Macquarine Research 20120910 (SWOT Analysis)

MALAYSIA
KPJ Healthcare
An undervalued healthcare leader
Initiate with Outperform, RM7.10 target price
We initiate coverage of KPJ Healthcare (KPJ), the largest private hospital
network operator in Malaysia (by number of hospitals) with an Outperform
recommendation based on 12-month sum-of-parts target price of RM7.10,
implying 13% upside from current levels and FY13E and FY14E PER of 23x and
20x, respectively. Despite no official dividend policy, we expect KPJ to continue
paying 50% of its net profit on a quarterly basis, which implies a 2.2% FY13E
dividend yield.
Driver 1: Benefiting from the public-to-private switch
Supported by the rise in income and increased acceptance of medical insurance,
private healthcare has become accessible to the public. Private healthcare
KPJ MK Outperform operators like KPJ should also continue to benefit from overcrowded public
Price (at CLOSE#, 05 Sep 2012) RM6.27 hospitals, as more than 80% of the healthcare budget is dedicated to supporting
public hospital operating expenditures. Despite the demand increase, new entry
12-month target RM 7.10 is limited by the zoning requirements implemented by the Private Healthcare
Upside/Downside % 13.2 Facilities and Services Act 1998 which limits the numbers of bed counts within
Valuation RM 5.20-7.60 an area.
- Sum of Parts
GICS sector Driver 2: Growing edge in captive market
Health Care Equipment & Services
Market cap RMm 3,988 Capitalising on its market share advantage, KPJ has been acquiring hospitals
30-day avg turnover US$m 1.3 around the nation to enter new markets while strengthening its number-one
Market cap US$m 1,282 position. By disposing the hospital assets to its associate Al-Aqar Healthcare
Number shares on issue m 636.1 REIT, KPJ is able to unlock part of the investment value upfront while continuing
with its acquisitions, without the need to raise additional funds. Al-Aqar
Investment fundamentals
Healthcare REIT is the only healthcare-focused REIT in Malaysia.
Year end 31 Dec 2011A 2012E 2013E 2014E
Revenue m 1,909.0 2,068.9 2,314.2 2,598.9 Driver 3: The blue-sky scenario – RM7.60 (21% upside)
EBIT m 159.2 179.3 210.0 244.8
EBIT growth % 10.5 12.6 17.1 16.6 There could be more upside to our base-case scenario target price of RM7.10,
Reported profit m 143.7 153.0 178.9 206.8
Adjusted profit m 143.7 153.0 178.9 206.8 as we assume that the three new hospitals beginning operation this year will only
EPS rep sen 26.3 23.2 27.1 31.4 start to positively contribute in 2014. We believe that the scenario could change,
EPS rep growth % 16.5 -11.8 16.9 15.6
EPS adj sen 26.3 23.2 27.1 31.4 as KPJ was able turn around KPJ Kajang within a year of operation. If such a
EPS adj growth % 16.5 -11.8 16.9 15.6 scenario were repeated, we could see potential upside to RM7.60.
PER rep x 23.8 27.0 23.1 20.0
PER adj x 23.8 27.0 23.1 20.0
Total DPS sen 12.0 11.6 13.6 15.7 Driver 4: Historical valuations no longer valid
Total div yield % 1.9 1.8 2.2 2.5
ROA % 8.7 8.8 9.6 10.4 Our implied valuation is demanding compared to KPJ‟s historical average;
ROE % 17.3 15.4 15.7 16.7 however, the stock fundamentals have significantly changed from two years ago.
EV/EBITDA x 12.9 14.1 12.2 10.6
Net debt/equity % 19.1 10.5 8.1 3.8 With JCorp trimming its stake from 81% in 2002 to the current 41% and the
P/BV x 3.8 3.8 3.5 3.2 listing of IHH Healthcare (IHH MK, Not Rated) , liquidity and interest in KPJ stock
Source: FactSet, Macquarie Research, September 2012
have improved significantly. Another rerating catalyst could also be a JV or M&A
(all figures in MYR unless noted) with a Singapore-based medical group providing the potential to gain access to
Analyst(s) Singaporean treatment in Malaysia paid by Medisave.
Chi Hoong Ng
+60 3 2059 8985 chihoong.ng@macquarie.com The Malaysia healthcare stock
Yeonzon Yeow
+60 3 2059 8982 yeonzon.yeow@macquarie.com For investors seeking to invest in the growing Malaysia healthcare market, we
believe that KPJ, with its Malaysia-focused operation and undemanding 23x
10 September 2012 FY13E PER with a 2.2% div yield (vs IHH at 33x consensus FY13E PER with no
Macquarie Capital Securities (Malaysia) dividend upside) is a compelling opportunity.
Sdn. Bhd.
Please refer to the important disclosures and analyst certification on page 2 and the inside back cover of this
document, or on our website www.macquarie.com.au/disclosures.
Macquarie Research KPJ Healthcare
Inside KPJ Healthcare Berhad (KPJ MK)

An undervalued healthcare leader 3 Company profile
Valuation, recommendation, risks 6  KPJ Healthcare Berhad (KPJ) is a leading private healthcare provider in
Malaysia with 21 hospitals in Malaysia and two in Indonesia. With more than
Benefiting from the public to private switch12
2,600 licensed beds, KPJ currently owns the largest private-hospital network
Growing edge in a captive market 16 in Malaysia. In 2011, KPJ treated 2.4m outpatients and 240,000 inpatients
Unsuspected derivative play on interest through its network hospital.
rate 19  As the availability of new hospital sites becomes more limited within the city
Malaysia Healthcare and its future 20 boundaries, private operators are now either working with property developers
or going further inland to expand their presence. We think KPJ‟s acquisition
growth strategy is viable as the risk associated with it is lower than setting up
KPJ shareholding chart new sites. Despite the government‟s focus on transforming Malaysia into a
medical-tourism destination, we believe this is a long-term plan, as Malaysia
Others is less competitive in services compared to peers.
32%
Jcorp*
45% Fig 1 KPJ‟s operation snapshot
Foreign
12% EPF
11%
*JCorp shareholdings includes Waqaf An-Nur Corp stake

As of 30 April 2012
Source: Company data, Macquarie Research, September
2012
KPJ number of patients trend
('000) Outpatients Intpatients

3,000
2,500
2,000
1,500
1,000
500 Source: Company data, Macquarie Research, September 2012
0
 KPJ started as the healthcare division of state-owned Johor Corporation

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(JCorp) in 1981. In 1994, JCorp decided to list KPJ as the first listed healthcare
Source: Company data, Macquarie Research, September group in Bursa, Malaysia. Currently, JCorp owns 45% of KPJ shares.
2012
KPJ MK rel KLCI performance, & rec Key Management and Directors
history
Kamaruzzan Abu Kassim, Chairman
 Kamaruzzaman, aged 48, was appointed as a Non-Independent Non-
Executive Director of KPJ on 3 January 2011 and subsequently as Chairman
of KPJ on 12 January 2011. He is currently the President & Chief Executive
Officer of Johor Corporation (JCorp).
Datuk Paduka Siti Sa‟diah Sheikh Bakir, Managing Director
 Siti Sa‟diah, aged 59, graduated with a Bachelor of Economics from the
University of Malaya in 1974 and holds an MBA from Henley Management
Note: Recommendation timeline - if not a continuous line, then there was no
Macquarie coverage at the time or there was an embargo period. College, University Reading, UK. Her career with Johor Corporation (JCorp)
Source: FactSet, Macquarie Research, September 2012 commenced in 1974 and she has been directly involved with JCorp's
(all figures in MYR unless noted)
Healthcare Division since 1978.
 She was appointed as the Chief Executive of Kumpulan Perubatan (Johor)
Sdn Bhd (KPJSB) from 1989 until the listing of KPJ in November 1994. She
has been the Managing Director of KPJ Healthcare Berhad (KPJ) since 1
March 1993.
10 September 2012 2
An undervalued healthcare leader

Initiating coverage with Outperform recommendation
Outperform We are initiating coverage of KPJ Healthcare (KPJ) with an Outperform recommendation and
recommendation a target price of RM7.10 based on our sum-of-parts methodology, which implies 13% upside
with target price of to the current share price. With the widest hospital network in Malaysia, we think KPJ is
RM7.10, which poised to benefit from the overstretched public system. In addition, we think that the recent
implies a 13% return listing of IHH Healthcare (IHH) has improved interest in KPJ stock, as investors view KPJ as
a pure Malaysia healthcare stock with an undemanding valuation.
Switching to private healthcare

The macro Despite allocating a similar annual budget to the healthcare system, most of the funds have
environment looks shifted from capex to opex due to the rising operational costs of public hospitals. On average
positive for only five hospitals were built over the last five years with public hospital beds only growing by
Malaysia private 2% from 2006-2011. Unless the government decides to allocate more funding to the public
healthcare player healthcare system, we believe that private providers will likely be big beneficiaries, as more
patients are forced to seek treatment with private operators, as the level of overcrowding at
public hospitals is expected to worsen.
Fig 2 More inpatients are now seeking medical treatment at private healthcare facilities
2008 2011
Private
26% Private
28%
Public
Public 72%
74%
Based on number of inpatients: 3.0mn (2008) and 3.2mn (2011)

Source: MOH, Macquarie Research, September 2012 Source: MOH, Macquarie Research, September 2012
In our view, the rise in income and acceptance of medical insurance among Malaysians will
help improve affordability and hence increase demand for private healthcare. In addition,
Malaysia is expected to reach an aging population status by 2035 (aging population status is
defined by WHO as one where at least 10% of the population is above the age of 60). As
such, there could be another opportunity for KPJ to offer elderly-care services in Malaysia.
Al-Aqar Healthcare REIT, benefiting KPJ in two ways

Al-Aqar benefits: The Private Healthcare Facilities and Services Act 1998 (the Act) governs all activity within
the private healthcare sector, which includes the building and expansion of new and
1) Lowering
established private hospitals. Within the Act, the zoning requirement also limits the population
investment
to number of beds ratio (1:500) within a 14km radius. The limitation benefits established
cost for KPJ
operators like KPJ as it limits the entry of new competitors. Capitalising on the Act‟s limits,
2) Potential KPJ is has been making several acquisitions, acquiring at least one hospital annually from
uplift in 2006 in an effort to either enter new markets or block competitors from entering the market.
overall
 We believe KPJ has a competitive edge as it has been able to „lighten‟ its balance sheet
valuation
and unlock the value of its hospital assets by disposing it to its associate, Al-Aqar
Healthcare REIT (Al-Aqar). With the REIT, KPJ can outbid its competitors (if needed)
knowing they can recoup part of their investment upfront, while improving the investment‟s
return. KPJ is the only operator to own a healthcare REIT in Malaysia.
10 September 2012 3
 There is an investment trend toward high-yielding companies that pay dividends from
strong defensive cash flow, to seek higher returns. We believe KPJ could be an indirect
beneficiary of this investment trend as its 49% owned Al-Aqar could potentially be valued
higher as it has similar earnings stability and dividend payout ratios to telco and consumer
stocks. If valued at 3.50% yield (vs the current yield at 5.2%), it would equate to an
additional 4% upside to our target price.
The bull case at RM7.60 implies 21% upside

Base case – RM7.10 (13% upside)
Base case –RM7.10 In our base-case scenario, we did not factor in any possible synergy from the two recently
(13% upside) acquired hospitals, Sabah Medical Centre (2010) and Sibu Specialist Medical Centre (2011)
in East Malaysia. As no new capacities have been installed over the past two years, we are
Bull case – RM7.60
forecasting the number of outpatients and inpatients to grow moderately at 7.0% and 7.5% for
(21% upside)
both 2012 and 2013, respectively. The number of patients growth rate should see
Bear case – RM5.20 improvement post-2013, as we expect KPJ Klang Specialist Hospital (May 2012), Sabah
(18% downside) Medical Centre and Pasir Gudang Specialist (total capacity of 570 beds), to start contributing
positively after more than one and half years of operation. Management also indicated that
new hospitals usually take two to three years to break-even.
Blue-sky scenario (bull case) – RM 7.60 (21% upside)
Turning around a In our bull-case scenario, instead of expecting improvement in patients‟ admissions post-
new hospital within 2013, we assume that the new hospitals would positively contribute within a year of operation
a year is possible, as KPJ Kajang (KPJ Kajang Specialist Hospital) managed to break even within its first year of
as it has been done operation.
before
With the above in mind, we expect the total of number of patients could grow by 7.8–9.3%
from 2013 to 2015, as opposed to our base-case scenario of 7.0–7.8%. The increase in the
number of patients would translate to a revenue increase of 0.7–5.1%, which would provide
uplift to our target price of RM7.10 (18% upside). Combined with the potential increase to Al-
Aqar‟s share price, our bull-case scenario could reach as high as RM7.60 (21% upside). We
expect a 10% chance this scenario will work.
Bear-case scenario – RM5.20 (18% downside)
In our bear-case scenario, we assume that inpatient numbers drop by 3.3%, 2.9% and 2.6%
in 2013, 2014 and 2015, respectively, to reflect the drop in foreign patient numbers following
macroeconomic weakness. The fall in inpatient numbers would translate to an 8-21% drop in
revenue from FY13 to FY15. Currently, the medical tourism segment contributes around 10%
of KPJ‟s revenue.
Why not invest in Thai hospital operators?
Fig 3 KPJ trades at 22x FY13E earnings vs regional peers at 21x–30x FY13E earnings
Up/ (Down) Market Div Yield 3-year EPS
Bbg Price Target side cap PER (x) EV/EBITDA (x) (%) CAGR
ticker (lcy) (lcy) (%) Rec (US$m) FY12E FY13E FY14E FY12E FY13E FY14E FY13E (%)
Malaysia
KPJ Healthcare KPJ MK 6.27 7.10 13.2 OP 1,279 27.0 23.1 20.0 14.1 12.2 10.6 2.2 12.9
IHH Healthcare IHH MK 3.11 NR 8,045 43.2 33.1 25.7 24.1 19.9 16.6 0.1 57.8
Thailand (Jitima Ratanatam)

Bangkok Dusit BGH TB 108.00 114.00 5.6 OP 5,355 29.6 24.2 19.9 18.1 15.6 13.6 1.7 23.3
Bumrungrad BH TB 81.50 69.00 -15.3 UP 1,905 31.3 29.7 24.7 22.5 19.3 16.5 2.0 21.7
Bangkok Chain BCH TB 9.55 10.00 4.7 N 611 21.9 21.1 18.5 12.6 10.9 10.2 2.8 14.5
India (Abhishek Singhal)

Apollo Hospitals* APHS IN 635.15 725.00 14.1 OP 1,551 27.7 21.7 17.2 14.5 11.9 9.8 0.7 32.9
Fortis Healthcare* FORH IN 93.40 85.00 -9.0 UP 680 nmf nmf 24.5 13.0 10.7 8.8 0.0 -37.8
Opto Circuits* OPTC IN 124.40 215.00 72.8 OP 542 5.8 5.0 4.5 5.4 4.8 4.3 2.4 18.2
Simple Average 31.8 23.5 19.3 17.5 13.9 11.9 1.4 17.9
Mkt Weighted Average 35.8 24.4 19.0 17.8 14.8 12.8 1.4
Priced as of market close 5 September 2012
*APHS IN, FOTH IN and OPTC IN are based on 03/FY13 – 03/FY15
Source: Bloomberg, Macquarie Research, September 2012
10 September 2012 4
Some may ask why not invest in Thai hospital healthcare operators, which currently trade at a
premium to KPJ but have apparent better growth prospects? In our view, given the
macroeconomic uncertainty, investors may be reluctant to invest in Thai operators as 26-59%
of their revenue comes from foreign patients as opposed to KPJ where foreign patients only
account for 10%. We saw a significant fall in the number of foreign patients visiting Thai
hospitals during the peak of the global financial crisis (2007-2009).
Fig 4 SWOT analysis
Strength: Weaknesses:
 KPJ is a well-established household name in Malaysia  Liquidity remains an issue as Johor Corp currently holds a
as it has more than 20 hospitals in the country and been 41% stake in KPJ Healthcare; this is an improvement from
operating for over 30 years. JCorp‟s previous stake of 81% in 2002.
 KPJ plans to inject its fully-operational hospitals into its  KPJ is operating close to its optimal utilization rate at
associate Al–Aqar Healthcare REIT and rent back these 65–70%; any delay in expansion plans could affect growth
assets through a lease-back agreement. This strategy will prospects.
free up cash flow for capex to help finance future
expansion.
Opportunities: Threats:
 10% of KPJ‟s revenue is from the medical tourism  As part of the „liberalisation‟ of the private healthcare sector in
segment; KPJ aims to increase this to 25% by working Malaysia, the government has started to allow foreign equity
with the government to further promote medical tourism participation in the set-up of new hospitals. The new foreign
aboard. hospitals may be seen as a threat as they have better
branding and stronger balance sheets.
 Despite having a network of 21 hospitals in Malaysia,
KPJ is not part of the 12 hospitals in Malaysia that are  Apart from the entry of foreign competitors, Malaysia could
approved by the Singapore government to use CPF also have an additional 17 new private hospitals by 2015,
Medisave in Malaysia. with licence to operate some 4,500 beds (incl. KPJ‟s new
hospitals).
Source: Macquarie Research, September 2012
10 September 2012 5
Valuation, recommendation, risks

TP RM7.10 with upside of 13%, and pays quarterly dividend
We value KPJ based on sum-of-parts methodology and arrive at our target price of RM7.10
with an implied upside of 13%. 85% of the target price value is derived from KPJ‟s hospital
operation business based on DCF methodology with 8.4% WACC and 10x EV/EBITDA for
the terminal value, and we also add the value of Al-Aqar Healthcare REIT (Al-Aqar) at market
price.
KPJ‟s implied 2013 P/E at 22x is higher than its historical average P/E of 10x as it reflects:
1. Improve trading liquidity
2. 1.4x higher comparable valuation of IHH (KPJ‟s 23x FYE13 PER vs IHH‟s 33x
FY13E PER)
3. Scale of the business vs competitors
4. Favourable legislation changes that have recently been implemented
Our cash flow assumptions and sensitivity analysis are summarized below.
Fig 5 Free cash flow assumptions

Free Cash Flow (FCF) 2013E 2014E 2015E 2016E 2017E
EBITDA 313.8 361.8 413.4 472.1 543.5

+ Dividend from associates (ex-Al Aqar) 7.8 8.8 10.1 11.6 13.3
- Tax -64.1 -74.0 -85.9 -100.6 -117.8
- Capex -200.0 -200.0 -200.0 -240.0 -240.0
- Change in WC -8.8 -10.1 -11.7 -14.2 -16.7
FCF 48.7 86.5 125.8 128.9 182.3
NPV of FCF @ 8.4% WACC 432

PV of terminal value 3,932 (Terminal Value of 4,977 based on 10x FY17 EBITDA)
Sum of NPV at YE 4,364
DCF valuation estimates at YE

Enterprise Value 4,364
Less: Net Debt 127
Less: Minority 115
Add: Al-Aqar REIT market value ~ 49% 495 (Mark to market @ RM1.45/shr)
Equity Value 4,617
Value per share 7.10 (Assuming all outstanding warrants are converted)
We calculate KPJ‟s terminal value at 10x FY17E EBITDA (one standard deviation above the
two-year historical EV/EBITDA average), which we think better reflects the defensiveness of
the business post the implementation of the Private Healthcare Facilities and Services Act
1998, which came into effect in May 2006.
Despite forecasting EBITDA to double by 2017, we are estimating flat capex estimates at
RM200m as KPJ should continue to maintain its „asset light‟ business model and will likely
dispose the newly built hospital buildings to Al-Aqar Healthcare REIT once they are
operational.
Fig 6 Implied valuation multiples

2012E 2013E 2014E
Implied valuation Current @TP Current @TP Current @TP
Implied P/ E (x) 27.0 30.2 23.1 25.8 20.0 22.3

Implied P/ BV (x) 3.8 4.5 3.5 4.1 3.2 3.7
Implied EV/ EBITDA (x) 14.1 16.3 12.2 13.9 10.6 12.1
Implied Dividend yield (%) 1.8 1.6 2.2 1.9 2.5 2.2
Source: Company data, Macquarie Research, September 2012; priced as of market close 5 September 2012
10 September 2012 6
Fig 7 Cost of equity and cost of debt assumption for WACC of 8.4%
Cost of equity Cost of debt
Risk-free rate 4.0% Pretax cost of debt 4.0%

Market risk premium 6.0% Marginal tax rate 25.0%
Stock Beta 0.85x
Cost of equity, Ke 9.1% Net cost of debt, Kd 3.0%
Weight applied 89% Weight applied 11%
Our risk-free rate estimate for WACC is based on the current 20-year Malaysia government
bond yield. There could be more upside potential to our target price as our risk-free rate
assumption at 4.0% could lower further, as the Malaysia 20-year government bond yield has
fallen from 4.07% to 3.92% since the beginning of the year.
Fig 8 DCF sensitivity analysis: WACC and terminal value EV/EBITDA multiples
Terminal EV/EBITDA
DCF Value sensitivity 8.5x 9.0x 9.5x 10.0x 10.5x 11.0x 11.5x
7.0% 6.50 6.80 7.10 7.40 7.70 8.00 8.40

WACC (%)
7.5% 6.40 6.70 7.00 7.30 7.60 7.90 8.20

8.0% 6.20 6.60 6.90 7.20 7.50 7.80 8.10
8.5% 6.10 6.40 6.70 7.10 7.30 7.60 7.90
9.0% 6.00 6.30 6.60 6.90 7.20 7.50 7.80
9.5% 5.90 6.20 6.50 6.80 7.10 7.40 7.70
10.0% 5.80 6.10 6.40 6.70 7.00 7.30 7.50
Undemanding valuation (at first glance)…

Valuation seems demanding compared to its historical average, at first glance, but the higher
valuation multiples reflect the changes KPJ has experienced compared to five years ago.
Fig 9 KPJ P/E trading-band chart Fig 10 KPJ EV/EBITDA trading-band chart
(x) (x)
25 14
+2 Stdev
12 +2 Stdev
20
10
+1 Stdev +1 Stdev
15 8
Average: 11x forward PER Average: 6.3x EV/EBITDA
6
10
4 -1 Stdev
5 -1 Stdev
2
-2 Stdev
-2 Stdev
0 0
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Source: Bloomberg, Macquarie Research, September 2012 Source: Bloomberg, Macquarie Research, September 2012
1) Improved trading liquidity

We believe the improved liquidity in KPJ shares is due to JCorp lowering its stake in KPJ from
81% in 2002 to 41% today. With JCorp‟s ongoing debt issue, there is a possibility that JCorp
could further divest its stake by disposing the warrant it currently owns. The outstanding
warrants would increase KPJ‟s share base by 3.7%, as they are already in the money (strike
price at RM1.70) with an expiration date in January 2015.
10 September 2012 7
Fig 11 JCorp‟s paring down has improved

KPJ‟s liquidity Fig 12 JCorp is looking to trim down its debt
(RM mn) ADTV (LHS) JCorp stake (RHS) (%) 400%

4.0 90
350% net debt to equity ratio
3.5 80
300%
70
3.0
60 250%
2.5
50 200%
2.0
40
150%
1.5
30
1.0 100%
20
0.5 10 50%
0.0 0 0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Bloomberg, JCorp, Macquarie Research, September 2012 Source: Company Data, Macquarie Research, September 2012
We believe it is We do not think that JCorp would look to raise its KPJ stake, despite recently getting help
highly unlikely from the federal government to help guarantee JCorp‟s newly issued debt, intended to
JCorp would refinance its outstanding bonds worth RM3.2bn, which matured in July 2012. During the
increase its KPJ process, JCorp sold RM700m of assets to help close the difference. With JCorp looking to
stake in the short to close the privatisation deal in QSR Brands (QSR MK, Not Rated) and KFC Holdings (M) (KFC
mid term. MK, Not Rated), we believe it is highly unlikely JCorp would increase its stake in KPJ.
2) Improved returns through the listing of Al-Aqar Healthcare REIT
To improve the KPJ‟s cash flow, starting from 2006 KPJ decided to operate under an „asset
light‟ business model by disposing its hospital assets to its associate Al-Aqar Healthcare
REIT. So far, KPJ has sold off 24 hospital buildings to Al-Aqar. We believe the move is
beneficial to shareholders as it unlocks the value of the building while freeing up more cash
flow to help fund KPJ new expansions.
…with room for a further re-rating
The listing of IHH (IHH MK, Not Rated) in Bursa Malaysia and the Singapore Stock
Exchange has raised investor interest in healthcare-related stocks in Malaysia (Fig 14). We
believe the reason for the increase in KPJ interest can be attributed to its similarity to IHH in
the Malaysia healthcare business, with KPJ trading at a discount to IHH. IHH is currently
valued at double the PER multiple of KPJ; although IHH is significantly larger with its
international reach, KPJ is more profitable with a better expected return on asset and equity
(Fig 13).
Fig 13 KPJ is expected to be more profitable than IHH Fig 14 Interest in KPJ picked up post listing of IHH
ROE (%) (RM mn)

IHH KPJ Average 5-day value traded
18 25.0
is on its new high post
16 listing of IHH
14 20.0
12
15.0
10
8
10.0
6
4 5.0
2
0 0.0
FY12 FY13 FY14 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
*IHH numbers based on Bloomberg consensus estimates

Source: Company Data, Macquarie Research, September 2012 Source: Bloomberg, Macquarie Research, September 2012
10 September 2012 8
KPJ has made an New REIT injection (of two hospitals)? We expect KPJ to inject Pasir Gudang hospital
offer to acquire the building and the New Sabah Medical Centre (SMC) building into Al-Aqar REIT once they are
remaining 49% both operational by the end of the year. KPJ could also recognise a gain from the revaluation
stake in SMC of these assets upon transfer/sale to Al-Aqar REIT, as it is currently being valued at cost on
its balance sheet.
An „official‟ dividend policy Currently KPJ does not have an „official‟ dividend policy, which
could potentially be a concern for yield-searching investors. An official dividend policy should
ease investor concerns on whether management will continue paying 50% of their profits
through dividends.
We are assuming Based on its historical trend, we do expect KPJ to maintain a 50% payout ratio for the full
KPJ will maintain a year with quarterly dividends. We have observed that companies that pay quarterly dividend
50% payout ratio are favoured, as investors are willing to pay a premium for the certainty of payment.
moving forward
Fig 15 KPJ started paying a quarterly dividend Fig 16 KPJ has one of the highest dividend yields
in 2010 among peers for FY12E
DPS (sen/shr) Div Yield (%)

60.0 4Q 3.5
3Q 3.0
50.0
2Q 2.5
40.0
1Q
2.0
30.0
1.5
20.0
1.0
10.0 0.5
0.0 0.0
2005 2006 2007 2008 2009 2010 2011 2012 Bangkok Opto KPJ BH Bangkok Apollo *IHH Fortis
Chain Circuits Dusit
DPS from 2005-2009 are adjusted to reflect bonus issue

DPS for 2007-2009 incl. dividend-in-specie for Al-Aqar share *IHH div yield is based on Bloomberg consensus estimates
KPJ’s div yield at Despite growing at a slower pace than its peers, KPJ is trading at sector-average multiples.
2.2% is 80bps above We think there is limited downside, as at 2.2%, KPJ yield is 80bps above the sector average
industry average of 1.4%. We expect KPJ to continue paying a quarterly dividend as opposed to the industry
norm of a semi or annual dividend.
Fig 17 KPJ trades at 22x FY13 earnings with a quarterly dividend payment
Up/(Down) Market Div Yield 3-year EPS
Bbg Price Target side Rec cap PER (x) EV/EBITDA (x) (%) CAGR
ticker (lcy) (lcy) (%) (US$m) FY12E FY13E FY14E FY12E FY13E FY14E FY13E (%)
Malaysia
KPJ Healthcare KPJ MK 6.27 7.10 13.2 OP 1,279 27.0 23.1 20.0 14.1 12.2 10.6 2.2 12.9
IHH Healthcare IHH MK 3.11 NR 8,045 43.2 33.1 25.7 24.1 19.9 16.6 0.1 57.8
Thailand (Jitima Ratanatam)

Bangkok Dusit BGH TB 108.00 114.00 5.6 OP 5,355 29.6 24.2 19.9 18.1 15.6 13.6 1.7 23.3
Bumrungrad BH TB 81.50 69.00 -15.3 UP 1,905 31.3 29.7 24.7 22.5 19.3 16.5 2.0 21.7
Bangkok Chain BCH TB 9.55 10.00 4.7 N 611 21.9 21.1 18.5 12.6 10.9 10.2 2.8 14.5
India (Abhishek Singhal)

Apollo Hospitals* APHS IN 635.15 725.00 14.1 OP 1,551 27.7 21.7 17.2 14.5 11.9 9.8 0.7 32.9
Fortis Healthcare* FORH IN 93.40 85.00 -9.0 UP 680 nmf nmf 24.5 13.0 10.7 8.8 0.0 -37.8
Opto Circuits* OPTC IN 124.40 215.00 72.8 OP 542 5.8 5.0 4.5 5.4 4.8 4.3 2.4 18.2
Simple Average 31.8 23.5 19.3 17.5 13.9 11.9 1.4 17.9
Mkt Weighted Average 35.8 24.4 19.0 17.8 14.8 12.8 1.4
Priced as of market close 5 September 2012
*APHS IN, FOTH IN and OPTC IN are based on 03/FY13 – 03/FY15
Source: Bloomberg, Macquarie Research, September 2012. Price as of 5 September 2012
10 September 2012 9
Why not invest in Thai hospital operators?

The biggest difference between Thai operators and KPJ is their reliance on international
patients (medical tourism patients). Based on the latest annual numbers, revenue contribution
from international patients for Thai operators is between 26-59%, compared to 10% for KPJ.
We think given the uncertainty looming in the macro environment, investors may prefer
investing in KPJ as its revenue is relatively stable compared to Thai operators.
Fig 18 KPJ‟s foreign-patient revenue is less than its Fig 19 Bumrungrad Hospital (BH TB) saw an 8% drop
Thai peers in international patients admissions during the GFC
100 (%) 500,000 # of patients

10
90 450,000
26
80 400,000
70 59
350,000
60 300,000
50
90 250,000
40
74 200,000
30
150,000
20 41
100,000
10
50,000
0
KPJ Bangkok Dusit Bumrungrad 0
Domestic International 2004 2005 2006 2007 2008 2009 2010 2011
Based on 2011 numbers

Source: Company Data, Macquarie Research, September 2012 Source: Company Data, Macquarie Research, September 2012
Comparing us to consensus
Fig 20 Our estimates are slightly above the street but we still think they are undervaluing KPJ shares
Net profit (RM mn) EBITDA (RM mn) Depreciation (RM mn) Target price
FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 (RM)
Macquarie 153.0 178.9 206.8 267.7 313.8 361.8 88.4 103.8 117.0 7.10
Consensus 151.2 173.8 205.0 284.6 322.6 371.0 81.6 86.9 99.4 6.46
Despite having slightly higher net profit FY12-FY14 (1-3%) estimates compared to the Street,
our EBITDA estimates are 6-8% below consensus. We think this is because the company will
receive a bigger contribution from its associate and lower interest expenses in future years.
The street may be underestimating the value of KPJ, as we believe it is no longer the
company it was several years ago – we have seen KPJ‟s liquidity significantly improve with a
steady quarterly policy.
Risks to our investment thesis

Risks to our target price and earnings forecasts come in the form of external and internal
financial market “shocks” or issues affecting our assumptions, such as:
 Timing of new hospital openings. Our estimates are based on the hospital expansion
plan timeline provided by KPJ management.
 Execution risk of overseas expansion. KPJ is still keen to expand overseas despite
hitting roadblocks in Dhaka and Bangladesh. There are execution risks in venturing aboard
from operation, valuation (i.e., over-paying) to regulatory risks.
 Recruiting the right medical professionals. KPJ‟s success lies in its ability to attract the
right medical professionals. KPJ‟s inroads in smaller cities are making it tougher to
retain/attract specialists in smaller cities as most specialists prefer working in bigger cities.
10 September 2012 10
 Legislative changes. There is a possible change to the current two-tier healthcare system
such as the 1Care for 1Malaysia plan with the possibility of introducing a British-like
National Health Service (NHS) system in the next two to three years. The implementation
of a new healthcare system could change the risk profile of the stock.
 Ability to sell its assets to Al-Aqar REIT. The ability to sell its assets to Al-Aqar REIT is
a key funding source for KPJ, as it enables them to continue their acquisition trail without
further leveraging their balance sheet.
 Ability to continue paying dividends. There is a risk that management may deviate from
its current informal system, including lowering the payout ratio or the frequency of the
dividend payments, as the current KPJ management does not have an official dividend
policy.
Benefiting from the public to private switch

KPJ benefiting from “the system”
KPJ, with the widest hospital network in Malaysia, is poised to benefit from patients opting for
private hospital care instead of cheaper-but-congested public hospitals. If the government‟s
focus remains on paying off medical bills and not building-up more hospitals, the congested
public hospital scene is expected to continue.
Fig 21 KPJ has one of the most extensive hospital networks in Malaysia
Source: Company Data, Macquarie Research, September 2012
“The system”: patients switching to private hospitals

Malaysia has a two-tier healthcare system consisting of a government-run universal healthcare
system and a private healthcare system. Under the two-tier system, all Malaysians are able to
seek medical treatment at a minimal fee (outpatient medical treatment is RM2 per visit).
Fig 22 More money is spent on private healthcare Fig 23 … but not from the government
(% of GDP) (RM'bn) Health Budget (LHS) (%)

2.8 18 % of Health Budget Allocation to National Budget (RHS) 9%
2.6 16 8%
2.4 14 7%
2.2 12 6%
2.0 10 5%
1.8 8 4%
1.6 6 3%
1.4 4 2%
1.2 Pirvate healthcare expenditure Public healthcare expenditure 2 1%
1.0 0 0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: World Databank, Macquarie Research, September 2012 Source: MOH, Macquarie Research, September 2012
Despite having a similar annual budget allocation for the healthcare sector, the recent focus
has been on operating expenditures instead of investing in new hospitals. The Malaysian
government has only allocated 2.5% of GDP towards public healthcare, which is less than the
5-6% of GDP recommended by WHO.
Fig 24 Government needs to start spending on Fig 25 … as only five government hospitals were
healthcare capex, in our view build over the last five years
(bn) 150 ('000) 43

16 Opex (RM 'bn) Capex (RM 'bn) public hospital (LHS) no. of beds (RHS) 42
145
14
41
12
140 40
10 39
135
8 38
6 130 37
4 36
125
2 35
0 120 34
2003 2004 2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: MOH, Macquarie Research, September 2012 Source: MOH, Macquarie Research, September 2012
More than 60% of the funding through opex is used for medical care payments, while 41% of
capex is used for either building or expanding hospitals. If we were to compare the absolute
amount being spent on new hospital and facilities, it has drop by 35% from RM2.2bn in 2003
to RM1.45bn in 2010.
With fewer hospitals being built, more patients have opted to seek treatment in private
hospitals. We expect this situation to worsen as government has significantly cut its spending
on building new hospitals. Malaysia‟s bed per population is low compared to other countries.
Fig 27 … as the government has significantly cut

Fig 26 Beds per 10,000 population across the region spending on new hospitals
# of bed (RM 'bn)

160
1.8
140
1.6 Total spending on new hospitals
120
1.4
100
1.2
80
1.0
60
0.8
40
0.6
20
0.4
0
0.2
a
a
n
es
a
ei
es
am
nd
na
si
si
pa
or
re
un
at
in
la
hi
ay
ne
n
ap
Ko
Ja
ilip
St
Br
ai
C
et
al
do
ng
0.0
Th
Vi
Ph
M
d
In
Si
te
ni
2003 2004 2005 2006 2007 2008 2009 2010

U
Source: WHO, Macquarie Research, September 2012 Source: MOH, Macquarie Research, September 2012
Given life expectancy expansion and the increasing acceptance of medical, demand for
private healthcare is expected to continue growing. However, for those who can‟t afford
private care, government aid is the only option. The problem is, without the government
stepping up their investment in public healthcare the system will be stretched even further.
Malaysia‟s ageing population (15% of people aged above or expected to reach the age of 60
by 2035) could also provide further opportunity for KPJ to enter into elderly-care services.
KPJ is transferring the knowledge from its elderly-care operations at its recently acquired Jeta
Gardens in Australia, which specialises in this field.
Fig 28 Medical premium contribution is on the rise,

supporting affordability Fig 29 Malaysia‟s population is aging
900 30% 30 ('mn) (%)

RM'mn (RHS) growth (LHS)
5.4
800 Population (LHS) >65 years old (RHS)
29
25%
700 5.2
28
600 20% 5.0
500 27
4.8
15%
400 26
4.6
300 10%
25 4.4
200
5%
24 4.2
100
0 0% 23 4.0
2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: BNM, Macquarie Research, September 2012 Source: MOH, Macquarie Research, September 2012
We believe there is still room for growth in the private healthcare sector, as only 25% of
Malaysian hospital beds are currently operated by private operators. KPJ is the market leader
in the private healthcare segment with 19% market share, followed by IHH (ParkwayPantai)
with 14% market share.
Fig 30 Private beds account for only 25% of total Fig 31 KPJ is Malaysia‟s leading private healthcare
beds available provider
60,000 # of beds
KPJ
50,000 19%
11,689 12,216 13,186 13,568
11,637 11,291
40,000
30,000
IHH
20,000 40,057 41,249 41,580 41,483 41,716 14%
38,625
10,000 Others
67%
0
2006 2007 2008 2009 2010 2011
Public Private
Source: MOH, Macquarie Research, September 2012 Source: MOH, Company Data, Macquarie Research, September 2012
Growing edge in a captive market

Hospital operators KPJ is not only benefiting from the change in patients‟ preference, but also, from the Private
like KPJ are the Healthcare Facilities and Services Act 1998. Under the Act, the expansion and building of new
main beneficiaries hospitals are required to adhere to zoning requirements (with the exception of specialist
of the Private hospitals), which limits the total hospital bed to population ratio within a 14km radius to 1: 500.
Healthcare Facilities
Existing players like KPJ benefited from the Act as it served as a barrier to entry. In addition,
and Services Act
it appears, with the help of it Al-Aqar REIT, KPJ is able to acquire smaller hospitals around
1998
the country while simultaneously denying its competitors market access.
KPJ: The only Malaysia hospital operator with a REIT

KPJ has been Given the Act was effective from May 2006, the availability of suitable locations for new
acquiring two hospitals are limited due to zoning constraints. To maintain KPJ‟s growth while strengthening
hospitals per year its portfolio as the leading Malaysian private hospital operator, KPJ has been actively looking
for the past five to acquire smaller hospitals (<90 beds) around Malaysia. On average, over the past five
years years, KPJ has acquired two hospitals per annum and we expect its acquisition momentum to
continue.
Lowering investment cost through Al-Aqar REIT
We believe that KPJ has an edge over its peers in penetrating new markets, as KPJ has the
ability to acquire smaller hospitals to gain access while being protected against other
competitors with the help of Al-Aqar REIT.
The REIT enables Although the allocation of RM100-250m for hospital acquisitions seems small, the cash
KPJ to lower its outflow for these acquisitions is usually lower. Upon completion of the acquisitions, KPJ then
investment cost disposes the hospital asset to its REIT and in return KPJ is compensated with cash and units
while maintaining in the REIT, while maintaining control over the hospital operation. By doing so, KPJ is able to
control of the asset recoup part of its investment upfront, and potentially reward its shareholders by distributing
the accumulated REIT units.
Fig 32 Preferable acquisition structure of KPJ
Source: Company data, Macquarie Research, September 2012
We believe that the advantage cannot be easily mimicked by its peers, as it requires a
reasonable size of building assets to set up a REIT. The only competitor that could possibly
follow suit would be Parkway Pantai (PPL) which has 11 hospitals with 2,010 beds in
Malaysia, as it recently decided to sell it Gleneagles Medical Centre, Malaysia to its parent
company associate Parkway Life REIT (PREIT SP, Not Rated). With the backing of the REIT,
KPJ should be able to continue with its acquisitions and could possible outbid its competitors
if needed.
Do these acquisitions make sense?

The zoning requirement acts as a barrier to entry against new private hospitals, while forming
a captive market for private hospitals within a 14km radius. Without new competition entering
the market, we believe the key question to ask is whether these acquisitions make sense.
Fig 33 Recent acquisition detail (2006-2012)

Est Valuation
Acquired Hospital Bed Count Date Stake Acq. Value PER (x) P/BV (x)
Damai Specialist Centre 48 16-Jan-06 97% 16.9 85.0 2.6

KPJ Selangor Specialist Hospital 172 10-Feb-06 60% 80.0 36.1 3.7
Sentosa Medical Centre 212 11-Dec-06 100% 72.0 18.2 1.5
Taiping Medical Centre 48 2-Jan-08 100% 18.0 10.3 1.7
Kluang Utama Specialist Hospital 50 31-Dec-08 100% 12.0 8.6 1.4
KPJ Seremban Specialist Hospital 130 5-Aug-09 100% 50.0 7.4 1.4
Sabah Medical Centre 150 25-Jun-10 51% 51.0 NA 0.7
Sibu Specialist Medical Centre 35 6-Apr-11 100% 28.1 78.6 2.9
Jeta Gardens 108 30-Nov-11 51% 19.0 NA 0.5
RS Medika Permata Hijau 7-May-12 80% 19.8 2.3 0.9
Average (Malaysia acq. only) 34.9 2.0
Average (Global) 30.8 1.7
Some of the recent acquisitions were done at a hefty valuation, which was due to its strategic
location purposes. For example, the Damai Specialist Centre was acquired at 85x PER, but
provided KPJ with a foothold into the Kota Kinabalu (capital of Sabah state) market which
only has three private hospitals and also limits more established competitors from entering
the market.
It is hard to quantify Excluding strategic investments, the valuation for these assets looks reasonable at 14x PER.
the new referral But it is hard to quantify the synergy arising from these acquisitions, as we are unable to
business arising break down the increase in revenues which are due to the new referral business. We view
from these management‟s ability to take advantage of the valuation differences between KPJ assets and
acquisitions the acquired assets as a plus.
Fig 34 Sentosa Medical Centre recent revenue growth trends
(mn)
70 Post acqusition 12%
60 Revenue (LHS) Growth (RHS) 10%
50 10% 8%
40 5% 6%
3% 4%
30 3% 4%
2%
20 2%
0%
10 0%
0 -2%
2003 2004 2005 2006 2007 2008 2009 2010
Overall some investors might not be comfortable with these acquisitions, but we believe that
management has the execution ability to at least maintain the growth rate of these newly
acquired assets. As scarcity of new hospital land increases, acquisitions will likely be the key
to KPJ‟s future.
Organic growth insufficient

Organic growth can Of KPJ hospitals, 71% are established hospitals with more than 10 years of operation. These
be obtained by hospitals provide relatively stable income but lack strong growth momentum given their
either investing in mature client base. To improve the return on these mature hospitals, KPJ is investing in new
new equipment or equipment to offer new services at a competitive rate to their current patients.
building new While building a new hospital can extract a higher return, the availability of suitable locations
hospitals remains a key concern. To tackle this problem, KPJ seeks to acquire partially built hospitals
or partner with township developers to build a new hospital within a new township.
Fig 35 Strong growth momentum

New # of Beds Est. Completion Eff. Stake
Sabah Medical Centre 250 2012 100%

Pasir Gudang Specialist Hospital 120 2012 100%
Muar Specialist Hospital 120 2013 100%
Bandar Dato Onn, JB 400 2014 100%
Pahang Specialist Hospital 200 2014 70%
Perlis Specialist Hospital 90 2014 60%
KPJ aims to Based on KPJ management experience, new hospital within a city area would likely take at
increase its hospital least one to three years before it is able to break even. Despite higher returns on the
count to 30 from 22 greenfield projects, management is inclined to grow through M&A as it provides them with a
by 2015 steady client base and doctors. KPJ aims to increase its hospital count to 30 from 22 by 2015.
Is the doctor shortage a problem to KPJ‟s growth strategy?

Specialists partner With recent news articles pointing out that Malaysia currently lacks many specialist doctors,
with KPJ (not we think KPJ is somewhat shielded from the problem. The key for the hospital growth lies in
employees) its ability to attract and retain doctors. In the KPJ hospital network, doctors/specialists rent a
clinic to practise while KPJ maintains the hospital facilities. With the specialist taking home
most of the consultation fee (KPJ takes 5-7% of it as a management fee), they are more likely
to stay with KPJ as they are not employed by KPJ and are free to refer their patients to any
facilities for further treatment.
The Act limits the KPJ need not to worry about doctors over-charging patients and in turn damaging its
fee a doctor can reputation, as all medical procedure and consultation fees have a price ceiling which is
charge to his patient regulated by the government.
While getting the right doctors to serve in smaller city hospitals is a challenge, acquiring
existing hospitals would come with existing specialists & staff. KPJ would then bring in new
equipment that was no longer being used in their bigger hospitals to diversify its service
offering in the newly acquired hospital.
Unsuspected derivative play on interest rate

Al-Aqar has the Emil Wolter, our Asia strategist believe that investors should stay focused on the return of
potential to add 5% capital, hence investors should be looking into yield stocks with growth (link). If yield is all that
to our target price matters, we believe Al-Aqar Healthcare REIT (Al-Aqar) could trade up to RM2.02 (which
would add an additional 5% to our target price) on the assumption that investors bid up to
sovereign yield. Based on Al-Aqar‟s current market value, it constitutes c.10% of our target
market value.
Fig 36 If yield is all that matters, moves in Al-Aqar‟s stock price could have a positive impact on our target price
Sovereign Debt Yield
Spread to Sovereign 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50%
0.00% 7.56 7.46 7.38 7.31 7.25 7.20 7.15

0.25% 7.46 7.38 7.31 7.25 7.20 7.15 7.11
0.50% 7.38 7.31 7.25 7.20 7.15 7.11 7.07
0.75% 7.31 7.25 7.20 7.15 7.11 7.07 7.04
1.00% 7.25 7.20 7.15 7.11 7.07 7.04 7.00
1.25% 7.20 7.15 7.11 7.07 7.04 7.00 6.98
Calculation are formulated based on FY11 net distribution
We have seen yield Assuming a more realistic assumption at a 75bps spread to sovereign debt, there would still
compression across be an additional 2% (RM0.11) upside to our current target price. In Malaysia, we have seen
high-yield consumer some yield compression from high-yield consumer names and the telco sector. We believe
names and the telco that the same yield compression scenario could also positively impact Al-Aqar‟s stock price
sector. as it has a similarly stable defensive cash flow.
Fig 37 Telco yield is on the move Fig 38 … same for the consumer sector
7.5% 7.5%
7.0%
7.0%
6.5%
6.5%
6.0%
4.8%
5.5%
6.0%
5.0%
5.5% 5.8%
4.5%
Div Yield div yield
5.0% 4.0%
Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Malaysia Healthcare and its future

Malaysia private healthcare services are regulated by the Private Healthcare Facilities and
Services Act 1998, which became effective in May 2006. The Act covers issues from zoning
requirements to the fees that a doctor can charge for their consultation. In this segment, we
will examine how the Act has changed the landscape of the business and the impact of the
new government policies (ETP & 1Care for 1Malaysia)
Zoning requirement for new private hospitals

Two federal territory The Private Healthcare Facilities and Services Act 1998 regulates the private healthcare and
and three states are hospital business in Malaysia. Under the Act, the expansion and the setting up of new
below the hospital are required to adhere to zoning requirements (with the exception of specialist
suggested zoning hospital), which limits the total hospital bed to population ratio within a 14km radius at 1:500.
requirement
Fig 39 Bed to population ratio in various states and federal territories
900 844
797
800 708 724 738
699
700
570 592 595
600 553
519
500
417
400 330 350
300 244 260
200
100
0
Melaka
Putrajaya
Sarawak
Labuan
Pinang
Johor
Selangor
Kedah
Pahang
Sabah
Kelantan
Terengganu
Perak
Perlis
Lumpur
Sembilan
Pulau
Kuala
Negeri
Source: MOH, Macquarie Research, September 2012
New hospitals can It is highly unlikely for any new hospitals to be approved in Kuala Lumpur and Pulau Pinang
only be built 20km as their bed to population ratio is above the zoning requirement and there aren‟t many new
away from the township development projects that are 20km distance away from an existing hospital.
nearest hospital
Where to build?
Affluent states
Preferably private hospital operators would want to set up at locations where the surrounding
population is affluent. 67% of the total current private hospital beds are located in the top 4
richest states in Malaysia (KL, Pulau Pinang, Sarawak & Selangor) while Kuala Lumpur alone
has 23% of the total capacity.
Fig 40 67% of private hospital beds are located in the top 4 richest state
(RM) # of beds
60,000 3,500
50,000 3,000
2,500
40,000
2,000
30,000
1,500
20,000
1,000
10,000 500
0 0
Melaka
Sarawak
Pinang
Selangor
Labuan
Pahang
Johor
Sabah
Kedah
Kelantan
Terengganu
Perak
Perlis
Lumpur
Sembilan
Pulau
Kuala
Negeri
GDP Hospital
Source: Department of Statistic 2010, MOH, Macquarie Research, September 2012
Acquisition or Within the 4 states mentioned, we don‟t think any private operators will be able to set up new
expansion of old hospitals in Kuala Lumpur and Pulau Pinang due to the zoning requirements. The only
hospital seems to possibility to increase market leadership in these 2 states would be either through acquisition.
be the only viable
Based on the Associate of Private Hospital of Malaysia (APHM) member list, the number of
way to enter KL and
privately owned and managed hospital in Kuala Lumpur is 26 and Pulau Pinang is 14.
Pulau Pinang
States with sizable population
Major hospital By 2020, the Malaysia government hopes to raise the GNI (gross national income) per capita
players will have to RM48,000. If the plan succeeds, affordability for private healthcare system should improve.
new hospital We expect more private healthcare groups to take advantage of it by setting up more
operating in KV or hospitals in the greater Klang Valley (KV) in Selangor and Kuala Lumpur and Iskandar
IDR within the next 3 Development Region (IDR) in Southern Johor.
years
Fig 41 Bigger population = bigger opportunity for private hospital operators
('000)
6,000 Population (LHS) # of hospitals (RHS) 70
5,000 60
50
4,000
40
3,000
30
2,000
20
1,000 10
0 0
Melaka
Putrajaya
Sarawak
Selangor
Labuan
Johor
Sabah
Kedah
Pinang
Kelantan
Pahang
Terengganu
Perak
Perlis
Lumpur
Sembilan
Pulau
Kuala
Negeri
Source: Department of Statistic 2010, Macquarie Research, September 2012
Pantai Parkway, KPJ and Thomson Medical Centre each has a hospital opening within the
next 3 years in either KV or IDR to take advantage of the rising population in those area.
JV with township developers

To obtain a strategic located land at a reasonable pricing, private hospital owners will have to
work with township developers to jointly develop hospitals land. The developers will help
secure the land within its newly develop township, while hospital operators will be in charge of
building and operating the hospital. The partnership resulted in lower initial capital investment
by hospital operators, but might be problematic for independent hospital operator as they
might not have full control planning the hospital future development.
Township
developers might Developers might also opt to own the hospital and outsource the operation of the hospital
opt to own the through hospital management agreements (HMA). Sunway Medical Center (link to Sunway
hospital instead of Group) and Sime Darby Healthcare (link to Sime Darby) are some of the successful hospital
partnering with own by township developers. HMAs might be another growth option for independent hospital
hospital operators operators as its getting harder for them to secure land for new hospitals.
ETP: Medical Tourism is a long-term project

To transform Malaysia into a high-income economy by 2020, Malaysia Prime Minister Najib
Razak unveiled the Economic Transformation Programme (ETP) which focuses on 12
National Key Economic Areas (NKEA). Under the private healthcare NKEA, the government
identified medical tourism as one of the potential growth segments. We agree with the
government that there is considerable market potential in the medical tourism segment, but
we believe it has a long way to go before Malaysia is able to monetise it.
Fig 42 Malaysia medical tourism market in small compare to its regional peer
(US$ mn)
1,400
1,200 1,145
1,000
800
628
600
400
170
200
0
Malaysia Singapore Thailand
*Singapore is based on 2010 numbers, Thailand is based on 2009 numbers

Source: IHH‟s prospectus, Macquarie Research, September 2012
We believe that Malaysia‟s hospitals are less competitive in this segment due to:
 Accreditation
 Branding
Accreditation
The main consideration for most patients when they are seeking treatment abroad is better
affordability without compromising on quality and care standards. Despite having a similar
pricing structure with Thailand, Malaysia hospitals are not competitive in attracting medical
tourists. We believe this is due to the lack of accredited hospitals and branding.
Fig 43 The cost of common medical procedure is similar in Malaysia and

Thailand
Hearth Bypass (CABG x 4) US $ Knee Replacement US $
Malaysia 18,500 Malaysia 11,000

Thailand 22,500 Thailand 10,500
Singapore 32,500 Singapore 17,500
US 144,317 US 65,918
Source: Companion Global Healthcare Inc, Macquarie Research, September 2012
As of June 2012, there are only 6 Joint Commission International (JCI) accredited hospitals in
Malaysia, while there are 18 and 13 JCI accredited hospitals in Thailand and Singapore,
respectively.
Fig 44 Malaysia still need to build/upgrade more hospitals that adhere to the JCI standard
# of JCI accredited hospitals

20
18
18
16
14 13
12
10
8
6
6 5
4
4
2
0
Thailand Singapore Malaysia Indonesia Philippines
Source: Joint Commission International (JCI), Macquarie Research, September 2012
JCI is the gold standard for healthcare quality and patient safety, and is the basic requirement
to be part of provider network for US-based health insurance. To help monetise the
government effort in promoting medical tourism, KPJ will likely look to increase the number of
JCI accredited hospitals from its current one hospital.
Branding
The setting up of the Malaysia Healthcare Travel Council (MHTC) as a one-stop info centre
for patients is a crucial step, as more marketing activities are needed to expose foreigners to
the possibility of seeking treatment in Malaysia. The medical tourism industry in Thailand did
an exemplary job of promoting itself through a segment on CBS: 60 minutes, a popular US
TV show.
To better cater to the medical tourism market, Thai hospitals like Bumrungrad International
Hospital have remodeled their lobby after a hotel lobby to better reflect their image as a
medical tourism hospital as opposed to a traditional hospital. For KPJ to be successful in this
segment, it would have to come up with a differentiation strategy aside from just compete in
pricing.
Singapore medisave, 1 conquer more to go
To improve the medical affordability in Singapore, Singapore government have allowed
patients to use Medisave (CPF) to pay for private care in 12 Malaysia hospitals. Before opting
for Malaysia hospitals, patients are required to be referred by the groups‟ Singapore centre
first. Cheaper medical cost in Malaysia is benefiting patients seeking treatment in Malaysia
as opposed to Singapore. The announcement is an early victory for the Malaysia medical
tourism segment, but more work is still needed to be done to attract patients from other
countries. In 2008, Singapore spent about S$10.2 bn on healthcare.
Fig 45 Singapore‟s Medisave-approved Malaysian healthcare services providers

Hospital Group Referral centre Facilities in Malaysia
Health Management International Balestier Clinic and Health Screening Centre Regency Specialist Hospital (Johor Baru)
Mahkota Medical Centre (Malacca)
Parkway Holdings East Shore Hospital Gleneagles Intan Medical Centre, Kuala Lumpur
Pantai Hospital, Kuala Lumpur
Pantai Hospital, Cheras
Pantai Hospital, Ampang
Pantai Hospital, Klang
Pantai Hospital, Ipoh
Pantai Hospital, Ayer Keroh
Pantai Hospital, Penang
Pantai Hospital, Batu Pahat
Pantai Hospital, Sungai Petani
Despite owning the largest hospital network in Malaysia, KPJ did not qualify to be part of the
panel of approved hospitals as they do not have a partner in Singapore, which is the rule
imposed by Medisave. We think it is important for KPJ to be part of the panel as it would help
to build a track record as a preferred medical tourism hospital.
Overall more effort and work still needs to be done by the Malaysian hospitals and KPJ if they
wish to break into the lucrative medical tourism segment.
Game changer: 1Care for 1 Malaysia?

According to multiple local media reports, the government is in the midst of introducing a new
healthcare system (1Care for 1Malaysia) to replace the current two-tier healthcare system.
We think the risk to our current forecast is low as the proposal is only at the conceptual stage
and is only expected to be brought to the table in 2014, but it could have material impact if it
becomes law.
1Care for 1Malaysia
1Care for 1Malaysia The objective of the 1Care for 1 Malaysia (1Care) plan is to solve the overworked public
is only at the healthcare system, as most funding is going through the private healthcare system while bulk
conceptual stage, of admissions are being handled by the public system. With the new 1Care system, patients
but has faced strong will have access to participating private hospitals through their local referral.
resistance from
 10% levy on salaries is needed. Based on the articles, Malaysian citizens would have to
Malaysian citizens
contribute 10% of their salary into 1Care to finance the scheme. We think that most
Malaysians would object to such a contribution as under the current setting they are able to
dictate their own contribution toward medical insurance as they deem fit. Without a say in
physician choice, middle class Malaysians would likely not agree to the increase in
contribution.
 The cost may go higher. The 1Care system does not cover all medical procedures and
medicines, and Malaysians might incur out-of-pocket expenses.
 Objection from private healthcare providers. The impact to private healthcare service
providers might be severe as patients have less flexibility in picking their physicians, and
are forced to seek treatment at the assigned facilities. We believe with the additional risks
involved, private providers are also likely to object to such plan.
KPJ Healthcare (KPJ MK, Outperform, Target Price: RM7.10)

Interim Results 1H/12A 2H/12E 1H/13E 2H/13E Profit & Loss 2011A 2012E 2013E 2014E
Revenue m 1,055 1,014 1,113 1,201 Revenue m 1,909 2,069 2,314 2,599
Gross Profit m 315 331 349 385 Gross Profit m 602 647 734 835
Cost of Goods Sold m 740 683 764 816 Cost of Goods Sold m 1,307 1,422 1,580 1,764
EBITDA m 131 136 157 157 EBITDA m 229 268 314 362
Depreciation m 37 52 50 54 Depreciation m 70 88 104 117
Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0
Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0
EBIT m 94 85 107 103 EBIT m 159 179 210 245
Net Interest Income m -8 8 -1 2 Net Interest Income m -9 -1 2 2
Associates m 17 24 16 28 Associates m 55 40 44 49
Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0
Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0
Other Pre-Tax Income m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0
Pre-Tax Profit m 103 116 123 134 Pre-Tax Profit m 205 219 256 296
Tax Expense m -25 -29 -33 -31 Tax Expense m -50 -55 -64 -74
Net Profit m 77 87 90 103 Net Profit m 154 164 192 222
Minority Interests m -9 -2 -11 -3 Minority Interests m -11 -11 -13 -15
Reported Earnings m 68 85 79 100 Reported Earnings m 144 153 179 207

Adjusted Earnings m 68 85 79 100 Adjusted Earnings m 144 153 179 207
EPS (rep) sen 10.3 12.9 12.0 15.2 EPS (rep) sen 26.3 23.2 27.1 31.4
EPS (adj) sen 10.3 12.9 12.0 15.2 EPS (adj) sen 26.3 23.2 27.1 31.4
EPS Growth yoy (adj) % -2.2 -18.3 15.9 17.8 EPS Growth (adj) % 16.5 -11.8 16.9 15.6
PE (rep) x 23.8 27.0 23.1 20.0
PE (adj) x 23.8 27.0 23.1 20.0
EBITDA Margin % 12.4 13.5 14.1 13.1 Total DPS sen 12.0 11.6 13.6 15.7
EBIT Margin % 8.9 8.4 9.6 8.6 Total Div Yield % 1.9 1.8 2.2 2.5
Earnings Split % 44.5 55.5 44.1 55.9 Weighted Average Shares m 546 660 660 660
Revenue Growth % 16.1 1.4 5.5 18.5 Period End Shares m 546 660 660 660
EBIT Growth % 12.4 12.9 13.1 21.6
Profit and Loss Ratios 2011A 2012E 2013E 2014E Cashflow Analysis 2011A 2012E 2013E 2014E
Revenue Growth % 15.4 8.4 11.9 12.3 EBITDA m 229 268 314 362
EBITDA Growth % 12.5 17.0 17.2 15.3 Tax Paid m -50 -55 -64 -74
EBIT Growth % 10.5 12.6 17.1 16.6 Chgs in Working Cap m 15 -41 -9 -10
Gross Profit Margin % 31.5 31.3 31.7 32.1 Net Interest Paid m -30 -26 -26 -26
EBITDA Margin % 12.0 12.9 13.6 13.9 Other m 99 67 95 103
EBIT Margin % 8.3 8.7 9.1 9.4 Operating Cashflow m 263 213 310 355
Net Profit Margin % 8.1 7.9 8.3 8.5 Acquisitions m 79 0 0 0
Payout Ratio % 45.6 50.0 50.0 50.0 Capex m -140 -200 -200 -200
EV/EBITDA x 12.9 14.1 12.2 10.6 Asset Sales m 0 0 0 0
EV/EBIT x 17.0 19.8 17.1 14.8 Other m -159 0 0 0
Investing Cashflow m -219 -200 -200 -200
Balance Sheet Ratios Dividend (Ordinary) m -63 -76 -89 -103
ROE % 17.3 15.4 15.7 16.7 Equity Raised m 32 127 0 0
ROA % 8.7 8.8 9.6 10.4 Debt Movements m 43 -37 -17 -8
ROIC % 11.3 11.3 11.8 12.9 Other m 0 0 0 0
Net Debt/Equity % 19.1 10.5 8.1 3.8 Financing Cashflow m 11 13 -106 -112
Interest Cover x 16.9 256.1 nmf nmf
Price/Book x 3.8 3.8 3.5 3.2 Net Chg in Cash/Debt m 55 26 4 43
Book Value per Share 1.6 1.7 1.8 2.0
Free Cashflow m 123 13 110 155
Balance Sheet 2011A 2012E 2013E 2014E
Cash m 252 278 282 325

Receivables m 305 325 363 408
Inventories m 47 44 49 55
Investments m 94 94 94 94
Fixed Assets m 668 780 876 959
Intangibles m 168 168 168 168
Other Assets m 425 425 425 425
Total Assets m 1,959 2,115 2,258 2,434
Payables m 335 312 346 387
Short Term Debt m 140 121 113 107
Long Term Debt m 302 284 276 273
Provisions m 0 0 0 0
Other Liabilities m 185 186 209 235
Total Liabilities m 962 903 944 1,001
Shareholders' Funds m 893 1,096 1,186 1,289
Minority Interests m 104 115 128 144
Other m 0 0 0 0
Total S/H Equity m 997 1,211 1,314 1,433
Total Liab & S/H Funds m 1,959 2,115 2,258 2,434
All figures in MYR unless noted.

Important disclosures:
Recommendation definitions Volatility index definition* Financial definitions
Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following
Outperform – return >3% in excess of benchmark return price movements. adjustments made:
Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for
Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging,
expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense
Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property
GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends &
yield minority interests
Macquarie – Asia/Europe High – stock should be expected to move up or
Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa*
Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets
Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average
Medium – stock should be expected to move up total assets
Macquarie First South - South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds
Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation
Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average
Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares
Macquarie - Canada
Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks
Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial
Underperform – return >5% below benchmark return * Applicable to Australian/NZ/Canada stocks only Reporting Standards).
Macquarie - USA Recommendations – 12 months
Outperform (Buy) – return >5% in excess of Russell Note: Quant recommendations may differ from
3000 index return Fundamental Analyst recommendations
Neutral (Hold) – return within 5% of Russell 3000 index
return
Underperform (Sell)– return >5% below Russell 3000
index return
Recommendation proportions – For quarter ending 30 June 2012

AU/NZ Asia RSA USA CA EUR
Outperform 55.67% 61.00% 53.43% 42.58% 69.23% 46.60% (for US coverage by MCUSA, 9.05% of stocks followed are investment banking clients)
Neutral 30.50% 22.11% 36.99% 52.41% 28.02% 33.69% (for US coverage by MCUSA, 8.14% of stocks followed are investment banking clients)
Underperform 13.83% 16.89% 9.59% 5.01% 2.75% 19.71% (for US coverage by MCUSA, 0.45% of stocks covered are investment banking clients)
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Macquarine Research 20120910 (SWOT Analysis)

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Macquarine Research 20120910 (SWOT Analysis)

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MALAYSIA

Inside KPJ Healthcare Berhad (KPJ MK)

*JCorp shareholdings includes Waqaf An-Nur Corp stake

KPJ number of patients trend

('000) Outpatients Intpatients

 KPJ started as the healthcare division of state-owned Johor Corporation

An undervalued healthcare leader

Switching to private healthcare

Based on number of inpatients: 3.0mn (2008) and 3.2mn (2011)

Al-Aqar Healthcare REIT, benefiting KPJ in two ways

The bull case at RM7.60 implies 21% upside

Why not invest in Thai hospital operators?

Thailand (Jitima Ratanatam)

India (Abhishek Singhal)

Fig 4 SWOT analysis

Valuation, recommendation, risks

Fig 5 Free cash flow assumptions

EBITDA 313.8 361.8 413.4 472.1 543.5

NPV of FCF @ 8.4% WACC 432

DCF valuation estimates at YE

Fig 6 Implied valuation multiples

Implied P/ E (x) 27.0 30.2 23.1 25.8 20.0 22.3

Risk-free rate 4.0% Pretax cost of debt 4.0%

7.0% 6.50 6.80 7.10 7.40 7.70 8.00 8.40

7.5% 6.40 6.70 7.00 7.30 7.60 7.90 8.20

Undemanding valuation (at first glance)…

1) Improved trading liquidity

Fig 11 JCorp‟s paring down has improved

(RM mn) ADTV (LHS) JCorp stake (RHS) (%) 400%

ROE (%) (RM mn)

*IHH numbers based on Bloomberg consensus estimates

DPS (sen/shr) Div Yield (%)

DPS from 2005-2009 are adjusted to reflect bonus issue

Thailand (Jitima Ratanatam)

India (Abhishek Singhal)

Why not invest in Thai hospital operators?

100 (%) 500,000 # of patients

Based on 2011 numbers

Risks to our investment thesis

Benefiting from the public to private switch

Source: Company Data, Macquarie Research, September 2012

“The system”: patients switching to private hospitals

(% of GDP) (RM'bn) Health Budget (LHS) (%)

1.2 Pirvate healthcare expenditure Public healthcare expenditure 2 1%

(bn) 150 ('000) 43

Fig 27 … as the government has significantly cut

# of bed (RM 'bn)

2003 2004 2005 2006 2007 2008 2009 2010

Fig 28 Medical premium contribution is on the rise,

900 30% 30 ('mn) (%)

Growing edge in a captive market

KPJ: The only Malaysia hospital operator with a REIT

Fig 32 Preferable acquisition structure of KPJ

Source: Company data, Macquarie Research, September 2012

Do these acquisitions make sense?

Fig 33 Recent acquisition detail (2006-2012)

Damai Specialist Centre 48 16-Jan-06 97% 16.9 85.0 2.6

Fig 34 Sentosa Medical Centre recent revenue growth trends

60 Revenue (LHS) Growth (RHS) 10%

Source: Company data, Macquarie Research, September 2012

Organic growth insufficient

Fig 35 Strong growth momentum

Sabah Medical Centre 250 2012 100%

Is the doctor shortage a problem to KPJ‟s growth strategy?