TRIS Rating Affirms Company & Senior Debt Ratings and Outlook of “BCH” at “A-/Stable”

TRIS Rating has affirmed the company and current senior debenture ratings of Bangkok Chain Hospital PLC (BCH) at “A-” with “stable” outlook. The ratings reflect the company’s strong position in the mid- to lower-income patient segment of the healthcare service industry and its diversified revenue base. These strengths are partially offset by rising leverage as BCH expands, a declining profit margin as World Medical Center (WMC) starts up, and intense competition in the healthcare industry. In addition, BCH is exposed to regulatory risk and the execution risks inherent in its future expansion plans. The “stable” outlook is based on the expectation that BCH will be able to maintain its market strength in the middle-income and social security coverage scheme (SC) segments, and gradually improve WMC’s operating performance. At the same time, the company is expected to employ a cautious financial policy for its new debt-funded investment projects. The debt to capitalization ratio should be kept below 50% in order to maintain its credit quality.

BCH owns and operates six general hospitals under the name “Kasemrad Hospital” and one newly opened hospital: WMC. Five hospitals are located in Bangkok and vicinity, while one is in Chiang Rai province and one is in Saraburi province. BCH ended its participation in the universal coverage (UC) system in 2010. BCH’s revenues are now derived from two patient groups: self-pay and SC. The revenue contributions from the self-pay and SC groups were approximately 70% and 30% of BCH’s total revenue, respectively. In 2012, BCH reported a 14% year-on-year (y-o-y) growth in revenue to Bt4,466 million. The rise was due mainly to the growth in revenue from both self-pay and SC patients. Profitability has also improved, after BCH exited the low-margin UC scheme and because of effective cost controls. BCH’s operating margin (operating income before depreciation and amortization as a percentage of sales) increased from 30% in 2010 to 34% in 2012.

BCH is one of the leading private hospitals participating in the SC scheme. Its SC market share in Bangkok, in terms of the number of the persons registered for the SC scheme, has ranged from 9%-11% over the past five years. The sizable base of registered SC participants gives the company economies of scale and helps sustain the utilization levels for BCH’s capital-intensive facilities.

BCH officially launched its seventh hospital, WMC, in March 2013, with an initial capacity of 150 beds. The full capacity of WMC is 320 beds. WMC aims to capture high-income patients in the rapidly growing Chaengwattana area. However, due to its limited track record and brand recognition in the new segment, the company needs time to develop its brand name and customer base. For the first nine months of 2013, WMC recorded a net loss of Bt220.8 million. BCH’s management team expects that WMC will break even in 2014.

For the first nine months of 2013, BCH’s seven hospitals generated revenue of Bt3,504 million, a 6% y-o-y rise. However, BCH’s net profit decreased by 33% y-o-y, to Bt452 million for the first nine of 2013, compared with Bt679 million in the same period a year earlier. The drop was due mainly to losses at WMC. The operating margin for the first nine months of 2013 dropped to 26.7%, from 34.1% in 2012. In TRIS Rating’s view, WMC’s weak performance will continue to pressure the overall margin of the group over the next two years. In TRIS Rating’s baseline scenario, BCH’s operating margin is expected to range between 27%-30% per annum during the next three years.

BCH’s financial strength dropped during the past two years. The company’s debt level rose considerably from Bt1,133 million in 2011 to Bt4,303 million at the end of September 2013. The debt to capitalization ratio increased from 23.9% at the end of 2011 to 50.6% at the end of September 2013. However, BCH’s liquidity status remains acceptable at the current rating level. In the first nine months of 2013, BCH’s liquidity status, as measured by the earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio, was satisfactory. The ratio was 8.8 times, while the funds from operations (FFO) to total debt ratio was 25.4% (annualized, based on trailing 12 months).

Going forward, the company plans to open a new hospital targeting SC patients. It plans to spend the capital of around Bt2,000 million in total over the next three years. As a result, leverage may increase from the current level. BCH’s operating performance is expected to improve gradually once WMC reaches the breakeven point.

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