q24. For services provided this year, BCH received payments at the predetermined rate of Bt12,000/RW through April. It will thus use Bt12,000/RW for 1Q-3Q24 but will slash this to 7,200/RW in 4Q24, the actual payment for November-December 2023, to counter a potential budget shortfall in 2024. In our view, this will pull core earnings down both YoY and QoQ in 4Q24. We have revised down our 2024F and 2025F core earnings by 6% each year to factor in this change. On an annual basis, we assume a lower average payment for high-cost care at Bt10,800/RW from 2024 onward.
How to mitigate this risk? The budget shortfall for the high-cost care is due to higher demand than anticipated for medical care. To address this, BCH says the private hospitals participating in SC services and the Social Security Office will collaborate to find a solution, perhaps guaranteeing payments to match the increase in demand. As private hospitals play a crucial role in handling the care for insured individuals under the SC system, BCH expects a resolution this year before private hospitals sign contracts for 2025 SC services.
Despite the earnings cut, we forecast core earnings growth of 19% YoY in 2025. We maintain our expectation of an earnings uptrend in 2025 backed by: 1) capacity expansion and renovations in 2024-25, 2) upgrade of a hospital in 1Q25, Karunvej Hospital Pathumthani to Kasemrad Hospital Pathumthani, 3) new services: Kasemrad Ari Radiation Oncology Center (3Q24, 51% held by BCH) and a mobile dental service (3Q24, 60% held by BCH) and 4) growing operations at three new hospitals: Kasemrad International Hospital Aranyaprathet, Kasemrad Hospital Prachinburi and Kasemrad International Hospital Vientiane.
Discounted valuation prices in negatives. BCH share price has fallen 21% over the past three months to trade at 21x 2025PE or -2SD of its historical average, pricing in the negatives. A share price catalyst will be resolution of the high-cost care payment that will lift the overhang from changes in SC payment. We keep our Outperform rating on BCH with a new end-2024 DCF TP of Bt21/share (down from Bt23/share), based on WACC at 7% and LT growth at 3%.
Risks. Change in SC reimbursement, slower patient traffic and cost burden at new facilities. We see ESG risk as patient safety (S): BCH has adopted a variety of quality assurance systems to provide continuous patient care.
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