RINGO

RATING

VIBHAVADI HOSPITAL PLC

20 April 2019

CORPORATES RATING RATIONALE

We assign the company rating and the senior unsecured debenture ratings of Vibhavadi Hospital
Company Rating: A- (VIBHA) at “A-” with a “stable” outlook. The ratings reflect VIBHA’s promising future prospect in both
Thailand and international level, competitiveness in terms of locations and recovering financial
performance supported by moderate level of leverage. However, these strengths can be offset by an
Issues rating: A-
intense competition in health care service industry and ability to control costs.
Senior unsecured
KEY RATING CONSIDERATION
Outlook: Stable
Company overview

VIBHA was established in 1986 and listed on SET in 1992. As of March 2019, major shareholders
were Mr.Chaiyasit Viriyamettakul and F&S 79 Company Limited, with shareholding of 14.81% and
14.61% respectively. VIBHA provides health care services under the name Vibhavadi Hospital with
capacities of 2,000 outpatients per day and 250 registered beds, serving over 91,000 inpatients and
657,000 outpatients a year. Targeted customers of the hospital are middle-income self-pay patients,
and patients who registered under social security and the national health security office systems.
Currently, VIBHA has two subsidiaries; Chiangmai Ram Medical Business Public Co Ltd. (CMR);
operates in health care service industry, and Princeton Park Suites Co. Ltd.; operates in hotel industry.

In 2018, the company’s total operating revenue was Bt62.02 millions. The main source of revenue
came from medical treatment which was contributed to 96.47% of total operating revenue.

Strengths and weaknesses

Strengths/opportunities
● Provides services under international standards from Joint Commission International (JCI), the
United States and ISO, and receive Healthcare Accreditation (HA) from the Healthcare Accreditation
Institute.
● Expertise in specialized treatment regarding gastrointestinal, heart disease, infertility, orthopedic,
and advanced LASIK.
● Growth in medical tourism from China and CLMV countries.
● Demographically diversified which capture both patients from capital and provincial areas.
Weaknesses/Threats
● High cost of hospital operations.
● High competitiveness among top health care service providers.
● Lack of medical personnel.

Stiff competition but demand is growing

Ringo Rating expects that the competition within private hospital will be intensified. The supply of
private hospital beds has been experiencing a sharp expansion and the total number of beds is
expected to rise by at least 2,700 beds by 2021 from the 2018 total of 35,000 (or annual growth of
2.5%). This will eventually lead to an intense competition between private hospitals in terms of both
pricing and the range of services offered. In addition to this, competition will also come from
government-run hospitals that are developing services that mirror those available in the private sector.
This increasing competition will tend to place a limit on the profitability and growth of private hospitals.

However, Thailand is becoming an aged society. The National Economic and Social Development Board (NESDB) forecasts that the
number of people aged over 60 will rise up to 18% of the total thai population in 2020 and 25% in 2030. This trend will consequently
lead to the rising rate of Non-Communicable Disease (NCD) such as cancer, stroke and eventually increase the demand for
quality healthcare service. Moreover, middle class consumers, who generate income more than USD 15,000 per annum, are expected
to increase up to 6 million people by 2020. As the primary customer of private hospitals is mid to upper-income class, they will see an
ongoing growth in customer base accordingly.

Considerations for customers with social security scheme

The revenue received from customers who engage in social security coverage scheme is currently counted as 16% of the total
revenue. Chiang Mai Ram Medical Business PLC, the largest attributor of the company’s revenue, is the top hospital in Chiang Mai
where customers pay with SC scheme. With an increase in both health insurance segment and SC customers in Bangkok and Chiang
Mai, rising account receivable from customers who engage in SC scheme is critical issue. Accordingly, VIBHA has been adapting
their strategies to capture more of these customers.

However, the company may face regulatory risk that comes along with an increase in revenue from SC scheme customers. Although
Thailand does not contain a large number of regulations related to SC scheme, change in one regulation will create certain effect on
the scheme, other public healthcare systems, and hospital participating in the managed care or SC scheme.

Continuous expansion of CMR

From the revenue breakdown of Vibhavadi Medical Center PLC in 2016, 2017, and 2018, Chiang Mai Ram Medical Business PLC
which VIBHA holds 83.55% stake of the company generates the largest proportion of the company with 59.03%, 59.76%, and 59.13%,
respectively. Any reform or investment plan of CMR affects revenue and net profit of the group.

By noticing prosperous opportunity in the north sector of Thailand, especially Lamphun and Chiang Mai, CMR has launched the
expansion plans with a capital of Bt3 billion consisting of 3 projects: Ramkhamhaeng Chiang Mai hospital, Lanna 3 hospital, and new
Hariphunchai Memorial hospital building. Customers with grade B and children are target customers of Ramkhamhaeng Chiang Mai
hospital and about 30% of total patient is estimated to be foreign patient. In order to respond to an increase of customers due to
construction of new airport and mass transit in Chiang Mai, the new Lanna hospital is set to be a destination for customers engaging
in social security coverage scheme as well as Lanna 1 hospital and Lanna 2 hospital. Lastly, the new building of Hariphunchai
Memorial hospital gives the hospital more capability up to 300 beds and the expected revenue from 3 projects is expected to lift the
group revenue by Bt8,000 to 10,000 million.

Overseas investment

Vibhavadi Medical Center PLC decided to put more concentration on overseas activity especially ASEAN including Myanmar,
Cabambodia, and Laos by launching the plan of holding at least a 25% stake in local hospitals. By engaging in international
investment, the company will be able to attract more international investors and foreign customers. Moreover, its name, Vibhavadi
Medical center PLC, will receive more credibility and attractiveness in foreign countries.

However, VIBHA is not the first Thai healthcare company to enter the foreign market. Compared to Bumrungrad Hospital PLC, VIBHA
is a laggard in the field. Bumrungrad Hospital PLC has held 100% stake in Life and Longevity Limited listed in Hong Kong and other
healthcare services in Singapore and Mongolia. The awareness of other existing Thai healthcare centers will mitigate the chance for
VIBHA as a new player to capture position in the foreign countries.

Unsound historical performance due to increasing cost

According to historical performance, VIBHA’s revenue has been growing at 5.8% CAGR from 2014 to 2018. Vibhavadi hospital’s
revenue, 38% of medical treatment revenue, was increasing at 5%-8% annually. In terms of Lanna hospital, occupancy level of patient
was around 90% every year and even exceeded the full capacity in 2015 and 2018. This led to lower growth of actual patient receiving
services compared to surplus demand. Therefore, after operated Lanna 2 building in 2016, growth of in-patient department significantly
increased up to 24.11%. Despite the satisfactory performance of core business, sales of rental and services growth dropped from
10.5% to 6.4% in 2016 due to a sudden downturn of revenue from rental and service resulted from sharp decline in Chinese tourists.
Moreover, operating margin started to drop from 21% in 2015 to 17% in 2018 due to higher cost of medical treatment.
Improving company’s profitability

Sales of VIBHA is expected to grow from Bt6,474 million in 2018 by 7% in 2019 and 2020, which is slightly larger than the past three
years, and it will reach 9% in 2021. The main growth drivers will be tendency of unusual weather, expansion of the hospital, and
operation of new commercial zone. For Vibhavadi hospital, growth rate is expected to continue stable at 6% per annum. On the other
hand, CMR hospital will experience 5% growth of out-patient department due to irregular climate change and air pollution in Chiang
Mai recently despite having full capacity. With high level of occupancy rate, Lanna hospital planned to open new building in 2021 to
support excess demand and limited service which will crucially improve sales in that year. Revenue from rental and services is
expected to rise significantly according to great revenue support from Vi Plaza. From the decreasing historical trend, the revenue from
Princeton Park Suites hotel will continue to decrease at 11.5%. However, we believe that the plaza which is anticipated to generate
Bt60 million annually will offset the drop-off trend.

Gross profit margin of VIBHA dropped from 32% in 2017 to 30% in 2018 due to higher cost of medical treatment and increasing
depreciation of buildings; however, we expect that the ratio will be recovered in 2019. The cost of medical treatment is considered to
be main challenge of VIBHA’s profitability. Thus, the company should come up with a policy to control the level of costs.

Inadequate liquidity

VIBHA’s liquidity is low due to large portion of short-term loan and current portion of long-term liabilities compared to current assets.
In 2018, VIBHA has outstanding debt of Bt3,711 million, comprising Bt2,338 million of short-term debt and Bt1,373 million of long-
term debt. This proportion of short-term and long-term debt is expected to continue at this level in the future if there is no significant
change in interest rates of short-term and long-term liabilities.

Its cash and current investments stand at Bt308 million at the end of 2018. FFO is forecasted at around Bt1,500-Bt1,800 million per
annum and EBITDA would be around Bt1,900-Bt2,300 million per annum during 2019-2021, indicating that the company may not
have sufficient source of funds for upcoming short-term obligations. However, for working capital, the company’s account receivable,
inventory, and account payable days are quite stable. Capital expenditures is forecasted at Bt1,000 million due to continuous
expansion plan per annum, and dividend payments is forecasted at around Bt580-Bt680 million per annum.

Satisfactory financial leverage

From the past, the company can maintain a certain level of D/E ratio from 0.3 to 0.39 where D/E ratio in 2018 is slightly higher than
that in other years since the cost of borrowing is lower in that year. In 2018, the policy rate is increased from 1.5% to 1.75% which
can lead to higher cost of borrowing in the future. Therefore, we expect that the leverage level of VIBHA will be less. Much more,
capital expenditure is projected to be at the same level since the current occupancy rate of both hospitals, especially CMR, almost
reach their full capacity. Still, the expected D/E ratio of the company is in line with its range in the past.

The ratio of funds from operation (FFO) to total debt, which measures the level of cash flow protection, is quite stable for the past five
years despite continuing expansion and projects. We expect that the ratio will be decreasing slowly as year passes. The FFO to debt
ratio will range between 41%-48% during 2019 to 2021, showing an improving trend. Moreover, the company has debt to capitalization
ratio of 27.8% in 2018 and we forecast it to be in the range of 25%-27% in the next three years.

This rate is considered to be in line with its rated peers which include BDMS and BCH. BH is also one of VIBHA’s peer; however, the
company is not leveraged. In 2018, VIBHA has debt to EBITDA of 2.20 times, which is slightly higher than BDMS and BCH of 2.11
and 2.15 times. It also has EBITDA interest coverage of 10.14 times which is lower than its peers. However, VIBHA’s debt to
capitalization is 27.83% which is lower than 35.19% and 42.35% of BDMS and BCH, respectively. Lastly, VIBHA has middle level of
FFO to total debt of 37.47%, while that of BDMS and BCH are 33.5% and 37.66%.

RATING OUTLOOK

The “stable” outlook reflects our expectation that VIBHA would be able to control the cost due to improving operating result and higher
capacity to serve demand. For the industry, the company is also expected to benefit from an increase in aging population and support
from the government; however, there are some challenges due to a shortage of labor, high competition and need for cutting-edge
technology. In terms of financial aspect, it is expected to deliver sound financial results. The FFO to total debt ratio should range from
41% to 48% and debt to capitalization should be around 25% to 27%, despite continuing expansion plans.
 RATING SENSITIVITIES

VIBHA’s rating upside case may occur if the company has better control over its costs of treatment and the financial profile can be
maintain at this level with an improve in liquidity. In contrary, the rating could be downgraded if cash flow protection decreases
dramatically or VIBHA is unable to control the costs.

KEY QUESTIONS

● What is your strategy on future expansion in both Thailand and other countries, especially in Asian countries?
● What are your M&A and post-merger integration plan?
● Why was the cost of treatment in 2018 higher than the previous year and will it be at this level in the future?
● How would you deal with an increasing debt-to-equity ratio?
● Do you think that increasing policy rate will change your capital structure and if yes, how would it be?

FINANCIAL STATISTICS AND KEY FINANCIAL RATIOS

Unit: Bt million

2014 2015 2016 2017 2018 2019F 2020F 2021F

Total operating revenues 4,961 5,468 5,822 6,202 6,570 7,018 7,494 8,167

Gross interest expense 100 103 123 152 162 188 188 192

Net income from operations 773 941 866 1,065 876 940 1,000 1,087

Funds from operations (FFO) 898 1,279 1,291 1,361 1,354 1,417 1,519 1,643

EBITDA 1,173 1,593 1,583 1,811 1,640 1,809 1,925 2,072

Capital expenditures 0 775 1,402 1,058 512 1,027 1,027 1,027

Total assets 10,560 11,385 14,487 15,446 15,547 15,971 16,510 17,103

Total debts 2,116 2,249 2,760 3,236 3,614 3,734 3,831 3,865

Shareholders' equity 6,413 7,016 9,229 9,367 9,375 9,795 10,241 10,726
Operating income before depreciation
and amortization as % of sales 24.01% 29.53% 27.57% 29.67% 25.33% 26.13% 26.02% 25.67%

EBITDA interest coverage 11.70 15.49 12.92 11.90 10.14 9.64 10.23 10.81

FFO/Total debt (%) 42.43% 56.86% 46.76% 42.05% 37.47% 37.95% 39.64% 42.52%

Total debt/capitalization (%) 24.81% 24.28% 23.02% 25.68% 27.82% 27.60% 27.23% 26.49%

Members
Hasadin Phonrabul 5902640134
Jidapa Srivaranun 5902640175
Kanokporn Navykarn 5902640225
Kyung Jin Park 5902640282
Palita Varojpiputhn5902640548
Prem Phansuriyanon 5902640878
Siramol Chaijindawat 5902640993